Chemung Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Chemung is a New York-based financial holding company providing banking, lending, wealth management and related services, primarily through Chemung Canal Trust Company.
Financial performance and position
Amounts below are in millions of dollars unless otherwise noted.
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $18.6 | $17.6 | $38.5 | $34.3 |
| Non-interest income | $5.4 | $5.3 | $10.9 | $11.0 |
| Net income | $6.3 | $8.0 | $13.6 | $14.9 |
| Diluted EPS | $1.33 | $1.72 | $2.87 | $3.18 |
| FTE net interest margin | 2.87% | 2.97% | 3.00% | 2.92% |
- Q2 pre-provision income was $8.1 million, down 5.7% year over year; non-interest expense rose 11.0% to $15.9 million. The Q2 provision for credit losses was $0.2 million, versus a $1.7 million credit in Q2 2022.
- Six-month operating cash flow was $17.9 million; investing cash use was $34.7 million and financing cash provided was $15.2 million. Cash and cash equivalents ended at $54.2 million, down $1.6 million from year-end 2022.
- At June 30, total assets were $2.675 billion, loans net of allowance were $1.874 billion and deposits were $2.390 billion. Total loans grew 3.5% from year-end; total deposits grew 2.7%.
- Shareholders’ equity was $177.4 million, or 6.63% of assets; tangible equity to tangible assets was 5.87%. The Bank was categorized as well capitalized; its total risk-based capital ratio was 12.45% and Tier 1 leverage ratio was 8.13%.
- Allowance for credit losses was $20.2 million, 1.07% of loans. Nonperforming loans were $7.3 million, or 0.39% of loans; six-month net charge-offs were $0.4 million.
- FHLBNY overnight advances were $50.8 million, down from $95.8 million at year-end. The company reported $634.1 million in additional funding resources, including $193.9 million of available FHLBNY capacity, $60.0 million of correspondent lines and $298.2 million of unpledged securities.
Changes and material items
- Q2 net income fell 21.7% year over year; six-month net income declined 9.0%. Higher loan yields lifted interest income, but materially higher deposit and borrowing costs absorbed much of that benefit. Q2 interest expense increased to $9.2 million from $0.9 million.
- Deposits included $185.5 million of brokered deposits, up from $73.5 million at year-end. Uninsured deposits were $613.7 million, or 25.7% of deposits, versus $700.9 million, or 30.1%, at year-end. Non-interest-bearing deposits decreased $61.7 million.
- Available-for-sale securities had $96.1 million of gross unrealized losses at quarter-end, largely attributed by management to interest rates and illiquidity rather than credit deterioration. Accumulated other comprehensive loss was $74.7 million.
- CECL was adopted January 1, 2023, with a $1.5 million after-tax cumulative reduction to retained earnings. Adoption established an allowance for unfunded commitments; the ending balance was $1.0 million. Comparisons with 2022 credit-loss provisions are affected by the change from the incurred-loss method.
Outlook, risks and contingencies
- The filing provides no specific earnings or financial guidance. Management said current liquidity resources were sufficient for needs at the reporting date, while cautioning that deposit outflows could increase reliance on more costly secondary funding, constrain growth or require asset sales. The Bank had not used the Bank Term Funding Program as of the filing.
- Management identifies deposit competition, rising funding costs, interest-rate risk, credit losses, inflation, cybersecurity, regulatory changes and banking-sector confidence as risks. Interest-rate modeling estimated that an immediate 100-basis-point rate increase would raise next-12-month net interest income 0.80%, while a 100-basis-point decrease would raise it 3.85%; these are modeled estimates, not forecasts.
- A lawsuit against Pioneer Bank remains outstanding concerning a participation in a defaulted commercial credit facility. Chemung reported a $4.2 million participation, a $0.5 million recovery, and continues to pursue the remaining $3.7 million plus expenses. Management said it knew of no other pending proceedings expected to materially affect results or liquidity.
- A shelf registration statement for up to $75 million of securities became effective July 13, 2023. The filing does not state that an offering had occurred.
Important facts for investors to verify
- Whether deposit pricing, brokered-funding reliance and deposit mix continue to pressure net interest margin.
- Credit quality and allowance adequacy, especially in commercial real estate and commercial and industrial lending; real estate-related commercial loans represented 50.5% of total loans.
- Potential liquidity and capital effects of unrealized securities losses, uninsured deposits and any subsequent securities sales or borrowings.
- How the CECL methodology, economic forecasts and qualitative reserve assumptions affect future provisions.
- Developments in the Pioneer Bank litigation and any use of the newly effective shelf registration.