Chemung Financial Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 24, 2021. This is an annual report, not a stand-alone quarterly filing. Chemung is a community banking and financial-services holding company operating primarily in New York and Pennsylvania, with banking, wealth management and other financial services.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total assets, year-end | $2.279 billion | $1.788 billion |
| Loans, net of deferred fees, year-end | $1.536 billion | $1.309 billion |
| Deposits, year-end | $2.038 billion | $1.572 billion |
| Net interest income | $62.9 million | $60.6 million |
| Non-interest income | $21.1 million | $20.1 million |
| Net income / diluted EPS | $19.3 million / $4.01 | $15.6 million / $3.21 |
| Operating cash flow | $28.7 million | $26.4 million |
| Net cash used in investing activities | $495.8 million | $32.7 million |
| Net cash provided by (used in) financing activities | $453.8 million | $(1.8) million |
| Year-end cash and cash equivalents | $108.5 million | $121.9 million |
- Net interest margin (fully taxable equivalent) declined to 3.25% from 3.64%; net interest income nevertheless rose 3.8%, primarily as average interest-earning assets expanded by $270.4 million and interest expense fell.
- Adjusted efficiency ratio improved to 65.71% from 67.95%. Return on average assets was 0.94% (0.88% in 2019); return on average equity was 9.94% (8.86%).
- Allowance for loan losses was $20.9 million, or 1.36% of loans, versus $23.5 million, or 1.79%, in 2019. Net charge-offs increased to $6.8 million from $1.4 million. Non-performing loans fell to $10.0 million, or 0.65% of loans, from $18.0 million, or 1.38%.
- Year-end shareholders’ equity was $199.7 million; equity-to-assets was 8.76%, down from 10.22%. The Bank remained well capitalized: total risk-based capital ratio was 13.12%, CET1 was 11.87%, and Tier 1 leverage was 7.59%.
- No FHLBNY advances or repurchase-agreement borrowings were outstanding at year-end. Cash and cash equivalents were $108.5 million; $373.8 million of available-for-sale securities were unpledged, and reported unused FHLBNY borrowing capacity was $89.6 million in the liquidity discussion.
- The Corporation paid $1.04 per share in dividends during 2020. It completed a 250,000-share repurchase program at an average $29.40 per share; a new program of up to 250,000 shares was authorized in January 2021.
Material changes versus 2019
- Net income rose 23.4% and EPS rose 24.9%, reflecting higher net interest and non-interest income and lower loan-loss provision, partly offset by higher taxes and expenses.
- Assets grew 27.5%, deposits 29.6%, and loans 17.4%. PPP loans accounted for $150.9 million of year-end loan growth; deposit growth also reflected stimulus funds and PPP disbursements. Securities available for sale nearly doubled to $554.6 million.
- Non-interest income increased 5.2%, with stronger gains on mortgage and commercial loan sales and swap-related income. Deposit service charges fell $1.3 million, mainly due to lower NSF and overdraft fees.
- The 2020 provision was $4.2 million, down from $5.9 million in 2019, which included a $4.2 million specific impairment on a commercial loan participation. Despite the lower provision, net charge-offs rose materially in 2020, including a $3.8 million commercial participation charge-off and a $2.1 million commercial mortgage charge-off.
- The Bank entered the Buffalo metropolitan area with a loan production office in October 2020 and planned a full-service branch, subject to regulatory approval.
Outlook, risks and unusual items
- Management described liquidity as strong but gave no quantified earnings or margin guidance. It continued monitoring COVID-19 credit exposures and adjusted allowance assumptions for higher-risk industries.
- At the pandemic peak, loan forbearances reached 15.77% of the portfolio; by year-end they were 1.35%. COVID-related modifications totaling $20.8 million remained in modified status at year-end. The filing says most year-end forbearances were in accommodation and food services and entertainment and recreation.
- The Corporation originated 1,260 PPP loans in the first round. By year-end, the SBA had forgiven 141 loans totaling $39.0 million from applications submitted for $49.0 million. A further 589 loans totaling $64.2 million had been funded by the date of filing. PPP carries servicing, regulatory, reputational and SBA-guarantee risks.
- Key exposures include commercial real estate and business lending (70.6% of loans), economic and pandemic-related borrower stress, interest-rate and net-interest-margin sensitivity, deposit competition and funding access, cybersecurity and operational risks, and the transition away from LIBOR. Management estimated a 100-basis-point rate decrease would reduce next-12-month net interest income 5.18%; a 200-basis-point increase would increase it 9.20%.
- A lawsuit against Pioneer Bank seeks recovery of the remaining $3.7 million, plus accumulated expenses, on a $4.2 million participation in a commercial credit linked to alleged fraud; Chemung received approximately $0.5 million in April 2020. Management reported no other pending proceeding believed likely to materially affect results or liquidity.
- Management reported no goodwill impairment in 2020. CECL adoption is planned for January 1, 2023, and the Corporation anticipates it may increase the allowance for credit losses. The auditor issued an unqualified opinion and identified the collectively evaluated loan-loss allowance and goodwill impairment assessment as critical audit matters.
Important facts for investors to verify
- Whether post-year-end PPP forgiveness and subsequent borrower performance alter credit risk, fee income or the allowance, particularly for commercial real estate and pandemic-affected sectors.
- How net interest margin and earnings respond to prolonged low rates, deposit repricing and the portfolio’s interest-rate exposures.
- The assumptions supporting the $20.9 million allowance, elevated 2020 charge-offs and planned CECL transition.
- Liquidity and capital implications of rapid deposit and asset growth, securities valuation changes, planned repurchases, and continued dividend payments.
- Developments in the Pioneer Bank litigation and the regulatory approvals and economics of the proposed Buffalo branch.
- The filing reports unused FHLBNY capacity of $89.6 million in its liquidity discussion and $86.3 million elsewhere; verify the applicable measure and availability.