Chemung Financial Corporation
Annual Report 2019

Plain-text annual report

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 of deferred loan fees 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 0.2% 88.6% N/A 2.0% (23.3)% (100.0)% (0.1)% (14.3)% (20.5)% 1.9% (0.2)% 23.9% 0.2% 10.7% (3.2)% (20.9)% 9.9% 12.0% 0.8% 2019 $60,611 5,945 19 9,503 10,551 55,696 3,434 $15,609 2018 $60,480 3,153 9,317 13,757 989 55,777 4,009 $19,626 $1,787,827 1,309,219 23,478 1,572,138 182,627 362 $1,755,343 1,311,906 18,944 1,569,237 165,029 374 3.21 37.35 32.74 1.04 4,869 1.79% 0.88% 8.86% 10.18% 4.06 33.99 29.22 1.04 4,832 1.44% 1.14% 12.76% 15.07% Trust Assets Under Administration (market value): as Fiduciary as Custodian $1,548,560 366,757 $1,915,317 $1,411,564 356,615 $1,768,179 9.7% 2.8% 8.3% Common Stock Market Prices & Dividends Paid During Past Two Years: December 31, 2019 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter High Low Dividends $46.04 49.00 49.96 48.36 $41.60 39.00 44.80 39.69 $0.26 0.26 0.26 0.26 December 31, 2018 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter High Low Dividends $44.52 51.69 52.99 50.24 $38.50 41.02 46.01 42.50 $0.26 0.26 0.26 0.26 As of February 29th, 2020 there were 482 registered holders of record of the Corporation’s stock. Letter to Shareholders 2019 Annual Report Fellow Shareholders: We appreciate the opportunity to share the results of Chemung Financial Corporation during the past year. 2019 was a year of mixed results but concluded with net income of $15.6 million, or $3.21 per share, which represented the second highest level of earnings in our company’s 186-year history. These outcomes have improved our capital position to record highs. Many quantitative factors have contributed to these results: the bank’s low cost of deposits; a record high net interest income; ongoing emphasis on improving our efficiency ratio; and continuing increases income generated from our Wealth Management Group. in fee dividend payments of $1.04 per share, in 2019. Additionally, all of our capital ratios exceed regulatory standards and our banking regulators recognize institution. us as a well-capitalized Overall, our company’s balance sheet increased 1.9%, or $32.5 million, during 2019, to $1.8 billion. Year over year, net loans remained relatively stable totaling $1.3 billion, as principal pay downs nearly equaled the $280 million in new loan production. Total cash and cash equivalents decreased by $8.1 million, while the Corporation’s investment securities portfolio increased by $40.3 million, or 16.2%, in 2019, as we managed liquidity needs against the opportunity for higher yields earned on to for required This past year also meaningful provided including challenges the previously disclosed our provisions loan allowance losses for two commercial credit relationships that resulted in one-time, pre-tax, $6.1 million, charges to our earnings. As a result, our year-end net income missed our expectations. This, however, does not positive the diminish 2019. of activities has been the case for our 186-year tenure, we remain steadfastly committed Community Banking philosophy. Our success is directly correlated to an overarching commitment to our stakeholders: the shareholders, clients, colleagues and communities who we proudly assist. This philosophy is deeply embedded in our Corporation’s core values. Ultimately, our ability to provide sustainable value to all of these important constituents is how we measure our success. Our Results Moreover, our as to increased our As noted earlier, our consolidated net income for 2019 totaled $15.6 total million. This shareholder’s equity by 10.7% to $182.6 million at December 31, 2019 compared to $165.0 million at the beginning of the year. Our earnings resulted in a 0.88% Return on Average Assets (ROAA) and an 8.86% Return on Average Equity (ROAE). Our capital grew significantly even as we continued our long tradition of uninterrupted cash “Our success is directly correlated to an overarching commitment to our stakeholders: the shareholders, clients, colleagues and communities who we proudly assist. ” our investments. Total deposits rose slightly, increasing by $2.9 million to $1.6 billion at December 31, 2019. The continued strengthening of our liquidity position supports our expectations lending during 2020. for increased In 2019, we experienced an eight basis point decrease in the bank’s net interest margin, fully taxable equivalent. Given the Federal Reserve’s pattern of interest rate adjustments, four increases in 2018 and three decreases in the second half of 2019, management of the bank’s net interest margin remains a top priority. This has been especially challenging in this year of declining rates, as interest rates on adjustable loans tend to reprice more rapidly than deposits. This year, the total average yield on the bank’s loan portfolio increased by 11 basis points to 4.50%, however the total average cost of interest bearing deposits increased by 25 basis points to 0.56%. Throughout the bank’s footprint, there remains intense competition for loan originations, which has resulted for in very competitive pricing for new loan activity. At the same time, credit union and other banks’ CD and money market specials generate pricing pressure on the funding side of the balance sheet. Despite the reduction in the bank’s net interest margin, our net interest income during 2019 totaled $60.6 million, which is approximately $131 thousand more than the prior year. This was also a year of balance sheet management as we prepare for the future growth of the company. In particular, we realigned our commercial loan concentrations by increasing our commercial & industrial loan balances while decreasing the outstanding non-owner occupied commercial real estate loan portfolio. This change, combined with the positive results of our management liquidity providing strategy, is a pathway future growth. This is especially in our Capital evident division, where Bank we continue to serve as one of the region’s top commercial lending institutions. At December 31, 2019, the Capital Bank commercial division’s loan totaled $647.5 million which was 73.7% of our bank’s total commercial loan portfolio. Throughout the year, there was appropriate focus on the credit quality of our loan portfolios. At year-end, our nonperforming loans ratio increased from 0.93% to 1.38%, and our nonperforming assets to total increased from 0.73% assets ratio increases to 1.04%. While are disappointing, largely attributable to the two commercial credit relationships, previously disclosed, which prompted a $6.1 million, pre- allowance. tax, reserve At year-end, our commercial loan portfolio accounted for nearly 68% of our total loan portfolio. Based on this growth and the increasing complexity of the loans that the bank now originates, we added a Chief Credit Officer to our Executive Management team. In September, we recruited Peter Cosgrove to join the bank in this newly created position. Peter is a seasoned banking professional with significant lending and senior management experience at both big and small financial institutions. these they are loans to total portfolio specific This addition will strengthen the credit process and improve the efficiency of delivering capital to our clients. And, it will streamline origination activities and provide additional oversight and diligence to our commercial lending processes. We also expect that this addition will enhance our broader credit review, collection and risk management functions. The bank’s Wealth Management Group (WMG) continues to grow in impact for our clients and its financial results are positively affecting our bottom line. The market value of assets under management or administration increased by 8.3% during the last year and totaled $1.9 billion at December 31, 2019. A broader increase within the securities markets boosted these results, as well as significant new account relationships throughout our three core WMG businesses. WMG fee income for 2019 totaled $9.5 million, nearly $200 thousand more than the previous year. Our Platform Our distribution channels continue to evolve as clients’ demand for these services expand through their use of our digital platforms, while visiting our traditional branches less frequently. Industry statistics indicate that approximately 40% of bank customers never visit a branch office and our experience parallels that. This changing dynamic necessitates a near continual evaluation of product and service delivery and requires thoughtful adjustments to our staffing levels and office hours. We maintain a consistent top goal of providing tier client experience whenever these changes are contemplated. This year, we again significant executed changes to our branch network. Over the past 14 months, we consolidated traditional branch two in (located offices Johnson City and Painted Post). We are pleased our client retention after consolidation has been very high. And, in January 2020, we announced that we would be closing our Towanda, PA branch office, effective April 30th. In 2019, we continued to invest in digital improvements to our offerings with upgrades to our mobile banking & mobile deposit applications, online account origination, as well as many of our fraud and security controls. In 2020, we will be focusing on data analytics for our clients and prospects as well as “end to end” digital loan processing. Of significant importance in 2020, we will continue our thoughtful investment in anti-fraud and security enhancements. While traditional banking through branch offices will never go away, it is essential that we remain keenly attentive to the expectations of our clients as we evaluate future opportunities to be more efficient and enhance the client experience. Looking forward, we are diligently evaluating operational and structural efficiencies to create cost savings and streamline productivity. During the past year, we completed numerous efficiency improvements to our banking platforms. We transitioned our core systems from in-house to an outsourced environment, hosted by Fiserv. In addition, we consolidated our data and phone communications across the entire footprint. This conversion maximizes efficiency, speed and disaster recovery capabilities through one, industry-recognized vendor. We also implemented and expanded robotic automation again improving the efficiency of the Corporation and mitigating risk. This year, we engaged an efficiency expert to streamline and create efficiencies, reduce risk, and improve the client experience. This effort was a major undertaking that solicited bank wide input and developed a forward-looking plan to create consistency, minimize the duplication of effort, and accelerate the adoption of procedural changes. Through these many initiatives, we anticipate short-term and long-term benefits through increased fee income, cost savings, productivity improvement, and the diminution of risk. We are starting to see the benefit of these efforts as the number of our full-time equivalent employees has decreased from 374 at December 31, 2018 to 362 at December 31, 2019. Market Developments During 2019, there was a noticeable increase in M&A (mergers and acquisitions) activity within the banking industry, including markets within our footprint. After many years of inactivity, several smaller, long tenured institutions elected to merge with larger, out-of-market financial institutions in 2019. These transactions often create disruption within a community. As in the past, we will consider strategies to capitalize on these changes as we focus our customer acquisition tactics on quality clients that are searching for a new financial institution. We recognize that the growth of our franchise, either organically, through through expansion or acquisition, are important strategic opportunities. This growth can leverage our institutional overhead, and provide pricing advantages, management expertise, as well as expand the impact of our positive community unique model. banking believe We our and could help execution that institutions other are looking for a partner where our brand of banking would make a positive difference. Our Communities strongly proficiency product Throughout our history, an important part of our success has been our immense commitment to the communities we serve. On a daily basis, our employees are serving as volunteers in a variety of not-for-profit organizations that are making an important difference in the lives of our clients, families, friends and neighbors. It is encouraging to see them accept leadership roles, helping direct meaningful efforts that positively influence the quality of life for so many. The efforts of our employees help supplement our corporate contribution and sponsorship budgets. The results from the combination of all three of these community outreach efforts provides a lasting positive force in the cities, towns and villages that we serve. Our Leadership Team There have been important leadership changes within the past year that are notable to report. As mentioned earlier, Peter Cosgrove joined our company this past September. He joined the bank as Chief Credit Officer and, upon the retirement of Karen Makowski in December, he assumed the role of Chief Risk Officer as well. With more than three decades of banking experience, Peter has the expertise, stature and respect to make a positive impact at our bank through these “We continued our investment in our communities and provided sophisticated and reliable financial services and products for our clients across our broad footprint.” Today, we look forward to the promise of an exciting future for New York State’s oldest locally-owned and managed community bank. We have developed a rigorous plan of initiatives that focuses on delivering exceptional client service, finding efficiencies in our platform, executing on our technology plan, and prudently managing risk. As always, we remain committed to our community banking philosophy that is paramount to our future success. Thank you for your continued confidence and support of our company. Anders M. Tomson President & CEO David J. Dalrymple Chairman of the Board two important positions. As Chief Risk Officer, Peter replaces Karen Makowski who created our enterprise risk management operation and served as its leader throughout her eight year tenure with our bank. We extend our thanks and best wishes to Karen upon her retirement. In addition, the May 2020 annual shareholders’ meeting will mark the end of the term of Bruce Boyea, who joined the Chemung Canal and Chemung Financial Boards in 2011. During his tenure on the Board, Bruce’s business acumen, advocacy for the bank, and his significant community involvement, both in Broome County and throughout New York State, has proven invaluable to our company. We extend our thanks and appreciation for his commitment of time and energy to help us grow and flourish. Bruce’s departure follows the recent retirement of another Director, Kevin Tully. While Kevin’s tenure on the Board was short, his understanding of banking issues, his accounting and tax expertise, and his friendly demeanor are surely missed. In Conclusion 2019 was certainly an eventful year. We again executed the community banking strategies that are the hallmark of our great company. We continued our investment in our communities and provided sophisticated and reliable financial services and products to our clients across our broad footprint. We accomplished these results always with the preeminent consideration of our shareholders’ interests. We are thankful for their investment and confidence in our bank. Board of Directors Annual Meeting : The Annual Meeting of Shareholders will be held on Wednesday, May 13, 2020, at 2:00 p.m. at the downtown Holiday Inn, Elmira – Riverview. Anders M. Tomson President & CEO Chemung Financial Corporation, Chemung Canal Trust Company, & CFS Group, Inc. David J. Dalrymple Chairman of the Board Chemung Financial Corporation, Chemung Canal Trust Company, & CFS Group, Inc. President Dalrymple Gravel & Contracting Larry H. Becker Chief Operating Officer The Windsor Companies Ronald M. Bentley Retired President & CEO Chemung Financial Corporation, Chemung Canal Trust Company, & CFS Group, Inc. Bruce W. Boyea Chairman & CEO Security Mutual Life Insurance Co. of New York Stephen M. Lounsberry III President Applied Technology Manufacturing Corporation David M. Buicko President & CEO Galesi Group Robert H. Dalrymple Vice President & Secretary Dalrymple Holding Corporation President Seneca Stone Corporation Vice President Chemung Contracting Corporation Denise V. Gonick Strategic Advisor Jeffrey B. Streeter President Streeter Associates Richard W. Swan Retired Chairman of the Board Swan and Sons-Morss Co., Inc. G. Thomas Tranter Jr. President Corning Enterprises (Retired 3/31/2020) Thomas R. Tyrrell Vice President Rose & Kiernan, Inc. Executive Management Team Anders M. Tomson President & Chief Executive Officer Pamela D. Burns Senior Vice President Human Resources L. Dale Cole Executive Vice President & Chief Information Officer Peter K. Cosgrove Executive Vice President & Chief Credit Officer Louis C. DiFabio Executive Vice President Business Client Services Daniel D. Fariello President Capital Bank Division 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 (Retired 1/2/2020) Kathleen S. McKillip Assistant Vice President & Corporate Secretary Duane W. Mittan Vice President & Chief Auditor Michael J. Wayne Senior Vice President Marketing (Retired 3/31/2020) Thomas W. Wirth Executive Vice President Wealth Management Group 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. Capital Bank Division Advisory Board Raimundo Archibold Jr. Managing Director Schwartz Heslin Group Raymond Kinley Jr. Retired President & CEO Clough Harbour & Associates Carl Becker Vice President & Counsel The Windsor Companies Kenneth Brownell Managing Director Vanguard-Fine, LLC Paola Horvath Owner Orange Theory Fitness Gerald Jennings Former Mayor City of Albany Dave Jersen CEO Jersen Construction Group Spencer Jones Executive Dawn Homes Management John Maloy Managing Partner James H. Maloy, Inc. Dr. Lee McElroy Director of Athletics & Associate Vice President Rensselaer Polytechnic Institute Mark Rosen President Dawn Homes Management Jacqueline Rosetti-Falvey President Rosetti Properties Dean Rueckert Past President Rueckert Advertising Edward Trombly Partner Barclay Damon 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 economic 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 2019 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. 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, 2020, 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. Serving 13 Counties in Two States Bank Officers Senior Vice Presidents Vice Presidents Timothy Rubery Small Business Lending Joseph Tascone WMG Investment Services Thomas Whitaker Finance Catherine Crandall WMG Estate Administration Marianne Kalec Retail Lending Christopher Kelly Retirement Services Jeffrey Kenefick Commercial Lending Mark Lasch WMG Regional Manager Mary Meisner Regulatory Risk J. Edmond Morton IV WMG Regional Manager Yvonne Albee Regulatory Risk Dawn Aubin Auburn & Seneca Falls Roberta Bastow Commercial Lending Michael Battersby Support Services Kellea Bauda Business Development Michael Blatt WMG Investment Services Peter Capozzola WMG Investment Services Marci Cartwright CFS Group, Inc. Bryce Cutler Business Development Mark Fife Commercial Lending Yvette Francisco Loan Review Victoria Harkins WMG Prestige Banking Kevin Harrigan Commercial Lending James Hartle Branch Administration Scott Heffner Marketing Mary Keefe Business Services John Kite Special Assets James Kresge Commercial Credit Danielle Krisko Business Client Services D. Tavis McKeon E-Retail Mary Anne Narosky Business Client Services Nino Pellegrino Business Development Jennifer Sczepanski Branch Administration John Sentigar Information Technology Andrea Seymour Logistical Support John Shea WMG Relationship Manager Gregory Stewart WMG Sr. Relationship Manager Frank Vassallo Finance Sheila Washburn ATM & Card Services Assistant Vice Presidents Assistant Treasurers Kimberly Bailey Canton & Troy Laura Bennett Real Estate Lending Bruce Boughton Montour Falls & Watkins Glen Kevin Brimmer WMG Investment Services Gregory Bruno Clifton Park & Schenectady David Carlson Elmira Heights Maureen Clarke State St. & Slingerlands Christopher Coletta Commercial Loans Pamela Colomaio Bath Alison Conklin-DeVita Southport & Westside Joel Crimmins Commerical Loans Jennifer Cruise WMG Support Services Shelby Fay WMG Investment Services Sandra Grooms Elmira Rd. & Ithaca Station Michael Hart WMG Estate Administration Amy Howell Consumer Lending Tara Humphrey Loan Operations Matthew Keefe Regulatory Risk Sanya Lam Latham & Wolf Rd. Andrea McClure WMG Tax Services Patrick McFarland Regulatory Risk Julianne Meeker Computer Operations Jack Narosky BCSG Relationship Manager Michael Novotny Branch Administration Brenda Praschunus Arnot Rd. & Big Flats Monica Ridosh Human Resources Sheryl Scott Corning Heidi Wahl WMG Estate Administration Patrick Ward WMG Presitge Banking Tracey Wardwell Wilton Sue Williams Waverly Kristen Woodward E-Retail Lauren Zell WMG Retirement Services Ann Burns Special Assets Dena Carrigan Elmira Heights Sarah Darling Owego & Tioga Austin Farrell Horseheads Judith Frisk Westside Noelle Gilchrist Treasury Management Tonya Johnson Regulatory Risk Barbara Keller Consumer Lending Alice Kiser Bank Operations Megan Kozdemba Real Estate Lending Aimee O’Connor Towanda Andrew Stockwell Community Corners & Cortland Megan Thomson Main Office Charolette Truxal Vestal & Binghamton Sarah Vergason Computer Operations Devin Wandell WMG Estate Administration Cortni Wickham Credit Department Sarah Williamson Contact Center Tyler Wilson Regulatory Risk Heidi Wood Resource Recovery *Listing as of February 28, 2020* Serving 13 Counties in Two States Bank Anywhere, Anytime. 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 *Towanda branch will be closing 4/30/2020* BROOME 127 Court St., Binghamton 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 (Wilton) SCHENECTADY 2 Rush St., Schenectady 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 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 chemungcanal.com capitalbank.com 

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