Chemung Financial Corporation Reports Third Quarter 2016 Net Income of $2.7 Million, or $0.58 per Share

Company Release - 10/20/2016 4:49 PM ET

ELMIRA, N.Y., Oct. 20, 2016 (GLOBE NEWSWIRE) -- Chemung Financial Corporation (the “Corporation”) (Nasdaq:CHMG), the parent company of Chemung Canal Trust Company (the “Bank”), today reported net income for the third quarter of 2016 of $2.7 million, or $0.58 per share, compared to $2.5 million, or $0.52 per share, for the third quarter of 2015.

Ronald M. Bentley, Chemung Financial Corporation CEO, stated:

“Our average earning assets for the third quarter this year were up over $100 million from the third quarter of last year, driving an increase in net interest income of $349 thousand from the same quarter last year. We continue to drive organic growth through the addition of high quality commercial credits resulting in a year to date increase in commercial loans of 8.6%. I am pleased to see the realization of the benefits associated with our ongoing retail transformation.  With new digital technology changing the way people conduct their banking, the transformation of our brick and mortar branch system is producing significant cost savings.”

Third Quarter Highlights1

  • Loans, net of deferred fees, increased $47.9 million, or 4.1%
  • Commercial loans increased $60.0 million, or 8.6%
  • Deposits increased $108.6 million, or 7.8%
  • Net interest income increased $0.3 million, or 2.7%
  • Dividends declared during the quarter were $0.26

A more detailed summary of financial performance follows.

1 Balance sheet comparisons are calculated for September 30, 2016 versus December 31, 2015.  Income statement comparisons are calculated for the third quarter of 2016 versus prior-year third quarter.

3rd Quarter 2016 vs 2nd Quarter 2016

Net Interest Income:

Net interest income for the current quarter totaled $13.0 million, consistent with the prior quarter.  Interest and fees from loans and interest-bearing deposits both increased $0.2 million, while interest and dividend income from securities decreased $0.1 million when compared to the prior quarter.  Fully taxable equivalent net interest margin was 3.33%, compared with 3.36% for the prior quarter.  Average interest-earning assets increased $4.0 million compared to the prior quarter.  The yield on interest-earning assets decreased two basis points, while the cost of interest-bearing liabilities increased one basis point compared to the prior quarter.  The decline in the yield on interest-earning assets can be mostly attributed to a seven basis point decline in the yield of commercial loans and a ten and six basis point decline in the yields of taxable and tax-exempt securities, respectively, offset by a ten basis point increase in the yield of consumer loans.  The decline in the yield of commercial loans can be attributed to new production at lower competitive rates. The decline in the yield of taxable securities can be attributed to higher projected prepayment speeds when comparing the current quarter to the prior quarter.  The decline in the yield of tax-exempt securities can be attributed to the maturities of municipal securities.  The increase in the yield of consumer loans can be attributed to the indirect loan portfolio and increasing the portfolio toward higher yielding used car loans.

Non-Interest Income:

Non-interest income for the quarter was $5.4 million compared with $5.2 million for the prior quarter, an increase of $0.2 million, or 4.2%.  The increase was due primarily to increases of $0.1 million in service charges on deposit accounts, $0.3 million in interchange revenue from debit card transactions, and a $0.1 million net gain on security transactions, offset by decreases of $0.2 million in wealth management group fee income and $0.1 million in other non-interest income.  The increase in interchange revenue from debit card transactions is due to the recognition of an incremental volume bonus related to the rebranding of the Bank’s credit cards in 2015.  The net gain on security transactions can be attributed to the sale of $15.0 million in agency securities during the current quarter.  The decrease in wealth management group fee income can be attributed to a decline in revenue from tax services performed during the prior quarter. 

Non-Interest Expense:

Non-interest expense for the quarter was $13.5 million compared with $15.6 million for the prior quarter, a decrease of $2.1 million, or 13.5%.  The decrease was due primarily to decreases of $0.1 million in pension and other employee benefits, $0.4 million in net occupancy expenses, $0.1 million in furniture and equipment expenses, $0.1 million in data processing expenses, $0.1 million in professional services, $0.2 million in marketing and advertising, and $1.3 million in other non-interest expenses, offset by an increase of $0.2 million in salaries and wages.  The decrease in net occupancy expenses and furniture and equipment expenses can be attributed to the closure of the branch at 202 East State Street in Ithaca, NY during the second quarter. The decrease in professional services can be attributed to start-up costs associated with the establishment of Chemung Risk Management, Inc. (the “Captive”), a captive insurance subsidiary, which was completed in the second quarter.  The decrease in marketing and advertising expense was due to seasonality, as the Bank sponsors the majority of its events during the second quarter.  The decrease in other non-interest expense can be attributed to the establishment of a $1.2 million legal reserve during the second quarter. 

3rd Quarter 2016 vs 3rd Quarter 2015

Net Interest Income:

Net interest income for the current quarter totaled $13.0 million compared with $12.7 million for the same period in the prior year, an increase of $0.3 million, or 2.7%.  Interest and fees from loans increased $0.4 million when compared to the same period in the prior year.  Fully taxable equivalent net interest margin was 3.33%, compared with 3.45% for the same period in the prior year.  Average interest-earning assets increased $103.3 million compared to the same period in the prior year.  The yield on interest-earning assets decreased 12 basis points, while the cost of interest-bearing liabilities increased one basis point compared to the same period in the prior year.  The decline in the yield on interest-earning assets can be mostly attributed to a 25 basis point decline in the yield of commercial loans, offset by a 33 basis point increase in the yield of consumer loans.

Non-Interest Income:

Non-interest income for the quarter was $5.4 million compared with $4.9 million for the same period in the prior year, an increase of $0.5 million, or 10.6%.  The increase was due primarily to increases of $0.4 million in interchange revenue from debit card transactions, $0.1 million in service charges on deposit accounts, and a $0.1 million net gain on security transactions, offset by a decrease of $0.1 million in wealth management group fee income.  The increase in interchange revenue from debit card transactions is due to the recognition of an incremental volume bonus related to the rebranding of the Bank’s credit cards in 2015.  The net gain on security transactions can be attributed to the sale of $15.0 million in agency securities during the current quarter.  The decrease in wealth management group fee income can be attributed to a decline in assets under management or administration. 

Non-Interest Expense:

Non-interest expense for the quarter was $13.5 million compared with $13.6 million for the same period in the prior year, a decrease of $0.1 million, or 1.2%.  The decrease was due primarily to decreases of $0.2 million in net occupancy expenses, $0.1 million in data processing expenses, $0.1 million in marketing and advertising expenses, and $0.1 million in other non-interest expenses, offset by increases of $0.2 million in salaries and wages and $0.3 million in professional services.  The decrease in net occupancy expenses can be attributed to the closure of the branch office at 202 East State Street in Ithaca, NY during the second quarter of 2016.  The increase in salaries and wages can be attributed to an increase in the merit bonus pool for 2016.  The increase in professional services can be attributed to consulting services associated with the incremental volume bonus related to the rebranding of the Bank’s credit cards in 2015. 

Asset Quality

Non-performing loans totaled $12.9 million at September 30, 2016, or 1.06% of total loans, compared with $12.2 million at December 31, 2015, or 1.05% of total loans.  The increase in non-performing loans at September 30, 2016 was primarily in the consumer loan and residential mortgage segments of the loan portfolio, offset by a decrease in the commercial mortgage segment.  Non-performing assets, which are comprised of non-performing loans and other real estate owned, were $13.3 million, or 0.77% of total assets, at September 30, 2016, compared with $13.8 million, or 0.85% of total assets, at December 31, 2015.  The decrease in non-performing assets was due to the sale of one large commercial property in other real estate owned.

Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth.  Based on this analysis, the provision for loan losses for the third quarter of 2016 and 2015 were $1.1 million and $0.3 million, respectively.  Net charge-offs for the third quarter of 2016 were $0.4 million compared with $0.3 million for the same period in the prior year.  The increase in the provision for loan losses, compared to the same period in the prior year, can be attributed to increases in the commercial loan portfolio and impaired loans.   

At September 30, 2016, the allowance for loan losses was $15.3 million, compared with $14.3 million at December 31, 2015.  The allowance for loan losses was 118.8% of non-performing loans at September 30, 2016 compared with 116.6% at December 31, 2015.  The ratio of the allowance for loan losses to total loans was 1.26% at September 30, 2016 compared with 1.22% at December 31, 2015.

Balance Sheet Activity

Assets totaled $1.729 billion at September 30, 2016 compared with $1.620 billion at December 31, 2015, an increase of $108.9 million, or 6.7%.  The growth was due primarily to increases of $109.3 million in cash and cash equivalents and $47.9 million in the loan portfolio, partially offset by a $41.6 million decrease in securities available for sale. 

The increase in cash and cash equivalents can be attributed to maturities, pay-downs, and the sale of available for sale securities and an increase in deposits, offset by an increase in total loans and the pay down of FHLB overnight advances.

The increase in total loans can be attributed to increases of $70.2 million in commercial mortgages and $1.9 million in residential mortgages, offset by decreases in commercial and agriculture of $10.2 million, indirect consumer of $8.8 million, and other consumer of $5.0 million.

The decrease in securities available for sale can be mostly attributed to the sale of $14.5 million in U.S. treasuries in the first quarter and $15.0 million in agency securities in the third quarter, along with $60.3 million in maturities and calls of agencies and pay-downs on mortgage-backed securities, offset by additional purchases of $1.8 million in municipals and $46.4 million in mortgage-backed securities during the third quarter. 

Deposits totaled $1.509 billion at September 30, 2016 compared with $1.400 billion at December 31, 2015, an increase of $108.6 million, or 7.8%.  The growth was attributable to increases of $22.0 million in non-interest bearing demand deposits, $18.9 million in interest-bearing demand deposits, $81.6 million in money market accounts, and $3.8 million in savings deposits.  Partially offsetting the increases noted above was a decrease of $17.7 million in time deposits.  The changes in money market accounts and demand deposits can be attributed to the seasonal inflow of deposits from municipal clients.

Total equity was $144.8 million at September 30, 2016 compared with $137.2 million at December 31, 2015, an increase of $7.6 million, or 5.6%.  The increase was primarily due to earnings of $7.1 million, a reduction of $0.8 million in treasury stock, and a decrease of $3.2 million in accumulated other comprehensive loss, offset by $3.7 million in dividends declared during the year.

The total equity to total assets ratio was 8.38% at September 30, 2016 compared with 8.47% at December 31, 2015.  The tangible equity to tangible assets ratio was 7.03% at September 30, 2016 compared with 6.99% at December 31, 2015.  Book value per share increased to $30.37 at September 30, 2016 from $28.96 at December 31, 2015.  As of September 30, 2016, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines and the Corporation met capital requirements under regulatory guidelines.

Other Items

The market value of total assets under management or administration in our Wealth Management Group was $1.714 billion at September 30, 2016, including $293.0 million of assets under management or administration for the Corporation, compared with $1.856 billion at December 31, 2015, including $304.1 million of assets held under management or administration for the Corporation, a decrease of $141.6 million, or 7.6%.  The decrease can be mostly attributed to the loss of one large non-profit customer during the first quarter of 2016.

On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future retirement benefits after December 31, 2016.  Beginning on January 1, 2017, both the pay-based and service-based component of the formula used to determine retirement benefits in the pension plan will be frozen so that participants will no longer earn further retirement benefits.  Due to the freezing of the pension plan, the Corporation amended its defined contribution profit sharing, savings, and investment plan (“401(k)”) for all active participants to supersede the current contribution formula used by the Corporation.  Beginning on January 1, 2017 the Corporation will begin contributing a non-discretionary 3% of gross annual wages (as defined by the 401(k) plan) for each participant, regardless of the participant’s deferral, in addition to a 50% match up to 6% of gross annual wages.  All contributions beginning January 1, 2017 will vest immediately.  The Corporation expects these changes will have no impact on 2016 results.  The Corporation expects the freezing of the pension plan will reduce the Corporation’s pension expense for fiscal year 2017 by approximately $2.6 million when compared to fiscal year 2016.  The increase in the Corporation’s contribution to the 401(k) will increase the Corporation’s 401(k) expense for fiscal year 2017 by approximately $0.7 million when compared to fiscal year 2016.

Additionally, on October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan, effective January 1, 2017.  The Corporation expects to recognize a $0.3 million curtailment gain related to the amendment of the plan in the fourth quarter of 2016.  The Corporation also expects that the freezing of the plan to new retirees will reduce the postretirement health care expense for fiscal year 2017 by approximately $0.1 million when compared to fiscal year 2016.

Ronald M. Bentley, Chemung Financial Corporation CEO, stated:

“The freezing of our defined benefit pension plan and defined benefit health care plan will allow us to manage the rising costs of our retirement plans and limit our long-term liabilities.  Our compensation and benefits package remains highly competitive and will enable us to attract and retain talent.”

About Chemung Financial Corporation

Chemung Financial Corporation is a $1.7 billion financial services holding company headquartered in Elmira, New York and operates 33 retail offices through its principal subsidiary, Chemung Canal Trust Company, a full-service community bank with trust powers.  Established in 1833, Chemung Canal Trust Company is the oldest locally-owned and managed community bank in New York State.  Chemung Financial Corporation is also the parent of CFS Group, Inc., a financial services subsidiary offering non-traditional services including mutual funds, annuities, brokerage services, tax preparation services and insurance, and Chemung Risk Management, Inc., a captive insurance company based in the State of Nevada.

This press release may be found at: www.chemungcanal.com under Investor Relations.

Chemung Financial Corporation          
Consolidated Balance Sheets (Unaudited) 
  Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
(in thousands)  2016   2016   2016   2015   2015 
ASSETS          
Cash and due from financial institutions $35,345  $27,233  $26,471  $24,886  $30,800 
Interest-bearing deposits in other financial institutions  100,159   80,121   29,388   1,299   44,449 
Total cash and cash equivalents  135,504   107,354   55,859   26,185   75,249 
           
Trading assets, at fair value  720   767   734   701   636 
           
Securities available for sale  303,259   300,277   324,484   344,820   335,571 
Securities held to maturity  4,504   3,518   4,577   4,566   4,604 
FHLB and FRB stocks, at cost  4,491   4,491   4,179   4,797   4,171 
Total investment securities  312,254   308,286   333,240   354,183   344,346 
           
Commercial  759,675   742,874   725,596   699,711   664,505 
Mortgage  197,665   196,200   196,751   195,778   197,506 
Consumer  259,226   262,082   264,546   273,144   279,926 
Loans, net of deferred loan fees  1,216,566   1,201,156   1,186,893   1,168,633   1,141,937 
Allowance for loan losses  (15,325)  (14,668)  (14,527)  (14,260)  (14,022)
Loans, net  1,201,241   1,186,488   1,172,366   1,154,373   1,127,915 
           
Loans held for sale  119   809   593   1,076   316 
Premises and equipment, net  29,084   29,706   28,620   29,397   30,023 
Goodwill  21,824   21,824   21,824   21,824   21,824 
Other intangible assets, net  3,183   3,428   3,673   3,931   4,201 
Accrued interest receivable and other assets  24,936   25,270   26,317   28,294   27,129 
Total assets $1,728,865  $1,683,932  $1,643,226  $1,619,964  $1,631,639 
           
LIABILITIES AND SHAREHOLDERS' EQUITY          
Deposits:          
Non-interest-bearing demand deposits $424,243  $408,846  $393,121  $402,236  $392,734 
Interest-bearing demand deposits  149,527   126,305   141,457   130,573   144,097 
Money market accounts  579,211   562,028   527,578   497,658   503,411 
Savings deposits  207,544   212,086   208,555   203,749   196,994 
Time deposits  148,419   158,655   163,541   166,079   173,205 
Total deposits  1,508,944   1,467,920   1,434,252   1,400,295   1,410,441 
           
FHLB overnight advances  -   -   -   13,900   - 
Securities sold under agreements to repurchase  30,002   28,778   28,825   28,453   30,358 
FHLB advances and other debt  23,893   23,970   22,012   22,076   22,140 
Accrued interest payable and other liabilities  21,214   19,855   17,091   17,998   29,985 
Total liabilities  1,584,053   1,540,523   1,502,180   1,482,722   1,492,924 
           
Shareholders' equity          
Common stock  53   53   53   53   53 
Additional-paid-in capital  45,724   45,639   45,652   45,537   45,545 
Retained earnings  122,382   120,860   120,460   118,973   118,057 
Treasury stock, at cost  (15,542)  (15,608)  (15,781)  (16,379)  (16,654)
Accumulated other comprehensive income (loss)  (7,805)  (7,535)  (9,338)  (10,942)  (8,286)
Total shareholders' equity  144,812   143,409   141,046   137,242   138,715 
Total liabilities and shareholders' equity $1,728,865  $1,683,932  $1,643,226  $1,619,964  $1,631,639 
           
Period-end shares outstanding  4,768   4,762   4,759   4,739   4,724 


Chemung Financial Corporation           
Consolidated Statements of Income (Unaudited) 
  Three Months Ended   Nine Months Ended  
  September 30, Percent September 30, Percent
(in thousands, except per share data)  2016   2015  Change  2016   2015  Change
Interest and dividend income:            
Loans, including fees $12,487  $12,114   3.1  $37,054  $36,113   2.6 
Taxable securities  1,225   1,237   (1.0)  3,943   3,490   13.0 
Tax exempt securities  228   227   0.4   722   685   5.4 
Interest-bearing deposits  85   17   400.0   180   60   200.0 
Total interest and dividend income  14,025   13,595   3.2   41,899   40,348   3.8 
            
Interest expense:            
Deposits  561   500   12.2   1,607   1,478   8.7 
Securities sold under agreements to repurchase  214   213   0.5   636   634   0.3 
Borrowed funds  210   191   9.9   623   556   12.1 
Total interest expense  985   904   9.0   2,866   2,668   7.4 
            
Net interest income  13,040   12,691   2.7   39,033   37,680   3.6 
Provision for loan losses  1,050   307   242.0   2,033   956   112.7 
Net interest income after provision for loan losses  11,990   12,384   (3.2)  37,000   36,724   0.8 
            
Non-interest income:            
Wealth management group fee income  2,027   2,122   (4.5)  6,240   6,446   (3.2)
Service charges on deposit accounts  1,361   1,275   6.7   3,781   3,637   4.0 
Interchange revenue from debit card transactions  1,203   831   44.8   3,035   2,499   21.4 
Net gains (losses) on securities transactions  75   (11)  N/M   983   291   237.8 
Net gains on sales of loans held for sale  115   89   29.2   273   239   14.2 
Net gains (losses) on sales of other real estate owned  10   -   N/M   (6)  120   N/M 
Income from bank owned life insurance  19   19   0.0   55   56   (1.8)
Other  625   587   6.5   1,891   2,136   (11.5)
Total non-interest income  5,435   4,912   10.6   16,252   15,424   5.4 
             
Non-interest expense:            
Salaries and wages  5,355   5,135   4.3   15,720   15,423   1.9 
Pension and other employee benefits  1,573   1,562   0.7   4,894   4,848   0.9 
Net occupancy  1,503   1,701   (11.6)  5,287   5,308   (0.4)
Furniture and equipment  685   742   (7.7)  2,286   2,264   1.0 
Data processing  1,624   1,751   (7.3)  5,058   4,864   4.0 
Professional services  502   200   151.0   1,418   889   59.5 
Amortization of intangible assets  245   277   (11.6)  748   866   (13.6)
Marketing and advertising  101   208   (51.4)  648   714   (9.2)
Other real estate owned expense  41   79   (48.1)  150   387   (61.2)
FDIC insurance  324   277   17.0   895   843   6.2 
Loan expense  162   212   (23.6)  462   527   (12.3)
Other  1,356   1,490   (9.0)  5,483   4,260   28.7 
Total non-interest expense  13,471   13,634   (1.2)  43,049   41,193   4.5 
             
Income before income tax expense  3,954   3,662   8.0   10,203   10,955   (6.9)
Income tax expense  1,209   1,211   (0.2)  3,130   3,651   (14.3)
  Net income $2,745  $2,451   12.0  $7,073  $7,304   (3.2)
             
Basic and diluted earnings per share $0.58  $0.52    $1.49  $1.55   
Cash dividends declared per share  0.26   0.26     0.78   0.78   
Average basic and diluted shares outstanding  4,765   4,722     4,758   4,715   
             
N/M - Not meaningful            


Chemung Financial Corporation 
Consolidated Financial Highlights (Unaudited) 
            As of or for the
  As of or for the Three Months Ended Nine Months Ended
  Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
(in thousands, per share data)  2016   2016   2016   2015   2015   2016   2015 
RESULTS OF OPERATIONS       
Interest income $  14,025  $  13,925  $  13,949  $  13,896  $  13,595  $  41,899  $  40,348 
Interest expense  985   957   924   934   904   2,866   2,668 
Net interest income  13,040   12,968   13,025   12,962   12,691   39,033   37,680 
Provision for loan losses  1,050   388   595   615   307   2,033   956 
Net interest income after provision for loan losses  11,990   12,580   12,430   12,347   12,384   37,000   36,724 
Non-interest income  5,435   5,216   5,601   5,023   4,912   16,252   15,424 
Non-interest expense  13,471   15,570   14,008   14,234   13,634   43,049   41,193 
Income before income tax expense  3,954   2,226   4,023   3,136   3,662   10,203   10,955 
Income tax expense  1,209   605   1,316   1,007   1,211   3,130   3,651 
Net income $  2,745  $  1,621  $  2,707  $  2,129  $  2,451  $  7,073  $  7,304 
               
Basic and diluted earnings per share $  0.58  $  0.34  $  0.57  $  0.45  $  0.52  $  1.49  $  1.55 
Average basic and diluted shares outstanding  4,765   4,760   4,750   4,731   4,722   4,758   4,715 
               
PERFORMANCE RATIOS              
Return on average assets  0.65%  0.39%  0.67%  0.52%  0.62%  0.57%  0.62%
Return on average equity  7.55%  4.57%  7.73%  6.05%  7.05%  6.62%  7.12%
Return on average tangible equity (a)  9.14%  5.55%  9.45%  7.42%  8.71%  8.05%  8.83%
Efficiency ratio (a) (b)  71.28%  77.00%  76.89%  77.35%  75.25%  75.03%  75.78%
Non-interest expense to average assets  3.20%  3.75%  3.48%  3.49%  3.44%  3.47%  3.52%
Loans to deposits  80.62%  81.83%  82.75%  83.46%  80.96%  80.62%  80.96%
               
YIELDS / RATES - Fully Taxable Equivalent              
Yield on loans  4.16%  4.17%  4.21%  4.20%  4.22%  4.18%  4.25%
Yield on investments  1.73%  1.81%  2.07%  1.98%  1.89%  1.86%  1.87%
Yield on interest-earning assets  3.58%  3.60%  3.72%  3.66%  3.70%  3.63%  3.73%
Cost of interest-bearing deposits  0.21%  0.21%  0.20%  0.20%  0.20%  0.21%  0.20%
Cost of borrowings  3.15%  3.16%  2.66%  2.99%  3.03%  2.97%  2.80%
Cost of interest-bearing liabilities  0.36%  0.35%  0.35%  0.35%  0.35%  0.35%  0.35%
Interest rate spread  3.22%  3.25%  3.37%  3.31%  3.35%  3.28%  3.38%
Net interest margin, fully taxable equivalent