Chemung Financial Corporation — FY2021 Form 10-K
Business context and period. This is the annual report for the year ended December 31, 2021, comparing results with 2020. Chemung is a New York community bank holding company operating through Chemung Canal Trust Company, wealth management and other financial-services subsidiaries. At year-end it had $2.42 billion in assets, $1.52 billion in loans, $2.16 billion in deposits and $211.5 million in shareholders’ equity. The Bank operated 31 branches in New York and Pennsylvania and opened a branch in Clarence, New York, entering the Buffalo market.
Financial performance and condition
- Earnings: Net income rose 37.2% to $26.4 million; diluted EPS was $5.64, up from $4.01. Return on average assets was 1.09% and return on average equity was 12.94%.
- Revenue and margins: Net interest income increased 4.2% to $65.6 million, while fully taxable-equivalent net interest margin declined to 2.84% from 3.25%. Non-interest income rose 13.0% to $23.9 million, led by wealth management fees and debit-card interchange. Non-interest expense declined 0.5% to $55.7 million. The adjusted efficiency ratio improved to 61.71% from 65.71%.
- Credit costs and asset quality: Provision for loan losses fell to $17,000 from $4.2 million; the company recorded $84,000 of net recoveries versus $6.8 million of net charge-offs in 2020. Non-performing loans were $8.1 million, or 0.54% of loans, compared with $10.0 million, or 0.65%, a year earlier. The allowance was $21.0 million, or 1.38% of loans, and included $2.4 million of pandemic-related reserves.
- Balance sheet and funding: Total assets grew 6.1%; deposits increased 5.8%, while loans declined 1.2%, partly reflecting PPP forgiveness and repayments. Cash and cash equivalents fell to $27.0 million from $108.5 million. Available-for-sale securities were $792.0 million, of which $547.7 million was unpledged. Unused FHLBNY borrowing capacity was $161.0 million, and $68.0 million of unsecured credit lines were available.
- Debt and capital: Year-end liabilities included $14.6 million of FHLBNY overnight advances and $3.6 million of finance lease obligations; total deposits were $2.16 billion. The Bank was well capitalized: total risk-based capital was 13.69%, common equity Tier 1 was 12.44%, and leverage capital was 7.74%. Consolidated equity-to-assets was 8.74%.
- Cash flow: Operating activities provided $35.5 million; investing activities used $242.5 million, principally reflecting securities purchases; financing activities provided $125.5 million, mainly from deposit growth and advances. Cash and cash equivalents decreased $81.6 million.
- Shareholder returns: Dividends declared were $1.19 per share, up from $1.04. The company repurchased 41,424 shares in 2021 for $1.6 million; 49,184 shares had been repurchased under the program by March 11, 2022.
Material changes versus 2020
- Net income improved as higher net interest and non-interest income, lower provision expense and slightly lower operating expenses more than offset higher income taxes.
- Average interest-earning assets increased $379.4 million, supporting net interest income growth, but the yield on those assets fell and net interest margin contracted.
- Wealth management fee income increased 16.6% to $11.1 million, described as a record, and assets under management or administration rose 11.2% to $2.325 billion.
- Available-for-sale securities increased 42.8% to $792.0 million. The portfolio’s fair-value decline contributed to an $8.9 million decrease in accumulated other comprehensive income, leaving year-end AOCI at a $6.5 million loss.
- COVID-19 loan forbearances had peaked at 15.77% of loans in May 2020; none remained at December 31, 2021. PPP loans outstanding were $43.2 million at year-end.
Outlook, risks and unusual items
- Management described liquidity as strong but gave no specific earnings, revenue or margin guidance. It said the continuing effects of COVID-19 and related stimulus on future results, credit reserves, capital and liquidity remained uncertain.
- Interest-rate risk is material. The company estimated a 6.52% reduction in next-12-month net interest income under an immediate 100-basis-point rate decrease, and an 8.71% increase under a 200-basis-point increase. Rising rates can also reduce securities values and affect borrowers, funding costs and deposit competition.
- Commercial real estate and business loans totaled $1.060 billion, or 69.8% of loans. Management also identified concentration, participation-loan oversight, indirect auto lending, economic weakness, inflation, cybersecurity, competition and access to funding as risks.
- Available-for-sale securities had $10.0 million of gross unrealized losses at year-end, mainly on mortgage-backed securities. Management attributed the decline to interest rates rather than credit quality and reported no other-than-temporary impairment charges.
- In June 2021, the Bank entered a New York State Department of Financial Services consent order concerning alleged fair-lending violations in indirect auto lending. It agreed to $53,000 in borrower restitution and a $350,000 civil penalty; further restitution could be owed following review of 2020 and 2021 lending.
- The company continued pursuing recovery of $3.7 million, plus expenses, on a loan participation linked to alleged fraud; it had received approximately $0.5 million in 2020. Management said other pending proceedings were not expected to have a material adverse effect.
- CECL adoption is scheduled for January 1, 2023. Management expected a one-time cumulative adjustment to the allowance upon adoption, but did not quantify it.
- The company reported effective disclosure controls and internal control over financial reporting. Crowe LLP issued an unqualified audit opinion and identified the allowance for collectively evaluated loans as a critical audit matter.
Important facts for investors to verify
- Whether margins and net interest income hold up as rates, asset yields and deposit costs change.
- How the sizable commercial real estate and business-loan exposure performs, including impaired loans, TDRs and the $2.4 million pandemic reserve.
- The extent of any additional restitution under the indirect auto lending consent order and the outcome of the participation-loan recovery lawsuit.
- The timing and magnitude of securities valuation effects, and whether available liquidity remains adequate if deposits or funding conditions change.
- The expected CECL transition effect, which the filing does not quantify.
- Dividend and repurchase capacity, including dependence on regulated Bank dividends and continued well-capitalized status.