CHEMUNG FINANCIAL CORPORATION Overview
The following is the MD&A of the Corporation in this Form 10-K atDecember 31, 2022 and 2021, and for the years endedDecember 31, 2022 , and 2021. The purpose of this discussion is to focus on information about the financial condition and results of operations of the Corporation. Reference should be made to the accompanying audited consolidated financial statements and footnotes for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 2-5. The MD&A included in this Form 10-K 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. The Corporation has been a financial holding company since 2000, and 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 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, a wholly-owned subsidiary of the Corporation which was formed and began operations onMay 31, 2016 , is aNevada -based captive insurance company that 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 theState of Nevada and undergoes periodic examinations by theNevada Division of Insurance . Forward-looking Statements This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. 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, and changes in general business and economic trends. 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" of this annual report on Form 10-K. The Corporation's quarterly filings are available publicly on theSEC's website at http://www.sec.gov, on the Corporation's website at http://www.chemungcanal.com or by written request to:Kathleen S. McKillip , Corporate Secretary,Chemung Financial Corporation ,One Chemung Canal Plaza ,Elmira, NY 14901. 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. 36 --------------------------------------------------------------------------------
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 years presented. Actual results could be different from these estimates.
Allowance for Loan Losses
Management considers the allowance for loan losses to be a critical accounting estimate given the uncertainty in evaluating the level of allowance required to cover probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. Determining the amount requires significant judgement on the part of management, is multi-faceted, and can be imprecise. Considerations include use of estimates related to the timing of expected cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, implications of current economic trends and conditions, and other qualitative factors, all of which may be susceptible to significant change. The allowance is established through a provision for loan losses in the Consolidated Statements of Income, and evaluation of the adequacy of the allowance for loan losses is performed by management on a quarterly basis. 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. Actual loss experience is supplemented with other qualitative factors based on the risks present in each portfolio segment. It is difficult to estimate how potential changes in any one economic factor may have, or input might affect, the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance, and changes in those factors and inputs considered may not occur at the same rate or be consistent across all product types. Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others. Qualitative factors considered include lending practices & oversight, an array of local and national economic considerations, and other factors pertinent to the credit quality of the portfolio. In estimating the allowance for loan and lease losses, management considers the sensitivity of the model to the significant judgements and assumptions built in, and the material impact that these assumptions could have on the allowance. Given the concentration of ALLL allocation to the commercial portfolio, specifically in the area of commercial real estate, management has analyzed a series of economic scenarios to determine the hypothetical impact that changes in the underlying conditions of the commercial real estate portfolio may have on reserve requirements. Management determined that these scenarios could materially impact ALLL requirements, either positively or adversely. Real estate values in the Corporation's market area have not changed dramatically in recent years, primarily appreciating, 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 require additional provisions for loan losses. This analysis helps guide management in making determinations relating to adjustments in the qualitative portion of the allowance.
If the assumptions underlying the determination of the ALLL prove to be incorrect, the allowance may not be sufficient to cover actual loan losses and an increase in the allowance may be necessary to account for different assumptions or adverse developments. In addition, problems with one or more specific loans could require a significant increase to the ALLL.
Management's methodology and policy in determining the allowance for loan losses
can be found in Note 1 to the Consolidated Financial Statements included in Item
8 of this Annual Report on Form 10-K. The activity in the allowance for loan
losses is depicted in supporting tables in Note 4 to the Consolidated Financial
Statements included in Item 8 of this Annual Report on Form 10-K.
37
--------------------------------------------------------------------------------Consolidated Financial Highlights
As of or for the Years Ended
December 31, December 31,
(in thousands, except per share data) 2022 2021
RESULTS OF OPERATIONS
Interest and dividend income $ 81,475 $ 69,008
Interest expense 7,296 3,419
Net interest income 74,179 65,589
Provision for loan losses (554) 17
Net interest income after provision for loan losses 74,733 65,572
Non-interest income 21,436 23,870
Non-interest expenses 59,280 55,682
Income before income tax expense 36,889 33,760
Income tax expense 8,106 7,335
Net income $ 28,783 $ 26,425
Basic and diluted earnings per share $ 6.13 $ 5.64
Average basic and diluted shares outstanding 4,693 4,683
PERFORMANCE RATIOS
Return on average assets 1.15 % 1.09 %
Return on average equity 15.93 % 12.94 %
Return on average tangible equity (a) 18.12 % 14.49 %
Efficiency ratio (unadjusted) (f) 62.00 % 62.24 %
Efficiency ratio (adjusted) (a) (b) 61.71 % 61.71 %
Non-interest expense to average assets 2.37 % 2.30 %
Loans to deposits 78.61 % 70.44 %
AVERAGE YIELDS / RATES - Fully Taxable Equivalent
Yield on loans 4.14 % 3.82 %
Yield on investments 1.71 % 1.34 %
Yield on interest-earning assets 3.35 % 2.99 %
Cost of interest-bearing deposits 0.44 % 0.22 %
Cost of borrowings 2.76 % 3.05 %
Cost of interest-bearing liabilities 0.47 % 0.23 %
Interest rate spread 2.88 % 2.76 %
Net interest margin, fully taxable equivalent 3.05 % 2.84 %
CAPITAL
Total equity to total assets at end of year 6.29 % 8.74 % Tangible equity to tangible assets at end of year (a) 5.51 % 7.91 % Book value per share$ 35.32 $ 45.09 Tangible book value per share (a) 30.69 40.44 Year-end market value per share 45.87 46.45 Dividends declared per share 1.24 1.19 38 -------------------------------------------------------------------------------- As of or
for the Years Ended
December 31, December 31,
(in thousands, except per share data) 2022 2021
AVERAGE BALANCES
Loans (c) $ 1,646,576 $ 1,545,579
Interest-earning assets 2,444,287 2,324,498
Total assets 2,496,099 2,421,801
Deposits 2,255,326 2,179,128
Total equity 180,684 204,239
Tangible equity (a) 158,857 182,314
ASSET QUALITY
Net charge-offs (recoveries) $ 812 $ (84)
Non-performing loans (d) 8,178 8,114
Non-performing assets (e) 8,373 8,227
Allowance for loan losses 19,659 21,025
Annualized net charge-offs (recoveries) to average loans 0.05 % (0.01) %
Non-performing loans to total loans 0.45 % 0.54 %
Non-performing assets to total assets 0.32 % 0.34 %
Allowance for loan losses to total loans 1.07 % 1.38 %
Allowance for loan losses to non-performing loans 240.39 % 259.17 %
(a) See the GAAP to Non-GAAP reconciliations on pages 63-66.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less
legal accruals and settlements divided by the total of fully taxable equivalent net interest income
plus non-interest income less net gains on securities transactions.
(c) Loans include loans held for sale. Loans do not reflect the allowance for loan losses.
(d) Non-performing loans include non-accrual loans only.
(e) Non-performing assets include non-performing loans plus other real estate owned.
(f) Efficiency ratio (unadjusted) is non-interest bearing expense divided by the total of net
interest income plus non-interest income.
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 years endedDecember 31, 2022 and 2021. For a discussion of the Critical Accounting Estimates that affect the Consolidated Results of Operations, see page 37. 39 --------------------------------------------------------------------------------
Net Income
The following table presents selected financial information for the years
indicated, and the dollar and percent change (in thousands, except per share and
ratio data):
Years Ended December 31,
2022 2021 Change Percentage Change
Net interest income $ 74,179 $ 65,589 $ 8,590 13.1 %
Non-interest income 21,436 23,870 (2,434) (10.2) %
Non-interest expenses 59,280 55,682 3,598 6.5 %
Pre-provision income 36,335 33,777 2,558 7.6 %
Provision for loan losses (554) 17 (571) N/M
Income tax expense 8,106 7,335 771 10.5 %
Net income $ 28,783 $ 26,425 $ 2,358 8.9 %
Basic and diluted earnings per share $ 6.13 $ 5.64 $ 0.49 8.7 %
Selected financial ratios
Return on average assets 1.15 % 1.09 %
Return on average equity 15.93 % 12.94 %
Net interest margin, fully taxable equivalent 3.05 % 2.84 %
Efficiency ratio (adjusted) (a) 61.71 % 61.71 %
Non-interest expense to average assets 2.37 % 2.30 %
(a) See the GAAP to Non-GAAP reconciliations on pages 63-66
Net income for the year endedDecember 31, 2022 was$28.8 million , or$6.13 per share, compared with net income of$26.4 million , or$5.64 per share, for the prior year. Return on average equity for the year endedDecember 31, 2022 was 15.93%, compared with 12.94% for the prior year. The increase in net income for the year endedDecember 31, 2022 , compared to the prior year, was driven by an increase in net interest income and a decrease in the provision for loan losses, offset by a decrease in non-interest income and increases in non-interest expenses and income tax expense.
Net Interest Income
The following table presents net interest income for the years indicated, and the dollar and percent change (in thousands):
Years Ended December 31,
2022 2021 Change Percentage Change
Interest and dividend income $ 81,475 $ 69,008 $ 12,467 18.1 %
Interest expense 7,296 3,419 3,877 113.4 %
Net interest income $ 74,179 $ 65,589 $ 8,590 13.1 %
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 accrued on interest-bearing liabilities such as deposits and borrowings,
is the largest contributor to the Corporation's earnings.
Net interest income for the year ended December 31, 2022 totaled $74.2 million ,
an increase of $8.6 million , or 13.1%, compared with $65.6 million for the prior
year. Fully taxable equivalent net interest margin was 3.05% for the year ended
December 31, 2022 compared with 2.84% for the prior year. The increase in net
interest income was primarily due to increases of $9.2 million in interest
income on loans, including fees, $3.2 million in interest and dividend income on
taxable securities, and $0.1 million in interest income on interest-earning
deposits, offset by increases of $3.4 million in interest expense on deposits,
and $0.5 million in interest expense on borrowed funds.
40
--------------------------------------------------------------------------------
The increase in interest income on loans, including fees was due primarily to a
32 basis points increase in the average yield on loans, primarily related to the
commercial and consumer loan portfolios due to an increase in interest rates,
and a $101.0 million increase in average loan balances, representing increases
across all loan categories. The increase in interest and dividend income on
taxable securities was due primarily to a 28 basis points increase in the
average yield, due to an increase in interest rates, and an increase in the
average invested balances of $83.9 million . The increase in interest income on
interest-earning deposits was due primarily to the increase in interest rates on
overnight deposits with the average yield on interest-earning deposits
increasing from 0.17% in 2021 to 1.24% in 2022. The increase in interest expense
on deposits was due primarily to a 22 basis points increase in average rates
paid on interest-bearing deposits which included higher costing one-way brokered
deposits, and an organic deposit campaign in the fourth quarter of 2022, when
compared to the prior year. The increase in interest expense on borrowed funds
was due primarily to an increase in the average balances and interest rates of
overnight FHLBNY borrowings, when compared to the prior year.
Average interest-earning assets increased $119.8 million in 2022 when compared
to the prior year. Average interest-bearing liabilities increased $70.0 million
when compared to the prior year. The average yield on average interest-earning
assets increased 36 basis points, and the average cost of interest-bearing
liabilities increased 24 basis points, when compared to the prior year.
41
--------------------------------------------------------------------------------Average Consolidated Balance Sheet and Interest Analysis
The following table presents certain information related to the Corporation's average consolidated balance sheets and its consolidated statements of income for the years endedDecember 31, 2022 , and 2021. It also reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the years endedDecember 31, 2022 , and 2021. For the purpose of the table 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 was$1.2 million and$4.0 million for the years endedDecember 31, 2022 and 2021, respectively, and was comprised primarily of fees related to the Paycheck Protection Program. AVERAGE CONSOLIDATED BALANCE
SHEETS AND NET INTEREST INCOME ANALYSIS
Year Ended December 31,
2022 2021
Yield/ Yield/
(in thousands) Average Balance Interest Rate Average Balance Interest Rate
Interest-earning assets:
Commercial loans $ 1,143,908 $ 50,146 4.38 % $ 1,091,569 $ 42,661 3.91 %
Mortgage loans 274,067 9,226 3.37 % 248,387 8,474 3.41 %
Consumer loans 228,601 8,857 3.87 % 205,623 7,850 3.82 %
Taxable securities 734,898 12,107 1.65 % 650,974 8,946 1.37 %
Tax-exempt securities 41,915 1,304 3.11 % 41,632 1,308 3.14 %
Interest-earning deposits 20,898 260 1.24 % 86,313 151 0.17 %
Total interest-earning assets 2,444,287 81,900 3.35 % 2,324,498 69,390 2.99 %
Non-interest earning assets:
Cash and due from banks 24,497 26,150
Premises and equipment, net 16,978 19,107
Other assets 90,879 69,445
Allowance for loan losses (19,453) (21,093)
AFS valuation allowance (61,089) 3,694
Total assets $ 2,496,099 $ 2,421,801
Interest-bearing liabilities:
Interest-bearing demand deposits $ 278,946 $ 412 0.15 % $ 287,340 $ 235 0.08 %
Savings and insured money market
deposits 949,597 2,241 0.24 % 932,940 930 0.10 %
Time deposits 297,662 4,002 1.34 % 254,718 2,119 0.83 %
Capital leases and other debt 23,208 641 2.76 % 4,420 135 3.05 %
Total interest-bearing liabilities 1,549,413 7,296 0.47 % 1,479,418 3,419 0.23 %
Non-interest bearing liabilities: Demand deposits 729,121 704,130 Other liabilities 36,881 34,014 Total liabilities 2,315,415 2,217,562 Shareholders' equity 180,684 204,239 Total liabilities and shareholders' equity$ 2,496,099 $ 2,421,801 Fully taxable equivalent net interest income 74,604 65,971 Net interest rate spread (1) 2.88 % 2.76 % Net interest margin, fully taxable equivalent (2) 3.05 % 2.84 % Taxable equivalent adjustment (425) (382) Net interest income$ 74,179 $ 65,589 (1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average cost of interest-bearing liabilities. (2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets. 42 --------------------------------------------------------------------------------
Changes Due to Rate and Volume
Net interest income can be analyzed in terms of the impact of changes in rates
and volumes. The table below illustrates the extent to which changes in interest
rates and in the volume of average interest-earning assets and interest-bearing
liabilities have affected the Corporation's interest income and interest expense
during the years indicated. 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
purposes of this table, 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 years 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.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
2022 vs. 2021
Increase/(Decrease)
Total Due to Due to
(in thousands) Change Volume Rate
Interest income
Commercial loans $ 7,485 $ 2,134 $ 5,351
Mortgage loans 752 854 (102)
Consumer loans 1,007 901 106
Taxable securities 3,161 1,223 1,938
Tax-exempt securities (4) 9 (13)
Interest-earning deposits 109 (187) 296
Total interest income 12,510 4,934 7,576
Interest expense
Interest-bearing demand deposits 177 (7) 184
Savings and insured money market deposits 1,311 17 1,294
Time deposits 1,883 405 1,478
Long-term advances and other debt 506 520 (14)
Total interest expense 3,877 935 2,942
Fully taxable equivalent net interest income $ 8,633 $ 3,999 $ 4,634
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 continued to evaluate the potential impact of the COVID-19 pandemic
as it relates to the loan portfolio in 2022. As part of this analysis, the
Corporation released the remaining $2.4 million of the pandemic related portion
of the allowance in 2022. In total, the Corporation released $4.3 million and
utilized $0.5 million of the pandemic related allowance established in 2020. The
Corporation no longer holds a pandemic related reserve as part of the allowance
for loan losses.
The provision for loan losses for the years ended December 31, 2022 , and 2021
was credit of a $0.6 million and a provision of $17.0 thousand , respectively.
The decrease was primarily due to the $2.4 million release of the pandemic
related portion of the allowance, the $1.5 million release of a specific reserve
related to the sale of a large commercial real estate credit, positive impacts
of $0.8 million related to the upgrade 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 2020.
These decreases in the provision were offset by additional provision of $4.2
million related to increased loan growth, along with additional provisioning for
loan concentrations and deteriorating national economic conditions. Net
charge-offs for the year ended December 31, 2022 , were $0.8 million . Net
recoveries for the year ended December 31, 2021 were $0.1 million .
43
--------------------------------------------------------------------------------Non-interest income
The following table presents non-interest income for the years indicated, and the dollar and percent change (in thousands):
Years Ended December 31,
2022 2021 Change Percentage Change
WMG fee income $ 10,280 $ 11,072 $ (792) (7.2) %
Service charges on deposit accounts 3,788 3,214 574 17.9 %
Interchange revenue from debit card
transactions 4,603 4,844 (241) (5.0) %
Change in fair value of equity investments (349) 246 (595) (241.9) %
Net gains on sales of loans held for sale 107 1,073 (966) (90.0) %
Net gains (losses) on sales of other real
estate owned 60 (16) 76 475.0 %
Income from bank owned life insurance 46 52 (6) (11.5) %
CFS fee and commission income 1,079 1,044 35 3.4 %
Other 1,822 2,341 (519) (22.2) %
Total non-interest income $ 21,436 $ 23,870 $ (2,434) (10.2) %
Non-interest income for the year ended December 31, 2022 was $21.4 million
compared with $23.9 million for the prior year, a decrease of $2.4 million , or
10.2%. The decrease was due primarily to decreases of $1.0 million in net gains
on sales of loans held for sale, $0.8 million in wealth management group fee
income, $0.6 million in the change in fair value of equity investments,
$0.5 million in other non-interest income, and $0.2 million in interchange
revenue from debit card transactions, offset by an increase of $0.6 million in
service charges on deposit accounts.
Net Gains on Sales of Loans Held for Sale
Net gains on sales of loans held for sale decreased primarily due to a decrease
in net gains on sales of residential mortgage loans sold into the secondary
market when compared to the prior year.
Wealth Management Group Fee Income
The decrease in wealth management group fee income was primarily attributed to a
decrease in the market value of total assets under management or administration.
Change in Fair Value of Equity Investments
Change in fair value of equity investments decreased in 2022 compared to the
prior year primarily due to a decrease in the assets held and the market value
thereon.
Other non-interest income
Other non-interest income decreased compared to the prior year primarily due to
the receipt of real estate and sales tax refunds received in the prior year.
Interchange Revenue from Debit Card Transactions
The decrease in interchange revenue from debit card transactions was primarily
attributable to a decrease in consumer debit card usage when compared to the
prior year.
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 prior
year.
44--------------------------------------------------------------------------------
Non-interest expenses
The following table presents non-interest expenses for the years indicated, and the dollar and percent change (in thousands):
Years Ended December 31,
2022 2021 Change Percentage Change
Compensation expenses:
Salaries and wages $ 25,054 $ 24,413 $ 641 2.6 %
Pension and other employee benefits 7,668 6,086 1,582 26.0 %
Other components of net periodic pension cost
(benefits) (1,648) (1,583) (65) (4.1) %
Total compensation expenses 31,074 28,916 2,158 7.5 %
Non-compensation expenses:
Net occupancy 5,539 5,873 (334) (5.7) %
Furniture and equipment 1,906 1,669 237 14.2 %
Data processing 8,919 8,519 400 4.7 %
Professional services 2,171 1,932 239 12.4 %
Amortization of intangible assets 15 243 (228) (93.8) %
Marketing and advertising 941 792 149 18.8 %
Other real estate owned expense (5) 40 (45) (112.5) %
FDIC insurance 1,356 1,408 (52) (3.7) %
Loan expense 1,001 1,037 (36) (3.5) %
Other 6,363 5,253 1,110 21.1 %
Total non-compensation expenses 28,206 26,766 1,440 5.4 %
Total non-interest expenses $ 59,280 $ 55,682 $ 3,598 6.5 %
Non-interest expense increased $3.6 million , or 6.5% in 2022. The increase was
due primarily to increases of $2.2 million in total compensation expenses and
$1.4 million in total non-compensation expenses.
Compensation expenses
Compensation expenses increased $2.2 million , or 7.5% when compared to the prior
year, primarily due to increases of $1.6 million in pension and other employee
benefit expense and $0.6 million in salaries and wages, partially offset by a
$0.1 million increase in the credit related to the net periodic pension and
post-retirement benefits. Pension and other employee benefits increased
primarily due to an increase in healthcare costs when compared to the prior
year. The increase in salaries and wages was primarily due to annual merit
increases, increases in salary costs to fill open positions due to competitive
market conditions, and a decrease in deferred salary costs related to PPP,
offset by a decline in the market value of the Corporation's deferred
compensation plan, when compared to the prior year. The increase in the credit
related to the net periodic pension and post-retirement benefits was primarily
due to a change in factors used to prepare annual actuarial estimates.
45
--------------------------------------------------------------------------------
Non-compensation expenses
Non-compensation expenses increased $1.4 million , or 5.4%, primarily due to
increases of $1.1 million in other non-interest expense, $0.4 million in data
processing expense, $0.2 million in professional services, and $0.2 million in
furniture and equipment expenditures, offset by decreases of $0.3 million in net
occupancy expense and $0.2 million in amortization of intangible assets.
The increase in other non-interest expense was due primarily to the $0.3 million
recognition of directors' stock compensation expense due to the implementation
of the Corporation's 2021 Equity Incentive Plan, a $0.1 million increase in
CDARS fee expense, $0.1 million of additional restitution regarding previously
disclosed consumer compliance matters, and a $0.2 million related reserve which
was initially released in 2021. The increase in data processing expense was
primarily attributable to investment in the Corporation's Tap-to-Pay debit cards
supporting contactless transactions, increased software maintenance expenses,
and a credit received in the prior year. Professional services increased
primarily due to additional consulting services in the current year. Furniture
and equipment expenditures increased primarily due to a an increase in building
security enhancements and ATM maintenance expenses when compared to the prior
year. The decrease in net occupancy expense was primarily attributable to
decreases in depreciation expense related to the sale of properties, when
compared to the prior year. The decrease in amortization of intangible assets
was primarily attributable to an intangible asset reaching its fully amortized
value.
Income tax expense
The following table presents income tax expense and the effective tax rate for
the years indicated, and the dollar and percent change (in thousands):
Years Ended December 31,
2022 2021 Change Percentage Change
Income before income tax expense $ 36,889 $ 33,760 $ 3,129 9.3 %
Income tax expense $ 8,106 $ 7,335 $ 771 10.5 %
Effective tax rate 22.0 % 21.7 %
The effective tax rate increased to 22.0% for the year ended December 31, 2022
compared with 21.7% for the prior year. The increase in income tax expense can
be attributed to an increase in pre-tax income.
46
--------------------------------------------------------------------------------Financial Condition
The following table presents selected financial information at
December 31, December 31,
2022 2021 Change Percentage Change
Assets
Total cash and cash equivalents $ 55,869 $ 26,981 $ 28,888 107.1 %
Total investment securities, FHLB, and FRB
stock 646,040 802,998 (156,958) (19.5) %
Loans, net of deferred loan fees 1,829,448 1,518,249 311,199 20.5 %
Allowance for loan losses (19,659) (21,025) (1,366) (6.5) %
Loans, net 1,809,789 1,497,224 312,565 20.9 %
Goodwill and other intangible assets, net 21,824 21,839 (15) (0.1) %
Other assets 112,031 69,433 42,598 61.4 %
Total assets $ 2,645,553 $ 2,418,475 $ 227,078 9.4 %
Liabilities and Shareholders' Equity
Total deposits $ 2,327,227 $ 2,155,433 $ 171,794 8.0 %
Capital lease obligations and FHLBNY advances 99,137 18,164 80,973 445.8 %
Other liabilities 52,801 33,423 19,378 58.0 %
Total liabilities 2,479,165 2,207,020 272,145 12.3 %
Total shareholders' equity 166,388 211,455 (45,067) (21.3) %
Total liabilities and shareholders' equity
9.4 %
Cash and cash equivalents
The increase in cash and cash equivalents can be mostly attributed to changes in
securities, loans, deposits, and borrowings, offset by net income.
Investment securities
The decrease was primarily due to $86.2 million in paydowns and a decrease in
the fair value of the portfolio of $93.2 million due to increases in interest
rates, offset by purchases of $23.7 million of the securities available for sale
portfolio.
Loans, net
The increase in total loans, net, can be mostly attributed to increases of
$189.4 million in commercial loans, $95.5 million in consumer loans, and
$26.3 million in residential mortgage loans.
Allowance for Loan Losses
The decrease in the allowance for loan losses can mostly be attributed to the
release of the aforementioned $2.4 million pandemic related portion of the
allowance, the $1.5 million release of a specific reserve related to the sale 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 allowance were offset by additional provision of $4.2 million
related to increased loan growth, along with additional provision for loan
concentrations and deteriorating national economic conditions. The allowance for
loan losses was 240.39% of non-performing loans at December 31, 2022 compared to
259.17% at December 31, 2021 . The ratio of the allowance for loan losses to
total loans was 1.07% at December 31, 2022 compared to 1.38% at December 31,
2021 . Please refer to Note 1 - Summary of Significant Accounting Policies for
discussion on transition to Current Expected Credit Losses.
47
--------------------------------------------------------------------------------
Goodwill and other intangible assets, net
The decrease in goodwill and other intangible assets, net, can be attributed to
amortization of other intangible assets. There were no impairments of goodwill
or other intangible assets during the years ended December 31, 2022 and 2021.
Other Assets
The increase in other assets can be mostly attributed to increases of $16.9
million in deferred tax asset related to the market value adjustment on the
available for sale securities portfolio, and $17.9 million in interest rate swap
assets, primarily due to changes in interest rates.
Deposits
The growth in deposits was attributable to an increase of$206.0 million in time deposits,$73.5 million of which were one-way brokered deposits, offset by decreases of$13.7 million in insured money market accounts,$13.1 million in interest-bearing demand deposits,$6.3 million in non-interest bearing demand deposits, and$1.2 million in savings deposits.
Capital Lease Obligations and FHLBNY Advances
The increase in capital lease obligations and FHLBNY advances can be mostly
attributed to
Other Liabilities The increase in other liabilities can be mostly attributed to a$17.7 million increase in interest rate swap liabilities, primarily due to changes in interest rates. Shareholders' equity The decrease in shareholders' equity was due primarily to a$68.7 million decrease in accumulated other income (loss), offset by an increase of$23.0 million in retained earnings. The decrease in accumulated other comprehensive income (loss) can mostly be attributed to a decrease in the fair value of the securities portfolio. The increase in retained earnings was primarily due to net income of$28.8 million , offset by$5.8 million in dividends declared during the current year.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. During 2022, a total of 14,263 shares of common stock at a total cost of$0.6 million were repurchased by the Corporation under its share repurchase program. The weighted average cost was$45.00 per share repurchased. Remaining buyback authority under the share repurchase program was 200,816 shares atDecember 31, 2022 . As ofMarch 10, 2023 , 49,184 shares have been repurchased, at an average cost of$40.42 per share. Assets under management or administration The market value of total assets under management or administration in WMG was$2.053 billion , including$346.5 million of assets held under management or administration for the Corporation, atDecember 31, 2022 compared with$2.325 billion , including$344.2 million of assets held under management or administration for the Corporation, atDecember 31, 2021 , a decrease of$271.9 million , or 11.7%. The decrease in total assets under management or administration for the Corporation can be mostly attributed to a general decline in the market value of the assets under management. 48 --------------------------------------------------------------------------------
Balance Sheet Comparisons
The table below contains selected year-end and average balance sheet information
at and for the years
SELECTED BALANCE SHEET INFORMATION
YEAR-END BALANCE SHEET AVERAGE BALANCE SHEET
% Change % Change
2021 to 2021 to
2022 2021 2022 2022 2021 2022
Total assets $ 2,645.6 $ 2,418.5 9.4 % $ 2,496.1 $ 2,421.8 3.1 %
Interest-earning assets (1) 2,502.0 2,331.3 7.3 % 2,444.3 2,324.5 5.2 %
Loans (2) 1,829.4 1,518.6 20.5 % 1,646.6 1,545.6 6.5 %
Investments (3) 672.6 812.6 (17.2) % 797.7 778.9 2.4 %
Deposits 2,327.2 2,155.4 8.0 % 2,255.3 2,179.1 3.5 %
Borrowings (4) 99.1 18.2 444.5 % 23.2 4.4 427.3 %
Allowance for loan losses 19.7 21.0 (6.2) % 19.5 21.1 (7.6) %
Shareholders' equity 166.4 211.5 (21.3) % 180.7 204.2 (11.5) %
(1) Average interest-earning assets include securities available for sale at
estimated fair value and securities held to maturity based on amortized cost,
loans and loans held for sale net of deferred loan fees, interest-earning
deposits, FHLBNY stock, FRBNY stock, equity investments, and federal funds sold.
(2) Average loans and loans held for sale, net of deferred loan fees.
(3) Average balances for investments include securities available for sale at
estimated fair value and securities held to maturity, based on amortized cost,
equity investments, FHLBNY stock, FRBNY stock, federal funds sold and
interest-earning deposits.
(4) Average borrowings include overnight advances, and capitalized lease
obligations.
Cash and Cash Equivalents
Total cash and cash equivalents increased
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$632.6 million atDecember 31, 2022 , a decrease of$159.4 million , or 20.1%, from$792.0 million atDecember 31, 2021 . The decrease was primarily due to$86.2 million in paydowns and a decrease in the fair value of the portfolio of$93.2 million due to increases in interest rates, offset by purchases of$23.7 million . The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation's market areas. These securities totaled$2.4 million atDecember 31, 2022 , a decrease of$1.4 million or 36.0%, from$3.8 million atDecember 31, 2021 , due primarily to maturities. Non-marketable equity securities atDecember 31, 2022 include shares of FRBNY stock and FHLBNY stock, carried at their cost of$1.8 million and$6.4 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. 49 -------------------------------------------------------------------------------- The table below sets forth the carrying amounts and maturities of held to maturity debt securities atDecember 31, 2022 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security) (in thousands): MATURITIES
AND YIELDS OF HELD TO MATURITY SECURITIES
After Five, But Within Ten
Within One Year After One, But Within Five Years Years After Ten Years
Amount Yield Amount Yield Amount Yield Amount Yield
Obligations of states and
political subdivisions 759 3.95 % 193 3.79 % - N/A - N/A
Time deposits with other
institutions 737 1.86 % 735 3.35 % - N/A - N/A
Total $ 1,496 2.92 % $ 928 3.44 % $ - N/A $ - N/A
The weighted-average yield on the Corporation's held to maturity debt securities
at December 31, 2022 was 3.92% related to obligations of states and political
subdivisions, and 2.62% related to time deposits with other institutions.
Management evaluates securities for OTTI on a quarterly basis, and more
frequently when economic or market conditions warrant such an evaluation. For
the years ended December 31, 2022 and 2021, the Corporation had no OTTI charges.
Loans
The Corporation has reporting systems to monitor: (i) loan originations and
concentrations, (ii) delinquent loans, (iii) non-performing assets, including
non-performing loans, troubled debt restructurings, 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 type and
percentage of total loans at the end of December 31, 2022 and December 31, 2021
(in thousands):
LOAN COMPOSITION
% Change
December 31, 2021 to
2022 % 2021 % 2022
Commercial and agricultural:
Commercial and industrial $ 252,044 13.8 % $ 256,893 16.9 % (1.9) %
Agricultural 249 - % 394 - % (36.8) %
Commercial mortgages:
Construction 108,243 5.9 % 82,204 5.4 % 31.7 %
Commercial mortgages 888,670 48.7 % 720,358 47.5 % 23.4 %
Residential mortgages 285,672 15.6 % 259,334 17.1 % 10.2 %
Consumer loans:
Home equity lines and loans 81,401 4.4 % 70,670 4.7 % 15.2 %
Indirect consumer loans 202,124 11.0 % 118,569 7.8 % 70.5 %
Direct consumer loans 11,045 0.6 % 9,827 0.6 % 12.4 %
Total $ 1,829,448 100.0 % $ 1,518,249 100.0 %
50-------------------------------------------------------------------------------- Portfolio loans totaled$1.829 billion atDecember 31, 2022 and$1.518 billion atDecember 31, 2021 , an increase of$311.2 million , or 20.5%. The increase was driven by increases of$194.4 million in commercial real estate loans, or 24.2%,$83.6 million , or 70.5% in indirect automobile loans, and$26.3 million in residential mortgages, or 10.2%, offset by a decrease of$5.0 million , or 1.9% in commercial & agricultural loans. The increase in total commercial real estate loans was a result of a$26.0 million increase in construction loans and a$168.3 million increase in commercial real estate loans, primarily driven by increases in loans secured by non-owner occupied and multi-family properties. The increase in indirect automobile loans was attributable to a renewed focus in the program following a pricing restructuring, as well as increased demand for automobiles coupled with elevated vehicle prices nationwide. Increases in residential mortgage loans was due to new originations being retained in the portfolio as opposed to being sold into the secondary market, and continued strong demand through the majority of the year, despite the rising interest rate environment. The decrease in commercial and agricultural loans was primarily the result of a net decrease in PPP loans of$42.5 million during the year, related to SBA forgiveness. PPP loan balances of$0.7 million remained atDecember 31, 2022 , with$0.5 million and$0.2 million of Phase 1 and Phase 2 loans, respectively. The table below presents the Corporation's outstanding loan balance by bank division (in thousands): LOANS BY DIVISION December 31, 2022 2021 2020 2019 2018 Chemung Canal Trust Company*^$ 731,344 639,144
1,098,104 879,105 877,995 732,820 708,773
Total loans $ 1,829,448 $ 1,518,249 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 changes in economic or other conditions. The Corporation's concentration policy limits consider the volume of commercial loans to any one specific industry, sponsor, collateral type and location. In addition, the Corporation's policy limits the volume of non-owner occupied commercial mortgages to four times total risk based capital. AtDecember 31, 2022 and 2021, total non-owner occupied commercial real estate loans divided by total Bank risk based capital was 382.9% and 346.5%, respectively. The Corporation also monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. AtDecember 31, 2022 and 2021, commercial loans to borrowers involved in the real estate, and real estate rental and leasing businesses were 48.3% 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 ofDecember 31, 2022 and 2021. 51 -------------------------------------------------------------------------------- The table below shows the maturity of loans outstanding as ofDecember 31, 2022 . Also provided are the amounts due by maturity, classified according to fixed interest rates and variable interest rates (in thousands):
LOAN AMOUNTS CONTRACTUALLY DUE AFTER
After One But
Within Five After Five But
Within One Year Years Within 15 Years After 15 Years TotalCommercial and agricultural:
Commercial and industrial$ 64,485 $ 105,091 $ 77,820 $ 4,648$ 252,044 Agricultural - 25 224 - 249 Commercial mortgages: Construction 6,113 43,215 51,180 7,735
108,243
Commercial mortgages 26,515 211,892 623,385 26,878
888,670
Residential mortgages 8,894 9,171 129,661 137,946
285,672
Consumer loans:
Home equity lines and loans 361 5,262 54,338 21,440
81,401
Indirect consumer loans 2,020 84,328 115,776 - 202,124 Direct consumer loans 372 4,163 4,489 2,021 11,045 Total$ 108,760 $ 463,147 $ 1,056,873 $ 200,668 $ 1,829,448 After One But Within Five After Five But Loans maturing with: Years Within 15 Years After 15 Years Total Fixed interest rates$ 280,677 $ 509,202 $ 98,150 $ 888,029 Variable interest rates 182,470 547,671 102,518$ 832,659 Total$ 463,147 $ 1,056,873 $ 200,668 $ 1,720,688 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 on 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 on 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 contractual 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. 52 -------------------------------------------------------------------------------- The following table summarizes the Corporation's non-performing assets, (in thousands): NON-PERFORMING ASSETS December 31, 2022 2021 2020 2019 2018 Non-accrual loans$ 4,143 $ 3,469 $ 6,011 $ 9,938 $ 6,305 Non-accrual troubled debt restructurings 4,035 4,645 3,941 8,070 5,949 Total non-performing loans 8,178 8,114 9,952 18,008 12,254 Other real estate owned 195 113 237 517 574 Total non-performing assets$ 8,373 $ 8,227
Ratio of non-performing loans to total loans 0.45 % 0.54 % 0.65 % 1.38 % 0.93 % Ratio of non-performing assets to total assets 0.32 % 0.34 % 0.45 % 1.04 % 0.73 % Ratio of allowance for loan losses to non-performing loans 240.39 % 259.17 %
210.25 % 130.38 % 154.59 %
Accruing loans past due 90 days or more (1)$ 1 $ 4 $ 2 $ 7 $ 19 Accruing troubled debt restructurings (1)$ 1,405 $ 5,643
(1)These loans are not included in non-performing assets above.
Interest income recorded on non-accrual and troubled debt restructured loans was
Non-Performing Loans
Non-performing loans totaled$8.2 million atDecember 31, 2022 , or 0.45% of total loans, compared with$8.1 million atDecember 31, 2021 , or 0.54% of total loans. The increase in non-performing loans atDecember 31, 2022 as compared toDecember 31, 2021 was due to the additional classification of multiple commercial loans, offset by pay downs on existing non-performing loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was$8.4 million , or 0.32% of total assets, atDecember 31, 2022 , compared with$8.2 million , or 0.34% of total assets, atDecember 31, 2021 . The recorded investment of accruing loans past due 90 days or more was less than$0.1 million atDecember 31, 2022 andDecember 31, 2021 . There were no PCI loans as ofDecember 31, 2022 andDecember 31, 2021 . PCI loans are accounted for under separate accounting guidance, ASC Subtopic 310-30, "Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality."
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 may modify the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance, applicable to the Corporation as of December, 31 2022. 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. As ofDecember 31, 2022 and 2021, the Corporation had$4.0 million and$4.6 million of non-accrual TDRs, respectively. As ofDecember 31, 2022 , the Corporation had$1.4 million of accruing TDRs compared with$5.6 million as ofDecember 31, 2021 . No loans were modifed as troubled debt restructurings during the twelve months endedDecember 31, 2022 . 53 --------------------------------------------------------------------------------
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 unpaid principal balance of impaired loans atDecember 31, 2022 totaled$7.5 million , including TDRs of$5.4 million , compared to$18.2 million atDecember 31, 2021 , including TDRs of$10.3 million . The recorded investment of impaired loans atDecember 31, 2022 totaled$7.5 million compared to$11.6 million atDecember 31, 2021 . Included in the recorded investment of impaired loans atDecember 31, 2022 , were loans totaling$1.3 million for which impairment allowances of$1.1 million have been specifically allocated to the allowance for loan losses. The decrease in the recorded investment in impaired loans was primarily due to the sale of a large commerical real estate loan, reducing the recorded investment in impaired loans by$3.5 million . As ofDecember 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 an 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 remained stable. 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 the 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 credit losses on existing loans. The allowance is established
based upon management's evaluation of the probable inherent losses in the
portfolio in accordance with GAAP, and is comprised of both specific valuation
allowances and general valuation allowances.
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. Specific
valuation allowances are established based on management's analyses of
individually impaired loans. Factors considered by management in determining
impairment include payment status, evaluations of the underlying collateral,
expected cash flows, 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 anticipated 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 changes & trends in the global economy.
54
--------------------------------------------------------------------------------
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 quarterly 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 $19.7 million at December 31, 2022 , compared
to $21.0 million at December 31, 2021 . The allowance for loan losses was 240.39%
of non-performing loans at December 31, 2022 compared to 259.17% at December 31,
2021 . The ratio of allowance for loan losses to total loans was 1.07% at
December 31, 2022 and 1.38% at December 31, 2021 , respectively. The Corporation
continued to monitor the loan portfolio for lagging effects related to the
COVID-19 pandemic throughout 2022. 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
remaining $2.4 million of the pandemic related provision was released in 2022.
Overall, the Corporation released $4.3 million and utilized $0.5 million of the
pandemic related provision, and no provision remains at December 31, 2022 .
Net charge-offs for the year ended December 31, 2022 were $0.8 million compared
with net recoveries of $0.1 million for the year ended December 31, 2021 . The
ratio of net charge-offs (recoveries) to average loans outstanding was 0.05% for
2022 compared to (0.01)% for 2021. The increase in net charge-offs can primarily
be attributed to the $0.7 million charge off on a large commercial real estate
loan.
55
--------------------------------------------------------------------------------
The table below summarizes the Corporation's allowance for loan losses,
non-accrual loans, and ratio of net charge-offs and recoveries to average loans
outstanding by loan category for the years ended
ALLOWANCE FOR LOAN LOSSES AND LOAN CREDIT RATIOS BY LOAN CATEGORY
Net
charge-offs
Allowance for Allowance to Non-performing loans to Allowance to (recoveries) toBalance at December 31, 2022 loan losses loans1 Non-performing loans loans1 non-performing loans average loans Commercial and agricultural$ 3,373 1.34 % $ 1,946 0.77 % 173.33 % (0.01) % Commercial mortgages 11,576 1.16 % 3,933 0.39 % 294.33 % 0.08 % Residential mortgages 1,845 0.65 % 986 0.35 % 187.12 % (0.01) % Consumer loans 2,865 0.97 % 1,313 0.45 % 218.20 % 0.07 % Total$ 19,659 1.07 % $ 8,178 0.45 % 240.39 % 0.05 % Net charge-offs Allowance for Allowance to Non-performing loans to Allowance to (recoveries) to Balance at December 31, 2021 loan losses loans1 Non-performing loans loans1 non-performing loans average loans Commercial and agricultural$ 3,591 1.40 % $ 1,932 0.75 % 185.87 % (0.09) % Commercial mortgages 13,556 1.69 % 3,878 0.48 % 349.56 % 0.01 % Residential mortgages 1,803 0.70 % 1,039 0.40 % 173.53 % 0.03 % Consumer loans 2,075 1.04 % 1,265 0.64 % 164.03 % 0.05 % Total$ 21,025 1.38 % $ 8,114 0.54 % 259.17 % (0.01) % Consolidated Ratios at December 31, 2022 2021 Non-performing loans to total loans 0.45 % 0.54 % Allowance for loan losses to total loans 1.07 % 1.38 % Allowance for loan losses to total loans, net of PPP 1.08 % 1.43 % Allowance for loan losses to non-performing loans 240.39 % 259.17 %
1 Ratio is a percentage of loan category.
The decrease in the allowance to non-accrual loans was primarily due to a$0.1 million increase in non-accrual loans from 2021 to 2022, without an equivalent increase in the allowance allocated to non-accrual loans. This was due to the sale of a large commercial real estate loan which carried a specifically allocated reserve of$1.5 million , resulting in the majority of non-accrual loans atDecember 31, 2022 being carried without a specific reserve allocation. The decrease in the allowance for loan losses to outstanding loans can be attributed to the increase of$311.2 . million in outstanding loans, most of which were collectively evaluated for impairment atDecember 31, 2022 , and therefore required lower allowance allocation rates to be applied. Refer to Note 4 of the audited Consolidated Financial Statements appearing elsewhere in this report for components used in credit ratios presented above. 56 --------------------------------------------------------------------------------
The table below summarizes the Corporation's loan loss experience for the years
ended
SUMMARY OF LOAN LOSS EXPERIENCE
Years Ended December 31,
2022 2021
Allowance for loan losses at beginning of year
$ 20,924 Charge-offs: Commercial and agricultural 20 28 Commercial mortgages 687 43 Residential mortgages 17 75 Consumer loans 770 593 Total 1,494 739 Recoveries: Commercial and agricultural 42 312 Commercial mortgages 3 3 Residential mortgages 40 10 Consumer loans 597 498 Total 682 823 Net charge-offs (recoveries) 812 (84) Provision charged to operations (554)
17
Allowance for loan losses at end of year$ 19,659 $ 21,025 Other Real Estate Owned AtDecember 31, 2022 , OREO totaled$0.2 million compared to$0.1 million atDecember 31, 2021 . There were four properties relating to residential mortgages and one property relating to a residential home equity loan added to OREO in 2022, and four residential properties were sold from OREO during 2022.
Deposits
The table below summarizes the Corporation's deposit composition by segment atDecember 31, 2022 , and 2021, and the dollar and percent change fromDecember 31, 2021 toDecember 31, 2022 (in thousands): DEPOSITS December 31, 2022 December 31, 2021 2022 v. 2021 Amount % of Total Amount % of Total $ Change % Change Non-interest-bearing demand deposits $ 733,329 31.4 % $ 739,607 34.3 %$ (6,278) (0.8) % Interest-bearing demand deposits 271,645 11.7 % 284,721 13.2 % (13,076) (4.6) % Money market accounts 640,840 27.5 % 654,553 30.4 % (13,713) (2.1) % Savings deposits 279,029 12.0 % 280,195 13.0 % (1,166) (0.4) % Certificates of deposits$250,000 or less 272,182 11.7 % 141,990 6.6 % 130,192 91.7 % Certificates of deposits greater than$250,000 31,547 1.4 % 27,974 1.3 % 3,573 12.8 % One-way brokered deposits 73,452 3.2 % - - % 73,452 N/A Other time deposits 25,203 1.1 % 26,393 1.2 % (1,190) (4.5) % Total$ 2,327,227 100.0 %$ 2,155,433 100.0 %$ 171,794 8.0 % 57
-------------------------------------------------------------------------------- Deposits totaled$2.327 billion atDecember 31, 2022 , compared with$2.155 billion atDecember 31, 2021 , an increase of$171.8 million , or 8.0%. AtDecember 31, 2022 , demand deposit and money market accounts comprised 70.7% of total deposits compared with 77.9% atDecember 31, 2021 . The growth in deposits was attributable to an increase of$206.0 million in time deposits,$73.5 million of which were one-way brokered deposits, offset by decreases of$13.7 million in money market accounts,$13.1 million in interest-bearing demand deposits,$6.3 million in non-interest bearing demand deposits, and$1.2 million in savings deposits. AtDecember 31, 2022 , public funds deposits totaled$349.0 million compared to$378.9 million atDecember 31, 2021 . The Corporation has developed a program for the retention and management of public funds deposits. These deposits are from public entities, such as school districts and municipalities. There is a seasonal component to public deposit levels associated with annual tax collections. Public funds deposits generally increase at the end of the first and third quarters. Public funds deposit accounts above theFDIC insured limit are collateralized by municipal bonds and eligible government and government agency securities such as those issued by the FHLB, Fannie Mae, and Freddie Mac. The table below summarizes the Corporation's public funds deposit composition by segment (in thousands): December 31, Public Funds: 2022 2021 Non-interest-bearing demand deposits$ 20,274 $
31,739
Interest-bearing demand deposits 62,219
54,520
Insured money market accounts 255,261 278,790 Savings deposits 8,120 11,104 Time deposits 3,125 2,769 Total public funds$ 348,999 $ 378,922 Total deposits$ 2,327,227 $ 2,155,433 Percentage of public funds to total deposits 15.0 %
17.6 %
The aggregate amount of the Corporation's outstanding uninsured deposits was$548.0 million , or 24%, and$558.0 million , or 26%, as ofDecember 31, 2022 and 2021, respectively. As ofDecember 31, 2022 , the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than or equal to$250,000 was$31.5 million . The table below presents the Corporation's scheduled maturity of those certificates as ofDecember 31, 2022 (in thousands): December 31, 2022 3 months or less $ 2,877 Over 3 through 6 months - Over 6 through 12 months 9,660 Over 12 months 19,010 $ 31,547 The table below presents the Corporation's deposits balance by bank division (in thousands): DEPOSITS BY DIVISION December 31, 2022 2021 2020 2019 2018 Chemung Canal Trust Company* 1,892,020 1,739,826
435,207 415,607 351,404 254,913 240,579
Total deposits $ 2,327,227 $ 2,155,433
58
--------------------------------------------------------------------------------
In addition to consumer, commercial and public deposits, other sources of funds
include 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. Deposits
placed in the CDARS and ICS programs were $441.6 million and $288.1 million as
of December 31, 2022 and 2021, respectively.
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 denovo branching, (ii) training branch employees to
identify and meet client financial needs with Bank products and services, (iii)
link business and consumer loans to a primary checking account at the Bank, (iv)
aggressively promote direct deposit of client's payroll checks or benefit checks
and (v) 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 anticipates that it may
use brokered deposits as a secondary source of funding to support asset growth.
Information regarding deposits is included in Note 8 to the consolidated financial statements appearing elsewhere in this report.
Borrowings
FHLBNY overnight advances increased$81.2 million atDecember 31, 2022 when compared to 2021. For each year endedDecember 31, 2022 , and 2021 respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity. There were no FHLBNY term advances as of and for the years endedDecember 31, 2022 , and 2021. Information regarding FHLBNY advances is included in Note 9 of the audited Consolidated Financial Statements appearing elsewhere in this report. There were no securities sold under agreements to repurchase as of and for the years endedDecember 31, 2022 , or 2021. Derivatives The Corporation offers interest rate swap agreements to qualified commercial lending customers. These agreements allow the Corporation's customers to effectively fix the interest rate on a variable rate loan by entering into a separate agreement. Simultaneous with the execution of such an agreement with a customer, the Corporation enters into a matching interest rate swap agreement with an unrelated third party provider, which allows the Corporation to continue to receive the variable rate under the loan agreement with the customer. The agreement with the third party is not designated as a hedge contract, therefore changes in fair value are recorded through other non-interest income. Assets and liabilities associated with the agreements are recorded in other assets and other liabilities on the balance sheet. Gains and losses are recorded as other non-interest income. The Corporation is exposed to credit loss equal to the fair value of the interest rate swaps, not the notional amount of the derivatives, in the event of nonperformance by the counterparty to the interest rate swap agreements. Additionally, the swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's consolidated balance sheets, which typically involves a day one gain. Since the terms of the two interest rate swap agreements are identical, the income statement impact to the Corporation is limited to the day one gain and an allowance for credit loss exposure, in the event of nonperformance. The Corporation recognized$0.3 million and$0.4 million in swap income for the years endedDecember 31, 2022 and 2021, respectively. The Corporation also participates in the credit exposure of certain interest rate swaps in which it participates in the related commercial loan. The Corporation receives an upfront fee for participating in the credit exposure of the interest rate swap and recognizes the fee to other non-interest income immediately. The Corporation is exposed to its share of the credit loss equal to the fair value of the derivatives in the event of nonperformance by the counter-party of the interest rate swap. The Corporation determines the fair value of the credit loss exposure using historical losses of the loan category associated with the credit exposure.
Information regarding derivatives is included in Note 11 to the consolidated financial statements appearing elsewhere in this report.
59
--------------------------------------------------------------------------------Shareholders' Equity
Total shareholders' equity was$166.4 million atDecember 31, 2022 , compared with$211.5 million atDecember 31, 2021 , a decrease of$45.1 million , or 21.3%. The decrease in shareholders' equity was due primarily to a$68.7 million decrease in accumulated other income (loss), offset by an increase of$23.0 million in retained earnings. The decrease in accumulated other comprehensive income (loss) can mostly be attributed to a decrease in the fair value of the securities portfolio. The increase in retained earnings was primarily due to net income of$28.8 million , offset by$5.8 million in dividends declared during the current year.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. Total shareholders' equity to total assets ratio was 6.29% atDecember 31, 2022 compared with 8.74% atDecember 31, 2021 . Tangible equity to tangible assets ratio was 5.51% atDecember 31, 2022 , compared with 7.91% atDecember 31, 2021 . The Bank is subject to the capital adequacy guidelines of theFederal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As ofDecember 31, 2022 , the Bank's capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines. A comparison of the Bank's actual capital ratios to the ratios required to be adequately or well-capitalized atDecember 31, 2022 and 2021, is included in Footnote 20 of the audited Consolidated Financial Statements. For more information regarding current capital regulations see Part I-"Business-Supervision and Regulation-Regulatory Capital Requirements." Cash dividends declared during 2022 totaled$5.8 million , or$1.24 per share, compared to$5.6 million , or$1.19 per share in 2021. Dividends declared during 2022 amounted to 20.15% of net income compared to 21.02% of net income for 2021. Management seeks to continue generating sufficient capital internally, while continuing to pay dividends to the Corporation's shareholders. 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. OnJanuary 8, 2021 , the Corporation announced that the Board of Directors approved a stock repurchase program. Under the 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 and Exchange Act of 1934. As ofMarch 10, 2023 , 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. The remaining buyback authority under the share repurchase program was 200,816 shares as of theMarch 10, 2023 . OnApril 27, 2020 , the Corporation filed with theSEC a Form S-3 Registration Statement under the Securities Act of 1933. The Corporation's Board of Directors approved the filing with theSEC 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. TheSEC declared the registration statement effective onMay 7, 2020 . 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$250,000 or more, one-way 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$99.8 million and$161.0 million atDecember 31, 2022 and 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 were available atDecember 31, 2022 . 60 -------------------------------------------------------------------------------- OnMarch 12, 2023 , theTreasury Department ,Federal Reserve andFDIC jointly announced a new liquidity program, the Bank Term Funding Program (BTFP), in response to the failure of two banks earlier that week. Under the BTFP, institutions can pledge certain securities (i.e., securities eligible for purchase by the Federal Reserve Banks in open market operations) for the par value of the securities at a borrowing rate of ten basis points over the one-year overnight index swap rate. There will be no fees with the advance. AnyU.S. federally insured depository institution is eligible to participate in the BTFP. The advances, which may have a term of up to one year, may be prepaid by the borrowing institution at any time (including for purposes of refinancing) without penalty. The Corporation has a detailed Funds Management Policy that includes sections on liquidity measurement and management, and a Liquidity Contingency Plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. This policy and plan are established and revised as needed by the management and Board ALCO committees. The ALCO is responsible for measuring liquidity, establishing liquidity targets and implementing strategies to achieve selected targets. The ALCO is responsible for coordinating activities across the Corporation to ensure that prudent levels of contingent or standby liquidity are available at all times. Based on the ongoing assessment of the liquidity considerations, management believes the Corporation's sources of funding meet anticipated funding needs.
Consolidated Cash Flows Analysis
The table below summarizes the Corporation's cash flows on a direct basis, for the years indicated (in thousands):
CONSOLIDATED SUMMARY OF CASH FLOWS
Years Ended December 31,
(in thousands) 2022 2021
Net cash provided by operating activities $ 35,047 $ 35,461
Net cash provided (used) by investing activities (252,620) (242,484)
Net cash provided (used) by financing activities 246,461 125,466
Net increase (decrease) in cash and cash equivalents $ 28,888 $ (81,557)
Operating activities
The Corporation believes cash flows from operations, available cash balances and
its ability to generate cash through borrowings are sufficient to fund the
Corporation's operating liquidity needs. Cash provided by operating activities
in the years ended December 31, 2022 and 2021 predominantly resulted from net
income after non-cash operating adjustments.
Investing activities
Cash used in investing activities during the year ended December 31, 2022
predominantly resulted from a net increase in loans, offset by maturities, and
principal collected on securities available for sale. Cash used in investing
activities during the year ended December 31, 2021 predominantly resulted from
purchases of securities available for sale and a net increase in loans, offset
by maturities, and principal collected on securities available for sale.
Financing activities
Cash provided by financing activities during the year ended December 31, 2022
resulted primarily from an increase in certificate of deposits, one-way brokered
deposits, and FHLBNY overnight advances, offset by the payment of dividends to
shareholders. Cash provided by financing activities during the year ended
December 31, 2021 resulted from an increase in deposits and FHLBNY overnight
advances, offset by the payment of dividends to shareholders and the repurchase
of treasury shares through the Corporation's common stock repurchase program.
Off-balance Sheet Arrangements
In the normal course of operations, the Corporation engages in a variety of
financial transactions that, in accordance with GAAP are not recorded in the
financial statements. The Corporation is also 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, commitments to fund new
loans, interest rate swaps, and risk participation agreements. 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.
61
--------------------------------------------------------------------------------
The table below shows the Corporation's off-balance sheet arrangements as of
COMMITMENT MATURITY BY PERIOD
2028 and
Total 2023 2024-2025 2026-2027 thereafter
Standby letters of credit $ 17,211 $ 15,765 $
384
256,772 256,772 - - -
Commitments to fund new loans 119,509 119,509 - - -
Total $ 393,492 $ 392,046 $ 384 $ 1,032 $ 30
(1) Not included in this total are unused portions of home equity lines of
credit, credit card lines and consumer overdraft protection lines of credit,
since no contractual maturity dates exist for these types of loans. Commitments
to outside parties under these lines of credit were $59.3 million , $5.0 million
and $8.0 million , respectively, at December 31, 2022 .
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 ofSEC -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 onJanuary 1, 2020 . Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8.5% for 2021. The community bank leverage ratio requirement returned to 9.0% onJanuary 1, 2022 . The Bank has not elected to use the community bank leverage ratio. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, under capitalized, significantly under capitalized, and critically under capitalized, 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 ofDecember 31, 2022 andDecember 31, 2021 the Corporation and Bank met all capital adequacy requirements to which they were subject. As ofDecember 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 ofDecember 31, 2022 , the most recent notification from theFederal 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. 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 ofDecember 31, 2022 and 2021 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies. Refer to Note 19 of the audited Consolidated Financial Statements appearing elsewhere in this report for a table summarizing the Corporation's and the Bank's actual and required regulatory capital ratios. For more information regarding current capital regulations see Part I-"Business-Supervision and Regulation-Regulatory Capital Requirements." 62 --------------------------------------------------------------------------------
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 the current year's net income, combined with the retained net income of the preceding two years. AtDecember 31, 2022 , the Bank could, without prior approval, declare dividends of approximately$49.3 million .
Adoption of New Accounting Standards
For a discussion of the impact of recently issued accounting standards, please see Note 1 to the Corporation's audited Consolidated Financial Statements which begins on page F-9.
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 F-3 through F-8. 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. TheSEC 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. TheSEC 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 theSEC and may constitute "non-GAAP financial measures" within the meaning of theSEC's rules, although we are unable to state with certainty that theSEC 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.
63
--------------------------------------------------------------------------------As of or for the Years Ended
December 31, December 31,
(in thousands, except ratio data) 2022 2021
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
Net interest income (GAAP)$ 74,179 $ 65,589 Fully taxable equivalent adjustment 425 382 Fully taxable equivalent net interest income (non-GAAP)$ 74,604 $ 65,971 Average interest-earning assets (GAAP)$ 2,444,287 $ 2,324,498 Net interest margin - fully taxable equivalent (non-GAAP) 3.05 % 2.84 % 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. As
of or for the Years Ended
December 31, December 31,
(in thousands, except ratio data) 2022 2021
EFFICIENCY RATIO
Net interest income (GAAP)$ 74,179 $ 65,589 Fully taxable equivalent adjustment 425 382
Fully taxable equivalent net interest income (non-GAAP)
$ 65,971 Non-interest income (GAAP)$ 21,436 $ 23,870 Less: net (gains) losses on security transactions - - Adjusted non-interest income (non-GAAP)$ 21,436 $ 23,870 Non-interest expense (GAAP)$ 59,280 $ 55,682 Less: amortization of intangible assets (15) (243) Adjusted non-interest expense (non-GAAP)$ 59,265 $ 55,439 Efficiency ratio (unadjusted) 62.00 % 62.24 % Efficiency ratio (adjusted) 61.71 % 61.71 % 64
--------------------------------------------------------------------------------
Tangible Equity and Tangible Assets (Year-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 equity
divided by common shares at year-end. These measures are meaningful to the
Corporation, as well as investors and analysts, in assessing the Corporation's
use of equity.
As of or for the Years Ended
December 31, December 31,
(in thousands, except per share and ratio data) 2022 2021
TANGIBLE EQUITY AND TANGIBLE ASSETS (YEAR END)
Total shareholders' equity (GAAP) $ 166,388 $ 211,455
Less: intangible assets (21,824) (21,839)
Tangible equity (non-GAAP) $ 144,564 $ 189,616
Total assets (GAAP) $ 2,645,553 $ 2,418,475
Less: intangible assets (21,824) (21,839)
Tangible assets (non-GAAP) $ 2,623,729 $ 2,396,636
Total equity to total assets at end of year (GAAP) 6.29 % 8.74 %
Book value per share (GAAP) $ 35.32 $ 45.09
Tangible equity to tangible assets at end of year (non-GAAP) 5.51 % 7.91 %
Tangible book value per share (non-GAAP) $ 30.69 $ 40.44 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 year.
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.
As of or for the Years Ended
December 31, December 31,
(in thousands, except ratio data) 2022 2021
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP) $ 180,684 $ 204,239
Less: average intangible assets (21,827) (21,925)
Average tangible equity (non-GAAP) $ 158,857 $ 182,314
Return on average equity (GAAP) 15.93 % 12.94 %
Return on average tangible equity (non-GAAP) 18.12 % 14.49 %
65--------------------------------------------------------------------------------
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 year by removing from the
calculation thereof the impact of certain transactions or other material items
of income or expense occurring during the year, 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
year 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.
As of or for the Years Ended
December 31, December 31,
(in thousands, except per share and ratio data) 2022 2021
NON-GAAP NET INCOME
Reported net income (loss) (GAAP) $ 28,783 $ 26,425
Net changes in fair value of investments (net of tax) - -
Net (gains) losses on security transactions (net of tax) - -
Legal accruals and settlements (net of tax) - -
Remeasurement of net deferred tax asset - -
Net income (non-GAAP) $ 28,783 $ 26,425
Average basic and diluted shares outstanding 4,693 4,683
Reported basic and diluted earnings per share (GAAP) $ 6.13 $ 5.64
Reported return on average assets (GAAP) 1.15 % 1.09 %
Reported return on average equity (GAAP) 15.93 % 12.94 %
Basic and diluted earnings per share (non-GAAP) $ 6.13 $ 5.64
Return on average assets (non-GAAP) 1.15 % 1.09 %
Return on average equity (non-GAAP) 15.93 % 12.94 %
66--------------------------------------------------------------------------------
© Edgar Online, source
