Chemung Financial Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance-sheet comparisons are to December 31, 2022. Chemung Financial is a financial holding company whose subsidiaries provide banking, lending, wealth management and related services, primarily in local markets. Financial amounts below are in millions unless otherwise stated.
Financial performance
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Net interest income | $19.9 | $16.7; up 19.6% |
| Provision for credit losses | $0.3 expense | $1.1 credit |
| Non-interest income | $5.4 | $5.7; down 4.2% |
| Non-interest expense | $15.8 | $14.7; up 8.0% |
| Net income / diluted EPS | $7.3 / $1.54 | $6.9 / $1.46 |
| Fully taxable-equivalent net interest margin | 3.14% | 2.87% |
| Return on average assets / equity | 1.12% / 16.97% | 1.14% / 13.68% |
Higher loan and securities yields and loan growth drove interest income higher, while deposit and borrowing costs rose sharply. Net interest margin improved year over year, though the interest-rate spread narrowed. Management attributed the increase in earnings primarily to net interest income; higher expenses and credit-loss provision, and lower non-interest income, partly offset it. WMG fees declined 6.4%, primarily reflecting lower market values of assets under management or administration; other non-interest income also fell.
Financial position, liquidity and credit
- Total assets were $2.654 billion, up 0.3% from year-end; loans, net of deferred fees and before allowance, were $1.874 billion, up 2.4%. Commercial real estate and real estate-related lending represented 49.4% of total loans.
- Deposits were $2.332 billion, nearly unchanged overall. Non-interest-bearing deposits declined $42.7 million, while brokered deposits increased $53.3 million to $126.8 million. Uninsured deposits, net of municipal pledges, were 21.2% of deposits, down from 23.5%.
- Cash and cash equivalents were $34.6 million, down $21.2 million from year-end. Q1 operating cash flow was $10.7 million; investing activities used $29.9 million and financing activities used $2.0 million. FHLBNY overnight advances were $90.1 million; total advances and other debt were $93.3 million.
- Management reported $184.4 million of additional funding capacity after deducting uninsured deposits, including $111.0 million of unused FHLBNY capacity, $60.0 million of correspondent-bank lines and $368.4 million of unpledged available-for-sale securities, offset by the uninsured-deposit balance. The bank was eligible for the Bank Term Funding Program but had not used it by March 31, 2023.
- Allowance for credit losses on loans was $20.1 million, or 1.07% of loans; non-performing loans were $7.7 million, or 0.41% of loans. Net charge-offs were $0.3 million. The allowance covered 259.7% of non-performing loans.
- Available-for-sale securities had $88.9 million of gross unrealized losses at quarter-end, largely attributed by management to interest rates and illiquidity rather than credit deterioration. The portfolio’s fair value was $626.1 million; management stated it did not intend, and was not likely to be required, to sell the securities before recovery.
- Shareholders’ equity was $177.3 million; total equity to assets was 6.68% and tangible equity to tangible assets was 5.91%. The Bank was categorized as well capitalized; its total risk-based capital ratio was 12.34% and Tier 1 leverage ratio was 7.98%.
Changes, outlook and risks
- Effective January 1, 2023, the company adopted CECL. The transition reduced retained earnings by $1.1 million net of tax and established a $1.1 million reserve for unfunded commitments; the loan allowance increased by approximately $0.4 million. The Q1 provision comparisons are therefore under different credit-loss methodologies.
- Management said loan growth was concentrated in commercial mortgages and consumer lending and anticipated future growth to remain focused on commercial mortgages and commercial and industrial loans, particularly in Western New York. No quantified earnings or full-year guidance is provided in the supplied filing text.
- Management described banking-sector deposit competition and liquidity pressures amid rising rates and recent bank failures. It warned that deposit outflows could require greater use of secondary funding, increasing funding costs and reducing earnings; severe liquidity pressure could also constrain lending, investment or other activity.
- Interest-rate risk remains a key market risk. The company estimated that an immediate 100-basis-point rate decrease would increase next-12-month net interest income by 3.27%, while a 200-basis-point increase would increase it by 2.32%, within policy limits. These are model estimates, not guidance.
- The filing identifies potential risks from economic conditions, interest rates, credit losses, deposit competition, cyber risks, regulation and increased FDIC assessments. A lawsuit against Pioneer Bank remains pending over a defaulted commercial credit participation: Chemung reported a $4.2 million interest, a $0.5 million recovery, and continues to pursue the remaining $3.7 million and expenses.
- The company declared a $0.31-per-share dividend. It repurchased no shares during the quarter; 200,816 shares remained authorized for repurchase at March 31.
Important facts for investors to verify
- Subsequent deposit trends, uninsured-deposit concentration, brokered funding use and available liquidity, particularly given sector-wide deposit pressures.
- How deposit and borrowing costs evolve relative to loan yields and whether net interest margin can be sustained.
- Commercial real estate concentration, credit quality, charge-offs and the assumptions underlying the newly adopted CECL allowance.
- The sensitivity and potential realizability of the securities portfolio’s unrealized losses, including any need to sell or pledge securities.
- Developments in the Pioneer Bank litigation, the potential recovery amount and any material change in contingency disclosures.