Chemung Financial Corporation
Annual Report 2014

Plain-text annual report

2014 Annual Report 2014AnnualReport-20150210.indd 1 3/10/2015 1:16:40 PM Financial Highlights (in thousands, except share, per share, and ratio data) Operating Results – Year Ended December 31 Net interest income Provision for loan losses Other operating income: Securities gains, net Wealth Management Group fee income Other income Other operating expenses: Merger and acquisition related expenses Legal settlements Other expenses Income tax expense Net income At Year End: Assets Loans, net Allowance for loan losses Deposits Shareholders’ equity Employees (full-time equivalent) Share and Per Share Data: Net income Book value, at year end Tangible book value, at year end Dividends declared Shares outstanding (average) Ratios: Allowance to total loans Return on average assets Return on average equity Return on average tangible equity 2014 $49,568 $3,981 $6,869 $7,747 $12,140 $115 $4,250 $56,112 $3,709 $8,157 $1,524,539 $1,121,574 $13,686 $1,280,014 $133,628 393 $1.74 $28.44 $22.71 $1.04 4,683,067 1.22% 0.54% 5.74% 7.12% 2013 $46,631 $2,755 $(13) $7,344 $10,746 % of Change 6.30% 44.50% 5.49% 12.97% $1,387 (91.71)% 16.87% (2.96)% (6.57)% 3.28% 12.62% 7.12% 1.09% (3.57)% 0.77% (6.95)% (4.15)% (3.89)% 0.50% $48,013 $3,822 $8,731 $1,476,143 $995,866 $12,776 $1,266,256 $138,578 390 $1.87 $29.67 $23.63 $1.04 4,659,685 1.28% 0.67% 6.50% 8.12% Trust Assets Under Administration (market value): as Fiduciary as Custodian $1,485,236 $470,570 $1,955,806 $1,424,491 $463,923 $1,888,414 4.26% 1.43% 3.57% Common Stock Market Prices & Dividends Paid During Past Two Years December 31, 2014 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter $30.70 $31.14 $31.20 $35.90 High Low $27.38 $27.00 $27.00 $26.81 Dividends $0.26 $0.26 $0.26 $0.26 December 31, 2013 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter High Low Dividends $36.00 $35.85 $34.53 $33.99 $30.23 $30.31 $30.18 $28.41 $0.26 $0.26 $0.26 As of February 28, 2015, there were 1,793 registered holders of record of the Corporation’s stock, which includes 1,196 Non-Objecting Beneficial Owners (“NOBO”) shares held in street name. 2014AnnualReport-20150210.indd 2 3/10/2015 1:16:40 PM April 2015 Dear Fellow Shareholders: The banking business is changing quickly and grow- ing more complex every day. Cyber threats, the revenue squeeze, regulatory pressures, mobile payments and baby boomer retirements dominate the banking news and are challenging most banking companies. We are pleased to report that your Board of Directors and man- agement team are not only keeping up but are preparing us for a bright future. Your Board embraces the regulatory demands to increase their knowledge and provide strong oversight. The management team is talented, energetic and committed to shareholder value. They continue to execute well against our long-term strategic plan. By all accounts, 2014 was an unusual and very challenging year for your company. While our financial results for the year were clouded by several significant non-recurring and extraordinary events, which I will explain below, our core earnings were basically on target. This letter will re- port on our financial results, describe some of our major accomplishments of the year and the progress we are making in meeting these new challenges. Financial Results As expected, the historically low interest rate environment continued to pressure earnings for Chemung Canal and most banking companies. It appears that much of the asset re- pricing is behind us and future balance sheet growth should translate into net interest income and earnings growth. Net income for the year was $8.2 million and earnings per share (EPS) were $1.74. Excluding one-time, non-recurring items, net income and EPS were in line with our expectations for the year which, coincidentally, were equal to the above. In 2014, $4.8 million in dividends were declared continuing our long history of uninterrupted dividend payments. Our return on average assets was 0.54% and our return on average eq- uity was 5.74%. Our earnings performance was powered by double-digit loan growth, stable core deposits, higher revenue in our Wealth Management Group, higher interchange (debit card) income and disciplined expense control. Commercial loans increased $100.5 million, or 19.4%, and consumer and mortgage loans increased $25.2 million or 5.3% from year earlier levels. In achieving this exceptional level of growth, we should emphasize that we did not relax or depart from our conservative underwriting principles. Evi- denced by the ratio of non-performing assets to total assets, 0.71% at year-end, credit quality remains strong. Demand de- posits grew $15.1 million or 4.3% while total core deposits (demand, NOW, savings and money market) grew $46.4 mil- lion or 4.5% from year earlier levels. At December 31, 2014, our balance sheet reflects total assets of $1.5 billion, total loans of $1.1 billion, total depos- its of $1.3 billion and total shareholders’ equity of $133.6 million. Tangible book value per common share at year- end was $22.71. In a move to optimize our balance sheet, lessen capital volatility and strengthen our regulatory capital ratios, we took ad- vantage of an all-time-high stock market and sold long- held equity securities gener- ating a pre-tax gain of $6.3 million. Our capital ratios exceed the higher minimum regulatory capital require- ments for banks under the new Basel III rules, which went into effect January 1st. The market value of total as- sets under management or administration in our Wealth Management Group was $2.0 billion at year-end. Ronald Bentley, President & CEO As previously mentioned, 2014 earnings were impacted by some extraordinary events. The Bank was a party in two legal proceedings involving our Wealth Management Group. In both proceedings, the Bank, as trustee pursuant to written trust instruments, had sought judicial settle- ment of trust accounts in New York’s Surrogate’s Court. For both proceedings, the Bank agreed to participate in non- binding mediation. The me- diation yielded a settlement with both parties, which re- sulted in a pre-tax loss of $4.3 million. Our insurance covered the remainder of the settlement. We continue to maintain that these claims were without merit, but believed it to be in our best interest to settle and put this behind us given the distrac- tion and excessive costs of litigating such a complex trust issue. David Dalrymple, Chairman of the Board A Comment about Our Stock Price We remain confident in the long-term value of our stock. We believe two factors contributed to the decline from recent highs. First, and as expected, our core earnings declined due primarily to margin compression. Second, our stock was deleted from the Russell 3000, an index comprised of the largest 3,000 U.S. companies based on market capitalization. With the strong equity market of 2013, many non-financial companies saw their market capitalization rise significantly. Consequently, the threshold to be included in the Russell 3000 rose significantly, and many financial institutions that did not see their market capitalization rise consistent with non-financial companies, were deleted from the index. The mutual funds that mirror the Russell 3000 no longer needed to own CFC stock. As our earn- ings improve and our market capitalization climbs, we expect to be added back into the Russell 3000 in the future. We strongly 1 2014AnnualReport-20150210.indd 3 3/10/2015 1:16:44 PM believe that CFC is undervalued and an attractive investment considering our 3.7% dividend (based on a $28 stock price), our strong balance sheet and commanding market share posi- tion in many markets. Growth and Acquisitions We are pleased to report that the Bank of America (“BoA”) branch purchase was accretive to earnings in the first year as we were successful in redeploying the acquired deposits out of lower-yielding securities and into higher-yielding loans at a fast- er pace than originally projected. The integration of the six offices into our operations went flawlessly and we have been well received in these markets. We have built a better engine to grow our company organically—we have the people and products to compete with anyone. We again delivered strong or- ganic growth in 2014. We have built a better engine to grow our company organically—we have the people and products to compete with anyone. Regulatory Environment The flood of new regulations continues. On the horizon are new accounting rules for the calculation of the allow- ance for loan and lease losses and new, higher capital standards. We are confident in our ability to comply with these new regulations. We understand the Superintendent of the New York Department of Financial Services will promulgate new cyber security regulations for banks. Touted as the stron- gest cyber security regulations in the nation, we will move quickly to adopt these practices and comply with the new In Memoriam : Jan P. Updegraff, 1943-2014 This past year, we lost longtime leader, colleague and friend, Jan P. Updegraff. Jan devoted almost his entire career to Chemung Canal Trust Company, serving as President and Chief Executive Officer from 1996 to 2006. The Bank grew and prospered under his leadership. Following his retirement in 2007, he continued to serve with distinction on our board of directors. Jan was a model community banker and played a leadership role in many community organizations. He made many important contributions to the quality of life we enjoy today. 2 rules because it protects the Bank and our clients. While burdensome and costly, it is the right thing to do. Risk Management Risk management has taken center stage in the banking industry, and we are pleased to report that we have built a comprehensive and robust enterprise-wide risk management program. In a business where trouble can come from so many different places, we are proactively managing both current and emerg- ing risks to the organization. Other Accomplishments This past January, we moved into our new Capital Region headquarters in downtown Alba- ny. Located at 132 State Street, our new regional headquarters is steps away from the Capitol Building. It is exciting to be a part of the revitalization of the former Wellington Row site, which includes a new 204-room Renaissance by Marriott and a new Convention Center. We are also in the process of relocating our Clifton Park, NY office to a more convenient, freestanding building with a two-bay drive-up and ATM a short distance away from our current storefront location. The mobile (Bank-in-Your-Hand) channel is transform- ing the banking industry and the payments system. Branch traffic continues to decline and we are rethinking our dis- tribution and delivery strategy. The fast adoption rate of mobile and new payments alternatives, such as Apple Pay and PayPal, has surprised many and has profound implica- tions for the future of banking. We began offering mobile check deposit in April. Take a picture of the check to be deposited and click “Submit.” It’s that easy. In December, we unveiled our new websites. The new sites offer many convenient features for our users, in- cluding Branch/ATM locators with Google Maps, simpler navigation, social media integration, account selectors and responsive designs. Responsive designs optimize the website experience based on how the user is visiting the page—computer, tablet or mobile. In most of our markets, we serve an older demograph- ic. To ensure that we are meeting their financial needs, we re-examined our product and services. In conducting this research, we learned that our “49 Forever” was the best-in-class checking product on the market. If you are a “mature” consumer, you should check it out. Later this year, we are planning to reissue all debit cards with an EMV chip. EMV technology is the global stan- dard today and provides greater protection for our clients against identity theft and fraud. In connection with this card reissue, we will also convert to MasterCard, a debit card brand with universal merchant acceptance. Our Big Flats office recognized its 50th anniversary, and our Montour Falls and Waverly branches celebrated 2014AnnualReport-20150210.indd 4 3/10/2015 1:16:45 PM Our new regional headquarters located at 132 State Street in Downtown Albany. their 40th anniversary. We celebrated by hosting week- long Customer Appreciation events. It was fun for all. Investing in Our Future Leaders We continue to invest in our future leaders. Career de- velopment plans are created and progress is monitored. We encourage staff to attend professional educational programs, conferences and seminars to increase their knowledge and keep them current in their field. This past year, we established “Leadership Chemung Canal”, a de- velopment program for high potential employees. We are getting them ready for when the call comes. Corporate Citizenship Hundreds of community, civic and philanthropic or- ganizations benefit from the support of Chemung Canal. This may take the form of direct financial support and/ or employees volunteering their personal time to these causes. Many play a leadership role in these organiza- tions. Chemung Canal employees give generously of their time and talents and we are proud of them. Retirements after a Quarter Century of Service The following have retired after serving Chemung Canal for more than 25 years: Audrey Manchester (38 years), Ce- leste Knickerbocker (35 years), Debbie Stanton (35 years) and Sandy Jensen (25 years). We thank them for their dedi- cation and contributions, and we extend our best wishes to them in retirement. Through a combination of internal profes- sional development, promotion, and external recruitment, we have provided for seamless management succession. Our Board of Directors At our annual meeting in May, Robert L. Storch will retire from our Board of Directors. Bob joined our Board in connection with the 2009 acquisition of the Bank of Canton and we wish to thank him for his many contribu- tions to our success over the past six years. Looking Forward You can expect us to continue to operate with a con- servative, community bank business model. Deposits gathered locally will be channeled back into our local communities in the form of loans to businesses, indi- viduals, organizations and other enterprises. We will continue to build long-term relationships with our cli- ents and play a vital role in the communities where we do business. We will be prudent and disciplined in our lending practices. Decisions will be made locally. We will deliver a superior client experience. We will control ex- penses and exploit technology. We have long held that our business is not about bril- liant strategy; it is about superior execution. With superior execution, we will grow earnings and continue to create value for our shareholders, clients, employees and the communities where we do business. A dedicated board of directors and a talented, profes- sional and motivated staff are required to successfully meet the challenges facing the financial services industry and Chemung Canal. We are grateful to have both. We wish to thank our board of directors for their tireless efforts and wisdom in guiding this institution. We wish to thank our employees for their hard work and loyalty. We wish to thank our clients for their business. And we wish to thank our shareholders for your continued support and investment in Chemung Financial Corporation. Ronald M. Bentley President & Chief Executive Officer David J. Dalrymple Chairman of the Board 3 2014AnnualReport-20150210.indd 5 3/10/2015 1:16:47 PM Sitting (left to right) R. Storch, R. Dalrymple, R. Bentley, D. Dalrymple, C. Drinkwater, and J. Potter Standing (left to right) L. Becker, S. Lounsberry III, R. Swan, B. Boyea, T. Tyrrell, G. T. Tranter Jr., W. Eggers, and E. Sneeringer Jr. Board of Directors Ronald M. Bentley President & Chief Executive Officer Chemung Financial Corporation, Chemung Canal Trust Company and CFS Group, Inc. Larry H. Becker Chief Operating Officer Windsor Development Group, Inc. Bruce W. Boyea Chairman, President & Chief Executive Officer Security Mutual Life Insurance Company of New York David J. Dalrymple Chairman of the Board Chemung Financial Corporation, Chemung Canal Trust Company and President, Dalrymple Gravel & Contracting Robert H. Dalrymple Vice President & Secretary Dalrymple Holding Corporation Clover M. Drinkwater Partner Sayles & Evans William D. Eggers Senior Counsel Nixon Peabody LLP Robert L. Storch Retired Owner Storchmont Dairy Farms Stephen M. Lounsberry III President Applied Technology Manufacturing Richard W. Swan Chairman of the Board Swan and Sons-Morss Co., Inc. John F. Potter President Seneca Beverage Corporation Eugene M. Sneeringer Jr. Principal Sneeringer Monahan Provost Redgrave Title Agency, Inc. Capital Bank Division Advisory Board Elizabeth T. Coco Entrepreneur in Residence University of Albany Paul Kasselman President Kasselman Electric Inc. Denise Gonick President & Chief Executive Officer MVP Healthcare Gerald D. Jennings Former Mayor City of Albany Raymond J. Kinley Jr. Retired President & Chief Executive Officer Clough Harbour & Associates Jim Menzies Founder, Leontine Consulting LLC Retired Chief Executive Officer KeyBank, New York Gregory Oberting President Interstate Commodities, Inc. Joseph A. Reilly President Empire Broadcasting Mark J. Rosen President Dawn Homes Management G. Thomas Tranter Jr. President Corning Enterprises Thomas R. Tyrrell Vice President Rose & Kiernan, Inc. Dean A. Rueckert President Rueckert Advertising and Public Relations Edward J. Trombly Partner Hiscock & Barclay Other Information Dividend Reinvestment and Stock Purchase Plan: Registered shareholders of Chemung Financial Corporation, through The Dividend Reinvestment and Stock Purchase Plan, may reinvest their dividends or make quarterly cash payments to purchase additional stock of the Corporation. Shareholders not enrolled in the plan may view and print a descriptive brochure and enrollment form at www.amstock.com or receive the plan documents upon written request to the Corporation’s secretary at the following address: Chemung Financial Corporation, Attn: Corporate Secretary, P.O Box 1522, Elmira, NY 14902-1522. Form 10-K Annual Report: A copy of the Corporation’s Form 10-K Annual Report is available without charge to shareholders after March 31, 2015, upon written request to the Corporation’s secretary. A copy is also available on our Transfer Agent, American Stock Transfer & Trust Company’s website at amstock.com/proxyservices/viewmaterials.asp. Annual Meeting: The Annual Meeting of Shareholders will be held on Thursday, May 7, 2015, at 2:00 p.m. at the downtown Holiday Inn, Elmira – Riverview. 4 2014AnnualReport-20150210.indd 6 3/10/2015 1:16:50 PM Executive Management Team Ronald M. Bentley President & Chief Executive Officer • Richard G. Carr Executive Vice President, Business Client Services • Louis C. DiFabio Executive Vice President, Retail Client Services • Karl F. Krebs Executive Vice President, Chief Financial Officer and Treasurer • Karen R. Makowski Executive Vice President, Chief Administrative & Risk Officer • Melinda A. Sartori Executive Vice President, Wealth Management Group • Anders M. Tomson Division President, Capital Bank • Pamela D. Burns Senior Vice President, Human Resources • Michael J. Crimmins Senior Vice President, Support Services • Michael J. Wayne Senior Vice President, Marketing • Brendan P. McCormick Vice President & Auditor • Kathleen S. McKillip Assistant Treasurer & Corporate Secretary Senior Vice Presidents Catherine B. Crandall WMG Estate Administration • Daniel D. Fariello Commercial Lending • Marianne T. Kalec Retail Lending • Robert M. Pichette Commercial Lending • Timothy P. Rubery Commercial Lending • Thomas J. Whitaker Finance • Thomas W. Wirth, CFA Investment Services Vice Presidents Yvonne L. Albee Regulatory Risk • Dawn L. Aubin Auburn Genesee Street Branch • Judy L. Barton Bank Operations • Michael J. Battersby Branch Administration • Michael D. Blatt, CFA Investment Services • Nikki M. Bower Project Management • Marci L. Cartwright Wealth Management Group • Andrew C. Day Commercial Lending• Lucimar Foo-Siam Escudero Commercial Credit • Yvette M. Francisco Loan Review • Thomas E. Funk Finance • Victoria A. Harkins Private Banking • Kevin Harrigan Commercial Lending • James S. Hartle Branch Administration • Craig B. Heffner Commercial Lending • William M. Hodel Commercial Lending • Mary Keefe Business Services • Christopher K. Kelly Retirement Services Group • Mark P. Kenjerska Ithaca Commons Branch • Christopher Kennedy Commercial Lending • John T. Kite Commercial Lending • Michael S. Lares WMG Estate Administration • Ronald W. Lesch Commercial Lending • Christopher B. Loughridge WMG Estate Administration • Eileen M. McCarthy WMG Support Services • D. Tavis McKeon Branch Administration • J. Edmond Morton IV WMG Regional Manager • Ronald W. Poole Commercial Lending • Chester L. Reed Commercial Lending • Robert A. Roemmelt Jr. Arnot Road Branch • Jennifer Sczepanski Branch Administration • John J. Sentigar Information Technology • John E. Shea Wealth Management Group • Michael R. Smith Cortland Branch • Susan L. Smith Auburn Grant Ave Branch • Theresa A. Wagner Deposit Operations • Sheila A. Washburn Bank Operations • Kenneth J. Wilson Business Development Assistant Vice Presidents Kimberly A. Bailey Canton Branch • Lindsay A. Barrile WMG Estate Administration • David E. Carlson Troy Branch • Richard W. Carroll Horseheads Branch • Alison Conklin-DeVita Southport Branch • Matthew R. Crabtree Finance • Joel A. Crimmins Commercial Lending • Gary Earley WMG Estate Administration • Constance L. English Corning Branch • Sandra L. Grooms Ithaca Station Branch • Michael L. Hart WMG Estate Administration • Scott T. Heffner Marketing • Matthew Keefe Regulatory Risk • Lorri A. Miller Tioga Branch • Jack D. Narosky Business Development • Mary Anne Narosky Business Client Services • Debra Newcomer Main Office Branch • Randi Richer Loan Operations • Sheryl J. Scott Big Flats Branch • Andrea L. Seymour Logistical Support • Zoran M. Smiljanic Ithaca South Branch • Meredith L. Tigue Regulatory Risk • David Wakeman Resource Recovery Assistant Treasurers Sherry L. Armstrong Community Corners Branch • Larisa A. Benderskaya Latham Branch • Laura L. Bennett Real Estate Lending • Marcia L. Boor Business Services • Gregory J. Bruno Clifton Park Branch • Elizabeth M. Courtright Regulatory Risk • Sarah A. Darling Owego Branch • Cheryl A. DeBlock Binghamton Branch • Karen A. Dimmick Westside Branch • Stephanie L. Gibbons Real Estate Lending • Tara J. Humphrey Branch Administration • Barbara L. Keller Indirect Lending • Lashonda R. Love State Street Branch • Sharon M. Martin Elmira Heights Branch • Patrick J. McFarland Regulatory Risk • Julianne E. Meeker Computer Operations • Christine Perlee Wolf Road Branch • Veronica S. Porter Seneca Falls Branch • Brenda S. Praschunus Montour Falls Branch • Jessica L. Ryan Watkins Glen Branch • Allison A. Strife Human Resources • Todd N. Trencansky Vestal Branch • Charolette R. Truxal Oakdale Mall Branch • Devin E. Wandell WMG Estate Administration • Jennifer L. White Bath Branch • Sue A. Williams Waverly Branch • Jean A. Wise-Wicks Painted Post Branch CFS Group, Inc. Sean F. Beliles Vice President • Joseph M. Cascio Vice President Effective as of March 15, 2015. 2014AnnualReport-20150210.indd 7 3/10/2015 1:16:51 PM Bradford County CANTON 5 West Main Street • Canton, PA • (570) 673-5127 TOWANDA 304 Main Street • Towanda, PA • (570) 265-7169 TROY 159 Canton Street • Troy, PA • (570) 297-0657 Broome County BINGHAMTON 127 Court Street • Binghamton, NY • (607) 771-6874 OAKDALE MALL 601-635 Harry L. Drive • Johnson City, NY • (607) 729-6347 VESTAL 100 Rano Boulevard • Vestal, NY • (607) 797-1721 Cayuga County AUBURN 120 Genesee Street • Auburn, NY • (315) 255-7810 AUBURN 185 Grant Avenue • Auburn, NY • (315) 253-7155 Chemung County BIG FLATS 437 Maple Street • Big Flats, NY • (607) 562-8474 ELMIRA HEIGHTS 100 West McCann’s Boulevard • Elmira Heights, NY • (607) 734-1323 MAIN OFFICE One Chemung Canal Plaza • Elmira, NY • (607) 737-3711 HORSEHEADS 29 Arnot Road • Horseheads, NY • (607) 739-0373 HORSEHEADS 602 South Main Street • Horseh- eads, NY • (607) 739-8735 SOUTHPORT 951 Pennsylvania Avenue • Elmira, NY • (607) 734-2111 WESTSIDE 628 West Church Street • Elmira, NY • (607) 734-7204 Cortland County CORTLAND 1094 State Route 222 • Cortland, NY • (607) 753-1707 Schuyler County MONTOUR FALLS 303 West Main Street • Montour Falls, NY • (607) 535-7103 WATKINS GLEN 318 North Franklin Street • Watkins Glen, NY • (607) 535-7186 Seneca County SENECA FALLS 54 Fall Street • Seneca Falls, NY • (315) 568-5820 Steuben County BATH 410 West Morris Street • Bath, NY • (607) 776-3361 CORNING 149 West Market Street • Corning, NY • (607) 962-4668 PAINTED POST 243 North Hamilton Street • Painted Post, NY • (607) 962-6811 Tioga County OWEGO 203 Main Street • Owego, NY • (607) 687-0670 OWEGO 1054 State Route 17C • Owego, NY • (607) 387-5757 WAVERLY 405 Chemung Street • Waverly, NY • (607) 565-8168 Tompkins County COMMUNITY CORNERS 909 Hanshaw Road • Ithaca, NY • (607) 257-2194 ITHACA SOUTH 304 Elmira Road • Ithaca, NY • (607) 272-2407 THE STATION 806 West Buffalo Street • Ithaca, NY • (607) 277-2609 THE COMMONS 202 The Commons • Ithaca, NY • (607) 274-4860 Capital Region ALBANY 132 State Street • Albany, NY • (518) 434-1212 ALBANY 65 Wolf Road • Albany, NY • (518) 438-0046 CLIFTON PARK 7 Southside Drive • Clifton Park, NY • (518) 579-2080 LATHAM 581 Loudon Road • Latham, NY • (518) 694-3670 SLINGERLANDS 1365 New Scotland Road • Slingerlands, NY • (518) 694-5620 All locations offer 24-hour ATM services. For office hours and directions, visit chemungcanal.com or capitalbank.com. General Information: (800) 836-3711 | Member FDIC 2014AnnualReport-20150210.indd 8 3/10/2015 1:16:52 PM 

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