$60.88
$124.33
bear $60.88
base $106.67
bull $124.33
margin of safety $38.00
market price* $80.51
BUSINESS. Chemung Financial is the holding company for Chemung Canal Trust Company, a New York bank founded in 1833 and based in Elmira. It runs 30 branches across 13 New York counties and Bradford County, Pennsylvania, plus a Capital Bank division (Albany, Saratoga and Schenectady counties) and a Canal Bank division (Erie County, where it opened a branch in 2021 and a regional banking center in 2024). At June 30, 2026 it had $2.82 billion of assets, $2.36 billion of deposits and $270 million of shareholders' equity. It holds 64.56% of all deposits in its home county, Chemung, but only 1.81% in the Capital region and 0.06% in the Erie County market, so the expansion markets are still small. A wealth management arm with $2.338 billion under management or administration at the end of 2025 produces the largest share of fee income. Growth has historically come from buying banks and branches (Canton Bancorp in 2009, Fort Orange Financial in 2011) and opening new offices. WHAT MOVED EARNINGS. Reported earnings were $3.14 a share in 2025 against $4.96 in 2024, but the drop was a decision, not a decline. After issuing $45.0 million of 7.75% ten-year subordinated notes in June 2025, management sold $244.8 million of lower-yielding bonds (about 40% of the portfolio) at a $17.5 million pre-tax loss and used the proceeds to pay off $155.0 million of wholesale funding, including $100.0 million of brokered deposits. Removing that loss and a $0.6 million branch-sale gain, both taxed at the 24.2% rate the company paid in 2025, 2025 earnings were about $5.81 a share. The benefit is visible: net interest income was $87.2 million in 2025 against $74.1 million in 2024 (net interest margin 3.26% against 2.76%), and $48.3 million in the first half of 2026 against $40.6 million a year earlier. Earnings were $1.91 and $1.82 a share in the first and second quarters of 2026 ($3.73 for the half, against a loss of $0.09 in the first half of 2025). Net income for the four quarters since the repositioning (second half of 2025 plus first half of 2026) was $33.5 million, about $6.94 a share. Costs are rising too: non-interest expense grew 6.0% in the first half of 2026. Earnings per share over the last ten years: $2.11 (2016), $1.55 (2017, depressed by an unusually high tax charge), $4.06, $3.21, $4.01, $5.64 (2021), $6.13, $5.28, $4.96 and $3.14 (2025 reported; $5.81 as adjusted above). LOANS AND CREDIT. Loans were $2.27 billion at the end of 2025: commercial mortgages $1.41 billion (62%), of which non-owner-occupied commercial property was $1.11 billion (49%) and construction $120 million; business loans $324 million (14%); residential mortgages $287 million (13%); consumer loans $249 million (11%), including $133 million of indirect auto loans that are shrinking. Credit is currently clean: non-performing loans were about $7.9 million (0.35% of loans), net charge-offs were $1.9 million (0.09% of loans) in 2025 and 0.06% in 2024, and the loan-loss reserve was $24.2 million (1.07% of loans, 306% of non-performing loans). The consolidated common equity Tier 1 capital ratio was 12.30% at the end of 2025. The concentration in commercial real estate is the main risk in this company. HOW WE VALUE IT. Because this is a lender, deposits and the subordinated notes are the raw material of the business and their interest is already deducted in earnings, so we value the earnings available to shareholders each year and subtract no debt. Each case below is therefore worth the same before and after debt: nothing is deducted. Starting level. The five-year earnings history (2021 to 2025, with 2025 adjusted) has a median of $5.64 a share, but the business was restructured in mid-2025 and the four quarters since describe it as it now is: $6.94 a share. We start from that and deduct a normal allowance for future credit losses: provisions over those four quarters were about $3.4 million (roughly 0.15% of loans a year); a credit cycle half as severe as the national 2009-2011 experience arriving once in a decade would average about a third of a percent a year, so we use 0.30%. That takes about $0.56 a share off, giving about $6.40. Growth check: 2025 earnings fell 36.7% as reported ($3.14 against $4.96) but rose 17.1% as adjusted ($5.81 against $4.96); the base case assumes $6.40 next year, 10.2% above the adjusted 2025 figure. That is a return to a level the bank has already earned in the four quarters since the repositioning, not new growth. No further growth is credited: earnings per share have not grown over five years (adjusted $5.81 in 2025 against $5.64 in 2021), and the Capital region and Erie County expansions are small and recent. Retained profits are not credited as growth either. BASE CASE: $106.67 a share. Earnings stay at $6.40 a share indefinitely, with no growth. The evidence for that persistence is a 193-year-old deposit franchise with a 64.56% share of its home county, positive full-year earnings in every year reviewed (2014 through 2025), and net income that rose in 2020 ($19.3 million against $15.6 million in 2019). The business is worth $106.67 a share, nothing is deducted for debt, and the difference is $106.67. BULL CASE: $124.33 a share. The first half of 2026 annualized ($18.0 million doubled, or $36.0 million, which is $7.46 a share) holds flat with credit costs staying near today's low level (provisions were $1.2 million in the first half). The margin improvement is already in the reported numbers, so nothing beyond what has been earned is assumed. Worth $124.33, nothing deducted, difference $124.33. BEAR CASE: $60.88 a share. Two named risks. First, the margin gain reverses within a year and earnings return to the 2024 level of $4.96 a share (pre-provision pre-tax profit of $30.0 million; the 2.76% margin year). We cannot point to a filing item that forces this; it is included because the 2024 margin is the most recent evidence of the business before the repositioning. Second, a full credit cycle of the 2009-2011 kind begins in year two. Using Federal Reserve charge-off rates for all US commercial banks, cumulative three-year losses were 6.1% on commercial real estate, 4.9% on business loans, 6.0% on residential mortgages and 15.0% on consumer loans (the consumer figure includes credit cards and is harsher than this bank's indirect-auto and home-equity book). Applied to Chemung's year-end 2025 balances that is $86.1 million + $15.9 million + $17.2 million + $37.3 million = $156.6 million, or 6.9% of loans, falling $60.8 million, $59.5 million and $36.3 million over three years. Against $30.0 million of pre-provision profit that gives pre-tax losses of $30.8 million, $29.4 million and $6.3 million, or after-tax losses of $24.2 million, $23.2 million and $5.0 million at the 21.3% tax rate (about $5.00, $4.79 and $1.03 a share), a total of $52.3 million or $10.81 a share. Earnings then return to $4.96. The bank survives: consolidated common equity Tier 1 capital would fall from 12.30% to about 9.8% (before counting any earnings retained in the meantime), against 6.5% needed to count as well capitalized, so no dilution is assumed. Worth $60.88, nothing deducted, difference $60.88. This is above tangible book value (about $51 a share at June 30, 2026) because after the cycle the bank would still earn $4.96 a share on roughly $196 million of remaining tangible equity, about a 12% return. TRYING TO BREAK THE CASE. The most important assumption is that the margin gain is durable. Two facts support it: part of the gain came from retiring $155.0 million of wholesale funding (brokered deposits were $92.2 million, 3.8% of deposits, at the end of 2024 and none at the end of 2025), which has been repaid; and net interest income kept rising after the repositioning ($24.7 million in the second quarter of 2026 against $20.8 million a year earlier, up 18.6%). The second test was credit: if commercial real estate losses ran at double the national 2009-2011 record (12.2% of those loans, an extra $86.1 million before tax or $67.8 million after tax, $14.01 a share), capital would fall to about 6.6% before retained earnings, barely above the 6.5% well-capitalized line, and dilution or regulatory restrictions would become likely. No case models that outcome. The subordinated notes mature in June 2035 and become floating-rate (3-month SOFR plus 4.15 points) in June 2030; neither date threatens the bank. The figures for 2026 come from the structured data in the second-quarter filing; its narrative text was not available to review. Chemung's own loan losses in 2009-2011 are not in the filings reviewed, so the downturn uses national figures. Our earlier estimates for this company were built on a different basis and are not comparable. MARGIN-OF-SAFETY PRICE: $38. We are fairly sure of the earnings level, because four quarters of results since the repositioning are in the reports, but not certain it holds through a falling-rate or deposit-competition cycle, and the credit record is clean only because credit has been benign. The worst plausible outcome is a commercial real estate downturn: in the cycle case above the bank stays well capitalized, but in the doubled-loss case capital would sit right at the well-capitalized minimum. If we are wrong about the margin, earnings of $4.96 a share would be worth $82.67 on our basis; if wrong about credit, tangible book value after the cycle would be about $41 to $44 a share, depending on whether a year of retained earnings comes before the downturn. At $38 the price is below that figure even in the cycle case. The price assumes a three-to-five-year holding period. Over that period the bank pays $1.36 a share a year in dividends (3.6% of $38; $0.34 a quarter in 2026, $1.32 in 2025) and, if earnings stay near $6.40, adds about $5.04 a share a year to tangible book value, which is about $66.50 in three years and $76.60 in five (assuming no change in unrealized bond losses). For a 20% annual return including dividends from $38, the shares would have to reach about $61 after three years or $84 after five, roughly 0.9 times and 1.1 times that projected tangible book value, with the business still earning 16.8% of the $38 price each year ($6.40). That is why the margin-of-safety price is $38 and not higher.