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Chemung Financial Corporation Reports Third Quarter 2018 Net Income of $6.9 Million, or $1.43 per Share

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ELMIRA, N.Y., Oct. 18, 2018 (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 2018 of $6.9 million, or $1.43 per share, compared to $3.7 million, or $0.76 per share, for the third quarter of 2017.

Anders M. Tomson, Chemung Financial Corporation CEO, stated:

"Third quarter results were indicative of our commitment to deliver consistent, strong core earnings, while managing the quality and composition of our balance sheet. During the quarter, we slowed loan growth in our indirect auto book and introduced competitive CD offerings in support of maintaining our focus on managing liquidity in a very competitive deposit environment. Our efforts are paying off. We ended the quarter in a strong liquidity position and with earnings of $6.9 million that drove an increase in retained earnings of $5.7 million and also strengthened capital ratios.  During the quarter we seized the opportunity to sell off our position in Visa B shares which have recently become more liquid and increased in value, realizing a pre-tax gain of $2.1 million. Our experienced team remains focused on our strong community bank culture while being ever mindful of delivering strong performance to our shareholders."

Third Quarter Highlights1

  • Net interest income increased $0.3 million, or 2.1%
                 
  • Non-interest income increased $2.2 million, or 42.9%
                 
  • Effective tax rate decreased from 31.9% to 20.6%

  • Loans, net of deferred fees, increased $8.8 million, or 0.7%

  • Commercial loans increased $14.6 million, or 1.7%

  • Deposits increased $108.6 million, or 7.4%

  • Dividends declared during the third quarter of 2018 were $0.26 per share

A more detailed summary of financial performance follows.

1 Balance sheet comparisons are calculated for September 30, 2018 versus December 31, 2017.  Income statement comparisons are calculated for the third quarter of 2018 versus the third quarter of 2017.

3rd Quarter 2018 vs 3rd Quarter 2017

Net Interest Income:

Net interest income for the current quarter totaled $15.1 million compared with $14.8 million for the same period in the prior year, an increase of $0.3 million, or 2.1%.  Interest and fees from loans increased $0.9 million, while interest from investments, including interest-earning deposits, decreased $0.2 million in the third quarter of 2018 as compared to the same period in the prior year.  Interest expense on deposits increased $0.3 million and interest expense on borrowed funds increased $0.1 million, while interest expense on securities sold under agreements to repurchase decreased $0.1 million in the third quarter of 2018 when compared to the same period in the prior year.  Fully taxable equivalent net interest margin was 3.71% in the third quarter of 2018, compared with 3.68% for the same period in the prior year.  Average interest-earning assets increased $9.3 million in the third quarter of 2018, compared to the same period in the prior year.  The average yield on interest-earning assets increased ten basis points, while the average cost of interest-bearing liabilities increased twelve basis points in the third quarter of 2018, compared to the same period in the prior year.  The increase in interest and dividend income for the current quarter can be mostly attributed to a $62.0 million increase in the average balance of commercial loans, primarily commercial real estate, along with a six basis points increase in the average yield on commercial loans, and a $16.0 million increase in the average balance of consumer loans, compared to the same period in the prior year.  The increase in interest expense for the current quarter can be mostly attributed to an increase in interest rates on interest-bearing deposit accounts, including promotional interest rates on time deposits, and a $7.8 million increase in the average balance of FHLB advances and securities sold under agreements to repurchase.

Non-Interest Income:

Non-interest income for the current quarter was $7.4 million compared with $5.2 million for the same period in the prior year, an increase of $2.2 million, or 42.9%.  The increase was due primarily to increases of $2.1 million in net gains on securities transactions and $0.3 million in Wealth Management Group fee income.  The increase in net gains on securities was attributed to the sale of Visa Class B shares.  The increase in Wealth Management Group fee income can be attributed to an increase in the market value of assets under management or administration.

Non-Interest Expense:

Non-interest expense for the current quarter was $13.4 million compared with $13.3 million for the same period in the prior year, an increase of $0.1 million, or 1.1%.  The increase was due primarily to increases of $0.2 million in salaries and wages, $0.2 million in net occupancy, and $0.1 million in data processing, which was offset by decreases of $0.1 million in pension and other employee benefits, $0.1 million in other components of net periodic pension and post retirement benefits, and $0.3 million in other non-interest expenses.  The increase in salaries and wages can be attributed to annual merit increases and an increase in headcount with two denovo branches which opened in 2018.  One branch opened in January 2018 in Schenectady, New York and the other branch opened in May 2018 in Wilton, New York.  The increases in net occupancy and data processing expenses can also be attributed to the two new branches, along with the timing of various projects.  The decrease in pension and other employee benefits can be attributed to declines in healthcare and pension costs in the current quarter, when compared to the same period in the prior year. 

Income Tax Expense:

Income tax expense for the current quarter was $1.8 million compared with $1.7 million for the same period in the prior year, an increase of $0.1 million, or 5.4%.  The Corporation recognized a $3.4 million increase in income before income tax expense for the quarter, when compared to the same period in the prior year.  Although income tax expense increased in the current quarter, when compared to the same period in the prior year, the effective tax rate decreased from 31.9% to 20.6%.  The decrease was due primarily to the decline in the Federal income tax rate from 34% to 21%, with the enactment of the Tax Cuts and Jobs Act of 2017.  Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation's state income tax.

3rd Quarter 2018 vs 2nd Quarter 2018

Net Interest Income:

Net interest income for the current quarter totaled $15.1 million compared with $15.0 million for the prior quarter, an increase of $0.1 million, or 0.4%.  Interest and fees from loans increased $0.3 million, while interest from investments, including interest-earning deposits, remained level with the prior quarter.  Interest expense on deposits increased $0.3 million, while interest expense on securities sold under agreements to repurchase decreased slightly and interest expense on borrowed funds remained level in the third quarter of 2018 when compared to prior quarter.  Fully taxable equivalent net interest margin was 3.71% in the third quarter of 2018, compared with 3.73% for the prior quarter.  Average interest-earning assets decreased $0.5 million in the third quarter of 2018, compared to the prior quarter.  The average yield on interest-earning assets increased two basis points, while the average cost of interest-bearing liabilities increased seven basis points in the third quarter of 2018, compared to the prior quarter.  The increase in interest and dividend income for the current quarter can be mostly attributed to a $1.7 million increase in the average balance of total loans, along with a three basis points increase in the average yield on total loans, and an $11.6 million increase in the average balance of interest-earning deposits, along with a 112 basis points increase in the average yield on interest-earning deposits, compared to the prior quarter.  These items were partially offset by a $13.8 million decrease in the average balance of investment securities, compared to the prior quarter.  The increase in the average balance of total loans was due to a $6.4 million increase in the average balance of commercial loans, partially offset by decreases of $2.7 million in the average balance of residential mortgage loans and $2.0 million in the average balance of consumer loans.  The increase in interest expense for the current quarter can be mostly attributed to an increase in interest rates on interest-bearing deposit accounts, including promotional interest rates on time deposits, partially offset by a decrease of $7.3 million in the average balance of securities sold under agreements to repurchase and borrowed funds.

Non-Interest Income:

Non-interest income for the current quarter was $7.4 million compared with $5.3 million for the prior quarter, an increase of $2.1 million, or 38.6%.  The increase was primarily due to a $2.1 million increase in net gains on securities transactions, resulting from the sale of Visa Class B shares during the third quarter of 2018. 

Non-Interest Expense:

Non-interest expense for the current quarter was $13.4 million compared with $15.0 million for the prior quarter, a decrease of $1.6 million, or 10.3%.  The decrease was due primarily to decreases of $1.0 million in legal accruals and settlements, $0.3 million in pension and other employee benefits, and $0.3 million in other non-interest expense, partially offset by a $0.1 million increase in salaries and wages.  The decrease in legal accruals and settlements can be attributed to the settlement agreement in the matter of Fane vs. Chemung Canal Trust Company (the "Action") during the second quarter of 2018.  As noted in the Current Report on Form 8-K filed on June 15, 2018, the two parties agreed to release each other from any and all liabilities, claims, counterclaims, demands, charges, complaints and causes of action, to dismiss the Action with prejudice, and the Bank agreed to pay Fane $3.3 million in connection with the settlement of the Action. The Bank had previously reserved $2.3 million for the Action and therefore recognized an additional $1.0 million in legal accruals and settlements during the second quarter of 2018.  The decrease in pension and other employee benefits can be attributed to a decline in healthcare costs in the current quarter, when compared to the prior quarter.  The increase in salaries and wages can be attributed to annual merit increases and an increase in headcount associated with a denovo branch opened in the second quarter of 2018.  The Bank opened a denovo branch in Wilton, New York in May 2018.

Income Tax Expense:

Income tax expense for the current quarter was $1.8 million compared with $0.5 million for the prior quarter, an increase of $1.3 million, or 270.8%.  The increase was due primarily to a $5.7 million increase in income before income tax expense for the third quarter of 2018, when compared to the prior quarter.

Asset Quality

Non-performing loans totaled $12.6 million at September 30, 2018, or 0.96% of total loans, compared with $17.3 million at December 31, 2017, or 1.32% of total loans.  Non-performing assets, which are comprised of non-performing loans and other real estate owned, were $13.4 million, or 0.76% of total assets, at September 30, 2018, compared with $19.3 million, or 1.13% of total assets, at December 31, 2017. The decline in non-performing loans can be mostly attributed to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018.  The decline in non-performing assets can be mostly attributed to the charge-off of multiple large commercial loans to one borrower for $3.6 million and the sale of one other real estate owned property during the second quarter of 2018.

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 2018 was $0.3 million, a decrease of $1.0 million compared with the same period in the prior year.  Net charge-offs for the third quarter of 2018 were $0.3 million, compared with $0.7 million for the third quarter of 2017.

The allowance for loan losses was $19.6 million at September 30, 2018 compared with $21.2 million at December 31, 2017.  The allowance for loan losses was 155.48% of non-performing loans at September 30, 2018 compared with 122.15% at December 31, 2017.  The ratio of the allowance for loan losses to total loans was 1.49% at September 30, 2018 compared with 1.61% at December 31, 2017.

Balance Sheet Activity

Total assets totaled $1.754 billion at September 30, 2018 compared with $1.708 billion at December 31, 2017, an increase of $46.2 million, or 2.7%.  The increase can be mostly attributed to increases of $83.2 million in cash and cash equivalents, $8.8 million in loans, net of deferred loan fees, and $2.4 million in accrued interest receivable and other assets, offset by a decrease of $48.8 million in total investment securities.

The increase in cash and cash equivalents was due to changes in securities, loans, deposits, and borrowings.  The increase in total loans can be mostly attributed to increases of $20.6 million in commercial mortgages and $4.1 million in indirect consumer loans, partially offset by decreases of $6.0 million in commercial and agriculture loans, $5.8 million in residential mortgages, and $4.1 million in other consumer loans.  The increase in accrued interest receivable and other assets can be mostly attributed to the fair market adjustment to interest rate swaps for the year to date ($1.5 million) and increases in operating prepaid assets and the net deferred tax asset.  The decrease in securities available for sale can be mostly attributed to pay-downs, maturities, and a decrease in fair value related to an increase in interest rates.

Total liabilities totaled $1.597 billion at September 30, 2018 compared with $1.558 billion at December 31, 2017, an increase of $39.6 million or 2.5%.  Deposits totaled $1.576 billion at September 30, 2018 compared with $1.467 billion at December 31, 2017, an increase of $108.6 million, or 7.4%.  The growth was attributable to increases of $2.3 million in non-interest bearing demand deposits accounts, $62.1 million in interest-bearing demand deposit accounts, $18.7 million in money market accounts, and $26.5 million in time deposits, due to a rate promotion, offset by a decrease of $1.0 million in savings accounts.  The increase in interest-bearing demand deposit accounts was mainly attributable to the seasonal inflow from existing municipal clients.  Also, in the current quarter, the Bank converted its off balance sheet sweep agreement accounts into interest-bearing demand deposit accounts which resulted in the onboarding of approximately $30.0 million in deposits.  FHLB advances and other debt totaled $4.4 million at September 30, 2018 compared with $64.2 million at December 31, 2017, a decrease of $59.9 million, or 93.2%.  The decline in FHLB advances can be attributed to an increase in deposits and decline in securities.

Total shareholders' equity was $156.5 million at September 30, 2018 compared with $149.8 million at December 31, 2017, an increase of $6.7 million, or 4.5%.  The increase in retained earnings of $10.2 million was due primarily to earnings of $13.9 million, offset by $3.7 million in dividends declared.  The increase in accumulated other comprehensive loss of $4.9 million can be attributed to the decline in the fair market value of the securities portfolio.  Also, treasury stock decreased $1.4 million, due to the issuance of shares to the Corporation's employee benefit stock plans.

The total equity to total assets ratio was 8.92% at September 30, 2018 compared with 8.77% at December 31, 2017.  The tangible equity to tangible assets ratio was 7.69% at September 30, 2018 compared with 7.48% at December 31, 2017.  Book value per share increased to $32.35 at September 30, 2018 from $31.10 at December 31, 2017.  As of September 30, 2018, the Bank's capital ratios were in excess of those required to be considered well-capitalized under the regulatory framework for prompt corrective action and the Corporation met all capital adequacy requirements to which it is subject.

Other Items

The market value of total assets under management or administration in our Wealth Management Group was $1.923 billion at September 30, 2018, including $264.6 million of assets under management or administration for the Corporation, compared to $1.952 billion at December 31, 2017, including $346.8 million of assets under management or administration for the Corporation, a decrease of $28.5 million, or 1.5%.  The decline in total assets under management or administration can be mostly attributed to a decrease in the Corporation's pledged securities portfolio for municipal deposits and the decrease in the mutual fund sweep agreement accounts (previously described under balance sheet activity), which are held by its Wealth Management Group.

About Chemung Financial Corporation

Chemung Financial Corporation is a $1.8 billion financial services holding company headquartered in Elmira, New York and operates 35 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)   2018   2018   2018   2017   2017
ASSETS                    
Cash and due from financial institutions   $   31,831     $ 30,837     $   25,473     $   27,966     $   34,572  
Interest-earning deposits in other financial institutions       82,081       3,978         5,531         2,763         21,806  
  Total cash and cash equivalents       113,912       34,815         31,004         30,729      
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