Chemung Financial Corporation — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024. Chemung Financial is a New York-based financial holding company whose subsidiaries provide banking, lending, wealth management and related financial services. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q1 2024 | Comparable period / prior date |
|---|---|---|
| Net interest income | $18.1 million | $19.9 million; down 9.3% year over year |
| Net interest margin, fully taxable equivalent | 2.73% | 3.14%; down 41 basis points |
| Non-interest income | $5.7 million | $5.4 million; up 4.3% |
| Non-interest expense | $16.7 million | $15.8 million; up 5.4% |
| Net income / diluted EPS | $7.1 million / $1.48 | $7.3 million / $1.54; down 3.0% / 3.9% |
| Return on average assets / equity | 1.04% / 14.48% | 1.12% / 16.97% |
| Total assets | $2,784.9 million | $2,710.5 million at Dec. 31, 2023 |
| Loans, net of allowance | $1,983.1 million | $1,950.1 million at Dec. 31, 2023 |
| Total deposits | $2,480.8 million | $2,429.4 million at Dec. 31, 2023 |
| Shareholders’ equity | $197.1 million; 7.08% of assets | $195.2 million; 7.20% at Dec. 31, 2023 |
Interest and dividend income rose 19.0% year over year, but interest expense more than doubled, mainly as deposit costs increased. The average cost of interest-bearing deposits rose to 2.75% from 1.34%; the average yield on interest-earning assets increased to 4.70% from 4.12%. The adjusted efficiency ratio was 70.07%, compared with 62.18% a year earlier.
Operating cash flow was $7.9 million, investing cash outflow was $17.9 million, and financing cash inflow was $67.9 million. Cash and cash equivalents increased $58.0 million to $94.9 million. The financing inflow included deposit growth and a $50 million Federal Reserve advance, offset in part by repayment of FHLBNY overnight borrowings.
Material changes and asset quality
- Loans grew $30.9 million, or 1.6%, from year-end, led by commercial mortgages and commercial and industrial lending. Commercial real estate loans totaled $1.146 billion, about 57% of total loans; real estate and real estate rental/leasing borrowers represented 50.4% of total loans.
- The allowance for credit losses declined to $20.5 million from $22.5 million. The quarter included a $2.04 million provision credit, versus a $277,000 provision expense in Q1 2023. Management attributed the decline to updated loss drivers, improved economic forecasts and paydowns on individually analyzed loans.
- Non-performing loans fell to $7.8 million, or 0.39% of loans, from $10.4 million, or 0.53%, at year-end. The allowance equaled 1.02% of loans and 261% of non-performing loans. Net charge-offs were $182,000.
- Available-for-sale securities were $566.0 million at fair value, down $18.0 million from year-end. Gross unrealized losses were $90.7 million; accumulated other comprehensive loss was $70.1 million. Management said the losses primarily reflect interest rates and illiquidity, and stated it does not intend, nor expects to be required, to sell the securities before recovery.
- Deposits increased $51.3 million. Brokered deposits declined $16.8 million to $126.0 million, while uninsured deposits increased to $689.4 million, or 27.8% of deposits; some municipal deposits are collateralized.
Liquidity, debt, outlook and risks
At quarter-end, cash and cash equivalents were $94.9 million, and $240.3 million of available-for-sale securities were unpledged. The Bank reported $231.0 million of unused FHLBNY borrowing capacity and $60.0 million of available unsecured credit lines. A $50.0 million Federal Reserve BTFP advance, bearing 4.91% and maturing January 2025, was outstanding; the program stopped accepting new advances after March 11, 2024. Management stated that available funding sources meet anticipated needs.
The Bank was categorized as well capitalized. Its regulatory ratios included total capital of 12.76%, Tier 1 capital of 11.71%, common equity Tier 1 of 11.71%, and Tier 1 leverage of 8.49%. The filing gives no specific earnings, margin, loan-growth or deposit-growth guidance. Interest-rate sensitivity modeling estimated positive next-12-month net interest income effects under both rate decreases and increases; these are scenario estimates, not forecasts.
Key risks include deposit pricing and retention, interest-rate changes, credit deterioration and commercial real estate concentration, economic conditions, competition, cybersecurity, regulation and FDIC assessments. A 100-basis-point increase in forecast unemployment combined with a 50-basis-point reduction in forecast GDP growth would increase the modeled allowance by $1.3 million, assuming qualitative adjustments remained unchanged. The company also continues litigation related to a defaulted syndicated commercial credit; it is pursuing recovery of $3.7 million plus expenses. Management reported no other pending proceedings expected to materially harm results or liquidity, and no material change to the risk factors in its 2023 Form 10-K.
Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit costs continue to rise and pressure net interest income and margin.
- Commercial real estate portfolio performance, including office, multifamily and regional exposures, and any changes in criticized or non-performing loans.
- Whether the reduced allowance remains adequate if economic forecasts or credit conditions worsen.
- Liquidity and funding after the BTFP’s closure to new advances, including uninsured-deposit levels and available borrowing capacity.
- The sensitivity of equity and reported comprehensive income to available-for-sale securities valuation changes, and the status and potential recovery of the $3.7 million litigation claim.