EXHIBIT A
TABLE OF QUARTERLY MARKET PRICE RANGES
Market Prices of Chemung Financial Corporation Stock
During Past Three Years (dollars)
1999 1998 1997
1st Quarter 26 1/2 - 29 21 1/2 - 25 1/2 16 13/16 - 18
2nd Quarter 24 - 27 25 3/4 - 30 16 3/4 - 17 5/8
3rd Quarter 24 - 26 26 1/4 - 30 16 13/16 - 18 3/4
4th Quarter 24 1/4 - 25 3/4 22 3/4 - 28 19 1/8 - 23 3/4
EXHIBIT B
TABLE OF DIVIDENDS PAID
Dividends Paid Per Common Share by Chemung Financial Corporation
During Past Three Years
1999 1998 1997
January 4 $0.170 $0.155 $0.140
April 1 0.170 0.155 0.140
July 1 0.190 0.170 0.155
October 1 0.190 0.170 0.155
$0.720 $0.650 $0.590
As of December 31, 1999 there were 747 registered holders of
record of the Corporation's stock. Chemung Financial Corporation
common stock is inactively traded in the over-the-counter market.
The quarterly market price ranges for the Corporation's stock for
the past three (3) years are based upon actual transactions as
reported by brokerage firms which maintain a market or conduct
trades in the Corporation's stock and other transactions known by
the Corporation's management.
EXHIBIT C
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCLUDING FINANCIAL DATA EXHIBITS
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The purpose of this discussion is to focus on information about
the financial condition and results of operations of Chemung
Financial Corporation that is not otherwise apparent from the
consolidated financial statements included in this annual report.
Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an
understanding of the following discussion and analysis.
Forward-Looking Statements
Statements included in this discussion and in future filings by
Chemung Financial Corporation (the "Corporation") with the
Securities and Exchange Commission, in Chemung Financial
Corporation press releases, and in oral statements made with the
approval of an authorized executive officer, which are not
historical or current facts, are "forward-looking statements"
made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995, and are subject to
certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently
anticipated or projected. Chemung Financial Corporation wishes to
caution readers not to place undue reliance on any such forward-
looking statements, which speak only as of the date made. The
following important factors, among others, in some cases have
caused and in the future could cause Chemung Financial
Corporation's actual financial performance to differ materially
from that expressed in any forward-looking statement: (1) credit
risk, (2) interest rate risk, (3) competition, (4) changes in the
regulatory environment, and (5) changes in general business and
economic trends. The foregoing list should not be construed as
exhaustive, and the Corporation disclaims any obligation to
subsequently revise any forward-looking statements to reflect
events or circumstances after the date of such statements, or to
reflect the occurrence of anticipated or unanticipated events.
Description of Business
Chemung Financial Corporation is a one-bank holding company with
its only subsidiary being Chemung Canal Trust Company (the
"Bank"), a full-service community bank with full Trust powers.
Therefore, the financial condition should be examined in terms of
the acquisition and deployment of funds within its "market
areas". Management defines the market areas of Chemung Canal
Trust Company as those areas within a 25-mile radius of its
branches in Chemung, Steuben, Schuyler, and Tioga counties,
including the northern tier of Pennsylvania. The Bank's lending
policy restricts substantially all lending efforts to these
geographical regions.
Management of Credit Risk - Loan Portfolio
The Bank manages credit risk, while conforming to state and
federal laws governing the making of loans, through written
policies and procedures; loan review to identify loan problems at
the earliest possible time; collection procedures (continued even
after a loan is charged off); an adequate allowance for loan
losses; and continuing education and training to ensure lending
expertise. Diversification by loan product is maintained through
offering commercial loans, 1-4 family mortgages, and a full range
of consumer loans.
The Loan Committee of the Board is designated to receive required
loan reports, oversee loan policy, and approve loans above
authorized individual and Senior Officers Loan Committee lending
limits. The Senior Loan Committee, consisting of the president,
two executive vice presidents, senior lending officer, mortgage
officer, and consumer loan officer, implements the Board-approved
loan policy.
Supervision and Regulation
The Corporation, as a bank holding company, is regulated under
the Bank Holding Company Act of 1956, as amended (the "Act"), and
is subject to the supervision of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board"). Generally,
the Act limits the business of bank holding companies to banking,
or managing or controlling banks, performing certain servicing
activities for subsidiaries, and engaging in such other
activities as the Federal Reserve Board may determine to be
closely related to banking and a proper incident thereto.
The Bank is chartered under the laws of New York State and is
supervised by the New York State Banking Department.
The Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") was passed in order to protect depositors and
taxpayers from the excesses of the S and L problems of the
1980's. There are a number of provisions in this act that
significantly increase the operating costs of the Bank. These
rules specifically impact the cost of external audit, the
mortgage loan product (through appraisal requirements), as well
as all other loan products.
Competition
The Bank is subject to intense competition in the lending and
deposit gathering aspects of its business from commercial and
thrift banking institutions, credit unions and other providers of
financial services, such as brokerage firms, investment
companies, insurance companies and Internet vendors. The Bank
also competes with non-financial institutions, including retail
stores and certain utilities that maintain their own credit
programs, as well as governmental agencies that make available
loans to certain borrowers. Unlike the Bank, many of these
competitors are not subject to regulation as extensive as that
described under the "Supervision and Regulation" section and, as
a result, they may have a competitive advantage over the
Corporation in certain respects. This is particularly true of
credit unions, as their pricing is not encumbered by income
taxes.
Competition for the Bank's fiduciary services comes primarily
from brokerage firms, independent investment advisors, and a non-
bank trust company operating in Steuben County with newly
expanded powers. This is considered to be significant
competition, as these firms devote much of their considerable
resources toward gaining larger positions in these markets.
Trust assets under administration, however, totaled $1.5 billion
at December 31, 1999, compared to $1.4 billion a year earlier and
$1.2 billion at December 31, 1997. Relative to the Bank's
consolidated net assets, the Trust and Investment Division is
unusually large and is responsible for the largest component of
non-interest revenue.
During 1999, as well as 1998 and 1997, the Trust and Investment
Division noted a continued increase in the competition for
personal and corporate investment management services in our
market areas. Early in 1998, management formed a strategic
alliance with a third party administrator for the purpose of
outsourcing retirement fund recordkeeping. The tradeoff in
revenue and expense is not material, but the alliance contributed
importantly to our efforts to bring first-rate technology to our
retirement services clients. We see this strategy as extremely
important in our efforts to remain in the retirement services
business, while reducing the requirements for investing in
related technology.
Year 2000
In 1997, management advised its Board of Directors of the many
issues surrounding the approach of January 1, 2000. Nearly all
computer hardware and software developed during the century had
been programmed with two-digit reference to each year. Such
hardware and software, if not upgraded by January 1, 2000, could
become useless.
Beginning at that time, and continuing throughout 1998 and 1999,
under the direction of the Bank's operations committee,
management undertook a five-phase project to respond to the
issue, with major emphasis on identifying all applications and
databases supporting the Bank's mission-critical applications.
The five phases included: awareness, assessment, renovation,
validation and implementation, with a goal of neutralizing not
only the Bank's vulnerability, but also to determine the
financial capacity of its vendors, determine the need for
alternate vendors, and evaluate the capacity of its customers to
respond to this challenge. Additionally, a contingency plan was
formulated to assure business continuation in the event of Year
2000 system failures.
All of these efforts proved successful and we entered the year
2000 with all operating systems functioning normally with no
disruption in service to our customers. A committee will
continue to monitor and evaluate the Bank's efforts throughout
2000, as well as any possible effects of Year 2000 on borrowers
and other third parties that may not be immediately apparent.
Expenditures associated with Year 2000 readiness, including
hardware and software upgrades, as well as expenditures of
testing totaled approximately, $250,000.
While some of the hardware and software expenditures may have
been made even without the Year 2000 issue, the greatest
opportunity cost of the Year 2000 challenge was the management
time spent on this issue versus other areas, such as new product
development. With the Year 2000 efforts successfully completed,
we look forward to re-deploying these management resources to
other opportunities available to the Corporation.
Employees
The Corporation and its banking subsidiary had 303 full-time
equivalent employees (FTE's) on December 31, 1999, versus 291 at
the beginning of the year and 281 on December 31, 1997. The
employment trend is relatively stable.
Consolidated Balance Sheet Comments
Average earning assets for 1999 grew by $60.4 million or 11.4% to
$591.6 million, compared to $531.2 million in 1998 and $490.9
million in 1997. Loan activity was strong throughout the year,
with the year end 1999 balance growing $30.7 million or 9.3% to
$360.0 million. Particular strength was shown in business loans,
which grew by $17.2 million or 15.1%. Mortgage (both residential
and commercial) and consumer loan growth was also strong
throughout the year, with year end balances growing $5.0 million
(5.6%) and $8.5 million (6.8%), respectively. Growth in consumer
lending continues to be influenced by the volume of indirect auto
financings. Average total loan balances were $346.5 million
versus $311.7 million during 1998 and $291.3 million during 1997.
The growth in average loans, as well as, a $25.5 million increase
in average investments (at amortized cost), was funded by a $55.7
million increase in average total funding liabilities, including
deposits and other borrowed funds. Average deposits for 1999
were $494.1 million, an increase of $26.9 million or 5.8% when
compared to the 1998 average of $467.2 million. Average deposits
in 1997 totaled $450.2 million. Period end deposit balances were
up $15.7 million or 3.4%, with this growth centered in time and
investment certificate balances which increased $21.6 million
(107.1%) and $4.6 million (3.6%), respectively. These increases
were offset primarily by lower year end 1999 demand deposit and
insured money market account balances compared to year end 1998
which declined $3.6 million and $7.1 million, respectively. It
should be pointed out that with year end 1998 falling on a
Thursday, balances were somewhat inflated as compared to year end
1999 due to the fact that social security direct deposits, which
are normally received on the 3rd of the month, were received and
credited on December 31, 1998. This year, these same deposits
were received and credited on January 3, 2000. Accordingly,
period end 1999 deposit growth over period end 1998 is less than
the growth in average deposits realized in 1999 versus the 1998
average deposits. Other borrowed funds, consisting primarily of
securities sold under agreements to repurchase and Federal Home
Loan Bank advances, increased on average by $28.7 million. While
the Bank entered into no new leveraging transactions during 1999,
the average increase is related to leveraged transactions which
occurred in the later half of 1998. The increase of $22.8
million in year end 1999 Federal Home Loan Bank advances occurred
primarily during November and December of 1999, and is related to
both a decrease in deposits during December as well as
maintaining higher cash on hand balances as it related to Year
2000 contingency planning. These cash balances were
approximately $10.6 million higher than year end 1998 balances.
Exhibit I BALANCE SHEET COMPARISONS
(in millions)
Change Compounded
Average Balance 1998 Annual
Sheet 1999 1998 1997 1996 1995 1994 to Growth 5
1999 Years
Total Assets $642.2 $584.0 $539.2 $516.2 $494.1 $431.2 10.0% 8.3%
Earning Assets 591.6 531.2 490.9 469.5 447.1 394.7 11.4% 8.4%
Loans, net of
unearned income
and deferred fees 346.5 311.7 291.3 273.9 249.1 221.4 11.2% 9.4%
Investments (1) 245.0 219.5 199.8 195.6 198.0 173.3 11.6% 7.2%
Deposits 494.1 467.2 450.2 440.9 424.4 374.6 5.8% 5.7%
Wholesale funding
(Advances) 66.6 37.0 13.1 2.9 N/A N/A 80.0% N/A
Tier I equity (2) 57.6 52.6 51.6 46.4 41.7 38.2 9.5% 8.6%
<FN>
<FN1>
(1) Average balances for investments include securities available for sale
and securities held to maturity, based on amortized cost, and federal funds
sold and interest bearing deposits.
<FN2>
(2) Average shareholders' equity less intangible assets and accumulated
other comprehensive income.
</FN>
Change Compounded
Ending Balance 1998 Annual
Sheet 1999 1998 1997 1996 1995 1994 to Growth 5
1999 Years
Total Assets $653.2 $620.1 $545.5 $529.2 $499.3 $494.3 5.3% 5.7%
Earning Assets 597.6 563.5 486.1 474.6 446.3 448.9 6.1% 5.9%
Loans, net of
unearned income
and deferred fees 360.0 329.3 296.9 283.7 263.0 236.5 9.3% 8.8%
Allowance for
loan losses 4.7 4.5 4.1 4.0 3.9 3.6 3.5% 5.3%
Investments (1) 237.1 243.3 196.8 196.3 189.6 212.1 -2.5% 2.3%
Deposits 481.8 466.1 451.0 439.6 426.9 432.3 3.4% 2.2%
Wholesale
funding (Advances) 94.2 71.4 20.5 10.0 N/A N/A 31.9% N/A
Tangible equity(2) 59.7 59.9 54.8 48.7 44.9 37.2 -0.3% 9.9%
<FN>
<FN1>
(1) Investments include both securities available for sale and securities
held to maturity, at estimated fair value, and interest bearing deposits.
<FN2>
(2) Shareholders' equity less intangible assets.
</FN>
Securities
The Board-approved Funds Management Policy includes an investment
portfolio policy which requires that, except for local municipal
obligations that are sometimes not rated or carry ratings above
"Baa" but below "A" by Moody's or Standard and Poors, debt
securities purchased for the bond portfolio must carry a minimum
rating of "A". Marketable securities are classified as Available
for Sale while local direct investment in municipal obligations
are classified as Held to Maturity. The Available for Sale
segment of the securities portfolio at December 31, 1999, was
$227.4 million compared to $235.3 million a year earlier and
$185.3 million at the end of 1997. At year-end 1999, total
unrealized depreciation in the securities available for sale
portfolio was $504 thousand, compared to an unrealized gain of
$8.983 million a year ago. This change is reflective of the
impact that higher market interest rates had on the fair value of
the bond portfolio.
The components of this change are set forth in the following
table (in thousands):
1999 1998
Estimated Unrealized Estimated
Amortized Fair Appreciation Amortized Fair Unrealized
At December 31 Cost Value (Depreciation) Cost Value Appreciation
U.S. Treasury
Securities $ 15,507 $ 15,341 $ (166) $ 23,013 $ 29,295 $ 282
Obligations of
other U.S.
Government
Agencies 96,004 92,697 (3,307) 77,787 78,233 446
Mortgage-
backed 77,419 73,747 (3,672) 89,245 89,593 348
securities
Obligations of
states and
Political
Subdivisions 21,359 20,734 (625) 20,967 21,432 465
Corporate
bonds 10,663 10,130 (533) 9,682 9,705 23
and notes
Corporate Stocks 6,936 14,735 7,799 5,617 13,036 7,419
Totals $227,888 $227,384 $ (504) $226,311 $235,294 $ 8,983
Included in the above table are 44,839 shares of SLM Holding
Corporation at a cost basis of approximately $4 thousand and
estimated fair value of $1.894 million. These shares were
acquired as preferred shares of Student Loan Marketing
Association ("SALLIE MAE"), a permitted exception to the
Government regulation banning bank ownership of equity securities
in the original capitalization of the U.S. Government Agency.
Later, the shares were converted to common stock as SALLIE MAE
recapitalized. Additionally, at December 31, 1999, the Bank's
portfolio held marketable equities totaling $89 thousand at cost,
with a total estimated fair value of $5.964 million. The shares,
other than SLM Holding Corp., were acquired prior to the
enactment of the Banking Act of 1933. Non-marketable equity
securities included in the Bank portfolio are 10,572 shares of
Federal Reserve Bank and 52,450 shares of the Federal Home Loan
Bank of New York. They are carried at their cost of $528.6
thousand and $5.245 million, respectively. The fair value of
these securities is assumed to approximate their cost. The number
of shares of these last two investments is regulated by
regulatory policies of the respective institutions.
Asset Quality
Non-performing loans at year end decreased to $1.405 million
versus $4.853 million at the end of 1998 and $1.617 million at
the end of 1997, and represented 0.39% of total loans outstanding
compared to 1.5% at the end of 1998 and 0.54% on December 31,
1997. The decrease in 1999 and the increase in 1998 relate
primarily to one real estate secured commercial loan which was
paid in full during the fourth quarter of 1999. Net loan charge
offs were $517 thousand or 0.15% of average outstanding loans in
1999, compared to $436 thousand or 0.14% of average outstanding
loans in 1998 and $680 thousand or 0.23% of average outstanding
loans in 1997. The allowance for loan losses at December 31,
1999 was 1.30% of total outstandings versus 1.37% a year ago and
1.40% at December 31, 1997.
Capital Resources and Dividends
The Corporation continues to maintain a strong capital position.
Tangible shareholders' equity at December 31, 1999, was $59.7
million or 9.13% of total assets compared to $59.9 million or
9.65% of total assets a year earlier and $54.8 million or 9.98%
at December 31, 1997. While undistributed earnings (net earnings
less dividends declared) increased in 1999 by $5.3 million, the
decrease in tangible shareholders' equity at December 31, 1999,
is primarily due to a $5.7 million decrease in accumulated other
comprehensive income related to the net decrease in unrealized
gains on available for sale securities, and the purchase of $1.5
million in treasury stock. The impact of the above was somewhat
offset by a $587 thousand decrease in intangible assets, and a
$1.1 million increase in shareholders' equity related to
restricted stock units for the directors' deferred compensation
plan. As of December 31, 1999, the Corporation's ratio of Total
Capital to Risk Weighted Assets was 16.57% compared with 16.67% a
year earlier and 17.44% at December 31, 1997. The Corporation's
leverage ratio (Average Tier I Capital/Average Assets) was 9.49%
during 1999 and 9.57% in 1998.
Under Federal Reserve regulations (see Note 14 to the
consolidated financial statements), the Bank is limited to the
amount it may loan to the Corporation, unless such loans are
collateralized by specific obligations. At December 31, 1999, the
maximum amount available for transfer from the Bank to the
Corporation in the form of loans was $1.8 million. The Bank is
subject to legal limitations on the amount of dividends that can
be paid to the Corporation. Dividends are limited to retained
net profits, as defined by regulations, for the current year and
the two preceding years. At December 31, 1999, $9.6 million was
available for the declaration of dividends.
Cash dividends declared amounted to $3.097 million in 1999 versus
$2.741 million in 1998 and $2.506 million in 1997. Dividends
declared during 1999 amounted to 36.9% of net income compared to
37.6% and 36.6% of 1998 and 1997 net income, respectively. It is
management's objective to continue generating sufficient capital
internally, while retaining an adequate dividend payout ratio.
Treasury Shares
When shares of the Corporation become available in the market, we
may purchase them after careful consideration of our capital
position. During 1999, 58,674 shares were purchased at a total
cost of $1.465 million or an average price of $24.96 per share.
In 1998, 39,383 shares were purchased at a total cost of $984
thousand or an average price of $24.99 per share, and in 1997
there were 5,370 shares purchased at a total cost of $108
thousand ($20.07 per share).
Performance Summary
Net income for 1999 was affected by 1) higher volumes of average
earning assets and total funding liabilities, 2) lower average
interest rates on both sides of the balance sheet resulting in a
lower net interest margin, 3) higher non-interest income volumes,
and 4) higher non-interest expenses.
Consolidated net income for 1999 was $8.392 million versus $7.297
million in 1998, up $1.095 million (15.0%) or $2.03 per share
versus $1.77 per share (up 14.7%). In 1997, the Corporation
earned $6.857 million. Quarterly dividends declared totaled
$0.76 per share versus $0.665 in 1998 and $0.605 in 1997,
adjusted for the two-for-one stock split, effected in the form of
a 100% stock dividend in June 1998.
Net interest income in 1999 increased $1.710 million or 7.2% over
1998. Total interest and dividend income on earning assets was
$44.177 million in 1999 compared to $41.405 million in 1998 and
$39.372 million in 1997. While the yield on average earning
assets declined to 7.47% during 1999 compared to 7.80% and 8.02%
in 1998 and 1997, respectively, this was offset by a $60.4
million or 11.4% increase in average earning assets. $34.8
million of the increase in average earning assets was generated
in our loan portfolio with the remainder consisting of higher
average balances in the securities portfolio. Total average
funding liabilities during 1999 increased by $55.7 million or
10.9%. The interest expense associated with these liabilities
totaled $18.728 million in 1999 as compared to $17.666 million in
1998 and $16.098 million in 1997. The cost of funds on these
average funding liabilities, including the effect of non-interest
bearing funding sources (such as demand deposits), decreased to
3.30% during 1999 versus 3.45% and 3.39% during 1998 and 1997,
respectively. The above yields and costs resulted in a net
interest margin in 1999 of 4.30%, compared to 4.47% in 1998 and
4.74% in 1997.
Non-interest income increased $1.188 million to $9.405 million,
up 14.5% over 1998. Trust and Investment Services income, at
$4.813 million was again the largest component and registered an
increase of 6.8%. Other significant increases were realized in
service charges (+ $207 thousand), income from our equity
investment in Cephas Capital Partners, LP (+ $178 thousand),
credit card merchant earnings (+ $139 thousand) and checkcard
interchange income (+ $149 thousand). Gains realized in the
Bank's investment securities portfolio were $151 thousand
compared to $216 thousand in 1998 and $324 thousand in 1997.
Non-interest expenses increased $1.158 million (5.7%) to $21.6
million. Non-interest expenses for 1998 were $20.5 million
compared to $19.4 million in 1997. These expenses were
negatively affected by a $337 thousand increase in salaries and
other employee benefits, a $248 thousand increase in advertising
costs, a $229 thousand increase in data processing expenses, and
a $144 thousand increase in credit card processing fees.
During 1999, the Bank's provision for loan losses totaled $673
thousand, down $127 thousand from $800 thousand in 1998 and $850
thousand in 1997. The change is a reflection of management's
ongoing evaluation of the risk inherent in the portfolio.
Income tax expense in 1999 totaled $4.159 million as compared to
$3.386 million in 1998, an increase of 22.8%. In addition to the
tax on 1999 pre-tax income, income tax expense in 1999 was
impacted by an additional tax of $87 thousand resulting from the
accounting for the effect of a phased-in New York State tax rate
reduction on deferred tax assets and liabilities.
Exhibit II EARNINGS FOR THE YEARS ENDED DECEMBER 31,
Change Compounded
l998 Annual
to Growth 5
(in thousands) 1999 1998 1997 1996 1995 1994 1999 Years
Net Interest $25,449 $23,739 $23,274 $22,468 $21,849 $19,304 7.2% 5.7%
Income
Provision for
Loan Losses 673 800 850 742 564 624 -15.9% 1.5%
Net Interest
Income after
Provision for 24,777 22,939 22,424 21,726 21,285 18,680 8.0% 5.8%
loan losses
Other Operating
Income:
Trust and
Investment 4,813 4,505 4,079 3,719 3,678 3,323 6.8% 7.7%
Services Income
Securities
Gains, Net 151 216 324 610 531 140 -30.1% 1.5%
Other Income 4,442 3,496 3,065 2,777 2,527 2,222 27.1% 14.9%
Total Other
Operating Income 9,405 8,217 7,468 7,106 6,736 5,685 14.5% 10.6%
Other Operating
Expenses 21,631 20,473 19,368 19,408 19,560 17,375 5.7% 4.5%
Income before
income tax 12,551 10,683 10,524 9,424 8,461 6,990 17.5% 12.4%
expense
Income tax expense 4,159 3,386 3,667 3,266 2,859 2,342 22.8% 12.2%
Net Income $8,392 7,297 6,857 6,158 5,602 4,648 15.0% 12.5%
Exhibit III CHANGES DUE TO VOLUME AND RATE
The following table demonstrates the impact on net interest
income of the changes in the volume of earning assets and
interest-bearing liabilities and changes in rates earned and
paid by the Corporation. For purposes of constructing this
table, average investment securities are at average
amortized cost and earning asset averages include non-
performing loans. Therefore, the impact of lower levels of
non-performing loans is reflected in the change due to rate,
but does not affect changes due to volume. No tax
equivalent adjustments were made.
1999 vs. 1998 1998 vs. 1997
Increase/(Decrease) Increase/(Decrease)
Total Due to Due to Total Due to Due to
Interest income (in Change Volume Rate Change Volume Rate
thousands)
Loans $1,582 3,004 (1,422) $1,185 $1,836 $ (651)
Taxable investment 1,530 1,974 (444) 559 1,017 (458)
securities
Tax-exempt investment
securities (159) (138) (21) (8) (2) (6)
Federal funds sold (106) (52) (54) 290 293 (3)
Interest bearing deposits (74) (165) 91 7 (80) 87
Total Interest Income $2,773 4,623 (1,850) $2,033 $3,064 $(1,031)
Interest Expense (in
thousands)
Interest Bearing Demand
deposits $ (86) (25) (61) $ (64) $ (23) $ (41)
Savings deposits 58 236 (178) 390 229 161
Time deposits (121) 607 (728) 164 272 (108)
Federal Home Loan Bank
advances and Securities
sold under 1,211 1,424 (213) 1,078 1,126 (48)
Agreements to repurchase
Total Interest Expense $1,062 2,242 (1,180) $1,568 $1,604 $ (36)
Net Interest Income $1,711 2,381 (670) $ 465 $1,460 $ (995)
Intangible Assets
The Corporation's intangible assets at December 31, 1999, were $5.641
million and represented the premium paid in connection with the
acquisition of three branches from the Resolution Trust Corporation
("RTC") and the acquisition of Owego National Financial Corporation
during 1994. The intangible assets are amortized over 15 years for
both book and tax purposes. Amortization periods are monitored to
determine if events and circumstances require such periods to be
reduced. With respect to each of the branches acquired from the RTC,
management has determined that our purchase of these deposits
constituted entrance into major new market areas and provides a basis
for concluding that the purchased goodwill benefits will exist beyond
a short-term period.
Exhibit IV
Selected per share Change
data on Common 1998 Compounded
Shares (Adjusted To Annual
for two-for-one 1999 1998 1997 1996 1995 1994 1999 Growth
stock split) 5 Years
Net income per share $2.03 $ 1.77 $ 1.66 $ 1.48 $ 1.34 $ 1.23 14.7% 10.5%
Dividends declared 0.76 0.665 0.605 0.53 0.49 0.467 14.3% 10.2%
Tangible book value 14.5 14.59 13.24 11.76 10.79 8.88 -0.2% 10.4%
Market price at 12/31 24.50 27.50 21.00 17.00 13.88 12.75 -10.9% 14.0%
Average shares
outstanding
(in thousands) 4,132 4,116 4,143 4,159 4,176 3,798 0.4% 1.7%
Exhibit V
Selected Ratios 1999 1998 1997 1996 1995
Return on average assets 1.31% 1.25% 1.27% 1.19% 1.13%
Return on average tier I equity(1) 14.57% 13.88% 14.29% 14.08% 14.26%
Dividend yield for the year ended 3.43% 2.47% 2.95% 3.29% 3.60%
Dividend payout 36.90% 37.56% 36.55% 35.78% 36.52%
Tier I capital to risk adjusted 15.37% 15.42% 16.19% 15.61% 15.21%
assets
Tier I leverage ratio 9.49% 9.57% 9.49% 8.97% 8.52%
Total capital to risk adjusted 16.57% 16.67% 17.44% 16.87% 16.46%
assets
Loans to deposits 74.72% 70.63% 65.84% 64.53% 61.61%
Allowance for loan losses to 1.30% 1.37% 1.40% 1.40% 1.48%
total loans
Allowance for loan losses to non- 332% 92.9% 257% 231% 217%
performing loans
Non-performing loans to total 0.39% 1.47% 0.54% 0.61% 0.68%
loans
Net interest rate spread 3.48% 3.62% 3.89% 3.99% 4.12%
Net interest margin 4.30% 4.47% 4.74% 4.79% 4.89%
Efficiency ratio (2) 60.09% 61.97% 60.84% 63.41% 66.12%
<FN>
<FN1>
(1) Average Tier I Equity is average shareholders' equity less
intangible assets and accumulated other comprehensive income.
<FN2>
(2) Efficiency ratio is operating expenses adjusted for amortization
of intangible assets and donations divided by net interest income plus
other operating income adjusted for non-taxable gains on stock
donations.
</FN>
Consolidated Cash Flows
During 1999, cash and cash equivalents increased $3.253 million as
compared to a decrease of $5.599 million in 1998 and a $2.663 million
increase in 1997. In addition to cash provided by operating
activities, other primary sources of cash in 1999 included proceeds
from the sales and maturities of securities and student loans ($84.752
million), proceeds from Federal Home Loan Bank advances ($29.700
million), and an increase in deposits ($15.634 million). In 1998, the
primary sources of cash included proceeds from the sales and
maturities of securities and student loans ($108.012 million), a net
increase in securities sold under agreements to repurchase ($41.140
million), Federal Home Loan Bank advances ($26.900 million), and an
increase in deposits ($15.095 million).
Cash generated from the above activities was used primarily to fund
increases in earning assets. During 1999, the purchases of securities
and the funding of loans, net of repayments, totaled $86.084 million
and $33.738 million, respectively. Other significant uses of cash in
1999 included repayments of Federal Home Loan Bank advances ($6.900
million), purchases of premises and equipment ($3.506 million),
payment of cash dividends ($2.945 million), and the purchase of
treasury shares ($1.465 million). In 1998, the purchases of securities
and funding of loans, net of repayments, totaled $151.012 million and
$35.895 million, respectively. Repayments of Federal Home Loan Bank
advances were $16.300 million, and the investment in premises and
equipment totaled $1.325 million. Other significant uses of cash
included the payment of cash dividends ($2.685 million), and the
purchase of treasury shares ($984 thousand).
Liquidity and Sensitivity
The term "liquidity" refers primarily to the expected cash flows from
assets held and secondarily to borrowings secured by assets of the
Corporation. These two sources of liquidity have in the past been
sufficient to fund the operations of the Bank, and the Board of
Directors anticipates that they will suffice in the future. For this
reason, the term "liquidity" in the Bank's policies does not refer to
proceeds from the sale of assets, although the sale of assets held as
available for sale is a source of liquidity available to management.
Liquidity management involves the ability to meet the cash flow
requirements of deposit customers, borrowers, and the operating,
investing, and financing activities of the Corporation. Management of
interest rate sensitivity seeks to avoid fluctuating net interest
margins and to enhance consistent growth of net interest income
through periods of changing interest rates.
As intermediaries between borrowers and savers, commercial banks incur
interest rate risk. The Bank's Asset/Liability Committee (ALCO) has
the strategic responsibility for setting the policy guidelines on
acceptable exposure. The ALCO is made up of the president, asset
liability management officer, senior lending officer, senior marketing
officer, chief financial officer and others representing key
functions.
The Bank is a member of the Federal Home Loan Bank of New York
("FHLB") in order to access borrowings which enhance management's
ability to satisfy future liquidity needs. The Bank's $5.245 million
investment in FHLB stock allowed it to maintain a $62.726 million line
of credit at December 31, 1999. This compares to $56.696 million at
the end of 1998.
Interest rate risk is the risk that net interest income will fluctuate
as a result of a change in interest rates. It is the assumption of
interest rate risk, along with credit risk, that drives the net
interest margin of a financial institution. For that reason, the ALCO
has established tolerance limits based upon a 200 basis point change
in interest rates. At December 31, 1999, it is estimated that a 200
basis point increase in interest rates would negatively impact net
interest income by 7.8%, well within the Bank's established tolerance
limit of 12.0%.
A related component of interest rate risk is the expectation that the
market value of our capital account will fluctuate with changes in
interest rates. This component is a direct corollary to the earnings-
impact component: an institution exposed to earnings erosion is also
exposed to shrinkage in market value. During the fourth quarter of
1999, management, as part of it's Year 2000 contingency planning, took
special precautions in order to assure the Bank's ability to meet any
customer cash requirements. To this end, the Bank secured a $10.0
million guaranteed line of credit from the Federal Home Loan Bank.
Also, the Bank carried increased cash on hand at all of its offices
that in aggregate totaled $18.582 million at December 31, 1999, versus
$8.142 million at December 31, 1998. This precaution distorted some
of our financial and interest rate risk ratios. Specifically,
management noted that the risk of interest rates rising 200 basis
points would negatively impact market value of our capital account by
15.1%, slightly over the established tolerance of 15.0%. Given the
special circumstances surrounding the Year 2000 precautions,
management and the Board of Directors felt that no corrective action
was required. The increase in cash on hand was temporary and was
reduced in January 2000.
In recent years core deposits (NOW accounts, Insured Money Market
Accounts and Savings accounts) have not been repriced with movements
of interest rates in the negotiable securities markets. Rather, the
interest paid upon such funding sources during 1999, 1998 and 1997 has
been quite stable, even with movements in market rates in excess of
200 basis points. Short term rates (6 month U.S. Treasury Bills)
ranged between 4.41% - 5.85% during 1999 and 4.15% - 5.16% during
1998. Management does recognize the need for certain hedging
strategies during periods of anticipated higher fluctuations in
interest rates and the Board-approved Funds Management Policy provides
for limited use of certain derivatives in asset liability management.
These strategies were not employed during 1999.
The ALCO is responsible for supervising the preparation and annual
revisions of the financial segments of the Bank Plan, which is built
upon the committee's economic and interest-rate assumptions and the
Annual Budget. It is the responsibility of the ALCO to modify
prudently the Corporation's asset/liability policies.
Recent Accounting Pronouncements
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". This Statement establishes
comprehensive accounting and reporting requirements for derivative
instruments and hedging activities. The Statement requires companies
(including banks) to recognize all derivatives as either assets or
liabilities, including certain derivative instruments embedded in
other contracts, with the instruments measured at fair value. The
accounting for gains and losses resulting from changes in fair value
of the derivative instrument, depends on the intended use of the
derivative and the type of risk being hedged. This Statement, as
amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. Earlier adoption, however
is permitted. Management is currently evaluating the impact, if any,
of this Statement on the Corporation's Consolidated financial
statements.
John R. Battersby, Jr.
Treasurer and Chief Financial Officer
To our Shareholders:
The consolidated financial statements appearing in this annual report
have been prepared by the Corporation in accordance with generally
accepted accounting principles. The primary responsibility for the
integrity of the financial information included in this report rests
with management. The opinion of KPMG LLP, the Corporation's
independent accountants, on those consolidated financial statements is
included herein.
The Corporation and its subsidiary bank maintain a system of internal
accounting controls that is designed to provide reasonable assurance
that assets are safeguarded, that transactions are executed in
accordance with management's authorization and are properly recorded,
and that accounting records are adequate for preparation of
consolidated financial statements and other financial information.
The Internal Auditing Department is charged with the responsibility of
verifying accounting records and reviewing internal controls. The
internal auditor reports directly to the Examining Committee of the
Board of Directors whose members are all non-employee directors. The
Committee meets with management, the internal auditor and the
independent auditors in conjunction with its review of matters
relating to the consolidated financial statements and the internal
audit program. The independent auditors and the internal auditor meet
with the Examining Committee without the presence of management.
Jan P. Updegraff
President and Chief Executive Officer
John R. Battersby, Jr.
Treasurer and Chief Financial Officer
EXHIBIT D
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT AUDITORS'
Independent Auditors' Report
Board of Directors and Shareholders
Chemung Financial Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of
Chemung Financial Corporation and subsidiary as of December 31, 1999,
and 1998, and the related consolidated statements of income,
shareholders' equity and comprehensive income, and cash flows for each
of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the financial position
of Chemung Financial Corporation and subsidiary at December 31, 1999
and 1998, and the results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1999, in
conformity with generally accepted accounting principles.
Syracuse, New York
February 2, 2000
<CAPTION
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Balance Sheets
December 31 1999 1998
Assets
Cash and due from banks $30,926,401 27,515,582
Interest-bearing deposits with other financial
institutions 1,146,495 1,304,207
Total cash and cash equivalents 32,072,896 28,819,789
Securities available for sale, at estimated fair 227,383,641 235,293,736
value
Securities held to maturity, estimated fair value
of $8,606,703 at December 31, 1999 and
$6,660,923 at December 31, 1998 8,606,703 6,660,923
Loans, net of unearned income and deferred fees 359,963,407 329,255,342
Allowance for loan losses (4,665,093) (4,509,185)
Loans, net 355,298,314 324,746,157
Premises and equipment, net 12,121,667 10,084,608
Other assets 12,119,128 8,232,896
Intangible assets, net of accumulated amortization 5,641,025 6,228,328
Total assets $653,243,374 620,066,437
Liabilities and Shareholders' Equity
Deposits:
Non-interest-bearing $ 98,292,851 101,908,083
Interest-bearing 383,480,838 364,231,279
Total deposits 481,773,689 466,139,362
Securities sold under agreements to repurchase 49,946,491 50,587,369
Federal Home Loan Bank advances 49,700,000 26,900,000
Accrued interest payable 1,609,842 1,428,560
Dividends payable 849,257 697,570
Other liabilities 4,052,212 8,223,949
Total liabilities 587,931,491 553,976,810
Commitments and contingencies (note 13)
Shareholders' equity:
Common stock, $.01 par value per share, authorized
10,000,000 shares; issued 4,300,134 shares at
December 31, 1999 and 1998 43,001 43,001
Capital surplus 21,941,629 20,851,800
Retained earnings 48,065,946 42,770,991
Treasury stock, at cost (256,054 shares at
December 31, 1999; 197,380 shares at (4,435,629) (2,970,954)
December 31, 1998)
Accumulated other comprehensive income (loss) (303,064) 5,394,789
Total shareholders' equity 65,311,883 66,089,627
Total liabilities and shareholders' equity $653,243,374 620,066,437
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Income
Years ended December 31 1999 1998 1997
Interest and dividend income:
Loans $29,446,584 27,865,497 26,679,426
Securities 13,992,910 12,621,909 12,070,919
Federal funds sold 483,552 589,976 300,359
Interest-bearing deposits 253,724 327,927 321,265
Total interest and dividend income 44,176,770 41,405,309 39,371,969
Interest expense:
Deposits 15,096,420 15,246,674 14,756,046
Borrowed funds 1,044,567 736,493 659,753
Securities sold under agreements
to repurchase 2,586,552 1,683,244 682,065
Total interest expense 18,727,539 17,666,411 16,097,864
Net interest income 25,449,231 23,738,898 23,274,105
Provision for loan losses 672,669 800,000 850,100
Net interest income after
provision for loan losses 24,776,562 22,938,898 22,424,005
Other operating income:
Trust & investment services 4,812,723 4,504,569 4,078,880
income
Service charges on deposit 2,217,859 2,010,639 1,906,931
accounts
Net gain on sales of securities 150,585 215,993 323,989
Credit card merchant earnings 769,586 630,968 536,735
Other 1,454,253 854,850 621,273
Total other operating income 9,405,006 8,217,019 7,467,808
Other operating expenses:
Salaries and wages 8,928,490 8,290,133 8,041,859
Pension and other employee 1,637,612 1,939,033 2,033,962
benefits
Net occupancy expenses 1,838,431 1,739,063 1,562,568
Furniture and equipment expenses 1,713,266 1,655,776 1,651,675
Other 7,513,238 6,848,747 6,077,630
Total other operating expenses 21,631,037 20,472,752 19,367,694
Income before income tax expense 12,550,531 10,683,165 10,524,119
Income tax expense 4,159,030 3,386,027 3,666,899
Net income $ 8,391,501 7,297,138 6,857,220
Weighted average shares 4,132,148 4,116,405 4,143,089
outstanding
Basic Earnings Per Share $2.03 $1.77 $1.66
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Shareholders' Equity and Comprehensive Income
Accumulated
Other
Capital Retained Treasury Comprehensive
Common Surplus Earnings Stock Income Total
Stock (Loss)
Balances at December 31,1996 $10,750,335 10,101,804 33,885,269 (1,925,118) 3,307,909 56,120,199
Comprehensive Income:
Net Income - - 6,857,220 - - 6,857,220
Other comprehensive income - - - - 1,273,990 1,273,990
Total comprehensive income 8,131,210
Cash dividends declared
($.605 per share) - - (2,506,464) - - (2,506,464)
Purchase of 5,370 shares
of treasury stock - - - (107,768) - (107,768)
Balances at December 31, 1997 $10,750,335 10,101,804 38,236,025 (2,032,886) 4,581,899 61,637,177
Comprehensive Income:
Net income - - 7,297,138 - - 7,297,138
Other comprehensive income - - - - 812,890 812,890
Total comprehensive income 8,110,028
Reduction of par value
from $5.00 to $0.01 (10,728,834) 10,728,834 - - - -
per share
Two-for-one stock split
in the form of a 100%
stock dividend 21,500 - (21,500) - - -
Cash dividends declared
($.665 per share) - - (2,740,672) - - (2,740,672)
Purchase of 39,383 shares of
of treasury stock - - - (984,284) - (984,284)
Sale of 3,079 shares of
treasury stock - 21,162 - 46,216 - 67,378
Balances at December 31, 1998 $ 43,001 20,851,800 42,770,991 (2,970,954) 5,394,789 66,089,627
Comprehensive Income:
Net income - - 8,391,501 - - 8,391,501
Other comprehensive loss - - - - (5,697,853)(5,697,853
Total comprehensive income 2,693,648
Restricted stock units
for directors' deferred
compensation plan - 1,089,829 - - - 1,089,829
Cash dividends declared
($.76 per share) - - (3,096,546) - - (3,096,546)
Purchase of 58,674
shares of treasury stock - - - (1,464,675) - (1,464,675)
Balances at December 31,1999 $ 43,001 21,941,629 48,065,946 (4,435,629) ( 303,064)65,311,883
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
Consolidated Statements of Cash Flows
Years ended December 31 1999 1998 1997
Cash flows from operating
activities:
Net income $ 8,391,501 7,297,138 6,857,220
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of intangible assets 587,303 587,303 587,303
Provision for deferred tax expense 45,955 (554,345) (260,933)
(benefit)
Provision for loan losses 672,669 800,000 850,100
Depreciation and amortization 1,468,561 1,459,446 1,483,178
Amortization of premiums and
accretion of discounts on 473,074 321,469 248,288
securities, net
Gain on sales of securities, net (150,585) (215,993) (323,989)
Increase in other assets (3,886,234) (1,489,386) (1,834,245)
Increase in accrued interest payable 181,282 237,151 38,618
Increase (decrease) in other 661,219 2,945,355 (2,649,988)
liabilities
Net cash provided by operating 8,444,745 11,388,138 4,995,552
activities
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 12,239,005 19,174,487 24,071,461
Proceeds from maturities of and
principal collected on securities 4,529,397 7,054,835 12,226,947
held to maturity
Proceeds from maturities of and
principal collected on securities 65,470,411 78,602,492 30,683,353
available for sale
Purchases of securities available for (79,608,744) (146,519,981) (52,508,840)
sale
Purchases of securities held to (6,475,177) (4,491,731) (11,099,132)
maturity
Purchases of premises and equipment (3,505,619) (1,325,011) (1,989,588)
Net increase in loans (33,738,401) (35,894,863) (17,235,072)
Proceeds from sales of student loans 2,513,575 3,180,053 3,299,607
Net cash used in investing (38,575,553 (80,219,719) (12,551,264)
activities
Cash flows from financing activities:
Net (decrease) increase in demand
deposits, NOW accounts, savings
accounts, and insured money (10,265,077) 11,498,217 11,603,559
market accounts
Net increase (decrease) in
certificates of deposit and 25,899,404 3,596,803 (208,560)
individual retirement accounts
Net (decrease) increase in securities
sold under agreements to repurchase (640,878) 41,139,513 (4,923,284)
Federal Home Loan Bank advances 29,700,000 26,900,000 6,300,000
Repayments of Federal Home Loan Bank
advances (6,900,000) (16,300,000) -
Purchase of treasury stock (1,464,675) (984,284) (107,768)
Sale of treasury stock - 67,378 -
Cash dividends paid (2,944,859 ) (2,684,712) (2,445,074)
Net cash provided by financing 33,383,915 63,232,915 10,218,873
activities
Net increase (decrease) in cash and
cash equivalents 3,253,107 (5,598,666) 2,663,161
Cash and cash equivalents, beginning 28,819,789 34,418,455 31,755,294
of year
Cash and cash equivalents, end of $32,072,896 28,819,789 34,418,455
year
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Income Taxes $ 7,048,403 1,201,696 3,748,867
Interest $18,546,257 17,429,260 16,059,256
Supplemental disclosure of non-cash
activity:
Transfer of loans to other real $ 398,667 403,317 696,914
estate owned
Adjustment to securities available
for sale to fair value, net of tax ($5,697,853) 812,890 1,273,990
See accompanying notes to consolidated financial statements.
Chemung Financial Corporation and Subsidiary
Notes to Consolidated Financial Statements
December 31, 1999 and 1998
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Chemung Financial Corporation (the Corporation), through its
wholly owned subsidiary, Chemung Canal Trust Company (the Bank),
provides commercial banking services to its local market area.
The Corporation is subject to the regulations of certain federal
and state agencies and undergoes periodic examinations by those
regulatory agencies.
Basis of Presentation
The accompanying consolidated financial statements have been
prepared in conformity with generally accepted accounting
principles and include the accounts of the Corporation and the
Bank. All significant intercompany balances and transactions are
eliminated in consolidation.
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Securities
Management determines the appropriate classification of
securities at the time of purchase. If management has the intent
and the Corporation has the ability at the time of purchase to
hold securities until maturity, they are classified as held to
maturity and carried at amortized cost. Securities to be held
for indefinite periods of time or not intended to be held to
maturity are classified as available for sale and carried at fair
value. Unrealized holding gains and losses, net of the related
tax effects, on securities classified as available for sale are
excluded from earnings and are reported as accumulated other
comprehensive income (loss) in shareholders' equity until
realized. Realized gains and losses are determined using the
specific identification method.
A decline in the fair value of any available for sale or held to
maturity security below amortized cost that is deemed other than
temporary is charged to earnings resulting in the establishment
of a new cost basis for the security. Premiums and discounts are
amortized or accreted over the life of the related security as an
adjustment of yield using the interest method. Dividend and
interest income are recognized when earned.
Loans
Loans are stated at the amount of unpaid principal balance less
unearned discounts and net deferred origination fees and costs.
The Corporation has the ability and intent to hold its loans for
the foreseeable future, except for educational loans which are
sold to a third party from time to time upon reaching repayment
status.
Interest on loans is accrued and credited to operations on the
interest method. The accrual of interest is discontinued and
previously accrued interest is reversed when commercial loans
become 90 days delinquent and, when consumer, mortgage and home
equity loans, which are not guaranteed by government agencies,
become 120 days delinquent. Loans may also be placed on non-
accrual if management believes such classification is warranted
for other purposes. Loan origination fees and certain direct
loan origination costs are deferred and amortized over the life
of the loan as an adjustment of yield, using the interest method.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered
adequate to provide for probable loan losses. The allowance is
increased by provisions charged to earnings and recoveries of
loans previously charged off, and reduced by loan charge-offs.
The adequacy of the allowance is based on management's evaluation
of the inherent risk of loss in the loan portfolio, which
includes consideration of prevailing economic conditions, past
loss experience, the level of non-performing loans, delinquency
levels and other factors pertinent to estimating losses inherent
in the portfolio. Management believes that the allowance for loan
losses is adequate. While management uses available information
to recognize losses on loans, future additions to the allowances
may be necessary based on changes in economic conditions,
particularly in New York State. In addition, various regulatory
agencies, as an integral part of their examination process,
periodically review the Corporation's allowance for loan losses.
Such agencies may require the Corporation to recognize additions
to the allowance based on their judgments about information
available to them at the time of their examination.
Management, considering current information and events regarding
the borrower's ability to repay their obligations, considers a
loan to be impaired when it is probable that the Corporation will
be unable to collect all amounts due according to the contractual
terms of the loan agreement. When a loan is considered to be
impaired, the amount of the impairment is measured based on the
present value of expected future cash flows discounted at the
loan's effective interest rate or, as a practical expedient, at
the loan's observable market price or the fair value of
collateral, less the estimated costs to sell if the loan is
collateral dependent. Residential mortgage loans and consumer
loans are evaluated collectively since they are homogeneous and
generally carry smaller balances. All loans restructured in a
troubled debt restructuring are also considered impaired loans.
In general, interest income on impaired loans is recorded on a
cash basis when collection in full is reasonably expected. If
full collection is uncertain, cash receipts are applied first to
principal then to interest income.
Premises and Equipment
Land is carried at cost, while buildings and equipment are stated
at cost less accumulated depreciation and amortization.
Depreciation is charged to current operations under accelerated
and straight-line methods over the estimated useful lives of the
assets, which range from 15 to 50 years for buildings and from 3
to 10 years for equipment and furniture. Amortization of
leasehold improvements and leased equipment is recognized on the
straight-line method over the shorter of the lease term or the
estimated life of the asset.
Other Real Estate
Real estate acquired through foreclosure or deed in lieu of
foreclosure is recorded at the lower of the carrying value of the
loan or estimated fair value of the property at the time of
acquisition. Write downs from cost to estimated fair value which
are required at the time of foreclosure are charged to the
allowance for loan losses. Subsequent to acquisition, other real
estate is carried at the lower of the carrying amount or fair
value less estimated costs to dispose. Subsequent adjustments to
the carrying values of such properties resulting from declines in
fair value are charged to operations in the period in which the
declines occur. Other real estate owned at December 31, 1999,
amounted to $535,699 and at December 31, 1998, amounted to
$651,268.
Income Taxes
The Corporation files a consolidated tax return on the accrual
method. Deferred tax assets and liabilities are recognized for
future tax consequences attributable to temporary differences
between the financial statement carrying amounts of existing
assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which temporary
differences are expected to be recovered or settled, or the tax
carryforwards are expected to be utilized. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.
Trust and Investment Services Income
Assets held in a fiduciary or agency capacity for customers are
not included in the accompanying consolidated balance sheets,
since such assets are not assets of the Corporation. Trust and
Investment Services income is recognized on the accrual method
based on contractual rates applied to the balances of individual
trust accounts. Market value of trust assets under
administration totaled $1.486 billion at December 31, 1999, and
$1.401 billion at December 31, 1998.
Pension Plan
Pension costs, based on actuarial computations of current and
future benefits for employees, are charged to current operating
results. The Bank's funding policy is to contribute amounts to
the plan sufficient to meet minimum regulatory funding
requirements, plus such additional amounts as the Bank may
determine to be appropriate from time to time.
Postretirement Benefits
In addition to pension benefits, the Bank provides health care
and life insurance benefits for retired employees. The estimated
costs of providing benefits are accrued over the years the
employees render services necessary to earn those benefits.
Intangible Assets
Goodwill, which represents the excess of purchase price over the
fair value of identifiable assets acquired in 1995, is being
amortized over 15 years on the straight-line method. Deposit
base intangible, resulting from the Bank's purchase of deposits
from the Resolution Trust Company in 1994, is being amortized
over the expected useful life of 15 years on a straight-line
basis. Amortization periods are monitored to determine if events
and circumstances require such periods to be reduced.
Periodically, the Corporation reviews its goodwill and deposit
base intangible assets for events or changes in circumstances
that may indicate that the carrying amount of the asset is
impaired.
Basic Earnings Per Share
Basic earnings per share was computed on the basis of the
weighted average number of common shares outstanding,
retroactively adjusted for stock splits and dividends. Issuable
shares (such as those related to directors restricted stock
units) are considered outstanding and are included in the
computation of basic earnings per share.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from
banks, interest-bearing deposits with other financial
institutions, federal funds sold, and U.S. Treasury securities
with original terms to maturity of 90 days or less.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of U.S. Treasury securities
under agreements to repurchase. The agreements are treated as
financings, and the obligations to repurchase securities sold are
reflected as liabilities in the consolidated balance sheets. The
amount of the securities underlying the agreements remains in the
asset account. The Corporation has agreed to repurchase
securities identical to those sold. The securities underlying
the agreements were under the Bank's control.
Other Financial Instruments
The Corporation is a party to certain other financial instruments
with off-balance sheet risk such as commitments under standby
letters of credit, unused portions of lines of credit and
commitments to fund new loans. The Corporation's policy is to
record such instruments when funded.
Other Comprehensive Income
Comprehensive income at the Corporation represents net income
plus other comprehensive income, which consists of the net change
in unrealized holding gains or losses on securities available for
sale, net of the related tax effect. Accumulated other
comprehensive income represents the net unrealized holding gains
or losses on securities available for sale as of the consolidated
balance sheet dates, net of the related tax effect.
Comprehensive income for the years ended December 31, 1999, 1998,
and 1997 was $2,693,648, $8,110,028, and $8,131,210,
respectively. The following summarizes the components of other
comprehensive income:
Unrealized holding losses during the year ended
December 31, 1999, net of tax (pre-tax amount of
$(9,336,350)) $(5,607,412)
Reclassification adjustment for gains realized in
net income during the year ended December 31,
1999, net of tax (pre-tax amount of $150,585)
( 90,441)
Other comprehensive income for the year ended
December 31, 1999 $ (5,697,853)
Unrealized holding gains during the year ended
December 31, 1998, net of tax (pre-tax amount of
$1,569,456) $ 942,615
Reclassification adjustment for gains realized in
net income during the year ended December 31,
1998, net of tax (pre-tax amount of $215,993) ( 129,725)
Other comprehensive income for the year ended
December 31, 1998 $ 812,890
Unrealized holding gains during the year ended
December 31, 1997, net of tax (pre-tax amount of
$2,445,185) $ 1,468,578
Reclassification adjustment for gains realized in
net income during the year ended December 31,
1997, net of tax (pre-tax amount of $323,989) ( 194,588)
Other comprehensive income for the year ended
December 31, 1997 $ 1,273,990
Segment Reporting
The Corporation's operations are solely in the financial services
industry and include the provision of traditional commercial
banking services. The Company operates primarily in the
geographical regions of Chemung, Steuben, Schuyler, and Tioga
counties, including the northern tier of Pennsylvania. The
Company has identified separate operating segments, however,
these segments did not meet the quantitative threshold for
separate disclosure.
Reclassifications
Amounts in the prior years' consolidated financial statements are
reclassified whenever necessary to conform with the current
year's presentation.
Accounting Standards
In June 1998, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards (SFAS) No.
133, " Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards
for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging
activities. During the second quarter of 1999, the FASB issued
SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the Effective Date of FASB Statement No.
133." SFAS No. 137 defers the effective date of SFAS No. 133 by
one year from fiscal years beginning after June 15, 1999, to
fiscal years beginning after June 15, 2000. Management is
currently evaluating the impact, if any, of this Statement on the
Corporation's consolidated financial statements.
(2) RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Bank is required to maintain certain reserves of vault cash
and/or deposits with the Federal Reserve Bank of New York. The
amount of this reserve requirement is included in cash on hand of
$11,350,000 at December 31, 1999.
(3) SECURITIES
Amortized cost and estimated fair value of securities available
for sale at December 31, 1999, and 1998 are as follows:
1999 1998
Amortized Estimated Amortized Estimated
Cost Fair Cost Fair
Value Value
U.S. Treasury securities $15,507,454 15,341,305 23,012,624 23,294,865
Obligations of other U.S.
Government agencies 96,004,009 92,696,922 77,787,530 78,233,115
Mortgage backed securities 77,418,683 73,747,174 89,245,351 89,592,665
Obligations of states and
political subdivisions 21,358,536 20,733,805 20,967,461 21,431,874
Corporate bonds and notes 10,663,352 10,129,626 9,681,590 9,704,695
Corporate stocks 6,936,209 14,734,809 5,616,847 13,036,522
Total $227,888,243 227,383,641 226,311,403 235,293,736
Included in corporate stocks at December 31, 1999, and 1998 is
the Bank's required investment in the stock of the Federal Home
Loan Bank carried at its cost basis of $5,245,000 and $3,955,600,
respectively. This investment allows the Bank to maintain a
$62,726,000 line of credit with the Federal Home Loan Bank at
December 31, 1999, and $56,695,500 at December 31,1998. Other
equities required in the Bank portfolio include 10,572 shares of
Federal Reserve Bank stock valued at $528,600 at December 31,
1999, and 9,964 shares valued at $498,200 at December 31, 1998.
Gross unrealized gains and gross unrealized losses on securities
available for sale at December 31, 1999, and 1998 were as
follows:
1999 1998
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
U.S. Treasury securities $1,872 168,021 282,241 -
Obligations of other U.S. Government - 3,307,087 479,935 34,350
agencies
Mortgage backed securities 5,511 3,677,020 506,296 158,982
Obligations of states and other 15,321 640,052 470,174 5,761
political subdivisions
Corporate bonds and notes - 533,726 105,225 82,120
Corporate Stocks 7,798,600 - 7,419,675 -
Total $7,821,304 8,325,906 9,263,546 281,213
Gross realized gains on sales of securities available for sale were
$150,585, $215,993, and $323,989 for the years ended December 31, 1999,
1998 and 1997, respectively. There were no realized losses on sales of
securities available for sale for the years ended December 31, 1999, 1998
and 1997.
Securities held to maturity of $8,606,703 and $6,660,923 at December 31,
1999, and 1998, respectively, represent non-marketable obligations of
political subdivisions, usually local municipalities. Fair value
approximates amortized cost. There were no sales of securities held to
maturity in 1999, 1998 or 1997. The contractual maturity of these
securities is as follows at December 31, 1999: $5,431,077 within one year,
$2,461,826 after one year but within five years and $713,800 after five
years but within ten years.
Interest and dividends on securities for the years ended December 31, 1999,
1998 and 1997 were as follows:
1999 1998 1997
Taxable:
U. S. Treasury securities $ 1,119,844 1,920,930 2,821,733
Obligations of other U.S. Government 5,227,780 4,659,247 3,670,414
agencies
Mortgage backed securities 5,201,842 3,801,800 3,727,722
Corporate bonds and notes 631,480 391,720 48,984
Corporate stocks 536,980 414,602 360,184
Exempt from federal taxation:
Obligations of states and political
subdivisions 1,274,984 1,433,610 1,441,882
Total $13,992,910 12,621,909 12,070,919
The amortized cost and estimated fair value by years to contractual
maturity (mortgage backed securities are shown as maturing in the year of
the final contractual payment) as of December 31, 1999, for securities
available for sale are as follows (excluding corporate stocks):
Maturing
After One, But
Within One Year Within Five Years
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury securities $1,499,901 1,501,773 14,007,553 13,839,532
Obligations of other U.S. - - 51,934,435 50,303,794
Government agencies
Mortgage backed securities - - 1,206,538 1,197,625
Obligations of states and 3,026,537 3,033,485 4,506,863 4,496,040
political subdivisions
Corporate bonds and notes - - 2,496,556 2,410,984
Total $4,526,438 4,535,258 74,151,945 72,247,975
Maturing
After Five, But
Within Ten Years After Ten Years
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury securities $44,069,574 - - -
Obligations of other U.S. 44,069,574 42,393,128 - -
Government agencies
Mortgage backed securities 6,394,900 6,152,249 69,817,245 66,397,300
Obligations of states and 10,078,325 9,710,396 3,746,811 3,493,884
political subdivisions
Corporate bonds and notes 2,605,219 2,445,005 5,561,577 5,273,637
Total $63,148,018 60,700,778 79,125,633 75,164,821
Actual maturities may differ from contractual maturities above because
issuers may have the right to call or prepay obligations with or without
call or prepayment penalties.
The fair value of securities pledged to secure public funds on deposit or
for other purposes as required by law was $176,737,390 at December 31,
1999, and $160,490,195 at December 31, 1998. This includes U.S. Treasury
securities totaling $2,000,000 and $2,000,000 (fair value of $1,970,246 and
$2,073,760), mortgage backed securities totaling $9,125,075 and $13,328,093
(fair value of $8,791,440 and $13,622,012), and obligations of other U.S.
Government agencies totaling $59,689,815 and $62,023,789 (fair value of
$57,457,985 and $62,965,881) pledged to secure securities sold under
agreements to repurchase at December 31, 1999, and 1998, respectively.
There are no securities of a single issuer (other than securities of the
U.S. Government and its agencies) that exceed 10% of shareholders' equity
at December 31, 1999 or 1998.
In 1997, the Bank declared a special dividend payable to the Corporation
for the purpose of funding equity investments in Southern Tier Business
Development, LLC and Cephas Capital Partnership, LP. These small business
investment companies were established for the purpose of providing
financing to small businesses in areas served, including minority-owned
small businesses and those that will create jobs for the low to moderate
income levels in the targeted areas. These investments as of December 31,
1999 and 1998 totaled $2,175,866 and $1,800,282, respectively, and are
included in other assets under the equity method of accounting.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio is summarized as follows:
December 31, 1999 1998
Residential mortgages $90,346,353 84,554,079
Commercial mortgages 4,233,277 4,989,429
Commercial, financial and 130,774,872 113,478,081
agricultural
Leases, net 267,746 387,697
Consumer loans 134,616,556 126,096,779
Net deferred origination fees
and unearned income (275,397) (250,723)
$359,963,407 329,255,342
Residential mortgages totaling $82,364,702 for 1999, and $72,103,426 for
1998, were pledged as collateral for the Bank's line of credit with the
Federal Home Loan Bank of New York.
The Corporation's market area encompasses the New York State counties of
Chemung, Steuben, Schuyler and Tioga. Substantially all of the
Corporation's outstanding loans are with borrowers living or doing business
within 25 miles of the Bank's branches in these counties. The
Corporation's concentrations of credit risk are reflected in the preceding
table. The concentrations of credit risk with standby letters of credit,
committed lines of credit and commitments to originate new loans, generally
follow the loan classifications in the schedule. Other than general
economic risks, management is not aware of any material concentrations of
credit risk to any industry or individual borrower.
The principal balances of loans not accruing interest, including certain
impaired loans described below, totaled $640,051 and $4,458,393 at December
31, 1999, and 1998, respectively. The decrease in 1999 relates primarily
to one real estate secured commercial loan which was paid in full during
the fourth quarter of 1999. Loans with restructured payment terms because
of the borrowers' financial difficulties at December 31, 1999, totaled
$624,861. There were no loans with restructured payment terms because of
the borrowers' financial difficulties at December 31, 1998. The effect of
nonaccrual loans on interest income for the years ended December 31, 1999,
1998 and 1997 was not material. Loans past due greater than 90 days and
still accruing totaled $281,273, at December 31, 1999 and $394,949 at
December 31, 1998. The Bank is not committed to advance additional funds to
these borrowers.
Transactions in the allowance for loan losses for the years ended December
31, 1999, 1998, and 1997 were as follows:
1999 1998 1997
Balances at January 1 $4,509,185 4,145,422 3,975,000
Provision charged to operations 672,669 800,000 850,100
Loans charged off (690,034) (593,704) (770,389)
Recoveries 173,273 157,467 90,711
Balances at December 31 $4,665,093 4,509,185 4,145,422
At December 31, 1999, and 1998 the recorded investment in loans that are
considered to be impaired totaled $761,016 and $4,569,242, respectively.
Included in the 1999 amount are impaired loans of $360,689 for which the
related allowance for loan losses is $149,924. The 1998 amount includes
$4,321,019 of impaired loans with a related allowance for loan losses of
$993,207. The average recorded investment in impaired loans during 1999,
1998 and 1997 was $3,171,533, $2,837,325 and $1,201,217, respectively. The
effect on interest income for impaired loans was not material to the
consolidated financial statements in 1999, 1998 or 1997.
(5) PREMISES & EQUIPMENT
Premises and equipment at December 31, 1999, and 1998 are as follows:
1999 1998
Land $ 2,681,408 2,106,408
Buildings 13,222,838 11,644,535
Equipment and furniture 14,927,263 13,658,373
Leasehold improvements 431,448 429,020
31,262,957 27,838,336
Less accumulated depreciation 19,141,290 17,753,728
$12,121,667 10,084,608
(6) DEPOSITS
Interest-bearing deposits include certificates of deposit in denominations
of $100,000 or more aggregating $57,063,792 and $32,636,701 at December 31,
1999, and 1998, respectively. Interest expense on such certificates was
$2,777,298, $2,420,835 and $2,279,576 for 1999, 1998 and 1997,
respectively.
Scheduled maturities of certificates of deposit at December 31, 1999, are
summarized as follows:
TIME CERTIFICATES OF DEPOSIT
2000 $159,084,846
2001 26,480,336
2002 10,514,425
2003 2,487,131
2004 4,366,292
2005 and thereafter 364,569
$203,297,599
(7) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The agreements have maturities of 3 days to 9 years at December 31, 1999,
and 4 days to 10 years at December 31, 1998, and a weighted average
interest rate of 4.97% at December 31, 1999, and 4.80% at December 31,
1998. The maximum amounts outstanding at any one month-end and average
amount under these agreements during 1999 were $53,731,116 and
$51,900,947, respectively. The maximum amounts outstanding at any one
month-end and average amount under these agreements during 1998 were
$50,587,368 and $32,166,417, respectively.
(8) FEDERAL HOME LOAN BANK ADVANCES
Federal Home Loan Bank advances at December 31, 1999, consisted of a
$10,000,000, 4.90%, five year advance with a maturity date of October 2,
2003, a $10,000,000, 4.41%, ten year advance with a maturity date of
October 20, 2008, callable on or after October 20, 2001, and a $29,700,000,
3.60% three day advance with a maturity date of January 3, 2000.
(9) INCOME TAXES
For the years ended December 31, 1999, 1998, and 1997, income tax expense
attributable to income from operations consists of:
1999 1998 1997
Current:
State $ 481,750 449,653 871,137
Federal 3,631,325 3,490,719 3,056,695
4,113,075 3,940,372 3,927,832
Deferred Expense(Benefit) 45,955 (554,345) (260,933)
$4,159,030 3,386,027 3,666,899
Income tax expense differed from the amounts computed by applying the U.S.
Federal statutory income tax rate to income before income tax as follows:
1999 1998 1997
Tax computed at statutory rat e $4,267,180 3,632,276 3,578,200
Tax-exempt interest (522,865) (527,353) (499,677)
Dividend exclusion (55,707) (53,988) (50,369)
State taxes, net of federal 371,094 241,864 549,418
benefit
Nondeductible interest expense 64,792 68,089 66,403
Other items, net 34,536 25,139 22,924
Actual tax expense $4,159,030 3,386,027 3,666,899
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and deferred tax
liabilities at December 31, 1999, and 1998 are presented below:
1999 1998
Deferred tax assets:
Allowance for loan losses-book $1,817,054 1,800,968
Accrual for postretirement benefits other th an 750,595 812,079
pensions
Deferred loan fees 104,924 96,851
Deferred compensation and directors fees 655,745 623,570
Net unrealized losses on securities available 201,538 -
for sale
Accrued Pension - 96,307
Interest on non-accrual loans 50,271 119,330
Bond discount 46,586 103,624
Other 46,608 44,066
Total gross deferred tax assets 3,673,321 3,696,795
Deferred tax liabilities:
Depreciation 207,048 282,044
Allowance for loan losses-tax - 133,166
Prepaid Pension 54,137 -
Net unrealized gains on securities available - 3,587,543
for sale
Other - 25,032
Total gross deferred tax liabilities 261,185 4,027,785
Net deferred tax asset (liability) $3,412,136 (330,990)
Realization of deferred tax assets is dependent upon the
generation of future taxable income or the existence of
sufficient taxable income within the loss carryback period. A
valuation allowance is recognized when it is more likely than not
that some portion of the deferred tax assets will not be
realized. In assessing the need for a valuation allowance,
management considers the scheduled reversal of the deferred tax
liabilities, the level of historical taxable income and projected
future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be
deductible. Based on its assessment, management determined that
no valuation allowance is necessary.
(10) PENSION PLAN AND OTHER BENEFIT PLANS
The Bank has a noncontributory defined benefit pension plan
covering substantially all employees. The plan's defined benefit
formula generally bases payments to retired employees upon their
length of service multiplied by a percentage of the average
monthly pay over the last five years of employment.
The following table presents (1) change in the plan's projected
benefit obligation and plan assets, and (2) the plan's funded
status reconciled with amounts recognized in the Corporation's
consolidated balance sheet at December 31, 1999, and 1998:
1999 1998
Change in projected benefit obligation:
Projected benefit obligation at beginning of $14,549,204 13,370,944
year
Service cost 320,308 359,955
Interest cost 986,425 921,621
Plan amendments 384,407 -
Actuarial (gain) l o ss (2,335,605) 633,329
Benefits paid (883,658) (736,645)
Projected benefit obligation at end of year $13,021,081 14,549,204
Change in fair value of plan assets:
Fair value of plan assets at beginning of 19,209,845 16,777,650
year
Actual return on plan assets 2,135,378 3,201,812
Expenses paid (38,000) (32,972)
Benefits paid (883,658) (736,645)
Fair value of plan assets at end of year 20,423,565 19,209,845
Funded Status:
Plan assets in excess of projected benefit
obligation At end of year 7,402,484 4,660,641
Unrecognized net asset being recognized over 559,902 629,790
10 years
Prior service cost not yet recognized in net
periodic pension cost 796,207 470,599
Unrecongnized net actuarial gain (8,398,893) (5,804,670)
Prepaid (accrued) pension costs $ 359,700 (43,640)
Net periodic pension cost (income) in 1999, 1998, and 1997 is
comprised of the following:
Components of net periodic pension cost 1999 1998 1997
(income)
Service cost, benefit earned during the year $ 320,308 359,955 324,126
Interest cost on projected benefit 986,425 921,621 872,423
obligation
Expected return on plan assets (1,437,813 (1,395,769) (1,104,424)
Net amortization and deferral (272,260) (89,848) 12,646
Net periodic pension cost (income) $ (403,340) (204,041) 104,771
The principal actuarial assumptions used in 1999, 1998 and 1997 were as
follows:
1999 1998 1997
Discount rate 8.00% 6.75% 7.00%
Expected long-term rate of return on 7.50% 8.50% 8.50%
assets
Assumed rate of future compensation 5.00% 5.00% 5.00%
increase
The plan's assets at December 31, 1999, and 1998 are invested in
common and preferred stocks, U.S. Government securities,
corporate bonds and notes, and mutual funds.
The Bank also sponsors a defined contribution profit sharing,
savings and investment plan which covers all employees with a
minimum of 1,000 hours of annual service. The Bank matches at
the rate of 50% of the first 6% of an eligible employee's current
earnings. Expense under the plan totaled $620,279, $633,019, and
$591,669 for the years ended December 31, 1999, 1998 and 1997,
respectively.
The Bank sponsors a defined benefit health care plan that
provides postretirement medical, dental and prescription drug
benefits to full-time employees who meet minimum age and service
requirements. Postretirement life insurance benefits are also
provided to certain employees who retired prior to July 1981.
The plan is contributory, with retiree contributions adjusted
annually, and contains other cost sharing features such as
deductibles and coinsurance. The accounting for the plan
anticipates future cost-sharing changes to the written plan that
are consistent with the Bank's expressed intent to increase the
retiree contribution rate annually for the expected general
inflation rate for that year.
The following table presents (1) changes in the plan's
accumulated postretirement benefit obligation and (2) the plan's
funded status reconciled with amounts recognized in the
Corporation's consolidated balance sheet at December 31, 1999,
and 1998:
Change in accumulated postretirment benefit obligation 1999 1998
Accumulated postretirement benefit obligation at $2,214,000 1,848,000
beginning of year
Service cost 42,000 42,000
Interest cost 174,000 144,000
Participant contributions 70,320 56,940
Plan amendments 422,000 -
Actuarial (gain) loss (145,234) 535,405
Benefits paid (234,086) (412,345)
Accumulated postretirement benefit obligation at end of $2,543,000 2,214,000
year
Accrued postretirement benefit cost:
Accumulated postretirement benefit obligation end of $2,543,000 2,214,000
year
Unrecognized net actuarial gain (loss) 616,498 (361,732)
Accrued postretirement benefit cost at end of year,
included in other liabilities $1,926,502 1,852,268
The components of net periodic post-retirement benefit cost for
the years ended December 31, 1999, 1998, and 1997 are as follows:
1999 1998 1997
Service cost $ 42,000 42,000 40,000
Interest cost 174,000 144,000 117,000
Net amortization and deferral 22,000 - (7,000)
Net periodic postretirement cost $238,000 186,000 150,000
The postretirement benefit obligation was determined using a
discount rate of 8.00% for 1999 and 6.75% for 1998. The
assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation initially
ranged from 7.3% to 8.7% in 2000, depending on the specific
plan, and was decreased to 5.5% in the year 2005 and
thereafter, over the projected payout of benefits. The
health care cost trend rate assumption can have a
significant effect on the amounts reported. If the health
care cost trend rate was increased one percent, the
accumulated postretirement benefit obligation as of December
31, 1999, would have increased by 4.3%, and the aggregate of
service and interest cost would increase by 4.2%. If the
health care cost trend rate was decreased one percent, the
accumulated postretirement benefit obligation as of December
31, 1999, would have decreased by 3.9%, and the aggregate of
service and interest cost would have decreased by 3.7%.
However, the plan limits the increase in the Bank's annual
contributions to the plan for most participants to the
increase in base compensation for active employees.
(11) RELATED PARTY TRANSACTIONS
Members of the Board of Directors, certain Bank officers,
and their immediate families directly, or through entities
in which they are principal owners (more than 10% interest),
were customers of, and had loans and other transactions
with, the Bank in the ordinary course of business. All
loans and commitments included in such transactions were
made on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for
comparable transactions with other persons. These loans and
commitments, which did not involve more than normal risk of
collectibility or present other unfavorable features, are
summarized as follows for the years ended December 31, 1999
and 1998:
1999 1998
Balance at beginning of year $ 7,557,687 9,078,914
Additions 24,824,104 24,545,805
Amounts collected (25,162,984) (26,067,032)
Balance at end of year $ 7,218,807 7,557,687
(12) EXPENSES
The following expenses, which exceeded 1% of total revenues
(total interest income plus other operating income) in at least
one of the years presented, are included in other operating
expenses:
1999 1998 1997
Data processing services 1,979,254 1,618,091 1,358,882
Advertising 646,594 398,208 364,914
Amortization of intangible 587,303 587,303 587,303
assets
(13) COMMITMENTS AND CONTINGENCIES
In the normal course of business, there are outstanding various
commitments and contingent liabilities, such as commitments to
extend credit, which are not reflected in the accompanying
consolidated financial statements. Commitments to outside parties
under standby letters of credit, unused portions of lines of
credit, and commitments to fund new loans totaled $3,306,032,
$118,164,973 and $8,074,147, respectively, at December 31, 1999.
Commitments to outside parties under standby letters of credit,
unused portions of lines of credit, and commitments to fund new
loans totaled $1,439,623, $100,372,761 and $9,513,063,
respectively, at December 31, 1998. Because many commitments and
almost all standby letters of credit expire without being funded
in whole or in part, the contract amounts are not estimates of
future cash flows. Loan commitments and unused lines of credit
have off balance sheet credit risk because only origination fees
are recognized on the consolidated balance sheet until
commitments are fulfilled or expire. The credit risk amounts are
equal to the contractual amounts, assuming the amounts are fully
advanced and collateral or other security is of no value. The
Corporation does not anticipate losses as a result of these
transactions. These commitments also have off balance sheet
interest rate risk in that the interest rate at which these
commitments were made may not be at market rates on the date the
commitments are fulfilled.
At December 31, 1999, the Corporation had outstanding commitments
totaling $776,636 to fund equity investments in Small Business
Investment Companies. The Bank has employment contracts with
certain of its senior officers, which expire at various dates
through 2002 and may be extended on a year-to-year basis.
In the normal course of business, there are various outstanding
legal proceedings. In the opinion of management, the aggregate
amount involved in such proceedings is not material to the
financial condition or results of operations of the Corporation.
(14) SHAREHOLDERS' EQUITY
Under Federal Reserve regulations, the Bank is limited to the
amount it may loan to the Corporation, unless such loans are
collaterlized by specific obligations. At December 31, 1999, the
maximum amount available for transfer from the Bank to the
Corporation in the form of loans was $1,769,638. The Bank is
subject to legal limitations on the amount of dividends that can
be paid to the Corporation. Dividends are limited to retained
net profits, as defined by regulations, for the current year and
the two preceding years. At December 31, 1999, $9,631,842 was
available for the declaration of dividends.
(15) PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company only financial statement information of
Chemung Financial Corporation is as follows:
BALANCE SHEETS - DECEMBER 31 1999 1998
Assets:
Cash on deposit with subsidiary bank $ 29,669 333,753
Investment in subsidiary bank 61,907,440 62,758,019
Dividend receivable 949,257 797,570
Securities available for sale, at estimated 1,102,481 1,099,148
fair value
Other assets 2,188,718 1,800,282
Total assets $66,177,565 66,788,772
Liabilities and shareholders' equity:
Dividend payable 849,257 697,570
Other liabilities 16,425 1,575
Total Liabilities 865,682 699,145
Shareholders' equity:
Total shareholders' equity $65,311,883 66,089,627
Total Liabilities and shareholders' equity $66,177,565 66,788,772
STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
Income: 1999 1998 1997
Interest and dividends $ 93,060 112,375 111,341
Gain on sale of securities - - 28,981
Other income 177,530 2,533 -
Dividends from subsidiary bank 4,496,546 3,137,387 5,006,464
Income before equity in undistributed
Earnings of subsidiary bank 4,767,136 3,252,295 5,146,786
Equity in undistributed earnings of
subsidiary bank 3,759,448 4,126,662 1,749,017
Operating Expenses 76,036 78,546 -
Income before income tax expense 8,450,552 7,300,411 6,895,803
Income tax expense 59,061 3,273 38,583
Net Income $8,391,501 7,297,138 6,857,220
STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
1999 1998 1997
Cash flows from operating activities:
Net Income $8,391,501 $7,297,138 6,857,220
Adjustments to reconcile net income to
net cash
Provided by operating activities:
Equity in undistributed earnings of
subsidiary bank (3,759,448) (4,126,663) (1,749,017)
Increase in dividend receivable (151,687) (155,959) (61,391)
Gain on sale of securities - - (28,980)
Increase in other assets (388,436) (956,199) (844,875)
Increase (decrease) in other liabilities 13,520 (9,685) -
Net cash provided by operating 4,105,450 2,048,632 4,172,957
activities
Cash flow from investing activities:
Proceeds from sales of securities
available for sale - - 232,022
Net cash provided by investing - - 232,022
activities
Cash flow from financing activities:
Cash dividends paid (2,944,859) (2,681,428) (2,445,074)
Purchase of treasury stock (1,464,675) (984,284) (107,768)
Sale of treasury stock - 67,378 -
Net cash used in financing activities (4,409,534) (3,598,334) (2,552,842)
Increase (decrease) in cash and cash
equivalents (304,084) (1,549,702) 1,852,137
Cash and cash equivalents at beginning of 333,753 1,883,455 31,318
year
Cash and cash equivalents at end of year $ 29,669 333,753 1,883,455
(16) FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Short-Term Financial Instruments
For those short-term instruments that generally mature in ninety
days or less, the carrying value approximates fair value.
Securities
Fair values for securities are based on either 1) quoted market
prices, 2) dealer quotes, 3) correspondent bank pricing system,
or 4) discounted cash flow to maturity. For certain securities,
such as equity investments in the Federal Home Loan Bank, Federal
Reserve Bank and non-marketable obligations of political
subdivisions, fair value is estimated to approximate amortized
cost.
Loans Receivable
For variable-rate loans that reprice frequently, fair values are
based on carrying values. The fair values for other loans are
estimated through discounted cash flow analysis using interest
rates currently being offered for loans with similar terms and
credit quality.
Deposits
The fair values disclosed for demand deposits, savings accounts
and money market accounts are, by definition, equal to the
amounts payable on demand at the reporting date (i.e., their
carrying values).
The fair value of fixed maturity certificates of deposits is
estimated using a discounted cash flow approach that applies
interest rates currently being offered on certificates to a
schedule of weighted average expected monthly maturities on time
deposits.
Securities Sold Under Agreements to Repurchase (Repurchase
Agreements)
These instruments bear both variable and stated rates of
interest. Therefore, the carrying value approximates fair value
for the variable rate instruments and stated rate instruments are
based on a discounted cash flow to maturity.
Federal Home Loan Bank Advances
These instruments bear a stated rate of interest to maturity and
therefore the fair value is based on a discounted cash flow to
maturity.
Commitments to Extend Credit
The fair value of commitments to extend credit are based on fees
currently charged to enter into similar agreements, the counter
party's credit standing and discounted cash flow analysis. The
fair value of these commitments to extend credit approximates the
recorded amounts of the related fees and is not material at
December 31, 1999 and 1998.
Receivables and Payables
For these short term instruments the carrying value approximates
fair value.
The estimated fair value of the Corporation's financial
instruments as of December 31, 1999 and 1998 are as follows
(dollars in thousands):
1999 1998
Estimated Estimated
Carrying Fair Carrying Fair
Amount Value (1) Amount Value (1)
Financial assets:
Cash and due from banks $ 30,926 30,926 27,516 27,516
Interest-bearing deposits 1,146 1,146 1,304 1,304
Securities 235,990 235,990 241,955 241,955
Net loans 355,298 350,624 324,746 328,370
Accrued interest 4,143 4,143 3,843 3,843
receivable
Financial liabilities:
Deposits:
Demand, savings, NOW and
money market accounts $277,390 277,390 287,617 287,617
Time deposits 204,384 203,877 178,522 180,080
Repurchase agreements 49,946 49,610 50,587 50,867
Federal Home Loan Bank 49,700 49,239 26,900 26,961
advances
Dividends payable 849 849 697 697
Accrued interest payable 1,610 1,610 1,429 1,429
<FN>
<FN1>
(1) Fair value estimates are made at a specific point in
time, based on relevant market information and information
about the financial instrument. These estimates are
subjective in nature and involve uncertainties and matters
of significant judgement and, therefore, can not be
determined with precision. Changes in assumptions could
significantly affect the estimates.
</FN>
(17) REGULATORY CAPITAL REQUIREMENT
The Corporation and the Bank are subject to various regulatory
capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can
initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the consolidated
financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must
meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off-
balance sheet items as calculated under regulatory accounting
practices. The capital amounts and classifications are also
subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure
capital adequacy require the Corporation and the Bank to
maintain minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital to risk-weighted assets, and
of Tier 1 capital to average assets (all as defined in the
applicable regulations). Management believes that, as of
December 31, 1999, and 1998, the Corporation and the Bank met
all capital adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the
Federal Reserve Bank of New York categorized the Bank as well
capitalized under the regulatory framework for prompt corrective
action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based and Tier 1
leverage ratios as set forth in the table below. There have
been no conditions or events since that notification that
management believes have changed the Bank's or the Corporation's
capital category.
The actual capital amounts and ratios of the Corporation and the
Bank are also presented in the following table:
Required To
Actual Be Required To
Adequately Be Well
Capitalized Capitalized
Amou Rati Amou Rat Amount Rati
nt o nt io o
As of December 31, 1999
Total Capital(to Risk
Weighted Assets):
<C <C <C <C
Consolidated $64,639,014 16.57% > $31,199,743 > 8.00% > $38,999,678 > 10.00%
Subsidiary $61,254,697 15.84% > $30,939,128 > 8.00% > $38,673,909 > 10.00%
Tier 1 Capital(to Risk
Weighted Assets):
Consolidated $59,973,921 15.37% > $15,599,871 > 4.00% > $23,399,807 > 6.00%
Subsidiary $56,589,604 14.63% > $15,469,564 > 4.00% > $23,204,346 > 6.00%
Tier 1 Capital(to Average
Assets):
Consolidated $59,973,921 9.49% > $18,952,047 > 3.00% > $31,586,744 > 5.00%
Subsidiary $56,589,604 9.00% > $18,860,467 > 3.00% > $31,434,112 > 5.00%
As of December 31, 1998
Total Capital(to Risk
Weighted Assets):
Consolidated $58,883,505 16.67% > $28,261,391 > 8.00% > $35,326,739 > 10.00%
Subsidiary $55,534,144 15.85% > $28,028,918 > 8.00% > $35,036,147 > 10.00%
Tier 1 Capital(to Risk
Weighted Assets):
Consolidated $54,466,510 15.42% > $14,130,696 > 4.00% > $21,196,044 > 6.00%
Subsidiary $51,153,025 14.60% > $14,014,459 > 4.00% > $21,021,688 > 6.00%
Tier 1 Capital(to Average
Assets):
Consolidated $54,466,510 9.57% > $17,081,207 > 3.00% > $28,468,678 > 5.00%
Subsidiary $51,153,025 9.02% > $17,008,021 > 3.00% > $28,347,001 > 5.00%