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UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q |
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For Quarterly period ended June 30, 2022
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Or |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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Commission File No. 001-35741 |
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CHEMUNG FINANCIAL CORPORATION |
(Exact name of registrant as specified in its charter) |
|
New York | | 16-1237038 |
(State or other jurisdiction of incorporation or organization) | | | (I.R.S. Employer Identification No.) |
|
One Chemung Canal Plaza, Elmira, NY | | 14901 |
(Address of principal executive offices) | | | (Zip Code) |
|
| | | (607) 737-3711 or (800) 836-3711 | |
(Registrant's telephone number, including area code) |
|
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Securities registered pursuant to Section 12(b) of the Exchange Act: |
Title of each class | | Trading Symbol | | Name of exchange on which registered |
Common stock, par value $.01 per share | | CHMG | | The Nasdaq Stock Market LLC |
| | | | | | | | | | | | | | | | | | | | | | | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
Yes: ☒ No: ☐ |
|
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). |
Yes: ☒ No: ☐ |
|
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. |
Large accelerated filer | | ☐ | Non-accelerated filer | | ☒ |
Accelerated filer | | ☐ | Smaller reporting company | | ☒ |
| | | | Emerging growth company | | ☐ |
|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ |
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act): |
Yes: ☐ No: ☒ |
The number of shares of the registrant's common stock, $.01 par value, outstanding on July 31, 2022 was 4,675,684.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
GLOSSARY OF ABBREVIATIONS AND TERMS
To assist the reader the Corporation has provided the following list of commonly used abbreviations and terms included in the Notes to the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Abbreviations
| | | | | |
AFS | Available for sale securities |
ALCO | Asset-Liability Committee |
AOCI | Accumulated Other Comprehensive Income |
ASC | Accounting Standards Codification |
ASU | Accounting Standards Update |
Bank | Chemung Canal Trust Company |
Basel III | The Third Basel Accord of the Basel Committee on Banking Supervision |
Board of Directors | Board of Directors of Chemung Financial Corporation |
BOLI | Bank Owned Life Insurance |
CAM | Common area maintenance charges |
CARES Act | Coronavirus Aid, Relief, and Economic Security Act |
CDARS | Certificate of Deposit Account Registry Service |
CDO | Collateralized Debt Obligation |
CECL | Current expected credit loss |
CFS | CFS Group, Inc. |
Corporation | Chemung Financial Corporation |
COVID-19 | Coronavirus disease 2019 |
CRM | Chemung Risk Management, Inc. |
Dodd-Frank Act | The Dodd-Frank Wall Street Reform and Consumer Protection Act |
EPS | Earnings per share |
Exchange Act | Securities Exchange Act of 1934 |
FASB | Financial Accounting Standards Board |
FDIC | Federal Deposit Insurance Corporation |
FHLBNY | Federal Home Loan Bank of New York |
FRB | Board of Governors of the Federal Reserve System |
FRBNY | Federal Reserve Bank of New York |
Freddie Mac | Federal Home Loan Mortgage Corporation |
GAAP | U.S. Generally Accepted Accounting Principles |
HTM | Held to maturity securities |
ICS | Insured Cash Sweep Service |
IFRS | International Financial Reporting Standards |
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
NAICS | North American Industry Classification System |
N/M | Not meaningful |
OPEB | Other postemployment benefits |
OREO | Other real estate owned |
OTTI | Other-than-temporary impairment |
PCI | Purchased credit impaired |
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PPP | Paycheck Protection Program |
| |
Regulatory Relief Act | Economic Growth, Regulatory Relief, and Consumer Protection Act |
ROA | Return on average assets |
ROE | Return on average equity |
RWA | Risk-weighted assets |
SBA | Small Business Administration |
SEC | Securities and Exchange Commission |
Securities Act | Securities Act of 1933 |
Tax Act | Tax Cuts and Jobs Act of 2017 |
TDRs | Troubled debt restructurings |
WMG | Wealth Management Group |
Terms
| | | | | |
Allowance for loan losses to total loans | Represents period-end allowance for loan losses divided by retained loans. |
Assets under administration | Represents assets that are beneficially owned by clients and all investment decisions pertaining to these assets are also made by clients. |
Assets under management | Represents assets that are managed on behalf of clients. |
Basel I | A set of international banking regulations, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. The main focus was mainly on credit risk by creating a bank asset classification system. |
Basel III | A comprehensive set of reform measures designed to improve the regulation, supervision, and risk management within the banking sector. The reforms require banks to maintain proper leverage ratios and meet certain capital requirements. |
Benefit obligation | Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans. |
Brokered deposits | Refers to deposits obtained from or through the mediation or assistance of a deposit broker. |
Capital Bank | Division of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany and Saratoga. |
Captive insurance company | A company that provides risk-mitigation services for its parent company. |
CDARS | Product involving a network of financial institutions that exchange certificates of deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. |
Collateralized debt obligation | A structured financial product that pools together cash flow-generating assets, such as mortgages, bonds, and loans. |
Collateralized mortgage obligations | A type of mortgage-backed security with principal repayments organized according to their maturities and into different classes based on risk. The mortgages serve as collateral and are organized into classes based on their risk profile. |
Dodd-Frank Act | The Dodd-Frank Act was enacted on July 21, 2010 and significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress. |
Fully taxable equivalent basis | Income from tax-exempt loans and investment securities that have been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates; the corresponding income tax impact related to tax-exempt items is recorded within income tax expense. |
GAAP | Accounting principles generally accepted in the United States of America. |
Holding company | Consists of the operations for Chemung Financial Corporation (parent only). |
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ICS | Product involving a network of financial institutions that exchange interest-bearing money market deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. |
Loans held for sale | Residential real estate loans originated for sale on the secondary market with maturities from 15-30 years. |
Long term lease obligation | An obligation extending beyond the current year, which is related to a long term finance lease that is considered to have the economic characteristics of asset ownership. |
Mortgage-backed securities | A type of asset-backed security that is secured by a collection of mortgages. |
Municipal clients | A political unit, such as a city, town, or village, incorporated for local self-government. |
N/A | Data is not applicable or available for the period presented. |
N/M | Not meaningful. |
Non-GAAP | A calculation not made according to GAAP. |
Obligations of state and political subdivisions | An obligation that is guaranteed by the full faith and credit of a state or political subdivision that has the power to tax. |
Obligations of U.S. Government | A federally guaranteed obligation backed by the full power of the U.S. government, including Treasury bills, Treasury notes and Treasury bonds. |
Obligations of U.S. Government sponsored enterprise obligations | Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government. |
OREO | Represents real property owned by the Corporation, which is not directly related to its business and is most frequently the result of a foreclosure on real property. |
OTTI | Impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security. |
PCI loans | Represents loans that were acquired in the Fort Orange Financial Corp. transaction and deemed to be credit-impaired on the acquisition date in accordance with the guidance of FASB. |
Political subdivision | A county, city, town, or other municipal corporation, a public authority, or a publicly-owned entity that is an instrumentality of a state or a municipal corporation. |
Pre-provision profit/(loss) | Represents total net revenue less non-interest expense, before income tax expense (benefit). The Corporation believes that this financial measure is useful in assessing the ability of a bank to generate income in excess of its provision for credit losses. |
Regulatory Relief Act | The Economic Growth, Regulatory Relief and Consumer Protection Act was enacted on May 24, 2018 provides certain limited amendments to the Dodd-Frank Act, as well as certain targeted modifications to other post-financial crisis regulatory requirements. In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements. |
RWA | Risk-weighted assets consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On-balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off-balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. Risk-weighted assets also incorporate a measure for market risk related to applicable trading assets-debt and equity instruments. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets. |
SBA loan pools | Business loans partially guaranteed by the SBA. |
Securities sold under agreements to repurchase | Sale of securities together with an agreement for the seller to buy back the securities at a later date. |
| | | | | |
Tax Act | The Tax Act was enacted on December 22, 2017 and amended the Internal Revenue Code of 1986. The legislation reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, with some related business deductions and credits being either reduced or eliminated. |
TDR | A TDR is deemed to occur when the Corporation modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty. |
Trust preferred securities | A hybrid security with characteristics of both subordinated debt and preferred stock which allows for early redemption by the issuer, makes fixed or variable payments, and matures at face value. |
Unaudited | Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion. |
WMG | Provides services as executor and trustee under wills and agreements, and guardian, custodian, trustee and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, financial planning, pension, estate planning and employee benefit administration services. |
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | | | | | | | | | | | | | |
(in thousands, except share and per share data) | | June 30, 2022 | | December 31, 2021 |
ASSETS | | | | |
Cash and due from financial institutions | | $ | 24,371 | | | $ | 17,365 | |
Interest-earning deposits in other financial institutions | | 5,397 | | | 9,616 | |
Total cash and cash equivalents | | 29,768 | | | 26,981 | |
| | | | |
Equity investments, at estimated fair value | | 2,750 | | | 2,964 | |
Securities available for sale, at estimated fair value | | 692,995 | | | 792,026 | |
Securities held to maturity, estimated fair value of $2,938 at June 30, 2022 and $3,796 at December 31, 2021 | | 2,943 | | | 3,790 | |
FHLBNY and FRBNY Stock, at cost | | 5,897 | | | 4,218 | |
| | | | |
Loans, net of deferred loan fees | | 1,617,562 | | | 1,518,249 | |
Allowance for loan losses | | (17,485) | | | (21,025) | |
Loans, net | | 1,600,077 | | | 1,497,224 | |
| | | | |
Loans held for sale | | — | | | 396 | |
Premises and equipment, net | | 16,812 | | | 17,969 | |
Operating lease right-of-use assets | | 6,841 | | | 7,234 | |
Goodwill | | 21,824 | | | 21,824 | |
Other intangible assets, net | | — | | | 15 | |
Bank-owned life insurance | | 2,847 | | | 2,825 | |
Accrued interest receivable and other assets | | 67,157 | | | 41,009 | |
| | | | |
Total assets | | $ | 2,449,911 | | | $ | 2,418,475 | |
| | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | |
Deposits: | | | | |
Non-interest-bearing | | $ | 704,996 | | | $ | 739,607 | |
Interest-bearing | | 1,477,795 | | | 1,415,826 | |
Total deposits | | 2,182,791 | | | 2,155,433 | |
| | | | |
FHLBNY overnight advances | | 45,870 | | | 14,570 | |
| | | | |
| | | | |
Long term finance lease obligation | | 3,461 | | | 3,594 | |
Operating lease liabilities | | 6,998 | | | 7,378 | |
Dividends payable | | 1,449 | | | 1,450 | |
Accrued interest payable and other liabilities | | 34,652 | | | 24,595 | |
Total liabilities | | 2,275,221 | | | 2,207,020 | |
| | | | |
Shareholders' equity: | | | | |
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at June 30, 2022 and December 31, 2021 | | 53 | | | 53 | |
Additional paid-in capital | | 47,196 | | | 46,901 | |
Retained earnings | | 200,870 | | | 188,877 | |
Treasury stock, at cost; 635,547 shares at June 30, 2022 and 636,720 shares at December 31, 2021 | | (18,084) | | | (17,846) | |
Accumulated other comprehensive income (loss) | | (55,345) | | | (6,530) | |
Total shareholders' equity | | 174,690 | | | 211,455 | |
| | | | |
Total liabilities and shareholders' equity | | $ | 2,449,911 | | | $ | 2,418,475 | |
See accompanying notes to unaudited consolidated financial statements.
7
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands, except per share data) | | 2022 | | 2021 | | 2022 | | 2021 |
Interest and dividend income: | | | | | | | | |
Loans, including fees | | $ | 15,390 | | | $ | 14,692 | | | $ | 29,871 | | | $ | 29,309 | |
Taxable securities | | 2,863 | | | 1,951 | | | 5,551 | | | 3,753 | |
Tax exempt securities | | 268 | | | 266 | | | 538 | | | 527 | |
Interest-earning deposits | | 17 | | | 36 | | | 36 | | | 96 | |
Total interest and dividend income | | 18,538 | | | 16,945 | | | 35,996 | | | 33,685 | |
Interest expense: | | | | | | | | |
Deposits | | 769 | | | 832 | | | 1,517 | | | 1,753 | |
| | | | | | | | |
Borrowed funds | | 128 | | | 34 | | | 161 | | | 67 | |
Total interest expense | | 897 | | | 866 | | | 1,678 | | | 1,820 | |
Net interest income | | 17,641 | | | 16,079 | | | 34,318 | | | 31,865 | |
Provision (credit) for loan losses | | (1,744) | | | (150) | | | (2,889) | | | (409) | |
Net interest income after provision for loan losses | | 19,385 | | | 16,229 | | | 37,207 | | | 32,274 | |
| | | | | | | | |
Non-interest income: | | | | | | | | |
WMG fee income | | 2,628 | | | 2,803 | | | 5,385 | | | 5,481 | |
Service charges on deposit accounts | | 936 | | | 732 | | | 1,800 | | | 1,449 | |
Interchange revenue from debit card transactions | | 1,206 | | | 1,262 | | | 2,336 | | | 2,385 | |
| | | | | | | | |
Changes in fair value of equity investments | | (242) | | | 102 | | | (355) | | | 188 | |
Net gains on sales of loans held for sale | | 25 | | | 342 | | | 99 | | | 642 | |
Net gains (losses) on sales of other real estate owned | | 46 | | | — | | | 46 | | | (18) | |
Income from bank-owned life insurance | | 11 | | | 12 | | | 22 | | | 27 | |
Other | | 709 | | | 1,239 | | | 1,649 | | | 1,959 | |
Total non-interest income | | 5,319 | | | 6,492 | | | 10,982 | | | 12,113 | |
| | | | | | | | |
Non-interest expenses: | | | | | | | | |
Salaries and wages | | 6,056 | | | 6,037 | | | 12,279 | | | 11,799 | |
Pension and other employee benefits | | 1,937 | | | 1,480 | | | 3,655 | | | 2,939 | |
Other components of net periodic pension and postretirement benefits | | (403) | | | (391) | | | (811) | | | (782) | |
Net occupancy | | 1,369 | | | 1,491 | | | 2,796 | | | 3,014 | |
Furniture and equipment | | 410 | | | 410 | | | 847 | | | 776 | |
Data processing | | 2,468 | | | 2,048 | | | 4,655 | | | 4,051 | |
Professional services | | 664 | | | 535 | | | 1,185 | | | 989 | |
| | | | | | | | |
Amortization of intangible assets | | 4 | | | 89 | | | 15 | | | 190 | |
Marketing and advertising | | 184 | | | 284 | | | 460 | | | 410 | |
Other real estate owned | | 8 | | | 5 | | | (29) | | | 17 | |
FDIC insurance | | 284 | | | 329 | | | 598 | | | 719 | |
Loan expense | | 176 | | | 290 | | | 391 | | | 524 | |
| | | | | | | | |
Other | | 1,185 | | | 1,244 | | | 2,969 | | | 2,558 | |
Total non-interest expenses | | 14,342 | | | 13,851 | | | 29,010 | | | 27,204 | |
Income before income tax expense | | 10,362 | | | 8,870 | | | 19,179 | | | 17,183 | |
Income tax expense | | 2,338 | | | 2,075 | | | 4,288 | | | 3,858 | |
Net income | | $ | 8,024 | | | $ | 6,795 | | | $ | 14,891 | | | $ | 13,325 | |
| | | | | | | | |
Weighted average shares outstanding* | | 4,690 | | | 4,680 | | | 4,690 | | | 4,686 | |
Basic and diluted earnings per share | | $ | 1.72 | | | $ | 1.45 | | | $ | 3.18 | | | $ | 2.84 | |
| | | | | | | | |
|
See accompanying notes to unaudited consolidated financial statements.
8
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
(in thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Net income | | $ | 8,024 | | | $ | 6,795 | | | $ | 14,891 | | | $ | 13,325 | |
Other comprehensive income (loss): | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net unrealized gains (losses) | | (24,050) | | | 5,265 | | | (66,165) | | | (8,367) | |
Tax effect | | (6,303) | | | 1,372 | | | (17,331) | | | (2,107) | |
Net of tax amount | | (17,747) | | | 3,893 | | | (48,834) | | | (6,260) | |
| | | | | | | | |
Change in funded status of defined benefit pension plan and other benefit plans: | | | | | | | | |
| | | | | | | | |
Reclassification adjustment for amortization of prior service costs | | — | | | (55) | | | — | | | (110) | |
Reclassification adjustment for amortization of net actuarial loss | | 11 | | | 57 | | | 25 | | | 112 | |
Total before tax effect | | 11 | | | 2 | | | 25 | | | 2 | |
Tax effect | | 4 | | | 1 | | | 6 | | | 1 | |
Net of tax amount | | 7 | | | 1 | | | 19 | | | 1 | |
| | | | | | | | |
Total other comprehensive income (loss) | | (17,740) | | | 3,894 | | | (48,815) | | | (6,259) | |
| | | | | | | | |
Comprehensive income (loss) | | $ | (9,716) | | | $ | 10,689 | | | $ | (33,924) | | | $ | 7,066 | |
See accompanying notes to unaudited consolidated financial statements.
9
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except share and per share data) | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balances at March 31, 2021 | $ | 53 | | | $ | 47,025 | | | $ | 173,325 | | | $ | (17,867) | | | $ | (7,752) | | | $ | 194,784 | |
Net income | — | | | — | | | 6,795 | | | — | | | — | | | 6,795 | |
Other comprehensive income | — | | | — | | | — | | | — | | | 3,894 | | | 3,894 | |
Restricted stock awards | — | | | 87 | | | — | | | — | | | — | | | 87 | |
Restricted stock units for directors' deferred compensation plan | — | | | 4 | | | — | | | — | | | — | | | 4 | |
| | | | | | | | | | | |
Cash dividends declared ($0.31 per share) | — | | | — | | | (1,447) | | | — | | | — | | | (1,447) | |
Distribution of 2,707 shares of treasury stock for directors' compensation | — | | | (72) | | | — | | | 75 | | | — | | | 3 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase of 5,831 shares of common stock | — | | | — | | | — | | | (245) | | | — | | | (245) | |
Sale of 2,333 shares of treasury stock (a) | — | | | 37 | | | — | | | 65 | | | — | | | 102 | |
| | | | | | | | | | | |
Balances at June 30, 2021 | $ | 53 | | | $ | 47,081 | | | $ | 178,673 | | | $ | (17,972) | | | $ | (3,858) | | | $ | 203,977 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balances at March 31, 2022 | $ | 53 | | | $ | 46,880 | | | $ | 194,295 | | | $ | (18,113) | | | $ | (37,605) | | | $ | 185,510 | |
Net income | — | | | — | | | 8,024 | | | — | | | — | | | 8,024 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (17,740) | | | (17,740) | |
Restricted stock awards | — | | | 154 | | | — | | | — | | | — | | | 154 | |
Restricted stock units for directors' deferred compensation plan | — | | | 95 | | | — | | | — | | | — | | | 95 | |
| | | | | | | | | | | |
Cash dividends declared ($0.31 per share) | — | | | — | | | (1,449) | | | — | | | — | | | (1,449) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Sale of 2,137 shares of treasury stock (a) | — | | | 37 | | | — | | | 61 | | | — | | | 98 | |
Forfeiture of 681 shares of restricted stock awards | — | | | 30 | | | — | | | (32) | | | — | | | (2) | |
Balances at June 30, 2022 | $ | 53 | | | $ | 47,196 | | | $ | 200,870 | | | $ | (18,084) | | | $ | (55,345) | | | $ | 174,690 | |
(a) All treasury stock sales were completed at the prevailing market price with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan which is a defined contribution plan sponsored by the Bank.
See accompanying notes to unaudited consolidated financial statements.
10
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands, except share and per share data) | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Accumulated Other Comprehensive Loss | | Total |
Balances at January 1, 2021 | $ | 53 | | | $ | 46,764 | | | $ | 168,006 | | | $ | (17,525) | | | $ | 2,401 | | | $ | 199,699 | |
Net income | — | | | — | | | 13,325 | | | — | | | — | | | 13,325 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (6,259) | | | (6,259) | |
Restricted stock awards | — | | | 223 | | | — | | | — | | | — | | | 223 | |
Restricted stock units for directors' deferred compensation plan | — | | | 9 | | | — | | | — | | | — | | | 9 | |
| | | | | | | | | | | |
Cash dividends declared ($0.57 per share) | — | | | — | | | (2,658) | | | — | | | — | | | (2,658) | |
Distribution of 9,291 shares of treasury stock for directors' compensation | — | | | 64 | | | — | | | 253 | | | — | | | 317 | |
Distribution of 3,860 shares of treasury stock for employee compensation | — | | | 27 | | | — | | | 105 | | | — | | | 132 | |
Distribution of 2,707 shares of treasury stock for for deferred directors' compensation | — | | | (72) | | | — | | | 75 | | | — | | | 3 | |
Repurchase of 28,706 shares of common stock | — | | | — | | | — | | | (1,046) | | | — | | | (1,046) | |
Sale of 6,024 shares of treasury stock (a) | — | | | 66 | | | — | | | 166 | | | — | | | 232 | |
| | | | | | | | | | | |
Balances at June 30, 2021 | $ | 53 | | | $ | 47,081 | | | $ | 178,673 | | | $ | (17,972) | | | $ | (3,858) | | | $ | 203,977 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Balances at January 1, 2022 | $ | 53 | | | $ | 46,901 | | | $ | 188,877 | | | $ | (17,846) | | | $ | (6,530) | | | $ | 211,455 | |
Net income | — | | | — | | | 14,891 | | | — | | | — | | | 14,891 | |
Other comprehensive loss | — | | | — | | | — | | | — | | | (48,815) | | | (48,815) | |
Restricted stock awards | — | | | 333 | | | — | | | — | | | — | | | 333 | |
Restricted stock units for directors' deferred compensation plan | — | | | 100 | | | — | | | — | | | — | | | 100 | |
Distribution of 3,985 shares of treasury stock grants for employee restricted stock awards | — | | | (112) | | | — | | | 112 | | | — | | | — | |
Cash dividends declared ($0.62 per share) | — | | | — | | | (2,898) | | | — | | | — | | | (2,898) | |
Distribution of 8,575 shares of treasury stock for directors' compensation | — | | | (139) | | | — | | | 244 | | | — | | | 105 | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Repurchase of 15,388 shares of common stock | — | | | — | | | — | | | (695) | | | — | | | (695) | |
Sale of 4,682 shares of treasury stock (a) | — | | | 83 | | | — | | | 133 | | | — | | | 216 | |
Forfeiture of 681 shares of restricted stock awards | — | | | 30 | | | — | | | (32) | | | — | | | (2) | |
Balances at June 30, 2022 | $ | 53 | | | $ | 47,196 | | | $ | 200,870 | | | $ | (18,084) | | | $ | (55,345) | | | $ | 174,690 | |
(a) All treasury stock sales were completed at the prevailing market price with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan which is a defined contribution plan sponsored by the Bank.
See accompanying notes to unaudited consolidated financial statements.
11
| | | | | | | | | | | |
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
(UNAUDITED) |
(in thousands) | Six Months Ended June 30, |
CASH FLOWS FROM OPERATING ACTIVITIES: | 2022 | | 2021 |
Net income | $ | 14,891 | | | $ | 13,325 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Amortization (increase in) of right-of-use assets | 393 | | | 369 | |
Amortization of intangible assets | 15 | | | 190 | |
| | | |
Provision for loan losses | (2,889) | | | (409) | |
Loss (Gains) on disposal of fixed assets | 20 | | | (20) | |
Depreciation and amortization of fixed assets | 1,147 | | | 1,307 | |
Amortization of premiums on securities, net | 2,172 | | | 2,672 | |
Gain on sales of loans held for sale, net | (99) | | | (642) | |
Proceeds from sales of loans held for sale | 5,575 | | | 20,120 | |
Loans originated and held for sale | (5,080) | | | (19,308) | |
Net (gains) losses on sale of other real estate owned | (45) | | | 18 | |
| | | |
Net change in fair value of equity investments | 355 | | | (188) | |
| | | |
| | | |
Proceeds from sales of trading assets | 37 | | | 41 | |
Purchase of equity investments | (178) | | | (167) | |
(Increase) Decrease in other assets and accrued interest receivable | (8,656) | | | 1,375 | |
Increase in accrued interest payable | 25 | | | 7 | |
Expense related to restricted stock units for directors' deferred compensation plan | 100 | | | 9 | |
Expense related to employee stock compensation | — | | | 132 | |
Expense related to employee restricted stock awards | 333 | | | 223 | |
Increases in (payments on) operating leases | (380) | | | 145 | |
Increase (decrease) in other liabilities | 10,171 | | | (1,761) | |
Income from bank owned life insurance | (22) | | | (27) | |
Net cash provided by operating activities | 17,885 | | | 17,411 | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Proceeds from sales of securities available for sale | — | | | — | |
Proceeds from maturities, calls, and principal paydowns on securities available for sale | 53,412 | | | 72,057 | |
Proceeds from maturities and principal collected on securities held to maturity | 842 | | | 520 | |
Purchases of securities available for sale | (22,713) | | | (216,069) | |
Purchases of securities held to maturity | — | | | (1,042) | |
Purchase of FHLBNY and FRBNY stock | (13,096) | | | (412) | |
Redemption of FHLBNY and FRBNY stock | 11,417 | | | — | |
Proceeds from sales of fixed assets | 125 | | | — | |
Purchases of premises and equipment | (135) | | | (262) | |
Proceeds from sale of other real estate owned | 159 | | | 128 | |
Proceeds from bank owned life insurance | — | | | 286 | |
Net increase in loans | (100,256) | | | (21,407) | |
Net cash used in investing activities | (70,245) | | | (166,201) | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Net (decrease) increase in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts | (59,925) | | | 144,861 | |
Increase (decrease) in time deposits | 87,283 | | | (44,448) | |
| | | |
| | | |
Net proceeds from FHLB overnight advances | 31,300 | | | — | |
| | | |
| | | |
Payments made on finance leases | (133) | | | (125) | |
Purchase of treasury stock | (695) | | | (1,046) | |
Sale of treasury stock | 216 | | | 232 | |
Cash dividends paid | (2,899) | | | (2,425) | |
Net cash provided by financing activities | 55,147 | | | 97,049 | |
Net increase (decrease) in cash and cash equivalents | 2,787 | | | (51,741) | |
Cash and cash equivalents, beginning of period | 26,981 | | | 108,538 | |
Cash and cash equivalents, end of period | $ | 29,768 | | | $ | 56,797 | |
See accompanying notes to unaudited consolidated financial statements.
12
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
| | | | | | | | | | | |
(in thousands) | Six Months Ended June 30, |
Supplemental disclosure of cash flow information: | 2022 | | 2021 |
Cash paid for: | | | |
Interest | $ | 1,653 | | | $ | 1,813 | |
Income taxes | 2,545 | | | 2,900 | |
Supplemental disclosure of non-cash activity: | | | |
Transfer of loans to other real estate owned | 292 | | | 32 | |
Dividends declared, not yet paid | 1,449 | | | 1,447 | |
| | | |
Repurchase of common stock in lieu of employee payroll taxes | 53 | | | 80 | |
| | | |
Operating lease right-of-use assets | — | | | (498) | |
| | | |
Distribution of treasury stock for directors' compensation | 105 | | | 317 | |
Distribution of treasury stock for deferred directors' compensation | 100 | | | 3 | |
Forfeiture of shares of restricted stock awards | (2) | | | — | |
See accompanying notes to unaudited consolidated financial statements.
13
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Corporation, through its wholly-owned subsidiaries, the Bank and CFS, provides a wide range of banking, financing, fiduciary and other financial services to its clients. The Corporation and the Bank are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.
CRM, a wholly-owned subsidiary of the Corporation, which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8 of Regulation S-X of the Exchange Act. These financial statements include the accounts of the Corporation and its subsidiaries, and all significant intercompany balances and transactions are eliminated in consolidation. Amounts in the prior periods' consolidated financial statements are reclassified whenever necessary to conform to the current period's presentation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The unaudited consolidated financial statements should be read in conjunction with the Corporation's 2021 Annual Report on Form 10-K for the year ended December 31, 2021. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.
Reclassifications
Amounts in the prior year financial statements are reclassified whenever necessary to conform to the current year's presentation.
Recent Accounting Pronouncements
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal years beginning after December 15, 2018. In November 2019, the FASB adopted changes to delay the effective date of ASU 2016-13 to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay. The Corporation has established a committee to oversee the implementation of CECL and has selected a vendor to assist in the implementation process. The model chosen utilizes a loss driver analysis which includes reasonable and supportable forecasts to estimate future losses. This analysis includes different methods such as discounted cash flows, remaining life and vintage analysis, which are used depending on the nature of the portfolio segment. The Corporation is running its current incurred loss model and a CECL model concurrently. The Corporation is in the process of updating its policies and internal controls accordingly. The Corporation expects to recognize a one-time cumulative-effect adjustment to our allowance for loan losses upon adoption of CECL, effective of January 1, 2023, consistent with regulatory expectations set forth in interagency guidance.
In March 2022, the FASB issued ASU 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method. The amendments in this ASU expand the current last-of-layer hedging model from a single-layer method to allow multiple hedged layers of a single closed portfolio. To reflect that expansion, the last-of-layer method is renamed the portfolio layer method. In addition, ASU 2022-01 (1) expands the scope of the portfolio layer method to include non-prepayable assets, (2) specifies eligible hedging instruments in a single-layer hedge, (3) provides additional guidance on the accounting for and disclosure of hedge basis adjustments under the portfolio layer method and (4) specifies how edge basis adjustments should be considered when determining credit losses for the assets included in the closed portfolio. ASU 2022-01 is effective for interim and annual periods beginning after December 15, 2022, although early adoption is permitted. Upon adoption, ASU 2022-01 is not expected to have a significant impact on the Corporation's financial condition or results of operations.
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, the Corporation will be required to apply the loan and refinancing and restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs. The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within scope of Subtopic 326-20. ASU 2022-02 is effective for periods beginning after December 15, 2022. The Corporation will adopt ASU 2016-13 effective January 1, 2023 and will simultaneously implement ASU 2022-02.
Risks and Uncertainties - COVID-19
The Corporation's unaudited consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses established. Management evaluated the potential impact of the COVID-19 pandemic as it related to the loan portfolio. As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. During 2020, management increased certain allowance qualitative factors based on an assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.
Management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio. While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, management has designated certain industries as most impacted by COVID-19. For a discussion of the effect of COVID-19 on our business, see page 56 of this Form 10-Q.
NOTE 2 EARNINGS PER COMMON SHARE (shares in thousands)
Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Issuable shares, including those related to directors’ restricted stock shares, are considered outstanding and are included in the computation of basic earnings per share. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities and are considered outstanding at grant date. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur. Earnings per share were computed by dividing net income by 4,690 and 4,680 weighted average shares outstanding for the three month periods ended June 30, 2022 and 2021, respectively. Earnings per share were computed by dividing net income by 4,690 and 4,686 weighted average shares outstanding for the six month periods ended June 30, 2022 and 2021, respectively. Retroactive implementation of the Corporation's 2021 Equity Incentive Plan, approved June 8, 2021 by shareholders, required a change in methodology used to calculate weighted average outstanding shares in 2021. The change did not impact earnings per common share for the prior periods. There were no common stock equivalents during the three and six month periods ended June 30, 2022 or 2021.
NOTE 3 SECURITIES
Amortized cost and estimated fair value of securities available for sale are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
U.S. Treasury notes and bonds | | $ | 60,988 | | | $ | — | | | $ | 4,684 | | | $ | 56,304 | |
Mortgage-backed securities, residential | | 545,524 | | | 16 | | | 62,264 | | | 483,276 | |
Obligations of states and political subdivisions | | 39,948 | | | 10 | | | 992 | | | 38,966 | |
Corporate bonds and notes | | 25,750 | | | — | | | 817 | | | 24,933 | |
SBA loan pools | | 90,333 | | | 293 | | | 1,110 | | | 89,516 | |
| | | | | | | | |
Total | | $ | 762,543 | | | $ | 319 | | | $ | 69,867 | | | $ | 692,995 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Amortized Cost | | Unrealized Gains | | Unrealized Losses | | Estimated Fair Value |
U.S. Treasury notes and bonds | | $ | 61,084 | | | $ | 27 | | | $ | 680 | | | $ | 60,431 | |
Mortgage-backed securities, residential | | 582,060 | | | 4,032 | | | 8,731 | | | 577,361 | |
| | | | | | | | |
Obligations of states and political subdivisions | | 40,299 | | | 2,004 | | | — | | | 42,303 | |
Corporate bonds and notes | | 22,750 | | | 180 | | | 82 | | | 22,848 | |
SBA loan pools | | 89,216 | | | 344 | | | 477 | | | 89,083 | |
| | | | | | | | |
| | | | | | | | |
Total | | $ | 795,409 | | | $ | 6,587 | | | $ | 9,970 | | | $ | 792,026 | |
Amortized cost and estimated fair value of securities held to maturity are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Amortized Cost | | Unrecognized Gains | | Unrecognized Losses | | Estimated Fair Value |
Obligations of states and political subdivisions | | $ | 1,981 | | | $ | — | | | $ | — | | | $ | 1,981 | |
Time deposits with other financial institutions | | 962 | | | — | | | 5 | | | 957 | |
Total | | $ | 2,943 | | | $ | — | | | $ | 5 | | | $ | 2,938 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Amortized Cost | | Unrecognized Gains | | Unrecognized Losses | | Estimated Fair Value |
Obligations of states and political subdivisions | | $ | 2,157 | | | $ | — | | | $ | — | | | $ | 2,157 | |
Time deposits with other financial institutions | | 1,633 | | | 6 | | | — | | | 1,639 | |
Total | | $ | 3,790 | | | $ | 6 | | | $ | — | | | $ | 3,796 | |
The amortized cost and estimated fair value of debt securities are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 |
| | Available for Sale | | Held to Maturity |
| | Amortized Cost | | Fair Value | | Amortized Cost | | Fair Value |
Within one year | | $ | 1,963 | | | $ | 1,952 | | | $ | 2,672 | | | $ | 2,667 | |
After one, but within five years | | 104,071 | | | 98,146 | | | 271 | | | 271 | |
After five, but within ten years | | 20,183 | | | 19,673 | | | — | | | — | |
After ten years | | 469 | | | 432 | | | — | | | — | |
| | 126,686 | | | 120,203 | | | 2,943 | | | 2,938 | |
Mortgage-backed securities, residential | | 545,524 | | | 483,276 | | | — | | | — | |
| | | | | | | | |
SBA loan pools | | 90,333 | | | 89,516 | | | — | | | — | |
Total | | $ | 762,543 | | | $ | 692,995 | | | $ | 2,943 | | | $ | 2,938 | |
There were no proceeds from sales and calls of securities resulting in gains or losses for the three and six month periods ended June 30, 2022 and 2021.
The following tables summarize the investment securities available for sale with unrealized losses at June 30, 2022 and December 31, 2021 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or longer | | Total |
June 30, 2022 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury notes and bonds | $ | 56,304 | | | $ | 4,684 | | | $ | — | | | $ | — | | | $ | 56,304 | | | $ | 4,684 | |
Mortgage-backed securities, residential | 269,606 | | | 26,223 | | | 211,168 | | | 36,041 | | | 480,774 | | | 62,264 | |
Obligations of states and political subdivisions | 35,130 | | | 992 | | | — | | | — | | | 35,130 | | | 992 | |
Corporate bonds and notes | 12,944 | | | 806 | | | 1,989 | | | 11 | | | 14,933 | | | 817 | |
SBA loan pools | 40,324 | | | 914 | | | 29,257 | | | 196 | | | 69,581 | | | 1,110 | |
| | | | | | | | | | | |
Total temporarily impaired securities | $ | 414,308 | | | $ | 33,619 | | | $ | 242,414 | | | $ | 36,248 | | | $ | 656,722 | | | $ | 69,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less than 12 months | | 12 months or longer | | Total |
December 31, 2021 | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury notes and bonds | $ | 49,084 | | | $ | 680 | | | $ | — | | | $ | — | | | $ | 49,084 | | | $ | 680 | |
Mortgage-backed securities, residential | 293,720 | | | 4,502 | | | 122,050 | | | 4,229 | | | 415,770 | | | 8,731 | |
| | | | | | | | | | | |
Corporate bonds and notes | 4,928 | | | 72 | | | 1,989 | | | 10 | | | 6,917 | | | 82 | |
SBA loan pools | 51,235 | | | 296 | | | 13,769 | | | 181 | | | 65,004 | | | 477 | |
Total temporarily impaired securities | $ | 398,967 | | | $ | 5,550 | | | $ | 137,808 | | | $ | 4,420 | | | $ | 536,775 | | | $ | 9,970 | |
Other-Than-Temporary Impairment
As of June 30, 2022, the majority of the Corporation's unrealized losses in the investment securities portfolio related to mortgage-backed securities. At June 30, 2022, all of the unrealized losses related to mortgage-backed securities were issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell these securities and it is not likely that it will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at June 30, 2022.
NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio, net of deferred origination fees and costs, is summarized as follows (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Commercial and agricultural: | | | | |
Commercial and industrial | | $ | 258,474 | | | $ | 256,893 | |
Agricultural | | 89 | | | 394 | |
Commercial mortgages: | | | | |
Construction | | 94,937 | | | 82,204 | |
Commercial mortgages, other | | 771,201 | | | 720,358 | |
Residential mortgages | | 276,847 | | | 259,334 | |
Consumer loans: | | | | |
| | | | |
Home equity lines and loans | | 73,770 | | | 70,670 | |
Indirect consumer loans | | 132,330 | | | 118,569 | |
Direct consumer loans | | 9,914 | | | 9,827 | |
Total loans, net of deferred loan fees and costs | | 1,617,562 | | | 1,518,249 | |
Interest receivable on loans | | 4,431 | | | 4,133 | |
Total recorded investment in loans | | $ | 1,621,993 | | | $ | 1,522,382 | |
The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above. As of June 30, 2022 and December 31, 2021, the Corporation had outstanding PPP loan balances of $3.0 million and $43.2 million, respectively, which were included in commercial and industrial loans in the table above. These loans require no allowance for loan losses as of June 30, 2022 and December 31, 2021 since they are government guaranteed loans.
The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2022 |
Allowance for loan losses | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Beginning balance | $ | 3,485 | | | $ | 12,963 | | | $ | 1,606 | | | $ | 1,874 | | | $ | 19,928 | |
Charge-offs | (16) | | | (687) | | | — | | | (128) | | | (831) | |
Recoveries | 23 | | | 1 | | | — | | | 108 | | | 132 | |
Net recoveries (charge-offs) | 7 | | | (686) | | | — | | | (20) | | | (699) | |
Provision | 72 | | | (1,963) | | | 108 | | | 39 | | | (1,744) | |
Ending balance | $ | 3,564 | | | $ | 10,314 | | | $ | 1,714 | | | $ | 1,893 | | | $ | 17,485 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2021 |
Allowance for loan losses | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Beginning balance | $ | 4,337 | | | $ | 11,787 | | | $ | 2,115 | | | $ | 2,670 | | | $ | 20,909 | |
Charge-offs | (25) | | | — | | | (46) | | | (156) | | | (227) | |
Recoveries | 10 | | | 1 | | | 10 | | | 123 | | | 144 | |
Net recoveries (charge-offs) | (15) | | | 1 | | | (36) | | | (33) | | | (83) | |
Provision | (694) | | | 1,175 | | | (288) | | | (343) | | | (150) | |
Ending balance | $ | 3,628 | | | $ | 12,963 | | | $ | 1,791 | | | $ | 2,294 | | | $ | 20,676 | |
The following tables present the activity in the allowance for loan losses by portfolio segment for the six month periods ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2022 |
Allowance for loan losses | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Beginning balance | $ | 3,591 | | | $ | 13,556 | | | $ | 1,803 | | | $ | 2,075 | | | $ | 21,025 | |
Charge-offs | (20) | | | (687) | | | — | | | (322) | | | (1,029) | |
Recoveries | 30 | | | 2 | | | — | | | 346 | | | 378 | |
Net recoveries (charge-offs) | 10 | | | (685) | | | — | | | 24 | | | (651) | |
Provision | (37) | | | (2,557) | | | (89) | | | (206) | | | (2,889) | |
Ending balance | $ | 3,564 | | | $ | 10,314 | | | $ | 1,714 | | | $ | 1,893 | | | $ | 17,485 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2021 |
Allowance for loan losses | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Beginning balance | $ | 4,493 | | | $ | 11,496 | | | $ | 2,079 | | | $ | 2,856 | | | $ | 20,924 | |
Charge-offs | (25) | | | — | | | (71) | | | (320) | | | (416) | |
Recoveries | 275 | | | 1 | | | 10 | | | 291 | | | 577 | |
Net recoveries (charge-offs) | 250 | | | 1 | | | (61) | | | (29) | | | 161 | |
Provision | (1,115) | | | 1,466 | | | (227) | | | (533) | | | (409) | |
Ending balance | $ | 3,628 | | | $ | 12,963 | | | $ | 1,791 | | | $ | 2,294 | | | $ | 20,676 | |
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
Allowance for loan losses: | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Ending allowance balance attributable to loans: | | | | | | | | | |
Individually evaluated for impairment | $ | 1,239 | | | $ | 44 | | | $ | — | | | $ | 43 | | | $ | 1,326 | |
Collectively evaluated for impairment | 2,325 | | | 10,270 | | | 1,714 | | | 1,850 | | | 16,159 | |
| | | | | | | | | |
Total ending allowance balance | $ | 3,564 | | | $ | 10,314 | | | $ | 1,714 | | | $ | 1,893 | | | $ | 17,485 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Allowance for loan losses: | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Ending allowance balance attributable to loans: | | | | | | | | | |
Individually evaluated for impairment | $ | 1,394 | | | $ | 1,571 | | | $ | — | | | $ | 65 | | | $ | 3,030 | |
Collectively evaluated for impairment | 2,197 | | | 11,985 | | | 1,803 | | | 2,010 | | | 17,995 | |
| | | | | | | | | |
Total ending allowance balance | $ | 3,591 | | | $ | 13,556 | | | $ | 1,803 | | | $ | 2,075 | | | $ | 21,025 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
Loans: | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Loans individually evaluated for impairment | $ | 1,925 | | | $ | 4,210 | | | $ | 924 | | | $ | 290 | | | $ | 7,349 | |
Loans collectively evaluated for impairment | 257,383 | | | 864,425 | | | 276,643 | | | 216,193 | | | 1,614,644 | |
| | | | | | | | | |
Total ending loans balance | $ | 259,308 | | | $ | 868,635 | | | $ | 277,567 | | | $ | 216,483 | | | $ | 1,621,993 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Loans: | Commercial and Agricultural | | Commercial Mortgages | | Residential Mortgages | | Consumer Loans | | Total |
Loans individually evaluated for impairment | $ | 2,427 | | | $ | 7,967 | | | $ | 938 | | | $ | 315 | | | $ | 11,647 | |
Loans collectively evaluated for impairment | 255,586 | | | 796,858 | | | 259,029 | | | 199,262 | | | 1,510,735 | |
| | | | | | | | | |
Total ending loans balance | $ | 258,013 | | | $ | 804,825 | | | $ | 259,967 | | | $ | 199,577 | | | $ | 1,522,382 | |
The following table presents loans individually evaluated for impairment recognized by class of loans as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
With no related allowance recorded: | Unpaid Principal Balance | | Recorded Investment | | Allowance for Loan Losses Allocated | | Unpaid Principal Balance | | Recorded Investment | | Allowance for Loan Losses Allocated |
Commercial and agricultural: | | | | | | | | | | | |
Commercial and industrial | $ | 603 | | | $ | 602 | | | $ | — | | | $ | 954 | | | $ | 948 | | | $ | — | |
Commercial mortgages: | | | | | | | | | | | |
Construction | 96 | | | 97 | | | — | | | 129 | | | 130 | | | — | |
Commercial mortgages, other | 4,071 | | | 4,069 | | | — | | | 6,940 | | | 4,278 | | | — | |
Residential mortgages | 934 | | | 924 | | | — | | | 951 | | | 938 | | | — | |
Consumer loans: | | | | | | | | | | | |
Home equity lines and loans | 169 | | | 154 | | | — | | | 185 | | | 169 | | | — | |
With an allowance recorded: | | | | | | | | | | | |
Commercial and agricultural: | | | | | | | | | | | |
Commercial and industrial | 1,321 | | | 1,323 | | | 1,239 | | | 5,350 | | | 1,479 | | | 1,394 | |
Commercial mortgages: | | | | | | | | | | | |
Commercial mortgages, other | 44 | | | 44 | | | 44 | | | 3,550 | | | 3,559 | | | 1,571 | |
Consumer loans: | | | | | | | | | | | |
Home equity lines and loans | 136 | | | 136 | | | 43 | | | 146 | | | 146 | | | 65 | |
Total | $ | 7,374 | | | $ | 7,349 | | | $ | 1,326 | | | $ | 18,205 | | | $ | 11,647 | | | $ | 3,030 | |
The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans for the three and six month periods ended June 30, 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 | | Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
With no related allowance recorded: | | Average Recorded Investment | | Interest Income Recognized(1) | | Average Recorded Investment | | Interest Income Recognized(1) | | Average Recorded Investment | | Interest Income Recognized(1) | | Average Recorded Investment | | Interest Income Recognized(1) |
Commercial and agricultural: | | | | | | | | | | | | | | |
Commercial and industrial | | $ | 764 | | | $ | — | | | $ | 1,823 | | | $ | 13 | | | $ | 825 | | | $ | 3 | | | $ | 1,869 | | | $ | 26 | |
Commercial mortgages: | | | | | | | | | | | | | | |
Construction | | 105 | | | 1 | | | 168 | | | 2 | | | 113 | | | 2 | | | 175 | | | 3 | |
Commercial mortgages, other | | 4,088 | | | 7 | | | 4,780 | | | 8 | | | 4,151 | | | 14 | | | 4,774 | | | 15 | |
Residential mortgages | | 927 | | | 11 | | | 959 | | | 10 | | | 931 | | | 22 | | | 1,063 | | | 18 | |
Consumer loans: | | | | | | | | | | | | | | | | |
Home equity lines & loans | | 157 | | | — | | | 193 | | | 2 | | | 161 | | | 2 | | | 339 | | | 3 | |
With an allowance recorded: | | | | | | | | | | | | | | | | |
Commercial and agricultural: | | | | | | | | | | | | | | |
Commercial and industrial | | 1,369 | | | 3 | | | 1,498 | | | — | | | 1,405 | | | 5 | | | 1,478 | | | 2 | |
Commercial mortgages: | | | | | | | | | | | | | | |
Commercial mortgages, other | | 1,326 | | | — | | | 1,946 | | | — | | | 2,071 | | | 21 | | | 1,353 | | | — | |
Consumer loans: | | | | | | | | | | | | | | | | |
Home equity lines and loans | | 139 | | | — | | | 158 | | | — | | | 141 | | | — | | | 162 | | | — | |
Total | | $ | 8,875 | | | $ | 22 | | | $ | 11,525 | | | $ | 35 | | | $ | 9,798 | | | $ | 69 | | | $ | 11,213 | | | $ | 67 | |
(1)Cash basis interest income approximates interest income recognized.
The following table presents the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Non-accrual | | Loans Past Due 90 Days or More and Still Accruing |
| | June 30, 2022 | | December 31, 2021 | | June 30, 2022 | | December 31, 2021 |
Commercial and agricultural: | | | | | | | | |
Commercial and industrial | | $ | 1,748 | | | $ | 1,932 | | | $ | 2 | | | $ | 4 | |
| | | | | | | | |
Commercial mortgages: | | | | | | | | |
Construction | | 17 | | | 34 | | | — | | | — | |
Commercial mortgages, other | | 3,643 | | | 3,844 | | | — | | | — | |
Residential mortgages | | 600 | | | 1,039 | | | — | | | — | |
Consumer loans: | | | | | | | | |
| | | | | | | | |
Home equity lines and loans | | 785 | | | 790 | | | — | | | — | |
Indirect consumer loans | | 575 | | | 462 | | | — | | | — | |
Direct consumer loans | | 6 | | | 13 | | | — | | | — | |
Total | | $ | 7,374 | | | $ | 8,114 | | | $ | 2 | | | $ | 4 | |
The following tables present the aging of the recorded investment in loans as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | | | Loans Not Past Due | | Total |
Commercial and agricultural: | | | | | | | | | | | | | |
Commercial and industrial | $ | 56 | | | $ | 51 | | | $ | 14 | | | $ | 121 | | | | | $ | 259,098 | | | $ | 259,219 | |
Agricultural | — | | | — | | | — | | | — | | | | | 89 | | | 89 | |
Commercial mortgages: | | | | | | | | | | | | | |
Construction | 616 | | | — | | | — | | | 616 | | | | | 94,594 | | | 95,210 | |
Commercial mortgages, other | 350 | | | — | | | 244 | | | 594 | | | | | 772,831 | | | 773,425 | |
Residential mortgages | 1,330 | | | 88 | | | 341 | | | 1,759 | | | | | 275,808 | | | 277,567 | |
Consumer loans: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Home equity lines and loans | 26 | | | 70 | | | 543 | | | 639 | | | | | 73,287 | | | 73,926 | |
Indirect consumer loans | 600 | | | 237 | | | 285 | | | 1,122 | | | | | 131,479 | | | 132,601 | |
Direct consumer loans | 3 | | | — | | | 6 | | | 9 | | | | | 9,947 | | | 9,956 | |
Total | $ | 2,981 | | | $ | 446 | | | $ | 1,433 | | | $ | 4,860 | | | | | $ | 1,617,133 | | | $ | 1,621,993 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 30 - 59 Days Past Due | | 60 - 89 Days Past Due | | 90 Days or More Past Due | | Total Past Due | | | | Loans Not Past Due | | Total |
Commercial and agricultural: | | | | | | | | | | | | | |
Commercial and industrial | $ | 413 | | | $ | 148 | | | $ | 26 | | | $ | 587 | | | | | $ | 257,031 | | | $ | 257,618 | |
Agricultural | — | | | — | | | — | | | — | | | | | 395 | | | 395 | |
Commercial mortgages: | | | | | | | | | | | | | |
Construction | — | | | — | | | — | | | — | | | | | 82,435 | | | 82,435 | |
Commercial mortgages, other | 24 | | | 224 | | | 1,302 | | | 1,550 | | | | | 720,840 | | | 722,390 | |
Residential mortgages | 580 | | | 32 | | | 652 | | | 1,264 | | | | | 258,703 | | | 259,967 | |
Consumer loans: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Home equity lines and loans | 256 | | | 69 | | | 424 | | | 749 | | | | | 70,105 | | | 70,854 | |
Indirect consumer loans | 1,179 | | | 424 | | | 255 | | | 1,858 | | | | | 116,997 | | | 118,855 | |
Direct consumer loans | 24 | | | 11 | | | 13 | | | 48 | | | | | 9,820 | | | 9,868 | |
Total | $ | 2,476 | | | $ | 908 | | | $ | 2,672 | | | $ | 6,056 | | | | | $ | 1,516,326 | | | $ | 1,522,382 | |
Troubled Debt Restructurings:
A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 were considered current for COVID-19 related modifications and therefore not be treated as TDRs, until January 1, 2022. At its highest point as of May 31, 2020, in conformance with Section 4013 of the CARES Act, total loan forbearances represented 15.77% of the Corporation's total loan portfolio, or $242.5 million. As of June 30, 2022, no loans remained in modified status.
As of June 30, 2022 and December 31, 2021, the Corporation had a recorded investment in TDRs of $6.2 million and $10.3 million, respectively. There were specific reserves of $0.3 million and $1.9 million allocated for TDRs at June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, TDRs totaling $1.7 million were accruing interest under the modified terms and $4.5 million were on non-accrual status. As of December 31, 2021, TDRs totaling $5.6 million were accruing interest under the modified terms and $4.7 million were on non-accrual status. The Corporation committed no additional amounts as of both June 30, 2022 and December 31, 2021, to customers with outstanding loans that are classified as TDRs.
During the three months ended June 30, 2022, no loans were modified as TDRs. During the three month period ended June 30, 2021, the terms and conditions of two commercial mortgage loans were modified as TDRs. The modification of the terms of both of these loans included a postponement or reduction of the scheduled amortized payments for greater than a three month period.
During the six months ended June 30, 2022, no loans were modified as TDRs. During the six month period ended June 30, 2021, the terms and conditions of four commercial mortgage loan were modified as TDRs. The modification of the terms of all of these loans included a postponement or reduction of the scheduled amortized payments for greater than a three month period.
The following table presents loans by class modified as TDRs that occurred during the three month period ended June 30, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
June 30, 2021 | | Number of Loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Troubled debt restructurings: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Commercial mortgages: | | | | | | |
Commercial mortgages, other | | 2 | | | $ | 3,606 | | | $ | 3,606 | |
| | | | | | |
| | | | | | |
| | | | | | |
Total | | 2 | | | $ | 3,606 | | | $ | 3,606 | |
The TDRs described above increased the allowance for loan losses by $1.7 million and resulted in no charge-offs during the three month period ended June 30, 2021.
The following table presents loans by class modified as TDRs that occurred during the six month period ended June 30, 2021 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | |
June 30, 2021 | | Number of Loans | | Pre-Modification Outstanding Recorded Investment | | Post-Modification Outstanding Recorded Investment |
Troubled debt restructurings: | | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Commercial mortgages: | | | | | | |
Commercial mortgages, other | | 4 | | | $ | 6,094 | | | $ | 6,094 | |
Residential mortgages | | — | | | — | | | — | |
| | | | | | |
| | | | | | |
Total | | 4 | | | $ | 6,094 | | | $ | 6,094 | |
The TDRs described above increased the allowance for loan losses by $1.7 million and resulted in no charge-offs during the six month period ended June 30, 2021.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three and six month periods ended June 30, 2022 and 2021.
Credit Quality Indicators
The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower’s ability to service its debt and affirm the risk ratings for the loans at least annually.
For the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment. Retail loans are not rated until they become 90 days past due.
The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines):
Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.
Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
Commercial loans not meeting the criteria above to be considered criticized or classified, are considered to be pass rated loans. Loans listed as not rated, are included in groups of homogeneous loans performing under terms of the loan notes. Based on the analyses performed as of June 30, 2022 and December 31, 2021, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| Not Rated | | Pass | | Special Mention | | Substandard | | Doubtful | | | | Total |
Commercial and agricultural: | | | | | | | | | | | | | |
Commercial and industrial | $ | — | | | $ | 251,866 | | | $ | 3,188 | | | $ | 3,186 | | | $ | 979 | | | | | $ | 259,219 | |
Agricultural | — | | | 89 | | | — | | | — | | | — | | | | | 89 | |
Commercial mortgages: | | | | | | | | | | | | | |
Construction | — | | | 95,193 | | | — | | | 17 | | | — | | | | | 95,210 | |
Commercial mortgages | — | | | 735,183 | | | 30,367 | | | 7,831 | | | 44 | | | | | 773,425 | |
Residential mortgages | 276,967 | | | — | | | — | | | 600 | | | — | | | | | 277,567 | |
Consumer loans: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Home equity lines and loans | 73,141 | | | — | | | — | | | 785 | | | — | | | | | 73,926 | |
Indirect consumer loans | 132,026 | | | — | | | — | | | 575 | | | — | | | | | 132,601 | |
Direct consumer loans | 9,950 | | | — | | | — | | | 6 | | | — | | | | | 9,956 | |
Total | $ | 492,084 | | | $ | 1,082,331 | | | $ | 33,555 | | | $ | 13,000 | | | $ | 1,023 | | | | | $ | 1,621,993 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Not Rated | | Pass | | Special Mention | | Substandard | | Doubtful | | | | Total |
Commercial and agricultural: | | | | | | | | | | | | | |
Commercial and industrial | $ | — | | | $ | 250,529 | | | $ | 2,892 | | | $ | 3,108 | | | $ | 1,089 | | | | | $ | 257,618 | |
Agricultural | — | | | 395 | | | — | | | — | | | — | | | | | 395 | |
Commercial mortgages: | | | | | | | | | | | | | |
Construction | — | | | 82,404 | | | — | | | 31 | | | — | | | | | 82,435 | |
Commercial mortgages | — | | | 672,741 | | | 31,072 | | | 17,458 | | | 1,119 | | | | | 722,390 | |
Residential mortgages | 258,928 | | | — | | | — | | | 1,039 | | | — | | | | | 259,967 | |
Consumer loans: | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Home equity lines and loans | 70,064 | | | — | | | — | | | 790 | | | — | | | | | 70,854 | |
Indirect consumer loans | 118,393 | | | — | | | — | | | 462 | | | — | | | | | 118,855 | |
Direct consumer loans | 9,855 | | | — | | | — | | | 13 | | | — | | | | | 9,868 | |
Total | $ | 457,240 | | | $ | 1,006,069 | | | $ | 33,964 | | | $ | 22,901 | | | $ | 2,208 | | | | | $ | 1,522,382 | |
The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
| | | | | Consumer Loans |
| Residential Mortgages | | | | Home Equity Lines and Loans | | Indirect Consumer Loans | | Other Direct Consumer Loans |
Performing | $ | 276,967 | | | | | $ | 73,141 | | | $ | 132,026 | | | $ | 9,950 | |
Non-Performing | 600 | | | | | 785 | | | 575 | | | 6 | |
| $ | 277,567 | | | | | $ | 73,926 | | | $ | 132,601 | | | $ | 9,956 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | | | Consumer Loans |
| Residential Mortgages | | | | Home Equity Lines and Loans | | Indirect Consumer Loans | | Other Direct Consumer Loans |
Performing | $ | 258,928 | | | | | $ | 70,064 | | | $ | 118,393 | | | $ | 9,855 | |
Non-Performing | 1,039 | | | | | 790 | | | 462 | | | 13 | |
| $ | 259,967 | | | | | $ | 70,854 | | | $ | 118,855 | | | $ | 9,868 | |
NOTE 5 FAIR VALUE
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods and significant assumptions to estimate fair value on a recurring basis:
Available for Sale Securities: The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs).
Equity Investments: Securities that are held to fund a deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value included in earnings. The fair values of equity investments are determined by quoted market prices (Level 1 inputs).
Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part of the allowance for loan loss accounting. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, typically resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
OREO: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral dependent impaired loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition.
Derivatives: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize credit default rate assumptions (Level 3 inputs).
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at June 30, 2022 Using |
Financial Assets: | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
U.S. Treasury notes and bonds | $ | 56,304 | | | $ | 56,304 | | | $ | — | | | $ | — | |
Mortgage-backed securities, residential | 483,276 | | | — | | | 483,276 | | | — | |
| | | | | | | |
Obligations of states and political subdivisions | 38,966 | | | — | | | 38,966 | | | — | |
Corporate bonds and notes | 24,933 | | | — | | | 24,933 | | | — | |
SBA loan pools | 89,516 | | | — | | | 89,516 | | | — | |
Total available for sale securities | $ | 692,995 | | | $ | 56,304 | | | $ | 636,691 | | | $ | — | |
| | | | | | | |
Equity investments, at fair value | $ | 2,190 | | | $ | 2,190 | | | $ | — | | | $ | — | |
Derivative assets | 17,616 | | | — | | | 17,616 | | | — | |
| | | | | | | |
Financial Liabilities: | | | | | | | |
Derivative liabilities | $ | 17,673 | | | $ | — | | | $ | 17,673 | | | $ | — | |
There were no transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurement at December 31, 2021 Using |
Financial Assets: | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
U.S. Treasury notes and bonds | $ | 60,431 | | | $ | 60,431 | | | $ | — | | | $ | — | |
Mortgage-backed securities, residential | 577,361 | | | — | | | 577,361 | | | — | |
| | | | | | | |
Obligations of states and political subdivisions | 42,303 | | | — | | | 42,303 | | | — | |
Corporate bonds and notes | 22,848 | | | — | | | 22,848 | | | — | |
SBA loan pools | 89,083 | | | — | | | 89,083 | | | — | |
| | | | | | | |
| | | | | | | |
Total available for sale securities | $ | 792,026 | | | $ | 60,431 | | | $ | 731,595 | | | $ | — | |
| | | | | | | |
Equity investments, at fair value | $ | 2,404 | | | $ | 2,404 | | | $ | — | | | $ | — | |
Derivative assets | 9,498 | | | — | | | 9,498 | | | — | |
| | | | | | | |
Financial Liabilities: | | | | | | | |
Derivative liabilities | $ | 9,726 | | | $ | — | | | $ | 9,726 | | | $ | — | |
There were no transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2021.
Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at June 30, 2022 Using | | |
Financial Assets: | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Gains (Losses) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other real estate owned: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Residential mortgages | $ | 83 | | | $ | — | | | $ | — | | | $ | 83 | | | $ | — | |
Consumer loans: | | | | | | | | | |
Home equity lines and loans | 54 | | | — | | | — | | | 54 | | | — | |
Total other real estate owned, net | $ | 137 | | | $ | — | | | $ | — | | | $ | 137 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Fair Value Measurement at December 31, 2021 Using | | |
Financial Assets: | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Total Gains (Losses) |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Other real estate owned: | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Residential mortgages | $ | 143 | | | $ | — | | | $ | — | | | $ | 143 | | | $ | — | |
| | | | | | | | | |
| | | | | | | | | |
Total other real estate owned, net | $ | 143 | | | $ | — | | | $ | — | | | $ | 143 | | | $ | — | |
The following tables present information related to Level 3 non-recurring fair value measurement at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Fair Value at June 30, 2022 | | Valuation Technique | | Unobservable Inputs | | Range [Weighted Average] at June 30, 2022 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
OREO: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Residential mortgages | | $ | 83 | | | Sales comparison | | Discount to appraised value | | 20.80% - 20.80% [20.80%] |
Consumer loans: | | | | | | | | |
Home equity lines and loans | | 54 | | | Sales comparison | | Discount to appraised value | | 20.80% - 20.80% [20.80%] |
| | $ | 137 | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Description | | Fair Value at December 31, 2021 | | Valuation Technique | | Unobservable Inputs | | Range [Weighted Average] at December 31, 2021 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
OREO: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Residential mortgages | | $ | 143 | | | Sales comparison | | Discount to appraised value | | 20.80% - 20.80% [20.80%] |
| | | | | | | | |
| | | | | | | | |
| | $ | 143 | | | | | | | |
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of other financial instruments, at June 30, 2022 and December 31, 2021, are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 |
Financial assets: | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Estimated Fair Value (1) |
Cash and due from financial institutions | $ | 24,371 | | | $ | 24,371 | | | $ | — | | | $ | — | | | $ | 24,371 | |
Interest-earning deposits in other financial institutions | 5,397 | | | 5,397 | | | — | | | — | | | 5,397 | |
Equity investments | 2,750 | | | 2,750 | | | — | | | — | | | 2,750 | |
Securities available for sale | 692,995 | | | 56,304 | | | 636,691 | | | — | | | 692,995 | |
Securities held to maturity | 2,943 | | | — | | | 957 | | | 1,981 | | | 2,938 | |
FHLBNY and FRBNY stock | 5,897 | | | — | | | — | | | — | | | N/A |
Loans, net and loans held for sale | 1,600,077 | | | — | | | — | | | 1,568,400 | | | 1,568,400 | |
Accrued interest receivable | 6,377 | | | 106 | | | 1,807 | | | 4,464 | | | 6,377 | |
Derivative Assets | 17,616 | | | — | | | 17,616 | | | — | | | 17,616 | |
| | | | | | | | | |
Financial liabilities: | | | | | | | | | |
Deposits: | | | | | | | | | |
Demand, savings, and insured money market accounts | $ | 1,899,151 | | | $ | 1,899,151 | | | $ | — | | | $ | — | | | $ | 1,899,151 | |
Time deposits | 283,640 | | | — | | | 284,305 | | | — | | | 284,305 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Accrued interest payable | 235 | | | 11 | | | 224 | | | — | | | 235 | |
Derivative Liabilities | 17,673 | | | — | | | 17,673 | | | — | | | 17,673 | |
(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
Financial assets: | Carrying Amount | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Estimated Fair Value (1) |
Cash and due from financial institutions | $ | 17,365 | | | $ | 17,365 | | | $ | — | | | $ | — | | | $ | 17,365 | |
Interest-earning deposits in other financial institutions | 9,616 | | | 9,616 | | | — | | | — | | | 9,616 | |
Equity investments | 2,964 | | | 2,964 | | | — | | | — | | | 2,964 | |
Securities available for sale | 792,026 | | | 60,431 | | | 731,595 | | | — | | | 792,026 | |
Securities held to maturity | 3,790 | | | — | | | 1,639 | | | 2,157 | | | 3,796 | |
FHLBNY and FRBNY stock | 4,218 | | | — | | | — | | | — | | | N/A |
Loans, net and loans held for sale | 1,497,620 | | | — | | | — | | | 1,480,967 | | | 1,480,967 | |
| | | | | | | | | |
Accrued interest receivable | 5,985 | | | 106 | | | 1,746 | | | 4,133 | | | 5,985 | |
Derivative Asset | 9,498 | | | — | | | 9,498 | | | — | | | 9,498 | |
| | | | | | | | | |
Financial liabilities: | | | | | | | | | |
Deposits: | | | | | | | | | |
Demand, savings, and insured money market accounts | $ | 1,959,076 | | | $ | 1,959,076 | | | $ | — | | | $ | — | | | $ | 1,959,076 | |
Time deposits | 196,357 | | | — | | | 197,658 | | | — | | | 197,658 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
Accrued interest payable | 210 | | | 10 | | | 200 | | | — | | | 210 | |
Derivative Liabilities | 9,726 | | | — | | | 9,726 | | | — | | | 9,726 | |
(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
NOTE 6 LEASES
Operating Leases
The Corporation leases certain branch properties under long-term, operating lease agreements. The leases expire at various dates through 2033 and generally include renewal options. As of June 30, 2022, the weighted average remaining lease term was 9.01 years with a weighted average discount rate of 3.34%. Rent expense was $0.2 million for the three months ended June 30, 2022. Rent expense was $0.5 million for the six months ended June 30, 2022. Certain leases provide for increases in future minimum annual rent payments as defined in the lease agreements. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees.
Leased branch properties at June 30, 2022 and December 31, 2021 consist of the following (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Operating lease right-of-use asset | | $ | 7,234 | | | $ | 7,145 | |
Less: accumulated amortization | | (393) | | | (759) | |
Less: lease termination | | — | | | (313) | |
Add: new lease agreement and modifications | | — | | | 1,161 | |
Operating lease right-of-use-assets, net | | $ | 6,841 | | | $ | 7,234 | |
The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of June 30, 2022 (in thousands):
| | | | | | | | |
Year | | Amount |
2022 | | $ | 487 | |
2023 | | 992 | |
2024 | | 924 | |
2025 | | 841 | |
2026 | | 845 | |
2027 and thereafter | | 4,021 | |
Total minimum lease payments | | 8,110 | |
Less: amount representing interest | | (1,112) | |
Present value of net minimum lease payments | | $ | 6,998 | |
As of June 30, 2022, the Corporation had no operating leases that were signed, but had not yet commenced.
Finance Leases
The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of June 30, 2022, the weighted average remaining lease term was 10.68 years with a weighted average discount rate of 3.38%. The Corporation has included these leases in premises and equipment as of June 30, 2022 and December 31, 2021 as follows (in thousands):
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Buildings | | $ | 5,572 | | | $ | 5,572 | |
Less: accumulated depreciation | | (2,374) | | | (2,208) | |
Net book value | | $ | 3,198 | | | $ | 3,364 | |
The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value of net minimum lease payments as of June 30, 2022 (in thousands):
| | | | | | | | |
Year | | Amount |
2022 | | $ | 195 | |
2023 | | 391 | |
2024 | | 391 | |
2025 | | 409 | |
2026 | | 425 | |
2027 and thereafter | | 2,417 | |
Total minimum lease payments | | 4,228 | |
Less: amount representing interest | | (767) | |
Present value of net minimum lease payments | | $ | 3,461 | |
As of June 30, 2022, the Corporation had no finance leases that were signed, but had not yet commenced.
Related Party Transactions
The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through July, 2024 from a member of the Corporation's Board of Directors with monthly rent and CAM related expenses totaling $4 thousand per month. Rent and CAM paid to this Board member totaled $13 thousand and $12 thousand for the three month periods ended June 30, 2022 and 2021, respectively. Rent and CAM paid to this Board member totaled $25 thousand for each of the six month periods ended June 30, 2022 and 2021. This Board member retired from the Corporation's Board of Directors as of June 7, 2022.
The Bank leases its branch located at 2 Rush Street, Schenectady, New York, under a lease agreement through February, 2033 from a member of the Corporation's Board of Directors with monthly rent and CAM related expenses totaling $8 thousand per month. Rent and CAM related expenses paid to this Board member totaled $25 thousand and $24 thousand for the three month periods ended June 30, 2022 and 2021, respectively. Rent and CAM related expenses paid to this Board member totaled $51 thousand and $50 thousand for the six month periods ended June 30, 2022 and 2021, respectively.
NOTE 7 GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill included in the core banking segment during the six month periods ended June 30, 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Beginning of year | | $ | 21,824 | | | $ | 21,824 | |
Acquired goodwill | | — | | | — | |
Ending balance June 30, | | $ | 21,824 | | | $ | 21,824 | |
Acquired intangible assets were as follows at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | At June 30, 2022 | | At December 31, 2021 |
| | Balance Acquired | | Accumulated Amortization | | Balance Acquired | | Accumulated Amortization |
Core deposit intangibles | | $ | 5,975 | | | $ | 5,975 | | | $ | 5,975 | | | $ | 5,974 | |
Other customer relationship intangibles | | 5,633 | | | 5,633 | | | 5,633 | | | 5,619 | |
Total | | $ | 11,608 | | | $ | 11,608 | | | $ | 11,608 | | | $ | 11,593 | |
Aggregate amortization expense was $4 thousand and $0.1 million for the three month periods ended June 30, 2022 and 2021, respectively. Aggregate amortization expense was $15.0 thousand and $0.2 million for the six month periods ended June 30, 2022 and 2021, respectively. As of June 30, 2022, there is no remaining estimated aggregate amortization expense.
The amount of goodwill reflected in the Corporation's Unaudited Consolidated Financial statements is required to be tested by management for impairment on at least an annual basis. Goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred.
NOTE 8 COMMITMENTS AND CONTINGENCIES
The Corporation is a party to certain financial instruments with off-balance sheet risk such as commitments under standby letters of credit, unused portions of lines of credit, overdraft protection and commitments to fund new loans. In accordance with GAAP, these financial instruments are not recorded in the financial statements. The Corporation's policy is to record such instruments when funded. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are generally used by the Corporation to manage clients' requests for funding and other client needs.
The following table lists the contractual amounts of financial instruments with off-balance sheet risk at June 30, 2022 and December 31, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
| Fixed Rate | | Variable Rate | | Fixed Rate | | Variable Rate |
Commitments to make loans | $ | 40,228 | | | $ | 80,861 | | | $ | 20,772 | | | $ | 46,558 | |
Unused lines of credit | 4,913 | | | 300,545 | | | 4,745 | | | 288,368 | |
Standby letters of credit | — | | | 16,278 | | | — | | | 7,974 | |
On February 4, 2020, the Corporation filed a lawsuit against Pioneer Bank, Albany, New York, in the Supreme Court of the State of New York in the County of Albany. As disclosed in the Corporation’s September 12, 2019 Current Report on Form 8-K, the Bank owns a participating interest totaling $4.2 million in an approximately $36.0 million commercial credit facility on which the borrower defaulted due to fraudulent activity. The Bank’s complaint alleges that Pioneer Bank, as lead bank, breached the participation agreement and engaged in fraud and negligent misrepresentation. The Corporation received a recovery of $0.5 million in April, 2020, and continues to pursue recovery of the remaining $3.7 million and accumulated expenses as a result of purchasing the participation interest.
In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of June 30, 2022, we believe that we are not a party to any additional pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.
NOTE 9 ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Accumulated other comprehensive income (loss) represents the net unrealized holding gains or losses on securities available for sale and the funded status of the Corporation's defined benefit pension plan and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect.
The following is a summary of the changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains and Losses on Securities Available for Sale | | Defined Benefit and Other Benefit Plans | | Total |
Balance at April 1, 2022 | | $ | (33,582) | | | $ | (4,023) | | | $ | (37,605) | |
| | | | | | |
| | | | | | |
Other comprehensive income before reclassification | | (17,747) | | | — | | | (17,747) | |
Amounts reclassified from accumulated other comprehensive income | | — | | | 7 | | | 7 | |
Net current period other comprehensive income (loss) | | (17,747) | | | 7 | | | (17,740) | |
Balance at June 30, 2022 | | $ | (51,329) | | | $ | (4,016) | | | $ | (55,345) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains and Losses on Securities Available for Sale | | Defined Benefit and Other Benefit Plans | | Total | | | | |
Balance at April 1, 2021 | | $ | (1,026) | | | $ | (6,726) | | | $ | (7,752) | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other comprehensive income before reclassification | | 3,893 | | | — | | | 3,893 | | | | | |
Amounts reclassified from accumulated other comprehensive income | | — | | | 1 | | | 1 | | | | | |
Net current period other comprehensive income | | 3,893 | | | 1 | | | 3,894 | | | | | |
Balance at June 30, 2021 | | $ | 2,867 | | | $ | (6,725) | | | $ | (3,858) | | | | | |
| | | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains and Losses on Securities Available for Sale | | Defined Benefit and Other Benefit Plans | | Total |
Balance at January 1, 2022 | | $ | (2,495) | | | $ | (4,035) | | | $ | (6,530) | |
| | | | | | |
| | | | | | |
Other comprehensive income before reclassification | | (48,834) | | | — | | | (48,834) | |
Amounts reclassified from accumulated other comprehensive income | | — | | | 19 | | | 19 | |
Net current period other comprehensive income | | (48,834) | | | 19 | | | (48,815) | |
Balance at June 30, 2022 | | $ | (51,329) | | | $ | (4,016) | | | $ | (55,345) | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Unrealized Gains and Losses on Securities Available for Sale | | Defined Benefit and Other Benefit Plans | | Total | | | | |
Balance at January 1, 2021 | | $ | 9,127 | | | $ | (6,726) | | | $ | 2,401 | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Other comprehensive income before reclassification | | (6,260) | | | — | | | (6,260) | | | | | |
Amounts reclassified from accumulated other comprehensive income | | — | | | 1 | | | 1 | | | | | |
Net current period other comprehensive income | | (6,260) | | | 1 | | | (6,259) | | | | | |
Balance at June 30, 2021 | | $ | 2,867 | | | $ | (6,725) | | | $ | (3,858) | | | | | |
The following is the reclassification out of accumulated other comprehensive income for the periods indicated (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Income (Loss) Components | | Three Months Ended June 30, | | Affected Line Item in the Statement Where Net Income is Presented |
| | 2022 | | 2021 | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Amortization of defined pension plan and other benefit plan items: | | | | | | |
| | | | | | |
Prior service costs (a) | | $ | — | | | $ | (55) | | | Other components of net periodic pension and postretirement benefits |
Actuarial losses (a) | | 11 | | | 57 | | | Other components of net periodic pension and postretirement benefits |
Tax effect | | (4) | | | (1) | | | Income tax expense |
Net of tax | | 7 | | | 1 | | | |
Total reclassification for the period, net of tax | | $ | 7 | | | $ | 1 | | | |
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).
| | | | | | | | | | | | | | | | | | | | |
Details about Accumulated Other Comprehensive Income (Loss) Components | | Six Months Ended June 30, | | Affected Line Item in the Statement Where Net Income is Presented |
| | 2022 | | 2021 | | |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Amortization of defined pension plan and other benefit plan items: | | | | | | |
| | | | | | |
Prior service costs (a) | | $ | — | | | $ | (110) | | | Other components of net periodic pension and postretirement benefits |
Actuarial losses (a) | | 25 | | | 112 | | | Other components of net periodic pension and postretirement benefits |
Tax effect | | (6) | | | (1) | | | Income tax expense |
Net of tax | | 19 | | | 1 | | | |
Total reclassification for the period, net of tax | | $ | 19 | | | $ | 1 | | | |
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).
NOTE 10 REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following tables present the Corporation's non-interest income by revenue stream and reportable segment for the three and six months ended June 30, 2022 and 2021 (in thousands). Items outside the scope of ASC 606 are noted as such.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2022 |
Revenue by Operating Segment: | | Core Banking | | WMG | | Holding Company, CFS, and CRM(b) | | Total |
Non-interest income | | | | | | | | |
Service charges on deposit accounts | | | | | | | | |
Overdraft fees | | $ | 727 | | | $ | — | | | $ | — | | | $ | 727 | |
Other | | 209 | | | — | | | — | | | 209 | |
Interchange revenue from debit card transactions | | 1,206 | | | — | | | — | | | 1,206 | |
WMG fee income | | — | | | 2,628 | | | — | | | 2,628 | |
CFS fee and commission income | | — | | | — | | | 271 | | | 271 | |
Net gains (losses) on sales of OREO | | 46 | | | — | | | — | | | 46 | |
Net gains on sales of loans(a) | | 25 | | | — | | | — | | | 25 | |
Loan servicing fees(a) | | 38 | | | — | | | — | | | 38 | |
| | | | | | | | |
Changes in fair value of equity investments(a) | | (236) | | | — | | | (6) | | | (242) | |
Income from bank-owned life insurance(a) | | 11 | | | — | | | — | | | 11 | |
Other(a) | | 416 | | | — | | | (16) | | | 400 | |
Total non-interest income (loss) | | $ | 2,442 | | | $ | 2,628 | | | $ | 249 | | | $ | 5,319 | |
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2021 |
Revenue by Operating Segment: | | Core Banking | | WMG | | Holding Company, CFS, and CRM(b) | | Total |
Non-interest income | | | | | | | | |
Service charges on deposit accounts | | | | | | | | |
Overdraft fees | | $ | 489 | | | $ | — | | | $ | — | | | $ | 489 | |
Other | | 243 | | | — | | | — | | | 243 | |
Interchange revenue from debit card transactions | | 1,262 | | | — | | | — | | | 1,262 | |
WMG fee income | | — | | | 2,803 | | | — | | | 2,803 | |
CFS fee and commission income | | — | | | — | | | 236 | | | 236 | |
Net gains (losses) on sales of OREO | | — | | | — | | | — | | | — | |
Net gains on sales of loans(a) | | 342 | | | — | | | — | | | 342 | |
Loan servicing fees(a) | | 35 | | | — | | | — | | | 35 | |
| | | | | | | | |
Changes in fair value of equity investments(a) | | 95 | | | — | | | 7 | | | 102 | |
Income from bank-owned life insurance(a) | | 12 | | | — | | | — | | | 12 | |
Other(a) | | 981 | | | — | | | (13) | | | 968 | |
Total non-interest income | | $ | 3,459 | | | $ | 2,803 | | | $ | 230 | | | $ | 6,492 | |
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2022 |
Revenue by Operating Segment: | | Core Banking | | WMG | | Holding Company, CFS, and CRM(b) | | Total |
Non-interest income | | | | | | | | |
Service charges on deposit accounts | | | | | | | | |
Overdraft fees | | $ | 1,400 | | | $ | — | | | $ | — | | | $ | 1,400 | |
Other | | 400 | | | — | | | — | | | 400 | |
Interchange revenue from debit card transactions | | 2,336 | | | — | | | — | | | 2,336 | |
WMG fee income | | — | | | 5,385 | | | — | | | 5,385 | |
CFS fee and commission income | | — | | | — | | | 524 | | | 524 | |
Net gains (losses) on sales of OREO | | 46 | | | — | | | — | | | 46 | |
Net gains on sales of loans(a) | | 99 | | | — | | | — | | | 99 | |
Loan servicing fees(a) | | 77 | | | — | | | — | | | 77 | |
Net gains on sales of securities(a) | | — | | | — | | | — | | | — | |
Changes in fair value of equity investments(a) | | (350) | | | — | | | (5) | | | (355) | |
Income from bank-owned life insurance(a) | | 22 | | | — | | | — | | | 22 | |
Other(a) | | 1,105 | | | — | | | (57) | | | 1,048 | |
Total non-interest income | | $ | 5,135 | | | $ | 5,385 | | | $ | 462 | | | $ | 10,982 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 |
Revenue by Operating Segment: | | Core Banking | | WMG | | Holding Company, CFS, and CRM(b) | | Total |
Non-interest income | | | | | | | | |
Service charges on deposit accounts | | | | | | | | |
Overdraft fees | | $ | 938 | | | $ | — | | | $ | — | | | $ | 938 | |
Other | | 511 | | | — | | | — | | | 511 | |
Interchange revenue from debit card transactions | | 2,385 | | | — | | | — | | | 2,385 | |
WMG fee income | | — | | | 5,481 | | | — | | | 5,481 | |
CFS fee and commission income | | — | | | — | | | 450 | | | 450 | |
Net gains on sales of OREO | | (18) | | | — | | | — | | | (18) | |
Net gains on sales of loans(a) | | 642 | | | — | | | — | | | 642 | |
Loan servicing fees(a) | | 70 | | | — | | | — | | | 70 | |
Net gains on sales of securities(a) | | — | | | — | | | — | | | — | |
Change in fair value of equity securities(a) | | 129 | | | — | | | 59 | | | 188 | |
Income from bank-owned life insurance(a) | | 27 | | | — | | | — | | | 27 | |
Other(a) | | 1,466 | | | — | | | (27) | | | 1,439 | |
Total non-interest income | | $ | 6,150 | | | $ | 5,481 | | | $ | 482 | | | $ | 12,113 | |
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
A description of the Corporation's revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which included services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are recognized at the time the maintenance occurs. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.
Interchange Income from Debit Card Transactions: The Corporation earns interchange fees from debit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to cardholder.
WMG Fee Income (Gross): The Corporation earns wealth management fees from its contracts with customers to manage assets for investment, and/or to conduct transactions on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at quarter-end.
CFS Fee and Commission Income (Net): The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The Corporation (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers. Investment brokerage fees are presented net of related costs. The Corporation also earns fees from tax services provided to its customers.
Net Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.
NOTE 11 COMPONENTS OF QUARTERLY AND YEAR TO DATE NET PERIODIC BENEFIT COSTS
The components of net periodic expense for the Corporation’s pension and other benefit plans for the periods indicated are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Qualified Pension Plan | | | | | | | | |
Service cost, benefits earned during the period | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost on projected benefit obligation | | 284 | | | 270 | | | 566 | | | 542 | |
Expected return on plan assets | | (708) | | | (673) | | | (1,421) | | | (1,346) | |
Amortization of unrecognized transition obligation | | — | | | — | | | — | | | — | |
Amortization of unrecognized prior service cost | | — | | | — | | | — | | | — | |
Amortization of unrecognized net loss | | — | | | 38 | | | — | | | 75 | |
Net periodic pension benefit | | $ | (424) | | | $ | (365) | | | $ | (855) | | | $ | (729) | |
| | | | | | | | |
Supplemental Pension Plan | | | | | | | | |
Service cost, benefits earned during the period | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost on projected benefit obligation | | 9 | | | 8 | | | 17 | | | 16 | |
Expected return on plan assets | | — | | | — | | | — | | | — | |
Amortization of unrecognized prior service cost | | — | | | — | | | — | | | — | |
Amortization of unrecognized net loss | | 4 | | | 5 | | | 9 | | | 10 | |
Net periodic supplemental pension cost | | $ | 13 | | | $ | 13 | | | $ | 26 | | | $ | 26 | |
| | | | | | | | |
Postretirement Plan, Medical and Life | | | | | | | | |
Service cost, benefits earned during the period | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Interest cost on projected benefit obligation | | 1 | | | 2 | | | 2 | | | 4 | |
Expected return on plan assets | | — | | | — | | | — | | | — | |
Amortization of unrecognized prior service cost | | — | | | (55) | | | — | | | (110) | |
Amortization of unrecognized net loss | | 7 | | | 14 | | | 16 | | | 27 | |
Net periodic postretirement, medical and life benefit | | $ | 8 | | | $ | (39) | | | $ | 18 | | | $ | (79) | |
NOTE 12 SEGMENT REPORTING
The Corporation manages its operations through two primary business segments: core banking and WMG. The core banking segment provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential mortgage loans, primarily in the Corporation’s local markets, and to invest in securities. The WMG services segment provides revenues by providing trust and investment advisory services to clients.
Accounting policies for the segments are the same as those described in Note 1 of the Corporation’s 2021 Annual Report on Form 10-K, which was filed with the SEC on March 23, 2022. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment.
The Holding Company, CFS, and CRM columns below includes amounts to eliminate transactions between segments (in thousands).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2022 |
| | Core Banking | | WMG | | Holding Company, CFS, and CRM | | Consolidated Totals |
Interest and dividend income | | $ | 18,531 | | | $ | — | | | $ | 7 | | | $ | 18,538 | |
Interest expense | | 897 | | | — | | | — | | | 897 | |
Net interest income | | 17,634 | | | — | | | 7 | | | 17,641 | |
Provision for loan losses | | (1,744) | | | — | | | — | | | (1,744) | |
Net interest income after provision for loan losses | | 19,378 | | | — | | | 7 | | | 19,385 | |
Other non-interest income | | 2,442 | | | 2,628 | | | 249 | | | 5,319 | |
| | | | | | | | |
Other non-interest expenses | | 12,226 | | | 1,650 | | | 466 | | | 14,342 | |
Income (loss) before income tax expense (benefit) | | 9,594 | | | 978 | | | (210) | | | 10,362 | |
Income tax expense (benefit) | | 2,167 | | | 229 | | | (58) | | | 2,338 | |
Segment net income (loss) | | $ | 7,427 | | | $ | 749 | | | $ | (152) | | | $ | 8,024 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended June 30, 2021 |
| | Core Banking | | WMG | | Holding Company, CFS, and CRM | | Consolidated Totals |
Interest and dividend income | | $ | 16,936 | | | $ | — | | | $ | 9 | | | $ | 16,945 | |
Interest expense | | 866 | | | — | | | — | | | 866 | |
Net interest income | | 16,070 | | | — | | | 9 | | | 16,079 | |
Provision for loan losses | | (150) | | | — | | | — | | | (150) | |
Net interest income after provision for loan losses | | 16,220 | | | — | | | 9 | | | 16,229 | |
Other non-interest income | | 3,459 | | | 2,803 | | | 230 | | | 6,492 | |
Legal accruals and settlements | | — | | | — | | | (269) | | | (269) | |
Other non-interest expenses | | 11,844 | | | 1,619 | | | 657 | | | 14,120 | |
Income (loss) before income tax expense (benefit) | | 7,835 | | | 1,184 | | | (149) | | | 8,870 | |
Income tax expense (benefit) | | 1,802 | | | 316 | | | (43) | | | 2,075 | |
Segment net income (loss) | | $ | 6,033 | | | $ | 868 | | | $ | (106) | | | $ | 6,795 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | |
| | Six Months Ended June 30, 2022 |
| | Core Banking | | WMG | | Holding Company, CFS, and CRM | | Consolidated Totals |
Interest and dividend income | | $ | 35,982 | | | $ | — | | | $ | 14 | | | $ | 35,996 | |
Interest expense | | 1,678 | | | — | | | — | | | 1,678 | |
Net interest income | | 34,304 | | | — | | | 14 | | | 34,318 | |
Provision for loan losses | | (2,889) | | | — | | | — | | | (2,889) | |
Net interest income after provision for loan losses | | 37,193 | | | — | | | 14 | | | 37,207 | |
Other non-interest income | | 5,135 | | | 5,385 | | | 462 | | | 10,982 | |
| | | | | | | | |
Other non-interest expenses | | 24,757 | | | 3,465 | | | 788 | | | 29,010 | |
Income (loss) before income tax expense (benefit) | | 17,571 | | | 1,920 | | | (312) | | | 19,179 | |
Income tax expense (benefit) | | 3,933 | | | 438 | | | (83) | | | 4,288 | |
Segment net income (loss) | | $ | 13,638 | | | $ | 1,482 | | | $ | (229) | | | $ | 14,891 | |
| | | | | | | | |
Segment assets | | $ | 2,441,375 | | | $ | 2,723 | | | $ | 5,813 | | | $ | 2,449,911 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2021 |
| | Core Banking | | WMG | | Holding Company, CFS, and CRM | | Consolidated Totals |
Interest and dividend income | | $ | 33,671 | | | $ | — | | | $ | 14 | | | $ | 33,685 | |
Interest expense | | 1,820 | | | — | | | — | | | 1,820 | |
Net interest income | | 31,851 | | | — | | | 14 | | | 31,865 | |
Provision for loan losses | | (409) | | | — | | | — | | | (409) | |
Net interest income after provision for loan losses | | 32,260 | | | — | | | 14 | | | 32,274 | |
Other non-interest income | | 6,150 | | | 5,481 | | | 482 | | | 12,113 | |
| | | | | | | | |
Other non-interest expenses | | 23,277 | | | 3,270 | | | 657 | | | 27,204 | |
Income (loss) before income tax expense (benefit) | | 15,133 | | | 2,211 | | | (161) | | | 17,183 | |
Income tax expense (benefit) | | 3,331 | | | 579 | | | (52) | | | 3,858 | |
Segment net income (loss) | | $ | 11,802 | | | $ | 1,632 | | | $ | (109) | | | $ | 13,325 | |
| | | | | | | | |
Segment assets | | $ | 2,369,856 | | | $ | 3,201 | | | $ | 7,655 | | | $ | 2,380,712 | |
NOTE 13 STOCK COMPENSATION
On June 8, 2021, the Corporation's shareholders approved the Corporation's 2021 Equity Incentive Plan (the "2021 Plan") which provides for the grant of stock-based awards to officers, employees and directors of the Corporation and the Bank. A Form S-8 Registration Statement was filed with the SEC on June 18, 2021 registering shares to be awarded under the 2021 Plan. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. The 2021 Plan provides officers, employees and directors of the Corporation and the Bank with additional incentives to promote the growth and performance of the Corporation. The prior plan shall remain in existence solely for the purpose of administering outstanding grants.
Under the terms of the 2021 Plan, the Corporation may make discretionary grants of restricted shares of the Corporation’s common stock to or for the benefit of employees selected to participate in the 2021 Plan, the chief executive officer and members of the Board of Directors. Awards are based on the performance, responsibility and contributions of the individual and are targeted at an average of the peer group. The maximum number of shares of the Corporation’s common stock that may be awarded as restricted shares related to the 2021 Plan may not exceed 170,000, upon which time a new plan may be filed. Compensation expense for shares granted will be recognized over the vesting period of the award based upon the average closing price of the Corporation's stock for each of the prior 30 trading days ending on the grant date.
During the six months ended June 30, 2022 and 2021, 12,560 and 13,151 shares, respectively, were re-issued from treasury to fund stock compensation. The expense related to the grants made in the first quarter of 2022 is recognized over a one year vesting period. Expense related to this compensation of $0.2 million was recognized during each of the three month periods ended June 30, 2022 and 2021, respectively. Expense related to this compensation of $0.6 million and $0.5 million was recognized during the six month periods ended June 30, 2022 and 2021, respectively. No shares were granted during the three month periods ended June 30, 2022 and 2021.
A summary of restricted stock activity for the three and six months ended June 30, 2022 is presented below: | | | | | | | | | | | | | | |
| | Shares | | Weighted–Average Grant Date Fair Value |
Nonvested at April 1, 2022 | | 48,288 | | | $43.68 |
Granted | | — | | | |
Vested | | — | | | |
Forfeited or cancelled | | (681) | | | $40.55 |
Nonvested at June 30, 2022 | | 47,607 | | | $43.72 |
| | | | | | | | | | | | | | |
| | Shares | | Weighted–Average Grant Date Fair Value |
Nonvested at January 1, 2022 | | 37,837 | | | $42.99 |
Granted | | 12,560 | | | $45.55 |
Vested | | (2,109) | | | $42.51 |
Forfeited or cancelled | | (681) | | | $40.55 |
Nonvested at June 30, 2022 | | 47,607 | | | $43.72 |
As of June 30, 2022, there was $1.6 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.66 years. The total fair value of shares vested was $99 thousand and $156 thousand for the six month periods ended June 30, 2022 and 2021, respectively.
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following is the MD&A of the Corporation in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2022 and 2021. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s 2021 Annual Report on Form 10-K, which was filed with the SEC on March 23, 2022, for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 3–6.
The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below, in Part I, Item 1A, Risk Factors and on pages 20–31 of the Corporation’s 2021 Form 10-K. For a discussion of the use of non-GAAP financial measures, see pages 64-67 of the Corporation's 2021 Form 10-K, and pages 70-73 in this Form 10-Q.
The Corporation has been a financial holding company since 2000, the Bank was established in 1833, CFS in 2001, and CRM in 2016. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services. The Bank relies substantially on a foundation of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its income primarily from interest and fees on loans, interest income on investment securities, WMG fee income, and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans, and general operating expenses. CRM is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for
which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.
Forward-looking Statements
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, inflation, cyber security risks, COVID-19, difficulties in managing the Corporation’s growth, competition, changes in law or the regulatory environment, and changes in general business and economic trends.
Information concerning these and other factors, including Risk Factors, can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s 2021 Annual Report on Form 10-K. These filings are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com or upon request from the Corporate Secretary at (607) 737-3746. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.
Critical Accounting Estimates
Critical accounting estimates include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with GAAP. As a result, the Corporation is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available at that time. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.
Allowance for Loan Losses
Actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, and more recently the expected impact of COVID-19 on the various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy, including the impact of COVID-19.
While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real estate values in the Corporation’s market area did not increase dramatically in the prior several years, and, as a result, any declines in real estate values have been modest. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses. The determination of the allowance also includes an evaluation of non-impaired loans and is based on historical loss experience adjusted for current factors.
Consolidated Financial Highlights
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| | | | | | | | | | | As of or for the |
| As of or for the Three Months Ended | | Six Months Ended |
| June 30, | | Mar. 31 | | Dec. 31 | | Sept. 30, | | June 30, | | June 30, | | June 30, |
(in thousands, except per share data) | 2022 | | 2022 | | 2021 | | 2021 | | 2021 | | 2022 | | 2021 |
RESULTS OF OPERATIONS |
Interest income | $ | 18,538 | | | $ | 17,458 | | | $ | 17,690 | | | $ | 17,633 | | | $ | 16,945 | | | $ | 35,996 | | | $ | 33,685 | |
Interest expense | 897 | | | 781 | | | 798 | | | 801 | | | 866 | | | 1,678 | | | 1,820 | |
Net interest income | 17,641 | | | 16,677 | | | 16,892 | | | 16,832 | | | 16,079 | | | 34,318 | | | 31,865 | |
Provision for loan losses | (1,744) | | | (1,145) | | | 70 | | | 356 | | | (150) | | | (2,889) | | | (409) | |
Net interest income after provision for loan losses | 19,385 | | | 17,822 | | | 16,822 | | | 16,476 | | | 16,229 | | | 37,207 | | | 32,274 | |
Non-interest income | 5,319 | | | 5,663 | | | 5,787 | | | 5,970 | | | 6,492 | | | 10,982 | | | 12,113 | |
Non-interest expense | 14,342 | | | 14,668 | | | 14,378 | | | 14,100 | | | 13,851 | | | 29,010 | | | 27,204 | |
Income before income tax expense | 10,362 | | | 8,817 | | | 8,231 | | | 8,346 | | | 8,870 | | | 19,179 | | | 17,183 | |
Income tax expense | 2,338 | | | 1,950 | | | 1,777 | | | 1,700 | | | 2,075 | | | 4,288 | | | 3,858 | |
Net income | $ | 8,024 | | | $ | 6,867 | | | $ | 6,454 | | | $ | 6,646 | | | $ | 6,795 | | | $ | 14,891 | | | $ | 13,325 | |
| | | | | | | | | | | | | |
Basic and diluted earnings per share | $ | 1.72 | | | $ | 1.46 | | | $ | 1.38 | | | $ | 1.42 | | | $ | 1.45 | | | $ | 3.18 | | | $ | 2.84 | |
Average basic and diluted shares outstanding (a) | 4,690 | | | 4,689 | | | 4,682 | | | 4,678 | | | 4,680 | | | 4,690 | | | 4,686 | |
| | | | | | | | | | | | | |
PERFORMANCE RATIOS - Annualized |
Return on average assets | 1.32 | % | | 1.14 | % | | 1.04 | % | | 1.09 | % | | 1.11 | % | | 1.23 | % | | 1.12 | % |
Return on average equity | 18.06 | % | | 13.68 | % | | 12.30 | % | | 12.68 | % | | 13.58 | % | | 15.73 | % | | 13.41 | % |
Return on average tangible equity (b) | 20.58 | % | | 15.32 | % | | 13.74 | % | | 14.16 | % | | 15.25 | % | | 17.77 | % | | 15.07 | % |
Efficiency ratio (unadjusted) (b) (g) | 62.47 | % | | 65.66 | % | | 63.40 | % | | 61.84 | % | | 61.37 | % | | 64.04 | % | | 61.86 | % |
Efficiency ratio (adjusted) (b) (c) | 62.17 | % | | 65.32 | % | | 63.11 | % | | 61.40 | % | | 60.72 | % | | 63.72 | % | | 61.17 | % |
Non-interest expense to average assets | 2.35 | % | | 2.43 | % | | 2.32 | % | | 2.30 | % | | 2.27 | % | | 2.39 | % | | 2.28 | % |
Loans to deposits | 74.11 | % | | 69.64 | % | | 70.44 | % | | 69.77 | % | | 72.87 | % | | 74.11 | % | | 72.87 | % |
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| | | | | | | | | | | | | |
YIELDS / RATES - Fully Taxable Equivalent |
Yield on loans | 3.90 | % | | 3.84 | % | | 3.90 | % | | 3.84 | % | | 3.72 | % | | 3.87 | % | | 3.77 | % |
Yield on investments | 1.60 | % | | 1.47 | % | | 1.35 | % | | 1.49 | % | | 1.21 | % | | 1.53 | % | | 1.24 | % |
Yield on interest-earning assets | 3.12 | % | | 3.00 | % | | 2.99 | % | | 3.02 | % | | 2.90 | % | | 3.06 | % | | 2.97 | % |
Cost of interest-bearing deposits | 0.21 | % | | 0.20 | % | | 0.21 | % | | 0.21 | % | | 0.22 | % | | 0.21 | % | | 0.24 | % |
Cost of borrowings | 1.70 | % | | 2.65 | % | | 2.16 | % | | 3.56 | % | | 3.64 | % | | 1.83 | % | | 3.58 | % |
Cost of interest-bearing liabilities | 0.24 | % | | 0.21 | % | | 0.22 | % | | 0.22 | % | | 0.23 | % | | 0.23 | % | | 0.25 | % |
Interest rate spread | 2.88 | % | | 2.79 | % | | 2.77 | % | | 2.80 | % | | 2.67 | % | | 2.83 | % | | 2.72 | % |
Net interest margin, fully taxable equivalent (b) | 2.97 | % | | 2.87 | % | | 2.85 | % | | 2.88 | % | | 2.76 | % | | 2.92 | % | | 2.81 | % |
| | | | | | | | | | | | | |
CAPITAL |
Total equity to total assets at end of period | 7.13 | % | | 7.50 | % | | 8.74 | % | | 8.53 | % | | 8.57 | % | | 7.13 | % | | 8.57 | % |
Tangible equity to tangible assets at end of period (b) | 6.30 | % | | 6.67 | % | | 7.91 | % | | 7.69 | % | | 7.72 | % | | 6.30 | % | | 7.72 | % |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Book value per share | $ | 37.24 | | | $ | 39.56 | | | $ | 45.09 | | | $ | 44.00 | | | $ | 43.57 | | | $ | 37.24 | | | $ | 43.57 | |
Tangible book value per share (b) | 32.59 | | | 34.91 | | | 40.44 | | | 39.34 | | | 38.90 | | | 32.59 | | | 38.90 | |
Period-end market value per share | 47.00 | | | 46.69 | | | 46.45 | | | 45.30 | | | 44.31 | | | 47.00 | | | 44.31 | |
Dividends declared per share | 0.31 | | | 0.31 | | | 0.31 | | | 0.31 | | | 0.31 | | | 0.62 | | | 0.57 | |
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AVERAGE BALANCES |
Loans and loans held for sale (d) | $ | 1,587,777 | | | $ | 1,532,445 | | | $ | 1,520,478 | | | $ | 1,519,264 | | | $ | 1,585,902 | | | $ | 1,560,264 | | | $ | 1,571,714 | |
Earning assets | 2,395,704 | | | 2,371,275 | | | 2,364,578 | | | 2,327,817 | | | 2,352,908 | | | 2,383,557 | | | 2,302,402 | |
Total assets | 2,446,763 | | | 2,451,944 | | | 2,454,294 | | | 2,427,107 | | | 2,447,587 | | | 2,449,339 | | | 2,402,823 | |
Deposits | 2,203,231 | | | 2,211,442 | | | 2,205,632 | | | 2,181,517 | | | 2,210,413 | | | 2,207,314 | | | 2,164,445 | |
Total equity | 178,207 | | | 203,613 | | | 208,147 | | | 208,023 | | | 200,627 | | | 190,841 | | | 200,332 | |
Tangible equity (b) | 156,382 | | | 181,778 | | | 186,302 | | | 186,155 | | | 178,681 | | | 169,011 | | | 178,337 | |
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| | | | | | | | | | | As of or for the |
| As of or for the Three Months Ended | | Six Months Ended |
| June 30, | | Mar. 31 | | Dec. 31 | | Sept. 30, | | June 30, | | June 30, | | June 30, |
| 2022 | | 2022 | | 2021 | | 2021 | | 2021 | | 2022 | | 2021 |
ASSET QUALITY |
Net charge-offs | $ | 699 | | | $ | (48) | | | $ | (15) | | | $ | 92 | | | $ | 83 | | | $ | 651 | | | $ | (161) | |
Non-performing loans (e) | 7,374 | | | 7,703 | | | 8,114 | | | 8,373 | | | 8,583 | | | 7,374 | | | 8,583 | |
Non-performing assets (f) | 7,665 | | | 7,956 | | | 8,226 | | | 8,544 | | | 8,707 | | | 7,665 | | | 8,707 | |
Allowance for loan losses | 17,485 | | | 19,928 | | | 21,025 | | | 20,940 | | | 20,676 | | | 17,485 | | | 20,676 | |
| | | | | | | | | | | | | |
Annualized net charge-offs to average loans | 0.18 | % | | (0.01) | % | | (0.01) | % | | 0.02 | % | | 0.02 | % | | 0.08 | % | | (0.02) | % |
Non-performing loans to total loans | 0.46 | % | | 0.49 | % | | 0.54 | % | | 0.56 | % | | 0.55 | % | | 0.46 | % | | 0.55 | % |
Non-performing assets to total assets | 0.31 | % | | 0.32 | % | | 0.34 | % | | 0.35 | % | | 0.37 | % | | 0.31 | % | | 0.37 | % |
Allowance for loan losses to total loans | 1.08 | % | | 1.27 | % | | 1.38 | % | | 1.38 | % | | 1.33 | % | | 1.08 | % | | 1.33 | % |
Allowance for loan losses to total loans, net of PPP | 1.08 | % | | 1.29 | % | | 1.43 | % | | 1.45 | % | | 1.46 | % | | 1.08 | % | | 1.46 | % |
Allowance for loan losses to non-performing loans | 237.12 | % | | 258.65 | % | | 259.17 | % | | 250.08 | % | | 240.89 | % | | 237.12 | % | | 240.89 | % |
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(a) Retroactive implementation of the Corporation's 2021 Equity Incentive Plan required a change in methodology used to calculate weighted average outstanding shares. |
(b) See the GAAP to Non-GAAP reconciliations. |
(c) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions. |
(d) Loans and loans held for sale do not reflect the allowance for loan losses. |
(e) Non-performing loans include non-accrual loans only. |
(f) Non-performing assets include non-performing loans plus other real estate owned. |
(g) Efficiency ratio (unadjusted) is non-interest expense divided by the total of net interest income plus non-interest income. | | | | |
In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies. Refer to pages 70-73 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.
Consolidated Results of Operations
The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the three and six months ended June 30, 2022 and 2021. For a discussion of the Critical Accounting Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see page 42 of this Form 10-Q and pages 42-43 of the Corporation’s 2021 Form 10-K.
Net Income
The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | Change | | % Change | | 2022 | | 2021 | | Change | | % Change |
Net interest income | | $ | 17,641 | | | $ | 16,079 | | | $ | 1,562 | | | 9.7 | % | | $ | 34,318 | | | $ | 31,865 | | | $ | 2,453 | | | 7.7 | % |
Non-interest income | | 5,319 | | | 6,492 | | | (1,173) | | | (18.1) | % | | 10,982 | | | 12,113 | | | (1,131) | | | (9.3) | % |
Non-interest expense | | 14,342 | | | 13,851 | | | 491 | | | 3.5 | % | | 29,010 | | | 27,204 | | | 1,806 | | | 6.6 | % |
Pre-provision income | | 8,618 | | | 8,720 | | | (102) | | | (1.2) | % | | 16,290 | | | 16,774 | | | (484) | | | (2.9) | % |
Provision for loan losses | | (1,744) | | | (150) | | | (1,594) | | | 1,062.7 | % | | (2,889) | | | (409) | | | (2,480) | | | 606.4 | % |
Income tax expense | | 2,338 | | | 2,075 | | | 263 | | | 12.7 | % | | 4,288 | | | 3,858 | | | 430 | | | 11.1 | % |
Net income | | $ | 8,024 | | | $ | 6,795 | | | $ | 1,229 | | | 18.1 | % | | $ | 14,891 | | | $ | 13,325 | | | $ | 1,566 | | | 11.8 | % |
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Basic and diluted earnings per share | | $ | 1.72 | | | $ | 1.45 | | | $ | 0.27 | | | 18.6 | % | | $ | 3.18 | | | $ | 2.84 | | | $ | 0.34 | | | 12.0 | % |
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| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Selected financial ratios: | | | | | | | | |
Return on average assets | | 1.32 | % | | 1.11 | % | | 1.23 | % | | 1.12 | % |
Return on average equity | | 18.06 | % | | 13.58 | % | | 15.73 | % | | 13.41 | % |
Net interest margin, fully taxable equivalent (a) | | 2.97 | % | | 2.76 | % | | 2.92 | % | | 2.81 | % |
Efficiency ratio (adjusted) (a) (b) | | 62.17 | % | | 60.72 | % | | 63.72 | % | | 61.17 | % |
Non-interest expenses to average assets | | 2.35 | % | | 2.27 | % | | 2.39 | % | | 2.28 | % |
(a) See the GAAP to Non-GAAP reconciliations. | | | | |
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions. |
Net income for the second quarter of 2022 was $8.0 million, or $1.72 per share, compared to $6.8 million, or $1.45 per share, for the same period in the prior year. Return on average equity for the current quarter was 18.06%, compared to 13.58% for the same period in the prior year. The increase in net income was due primarily to an increase in net interest income, and a decrease in the provision for loan losses, partially offset by increases in income tax expense and non-interest expense, and a decrease in non-interest income.
Net income for the six months ended June 30, 2022 was $14.9 million, or $3.18 per share, compared to $13.3 million, or $2.84 per share, for the same period in the prior year. Return on average equity for the six months ended June 30, 2022 was 15.73%, compared to 13.41% for the same period in the prior year. The increase in net income was attributable to an increase in net interest income and a decrease in the provision for loan losses, partially offset by increases in income tax expense and non-interest expense, and a decrease in non-interest income.
Net Interest Income
The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
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| Three Months Ended June 30, | | | | |
| 2022 | | 2021 | | Change | | Percentage Change |
Interest and dividend income | $ | 18,538 | | | $ | 16,945 | | | $ | 1,593 | | | 9.4 | % |
Interest expense | 897 | | | 866 | | | 31 | | | 3.6 | % |
Net interest income | $ | 17,641 | | | $ | 16,079 | | | $ | 1,562 | | | 9.7 | % |
Net interest income, which is the difference between the interest income earned on interest-earning assets such as loans and securities, and the interest expense paid on interest-bearing liabilities such as deposits and borrowings, is the largest contributor to the Corporation’s earnings.
Net interest income for the three months ended June 30, 2022 increased $1.6 million, or 9.7%, to $17.6 million compared to the same period in the prior year, due primarily to increases of $0.9 million in interest and dividend income on taxable securities, and $0.7 million in interest income on loans, including fees, and a decrease of $0.1 million in interest expense on deposits, offset by an increase of $0.1 million in interest expense on borrowed funds.
The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $122.0 million, and increase in the average yield on the portfolio of 29 basis points due to an increase in average interest rates. Average invested balances on taxable securities increased primarily due to purchases of higher yield securities exceeding repayments. The increase in interest income on loans, including fees was due primarily to an increase in average balances on mortgage loans of $23.6 million and an increase in the commercial loan portfolio average yield of 30 basis points due to an increase in average interest rates. The decrease in interest expense on deposits was due primarily to a decrease in the average balances on time deposits of $30.0 million, offset by a $0.1 million increase in interest expense on borrowed funds due primarily to a $26.8 million increase in average balances of overnight advances when compared to the same period in the prior year to fund loan growth. The increase in interest expense on borrowed funds was due primarily to a $26.8 million increase in average balances of overnight advances to fund loans. Interest income on interest-earning deposits decreased primarily due to a decrease of $81.7 million in the average balances of interest-earning deposits in the second quarter of 2022 when compared to the same period in the prior year, as excess cash was used to fund loan growth.
Fully taxable equivalent net interest margin was 2.97% in the second quarter of 2022, compared to 2.76% for the same period in the prior year. Average interest-earning assets increased $42.8 million for the three months ended June 30, 2022 compared to the same period in the prior year. The average yield on interest-earning assets increased 22 basis points, and the average cost of interest-bearing liabilities increased one basis point in the second quarter of 2022, compared to the same period in the prior year.
The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
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| Six Months Ended June 30, | | | | |
| 2022 | | 2021 | | Change | | Percentage Change |
Interest and dividend income | $ | 35,996 | | | $ | 33,685 | | | $ | 2,311 | | | 6.9 | % |
Interest expense | 1,678 | | | 1,820 | | | (142) | | | (7.8) | % |
Net interest income | $ | 34,318 | | | $ | 31,865 | | | $ | 2,453 | | | 7.7 | % |
Net interest income for the six months ended June 30, 2022 totaled $34.3 million compared to $31.9 million for the same period in the prior year, an increase of $2.5 million, or 7.7% due primarily to an increase of $2.3 million in interest and dividend income and a decrease of $0.1 million in interest expense.
The increase in interest and dividend income for the first six months of 2022 was primarily attributed to increases of $1.8 million in interest and dividend income on taxable securities, and $0.6 million in interest income on loans, including fees.
The increase in interest income on taxable securities was mostly attributable to a $170.9 million increase in average balances of taxable securities and an 18 basis points increase in average yield, primarily attributable to purchases of new securities at higher rates and the recognition of a prepayment penalty on a mortgage-backed security investment, when compared to the same period in the prior year. The increase in interest income on loans, including fees, was mostly attributable to an increase in average balances on mortgage loans of $21.7 million and an increase in the commercial loan portfolio average yield of 22 basis points due to an increase in average interest rates. Average loan balances decreased $11.5 million for the current period when compared to the same period in the prior year, and the recognition of PPP fees decreased $0.3 million for the current period when compared to the same period in the prior year. The decrease in interest expense was primarily attributed to a $0.2 million decrease in interest expense on deposits due primarily to a decrease in the average balances on time deposits of $41.1 million, offset by a $0.1 million increase in interest expense on borrowed funds due primarily to a $14.2 million increase in average balances of overnight advances when compared to the same period in the prior year to fund loan growth.
The average yield on interest-earning assets increased nine basis points, and the average cost of interest-bearing liabilities decreased two basis points for the six months ended June 30, 2022, as compared to the same period in the prior year. Average interest-earning assets increased $81.2 million compared to the same period in the prior year. Fully taxable equivalent net interest margin was 2.92% for the six months ended June 30, 2022 compared to 2.81% for the same period in the prior year.
Average Consolidated Balance Sheets and Interest Analysis
The following tables present certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the three and six months ended June 30, 2022 and 2021. For the purpose of the tables below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments. Loan fee income of $0.6 million and $0.9 million for the three month periods ended June 30, 2022 and 2021, respectively, related to the Paycheck Protection Program. Loan fee income of $1.6 million and $1.9 million for the six month periods ended June 30, 2022 and 2021, respectively, related to the Paycheck Protection Program.
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AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS |
| Three Months Ended June 30, 2022 | | Three Months Ended June 30, 2021 |
(in thousands) | Average Balance | | Interest | | Yield/Rate (3) | | Average Balance | | Interest | | Yield/Rate (3) |
Interest-earning assets: | | | | | | | | | | | |
Commercial loans | $ | 1,111,854 | | | $ | 11,244 | | | 4.06 | % | | $ | 1,132,348 | | | $ | 10,613 | | | 3.76 | % |
Mortgage loans | 270,112 | | | 2,256 | | | 3.35 | % | | 246,470 | | | 2,160 | | | 3.52 | % |
Consumer loans | 205,811 | | | 1,927 | | | 3.76 | % | | 207,084 | | | 1,948 | | | 3.77 | % |
Taxable securities | 751,784 | | | 2,866 | | | 1.53 | % | | 629,789 | | | 1,953 | | | 1.24 | % |
Tax-exempt securities | 42,222 | | | 330 | | | 3.13 | % | | 41,571 | | | 327 | | | 3.16 | % |
Interest-earning deposits | 13,921 | | | 18 | | | 0.52 | % | | 95,646 | | | 36 | | | 0.15 | % |
Total interest-earning assets | 2,395,704 | | | 18,641 | | | 3.12 | % | | 2,352,908 | | | 17,037 | | | 2.90 | % |
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Non-earning assets: | | | | | | | | | | | |
Cash and due from banks | 23,702 | | | | | | | 25,317 | | | | | |
Other assets | 47,471 | | | | | | | 90,444 | | | | | |
Allowance for loan losses | (20,114) | | | | | | | (21,082) | | | | | |
Total assets | $ | 2,446,763 | | | | | | | $ | 2,447,587 | | | | | |
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Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 273,723 | | | $ | 51 | | | 0.07 | % | | $ | 282,420 | | | $ | 55 | | | 0.08 | % |
Savings and insured money market deposits | 962,502 | | | 242 | | | 0.10 | % | | 958,629 | | | 233 | | | 0.10 | % |
Time deposits | 243,157 | | | 476 | | | 0.79 | % | | 273,131 | | | 544 | | | 0.80 | % |
Capital leases and other debt | 30,264 | | | 128 | | | 1.70 | % | | 3,746 | | | 34 | | | 3.64 | % |
Total interest-bearing liabilities | 1,509,646 | | | 897 | | | 0.24 | % | | 1,517,926 | | | 866 | | | 0.23 | % |
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Non-interest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | 723,849 | | | | | | | 696,233 | | | | | |
Other liabilities | 35,061 | | | | | | | 32,801 | | | | | |
Total liabilities | 2,268,556 | | | | | | | 2,246,960 | | | | | |
Shareholders' equity | 178,207 | | | | | | | 200,627 | | | | | |
Total liabilities and shareholders’ equity | $ | 2,446,763 | | | | | | | $ | 2,447,587 | | | | | |
Fully taxable equivalent net interest income | | | 17,744 | | | | | | | 16,171 | | | |
Net interest rate spread (1) | | | | | 2.88 | % | | | | | | 2.67 | % |
Net interest margin, fully taxable equivalent (2) | | | | | 2.97 | % | | | | | | 2.76 | % |
Taxable equivalent adjustment | | | (103) | | | | | | | (92) | | | |
Net interest income | | | $ | 17,641 | | | | | | | $ | 16,079 | | | |
(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
(3) Annualized.
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AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS |
| Six Months Ended June 30, 2022 | | Six Months Ended June 30, 2021 |
(in thousands) | Average Balance | | Interest | | Yield/ Rate (3) | | Average Balance | | Interest | | Yield/ Rate (3) |
Interest-earning assets: | | | | | | | | | | | |
Commercial loans | $ | 1,092,240 | | | $ | 21,791 | | | 4.02 | % | | $ | 1,118,307 | | | $ | 21,085 | | | 3.80 | % |
Mortgage loans | 266,105 | | | 4,409 | | | 3.34 | % | | 244,414 | | | 4,256 | | | 3.51 | % |
Consumer loans | 201,919 | | | 3,743 | | | 3.74 | % | | 208,993 | | | 4,026 | | | 3.88 | % |
Taxable securities | 755,127 | | | 5,556 | | | 1.48 | % | | 584,180 | | | 3,757 | | | 1.30 | % |
Tax-exempt securities | 42,328 | | | 663 | | | 3.16 | % | | 41,272 | | | 649 | | | 3.17 | % |
Interest-earning deposits | 25,838 | | | 36 | | | 0.28 | % | | 105,236 | | | 96 | | | 0.18 | % |
Total interest-earning assets | 2,383,557 | | | 36,198 | | | 3.06 | % | | 2,302,402 | | | 33,869 | | | 2.97 | % |
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Non-earning assets: | | | | | | | | | | | |
Cash and due from banks | 24,220 | | | | | | | 26,469 | | | | | |
Other assets | 62,230 | | | | | | | 95,139 | | | | | |
Allowance for loan losses | (20,668) | | | | | | | (21,187) | | | | | |
Total assets | $ | 2,449,339 | | | | | | | $ | 2,402,823 | | | | | |
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Interest-bearing liabilities: | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 283,521 | | | $ | 107 | | | 0.08 | % | | $ | 288,426 | | | $ | 122 | | | 0.09 | % |
Savings and insured money market deposits | 958,919 | | | 454 | | | 0.10 | % | | 920,076 | | | 508 | | | 0.11 | % |
Time deposits | 242,334 | | | 956 | | | 0.80 | % | | 283,442 | | | 1,123 | | | 0.80 | % |
Capital leases and other debt | 17,722 | | | 161 | | | 1.83 | % | | 3,777 | | | 67 | | | 3.58 | % |
Total interest-bearing liabilities | 1,502,496 | | | 1,678 | | | 0.23 | % | | 1,495,721 | | | 1,820 | | | 0.25 | % |
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Non-interest-bearing liabilities: | | | | | | | | | | | |
Demand deposits | 722,540 | | | | | | | 672,501 | | | | | |
Other liabilities | 33,462 | | | | | | | 34,269 | | | | | |
Total liabilities | 2,258,498 | | | | | | | 2,202,491 | | | | | |
Shareholders' equity | 190,841 | | | | | | | 200,332 | | | | | |
Total liabilities and shareholders’ equity | $ | 2,449,339 | | | | | | | $ | 2,402,823 | | | | | |
Fully taxable equivalent net interest income | | | 34,520 | | | | | | | 32,049 | | | |
Net interest rate spread (1) | | | | | 2.83 | % | | | | | | 2.72 | % |
Net interest margin, fully taxable equivalent (2) | | | | | 2.92 | % | | | | | | 2.81 | % |
Taxable equivalent adjustment | | | (202) | | | | | | | (184) | | | |
Net interest income | | | $ | 34,318 | | | | | | | $ | 31,865 | | | |
(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
(3) Annualized.
Changes Due to Rate and Volume
Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The tables below illustrate the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three and six months ended June 30, 2022 and 2021. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purpose of these tables, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.
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RATE/VOLUME ANALYSIS OF NET INTEREST INCOME |
| | Three Months Ended June 30, 2022 vs. 2021 |
| | Increase/(Decrease) |
| | Total Change | | Due to Volume | | Due to Rate |
(in thousands) | |
Interest and dividend income on: | | | | | | |
Commercial loans | | $ | 631 | | | $ | (195) | | | $ | 826 | |
Mortgage loans | | 96 | | | 203 | | | (107) | |
Consumer loans | | (21) | | | (15) | | | (6) | |
Taxable investment securities | | 913 | | | 414 | | | 499 | |
Tax-exempt investment securities | | 3 | | | 6 | | | (3) | |
Interest-earning deposits | | (18) | | | (50) | | | 32 | |
Total interest and dividend income, fully taxable equivalent | | 1,604 | | | 363 | | | 1,241 | |
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Interest expense on: | | | | | | |
Interest-bearing demand deposits | | (4) | | | (1) | | | (3) | |
Savings and insured money market deposits | | 9 | | | 9 | | | — | |
Time deposits | | (68) | | | (61) | | | (7) | |
Capital leases and other debt | | 94 | | | 121 | | | (27) | |
Total interest expense | | 31 | | | 68 | | | (37) | |
Net interest income, fully taxable equivalent | | $ | 1,573 | | | $ | 295 | | | $ | 1,278 | |
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| | Six Months Ended June 30, 2022 vs. 2021 |
| | Increase/(Decrease) |
| | Total Change | | Due to Volume | | Due to Rate |
(in thousands) | |
Interest and dividend income on: | | | | | | |
Commercial loans | | $ | 706 | | | $ | (498) | | | $ | 1,204 | |
Mortgage loans | | 153 | | | 366 | | | (213) | |
Consumer loans | | (283) | | | (137) | | | (146) | |
Taxable investment securities | | 1,799 | | | 1,221 | | | 578 | |
Tax-exempt investment securities | | 14 | | | 16 | | | (2) | |
Interest-earning deposits | | (60) | | | (95) | | | 35 | |
Total interest and dividend income, fully taxable equivalent | | 2,329 | | | 873 | | | 1,456 | |
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Interest expense on: | | | | | | |
Interest-bearing demand deposits | | (15) | | | (2) | | | (13) | |
Savings and insured money market deposits | | (54) | | | 12 | | | (66) | |
Time deposits | | (167) | | | (167) | | | — | |
Long-term advances and other debt | | 94 | | | 141 | | | (47) | |
Total interest expense | | (142) | | | (16) | | | (126) | |
Net interest income, fully taxable equivalent | | $ | 2,471 | | | $ | 889 | | | $ | 1,582 | |
Provision for loan losses
Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. Management continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio. As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. During 2020, management increased certain allowance qualitative factors based on its assessment of the impact of the current pandemic on local, national, and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.
Based upon management review of these factors, the Corporation released $1.2 million of the pandemic related portion of the allowance during the first quarter of 2022. To date the Corporation has released $3.1 million and utilized $0.5 million of the pandemic related provision, and $1.2 million remains as part of the allowance as of June 30, 2022.
The provision for loan losses decreased $1.6 million when compared to the same period in the prior year, to a credit of $1.7 million for the three months ended June 30, 2022. The decrease in the provision for loan losses was primarily due to the $1.5 million release of a specific reserve related to the settlement of a large commercial real estate credit and the positive impacts of $0.8 million related to upgrades of two commercial credits, and a $1.0 million decrease in the historical loss factor due to the roll-off of a commercial real estate owner occupied property previously charged off in the second quarter of 2020. These decreases in the provision were offset by additional provision related to increased loan growth. Net charge-offs for the second quarter of 2022 were $0.7 million, compared to net charge-offs of $0.1 million for the second quarter of 2021.
The provision for loan losses for the six months ended June 30, 2022 and 2021 was a credit of $2.9 million and $0.4 million, respectively. The $2.5 million decrease in the provision for loan losses when compared to the same period in the prior year was primarily due to the $1.2 million release of COVID-19 related portion of the allowance in the first quarter of 2022, the $1.5 million release of a specific reserve related to the settlement of a large commercial real estate credit, positive impacts of $0.8 million related to upgrades of two large commercial credits, and a $1.0 million decrease in the historical loss factor due to the roll-off of a commercial real estate owner occupied property previously charged off in the second quarter of 2020. These decreases in the provision were offset by $1.4 million of additional provision related to increased loan growth.
Net charge-offs for the six months ended June 30, 2022 were $0.7 million, compared to a net recovery of $0.2 million for the same period in 2021. The $0.7 million net charge-off for the six months ended June 30, 2022, was mostly attributed to the settlement of a large commercial real estate credit. The $0.2 million net recovery for the six month period ended June 30, 2021 was mostly attributed to the recovery of a partial charge-off of a commercial loan in the second quarter of 2020.
Non-interest income
The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2022 | | 2021 | | Change | | Percentage Change |
WMG fee income | | $ | 2,628 | | | $ | 2,803 | | | $ | (175) | | | (6.2) | % |
Service charges on deposit accounts | | 936 | | | 732 | | | 204 | | | 27.9 | % |
Interchange revenue from debit card transactions | | 1,206 | | | 1,262 | | | (56) | | | (4.4) | % |
| | | | | | | | |
Changes in fair value of equity investments | | (242) | | | 102 | | | (344) | | | (337.3) | % |
Net gains on sales of loans held for sale | | 25 | | | 342 | | | (317) | | | (92.7) | % |
Net gains (losses) on sales of other real estate owned | | 46 | | | — | | | 46 | | | N/M |
Income from bank owned life insurance | | 11 | | | 12 | | | (1) | | | (8.3) | % |
CFS fee and commission income | | 271 | | | 236 | | | 35 | | | 14.8 | % |
Other | | 438 | | | 1,003 | | | (565) | | | (56.3) | % |
Total non-interest income | | $ | 5,319 | | | $ | 6,492 | | | $ | (1,173) | | | (18.1) | % |
Total non-interest income for the second quarter of 2022 decreased $1.2 million compared to the same period in the prior year primarily due to decreases in other non-interest income, changes in fair value of equity investments, net gains on sales of loans held for sale and WMG fee income, offset by an increase in service charges on deposit accounts.
Change in Other Non-Interest Income
The decrease in other non-interest income was primarily due to a $0.5 million one-time refund of real estate and sales tax in the same period of the prior year, and the timing of the receipt of Mastercard incentives when compared to the same period in the prior year.
Change in Changes in Fair value of Equity Investments
The decrease in changes in fair value of equity investments was primarily due to a general decrease in the equity markets related to the Corporation's deferred compensation plan when compared to the same period in the prior year.
Change in Net Gains on Sales of Loans Held for Sale
The decrease in net gains on sales of loans held for sale was primarily attributable to a decrease in residential mortgage loans sold in the secondary market when compared to the same period in the prior year.
Change in WMG Fee Income
The decrease in WMG fee income was primarily due to a general decrease in the equity markets when compared to the same period in the prior year.
Change in Service Charges on Deposit Accounts
The increase in service charges on deposit accounts was primarily due to an increase in non-sufficient fund and overdraft fees when compared to the same period in the prior year.
The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2022 | | 2021 | | Change | | Percentage Change |
WMG fee income | | $ | 5,385 | | | $ | 5,481 | | | $ | (96) | | | (1.8) | % |
Service charges on deposit accounts | | 1,800 | | | 1,449 | | | 351 | | | 24.2 | % |
Interchange revenue from debit card transactions | | 2,336 | | | 2,385 | | | (49) | | | (2.1) | % |
| | | | | | | | |
Changes in fair value of equity investments | | (355) | | | 188 | | | (543) | | | (288.8) | % |
Net gains on sales of loans held for sale | | 99 | | | 642 | | | (543) | | | (84.6) | % |
Net gains (losses) on sales of other real estate owned | | 46 | | | (18) | | | 64 | | | 355.6 | % |
Income from bank owned life insurance | | 22 | | | 27 | | | (5) | | | (18.5) | % |
CFS fee and commission income | | 524 | | | 450 | | | 74 | | | 16.4 | % |
Other | | 1,125 | | | 1,509 | | | (384) | | | (25.4) | % |
Total non-interest income | | $ | 10,982 | | | $ | 12,113 | | | $ | (1,131) | | | (9.3) | % |
Total non-interest income for the six months ended June 30, 2022 decreased $1.1 million compared to the same period in the prior year. The decrease was primarily due to decreases in changes in fair value of equity investments, net gains on sales of loans held for sale, other non-interest income and WMG fee income, offset by an increase in service charges on deposit accounts.
Change in Fair Value of Equity Investments
The decrease in changes in fair value of equity investments was primarily due to a general decrease in the equity markets related to the Corporation's deferred compensation plan when compared to the prior year period.
Change in Net Gains on Sales of Loans Held for Sale
The decrease in net gains on sales of loans held for sale was primarily attributable to a decrease in residential mortgage loans sold in the secondary market when compared to the same period in the prior year.
Change in Other Non-Interest Income
The decrease in other non-interest income was due primarily to the receipt of $0.5 million in real estate and sale tax refunds received in the same period of the prior year.
Change in WMG Fee Income
The decrease in WMG fee income was primarily due to a general decrease in the equity markets when compared to the same period in the prior year.
Change in Service Charges on Deposit Accounts
The increase in service charges on deposit accounts was primarily due to an increase in non-sufficient fund and overdraft fees when compared to the same period in the prior year.
Non-interest expense
The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2022 | | 2021 | | Change | | Percentage Change |
Compensation expense: | | | | | | | | |
Salaries and wages | | $ | 6,056 | | | $ | 6,037 | | | $ | 19 | | | 0.3 | % |
Pension and other employee benefits | | 1,937 | | | 1,480 | | | 457 | | | 30.9 | % |
Other components of net periodic pension and postretirement benefits | | (403) | | | (391) | | | (12) | | | 3.1 | % |
Total compensation expense | | 7,590 | | | 7,126 | | | 464 | | | 6.5 | % |
| | | | | | | | |
Non-compensation expense: | | | | | | | | |
Net occupancy | | 1,369 | | | 1,491 | | | (122) | | | (8.2) | % |
Furniture and equipment | | 410 | | | 410 | | | — | | | — | % |
Data processing | | 2,468 | | | 2,048 | | | 420 | | | 20.5 | % |
Professional services | | 664 | | | 535 | | | 129 | | | 24.1 | % |
| | | | | | | | |
Amortization of intangible assets | | 4 | | | 89 | | | (85) | | | (95.5) | % |
Marketing and advertising | | 184 | | | 284 | | | (100) | | | (35.2) | % |
Other real estate owned expenses | | 8 | | | 5 | | | 3 | | | 60.0 | % |
FDIC insurance | | 284 | | | 329 | | | (45) | | | (13.7) | % |
Loan expenses | | 176 | | | 290 | | | (114) | | | (39.3) | % |
Other | | 1,185 | | | 1,244 | | | (59) | | | (4.7) | % |
Total non-compensation expense | | 6,752 | | | 6,725 | | | 27 | | | 0.4 | % |
Total non-interest expense | | $ | 14,342 | | | $ | 13,851 | | | $ | 491 | | | 3.5 | % |
Total non-interest expense for the second quarter of 2022 increased $0.5 million compared to the same period in the prior year. The increase was due to increases in total compensation expense and total non-compensation expense. For the three months ended June 30, 2022, non-interest expense to average assets was 2.35%, compared to 2.27% for the same period in the prior year.
Compensation expense
The increase in compensation expense, compared to the same period in the prior year, can be primarily attributed to an increase in pension and other employee benefits due to an increase in employee healthcare expenses.
Non-compensation expense
Non-compensation expense increased slightly, compared to the same period in the prior year. Increases in data processing expense and professional services were offset by decreases in net occupancy expense and marketing and advertising expense. The increase in data processing expense can be primarily attributed to expenses related to the Corporation's new Tap-to-Pay debit cards supporting contactless transactions, and the timing of invoices. The increase in professional services can mostly be attributed to an increase in legal fees compared to the same period in the prior year. Net occupancy expense decreased primarily due to decreases in depreciation expense related to the sale of properties, when compared to the same period in the prior year. Marketing and advertising expenses decreased primarily due to the timing of initiatives.
The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2022 | | 2021 | | Change | | Percentage Change |
Compensation expense: | | | | | | | | |
Salaries and wages | | $ | 12,279 | | | $ | 11,799 | | | $ | 480 | | | 4.1 | % |
Pension and other employee benefits | | 3,655 | | | 2,939 | | | 716 | | | 24.4 | % |
Other components of net periodic pension and postretirement benefits | | (811) | | | (782) | | | (29) | | | 3.7 | % |
Total compensation expense | | 15,123 | | | 13,956 | | | 1,167 | | | 8.4 | % |
| | | | | | | | |
Non-compensation expense: | | | | | | | | |
Net occupancy | | 2,796 | | | 3,014 | | | (218) | | | (7.2) | % |
Furniture and equipment | | 847 | | | 776 | | | 71 | | | 9.1 | % |
Data processing | | 4,655 | | | 4,051 | | | 604 | | | 14.9 | % |
Professional services | | 1,185 | | | 989 | | | 196 | | | 19.8 | % |
| | | | | | | | |
Amortization of intangible assets | | 15 | | | 190 | | | (175) | | | (92.1) | % |
Marketing and advertising | | 460 | | | 410 | | | 50 | | | 12.2 | % |
Other real estate owned expenses | | (29) | | | 17 | | | (46) | | | (270.6) | % |
FDIC insurance | | 598 | | | 719 | | | (121) | | | (16.8) | % |
Loan expenses | | 391 | | | 524 | | | (133) | | | (25.4) | % |
Other | | 2,969 | | | 2,558 | | | 411 | | | 16.1 | % |
Total non-compensation expense | | 13,887 | | | 13,248 | | | 639 | | | 4.8 | % |
Total non-interest expense | | $ | 29,010 | | | $ | 27,204 | | | $ | 1,806 | | | 6.6 | % |
Total non-interest expense for the six months ended June 30, 2022 increased $1.8 million compared to the same period in the prior year. The increase was due to increases in total compensation expense and total non-compensation expense. For the six months ended June 30, 2022, non-interest expense to average assets was 2.39%, compared to 2.28% for the same period in the prior year.
Compensation expense
The increase in compensation expense, compared to the same period in the prior year, can be mostly attributable to increases in salaries and wages and pension and other employee benefits. The increase in salaries and wages was primarily due to merit increases, increases in salary costs to fill open positions due to competitive market conditions, and a decrease in deferred salaries related to PPP, offset by a decline in the market value of the Corporation's deferred compensation plan, when compared to the same period in the prior year. The increase in pension and other employee benefits was primarily due to an increase in healthcare expenses when compared to the same period in the prior year.
Non-compensation expense
The increase in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to increases in data processing expense, other non-interest expense, and professional services, offset primarily by decreases in net occupancy expense, amortization of intangible assets, and FDIC insurance.
The increase in data processing expense was primarily due to investment in the Corporation's new Tap-to-Pay debit cards supporting contactless transactions, increased software maintenance expenses, and a credit received in the same period of the prior year. The increase in other non-interest expense can mostly be attributed to $0.1 million of additional restitution regarding previously disclosed consumer compliance matters, and a $0.2 million related reserve which was initially released in the second quarter of 2021. The increase in professional services can mostly be attributed to an increase in legal fees compared to the same period in the prior year. Net occupancy expenses decreased primarily due to decreases in depreciation expense related to the sale of properties, when compared to the same period in the prior year. Amortization of intangible assets decreased primarily due to intangible assets reaching fully depreciated value. FDIC insurance decreased primarily due to a decrease in the assessment rate when compared to the same period in the prior year.
Income tax expense
The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | |
| | 2022 | | 2021 | | Change | | Percentage Change |
Income before income tax expense | | $ | 10,362 | | | $ | 8,870 | | | $ | 1,492 | | | 16.8 | % |
Income tax expense | | 2,338 | | | 2,075 | | | 263 | | | 12.7 | % |
Effective tax rate | | 22.6 | % | | 23.4 | % | | | | |
Income tax expense for the current quarter was $2.3 million compared to $2.1 million for the same period in the prior year. The increase in income tax expense was due primarily to an increase of $1.5 million in income before income tax expense. The effective income tax rate decreased from 23.4% for the second quarter of 2021 to 22.6% for the second quarter of 2022.
The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | |
| | 2022 | | 2021 | | Change | | Percentage Change |
Income before income tax expense | | $ | 19,179 | | | $ | 17,183 | | | $ | 1,996 | | | 11.6 | % |
Income tax expense | | 4,288 | | | 3,858 | | | 430 | | | 11.1 | % |
Effective tax rate | | 22.4 | % | | 22.5 | % | | | | |
Income tax expense for the six months ended June 30, 2022 and 2021 were $4.3 million and $3.9 million, respectively. The increase in income tax expense was due primarily to an increase of $2.0 million in income before income tax expense. The effective income tax rate decreased from 22.5% for the six months ended June 30, 2021 to 22.4% for the six months ended June 30, 2022.
COVID-19
The Effect of COVID-19 on Our Business
The Corporation continued to monitor the COVID-19 pandemic while following guidance from the Centers for Disease Control (CDC), the New York Department of Health and our local governments, remained flexible with its COVID-19 response, and adapted as necessary throughout our footprint. This flexibility allowed us to ensure a healthy and safe work environment for our colleagues, clients and the communities we assist. As of the date of this filing, all of our 31 branches are open with normal business hours. Management did not experience any negative effects on our ability to maintain operations and financial reporting systems, and has not identified any impact on business continuity plans. As of June 30, 2022, no loan forbearances remain as part of the loan portfolio.
Paycheck Protection Program Initiative
As part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Congress established the Paycheck Protection Program (PPP) under the direction of the United States Small Business Administration (SBA). As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans. The PPP ended new loans in May, 2021. PPP loans have an interest rate of 1.0% and two-year or five-year loan terms to maturity. As of June 30, 2022, 86 loans, totaling $3.0 million were outstanding related to PPP, a portion of which may not be forgiven, and 2,051 loans, totaling $268.3 million were paid off.
Financial Condition
The following table presents selected financial information at the dates indicated, and the dollar and percent change (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 | | Change | | Percentage Change |
ASSETS | | | | | | | | |
Total cash and cash equivalents | | $ | 29,768 | | | $ | 26,981 | | | $ | 2,787 | | | 10.3 | % |
Total investment securities, FHLB, and FRB stock | | 704,585 | | | 802,998 | | | (98,413) | | | (12.3) | % |
| | | | | | | | |
Loans, net of deferred loan fees | | 1,617,562 | | | 1,518,249 | | | 99,313 | | | 6.5 | % |
Allowance for loan losses | | (17,485) | | | (21,025) | | | 3,540 | | | (16.8) | % |
Loans, net | | 1,600,077 | | | 1,497,224 | | | 102,853 | | | 6.9 | % |
| | | | | | | | |
Goodwill and other intangible assets, net | | 21,824 | | | 21,839 | | | (15) | | | (0.1) | % |
Other assets | | 93,657 | | | 69,433 | | | 24,224 | | | 34.9 | % |
Total assets | | $ | 2,449,911 | | | $ | 2,418,475 | | | $ | 31,436 | | | 1.3 | % |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
Total deposits | | $ | 2,182,791 | | | $ | 2,155,433 | | | $ | 27,358 | | | 1.3 | % |
Advances and other debt | | 49,331 | | | 18,164 | | | 31,167 | | | 171.6 | % |
Other liabilities | | 43,099 | | | 33,423 | | | 9,676 | | | 29.0 | % |
Total liabilities | | 2,275,221 | | | 2,207,020 | | | 68,201 | | | 3.1 | % |
| | | | | | | | |
Total shareholders’ equity | | 174,690 | | | 211,455 | | | (36,765) | | | (17.4) | % |
Total liabilities and shareholders’ equity | | $ | 2,449,911 | | | $ | 2,418,475 | | | $ | 31,436 | | | 1.3 | % |
Cash and Cash Equivalents
The increase in cash and cash equivalents can be attributed to changes in securities, loans, deposits and borrowings.
Investment securities
The decrease in investment securities can be mostly attributed to $65.7 million in paydowns and a decrease in the fair value of the portfolio of $66.5 million, due to increases in interest rates, offset by purchases in the amount of $36.0 million.
Loans, net
The increase in loans, net of deferred loan fees, can be primarily attributed to growth of $63.6 million in commercial mortgages, $1.3 million in commercial and industrial loans, $17.5 million in residential mortgages, $13.8 million in indirect consumer loans and $3.2 million in other consumer loans. Paydowns due to SBA forgiveness of PPP loans decreased the total loan portfolio by $40.2 million during the six months ended June 30, 2022.
Allowance for Loan Losses
The decrease in the allowance for loan losses can be primarily attributed to the $1.2 million release of the COVID-19 related portion of the allowance in the first quarter of 2022, the $1.5 million release of a specific reserve related to the settlement of a large commercial real estate credit, positive impacts of $0.8 million related to upgrades of two large commercial credits, and a $1.0 million decrease in the historical loss factor due to the roll-off of a commercial real estate owner occupied property previously charged off in the second quarter of 2020. These decreases were offset by $1.4 million of additional provision related to increased loan growth.
Other Assets
The increase in other assets can be primarily attributed to increases of $16.8 million in the deferred tax asset and $8.4 million in the interest rate swap asset.
Deposits
The increase in deposits can be attributed to increases of $39.8 million in time deposits, $47.5 million in brokered deposits, and $5.4 million in savings deposits, partially offset by decreases of $34.6 million in non-interest-bearing demand deposits, $17.2 million in interest-bearing demand deposit accounts, and $13.5 million in money market accounts.
Advances and Other Debt
The increase in advances and other debt can be primarily attributed to increases in overnight FHLBNY borrowing.
Other liabilities
The increase in other liabilities can be primarily attributed to an increase of $8.2 million in interest rate swap liabilities.
Shareholders’ equity
Shareholders’ equity was $174.7 million at June 30, 2022 compared to $211.5 million at December 31, 2021. The decrease can be primarily attributed to an increase in accumulated other comprehensive loss of $48.8 million and $2.9 million in dividends declared during the six months ended June 30, 2022, offset by earnings of $14.9 million, during the six months ended June 30, 2022. The increase in accumulated other comprehensive loss can be primarily attributed to a decrease in the fair market value of the available for sale securities portfolio due to the increase in interest rates. Treasury stock increased $0.2 million, primarily due to the repurchase of the Corporation's common stock, offset by the impact of the issuance of shares related to the Corporation's employee benefit plans and grants issued under the Corporation's stock compensation plan. The Corporation repurchased 14,263 shares during the first quarter of 2022 at a cost of $0.6 million, at an average cost of $45.00 per share. No shares were repurchased during the second quarter of 2022. As of June 30, 2022, a total of 49,184 shares have been repurchased at an average cost of $40.42 per share, pursuant to the Corporation's stock repurchase plan.
Assets under management or administration
The market value of total assets under management or administration in WMG was $1.992 billion at June 30, 2022, including $318.4 million of assets held under management or administration for the Corporation, compared to $2.325 billion at December 31, 2021, including $344.2 million of assets held under management or administration for the Corporation, a decrease of $332.6 million, or 14.31%, due to price declines in the capital markets.
Securities
The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt securities purchased for the bond portfolio to carry a minimum agency rating of "Baa". After an independent credit analysis is performed, the policy also allows the Corporation to purchase local municipal obligations that are not rated. The Corporation intends to maintain a reasonable level of securities to provide adequate liquidity and in order to have securities available to pledge to secure public deposits, repurchase agreements and other types of transactions. Fluctuations in the fair value of the Corporation’s securities relate primarily to changes in interest rates. Marketable securities are classified as Available for Sale, while investments in local municipal obligations are generally classified as Held to Maturity.
The available for sale segment of the securities portfolio totaled $693.0 million at June 30, 2022, a decrease of $99.0 million, or 12.5%, from $792.0 million at December 31, 2021. The decrease can be mostly attributed to $53.4 million in paydowns, and a decrease in the fair value of the portfolio of $66.2 million due to increases in interest rates, offset by purchases of $22.7 million. New purchases during the six months ended June 30, 2022 were primarily in mortgage-backed securities, SBA loan pools, and corporate subordinated debt issues. There were no puchases in the second quarter of 2022. The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled $2.9 million at June 30, 2022 and $3.8 million at December 31, 2021.
Non-marketable equity securities at June 30, 2022 and December 31, 2021 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $4.1 million, respectively. The fair value of these securities is assumed to approximate their cost. The investment in these stocks is regulated by regulatory policies of the respective institutions.
Loans
The Corporation has reporting systems to monitor: (i) loan origination and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, troubled debt restructurings, and other real estate owned, (iv) impaired loans, and (v) potential problem loans. Management reviews these systems on a regular basis.
The table below presents the Corporation’s loan composition by segment at the dates indicated, and the dollar and percent change from December 31, 2021 to June 30, 2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LOAN COMPOSITION |
| June 30, 2022 | | % of Total Loans | | December 31, 2021 | | % of Total Loans | | Dollar Change | | Percentage Change |
Commercial and agricultural: | | | | | | | | | | | |
Commercial and industrial | $ | 258,474 | | | 16.0 | % | | $ | 256,893 | | | 16.9 | % | | $ | 1,581 | | | 0.6 | % |
Agricultural | 89 | | | — | % | | 394 | | | — | % | | (305) | | | (77.4) | % |
Commercial mortgages: | | | | | | | | | | | |
Construction | 94,937 | | | 5.9 | % | | 82,204 | | | 5.4 | % | | 12,733 | | | 15.5 | % |
Commercial mortgages | 771,201 | | | 47.7 | % | | 720,358 | | | 47.5 | % | | 50,843 | | | 7.1 | % |
Residential mortgages | 276,847 | | | 17.1 | % | | 259,334 | | | 17.1 | % | | 17,513 | | | 6.8 | % |
Consumer loans: | | | | | | | | | | | |
| | | | | | | | | | | |
Home equity lines and loans | 73,770 | | | 4.6 | % | | 70,670 | | | 4.7 | % | | 3,100 | | | 4.4 | % |
Indirect consumer loans | 132,330 | | | 8.2 | % | | 118,569 | | | 7.8 | % | | 13,761 | | | 11.6 | % |
Direct consumer loans | 9,914 | | | 0.5 | % | | 9,827 | | | 0.6 | % | | 87 | | | 0.9 | % |
Total | $ | 1,617,562 | | | 100.0 | % | | $ | 1,518,249 | | | 100.0 | % | | $ | 99,313 | | | 6.5 | % |
Portfolio loans totaled $1.618 billion at June 30, 2022, an increase of $99.3 million, or 6.5%, from $1.518 billion at December 31, 2021. The increase in loans can be attributed to increases in all portfolios of, $63.6 million in commercial mortgage loans, $17.5 million in residential mortgages, $13.8 million in indirect consumer loans, $3.2 million in other consumer loans, and $1.3 million in commercial and industrial loans.
The increase in commercial mortgages can be primarily attributed to new originations in the multi-family portfolio. Paydowns due to SBA forgiveness of PPP loans decreased the total loan portfolio by $40.2 million as of June 30, 2022, as compared to December 31, 2021. Residential mortgage loans totaled $276.8 million at June 30, 2022, an increase of $17.5 million, or 6.8%, from December 31, 2021. During the six months ended June 30, 2022, $43.8 million of residential mortgages were originated, of which $5.5 million were sold in the secondary market to Freddie Mac. Indirect consumer loans totaled $132.3 million at June 30, 2022, an increase of $13.8 million, or 11.6%, from December 31, 2021, primarily due to a switch in the Corporation’s pricing from a dealer reserve pricing model to a flat fee program effective August, 2021, as well as increased demand for automobiles. During the six months ended June 30, 2022, $43.2 million of indirect automobile loans were originated, reflecting new franchise relationships and investments in technology to enhance the program. For the six months ending June 30, 2022, indirect loan originations were comprised of 33% new automobiles and 67% used automobiles, which represents a shift from December 31, 2021 toward an increase in consumer new automobile purchases. The Corporation anticipates that future growth in portfolio loans will continue to be concentrated in commercial mortgages and commercial and industrial loans, particularly within the Corporation's new Western New York market.
The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
LOANS BY DIVISION |
| June 30, 2022 | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
Chemung Canal Trust Company*^ | $ | 665,445 | | | $ | 639,144 | | | $ | 658,468 | | | $ | 576,399 | | | $ | 603,133 | |
Capital Bank Division | 952,117 | | | 879,105 | | | 877,995 | | | 732,820 | | | 708,773 | |
Total loans | $ | 1,617,562 | | | $ | 1,518,249 | | | $ | 1,536,463 | | | $ | 1,309,219 | | | $ | 1,311,906 | |
* All loans, excluding those originated by the Capital Bank division.
^ Includes $62.4 million and $47.0 million as of June 30, 2022 and December 31, 2021, respectively, in the Western New York market.
Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At June 30, 2022 and December 31, 2021, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were 47.3% and 45.1% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of June 30, 2022 and December 31, 2021.
The table below shows the maturity of loans outstanding as of June 30, 2022. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):
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| | Within One Year | | After One But Within Five Years | | After Five But Within 15 Years | | After 15 Years | | Total |
Commercial and agricultural: | | | | | | | | | | |
Commercial and industrial | | $ | 71,341 | | | $ | 101,526 | | | $ | 80,471 | | | $ | 5,136 | | | $ | 258,474 | |
Agricultural | | 20 | | | 19 | | | 50 | | | — | | | 89 | |
Commercial mortgages: | | | | | | | | | | |
Construction | | 5,382 | | | 28,666 | | | 50,474 | | | 10,415 | | | 94,937 | |
Commercial mortgages | | 36,089 | | | 171,853 | | | 530,301 | | | 32,958 | | | 771,201 | |
Residential mortgages | | 6,511 | | | 7,973 | | | 138,265 | | | 124,098 | | | 276,847 | |
Consumer loans: | | | | | | | | | | |
Home equity lines and loans | | 431 | | | 5,022 | | | 44,488 | | | 23,829 | | | 73,770 | |
Indirect consumer loans | | 2,081 | | | 67,968 | | | 62,279 | | | 2 | | | 132,330 | |
Direct consumer loans | | 341 | | | 5,840 | | | 1,257 | | | 2,476 | | | 9,914 | |
Total | | $ | 122,196 | | | $ | 388,867 | | | $ | 907,585 | | | $ | 198,914 | | | $ | 1,617,562 | |
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Loans maturing with: | | | | After One But Within Five Years | | After Five But Within 15 Years | | After 15 Years | | Total |
Fixed interest rates | | | | $ | 241,087 | | | $ | 449,290 | | | $ | 102,946 | | | $ | 793,323 | |
Variable interest rates | | | | 147,780 | | | 458,295 | | | 95,968 | | | 702,043 | |
Total | | | | $ | 388,867 | | | $ | 907,585 | | | $ | 198,914 | | | $ | 1,495,366 | |
Non-Performing Assets
Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure.
Past due status on all loans is based on the contractual terms of the loan. It is generally the Corporation's policy that a loan 90 days past due be placed in non-accrual status unless factors exist that would eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower. At the time loans are placed in non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its original principal and interest. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal balance has been recovered.
The following table summarizes the Corporation's non-performing assets (in thousands):
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NON-PERFORMING ASSETS | |
| | June 30, 2022 | | December 31, 2021 | |
Non-accrual loans | | $ | 2,831 | | | $ | 3,469 | | |
Non-accrual troubled debt restructurings | | 4,543 | | | 4,645 | | |
Total non-performing loans | | 7,374 | | | 8,114 | | |
Other real estate owned | | 291 | | | 113 | | |
Total non-performing assets | | $ | 7,665 | | | $ | 8,227 | | |
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Ratio of non-performing loans to total loans | | 0.46 | % | | 0.54 | % | |
Ratio of non-performing assets to total assets | | 0.31 | % | | 0.34 | % | |
Ratio of allowance for loan losses to non-performing loans | | 237.12 | % | | 259.17 | % | |
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Accruing loans past due 90 days or more (1) | | $ | 2 | | | $ | 4 | | |
Accruing troubled debt restructurings (1) | | $ | 1,663 | | | $ | 5,643 | | |
(1) Not included in non-performing assets above. | | | | | |
Non-Performing Loans
Non-performing loans totaled $7.4 million, or 0.46% of total loans at June 30, 2022, compared to $8.1 million, or 0.54% of total loans at December 31, 2021. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $7.7 million, or 0.31% of total assets, at June 30, 2022, compared to $8.2 million, or 0.34% of total assets, at December 31, 2021. The decrease in non-performing loans can mostly be attributed to payments received on non-performing loans across all portfolios. The decrease in non-performing assets can be attributed to the decrease in non-performing loans.
Accruing Loans Past due 90 Days or More
The recorded investment in accruing loans past due 90 days or more decreased from $4 thousand at December 31, 2021 to $2 thousand at June 30, 2022.
Troubled Debt Restructurings
The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation has modified the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 were considered current for COVID-19 related modifications and therefore were not be treated as TDRs until January 1, 2022. As of June 30, 2022, the Corporation had $4.5 million of non-accrual TDRs compared to $4.6 million as of December 31, 2021. As of June 30, 2022 and December 31, 2021, the Corporation had $1.7 million and $5.6 million respectively, of accruing TDRs.
Impaired Loans
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. The recorded investment balance of impaired loans at June 30, 2022 totaled $7.3 million, including TDRs of $6.2 million, compared to $11.6 million, including TDRs of $10.3 million, at December 31, 2021. Included in the recorded investment of impaired loans at June 30, 2022, were loans totaling $1.5 million for which impairment allowances of $1.3 million have been specifically allocated to the allowance for loan losses. As of December 31, 2021, the impaired loan total included $5.2 million of loans for which specific impairment allowances of $3.0 million were allocated to the allowance for loan losses.
The majority of the Corporation's impaired loans are secured and measured for impairment based on collateral evaluations. It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. In determining the amount of any specific allocation or charge-off, the Corporation will make adjustments to reflect the estimated costs to sell the property. Upon receipt and review of the updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs. Real estate values in the Corporation's market area have been holding steady. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.
Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. The allowance is established based on management’s evaluation of the probable incurred losses inherent in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.
Specific valuation allowances are established based on management’s analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, delinquent or unpaid property taxes, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five-year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, and more recently the expected impact of COVID-19 on the various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy, including the impact of COVID-19.
The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The allowance for loan losses was $17.5 million at June 30, 2022, and $21.0 million at December 31, 2021. The allowance for loan losses was 237.12% of non-performing loans at June 30, 2022 compared to 259.17% at December 31, 2021. The ratio of allowance for loan losses to total loans was 1.08% at June 30, 2022, compared to 1.38% at December 31, 2021. The ratio of the allowance for loan losses to total loans excluding PPP loans was 1.08% at June 30, 2022, compared to 1.43% at December 31, 2021. The Corporation continues to closely monitor the loan portfolio for effects related to the COVID-19 pandemic. Changes in governmental policies and economic pressures during the pandemic placed stress on certain industries while other industries initially anticipated to be highly impacted by the pandemic demonstrated resilience. Based upon management review of these factors the Corporation released $1.2 million of the pandemic related portion of the allowance during the first quarter of 2022. To date the Corporation has released $3.1 million and utilized $0.5 million of the pandemic related provision, and $1.2 million remains as part of the allowance as of June 30, 2022. Net charge-offs for the six months ended June 30, 2022 were $0.7 million, compared to net recoveries for the six months ended June 30, 2021 of $0.2 million.
The table below summarizes the Corporation’s allowance for loan losses and non-accrual loans outstanding by loan category at June 30, 2022 and December 31, 2021 (in thousands):
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ALLOWANCE FOR LOAN LOSSES BY LOAN CATEGORY |
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Balance at June 30, 2022 | Allowance for loan losses | | Allowance to loans1 | | Non-performing loans | | Non-performing loans to loans1 | | Allowance to non-performing loans |
Commercial and agricultural | 3,564 | | | 1.38 | % | | 1,748 | | | 0.68 | % | | 203.89 | % |
Commercial mortgages | 10,314 | | | 1.19 | % | | 3,660 | | | 0.42 | % | | 281.80 | % |
Residential mortgages | 1,714 | | | 0.62 | % | | 600 | | | 0.22 | % | | 285.67 | % |
Consumer loans | 1,893 | | | 0.88 | % | | 1,366 | | | 0.63 | % | | 138.58 | % |
Total | $ | 17,485 | | | 1.08 | % | | $ | 7,374 | | | 0.46 | % | | 237.12 | % |
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Balance at December 31, 2021 | Allowance for loan losses | | Allowance to loans1 | | Non-performing loans | | Non-performing loans to loans1 | | Allowance to non-performing loans |
Commercial and agricultural | $ | 3,591 | | | 1.40 | % | | $ | 1,932 | | | 0.75 | % | | 185.87 | % |
Commercial mortgages | 13,556 | | | 1.69 | % | | 3,878 | | | 0.48 | % | | 349.56 | % |
Residential mortgages | 1,803 | | | 0.70 | % | | 1,039 | | | 0.40 | % | | 173.53 | % |
Consumer loans | 2,075 | | | 1.04 | % | | 1,265 | | | 0.64 | % | | 164.03 | % |
Total | $ | 21,025 | | | 1.38 | % | | $ | 8,114 | | | 0.54 | % | | 259.17 | % |
1 Ratio is a percentage of loan category. | | | | | | | | |
The table below summarizes the Corporation’s consolidated credit ratios at June 30, 2022 and December 31, 2021:
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Consolidated Ratios | | June 30, 2022 | | December 31, 2021 |
Non-performing loans to total loans | | 0.46 | % | | 0.54 | % |
Allowance for loan losses to total loans | | 1.08 | % | | 1.38 | % |
Allowance for loan losses to total loans, net of PPP | | 1.08 | % | | 1.43 | % |
Allowance for loan losses to non-performing loans | | 237.12 | % | | 259.17 | % |
The table below summarizes the Corporation’s ratio of net charge-offs and recoveries to average loans outstanding by loan category for the six months ended June 30, 2022 and June 30, 2021:
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Credit Ratios | | June 30, 2022 | | June 30, 2021 |
Commercial and agricultural | | — | % | | (0.07) | % |
Commercial mortgages | | 0.08 | % | | — | % |
Residential mortgages | | — | % | | 0.03 | % |
Consumer loans | | 0.01 | % | | 0.01 | % |
Total | | 0.04 | % | | (0.01) | % |
The table below summarizes the Corporation’s loan loss experience for the six months ended June 30, 2022 and 2021 (in thousands):
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SUMMARY OF LOAN LOSS EXPERIENCE | | |
| Six Months Ended June 30, | | |
| 2022 | | 2021 | | |
Balance of allowance for loan losses at beginning of period | $ | 21,025 | | | $ | 20,924 | | | |
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Charge-offs: | | | | | |
Commercial and agricultural | 20 | | | 25 | | | |
Commercial mortgages | 687 | | | — | | | |
Residential mortgages | — | | | 71 | | | |
Consumer loans | 322 | | | 320 | | | |
Total charge-offs | 1,029 | | | 416 | | | |
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Recoveries: | | | | | |
Commercial and agricultural | 30 | | | 275 | | | |
Commercial mortgages | 2 | | | 1 | | | |
Residential mortgages | — | | | 10 | | | |
Consumer loans | 346 | | | 291 | | | |
Total recoveries | 378 | | | 577 | | | |
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Net charge-offs (recoveries) | 651 | | | (161) | | | |
Provision (credit) for loan losses | (2,889) | | | (409) | | | |
Balance of allowance for loan losses at end of period | $ | 17,485 | | | $ | 20,676 | | | |
Other Real Estate Owned
At June 30, 2022, OREO totaled $0.3 million compared to $0.1 million at December 31, 2021. The increase in other real estate owned was due primarily to the addition of four residential properties in the first six months of 2022.
Deposits
The table below summarizes the Corporation’s deposit composition by segment at the dates indicated, and the dollar and percent change from December 31, 2021 to June 30, 2022 (in thousands):
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DEPOSITS |
| June 30, 2022 | | December 31, 2021 | | Dollar Change | | Percentage Change |
Non-interest-bearing demand deposits | $ | 704,996 | | | $ | 739,607 | | | $ | (34,611) | | | (4.7) | % |
Interest-bearing demand deposits | 267,554 | | | 284,721 | | | (17,167) | | | (6.0) | % |
Insured money market accounts | 641,008 | | | 654,553 | | | (13,545) | | | (2.1) | % |
Savings deposits | 285,593 | | | 280,195 | | | 5,398 | | | 1.9 | % |
Time deposits | 283,640 | | | 196,357 | | | 87,283 | | | 44.5 | % |
Total | $ | 2,182,791 | | | $ | 2,155,433 | | | $ | 27,358 | | | 1.3 | % |
Deposits totaled $2.183 billion at June 30, 2022 compared to $2.155 billion at December 31, 2021, an increase of $27.4 million, or 1.3%. The increase was primarily attributable to increases of $87.3 million in time deposits, and $5.4 million in savings deposits, partially offset by decreases of $34.6 million in non-interest-bearing demand deposits, $17.2 million in interest-bearing demand deposits, and $13.5 million in money market accounts. The growth in deposits was due primarily to increases of $16.3 million in public deposits, $47.5 million in one-way brokered deposits, and $11.6 million in consumer deposits, offset by a decrease of $48.0 million in commercial deposits. At June 30, 2022, demand deposit and money market accounts comprised 73.9% of total deposits compared to 77.9% at December 31, 2021.
The table below presents the Corporation's deposits balance by bank division (in thousands):
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DEPOSITS BY DIVISION |
| June 30, 2022 | | December 31, 2021 | | December 31, 2020 | | December 31, 2019 | | December 31, 2018 |
Chemung Canal Trust Company* | $ | 1,807,019 | | | $ | 1,739,826 | | | $ | 1,686,370 | | | $ | 1,317,225 | | | $ | 1,328,658 | |
Capital Bank Division | 375,772 | | | 415,607 | | | 351,404 | | | 254,913 | | | 240,579 | |
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Total | $ | 2,182,791 | | | $ | 2,155,433 | | | $ | 2,037,774 | | | $ | 1,572,138 | | | $ | 1,569,237 | |
*All deposits, excluding those originated by the Capital Bank division.
In addition to consumer, commercial and public deposits, other sources of funds include reciprocal brokered deposits. The Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations. This will apply to the Corporation's participation in the CDARS and ICS programs. The CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. Brokered deposits include funds obtained through brokers. Deposits obtained through the CDARS and ICS programs were $388.7 million as of June 30, 2022, including $47.5 million of one-way brokered deposits, and $288.1 million as of December 31, 2021, which included no brokered deposits. The increase in CDARS and ICS deposits was due to the seasonal inflow of municipal client balances.
The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and other low interest-bearing deposit accounts. A checking account is the driver of a banking relationship and consumers consider the bank where they have their checking account as their primary bank. These customers will typically turn to their primary bank first when in need of other financial services. Strategies that have been developed and implemented to generate these deposits include: (i) acquire deposits by entering new markets through branch acquisitions or de novo branching, (ii) an annual checking account marketing campaign, (iii) training branch employees to identify and meet client financial needs with Bank products and services, (iv) link business and consumer loans to the customer's primary checking account at the Bank, (v) aggressively promote direct deposit of client’s payroll checks or benefit checks and (vi) constantly monitor the Corporation’s pricing strategies to ensure competitive products and services. The Corporation also considers brokered deposits to be an element of its deposit strategy and uses brokered deposits as a secondary source of funding to support growth.
Borrowings
Borrowings increased $31.2 million to $49.3 million at June 30, 2022 from December 31, 2021, primarily attributable to an increase in FHLBNY overnight advances when compared to December 31, 2021. There were no outstanding FHLBNY term advances as of and for the year ended June 30, 2022, and December 31, 2021, respectively.
Shareholders’ Equity
Total shareholders' equity decreased $36.8 million from $211.5 million at December 31, 2021 to $174.7 million at June 30, 2022, primarily due to an increase in accumulated other comprehensive loss, offset by an increase in retained earnings. The increase in accumulated other comprehensive loss of $48.8 million can be mostly attributed to the decrease in the fair market value of the available for sale securities portfolio. The increase in retained earnings of $12.0 million was due primarily to earnings of $14.9 million, offset by $2.9 million in dividends declared during the six months ended June 30, 2022. Treasury stock increased $0.2 million, primarily due to the Corporation's common stock repurchase program, offset by the impact of the issuance of shares related to the Corporation's employee benefit plans and grants issued under the Corporation's stock compensation plan. The total shareholders’ equity to total assets ratio was 7.13% at June 30, 2022 compared to 8.74% at December 31, 2021. The tangible equity to tangible assets ratio was 6.30% at June 30, 2022 compared to 7.91% at December 31, 2021. Book value per share decreased to $37.24 at June 30, 2022 from $45.09 at December 31, 2021.
The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. As of June 30, 2022, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.
When shares of the Corporation become available in the market, the Corporation may purchase them after careful consideration of the Corporation’s liquidity and capital positions. Purchases may be made from time to time on the open market or in privately negotiated transactions at the discretion of management. On January 8, 2021, the Corporation's Board of Directors approved a new stock repurchase program. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The Corporation repurchased 14,263 shares in the first quarter of 2022 at the weighted average cost of $45.00 per share. No shares were repurchased in the second quarter of 2022. As of June 30, 2022, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program, at the weighted average cost of $40.42 per share. Remaining buyback authority under the share repurchase program was 200,816 shares at June 30, 2022.
On April 27, 2020, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933. The Corporation's Board of Directors approved the filing with the SEC of a Shelf Registration Statement to register for sale from time to time up to $50 million of the following securities: (i) shares of common stock; (ii) unsecured debt securities, which may consist of notes, debentures or other evidences of indebtedness; (iii) warrants; (iv) purchase contracts; (v) units consisting of any combination of the foregoing; and (vi) subscription rights to purchase shares of common stock or debt securities. The SEC declared the registration statement effective on May 7, 2020.
Pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”), the FRB finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020. The Bank has not elected to use the community bank leverage ratio.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, brokered deposits, securities sold under agreements to repurchase and other borrowings.
The Corporation is a member of the FHLBNY which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. Based on available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of $151.4 million and $161.0 million at June 30, 2022 and December 31, 2021, respectively. The Corporation also had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which was available at June 30, 2022 and December 31, 2021, respectively. The Corporation borrowed $45.9 million and $14.6 million with FHLBNY overnight advances as of June 30, 2022 and December 31, 2021, respectively.
Management believes that the Corporation's liquidity position is strong. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, brokered deposits, FHLB borrowings, securities sold under agreements to repurchase and other borrowings. At June 30, 2022, the Corporation's cash and cash equivalents balance was $29.8 million. The Corporation also maintains an investment portfolio of securities available for sale, comprised primarily of mortgage-backed securities and municipal bonds. Although this portfolio generates interest income for the Corporation, it also serves as an available source of liquidity and capital if the need should arise. As of June 30, 2022, the Corporation's investment in securities available for sale was $693.0 million, $499.3 million of which was not pledged as collateral. Additionally, the Bank's unused borrowing capacity at the Federal Home Loan Bank of New York was $151.4 million as of June 30, 2022.
With respect to the Corporation's credit risk and lending activities, management has taken actions to identify and assess additional possible credit exposure due to the changing environment caused by the COVID-19 crisis based upon the industry types within our current loan portfolio. Lending risks, as mentioned, are being monitored by industry, based upon NAICS code, with specific attention being paid to those industries that may experience greater stress during this time.
Consolidated Cash Flows Analysis
The table below summarizes the Corporation's cash flows for the periods indicated (in thousands):
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CONSOLIDATED SUMMARY OF CASH FLOWS |
(in thousands) | | Six Months Ended June 30, |
| | 2022 | | 2021 |
Net cash provided by operating activities | | $ | 17,885 | | | $ | 17,411 | |
Net cash used in investing activities | | (70,245) | | | (166,201) | |
Net cash provided by financing activities | | 55,147 | | | 97,049 | |
Net increase (decrease) in cash and cash equivalents | | $ | 2,787 | | | $ | (51,741) | |
Operating activities
The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through short-term and long-term borrowings are sufficient to fund the Corporation’s operating liquidity needs. Cash provided by operating activities in the first six months of 2022 and 2021 predominantly resulted from net income after non-cash operating adjustments.
Investing activities
Cash used in investing activities during the first six months of 2022 predominantly resulted from a net increase in loans and purchases of securities available for sale, offset by maturities and principal paydowns on securities available for sale. Cash used in investing activities during the first six months of 2021 predominantly resulted from purchases of securities available for sale, and a net increase in loans, offset by principal paydowns on securities available for sale.
Financing activities
Cash provided by financing activities during the first six months of 2022 predominantly resulted from a net increase in deposits, including brokered deposits, and overnight advances. Cash provided by financing activities during the first six months of 2021 predominantly resulted from a net increase in deposits.
Capital Resources
The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the Regulatory Relief Act, the FRB amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant non-banking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, are not subject to regulatory capital requirements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is 2.50%. Organizations that fail to maintain the minimum capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan and other benefit plans are not included in computing regulatory capital.
Pursuant to the Regulatory Relief Act, the FRB finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020. The Bank has not elected to use the community bank leverage ratio.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. Management believes that, as of June 30, 2022 and December 31, 2021, the Bank met all capital adequacy requirements to which it was subject. As of December 31, 2018, the Corporation is no longer subject to FRB consolidated capital requirements applicable to bank holding companies, which are similar to those applicable to the Bank, until it reaches $3.0 billion in assets.
As of June 30, 2022, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank's capital category.
The regulatory capital ratios as of June 30, 2022 and December 31, 2021 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.
The Corporation and the Bank’s capital ratios as of June 30, 2022 were as follows (in thousands, except ratio data):
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| Actual | | Minimum Capital Adequacy | | Minimum Capital Adequacy with Capital Buffer | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
As of June 30, 2022 | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Total Capital (to Risk Weighted Assets): | |
Consolidated | $ | 225,695 | | | 13.37 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 217,544 | | | 12.88 | % | | $ | 135,085 | | | 8.00 | % | | $ | 177,299 | | | 10.50 | % | | $ | 168,856 | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets): | | | | | | | | | | | | | | |
Consolidated | $ | 208,210 | | | 12.33 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 200,059 | | | 11.85 | % | | $ | 101,314 | | | 6.00 | % | | $ | 143,528 | | | 8.50 | % | | $ | 135,085 | | | 8.00 | % |
Common Equity Tier 1 Capital (to Risk Weighted Assets): | | | | | | | | | | | | |
Consolidated | $ | 208,210 | | | 12.33 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 200,059 | | | 11.85 | % | | $ | 75,985 | | | 4.50 | % | | $ | 118,199 | | | 7.00 | % | | $ | 109,757 | | | 6.50 | % |
Tier 1 Capital (to Average Assets): | | | | | | | | | | | | | | | |
Consolidated | $ | 208,210 | | | 8.38 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 200,059 | | | 8.07 | % | | $ | 99,194 | | | 4.00 | % | | N/A | | N/A | | $ | 123,993 | | | 5.00 | % |
The Corporation and the Bank’s capital ratios as of December 31, 2021 were as follows (in thousands, except ratio data):
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| Actual | | Minimum Capital Adequacy | | Minimum Capital Adequacy with Capital Buffer | | To Be Well Capitalized Under Prompt Corrective Action Provisions |
As of December 31, 2021 | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
Total Capital (to Risk Weighted Assets): | |
Consolidated | $ | 215,091 | | | 14.21 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 206,988 | | | 13.69 | % | | $ | 120,950 | | | 8.00 | % | | $ | 158,746 | | | 10.50 | % | | $ | 151,187 | | | 10.00 | % |
Tier 1 Capital (to Risk Weighted Assets): | | | | | | | | | | | | | | |
Consolidated | $ | 196,147 | | | 12.96 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 188,063 | | | 12.44 | % | | $ | 90,712 | | | 6.00 | % | | $ | 128,509 | | | 8.50 | % | | $ | 120,950 | | | 8.00 | % |
Common Equity Tier 1 Capital (to Risk Weighted Assets): | | | | | | | | | | | | |
Consolidated | $ | 196,147 | | | 12.96 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 188,063 | | | 12.44 | % | | $ | 68,034 | | | 4.50 | % | | $ | 105,831 | | | 7.00 | % | | $ | 98,272 | | | 6.50 | % |
Tier 1 Capital (to Average Assets): | | | | | | | | | | | | | | | |
Consolidated | $ | 196,147 | | | 8.06 | % | | N/A | | N/A | | N/A | | N/A | | N/A | | N/A |
Bank | $ | 188,063 | | | 7.74 | % | | $ | 97,151 | | | 4.00 | % | | N/A | | N/A | | $ | 121,439 | | | 5.00 | % |
Dividend Restrictions
The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At June 30, 2022, the Bank could, without prior approval, declare dividends of approximately $39.1 million.
Adoption of New Accounting Standards
Please refer to Note 1, Summary of Significant Accounting Policies - Recent Accounting Pronouncements for a discussion of new accounting standards.
Explanation and Reconciliation of the Corporation’s Use of Non-GAAP Measures
The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on pages 7–13. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.
In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures, because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.
The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Corporation’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although we are unable to state with certainty that the SEC would so regard them.
Fully Taxable Equivalent Net Interest Income and Net Interest Margin
Net interest income is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of other institutions or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average interest-earning assets. For purposes of this measure as well, fully taxable equivalent net interest income is generally used by financial institutions, as opposed to actual net interest income, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. The Corporation follows these practices.
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| | | | | | | | | | | As of the |
| As of the Three Months Ended | | Six Months Ended |
(in thousands, except ratio data) | June 30, | | March 31, | | Dec. 31, | | Sept. 30, | | June 30, | | June 30, | | June 30, |
2022 | | 2022 | | 2021 | | 2021 | | 2021 | | 2022 | | 2021 |
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT | | | | | | | | | | | | | |
Net interest income (GAAP) | $ | 17,641 | | | $ | 16,677 | | | $ | 16,892 | | | $ | 16,832 | | | $ | 16,079 | | | $ | 34,318 | | | $ | 31,865 | |
Fully taxable equivalent adjustment | 103 | | | 99 | | | 105 | | | 94 | | | 92 | | | 202 | | | 184 | |
Fully taxable equivalent net interest income (non-GAAP) | $ | 17,744 | | | $ | 16,776 | | | $ | 16,997 | | | $ | 16,926 | | | $ | 16,171 | | | $ | 34,520 | | | $ | 32,049 | |
| | | | | | | | | | | | | |
Average interest-earning assets (GAAP) | $ | 2,395,704 | | | $ | 2,371,275 | | | $ | 2,364,578 | | | $ | 2,327,817 | | | $ | 2,352,908 | | | $ | 2,383,557 | | | $ | 2,302,402 | |
| | | | | | | | | | | | | |
Net interest margin - fully taxable equivalent (non-GAAP) | 2.97 | % | | 2.87 | % | | 2.85 | % | | 2.88 | % | | 2.76 | % | | 2.92 | % | | 2.81 | % |
Efficiency Ratio
The unadjusted efficiency ratio is calculated as non-interest expense divided by total revenue (net interest income and non-interest income). The adjusted efficiency ratio is a non-GAAP financial measure which represents the Corporation’s ability to turn resources into revenue and is calculated as non-interest expense divided by total revenue (fully taxable equivalent net interest income and non-interest income), adjusted for one-time occurrences and amortization. This measure is meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s productivity measured by the amount of revenue generated for each dollar spent.
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| | | | | | | | | | | As of the |
| As of the Three Months Ended | | Six Months Ended |
(in thousands, except ratio data) | June 30, | | March 31, | | Dec. 31, | | Sept. 30, | | June 30, | | June 30, | | June 30, |
2022 | | 2022 | | 2021 | | 2021 | | 2021 | | 2022 | | 2021 |
EFFICIENCY RATIO | | | | | | | | | | | | | |
Net interest income (GAAP) | $ | 17,641 | | | $ | 16,677 | | | $ | 16,892 | | | $ | 16,832 | | | $ | 16,079 | | | $ | 34,318 | | | $ | 31,865 | |
Fully taxable equivalent adjustment | 103 | | | 99 | | | 105 | | | 94 | | | 92 | | | 202 | | | 184 | |
Fully taxable equivalent net interest income (non-GAAP) | $ | 17,744 | | | $ | 16,776 | | | $ | 16,997 | | | $ | 16,926 | | | $ | 16,171 | | | $ | 34,520 | | | $ | 32,049 | |
| | | | | | | | | | | | | |
Non-interest income (GAAP) | $ | 5,319 | | | $ | 5,663 | | | $ | 5,787 | | | $ | 5,970 | | | $ | 6,492 | | | $ | 10,982 | | | $ | 12,113 | |
| | | | | | | | | | | | | |
Less: net (gains) losses on security transactions | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Adjusted non-interest income (non-GAAP) | $ | 5,319 | | | $ | 5,663 | | | $ | 5,787 | | | $ | 5,970 | | | $ | 6,492 | | | $ | 10,982 | | | $ | 12,113 | |
| | | | | | | | | | | | | |
Non-interest expense (GAAP) | $ | 14,342 | | | $ | 14,668 | | | $ | 14,378 | | | $ | 14,100 | | | $ | 13,851 | | | $ | 29,010 | | | $ | 27,204 | |
Less: amortization of intangible assets | (4) | | | (11) | | | (11) | | | (42) | | | (89) | | | (15) | | | (190) | |
| | | | | | | | | | | | | |
Adjusted non-interest expense (non-GAAP) | $ | 14,338 | | | $ | 14,657 | | | $ | 14,367 | | | $ | 14,058 | | | $ | 13,762 | | | $ | 28,995 | | | $ | 27,014 | |
| | | | | | | | | | | | | |
Efficiency ratio (unadjusted) | 62.47 | % | | 65.66 | % | | 63.40 | % | | 61.84 | % | | 61.37 | % | | 64.04 | % | | 61.86 | % |
Efficiency ratio (adjusted) | 62.17 | % | | 65.32 | % | | 63.11 | % | | 61.40 | % | | 60.72 | % | | 63.72 | % | | 61.17 | % |
Tangible Equity and Tangible Assets (Period-End)
Tangible equity, tangible assets, and tangible book value per share are each non-GAAP financial measures. Tangible equity represents the Corporation’s stockholders’ equity, less goodwill and intangible assets. Tangible assets represents the Corporation’s total assets, less goodwill and other intangible assets. Tangible book value per share represents the Corporation’s tangible equity divided by common shares at period-end. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.
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| | | | | | | | | | | As of or for the |
| As of or for the Three Months Ended | | Six Months Ended |
(in thousands, except per share and ratio data) | June 30, | | March 31, | | Dec. 31, | | Sept. 30, | | June 30, | | June 30, | | June 30, |
2022 | | 2022 | | 2021 | | 2021 | | 2021 | | 2022 | | 2021 |
TANGIBLE EQUITY AND TANGIBLE ASSETS | | | | | | | | | | | | | |
(PERIOD END) | | | | | | | | | | | | | |
Total shareholders' equity (GAAP) | $ | 174,690 | | | $ | 185,510 | | | $ | 211,455 | | | $ | 206,139 | | | $ | 203,977 | | | $ | 174,690 | | | $ | 203,977 | |
Less: intangible assets | (21,824) | | | (21,828) | | | (21,839) | | | (21,850) | | | (21,892) | | | (21,824) | | | (21,892) | |
Tangible equity (non-GAAP) | $ | 152,866 | | | $ | 163,682 | | | $ | 189,616 | | | $ | 184,289 | | | $ | 182,085 | | | $ | 152,866 | | | $ | 182,085 | |
| | | | | | | | | | | | | |
Total assets (GAAP) | $ | 2,449,911 | | | $ | 2,474,895 | | | $ | 2,418,475 | | | $ | 2,417,656 | | | $ | 2,380,712 | | | $ | 2,449,911 | | | $ | 2,380,712 | |
Less: intangible assets | (21,824) | | | (21,828) | | | (21,839) | | | (21,850) | | | (21,892) | | | (21,824) | | | (21,892) | |
Tangible assets (non-GAAP) | $ | 2,428,087 | | | $ | 2,453,067 | | | $ | 2,396,636 | | | $ | 2,395,806 | | | $ | 2,358,820 | | | $ | 2,428,087 | | | $ | 2,358,820 | |
| | | | | | | | | | | | | |
Total equity to total assets at end of period (GAAP) | 7.13 | % | | 7.49 | % | | 8.74 | % | | 8.53 | % | | 8.57 | % | | 7.13 | % | | 8.57 | % |
Book value per share (GAAP) | $ | 37.24 | | | $ | 39.56 | | | $ | 45.09 | | | $ | 44.00 | | | $ | 43.57 | | | $ | 37.24 | | | $ | 43.57 | |
| | | | | | | | | | | | | |
Tangible equity to tangible assets at end of period (non-GAAP) | 6.30 | % | | 6.67 | % | | 7.91 | % | | 7.69 | % | | 7.72 | % | | 6.30 | % | | 7.72 | % |
Tangible book value per share (non-GAAP) | $ | 32.59 | | | $ | 34.91 | | | $ | 40.44 | | | $ | 39.34 | | | $ | 38.90 | | | $ | 32.59 | | | $ | 38.90 | |
Tangible Equity (Average)
Average tangible equity and return on average tangible equity are each non-GAAP financial measures. Average tangible equity represents the Corporation’s average stockholders’ equity, less average goodwill and intangible assets for the period. Return on average tangible equity measures the Corporation’s earnings as a percentage of average tangible equity. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.
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| | | | | | | | | | | As of or for the |
| As of or for the Three Months Ended | | Six Months Ended |
| June 30, | | March 31, | | Dec. 31, | | Sept. 30, | | June 30, | | June 30, | | June 30, |
(in thousands, except ratio data) | 2022 | | 2022 | | 2021 | | 2021 | | 2021 | | 2022 | | 2021 |
TANGIBLE EQUITY (AVERAGE) | | | | | | | | | | | | | |
Total average shareholders' equity (GAAP) | $ | 178,207 | | | $ | 203,613 | | | $ | 208,147 | | | $ | 208,023 | | | $ | 200,627 | | | $ | 190,841 | | | $ | 200,332 | |
Less: average intangible assets | (21,825) | | | (21,835) | | | (21,845) | | | (21,868) | | | (21,946) | | | (21,830) | | | (21,995) | |
Average tangible equity (non-GAAP) | $ | 156,382 | | | $ | 181,778 | | | $ | 186,302 | | | $ | 186,155 | | | $ | 178,681 | | | $ | 169,011 | | | $ | 178,337 | |
| | | | | | | | | | | | | |
Return on average equity (GAAP) | 18.06 | % | | 13.68 | % | | 12.30 | % | | 12.68 | % | | 13.58 | % | | 15.73 | % | | 13.41 | % |
Return on average tangible equity (non-GAAP) | 20.58 | % | | 15.32 | % | | 13.74 | % | | 14.16 | % | | 15.25 | % | | 17.77 | % | | 15.07 | % |
Adjustments for Certain Items of Income or Expense
In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular period by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the period, including certain nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative impact on the Corporation’s financial results during the particular period in question. In the Corporation’s presentation of any such non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the supplemental financial information and explanations required under Regulation G.
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| | | | | | | | | | | As of or for the |
| As of or for the Three Months Ended | | Six Months Ended |
(in thousands, except per share and ratio data) | June 30, | | March 31, | | Dec. 31, | | Sept. 30, | | June 30, | | June 30, | | June 30, |
2022 | | 2022 | | 2021 | | 2021 | | 2021 | | 2022 | | 2021 |
NON-GAAP NET INCOME | | | | | | | | | | | | | |
Reported net income (GAAP) | $ | 8,024 | | | $ | 6,867 | | | $ | 6,454 | | | $ | 6,646 | | | $ | 6,795 | | | $ | 14,891 | | | $ | 13,325 | |
| | | | | | | | | | | | | |
Net (gains) losses on security transactions (net of tax) | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Non- GAAP net income | $ | 8,024 | | | $ | 6,867 | | | $ | 6,454 | | | $ | 6,646 | | | $ | 6,795 | | | $ | 14,891 | | | $ | 13,325 | |
| | | | | | | | | | | | | |
Average basic and diluted shares outstanding | 4,690 | | | 4,689 | | | 4,682 | | | 4,678 | | | 4,680 | | | 4,690 | | | 4,686 | |
| | | | | | | | | | | | | |
Reported basic and diluted earnings per share (GAAP) | $ | 1.72 | | | $ | 1.46 | | | $ | 1.38 | | | $ | 1.42 | | | $ | 1.45 | | | $ | 3.18 | | | $ | 2.84 | |
Reported return on average assets (GAAP) | 1.32 | % | | 1.14 | % | | 1.04 | % | | 1.09 | % | | 1.11 | % | | 1.23 | % | | 1.12 | % |
Reported return on average equity (GAAP) | 18.06 | % | | 13.68 | % | | 12.30 | % | | 12.68 | % | | 13.58 | % | | 15.73 | % | | 13.41 | % |
| | | | | | | | | | | | | |
Non-GAAP basic and diluted earnings per share | $ | 1.72 | | | $ | 1.46 | | | $ | 1.38 | | | $ | 1.42 | | | $ | 1.45 | | | $ | 3.18 | | | $ | 2.84 | |
Non-GAAP return on average assets | 1.32 | % | | 1.14 | % | | 1.04 | % | | 1.09 | % | | 1.11 | % | | 1.23 | % | | 1.12 | % |
Non-GAAP return on average equity | 18.06 | % | | 13.68 | % | | 12.30 | % | | 12.68 | % | | 13.58 | % | | 15.73 | % | | 13.41 | % |
ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Management considers interest rate risk to be the most significant market risk for the Corporation. Market risk is the risk of loss from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in the net income of the Corporation as a result of changes in interest rates.
The Corporation’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and credit quality of earning assets.
The Corporation’s objectives in its asset and liability management are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to changes in interest rates. The Corporation's ALCO has the strategic responsibility for setting the policy guidelines on acceptable exposure to interest rate risk. These guidelines contain specific measures and limits regarding the risks, which are monitored on a regular basis. The ALCO is made up of the President and Chief Executive Officer, the Chief Financial Officer and Treasurer, the Asset Liability Management Officer, and other officers representing key functions.
Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. For that reason, the ALCO has established tolerance limits based upon various basis point changes in interest rates, with appropriate floors set for interest-bearing liabilities. At June 30, 2022, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 6.55% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by 5.83%. Both are within the Corporation's policy guidelines.
A related component of interest rate risk is the expectation that the market value of the Corporation’s equity account will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact component: an institution exposed to earnings erosion is also exposed to a decline in market value. At June 30, 2022, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 2.44%. An immediate 200-basis point increase in interest rates would negatively impact the market value by 0.55%. Both are within the Corporation's policy guidelines.
Management does recognize the need for certain hedging strategies during periods of anticipated higher fluctuations in interest rates and the Funds Management Policy provides for limited use of certain derivatives in asset liability management.
Credit Risk
The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.
The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the President and Chief Executive Officer, Chief Financial Officer and Treasurer (non-voting), Chief Credit and Risk Officer, Business Client Division Manager, Retail Client Division Manager, Retail Loan Manager, Senior Commercial Real Estate Lender, and Commercial Loan Managers, implements the Board-approved loan policy.
ITEM 4: CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Corporation's management, with the participation of its Chief Executive Officer, who is the Corporation's principal executive officer, and its Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of June 30, 2022 pursuant to Rule 13a-15 of the Exchange Act, as amended. Based upon that evaluation, the principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures are effective as of June 30, 2022. In addition, there have been no changes in the Corporation’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.
Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Corporation under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On February 4, 2020, the Corporation filed a lawsuit against Pioneer Bank, Albany, New York, in the Supreme Court of the State of New York in the County of Albany. As disclosed in the Corporation’s September 12, 2019 Current Report on Form 8-K, the Bank owns a participating interest totaling $4.2 million in an approximately $36.0 million commercial credit facility on which the borrower defaulted due to fraudulent activity. The Bank’s complaint alleges that Pioneer Bank, as lead bank, breached the participation agreement and engaged in fraud and negligent misrepresentation. The Corporation received a recovery of $0.5 million in April, 2020, and continues to pursue recovery of the remaining $3.7 million and accumulated expenses as a result of purchasing the participation interest.
Other than as noted above, the Corporation believes that it is not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity as of June 30, 2022.
ITEM 1A. RISK FACTORS
There have been no material changes in the risk factors set forth in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on March 23, 2022.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Issuer Purchases of Equity Securities (1)
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Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Maximum number of shares that may yet be purchased under the plans or programs |
April 1 - April 30, 2022 | | — | | | — | | | — | | | 200,816 | |
May 1 - May 31, 2022 | | — | | | — | | | — | | | 200,816 | |
June 1 - June 30, 2022 | | — | | | — | | | — | | | 200,816 | |
Quarter ended June 30, 2022 | | — | | | $ | — | | | — | | | 200,816 | |
(1)On January 8, 2021, the Corporation’s Board of Directors approved a new stock repurchase plan. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its outstanding shares. Purchases may be made from time to time on the open market or in private negotiated transactions and will be at the discretion of management. As of June 30, 2022 the Corporation has repurchased a total of 49,184 shares at the weighted average cost of $40.42 per share. |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS
The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888.
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3.1 | Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008). |
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3.2 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008). |
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3.3 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006). |
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3.4 | Amended and Restated Bylaws of Chemung Financial Corporation, as amended June 15, 2022 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K filed with the Commission on June 15, 2022). |
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31.1 | Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
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31.2 | Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* |
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32.1 | Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.* |
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32.2 | Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.* |
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101.INS | Instance Document* |
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101.SCH | XBRL Taxonomy Schema* |
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101.CAL | XBRL Taxonomy Calculation Linkbase* |
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101.DEF | XBRL Taxonomy Definition Linkbase* |
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101.LAB | XBRL Taxonomy Label Linkbase* |
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101.PRE | XBRL Taxonomy Presentation Linkbase* |
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* | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CHEMUNG FINANCIAL CORPORATION
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DATED: August 11, 2022 | By: /s/ Anders M. Tomson |
| Anders M. Tomson President and Chief Executive Officer (Principal Executive Officer) |
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DATED: August 11, 2022 | By: /s/ Karl F. Krebs |
| Karl F. Krebs Chief Financial Officer and Treasurer (Principal Financial Officer) |
EXHIBIT INDEX
The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888
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3.1 | |
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3.2 | |
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3.3 | |
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3.4 | |
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31.1 | |
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31.2 | |
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32.1 | |
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32.2 | |
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101.INS | Instance Document* |
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101.SCH | XBRL Taxonomy Schema* |
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101.CAL | XBRL Taxonomy Calculation Linkbase* |
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101.DEF | XBRL Taxonomy Definition Linkbase* |
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101.LAB | XBRL Taxonomy Label Linkbase* |
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101.PRE | XBRL Taxonomy Presentation Linkbase* |
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* | Filed herewith. |