Chemung Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. The company provides community banking and wealth management services, principally through Chemung Canal Trust Company and CFS. Figures below are in U.S. dollars; financial statement amounts are rounded to millions unless otherwise indicated.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $18.0m | $19.0m | $56.6m | $53.3m |
| Non-interest income | $7.8m | $5.0m | $18.7m | $16.0m |
| Non-interest expense | $15.7m | $14.6m | $47.4m | $43.6m |
| Net income | $7.6m | $6.5m | $21.2m | $21.3m |
| Diluted EPS | $1.61 | $1.37 | $4.48 | $4.55 |
| Fully taxable-equivalent net interest margin | 2.73% | 3.08% | 2.91% | 2.98% |
- Q3 net income rose 18.5% year over year, helped by higher non-interest income and lower credit-loss provision, despite lower net interest income and higher expenses.
- Nine-month net income declined 0.7%. Higher net interest income and non-interest income were offset by increased expenses and credit-loss provision.
- Q3 non-interest income included a $2.4m Employee Retention Tax Credit (ERTC) recognized after amended tax returns were filed. Management’s non-GAAP presentation excludes the credit: adjusted Q3 net income was $5.8m versus GAAP net income of $7.6m; adjusted nine-month net income was $19.3m versus GAAP net income of $21.2m.
- Net interest margin contracted as deposit and borrowing costs rose faster than asset yields. Q3 interest expense increased $9.0m year over year, including an $8.9m increase in deposit interest expense; average cost of interest-bearing liabilities rose to 2.47% from 0.51%.
- Quarterly return on average assets was 1.14% and return on average equity was 16.89%. For the nine months, these were 1.07% and 15.93%, respectively.
Balance sheet, cash flow and liquidity
- Total assets were $2.708bn at September 30, up 2.4% from year-end 2022. Loans, net of deferred fees and before allowance, were $1.931bn, up 5.5%; commercial real estate remained the principal growth driver.
- Total deposits were $2.473bn, up 6.3% from December 31, 2022. Growth included $101.5m in brokered deposits and $87.3m in non-brokered time deposits; non-interest-bearing deposits declined $50.0m. Brokered deposits were $175.0m, versus $73.5m at year-end.
- Uninsured deposits were $671.9m, or 27.2% of deposits. Management described brokered deposits as a secondary funding source and stated that funding sources were adequate for anticipated needs.
- Cash and cash equivalents were $75.6m. Available-for-sale securities were $569.0m, of which $296.3m was unpledged. The bank reported $231.3m of unused FHLBNY borrowing capacity and $60.0m of available unsecured credit lines; it had not used the Bank Term Funding Program.
- FHLBNY overnight advances fell to zero from $95.8m at year-end; total liabilities included $3.1m of finance lease obligations. The filing reports no FHLBNY borrowing outstanding at September 30.
- Nine-month operating cash flow was $27.3m, investing cash use was $53.8m, and financing cash flow was $46.3m. Cash increased $19.7m to $75.6m.
- Shareholders’ equity was $170.1m; total equity to assets was 6.28%, and tangible equity to tangible assets was 5.52%. The bank’s total capital ratio was 12.51%, Tier 1 risk-based ratio 11.44%, and Tier 1 leverage ratio 8.29%; the bank was categorized as well capitalized.
Credit quality, securities and material changes
- The allowance for credit losses on loans was $20.3m, or 1.05% of loans, compared with $19.7m and 1.07% at year-end. The company adopted CECL on January 1, 2023, recording a $1.5m pretax transition adjustment to retained earnings, including a $1.1m reserve for unfunded commitments.
- Non-performing loans were $6.8m (0.35% of loans), down from $8.2m (0.45%) at year-end. Nine-month net charge-offs were $0.8m. Management cited consumer credit headwinds and qualitative reserve adjustments despite improving forecast unemployment and GDP inputs.
- Commercial real estate and real estate-related lending represented 49.1% of total loans. Commercial real estate loans in the Albany and Buffalo regions increased by $60.8m and $17.0m, respectively, from year-end.
- Available-for-sale securities had $114.9m of gross unrealized losses at quarter-end, up from $96.8m at December 31; most related to rate-driven declines in agency mortgage-backed securities. The company reported no credit-loss allowance on these securities and said it did not intend, and was not likely to be required, to sell them before recovery.
- Accumulated other comprehensive loss widened by $13.4m during the nine months, largely due to lower fair value of available-for-sale securities. This reduced reported equity despite positive net income.
- The quarterly dividend declared was $0.31 per share. No shares were repurchased in Q3; 200,816 shares remained authorized for repurchase at quarter-end.
Outlook, risks and contingencies
- The filing provides no specific earnings or growth guidance. Management identifies interest-rate risk as its most significant market risk. Its modeling estimated that an immediate 100-basis-point rate increase would raise next-12-month net interest income by 1.59%, while a 100-basis-point decrease would raise it by 3.78%; these are model scenarios, not forecasts.
- Key stated risks include deposit outflows and reliance on higher-cost funding, margin pressure, interest-rate-driven securities losses, credit deterioration, inflation, cybersecurity, competition, regulatory changes and potential increases in FDIC assessments.
- The company continues litigation against Pioneer Bank concerning a defaulted commercial credit participation. It had recovered $0.5m of its $4.2m participation and continues to pursue the remaining $3.7m plus expenses. Management said it knew of no other pending matter expected to materially affect results or liquidity.
- The board approved dissolution of captive insurer Chemung Risk Management, Inc. on October 18, 2023, described as immaterial. The filing states completion is expected by March 31, 2023, a date preceding approval; the stated date appears inconsistent and should be verified.
- Management concluded disclosure controls were effective as of September 30, 2023, with no material change in internal control over financial reporting during the quarter.
Investor verification points
- Assess sustainability of earnings excluding the one-time ERTC and monitor deposit repricing, brokered-deposit dependence and net interest margin.
- Review unrealized securities losses, available liquidity and the company’s ability to retain deposits without increasing funding costs.
- Track commercial real estate concentration and regional exposure, consumer loan performance, charge-offs and CECL reserve assumptions.
- Confirm regulatory capital and liquidity capacity under stress, including the availability and terms of contingent funding.
- Verify the stated March 31, 2023 completion date for the captive-insurance dissolution and follow the Pioneer Bank litigation.