KBRA Assigns Ratings to Chemung Financial Corporation

KBRA assigns a senior unsecured debt rating of BBB, a subordinated debt rating of BBB-, and a short-term debt rating of K3 to Elmira, NY-based Chemung Financial Corporation (NASDAQ: CHMG) ("the company"). In addition, KBRA assigns deposit and senior unsecured debt ratings of BBB+, a subordinated debt rating of BBB, and short-term deposit and debt ratings of K2 to its main subsidiary, Chemung Canal Trust Company. The Outlook for all long-term ratings is Stable.

CHMG’s ratings are anchored by its stable, low-cost, and granular funding base, which is supported by an extensive operating history and naturally robust market share in its Southern Tier legacy footprint. Moreover, the conservative approach to liquidity management, including a loan-to-deposit ratio that has historically remained in the low- to mid-80% range, helps reinforce this durable core deposit funding mix that funds most balance sheet growth. The deposit composition is favorable, including a high-level of NIB accounts (26% of total), which supports deposit costs (1.83% in 1Q25) well below the rated peer group. Moving forward, despite the ample growth opportunities in the Albany and Buffalo markets, KBRA expects the company to maintain its favorable liquidity and funding profile as loan growth opportunities are expected to be funded with core deposit gathering and natural runoff in the securities portfolio.

Core earnings are supported by a predictable stream of non-spread revenue, led by a wealth management arm ($2.2 billion of AUM/AUA) that offers ample cross-selling opportunities and sticky depositor relationships. Notwithstanding relatively strong fee income (23% of total revenues), NIM has typically trailed similarly rated peers, though partly attributable to a tilt toward lower-yielding and longer-duration CRE and residential mortgage loans. Moving forward, management plans to pursue commercial lending in its expansion markets, but overall earnings capacity is not expected materially change until those efforts scale. Moreover, CHMG is contemplating a potential securities portfolio positioning, which could help accelerate stronger returns.

Core capital, as measured by the CET1 ratio, has typically been managed in excess of 11.5%, naturally benefiting from the company’s lower RWA density (averaging 69% over past five years) and solid internal capital generation ability. However, CHMG’s large, underwater AFS securities portfolio ($60 million AOCL) weighs on TCE, with the related ratio at 7.4% as of 1Q25. When excluding the impact of AOCL, the TCE ratio is lifted by >200 bps, well above the rated peer group average. Moreover, we will continue to be mindful around capital levels as management executes its growth initiatives and potential balance sheet strategies.

While CHMG has previously experienced pockets of uptick in problem asset levels, we believe these to be idiosyncratic, largely driven by fraud-related incidents, and the contemporary loan portfolio appears to be conservatively underwritten. As such, NPAs have trended around 50 bps in recent years with negligible related loss content, while criticized and classified loan trends have been largely benign. That said, the company maintains a somewhat elevated investor CRE concentration, totaling nearly 400% of total risk-based capital as of 1Q25. However, management’s strategic focus on C&I lending in new markets is expected to result in a stable to gradually declining investor CRE concentration over time. Despite the current level, the CRE portfolio is highly granular, supported by disciplined underwriting standards, and is concentrated in stable markets where management has deep experience and long-standing customer relationships. Additionally, office exposure is relatively well-contained at 6% of total loans and is primarily composed of properties with service-oriented tenants located in suburban markets, which have demonstrated greater resilience than central business districts.

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