Chemung Financial Corporation
Annual Report 2017

Plain-text annual report

2017 A N N U A L R E P O R T FINANCIAL HIGHLIGHTS (in thousands, except per share data & employee count) 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: Legal accruals and 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 for loan losses to total loans Return on average assets Return on average equity Return on average tangible equity % of Change 8.9% 270.2% (89.0)% 5.9% (2.3)% (29.2)% (4.5)% 64.9% (25.9)% 3.0% 9.3% 48.5% 0.8% 4.2% 0.8% (26.5)% 3.4% 5.0% 0.8% 2017 $56,987 9,022 109 8,804 11,578 850 52,914 7,262 7,430 2016 $52,329 2,437 987 8,316 11,846 1,200 55,410 4,404 10,027 $1,707,620 1,311,824 21,161 1,467,446 149,813 371 $1,657,179 1,200,290 14,253 1,456,343 143,748 368 1.55 31.10 26.14 1.04 4,800 1.61% 0.43% 4.91% 5.85% 2.11 30.07 24.89 1.04 4,762 1.19% 0.60% 7.02% 8.52% Trust Assets Under Administration (market value): as Fiduciary as Custodian $1,531,433 420,119 $1,951,552 $1,340,362 380,787 $1,721,149 14.3% 10.3% 13.4% Common Stock Market Prices & Dividends Paid During Past Two Years: December 31, 2017 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter High Low Dividends $54.30 47.10 41.43 39.50 $44.06 39.00 37.05 32.72 $0.26 0.26 0.26 0.26 December 31, 2016 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter High Low Dividends $36.74 32.19 32.95 28.03 $28.29 27.47 26.20 26.25 $0.26 0.26 0.26 0.26 As of February 28, 2018, there were 512 registered holders of record of the Corporation’s stock. LETTER TO SHAREHOLDERS April 2018 Fellow Shareholders: We are pleased to report to you that 2017 was an im- portant year for Chemung Financial Corporation (the “Corporation”). Our balance sheet exhibited strong and consistent growth, which had a direct and material impact on net income. We invested significantly in our banking platforms, with an increasing focus on technology and digital banking. We welcomed new members to our Executive Management Team and our Board of Di- rectors, who will add meaningful perspective and expertise. And through it all, we continued our long tradition of investing in our communities and validating our strong community bank tradition of service and execution. D. Dalrymple A. Tomson We are encouraged that the strategies we’ve implemented are yielding positive results. We continue to grow our balance sheet result- ing in a substantial increase in revenue, while maintaining our focus on operational efficiencies. These improved results underscore our com- mitment to deliver shareholder value. Net income for 2017 was negatively influenced by two significant events. First, our 2017 earnings were impacted by the re-measurement of our net deferred tax asset (“DTA”), as a result of the enactment of the Tax Cuts and Jobs Act (“Tax Act”). Additionally, net income was nega- tively affected by a material increase in our provision for loan loss in the fourth quarter. Both of these items are addressed within this letter. Financial Results Balance sheet growth was ex- tremely important as we converted excess liquidity to loans. Loans, net of deferred fees, increased $111.5 million or 9.3%. Commercial loans increased $98.1, million or 13.2%. This loan growth prompted net inter- est income to increase $4.7 million, or 8.9% year over year. The Corporation remained disciplined in its cost containment as non-interest expense decreased $2.8 million or 5.0%. The Corporation’s fully taxable net interest margin was 3.6%, compared to 3.4% for the preceding year. The increase in net interest margin was the result of repricing on our loan and securities portfo- lios to current market rates. Over the same period, we have main- tained our low funding costs. Total equity was $149.8 million at year end, an increase of $6.1 million or 4.2%. Book value per share increased to $31.10 from $30.07 year over year, an increase of 3.4%. Tangible book value per share in- creased to $26.14 at year end, an increase of 5.0% from December 31, 2016. In 2017, the Corporation paid $4.9 million in dividends, continu- ing its long history of uninterrupted dividend payments. As stated above, our net income was reduced by two significant fourth-quarter events. First, net income for the year included a $2.9 million, one-time tax expense, resulting from the re-measurement of our DTA following the enactment of the Tax Act. Going forward, the Tax Act will reduce our federal statutory tax rate from 34% to 21%. As a result of the implementation of the Tax Act, the Corporation’s effective tax rate increased to 49.4% for 2017, compared to 30.5% for the prior year. Our effective rate for the year ending December 31, 2017, exclud- ing the one-time impact of the re-measurement of our DTA, was 29.5%. Second, impairment on a long-standing commercial credit resulted in an increase of $3.9 million in our provision for loan losses during the fourth quarter ending December 31, 2017. Although we believe this to be an isolated event, it is none the less disappointing. We are working vigorously to pursue recovery and look forward to its resolution. We are pleased with the progress we’ve made this year to strengthen our foundation. We are confident that our strong earn- ings, our commitment to balance sheet growth and the reduction in our federal statutory tax rate, position our Corporation for a more profitable future. We are encouraged that our steadfast focus on our community banking philosophy will allow us to continue gathering low-cost, stable deposits, and invest in the clients and communities that we proudly assist. As has been true for nearly 185 years, this long-term strategy provides sustained value for our shareholders and the other constituencies we serve across our 13-county footprint. Growing Our Franchise, Planning for the Future 2017 was a year of growth. As stated above, our balance sheet growth warrants specific mention. Of note, loans in the Capital Region grew $117.6 million, or 20.9%, com- pared to the prior year. Redeploy- ing deposits and securities into loans, coupled with increases in short-term rates, had a meaningful impact on our interest margin and net interest income growth. Also significant was our ability to pay off high-cost borrowings in 2017, which prompted a 23 basis point decline in our cost of borrowings. In addition, we announced that our physical distribution network will change in 2018. As of the date of this letter, we have opened our new Schenectady, NY branch and are well along in the development of a new branch in Wilton, NY. Our Schenectady branch is crisp, clean and modern with all of the bells and whistles of the branch of today, while planning for the future needs of “to- morrow’s clients.” Most importantly, we’ve assembled a seasoned team of professionals who embrace our core community-focused principles and stand ready to make a difference. These two locations will greatly enhance our distribution capabilities for our growing client base in the Capital Region. Upon completion, our branch network will consist of 35 offices directly serving 13 counties in two states. We continue to focus on our retail branch network. In Auburn, we successfully relocated our Genesee Street office into a smaller, more efficient space. As we progress, we will look for opportunities to right size our branch network while providing uncompromising service to our valued clients. Investing in our digital banking capacity remains a high priority. In fact, nearly one-third of our clients do not set foot inside of a branch. We are committed to providing these clients the same superior ser- vice they would receive with a face-to-face experience with one of our New Schenectady Branch BOARD OF DI REC TOR S Anders M. Tomson President & CEO, Chemung Financial Corporation, Chemung Canal Trust Company and CFS Group, Inc. David J. Dalrymple Chairman of the Board, Chemung Financial Corporation, Chemung Canal Trust Company, and President, Dalrymple Gravel & Contracting Larry H. Becker COO, Windsor Development Group, Inc. we are encouraged that the strategies we’ve implemented are yielding positive results ... these improved results underscore our commitment to deliver shareholder value. bankers. Our clients interact with us not only in person, but also via email, text, social media and video. We have deployed technology to allow them to apply for loans and open deposit accounts online. In 2018, we will deliver new technology, which will connect clients to our Contact Cen- ter directly through our new intelligent video teller machines. Today, our Contact Center is one of the busiest branches in our franchise and no one sets foot inside its walls except our well- trained and highly professional colleagues. This year we enacted a three-year stra- tegic plan for information technology and deployed technology enhancements through- out our entire platform. Led by our new Chief Information Officer and restructured informa- tion technology team, the Corporation has increased its investment and targeted its resources to ensure that the bank remains competitive and provides cutting-edge bank- ing services for our clients in the 21st century. Another opportunity for continued growth is small business lending. At Chemung Canal and Capital Bank—small business is big busi- ness. We expect our small business lending to accelerate in 2018 as we focus on this important market sector. Small business is the commercial backbone of our communities. It is imperative that we remain a vital source of capital, a banking partner and trusted ad- visor to these clients and stakeholders. To accomplish these goals, we’ve reorganized our lending teams and created a new focus on this very signifi- cant community resource. With new leadership, new lending parameters and a fresh commitment of capital, we are ready to broaden our efforts on behalf of these very important businesses. We are committed to making deliberate and prudent investments that enhance our risk profile over the long term. One measure we have taken to meet this challenge is to separate our Board Audit and Risk Committee, creating a new and distinct Enterprise Risk Committee. The new committee’s charter is to ensure that the investments we make and the risks we’re taking are in-line with our risk appetite and follow our traditional community banking philosophy. “ ” cities, towns and villages where we offer products and services. Led by designated and empowered Market Team Executives in each of our key areas, we are making a material, lasting and positive impact in all of the communities across our footprint. We are proud and thankful for our colleagues who commit so much of their time, talents and resources— volunteering to help those in need, endeavoring to enhance the qual- ity of life of their fellow citizens. We engage in community forums, lead neighborhood organi- zations, and dedicate countless hours of sup- port to ensure no one is left behind. In fact, our Corporation received an outstanding rating for our service test, as a component of our overall Community Reinvestment Act rating. Board & Executive Management Developments We are pleased to have expanded our Executive Management Team in 2017. Dale Cole now serves as our Chief Information Of- ficer and Duane Mittan joined the Corporation as our Chief Internal Auditor. Additionally, we named Dan Fariello President of Capital Bank, our Capital Region division. We are excited about the positive impact they are already having on our Corporation, and that we are a “company of choice” when we recruit experienced professionals. Recently, we welcomed new board members: David Buicko, De- nise Gonick and Jeff Streeter. All of these individuals lead significant businesses in addition to being recognized community leaders. Dave, Denise and Jeff will provide unique and invaluable leadership, per- spective and direction in support of the Corporation. We appreciate their willingness to serve and look forward to their contributions. At the same time, John Potter, one of our longest tenured Direc- tors, will be retiring at this year’s annual meeting. John’s leadership, his unwavering support and commitment to our community banking philosophy have been evident throughout his 27 years of service to our Corporation. We extend our sincere thanks and appreciation to John for his service, dedication and loyalty. We cannot discuss our community banking philosophy without mentioning our commitment to our clients and neighbors within the This year was also a difficult year for the Chemung Canal fam- ily. With tremendous respect and admiration, we acknowledge the Clover M. Drinkwater Partner Sayles & Evans Stephen M. Lounsberry III President, Applied Technology Manufacturing Richard W. Swan Retired Chairman of the Board, Swan and Sons-Morss Co., Inc. Ronald M. Bentley Retired President & CEO, Chemung Financial Corporation, Chemung Canal Trust Company and CFS Group, Inc. Bruce W. Boyea Chairman, President & CEO, Security Mutual Life Insurance Co. of New York Robert H. Dalrymple Vice President & Secretary Dalrymple Holding Corporation passing of two retired board members. Both Nelson Mooers van den Blink and Charlie Streeter are remembered for their many years of ser- vice and incredible passion for this Corporation and our communities. In their life, they touched many and we are fortunate to have had their friendship and commitment to Chemung Canal Trust Company. Their legacy of service is a standard we aspire to and has had a lasting effect on all of us who are privileged to work for this Corporation. Final Thoughts Despite a challenging end to the year, we are pleased with our over- all results for 2017. We again validated the direct and material impact that our strong community banking strategy has on our shareholders, clients, colleagues and communities. We embraced our strategy and delivered tremendous results in the face of intense competition and challenging regulatory constraints. 2017 was another year that af- firmed our commitment and ability to deliver value to our stakeholders. Today, we carefully consider the prospect of rising rates and the hope for a steeper yield curve. There is renewed optimism across our footprint that is fueled in some part by the newly enacted Tax Act. I am hopeful that the country will benefit from the promise of more rational regulation and a fairer tax plan. Unequivocally, the Tax Act will have a positive effect on our net income. We will watch these developments closely and react prudently to market changes. Looking forward, we have set another aggressive plan of initiatives that focuses on delivering exceptional client service, finding efficiencies in our banking platform, executing on our long-term strategic technology plan and, as always, carefully managing risk. This has been a year of incredible activity. We are committed to con- tinuing our initiatives to support our clients and the communities we serve. Our success is the direct result of our hard-working and talented staff, and the guidance and dedication of our Board of Directors. We are grateful for their assistance and support. On behalf of the Board, our management and staff, thank you for your support of our Corporation. Anders M. Tomson President & CEO David J. Dalrymple Chairman of the Board Capital Bank Division A DV I S O RY B OA R D Carl Becker Vice President & Counsel The Windsor Company Denise Gonick President & CEO MVP Healthcare Gerald D. Jennings Former Mayor City of Albany Spencer Jones Dawn Homes Management Paul Kasselman President Kasselman Electric Inc. Raymond J. Kinley Jr. Retired President & CEO Clough Harbour & Associates Dr. Lee McElroy Director of Athletics & Vice President Rensselaer Polytechnic Institute Jim Menzies Founder Leontine Consulting LLC Gregory Oberting President Interstate Commodities, Inc. Joseph A. Reilly Retired President NYS Broadcasters Association Mark J. Rosen President Dawn Homes Management Dean A. Rueckert Past President Rueckert Advertising and Public Relations Eugene M. Sneeringer Jr. Principal Sneeringer Monahan Provost Redgrave Title Agency Edward J. Trombly Partner Hiscock & Barclay John F. Potter President, Seneca Beverage Corporation G. Thomas Tranter Jr. President Corning Enterprises Kevin Tully Partner, Teal, Becker & Chiaramonte, CPAs PC Thomas R. Tyrrell Vice President Rose & Kiernan, Inc. BOARD OF DI RECTORS EXECUTI VE MANAGEM ENT TEA M Anders M. Tomson President & Chief Executive Officer Pamela D. Burns Senior Vice President Human Resources Loren D. Cole Senior Vice President Chief Information Officer Michael J. Crimmins Senior Vice President *retired March 31, 2018 Louis C. DiFabio Executive Vice President Business Client Services Daniel D. Fariello President Capital Bank Senior Vice Presidents Catherine B. Crandall, WMG Estate Administration • Marianne T. Kalec, Retail Lending • Mark P. Lasch, WMG Regional Manager • J. Edmond Morton IV, WMG Regional Manager Robert M. Pichette, Commercial Lending • Timothy P. Rubery, Small Business Lending • Joseph J. Tascone, WMG Investment Services • Thomas J. Whitaker, Finance Vice Presidents Yvonne L. Albee, Regulatory Risk • Dawn L. Aubin, Auburn/Seneca Falls • Roberta S. Bastow, Commercial Lending • Michael J. Battersby, Support Services • Michael D. Blatt, WMG Investment Services • Matthew R. Crabtree, Finance • Bryce E. Cutler, Business Development • Mark J. Fife, Commercial Lending • Yvette M. Francisco, Loan Review • Thomas E. Funk, Finance • Victoria A. Harkins, WMG Prestige Banking • Kevin P. Harrigan, Commercial Lending • James S. Hartle, Branch Administration • Scott T. Heffner, Marketing • Mary L. Keefe, Business Services • Christopher K. Kelly, WMG Retirement Services Group • Christopher Kennedy, Commercial Lending • John T. Kite, Commercial Lending • Michael S. Lares, WMG Investment Services • James M. Kresge, Commercial Credit • D. Tavis McKeon, E-Retail • Mary E. Meisner, BSA AML Officer • Mary Anne Narosky, Business Client Services • Nino J. Pellegrino, Business Development • Ronald W. Poole, Commercial Lending • Jennifer Sczepanski, Branch Administration • John J. Sentigar, Information Technology • Andrea L. Seymour, Logistical Support • John E. Shea, WMG Relationship Manager • George R. Spencer, Business Development • Gregory Stewart, WMG Sr. Relationship Manager • Sheila A. Washburn, ATM & Card Services Assistant Vice Presidents Kimberly A. Bailey, Canton • Bruce E. Boughton, Montour Falls/Watkins Glen • Gregory J. Bruno, Clifton Park/Schenectady • David E. Carlson, Elmira Heights Maureen L. Clarke, State St./Slingerlands • Pamela L. Colomaio, Bath • Alison J. Conklin-DeVita, Southport/Westside • Joel A. Crimmins, Commercial Lending Jennifer J. Cruise, WMG Support Services • Jennifer L. Fulton, Finance • Sandra L. Grooms, Elmira Rd./The Station • Michael L. Hart, WMG Estate Administration Matthew T. Keefe, Regulatory Risk • Sanya C. Lam, Latham/Wolf Rd. • Andrea D. McClure, WMG Tax Services • Jack O. Narosky, BCSG Relationship Manager Brenda S. Praschunus, Arnot Rd/Big Flats • Randi Richer, Commercial Loan Operations • Sheryl J. Scott, Corning/Painted Post •Heidi J. Wahl, WMG Relationship Manager • David A. Wakeman, Resource Recovery • Sue A. Williams, Waverly • Lauren K. Zell, WMG Retirement Services Assistant Treasurers Laura L. Bennett, Real Estate Lending • Marcia L. Boor, Business Services • Amy S. Chervinsky, Commercial Lending • Elizabeth M. Courtright, Regulatory Risk Sarah A. Darling, Owego • Austin T. Farrell, Horseheads • Tara J. Humphrey, Retail & Small Business Loan Operations • Tonya L. Johnson, CRA/Fair Lending Officer Barbara L. Keller, Consumer Lending • Alice J. Kiser, Bank Operations • Megan J. Kozdemba, Real Estate Lending • Patrick J. McFarland, Regulatory Risk • Julianne E. Meeker, Computer Operations • Michael J. Novotny, Branch Administration • Aimee G. O’Connor, Towanda/Troy • Monica L. Ridosh, Human Resources • Jessica L. Ryan, Main Office • Todd N. Trencansky, Vestal •Charolette R. Truxal, Binghamton/Oakdale Mall • Devin E. Wandell, WMG Estate Administration • Kristen E. Wolowitz, Real Estate Lending • Kristen N. Woodward, Contact Center CFS Group, Inc. Marci L. Cartwright, Vice President Kimberly A. Hazelton Executive Vice President Retail Client Services Karl F. Krebs Executive Vice President Chief Financial Officer & Treasurer Karen R. Makowski Executive Vice President Chief Risk Officer Kathleen S. McKillip Assistant Treasurer, Corporate Secretary Duane W. Mittan Vice President, Chief Auditor Michael J. Wayne Senior Vice President, Marketing Effective as of February 28, 2018. Thomas W. Wirth Executive Vice President Wealth Management Group (WMG) E XECUTIVE MA NAGEM ENT TEAM OTHER INFORMATION Forward-looking Statements: This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation’s expected financial position and operating results, the Corporation’s business strategy, the Corporation’s financial plans, forecasted demographic and eco- nomic trends relating to the Corporation’s industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation’s use of forward-looking words such as “may,” “will,” “anticipate,” “estimate,” “expect,” or “intend.” The Corporation cannot promise that its expectations in such forward-looking statements will turn out to be correct. The Corporation’s actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing the Corporation’s growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s 2017 Annual Report on Form 10-K. These filings are available publicly on the SEC’s website at www.sec.gov, on the Corporation’s website at chemungcanal.com or upon request from the Corporate Secretary at (607) 737-3746. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise. 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.astfinancial.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 30, 2018, 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 www.astproxyportal.com/ast/01079. Annual Meeting: The Annual Meeting of Shareholders will be held on Thursday, May 10, 2018, at 2:00 p.m. at the downtown Holiday Inn, Elmira – Riverview. ALBANY 132 State St., Albany 65 Wolf Rd., Albany 581 Loudon Rd., Latham 1365 New Scotland Rd., Slingerlands BRADFORD 5 W. Main St., Canton 304 Main St., Towanda 159 Canton St., Troy BROOME 127 Court St., Binghamton 601-635 Harry L. Dr., Johnson City 100 Rano Blvd., Vestal CAYUGA 110 Genesee St., Auburn 185 Grant Ave., Auburn CHEMUNG 437 Maple St., Big Flats One Chemung Canal Plaza, Elmira 628 W. Church St., Elmira 100 W. McCann’s Blvd., Elmira Heights 29 Arnot Rd., Horseheads 602 S. Main St., Horseheads 951 Pennsylvania Ave., Southport CORTLAND 1094 Highway 222, Cortland SARATOGA 25 Park Ave., Clifton Park 3057 Route 50, Saratoga Springs* SCHENECTADY 2 Rush St., Schenectady *To open mid-April SCHUYLER 303 W. Main St., Montour Falls 318 N. Franklin St., Watkins Glen SENECA 54 Fall St., Seneca Falls STEUBEN 410 W. Morris St., Bath 149 W. Market St., Corning 243 N. Hamilton St., Painted Post TIOGA 203 Main St., Owego 1054 St. Rte. 17C, Owego 405 Chemung St., Waverly TOMPKINS 909 Hanshaw Rd., Ithaca 304 Elmira Rd., Ithaca 806 W. Buffalo St., Ithaca For a complete list of office hours and directions, visit chemungcanal.com or capitalbank.com. For general information, call our Contact Center at 800.836.3711. 

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