Chemung Financial Corporation (CHMG) Earnings Call Transcript & Summary

Good day, ladies and gentlemen, and welcome to the Chemung Financial Corporation 2020 Annual Meeting of Shareholders. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Mr. David Dalrymple, Chairman of the Board of Directors. Sir, the floor is yours.

Thank you. Welcome to our 186th Annual Stockholders' Meeting of Chemung Financial Corporation. As noted, I'm Dave Dalrymple, Chairman of your Board of Directors. We appreciate your attendance today, either remotely or in person. And we want to note that with this current health crisis, it demonstrates just how essential banking services are to our way of life. It's appropriate to recognize the adaptability and effort of our employees in responding to the needs of our clients. Now more than ever, our customers and employees need the financial strength of our company to support them. This support will surely reduce the short-term profits of the bank. But in the long term, we can make no better investment. The current economic disruption leaves no one unaffected, but each business or customer will have a different story. Our ability to listen to our customers and responsibly develop a plan to support them will tremendously impact the communities we serve. So the mission is simple: Do whatever it takes to support our communities, our customers and our employees. I'd like to hand the meeting over to Anders Tomson, our President, who will now chair the rest of the meeting. Thank you.

Thank you, Dave. And I'd also like to welcome all of you to our annual meeting, our Annual Shareholders' Meeting. And I, too, want to first reiterate our commitment to serving our clients and our communities in this very challenging time. This afternoon, in addition to the formal business matters upon which shareholder action is required, we'll report to you on the condition of your company, what we accomplished in 2019 and our plans for the future. And because of the extraordinary circumstances caused by the global outbreak of the coronavirus, we will report today on its impact on the company and the steps we've taken to respond to the pandemic. I hope all of you had access to the information of the presentation that can be found at www.chemungcanal.com so that you can follow along under annual meeting. I would like to remind you that some of the remarks today contain certain forward-looking information and are, therefore, subject to risks and uncertainties as described in our SEC filings. We do appreciate your attendance here today and hope that our discussions about the company meets your expectations. Your support and investment in our company are very important. First, I'd like to introduce you to my fellow directors identified on Slide #4. I would like to express my personal appreciation to all the directors for their incredible efforts on behalf of our company and for their steadfast confidence and support. Today's meeting coincides with the retirement of Bruce W. Boyea from our Board of Directors, who joined Chemung Canal Trust Company and Chemung Financial Corporation's 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 have proven invaluable to our company. We extend our thanks and our appreciation for his commitment of time and energy to help us grow and flourish. Now Bruce's departure follows the recent retirement of another director, Kevin Tully. While Kevin's tenure on the Board was shorter, his understanding of banking issues, his accounting and his tax expertise and especially his friendly demeanor are missed. We extend our gratitude and thanks to both Kevin and Bruce for their service to our company. I believe the key to success for any President is to surround himself with highly talented people, and I am fortunate to have an outstanding management team. Our executive management team has readily stepped up to the challenge and delivered for our shareholders. These individuals, highlighted on Slide #6, manage our major lines of business and functional operating areas. They not only oversee critical components of the corporation, they also provide consistent guidance and leadership across the entire franchise on a daily basis. They are broadly responsible for prudently managing risk and ensuring the profitability of the corporation across the full breadth of the enterprise. Their enthusiasm and professionalism is fundamental to our success, and I am appreciative for their expertise and initiative. Moreover, I am thankful for their tremendous contributions to our results. Our official parties today are: proxies, Karl Krebs and Tom Whitaker; inspector of election, Monica Ridosh; SEC Counsel, Ben Azoff, Luse Gorman; and our external auditors, Tyler Pheanis and Bill Hoving, Crowe LLP. Now the principal business of the Annual Meeting of Shareholders is to elect 3 directors for terms of 3 years each and 1 director for a term of 1 year; to approve, on a nonbinding advisory basis, the compensation of the named executive officers, also referred to as say-on-pay; and to ratify the appointment of Crowe LLP as the company's independent registered public accounting firm for the fiscal year ending December 31, 2020. The Board of Directors set March 18, 2020, as the date of record for the shareholders' meeting. Pursuant to the bylaws, the Board of Directors has appointed Monica L. Ridosh, as inspector of election to serve at this meeting of shareholders. The oath of inspector has been executed by the inspector and received by the secretary. Therefore, I direct the oath of inspector be affixed to the minutes of this meeting. At this time, I would ask the Corporate Secretary of Chemung Financial Corporation, Kathleen S. McKillip to present the affidavit of mailing of the notice of meeting and accompanying proxy materials and to report on the existence of a quorum for the meeting.

I present the affidavit of mailing, which states that the notice of meeting, accompanying proxy materials and the annual report were mailed beginning April 1, 2020, to shareholders of record on March 18, 2020, the record date for shareholders entitled to notice of this meeting. In addition, I also present a list of the holders of record of the company's common stock as of the close of business on March 18, 2020. Finally, I have been advised by the inspector of election that at least the majority of the company's outstanding shares entitled to vote is represented in person or by proxy at today's meeting. Since the majority of the company's shares are represented here today, a quorum is present and the meeting is duly convened.

Thank you. The report of the secretary and the existence of a quorum is accepted. I direct the affidavit of mailing and a list of holders of record be filed with the records of this meeting. As in the past, the proxies will make and second a series of motions. I will now entertain a motion to dispense with the reading of the minutes of the last meeting of shareholders held on May 9, 2019.

I move to dispense with the reading of the minutes of the meeting of shareholders held May 9, 2019.

I second the motion.

You have heard the motion to dispense with the reading of the minutes. All in favor, please say aye. [Voting]

Any opposed say no? [Voting]

Any abstentions? [Voting]

Motion carried. The first item of business is the election of 3 directors for a 3-year term and 1 director for a 1-year term. A plurality of votes cast is required to elect each director nominee. Three of the directors elected today will hold office until the 2023 Annual Meeting of Shareholders or until their successors are elected and qualified. And 1 director elected today will hold office until 2021 -- until the 2021 Annual Meeting of Shareholders or until his successor is elected and qualified. As indicated in the company's proxy statement, the Board of Directors has nominated the following individuals for a 3-year term: Stephen M. Lounsberry III, Anders M. Tomson, G. Thomas Tranter Jr. And the Board of Directors has nominated the following individual for a 1-year term, Larry H. Becker. The second item of business is to approve the compensation of the named executive officers, also known as say-on-pay proposal. And the third item of business is the ratification of appointment by the Board of Directors of Crowe LLP as the company's independent registered public accounting firm for 2020. We will now hear the inspector's report of the voting results. Mrs. Ridosh?

With respect to proposal 1, election of directors, each nominee received at least 3,258,251 votes.

Therefore, each nominee named in the proxy statement has been duly elected a director of the company.

With respect to proposal 2, approval of the compensation of the named executive officers, the say-on-pay proposal, the voting results are as follows: for, 3,049,084; against, 403,876; and 61,320 abstained.

Therefore, proposal 2 has been approved.

With respect to proposal 3, the ratification of the appointment of Crowe LLP as the company's independent registered public accounting firm for 2020, the voting results are as follows: for, 4,156,752; against, 30,328; and 64,828 abstained.

Therefore, proposal 3 has also been ratified. The business portion of this meeting is now concluded, and I am pleased to give the following remarks. On behalf of the Board, management and staff, I want to again thank you for participating today and for your support of our company. I am pleased to represent my fellow colleagues and the directors of Chemung Financial Corporation to address our shareholders and report on our company's results for 2019. As I previously stated, today's presentation will be somewhat different from years past. As has been customary, we'll provide an update on the company's initiatives and financial results for the year ending 2019. In addition, we'll provide an overview of the company's response to COVID-19 and certain initiatives we have undertaken to respond to the pandemic and the preliminary impact of these initiatives on the corporation. Although overshadowed by current events, the past year was a successful year for Chemung Financial Corporation. I look forward to highlighting the year's financial results achieved through the execution of clear strategies targeted to improve the performance of the company. In 2019, we continued to deliver strong results for all our constituent shareholders, our engaged colleagues, valued shareholders, diverse communities and our clients, whose loyalty and commitment drive these results. The corporation's balance sheet is strong with stable capital that supports our risk-based assets and enables us to execute banking strategies confidently. As of December 31, 2019, our company's balance sheet increased 1.9% to $1.8 billion, as evidenced on Slide #10. Year-over-year, net loans remained relatively stable, totaling $1.3 billion as principal paydowns nearly equaled new loan production. Total deposits also remained largely unchanged at $1.6 billion. Shareholder equity grew to $183 million at year-end 2019. The result was a 10.7% increase over year-end 2018. As you can see on Slide 12, the corporation has consistently grown capital over an extended period, largely through retained earnings. The graph on Slide 13 highlights our key capital ratios. All of our capital ratios exceed regulatory standards. And our banking regulators recognize us as a well-capitalized institution. In addition to maintaining a strong balance sheet and growing capital, the company also achieved strong earnings in 2019 with net income of $15.6 million or $3.21 per share. The result was the second highest level of earnings in the company's 186-year history. These results achieved a return on average assets of 0.88% and a return on average equity of 8.86%. At December 31, 2019, the stock price was $42.50. This represented a year-over-year increase of 2.9%, as seen on Slide 16. However, as most of you are aware, the current stock price has reduced dramatically from this year-end figure. The company's share price has been materially impacted by the market uncertainties of the global pandemic. Chemung Canal is not alone in the result -- in this result as broad market indices and the financial sector as a whole have also experienced adverse impacts to value and elevated volatility. Of course, our focus remains on value and total shareholder return. In 2019, the corporation continued its tradition of uninterrupted dividend payments, paying approximately $5 million or $1.04 per share. Slide 18 illustrates the significant strategies that the bank executed on this year in its efforts to maximize earnings, reduce risk, improve the client experience and continue our strong position of community investment. In 2019, the corporation originated more than $267 million in loans. By design, this origination activity was more diverse than in years past. In 2019, 59% of originations were in commercial lending as compared to 65% in the prior year. As you can see on Slide #19, 2019 saw an elevated level of residential lending activity. Commercial loan balances continue to grow, however. In 2019, this portfolio grew 1.7% to $879 million. Notably, on Slide 21, the composition of the commercial portfolio also evolved. Again, by design, the percentage of commercial real estate to total commercial loans decreased by year-end while the portfolio balance of commercial and industrial loans materially increased. In total, we are pleased with the direction of the asset mix of the commercial loan book as well as the diversity of the loan origination -- as well as the diversity of loan origination activity broadly. In 2019, the company experienced 2 previously disclosed adverse credit events. While these increases are disappointing, they are largely attributable to the 2 commercial credit relationships which prompted a $6.1 million pretax specific reserve allowance. As you can see, these events increased our nonperforming assets to $18.5 million. At year-end, commercial loans 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. This addition will strengthen the credit process and improve the efficiency of delivering capital to our clients, 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. In 2019, we continue to focus on our core depository relationships. This strategy is yielding an important service model that permeates throughout our entire deposit franchise. On Slide 24, our 2019 deposit balances across all products and lines of business were stable and grew $2.9 million. This year, we experienced an 8 basis point decrease in the bank's net interest margin fully taxable equivalent. Given the Federal Reserve's pattern of interest rate adjustments, 4 increases in 2018 and 3 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 much more rapidly than deposits. And despite of these challenging market conditions, I am very pleased with our ability to maintain our traditionally low funding costs. As you can see, the corporation's cost of funds did rise by 7 basis points this year. However, our peer's funding costs increased by 23 basis points. The impact of this discipline was an increase in the bank's net interest income, continuing our track record of prudent balance sheet management and growth, coupled with disciplined interest rate management. In fact, the $60.6 million in net interest income achieved in 2019 was a record level for the corporation. Shown on Slide 28, Wealth Management Group completed another successful year in 2019 that contributed importantly to the corporation's results. The established reputation of our Wealth Management Group continued to serve us well throughout our diverse footprint. At year-end, the Wealth Management Group reported total assets under management and administration of $1.9 billion with total fee income exceeding $9.5 million. As you can see on Slide #29, the Wealth Management Group's contribution to the corporation's bottom line continues to increase, and we are pleased with the momentum in this important business. The community banking business is growing in complexity, and there's continued pressure to manage emerging trends in technology and risk. These requirements place tremendous cost burdens on the corporation. An important part of our success in 2019 was our continued focus on finding operating cost efficiencies. This year, our noninterest expense decreased by 1.9% to $55.7 million. A key discipline has been maintaining the company's salary and related costs. Even with the continued growth of the bank and the ever-increasing regulatory demands, we remain steadfast in managing our headcount. As you can see, we continue to reduce our FTE count year-over-year and achieve greater results with a focused, more nimble and professional workforce. 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. This year, we again executed significant changes to our branch network. Over the past 14 months, we've consolidated 2 traditional branch offices located in Johnson City and Painted Post. And we're pleased to say that our client retention after consolidation has been very high. Additionally, we closed our Towanda, Pennsylvania branch office in April 2020, as illustrated on Slide #32. These modifications follow 2 new branch offices in our Capital Bank Division in 2018. We opened an office in the city of Schenectady and town of Wilton in Saratoga County last year. These 2 locations enhanced our distribution capabilities for our growing client base in the capital region. Both branches have exceeded expectations relative to client acquisition and financial results. With these modifications, our branch network now consists of 32 offices serving 13 counties in 2 states. In 2019, we have continued to invest in digital improvements to our offerings with upgrades to our mobile banking and 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 an end-to-end digital loan processing system. Our significant importance in 2020, we will continue our thoughtful investment in antifraud and security enhancements. While traditional banking through branch offices will never go away, it's 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 digitally 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 an expanded robotic automation, again improving the efficiency of the corporation and mitigating risk. Over our long history, the corporation has adapted to changes in the economy, regulatory environment, customer trends and technology. We continue to evolve and remain an important resource for our clients and communities. As we consider our future, we recognize the extraordinary circumstances caused by the coronavirus, which has spread across the globe and materially affected all components of our communities, business environment, lifestyles, habits and customs. Globally, the pandemic has been intensely disruptive. At the bank, we have quickly altered how we work and interact as we continue to ensure that critical financial services are provided to our clients and communities during this crisis. Beginning on Slide #36, we highlight some of the important strategies as we work to ensure a safe and healthy work environment for our colleagues and clients while continuing to provide the essential banking services that are vitally important to our communities. As was reported earlier, our company has a strong capital base and liquidity position that will provide a solid financial foundation as we manage our business through this health care and economic crisis. This solid financial footing, coupled with our elevated risk and credit departments, will serve the corporation well as we prepare for the changing economic landscape and its impact on our company. And perhaps most importantly, our deep community relationships will keep us grounded and informed of changes in tune with the evolving community needs and the emerging risks. We will continue to respond quickly as circumstances dictate. Now the next 5 slides, 38 through 42, provide a detail of the timeline of the pandemic since its reported outbreak in China in December of 2019. Since that time, the virus has quickly spread throughout the globe and caused our bank to react nimbly to this emerging and significant threat. The first case of COVID-19 was reported in New York on March 1, 2020. And the next day, on March 2, the bank assembled its task force and began to plan and initiate changes to our operating model and implement key strategies. On March 7, New York state declared a state of emergency. And on March 13, the President declared a national state of emergency. We implemented our revision to our retail network soon thereafter as we restricted lobby access and began a series of 3 temporary branch closures that started on March 17. On March 20, the state paused all nonessential business. As we all know, banking is a fundamental service and deemed essential. Congress approved the CARES Act on March 27, which targets several economic recovery and stimulus efforts. Throughout April, the bank committed to providing economic relief for our clients and deployed significant resources for our community to access capital guidance and support. The COVID-19 pandemic will have significant impacts on the company's balance sheet and earnings. The Federal Reserve Bank cut the federal funds overnight rate by 150 basis points, which had an immediately negative impact on the bank's interest earnings. In addition, the broader impacts on our economy and the associated uncertainty provide tremendous challenges for the bank. However, our strong financial foundation and our disciplined approach grounded in sound banking practices provides a framework from which we execute our plans decisively and with confidence. An important component of our agenda was the establishment of key operating pillars, which guide us through a quickly changing landscape, necessitating evolving strategies. They are: we are open for business; we will ensure a safe and healthy work environment; we will support our colleagues and our communities; we will provide consistent, honest and transparent communications; and we will always base our initiatives and strategies on the execution of safe and sound banking practices. Furthermore, our strategies consider the interest of all our core stakeholders: our shareholders, our clients, our colleagues and, of course, our communities. As shown on Slide #46, an initial step to ensuring safe work environments and the continuation of service was to modify our retail branch network. We temporarily closed certain branches and restricted lobby access to an appointment system. Everyday transactions are managed through the drive-through while more complex transactions are handled in our lobbies under appropriate social distancing guidance. Throughout this crisis, we continue to open new accounts, we close loans and we're providing the full array of our wealth management products. We ensured that our buildings were safe. And we quickly instituted CDC and Department of Health guidelines. We ensured business continuity by relocating and splitting key work teams, expanding the bank's existing video conferencing capacity and broadly increasing our digital connectivity. We instituted robust remote work capabilities and lowered the census of our primary administrative buildings by more than 70%. Moving to Slide 48. We have focused on the specific needs and concerns of our colleagues. We created special access to financial resources and protected our at-risk population. We've provided accommodations and resources to help manage child care and elder care conflicts. We elevated safe work practices in all of our facilities across the footprint. We followed social distancing guidance and provided PPE to our teams as needed. And we can meet internally by phone, e-mail and video with consistency and externally through e-mail blasts, social media and video. We have also been present on local TV and in our local newspapers. We have networked with local and state officials, our peer banking companies, key financial partners as well as all of our regulators to ensure that we're instituting initiatives and protective measures timely and wisely. Based upon this broad communication network, we delivered consistent and clear messaging in a timely manner through multiple channels. Now many of our clients are experiencing financial distress from the pandemic. The bank instituted several measures, shown on Slide #51, to support both our consumer and business clients. The bank suspended many depository and ATM fees and worked with our clients in distress with modified loan payment plans. We provided loan modifications to provide temporary cash flow relief. In total, we modified more than $300 million in loans, supporting 976 clients. A key pillar of the CARES Act is the Payroll Protection Program, which provided support to small businesses who were negatively impacted by the pandemic. This program distributes capital through SBA-guaranteed loans and is delivered through financial institutions. As a certified SBA lender, we immediately embraced this program to provide badly needed capital to all of our communities. Our institution participated throughout both Phase 1 and Phase 2 of the PPP loan program. As of April 30, we assisted nearly 1,000 companies to access $181 million in capital, as noted on Slide #54. We estimate that this program has helped us support approximately 22,000 employees in our footprint. And I'm pleased to say those numbers are growing today. Our Wealth Management Group has also provided critical support for our clients. The CARES Act waived minimum distribution requirements for 401(k) plans and provided hardship waivers for needed distributions. And the pandemic created intense volatility in the market, which put a premium on the personal service and counsel our clients have grown to expect and rely upon. As we now consider New York state beginning its reopen process, we will continue to be guided by the key pillars that make up our plan. We will focus on safety and the health of our community. We will continue to be a valued and responsive financial resource, utilizing our full portfolio of products and services for all of our communities. Today, we are developing a multiphase regional plan to meet the needs of stakeholders. We will create a plan knowing that we'll be nimble and react quickly as the health care environment and the business needs of our clients evolve. In our 186-year history, we have withstood many challenges. We have weathered pandemics, world wars and economic crises. We have continued to provide critical banking services to our communities during this global pandemic, and we will proceed throughout with the confidence that our strong financial standing and long history provides. We will embrace our core banking, community banking principles and pillars. We will focus on our stakeholders and make long-term decisions grounded in the greater good and the prospect for a continued -- for our continued success and the well-being of the communities that we proudly assist. As we now close out this year's annual meeting, I am compelled to recognize our colleagues who commit so much of their time, talents and resources, volunteering to help those in need, endeavoring to enhance the quality of life of their fellow citizens. As we have seen our communities grapple with the effects of the pandemic, this community support is more important now than ever. The outpouring of assistance that we have provided our communities through this crisis and the appreciation for our commitment heartens me and reinforces the fundamental role we proudly serve for all of our stakeholders. Although we are pleased with our results for 2019, we recognize the significant challenges that lie before us. However, I remain confident in our future, the understanding that our strong community banking platform has a deep and lasting positive impact on our stakeholders and shareholders, clients, colleagues and communities. This bolsters me, and it gives me great promise. Earlier in the presentation, I mentioned the retirement of Bruce Boyea and Kevin Tully from our Board of Directors. I would also like to acknowledge several bank employees who retired during this past year, appearing on Slide #60. Their commitment to our company and their dedicated service helped strengthen our past and prepare us for the future. We thank all of them and extend our best wishes for a happy and healthy retirement. In closing, 2019 has been a year of tremendous activity and results. We recognize the challenge before us and continue forward committed to developing initiatives that support our clients and the communities that we assist. Our success will be the direct result of our hardworking and committed staff and the guidance and dedication of our Board of Directors. We are grateful for their assistance, and we are grateful for their support. On behalf of the Board, management and staff, thank you for your continued commitment to our company. I will now ask for a motion to adjourn the meeting.

I move that this meeting be adjourned.

I second the motion.

You have heard the motion to adjourn the meeting. All in favor, please say aye. [Voting]

Any opposed say no? [Voting]

Any abstentions? [Voting]

The motion is carried. And the annual meeting of the corporation is adjourned. Thank you very much.

Ladies and gentlemen, that will conclude today's call. We thank you for your participation. You may disconnect your phone line at this time, and have a great day.