Chemung Financial Corporation — 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; comparisons are with 2022. This is an annual filing, not a stand-alone fourth-quarter earnings report. The company is a New York bank holding company operating Chemung Canal Trust Company, CFS Group and a wealth management business. It reported $2.711 billion in assets and $2.429 billion in deposits at year-end.
Financial performance
| Metric | 2023 | 2022 | Change |
|---|---|---|---|
| Net interest income | $74.5 million | $74.2 million | +0.4% |
| Non-interest income | $24.5 million | $21.4 million | +14.5% |
| Net income | $25.0 million | $28.8 million | -13.1% |
| Diluted EPS | $5.28 | $6.13 | -13.9% |
| Net interest margin, fully taxable equivalent | 2.85% | 3.05% | -0.20 percentage points |
| Operating cash flow | $30.9 million | $35.0 million | -11.9% |
- Revenue drivers and margins: Interest and dividend income rose 38.8% to $113.1 million, but interest expense increased 429.3% to $38.6 million as deposit and borrowing costs repriced sharply. The average cost of interest-bearing liabilities rose to 2.20% from 0.47%; net interest income was nearly flat and margin contracted. Wealth management fees were $10.5 million.
- Expenses and earnings quality: Non-interest expense increased 8.4% to $64.2 million, including higher compensation, data-processing and FDIC insurance costs. The company recognized $2.37 million of employee retention tax credit income in 2023. Excluding that credit and a small securities loss, non-GAAP net income was $23.2 million, or $4.89 per share; this is a company-defined non-GAAP measure.
- Credit costs: Provision for credit losses was $3.3 million, versus a $0.6 million provision credit in 2022. Net charge-offs were $0.9 million, or 0.05% of average loans. The year-end loan allowance was $22.5 million, 1.14% of loans; including the unfunded-commitment reserve, coverage was 1.19%.
- Balance sheet and capital: Assets increased 2.5% to $2.711 billion; loans grew 7.8% to $1.973 billion and deposits rose 4.4% to $2.429 billion. Shareholders’ equity increased 17.3% to $195.2 million; equity-to-assets was 7.20%, up from 6.29%. The Bank was categorized as well capitalized; its total risk-based capital ratio was 12.76% and Tier 1 leverage ratio was 8.26%.
- Debt and liquidity: FHLBNY overnight advances fell to $31.9 million from $95.8 million. Year-end cash and cash equivalents declined to $36.8 million from $55.9 million. Management said funding sources were adequate; the company reported $60 million in available unsecured credit lines and $193.4 million of unused FHLBNY borrowing capacity. The Bank was eligible for the Federal Reserve’s BTFP and had pledged collateral after year-end; the program expired March 11, 2024.
- Shareholder returns: Dividends declared were $1.24 per share, unchanged from 2022. No shares were repurchased in the fourth quarter; 200,816 shares remained under the repurchase authorization at year-end.
Material changes and notable items
- Adopted CECL and related loan-modification guidance effective January 1, 2023. The adoption reduced retained earnings by $1.5 million before tax, or $1.1 million net of tax, and established an allowance for unfunded commitments.
- Commercial real estate growth was a principal driver of loan expansion. Commercial real estate loans were $1.123 billion, and non-owner-occupied CRE was 403.6% of Bank risk-based capital—above supervisory guidance indicators for heightened scrutiny when combined with recent portfolio growth.
- Available-for-sale securities had $85.2 million of gross unrealized losses at year-end, primarily attributed by management to interest rates and market liquidity rather than credit deterioration. The after-tax AOCI loss improved by $8.5 million during 2023, but remained $62.8 million for securities.
- Chemung Risk Management, Inc., the company’s captive insurer, was dissolved effective December 6, 2023; management said dissolution did not significantly affect annual results.
- The Bank had $655.7 million of uninsured deposits, 27.0% of total deposits. Demand, savings and insured money-market balances fell overall, while time deposits and brokered deposits increased. $578.7 million of time deposits were scheduled to mature in 2024, including $133.3 million of brokered deposits.
Outlook, risks and contingencies
- The filing provides no numerical earnings or growth guidance. Management described continued focus on relationship banking, stable deposits, loan growth and fee income, and planned a full-service Williamsville, New York branch opening in 2024.
- Key sensitivities include deposit competition and funding costs, interest-rate changes, liquidity and uninsured-deposit behavior, regional economic conditions, and credit performance. Management’s year-end rate simulation estimated 12-month net interest income would rise 1.28% under an immediate 100-basis-point rate increase and 4.07% under a 100-basis-point decrease; these are modeled scenarios, not guidance.
- Commercial real estate and commercial-and-industrial loans totaled $1.387 billion, 70.3% of loans. Risks include borrower cash flow, property values and occupancy, geographic concentration, and supervisory attention to CRE concentrations. Nonperforming loans increased to $10.4 million, or 0.53% of loans, from $8.2 million, or 0.45%.
- The company continues to pursue recovery of $3.7 million, plus interest and accumulated expenses, related to a commercial loan participation in which the borrower defaulted following alleged fraud. It had received approximately $0.5 million in 2020. The filing says other pending proceedings are not expected to materially affect results or liquidity.
- Management reported effective disclosure controls and internal control over financial reporting. Crowe LLP issued unqualified opinions on the financial statements and internal control; its critical audit matter was the collectively evaluated loan allowance for credit losses.
Important facts for investors to verify
- Track deposit pricing, retention, uninsured balances, brokered funding and the 2024 time-deposit maturities against available liquidity and funding capacity.
- Review CRE concentration and exposure by property type and geography, especially office, retail and construction, and monitor nonperforming loans, criticized loans and allowance assumptions.
- Assess whether loan yields can keep pace with deposit-cost repricing and whether margin stabilizes after the 2023 decline.
- Separate recurring performance from the $2.37 million employee retention tax credit and examine the company’s reconciliation of adjusted results.
- Monitor the securities portfolio’s unrealized losses, AOCI recovery and any need or incentive to sell securities to meet liquidity demands.
- Follow progress on the alleged-fraud participation recovery and the planned Williamsville branch opening, including its costs and contribution to growth.