CHEMUNG FINANCIAL CORPORATION Introduction
The following is the MD&A of the Corporation in this Quarterly Report on Form 10-Q for the three and six months endedJune 30, 2020 and 2019. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation's 2019 Annual Report on Form 10-K, which was filed with theSEC onMarch 12, 2020 , 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, on pages 19-29 of the Corporation's 2019 Form 10-K and on pages 67-68 of the Corporation'sMarch 31, 2020 Quarterly Form 10-Q. For a discussion of use of non-GAAP financial measures, see pages 69-72 of the Corporation's 2019 Form 10-K and pages 77-80 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 aNevada -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 45 --------------------------------------------------------------------------------
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, difficulties in managing the Corporation's growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Corporation could be subject to any of the following additional risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations: •demand for our products and services may decline, making it difficult to grow assets and income; •if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income; •collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase; •our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income; •the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us; •as the result of the decline in theFederal Reserve Board's target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income; •a material decrease in net income over several quarters could result in a decrease in the rate of our quarterly cash dividend; •our wealth management revenues may decline with continuing market turmoil; •our cyber security risks are increased as the result of an increase in the number of employees working remotely; •we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and •FDIC premiums may increase if the agency experiences additional resolution costs. Information concerning these and other factors can be found in the Corporation's periodic filings with theSEC , including the discussion under the heading "Item 1A. Risk Factors" in the Corporation's 2019 Annual Report on Form 10-K,March 31, 2020 Quarterly Report on Form 10-Q, and in this Quarterly Report on Form 10-Q. These filings are available publicly on theSEC'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.
COVID-19
The Effect of COVID-19 on Our Business
During the second quarter of 2020, the Corporation remained true to the two main
goals management set at the start of the COVID-19 pandemic: ensure a healthy and
safe work environment for our colleagues, clients and the communities we assist,
and provide top-tier financial services that our communities depend on in a
manner that is accessible, reliable and efficient. We
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continued to provide these essential banking services to our clients and the
communities, pivoting to offer banking transactions through newly created
walk-up windows, as well as our drive-up windows. More complex transactions were
handled inside our lobbies, by appointment only. At all times, social
distancing, sanitizing and facial coverings were required. As of the date of
this filing, 29 of our 32 offices have fully re-opened to normal business hours.
We continue to provide essential banking services to our clients and the
communities we serve.
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. Management does not anticipate additional risk with
respect to its ability to maintain internal control over financial reporting and
disclosure controls and procedures, nor does it expect any changes in such
controls and procedures.
On June 17, 2020 the New York legislature passed, and Governor Cuomo signed, new
legislation which allows certain borrowers to extend the period of forbearance
on a primary residence if financial hardship is demonstrated as a result of
COVID-19. The Corporation anticipates that this new law could increase the
amount of forbearance in the upcoming periods.
COVID-19 Loan Modifications Outstanding As Of
June 30, 2020 July 31, 2020
Total Loan Total Loan
# Clients Balance # Clients Balance
Commercial 172 $167.7 million 49 $52.8 million
Retail and Residential 457 $18.0 million 132 $6.3 million
The above reflects the uncertain economic situation as of June 30, 2020 whereby the initial response by customers prompted
a quick reaction to the unknown potential impact of COVID-19 on their business. Subsequently, customers may have
reassessed their financial position prior to finalization of a modification, either modifying deferral requests or
withdrawing the request altogether. In some cases, customers continued to make payments on modified loans. Of these
modifications, 100% were considered current prior to the forbearance and primarily reflect deferrals for 90 days. Deferred
principal and interest payments on loans with COVID-19 modifications in effect are estimated to total $4.9 million and
$1.9 million as of June 30, 2020 and July 31, 2020 , respectively.
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 (the "SBA"). Included in the
legislation, and additional legislation approved by Congress on April 23, 2020
and June 5, 2020 , was a total of $659 billion to assist small businesses by
providing SBA guaranteed loans to help pay for up to 24 weeks of their payroll,
in addition to other expenses such as interest expense on mortgages, rent or
utility payments. PPP loans have an interest rate of 1.0%, two-year and
five-year loan terms to maturity, and principal and interest payments deferred
until the lender receives the applicable forgiven amount or 10 months after the
period the business has used such funds. The funds are an effort to encourage
retention of employees and up to the entire loan balance and interest may be
forgiven, if the borrower meets certain predetermined SBA criteria. Businesses
with less than 500 employees are eligible, although certain corporate
organizational structures were not included in the legislation. As a qualified
SBA lender, the Corporation was automatically authorized to originate PPP loans.
The Corporation successfully navigated the processes set forth by the SBA and
assisted customers and non-customers through the PPP. As of June 30, 2020 , the
Bank received 1,370 applications, of which 1,195 were processed, and 1,167 or
$186.9 million were funded under the PPP, impacting approximately 19,000
employees of the approved businesses in our communities. As of the date of this
filing, the Corporation is preparing to assist the businesses who received PPP
loans with the forgiveness application phase of the program.
Participation in Paycheck Protection Program Liquidity Facility ("PPPLF")
The PPPLF was created by theBoard of Governors of theFederal Reserve System onApril 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act. Under the facility, the Federal Reserve Banks lend to participating financial institutions on a non-recourse basis, taking PPP loans as collateral. The Bank participated in the PPPLF and received funding for 141 loans totaling$66.4 million . The Corporation fully repaid the funds onMay 28, 2020 . 47 --------------------------------------------------------------------------------
Outlook
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, FHLB borrowings, securities sold under agreements to repurchase and other borrowings. AtJune 30, 2020 , the Corporation's cash and cash equivalents balance was$155.2 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 ofJune 30, 2020 , the Corporation's investment in securities available for sale was$317.1 million ,$126.0 million of which was not pledged as collateral. Additionally, the Bank's unused borrowing capacity at theFederal Home Loan Bank of New York was$124.9 million as ofJune 30, 2020 . The Corporation did not experience excessive draws on available working capital lines of credit and home equity lines of credit during the first half of 2020 due to the COVID-19 pandemic. Nor has the Corporation experienced any significant or unusual activity related to customer reaction to the COVID-19 pandemic that would create stress on the Corporation's liquidity position. With respect to the Corporation's credit risk and lending activities, management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio. The table below summarizes the Bank's commercial loan portfolio, excluding PPP loans, by NAICS code, as ofJune 30, 2020 . While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, the industries designated by Management to be most impacted by COVID-19 are indicated in bold. Commercial Loan Portfolio by
NAICS Codes
"Highly Impacted" industries in bold (dollars in
thousands) % of Total Loans
Loan Balance excluding PPP
Industry Sectors excluding PPP Loans Loans % of RBC*Real Estate, Rental & Leasing
Multifamily$ 180,558 20.54 % 96.71 % Hospitality 41,621 4.73 % 22.29 % Nursing Home/Assisted Living 13,197 1.50 % 7.07 % Medical Office ¹ 16,831 1.91 % 9.02 % Non-Essential Retail 38,017 4.32 % 20.36 % CRE Other 277,299 31.55 % 148.53 % Non-Real Estate Secured 36,035 4.10 % 19.30 % Agricultural, Forestry, Farming and Hunting¹ 1,611 0.18 % 0.86 % Accommodation and Food Services 44,231 5.03 % 23.69 % Manufacturing 30,704 3.49 % 16.45 % Arts, Entertainment and Recreation 34,659 3.94 % 18.56 % Health Care and Social Assistance ¹ 30,098 3.42 % 16.12 % Construction 26,652 3.03 % 14.28 % Wholesale Trade 26,060 2.96 % 13.96 % Retail Trade 22,053 2.51 % 11.81 % Professional, Scientific, and Technical Services 12,081 1.37 % 6.47 % Transportation and Warehousing 12,233 1.39 % 6.55 % Finance and Insurance 6,817 0.78 % 3.65 % Administration and Support, Waste Management, Remediation 6,521 0.74 % 3.49 % Educational Services 4,811 0.55 % 2.58 % Mining 2,793 0.32 % 1.50 % Other 14,144 1.64 % 9.08 %
Total Loans, excluding Paycheck Protection Program (PPP)
$ 879,026 100.00 % COVID-19 Highly Impacted Industries$ 245,111 27.88 % * Risk Based Capital ¹ Category added second quarter, 2020 COVID-19 highly impacted industries totaled$245.1 million , or 27.9% of the Bank's commercial loan portfolio excluding PPP loans, as ofJune 30, 2020 . PPP loans totaling$186.9 million are 100% guaranteed by the Federal Government and represent virtually no risk. The rental and leasing sector encompasses real estate rental properties plus rental of non-real estate items. In this same sector,$109.7 million of the loan balances related to commercial real estate rentals for hospitality, nursing/home assisted living, non-essential retail and medical offices and are considered "highly impacted." The arts, entertainment and 48 -------------------------------------------------------------------------------- recreation sector included$26.6 million of loan balances related to casinos. PPP loans to the highly impacted industries totaled$58.7 million . The COVID-19 pandemic is expected to continue to impact the Corporation's financial results, as well as demand for its services and products during the second half of 2020 and potentially beyond. The short and long-term implications of the COVID-19 pandemic, and related monetary and fiscal stimulus measures, on the Corporation's future revenues, earnings results, allowance for loan losses, capital reserves, and liquidity are uncertain at this time. Recent Events EffectiveApril 30, 2020 , the Corporation closed the branch office at304 Main Street ,Towanda, Pennsylvania . The Bank continues to serveBradford County, Pennsylvania with offices located inCanton andTroy, Pennsylvania , andWaverly, New York . 49
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