EXHIBIT A
TABLE OF QUARTERLY MARKET PRICE RANGES
Market Prices of Chemung Financial Corporation Stock
During Past Three Years (dollars)
- -----------------------------------------------------------------------------
1995 1994 1993
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Hi -- Lo Hi -- Lo Hi -- Lo
1st Quarter 26 1/4 - 25 24 - 23 21 1/4 - 17 1/2
2nd Quarter 26 1/4 - 25 26 - 23 24 1/2 - 22
3rd Quarter 25 - 24 1/4 26 - 24 1/2 24 1/4 - 22
4th Quarter 27 - 25 26 - 24 25 - 23
EXHIBIT B
TABLE OF DIVIDENDS PAID
Dividends Paid Per Share by Chemung Financial Corporation
During Past Three Years
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1995 1994 1993
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January 3 $.2400 $.2275 $.2100
April 3 .2400 .2275 .2100
July 3 .2400 .2275 .2100
October 2 .2500 .2400 .2275
- -----------------------------------------------------------------------------
$.9700 $.9225 $.8575
As of December 31, 1995 there were 834 registered holders of record of the
Corporation's stock. Chemung Financial Corporation's 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 THE SELECTED FINANCIAL DATA EXHIBIT
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 which 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.
Description of Business
Chemung Financial Corporation (the "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 employment 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 branches in these
communities. These areas encompass Chemung, Steuben, Schuyler, and Tioga
counties, together with 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 all state and Federal laws
governing the making of loans, through written policies and procedures
implemented to ensure loan repayment; 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 Executive Committee of the Board is designated to receive required loan
reports, oversee loan policy, and approve loans above the authorized individual
and Senior Loan Committee lending limits. The Senior Loan Committee, consisting
of the president, senior lending officer, commercial loan officer, mortgage
officer, consumer loan officer, and chief financial 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.
On October 1, 1992 the FDIC issued its final Risk-Related Premium System
Rule, which provides for "well capitalized" banks to be assessed at $0.23 per
$100. Lesser capitalized banks were assessed on a scale currently reaching to
$0.31. During the third quarter, the FDIC's Bank Insurance Fund ("BIF") became
fully capitalized at the required 1.25% of insured deposits. This resulted in
an 82% decline in the annualized premium to $0.04 per $100 insured deposit. In
subsequent developments, the BIF fund was recognized as over capitalized with
respect to statute law and the 1996 premium for well capitalized banks reduced
to the statutory limit of $2,000 in total. In order to be considered well
capitalized, the FDIC requires a bank's Total Risk Based Capital Ratio to be
greater than or equal to 10% AND its Tier 1 Risk Based Capital Ratio to be
greater than or equal to 6.00% AND its leverage ratio to be greater than or
equal to 5.00%. This designation has been maintained and the Bank's FDIC
insurance premiums for 1995 were $538 thousand vs $796 thousand in 1994 and $769
thousand in 1993. In 1995, FDIC premiums constituted the Corporation's fourth
largest non-interest expense behind salaries, credit card data processing, and
general data processing. In December 1995, the Bank received notification from
the FDIC that it remains well capitalized and, due to that the 1996 FDIC
insurance premium will be reduced to $2 thousand for BIF insured deposits.
There will, however, be a one-time charge to banks having deposits insured
by the Savings Association Insurance Fund ("SAIF") in order to recapitalize that
fund to the same level as the BIF fund. The two funds will then be merged. $36
million of the Bank's deposits will be subjected to the assessment which will
be expensed during the year that the enabling legislation is signed into law by
the President. The timing of this event is rendered uncertain by the debate
over federal budget reconciliation legislation to which it was originally
attached.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA
91") was passed in order to protect depositors and taxpayers from the excesses
of the S&L problems of the 1980's. There are a number of provisions in this act
that significantly increase the non-interest 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 and contain
the potential for the regulatory authorities to begin micro-managing banks of
all sizes. Thus, regulatory burden continues to be a major impediment to
banking profitability.
Competition
The Bank is subject to intense competition in the lending and deposit gathering
aspects of its business from commercial banks, savings banks, savings and loan
associations, credit unions; and other providers of financial services, such as
money market funds, brokerage firms, investment companies, credit companies and
insurance companies. The Bank also competes with nonfinancial 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. The Bank faces significant competition in acquiring quality assets,
due to such factors as increased activities by providers of credit cards, and
the increased lending powers granted to and employed by thrift institutions and
credit unions. The Bank also faces competition in attracting deposits at
reasonable prices due to the activities of money market funds; increased
activities of non-bank deposit takers, including brokerage firms; and the
increased availability of demand deposit type accounts at thrift institutions
and credit unions. Unlike the Corporation, many of these competitors, with the
particular exception of thrift institutions, 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.
Competition for the Bank's fiduciary services comes primarily from brokerage
firms and independent investment advisors. It is not considered particularly
significant and Trust Assets Under Administration totaled $771 million at book
($993 million at fair value) December 31, 1995, compared to $732 million a year
earlier. Relative to the Bank's total assets, when compared with peer banks,
the Trust Department is disproportionally large and favorable in terms of
generating non-interest income.
Exhibit I
Selected Financial Data
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Growth Rates
1995 1994 1993 1992 1991 1990 1 yr 5 yrs
- ---------------------------------------------------------------------------------------------------------------------
Per Share Data
- ---------------------------------------------------------------------------------------------------------------------
Net Operating Income $ 2.68 $2.45 $2.87 $2.55 $1.90 $1.93 9.4% 7.8%
Net Income 2.68 2.45 2.37 2.55 1.90 1.93 9.4% 7.8%
Dividends Declared 0.98 0.935 0.875 0.82 0.76 0.76 4.8% 5.8%
Tangible Book Value 21.57 17.75 20.25 18.75 17.02 15.91 21.5% 7.1%
Market Price 12/31 27.75 25.50 23.00 18.50 18.25 24.00 8.8% 3.1%
Average Shares O/S (thousands) 2,088 1,899 1,894 1,894 1,899 1,921 10.0% 1.7%
=====================================================================================================================
Earnings (in thousands)
- ---------------------------------------------------------------------------------------------------------------------
Net Interest Income 21,849 19,304 18,672 18,339 16,557 15,690 13.2% 7.9%
Loan Loss Provision 564 624 907 902 625 446 -9.6% 5.3%
Net Income after Loan Loss
Provision 21,285 18,680 17,765 17,437 15,932 15,244 14.0% 7.9%
Fiduciary Department Income 3,678 3,323 3,294 3,176 2,708 2,802 10.7% 6.3%
Securities Gains (Losses), net 531 140 821 105 (506) 7 279.3% N/A
Other Income 2,527 2,223 2,003 1,691 1,620 1,342 13.7% 17.7%
Total Non-Interest Income 6,736 5,686 6,118 4,972 3,822 4,151 18.5% 12.5%
Non Interest Expense 19,560 17,375 15,626 15,287 14,901 14,282 12.6% 7.4%
Pretax Income 8,461 6,991 8,257 7,122 4,853 5,113 21.0% 13.1%
Income Taxes 2,859 2,343 2,830 2,296 1,241 1,398 22.0% 20.9%
Net Operating Income 5,602 4,648 5,427 4,826 3,612 3,715 20.5% 10.2%
Effect of Accounting Change 0 0 (933) 0 0 0 N/A N/A
Net Income 5,602 4,648 4,494 4,826 3,612 3,715 20.5% 10.2%
=====================================================================================================================
Average Balance Sheet (in millions)
- ---------------------------------------------------------------------------------------------------------------------
Total Assets 495.2 431.2 397.7 387.0 356.8 332.1 14.8% 9.8%
Earning Assets 450.8 396.7 368.4 358.3 328.1 303.5 13.6% 9.7%
Loans - Net 249.1 221.4 224.1 221.0 218.6 205.2 12.5% 4.3%
Securities 187.0 161.6 144.3 137.3 108.9 98.4 15.7% 18.0%
Deposits 424.4 374.6 347.0 338.5 319.4 299.0 13.3% 8.4%
Tangible Equity 41.7 38.7 37.0 34.2 31.5 30.0 7.8% 7.8%
=====================================================================================================================
Ending Balance Sheet (in millions)
- ---------------------------------------------------------------------------------------------------------------------
Total Assets 501.9 494.3 398.1 385.8 381.7 335.8 1.5% 9.9%
Earning Assets 452.5 448.6 369.4 356.4 350.1 304.7 0.9% 9.7%
Loans - Net 259.1 232.9 218.8 214.9 224.2 206.6 11.2% 5.1%
Securities 179.5 204.0 137.1 127.5 110.1 94.1 -12.0% 18.2%
Deposits 426.9 432.3 342.9 339.2 325.8 302.8 -1.2% 8.2%
Tangible Equity 44.9 37.2 38.3 35.5 32.3 30.5 20.7% 9.4%
Allowance For Loan Losses 3.90 3.60 3.50 3.40 2.80 2.50 8.3% 11.2%
=====================================================================================================================
During 1995, as well as 1994, the Fiduciary Division noted a continued
increase in the competition for personal and corporate investment management
services in our market areas. The reasons were 1) aggressive pricing and
marketing by competitors; and 2) while our long-term investment performance
remained strong, short-term results during the 1992 and 1993 calendar years
prompted many present and potential clients to question the validity of a
consistent and inflexible approach to investing in equities. The temporal
proximity of these two developments challenged us to reflect upon the
traditional manner in which investment services have been brought to our
markets. We concluded that our proprietary products alone would fall short of
providing the level of flexibility that many of our customers will demand.
Thus, in an effort to position the Fiduciary Division for future growth, we
now compliment our more traditional investment alternatives with additional
products made available through strategic alliances with various mutual fund and
insurance companies.
Employees
The Corporation and its Banking subsidiary had 281 full-time equivalent
employees (FTE's) on December 31, 1995. The employment trend is relatively
stable.
Performance Summary
Net income for 1995 was impacted by 1) higher loan volumes, 2) widely
fluctuating interest rates, 3) higher levels of non-interest income, and 4)
important changes in non-interest expenses. This compares with 1994 when net
income was negatively impacted by an environment of a sustained rise in interest
rates.
During the third quarter, the Federal Deposit Insurance Corporation's Bank
Insurance Fund ("BIF") became fully capitalized at the required 1.25% of insured
deposits. This resulted in an 82% decline in the annualized premium to $0.04
per $100 insured deposit and resulted in an estimated $437 thousand reduction
from the budgeted full year's accrual of $975 thousand. A rebate during the
third quarter amounted to $253 thousand, of which $108 thousand served to reduce
the third quarter FDIC expense.
During the second and third quarter, the data processing function was
brought in-house from a remote-job-entry system through Mellon Datacenter.
Estimated non-recurring expenses associated with the project amounted to $370
thousand. This investment is viewed by management as a technological
requirement for delivering appropriate service to our market at the most
efficient cost. The annualized reduction in data processing expense is
estimated at $200 thousand.
Due to the sustained increase in loan demand, management decided to
increase the provision for loan losses to $200 thousand per quarter during the
first three quarters. This level was in anticipation of significant loan growth
due to the expansion of the Bank's service area, introduction of new products,
and positive economic conditions favoring increased lending activity. Average
loan balances were up 12.5% which was slightly below the business plan. Due in
part to very favorable prevailing economic conditions, however, the Bank's loan
loss experience was significantly below management's original expectations of
the inherent risk levels of the portfolio. There were no provisions added to
the allowance during November and December and $102 thousand of the allowance
for loan losses was returned to pretax income.
Non-performing loans at year end increased to $1.800 million versus $1.178
million at the end of 1994, and represented 0.68% of total outstandings compared
to 0.49% on December 31, 1994 and 0.85% on December 31, 1993. Net loan losses,
however, were only $264 thousand or 0.11% of average outstandings, compared to
$623.8 thousand in 1994 and $806.7 thousand in 1993. The allowance for loan
losses at December 31, 1995 was 1.48% of outstandings and, at 217% of
non-performing loans versus 306% a year ago and 186% in 1993, is felt by
management to be adequate.
Exhibit II
Selected Ratios
1995 1994 1993 1992 1991
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Return on average assets 1.13% 1.08% 1.13% 1.25% 1.01%
Return on average tangible equity 13.43% 12.01% 12.15% 14.12% 11.45%
Dividend yield 12/31 3.60% 3.76% 3.96% 4.54% 4.16%
Dividend payout 36.52% 38.22% 36.86% 32.17% 39.97%
Leverage ratio 8.34% 7.69% 9.63% 9.20% 8.46%
=======================================================================================================================
Tier I capital to risk adjusted assets 13.84% 13.71% 15.66% 14.80% 13.02%
Total capital to risk adjusted assets 15.15% 15.03% 17.09% 16.22% 14.15%
Loans to deposits 61.61% 54.71% 64.83% 64.38% 69.70%
Loan reserve to outstanding loans 1.48% 1.52% 1.57% 1.55% 1.23%
Loan reserve to non-performing loans 217% 306% 186% 178% 92%
Non-performing loans to outstanding loans 0.68% 0.49% 0.85% 0.87% 1.33%
=====================================================================================================================
Net interest rate spread 4.12% 4.26% 4.42% 4.35% 3.99%
Net interest margin 4.89% 4.89% 5.07% 5.12% 5.05%
=====================================================================================================================
Chemung Financial's net profits before dividends for 1995 were $5.602
million versus $4.648 million for 1994, up $954 thousand (20.5%) or $2.68 versus
$2.45 per share (9.4%) on 189 thousand average additional shares outstanding.
During 1993 the Corporation earned $2.37 when net profits before dividends were
reduced $933 thousand ($0.50 per share) by the change in accounting for
postretirement medical benefits to $4.494 million. Quarterly dividends declared
totaled $0.98 per share versus 1994's $0.935 and $0.875 in 1993.
While the average interest rate on earning assets was 8.07% during 1995
versus 7.49% in 1994, the interest expense on the Bank's liabilities also
increased to 3.95% in 1995 versus 3.23% in 1994 and delivered a net interest
spread of 4.12% versus 4.26% a year earlier. Due to higher levels of
non-interest bearing demand deposits, the net interest margin was maintained at
4.89%. Non-interest income totaled $6.736 million versus $5.685 million in 1994
and $6.119 million in 1993. Trust department income, at $3.678 million in 1995
versus $3.323 million in 1994 and $3.294 million in 1993 is the largest segment
on non-interest income. During 1995, $531 thousand in net securities gains were
realized as management moved from a strategy with emphasis upon liquidity to an
investment approach with higher yield potential. Securities sold or matured
were mostly U.S. Treasury securities with the proceeds reinvested primarily in
U.S. Government agency notes and U.S. Government agency guaranteed
mortgage-backed securities.
The decline in non-interest income during 1994 when compared to 1993
occurred because during 1993, $821 thousand in capital gains were realized.
$545 thousand of 1993's gains resulted from the sale of a defaulted bond at $790
thousand which had been written down to $245 thousand from $1 million during
1991.
During 1995, non-recurring expenses associated with the acquisition of
Owego were approximately $124 thousand. Management believes that future cost
efficiencies, together with future steady and sustainable growth in the Owego
market will recapture the goodwill associated with the acquisition.
Average earning assets for 1995 grew by $54.1 million or 13.6% to $450.8
million, compared to $396.7 million in 1994 and $368.4 million in 1993.
Commercial and consumer loan balances grew 19.7% and 8.0%, respectively, while
the mortgage portfolio increased $3.9 million (5.8%). Average total loan
balances were $249.1 million versus $221.4 million during 1994 (up 12.5%) and
$224.1 million during 1993. The 1994 acquisition of the Columbia branches from
RTC and the purchase of Owego at year-end 1994 had only minor impact upon the
average loan balances in 1995. Management expects significant progress in these
areas during 1996.
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 Bank. For purposes of constructing this
table, earning asset averages include non-performing loans.
Exhibit III
Changes Due to Volume and Rate
1995 vs 1994 1994 vs 1993
---------------------------------------------------------
Increase Increase
(Decrease) (Decrease)
- --------------------------------------------------------------------------------------------------------------------
Total Due to Due to Total Due to Due to
Change Volume Rate Change Volume Rate
- --------------------------------------------------------------------------------------------------------------------
C>
Interest Income (thousands)
- --------------------------------------------------------------------------------------------------------------------
Loans $ 3,862 $ 2,607 $ 1,255 $ (735) $ (249) $ (486)
Taxable investment
securities 2,198 1,273 925 1,674 1,603 71
Tax-exempt investment
securities 144 150 (6) 78 125 (47)
Federal funds sold 79 (81) 160 36 (78) 114
Interest-bearing deposits 215 145 70 70 39 31
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Total Interest Income $ 6,498 $ 4,094 $ 2,404 $ 1,123 $ 1,440 $ (317)
====================================================================================================================
Interest Expense (thousands)
- --------------------------------------------------------------------------------------------------------------------
Demand deposits $ 58 $ (1) $ 59 $ (138) $ 21 $ (159)
Savings deposits 618 176 442 (28) 251 (279)
Time deposits 2,862 1,580 1,282 558 498 60
Federal funds purchased
and securities sold
under agreement to
repurchase 413 179 234 99 8 91
- --------------------------------------------------------------------------------------------------------------------
Total Interest Expense $ 3,951 $ 1,934 $ 2,017 $ 491 $ 778 $ (287)
====================================================================================================================
Net Interest Income $ 2,547 $ 2,160 $ 387 $ 632 $ 662 $ 30
====================================================================================================================
The board-approved investment portfolio policy requires that except for local
municipal obligations which are sometimes unrated or carry ratings above "Baa"
but below "A" by Moody's or Standard & Poors, debt securities purchased for the
bond portfolio must carry a minimum rating of "A". The policy also states that,
except for short term U.S. Treasury Bills and/or U.S. Government Agency discount
notes, purchases are to be made with the intent of holding to maturity. During
1995, the regulatory authorities finalized their rules for examining
institutions relative to their exposure to interest rate risk with respect to
the fair value of an organization's net worth. They concluded that the fair
value of all securities would be considered irrespective of whether holdings
were categorized as held to maturity. In November 1995, the Financial
Accounting Standards Board published A Guide to Implementation of Statement 115
on Accounting for Certain Investments in Debt and Equity Securities. Concurrent
with the initial adoption of the Guide, but no later than December 31, 1995, the
Corporation was permitted to reassess the appropriateness of the classifications
of all securities held at that time and implement reclassification without
calling into question the intent of the Corporation to hold other debt
securities to maturity in the future. Effective December 1, 1995, the
Corporation transferred securities with amortized costs of $10,505,646 from the
held to maturity portfolio to the available for sale portfolio. The net
unrealized gain was $154,557. The transferred securities are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of shareholders' equity net of related taxes.
The Available for Sale segment of the securities portfolio at December 31,
1995 was $171.9 million compared to $188.8 million at the beginning of the
year. Interest rates continued to trend lower during the year. This, together
with an exceptional appreciation in the common stock portfolio of the
Corporation's banking subsidiary caused the Allowance valuation to increase to
$6.3 million at December 31, 1995, compared to a negative $295 thousand at
December 31, 1994. The components of the appreciation are set forth in the
following table:
Amortized Fair Appreciation
Cost Value (Depreciation)
- --------------------------------------------------------------------------------------------------------------------
(in thousands)
U.S. Treasury Securities $ 77,579 $ 78,516 $ 937
Obligations of other U.S.
Government Agencies 29,692 30,258 566
U.S. Government Agency
Mortgage-backed pools 30,647 30,573 (74)
Obligations of states and
political subdivisions 22,301 22,703 402
Other bonds and notes 2,941 3,014 73
Corporate stocks 2,468 6,818 4,350
- --------------------------------------------------------------------------------------------------------------------
Totals $ 165,628 $ 171,882 $ 6,254
====================================================================================================================
Included in Corporate stocks is 17,995 shares of Student Loan Marketing
Association ("SALLIE MAE") at a cost basis of $5,762 and fair value of
$1,187,670. These shares were acquired as preferred shares (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, 1995, the banking subsidiary's portfolio held
marketable investments in equities totalling $94,995 at cost with a total market
value of $3,194,389. These shares were acquired prior to the enactment of the
Banking Act of 1933. Other equities included in the bank portfolio are 9,964
shares of Federal Reserve Bank and 14,813 shares of the Federal Home Loan Bank
of New York. They are valued at $498,200 and $1,481,300, respectively.
Management has no current plans for selling these securities.
Capital Resources and Dividends
The Corporation continues to maintain a strong capital position. Tangible
shareholders' equity at December 31, 1995, was $44.9 million or 8.95% of total
assets compared to $37.2 million or 7.52% of total assets at the end of 1994 and
$38.3 million or 9.63% of assets at the end of 1993.
The Federal Reserve requires banks and bank holding companies to maintain
a minimum Tier I risk adjusted capital ratio of 4.00% and a minimum total risk
adjusted capital ratio of capital to assets of 8.00%. Tier I (core) capital is
essentially shareholders' equity, adjusted for goodwill purchased after 1988,
net of Treasury stock. Tier 2 (supplementary) capital may include preferred
stock, subordinated debt with an original maturity of 5 years or more, and the
allowance for loan losses.
The Corporation continues to maintain a strong capital position. As of
December 31, 1995, the Corporation's total Weighted Risk Adjusted Capital Ratio
was 15.15% compared with 15.03% at December 31, 1994 and 17.09% at the end of
1993. The leverage ratio (Average Tier I Capital/Average Assets) was 8.34% at
year end versus 7.69% in 1994 and 9.63% in 1993. Management's strategy for
leveraging the Corporation's capital is to maintain the leverage ratio between
7.50% and 8.50%.
Under Federal Reserve regulations (see Note 15 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,
1995, the maximum amount available for transfer from the Bank to the Corporation
in the form of loans was $1,660,655. 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, 1995, $7,857,299 was available for
the declaration of dividends.
Cash dividends declared amounted to $2.046 million in 1995 versus $1.777
million in 1994 and $1.657 million in 1993. Dividends declared amounted to
36.5% of net earnings compared to 38.2% and 36.8% of 1994 and 1993 net earnings,
respectively. It is management's objective to continue generating sufficient
capital internally, while retaining an adequate dividend payout ratio.
The core deposit intangible and goodwill in the amounts of $5.34 million and
$2.65 million, respectively, at December 31, 1995, which account for the premium
paid in connection with the acquisition of three branches from the Resolution
Trust Corporation ("RTC") and the Owego National Financial Corporation during
1994, is being 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 core deposit intangible benefits will exist beyond a
short-term period.
Treasury Shares
When shares of the Corporation come on the market, we will bid only after
careful review of our capital position. During 1995, 11,632 shares were
purchased at a total cost of $299,749 or an average price of $25.77 per share.
In 1994, 7,500 of the treasury shares were sold at a price of $23.00 per share
to fund profit sharing requirements. During 1993, 2,869 common shares were
purchased at a total cost of $65,638 ($22.878 average cost per share).
Cash Flow
Proceeds from maturities and sales of securities and student loans available for
sale trailed purchases of securities and loan originations, net of repayments
and net purchases of premises and equipment, by $356 thousand during 1995. Net
purchases of premises and equipment were $3.013 million, including $540 thousand
for real estate. In 1994, net cash used by investing activities was $85.1
million. Additionally, in June 1994, the bank acquired $45.6 million in
deposits from the RTC. This event resulted in unusually high levels of
securities purchases.
Net cash provided by financing activities amounted to a negative $4.495
million during 1995 compared to $49.0 million a year earlier, when the purchase
of deposits of acquired branches accounted for $45.6 million of the increase.
Core deposits (Demand, NOW, Savings and Insured Money Market Accounts) decreased
$14.3 million while certificates of deposit and individual retirement accounts
increased $8.9 million.
Liquidity and Sensitivity
The term "liquidity" refers primarily to the expected cash flows from assets
held for investment and secondarily to borrowings secured by assets held for
investments. 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, Senior Lending Officer, Senior
Marketing Officer, Chief Financial Officer, and others representing key
functions.
During 1993, the Bank became a member of the Federal Home Loan Bank of New
York ("FHLB"). The primary reasons for joining the FHLB were to enhance
management's ability to satisfy future liquidity needs and to have an additional
alternate for investing excess reserves. Having invested $1.481 million in FHLB
common stock, the Bank maintained a credit line of $52,389,800 at December 31,
1995.
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.
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.
Interest rate risk is portrayed below using the "contractual" gap.
Contractual gap measures the stated repricing and maturity of assets and
liabilities. At December 31, 1995, the cumulative one-year contractual gap for
the Bank was a negative $121.5 million versus a negative $111.4 million a year
earlier and a negative $75.2 at the end of 1993. This indicates that $121.5
million of earning assets could reprice after the source of funds reprice.
In recent years, however, 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 1995, 1994 and 1993 has been very stable, even with
movements in excess of 200 basis points. Short-term and intermediate-term
interest rates on U.S. Treasury Securities reached their lowest levels at the
beginning of 1994; peaked over 250 basis points higher at the beginning of 1995
and had declined more than 200 basis points by the end of the year.
December 31, 1995 Rate Sensitive
- --------------------------------------------------------------------------------------------------------------------
Contractual Amounts 1 to 90 91 to 365 1 to 5 Over 5
(Thousands) days days years years
- --------------------------------------------------------------------------------------------------------------------
Earning assets:
Loans $ 99,667 $ 24,573 $ 72,425 $ 66,291
Securities 6,684 43,993 85,648 35,538
Federal funds 10,000
Other (Equities) 6,818
- --------------------------------------------------------------------------------------------------------------------
Total earning assets 123,169 68,566 158,073 101,829
====================================================================================================================
Net sources:
NOW accounts 43,958
Insured Money Market 47,520
Time certificates
under $100 thousand 23,835 67,980 41,507 38
Time certificates
over $100 thousand 13,618 5,803 2,041
Savings 97,184
Repurchase agreements 13,382
- --------------------------------------------------------------------------------------------------------------------
Total sources 239,497 73,783 43,548 38
====================================================================================================================
Incremental gap -116,328 -5,217 114,525 101,791
Percent of earning assets -94.4 -7.6 72.4 100
Cumulative gap -116,328 -121,545 -7,020 94,771
Percent of total assets -25.8 -26.9 -1.6 21.0
================================================================================
The asset/liability management function of the Bank falls under the authority
of the Board of Directors, which has charged the ALCO with responsibility for
implementing its funds management policies. 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 any and all asset/liability strategies in order to achieve
profit goals.
On January 1, 1995, the Corporation adopted the provisions of Standards No.
114 (SFAS 114), Accounting by Creditors for Impairment of a Loan as amended by
SFAS No. 118 Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosure. These statements require that impaired loans be
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 the collateral if the loan is
collateral dependent. For purposes of these statements, a loan is impaired
when, based on current information and events, it is probable that a creditor
will be unable to collect all contractual interest and principal payments
according to the terms of the agreement.
SFAS 114 does not apply to large groups of small balance, homogeneous loans
that are collectively evaluated for impairment. This issuance requires the
Corporation to account for a troubled debt restructuring involving a
modification of terms at fair value as of the date of the restructuring.
The Corporation defines smaller balance, homogeneous loans as consumer loans,
residential mortgages, home equity and credit card outstandings. Significant
factors impacting management's judgment in determining when a loan is impaired
include an evaluation of compliance with repayment program, condition of
collateral, deterioration in financial strength of borrower or any case when the
expected future cash payments may be less than the recorded amount. Commercial
loans are placed upon non-accrual status when delinquency reaches 90 days unless
collateral is deemed adequate, while consumer, mortgage and home equity loans
are considered for non-accrual at 120 days. This is due to management's
evaluation of commercial loans as carrying a greater level of inherent risk.
New Accounting Standards
In June of 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 122 ("SFAS No. 122") Accounting for Certain
Mortgage Banking Activities, an Amendment of FASB Statement No. 65. This
statement amends certain provisions of Statement 65 to eliminate the accounting
distinction between rights to service mortgage loans for others that are
acquired through loan origination activities and those acquired through purchase
transactions. The Corporation presently recognizes servicing rights acquired
only through loan underwriting transactions and these are not material.
Adoption of SFAS No. 122 in 1996 will have no material impact upon its financial
statements based upon historical levels of sales where servicing is retained.
In October of 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 ("SFAS No. 123") Accounting for
Stock-Based Compensation which encourages, but does not require, companies to
use a fair value based method of determining compensation cost for grants of
stock options under stock-based employee compensation plans. Companies electing
to continue accounting for these plans under the provisions of Opinion 25 will
be required to present pro forma disclosures of net income and net income per
share, as if a fair value based method had been applied. The Corporation is
required to implement SFAS No. 123 on January 1, 1996. Management does not
believe the adoption of SFAS No. 123 will have a material impact on the
Corporation's consolidated financial statements as it does not currently have
a stock-based compensation plan.
/s/ "signature"
Jan P. Updegraff
Vice President & Treasurer
EXHIBIT D
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT AUDITORS
INDEPENDENT AUDITORS' REPORT
The 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, 1995 and 1994, and the
related consolidated statements of income, shareholders' equity and cash flows
for each of the years in the three-year period ended December 31, 1995. 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, 1995 and 1994, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in note 1 to the consolidated financial statements, effective
January 1, 1995, the Company changed its method of accounting for impairment of
loans to adopt the provisions of Statement of Financial Accounting Standards
(SFAS) No. 114, Accounting by Creditors for Impairment of a Loan, as amended by
SFAS No. 118, Accounting by Creditors for Impairment of a Loan - Income
Recognition and Disclosures. Also as discussed in note 1, at January 1, 1994,
the Company changed its method of accounting for securities to adopt the
provisions of SFAS No. 115, Accounting for Certain Investments in Debt and
Equity Securities, and at January 1, 1993 the Company changed its method of
accounting for postretirement benefits to adopt the provisions of SFAS No. 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions.
/s/ KPMG Peat Marwick LLP
Syracuse, New York
January 26, 1996
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
Assets December 31 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Cash and due from banks $ 27,293,592 24,266,349
Interest-bearing deposits with other 90,206 114,243
financial institutions
Federal funds sold 10,000,000 8,000,000
Securities available for sale, at fair value 171,882,062 188,828,284
Securities held to maturity, fair value of 7,582,044 15,168,682
$7,581,519 in 1995 and $15,012,570 in 1994
Loans 263,001,304 236,497,448
Allowance for loan losses (3,900,000) (3,599,968)
----------------------------------------------------------------------------------
Loans, net 259,101,304 232,897,480
Premises and equipment, net 10,290,702 8,527,302
Other assets 7,662,639 7,952,438
Goodwill and deposit base intangible, 7,990,237 8,577,540
net of accumulated amortization
----------------------------------------------------------------------------------
Total assets $ 501,892,786 $ 494,332,318
==================================================================================
Liabilities and Shareholders' Equity
- ----------------------------------------------------------------------------------------------------------------
Deposits:
Noninterest-bearing 83,591,381 81,135,334
Interest-bearing 343,287,511 351,135,386
----------------------------------------------------------------------------------
Total deposits 426,878,892 432,270,720
Securities sold under agreements to repurchase 13,381,581 10,203,785
Accrued interest payable 1,059,102 894,396
Dividends payable 520,462 456,027
Other liabilities 7,153,851 4,768,644
----------------------------------------------------------------------------------
Total liabilities 448,993,888 448,593,572
----------------------------------------------------------------------------------
Commitments and contingencies (note 14)
Shareholders' equity:
Common stock, $5.00 par value per share; 10,750,335 10,750,335
authorized 3,000,000 shares, issued: 2,150,067
Surplus 10,068,563 10,068,563
Retained earnings 29,930,969 26,374,590
Treasury stock, at cost (1995 - 68,218 shares; (1,579,298) (1,279,549)
1994 - 56,586 shares)
Net unrealized gain (loss) on securities 3,728,329 (175,193)
available for sale, net of taxes
----------------------------------------------------------------------------------
Total shareholders' equity 52,898,898 45,738,746
----------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 501,892,786 $ 494,332,318
==================================================================================
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 1995 1994 1993
------------------------------------------------------------------------------------------------------------
Interest income:
Loans $ 23,867,713 20,006,304 20,740,622
Securities 11,365,927 9,023,516 7,272,439
Federal funds sold 485,979 407,259 370,926
Interest-bearing deposits 357,090 142,882 72,931
------------------------------------------------------------------------------------------------------------
Total interest income 36,076,709 29,579,961 28,456,918
------------------------------------------------------------------------------------------------------------
Interest expense:
Deposits 13,446,125 9,895,852 9,503,976
Borrowed funds 7,538 8,366 108
Securities sold under agreements to repurchase 773,264 372,133 281,096
------------------------------------------------------------------------------------------------------------
Total interest expense 14,226,927 10,276,351 9,785,180
------------------------------------------------------------------------------------------------------------
Net interest income 21,849,782 19,303,610 18,671,738
Provision for loan losses 564,380 623,772 906,739
------------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 21,285,402 18,679,838 17,764,999
Other operating income:
Trust department income 3,677,622 3,322,643 3,294,388
Service charges on deposit accounts 1,502,971 1,318,448 1,273,640
Net gain on sales of securities 530,953 140,001 821,467
Credit card merchant earnings 494,821 436,246 377,628
Other 529,413 467,856 351,743
-----------------------------------------------------------------------------------------------------------
6,735,780 5,685,194 6,118,866
------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and wages 7,658,865 6,848,952 6,177,966
Pension and other employee benefits 2,214,273 1,824,114 1,983,641
Net occupancy expenses 1,586,077 1,440,755 1,281,754
Furniture and equipment expenses 1,475,543 1,270,385 1,203,610
Other 6,625,056 5,990,536 4,979,616
------------------------------------------------------------------------------------------------------------
19,559,814 17,374,742 15,626,587
------------------------------------------------------------------------------------------------------------
Income before income taxes and cumulative effect 8,461,368 6,990,290 8,257,278
of change in accounting principle
Income taxes 2,859,476 2,342,765 2,830,032
------------------------------------------------------------------------------------------------------------
Income before cumulative effect of change in 5,601,892 4,647,525 5,427,246
accounting principle
Cumulative effect, at January 1, 1993, of change in - - (933,183)
accounting for postretirement benefits other than
pensions, net of income tax expense of $643,939
------------------------------------------------------------------------------------------------------------
Net income $ 5,601,892 4,647,525 4,494,063
============================================================================================================
Weighted average number of common shares outstanding 2,087,751 1,899,488 1,893,618
============================================================================================================
Per common share:
Income before cumulative effect of change in $ 2.68 2.45 2.87
accounting principle
Cumulative effect of change in accounting $ - - (.50)
principle
------------------------------------------------------------------------------------------------------------
Net income $ 2.68 2.45 2.37
============================================================================================================
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Gain
(Loss) On
Securities
Common Retained Treasury Available
Stock Surplus Earnings Stock For Sale Total
- ----------------------------------------------------------------------------------------------------------------
Balances at December 31, 1992 $ 9,783,495 6,485,522 20,666,136 (1,428,686) - 35,506,467
Net income - - 4,494,063 - - 4,494,063
Cash dividends declared - - (1,656,528) - - (1,656,528)
($.875 per share)
Purchase of 2,869 shares of - - - (65,638) - (65,638)
treasury stock
Sale of 2,000 shares - 2,808 - 45,200 - 48,008
of treasury stock
- ----------------------------------------------------------------------------------------------------------------
Balances at December 31, 1993 9,783,495 6,488,330 23,503,671 (1,449,124) - 38,326,372
Net unrealized gain on - - - - 2,786,610 2,786,610
securities available for sale,
net of taxesof $1,910,980
Issuance of 193,368 shares 966,840 3,577,308 - - - 4,544,148
in acquisition
Net income - - 4,647,525 - - 4,647,525
Cash dividends declared - - (1,776,606) - - (1,776,606)
($.935 per share)
Sale of 7,500 shares - 2,925 - 169,575 - 172,500
of treasury stock
Change in net unrealized gain - - - - (2,961,803) (2,961,803)
(loss) on securities
available for sale, net of
taxes of $2,031,136
- ----------------------------------------------------------------------------------------------------------------
Balances at December 31, 1994 10,750,335 10,068,563 26,374,590 (1,279,549) (175,193) 45,738,746
Net income - - 5,601,892 - - 5,601,892
Cash dividends declared - - (2,045,513) - - (2,045,513)
($.98 per share)
Purchases of 11,632 shares of - - - (299,749) - (299,749)
treasury stock
Change in net unrealized gain - - - - 3,903,522 3,903,522
(loss) on securities
available for sale, net of
taxes of $2,645,891
- ----------------------------------------------------------------------------------------------------------------
Balances at December 31, 1995 $ 10,750,335 10,068,563 29,930,969 (1,579,298) 3,728,329 52,898,898
================================================================================================================
See accompanying notes to consolidated financial statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1995 1994 1993
---------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 5,601,892 4,647,525 4,494,063
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of goodwill and deposit 587,303 232,003 -
base intangible
Deferred income taxes (168,577) 98,614 (110,044)
Provision for loan losses 564,380 623,772 906,739
Depreciation and amortization 1,250,236 986,183 971,073
Amortization and discount on securities, net (458,579) (1,077,616) (709,539)
Gain on sales of securities, net (530,953) (140,001) (821,467)
(Increase) decrease in other assets 289,799 (1,968,603) (715,341)
Increase (decrease) in accrued interest payable 164,706 215,747 (110,944)
Increase (decrease) in other liabilities 2,553,784 (201,391) 677,656
Accrued postretirement benefits - - 1,577,122
---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 9,853,991 3,416,233 6,159,318
---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities held to maturity - - 6,013,130
Proceeds from sales of securities available 15,958,448 19,955,253 14,934,718
for sale
Proceeds from maturities of and principal 7,261,930 5,651,201 114,291,595
collected on securities held to maturity
Proceeds from maturities of and principal 94,781,598 69,972,928 -
collected on securities available for sale
Purchases of securities available for sale (78,373,282) (156,905,963) -
Purchases of securities held to maturity (10,202,780) (11,841,859) -
Purchases of securities - - (108,319,159)
Cash of acquired bank, net of cash paid - 2,894,434 -
Purchases of premises and equipment, net (3,013,636) (1,999,522) (533,821)
Loan originations, net of repayments and (29,563,052) (9,324,698) (7,289,548)
other reductions
Proceeds from sales of student loans 2,794,848 2,507,848 2,572,308
Deposit acquisition premium - (5,965,793) -
---------------------------------------------------------------------------------------------------------
Net cash provided (used) by $ (355,926) (85,056,171) 21,669,223
investing activities
(Continued)
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31 1995 1994 1993
---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase (decrease) in demand deposits, $ (14,320,289) 328,981 4,889,843
NOW accounts, savings accounts, and insured
money market accounts
Net increase (decrease) in certificates of 8,928,461 6,928,120 (1,195,261)
deposit and individual retirement account
Net increase (decrease) in securities sold 3,177,796 (2,341,784) 3,693,745
under agreements to repurchase
Purchases of treasury stock (299,749) - (65,638)
Sale of treasury stock - 172,500 48,008
Cash dividends paid (1,981,078) (1,751,148) (1,623,590)
Deposits of acquired branches - 45,628,085 -
---------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing (4,494,859) 48,964,754 5,747,107
activities
---------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash 5,003,206 (32,675,184) 33,575,648
equivalents
Cash and cash equivalents, beginning of year 32,380,592 65,055,776 31,480,128
---------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 37,383,798 32,380,592 65,055,776
=========================================================================================================
Supplemental disclosure of cash flow information:
Transfer of securities held to maturity $ 10,505,646 94,727,116 -
to securities available for sale
Cash paid during the year for:
Income Taxes 2,937,581 2,464,816 3,427,195
Interest $ 14,062,221 10,052,237 9,896,016
=========================================================================================================
On December 29, 1994, the Corporation acquired the stock of a commercial bank.
In conjunction with this acquisition, liabilities were assumed as follows:
Fair value of net assets acquired $ 42,381,450
Cash paid and fair value of common 5,780,938
stock issued ------------
Liabilities assumed $ 36,600,512
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1994
(1) Statement of 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. As discussed in note 2, at the end
of 1994 the Corporation acquired Owego National Financial Corporation (Owego),
a commercial bank.
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 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
The Corporation adopted the provisions of Statement of Financial Accounting
Standards No. 115 (SFAS 115), Accounting for Certain Investments in Debt and
Equity Securities, at January 1, 1994. SFAS 115 requires classification of
securities into three categories: held to maturity, available for sale and
trading. In conjunction with the adoption of SFAS 115, the Corporation
transferred securities with a cost basis of $94,727,116 to the available for
sale portfolio. There were $4,697,590 of net unrealized gains associated with
these 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 historical cost, adjusted for the
amortization or accretion of premiums or discounts. Securities to be held for
indefinite periods of time and not intended to be held to maturity are
classified as available for sale and carried at fair value. Securities held for
indefinite periods of time include securities that management intends to use as
part of its asset/liability management strategy and that may be sold in response
to changes in interest rates, resultant prepayment risk and other factors
related to interest rate and resultant prepayment risk changes. 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 a separate component of shareholders' equity until realized.
Realized gains and losses are determined using the specific identification
method.
Transfers of securities between categories are recorded at fair value at the
date of transfer. The unrealized holding gains or losses included in the
separate component of shareholders' equity for securities transferred from
available for sale to held to maturity are maintained and amortized into
earnings over the remaining life of the security as an adjustment to yield in
a manner consistent with the amortization or accretion of premium or discount
on the associated security.
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.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for loan losses. The allowance is increased by provisions charged to
earnings and recoveries of loans previously charged off, and reduced by loan
charge-offs. Charge-offs include the excess of a loan's carrying value over
estimated fair value of real estate received and transferred to other real
estate. The level of the allowance is based on management's evaluation of
potential losses in the loan portfolio, prevailing and anticipated economic
conditions, past loss experience, and other factors pertinent to estimating
potential losses. 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 Bank's allowance for loan losses. Such agencies may
require the Bank to recognize additions to the allowance based on their
judgments about information as available to them at the time of their
examination.
The Corporation adopted the provisions of SFAS No. 114, Accounting by
Creditors for Impairment of a Loan, as amended SFAS 118, Accounting by Creditors
for Impairment of a Loan - Income Recognition and Disclosures on January 1,
1995. 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 if the loan is collateral dependent.
Impairment losses are included in the allowance for loan losses through a charge
to the provision for loan losses. 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. Adoption of these statements did not have a material impact
on the Corporation's 1995 consolidated financial statements.
Loans
Loans are stated at the amount of unpaid principal balance less unearned
discounts and net deferred fees. The corporation has the ability and intent to
hold its loans until maturity 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 level yield
method. The accrual of interest is discounted 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. Loan origination
fees and certain loan origination costs are deferred and amortized over the life
of the loan using the interest method.
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 assets.
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.
Income Taxes
The Corporation files a consolidated return on the accrual method. Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to 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 those temporary differences are expected to be recovered or
settled. 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 Department 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 department income is recognized on the accrual method
based on contractual rates applied to the balances of individual trust accounts.
Pension Plan
Pension cost is computed using the projected unit credit actuarial cost method.
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. Effective January 1, 1993, the
Corporation adopted the provisions of SFAS 106, Employers' Accounting for
Postretirement Benefits Other Than Pensions, which established a new accounting
principle for the cost of retiree health care and other postretirement
benefits. Immediate recognition of the transition obligation was elected. The
cumulative effect of the change in method of accounting for postretirement
benefits other than pensions is reported in the 1993 consolidated statement of
income.
Goodwill and Deposit Base Intangible
Goodwill, which represents the excess of purchase price over the fair value of
identifiable assets acquired, 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 assets are not
recoverable.
Per Share Information
Per share data was computed on the basis of the weighted average number of
common shares outstanding, retroactively adjusted for stock splits and
dividends.
Cash and Cash Equivalents
Cash and cash equivalents include cash and amounts due from banks, 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. These agreements are treated as financings, and the obligations
to repurchase securities sold are reflected as
liabilities in the consolidated statement of financial condition. The amount
of the securities underlying the agreements remains in the asset account. The
Corporation has agreed to repurchase securities identical to those sold.
Financial Instruments With Off-Balance Sheet Risk
The Corporation does not engage in the use of derivative financial instruments
and the Corporation's only financial instruments with off-balance sheet risk are
commitments under standby letters of credit, unused portions of lines of credit
and commitments to fund new loans.
Reclassifications
Amounts in the prior year's consolidated financial statements are reclassified
whenever necessary to conform with the current year's presentation.
(2) Acquisitions
On December 29, 1994, management of the Corporation and of Owego signed the
documents required to consummate the previously announced acquisition of Owego.
Owego commenced business as a branch of the Bank on January 3, 1995. The total
purchase price was $5,780,938, consisting of $1,236,790 in cash and 193,368
shares of the Corporation's common stock with a fair value of $4,544,148 at the
date of acquisition. The acquisition was accounted for under the purchase
method, accordingly, all assets and liabilities acquired were recorded at their
fair values at the date of acquisition and the results of operations of Owego
are included in the consolidated financial statements beginning January 1,
1995. For taxation purposes the acquisition was accounted for as a tax free
reorganization. The excess of the cost over the fair value of the net assets
acquired (goodwill) of $2,843,750 is being amortized on the straight-line method
over a period of 15 years.
During 1994, the Bank acquired deposits totaling $45,628,085 from the
Resolution Trust Company at a premium of $5,965,793. This deposit base
intangible asset is being amortized on the straight-line method over 15 years.
The Corporation's unaudited proforma condensed consolidated results of
operations for the years ended December 31, 1994 and 1993 are presented below.
This proforma information has been prepared assuming that the acquisition of
Owego had been effective January 1, 1994 and 1993, respectively. Such proforma
condensed financial information includes various estimates and is not
necessarily indicative of the consolidated results of operations as they might
have been had the acquisition been effective as of January 1, 1994 or 1993.
Year ended Year ended
December 31, 1994 December 31, 1993
- ----------------------------------------------------------------------------------------------------------------
Proforma Proforma
- ----------------------------------------------------------------------------------------------------------------
(in thousands except per share amounts)
Net interest income $ 20,773 $ 20,265
Net Income $ 4,291 $ 4,651
Weighted average common $ 2,092 $ 2,087
shares outstanding
Net income per share $ 2.05 $ 2.23
3) Restrictions on Cash and Due from Bank Accounts
The Bank is required to maintain average reserve balances with the Federal
Reserve Bank of New York. The required average total reserve for the 14-day
maintenance period beginning December 21, 1995 was $6,954,000, of which $923,000
was required to be on deposit with the Federal Reserve Bank; the remainder,
$6,031,000, was represented by cash on hand.
(4) Securities
Amortized cost and fair value of securities available for sale at December 31,
1995 and 1994 are as follows:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 77,579,182 78,516,356 135,086,502 132,211,021
Obligations of other U.S.
Government agencies 29,692,008 30,258,315 31,806,859 31,027,012
Obligations of states and
political subdivisions 22,300,655 22,702,964 14,888,600 14,903,869
Other bonds and notes 33,587,684 33,586,921 5,192,796 5,193,756
Corporate stocks 2,468,469 6,817,506 2,148,876 5,492,626
- ----------------------------------------------------------------------------------------------------------------
$ 165,627,998 171,882,062 189,123,633 188,828,284
================================================================================================================
Amortized cost and fair value of securities held to maturity at December 31,
1995 and 1994 are as follows:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions $ 7,572,044 7,572,044 13,181,247 13,025,161
Other bonds and notes 10,000 9,475 1,987,435 1,987,409
- ----------------------------------------------------------------------------------------------------------------
$ 7,582,044 7,581,519 15,168,682 15,012,570
================================================================================================================
Included in corporate stocks at December 31, 1995 and 1994 is the Bank's
required investment in the stock of the Federal Home Loan Bank with a cost of
$1,481,300 and $1,193,200, respectively. This investment allows the Bank to
maintain a $52,389,800 line of credit with the Federal Home Loan Bank.
Gross unrealized gains and gross unrealized losses on securities available
for sale at December 31, 1995 and 1994 were as follows:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
- ----------------------------------------------------------------------------------------------------------------
U.S. Treasury securities $ 945,697 8,523 3,753 2,879,234
Obligations of other U.S.
Government agencies 571,096 4,789 89,733 869,580
Obligations of states and
political subdivisions 421,180 18,871 191,870 176,600
Other bonds and notes 95,297 96,060 38,976 38,017
Corporate stocks 4,349,037 - 3,356,773 13,023
- ----------------------------------------------------------------------------------------------------------------
$ 6,382,307 128,243 3,681,105 3,976,454
================================================================================================================
Gross unrealized gains and gross unrealized losses on securities held to
maturity at December 31, 1995 and 1994 were as follows:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
- ----------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions $ - - 976 157,062
Other bonds and notes - 525 4,677 4,703
- ----------------------------------------------------------------------------------------------------------------
$ - 525 5,653 161,765
================================================================================================================
Gross realized gains on sales of securities were $530,953, $140,001, and
$821,467 for the years ended December 31, 1995, 1994 and 1993, respectively.
Included in gross realized gains on sales of securities for the year ended
December 31, 1993 is $545,000 relating to the sale of a $1,000,000 security
which was deemed permanently impaired and written down by $755,000 in 1991. The
security was sold in 1993 for $790,000.
Interest and dividends on securities for the years ended December 31, 1995,
1994 and 1993 were as follows:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Taxable
U.S. Treasury securities $ 6,087,187 5,152,024 3,443,000
Obligations of other U.S.
Government agencies 2,918,058 1,739,701 1,548,043
Other bonds and notes 673,373 614,390 849,532
Corporate stocks 281,145 255,723 247,543
Exempt from federal taxation -
obligations of states and
political subdivisions 1,406,164 1,261,678 1,184,321
- ----------------------------------------------------------------------------------------------------------------
$ 11,365,927 9,023,516 7,272,439
================================================================================================================
The amortized cost and fair value by years to maturity as of December 31,
1995 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 $ 32,047,390 32,214,981 45,531,792 46,301,375
Obligations of other U.S.
Government agencies 6,494,823 6,528,615 21,197,185 21,698,140
Obligations of states and
political subdivisions 5,551,101 5,593,265 14,272,410 14,593,722
Other bonds and notes 1,496,762 1,517,605 1,443,893 1,495,940
- ----------------------------------------------------------------------------------------------------------------
Total $ 45,590,076 45,854,466 82,445,280 84,089,177
================================================================================================================
Maturing
- ----------------------------------------------------------------------------------------------------------------
After Five, But
Within Ten Years After Ten Years
- ----------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
Obligations U.S.
Government agencies $ 2,000,000 2,031,560 - -
Obligations of states and
political subdivisions 2,252,144 2,298,696 225,000 217,281
Other bonds and notes 5,021,051 5,031,379 25,625,978 25,541,997
- ----------------------------------------------------------------------------------------------------------------
Total $ 9,273,195 9,361,635 25,850,978 25,759,278
======================================================================================
The amortized cost and fair value by years to maturity as of December 31,
1995 for securities held to maturity are as follows:
Maturing
- ----------------------------------------------------------------------------------------------------------------
After One, But
Within One Year Within Five Years
- ----------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions $ 4,817,894 4,817,894 1,777,670 1,777,670
Other bonds and notes 5,000 4,875 5,000 4,600
- ----------------------------------------------------------------------------------------------------------------
Total $ 4,822,894 4,822,769 1,782,670 1,782,270
================================================================================================================
Maturing
- ----------------------------------------------------------------------------------------------------------------
After Five, But
Within Ten Years After Ten Years
- ----------------------------------------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------
Obligations of states and
political subdivisions $ 976,480 976,480 - -
================================================================================================================
The fair value of securities pledged to secure public funds on deposit or
for other purposes as required by law was $95,913,200 at December 31, 1995 and
$96,791,741 at December 31, 1994. U.S. Treasury securities totaling $18,380,000
and $19,277,150 (fair value of $18,616,689 and $ $18,776,577) were pledged to
secure repurchase agreements at December 31, 1995 and 1994, respectively, see
note 8.
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, 1995 or 1994. In November, 1995 the Financial Accounting Standards
Board published A Guide to Implementation of Statement 115 on Accounting for
Certain Investments in Debt and Equity Securities (Guide). Concurrent with the
initial adoption of the Guide, but no later than December 31, 1995, the
Corporation was permitted to reassess the appropriateness of the classifications
of all securities held at that time and implement reclassifications without
calling into question the intent of the Corporation to hold other debt
securities to maturity in the future. Effective December 1, 1995 the
Corporation transferred securities with amortized costs of $10,505,646 from the
held to maturity portfolio to the available for sale portfolio. The net
unrealized gain was $154,557. The transferred securities are reported at fair
value, with unrealized gains and losses excluded from earnings and reported as
a separate component of shareholders' equity, net of related taxes.
(5) Loans and Allowance for Loan Losses
The composition of the loan portfolio is summarized as follows:
December 31, 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Residential mortgages $ 61,070,320 54,717,992
Commercial mortgages 10,799,467 13,194,116
Commercial, financial and agricultura l89,785,341 75,006,015
Consumer loans 101,687,175 94,180,896
Net deferred fees and unearned income (340,999) (601,571)
- ----------------------------------------------------------------------------------------------------------------
$ 263,001,304 236,497,448
================================================================================================================
During 1995, 1994 and 1993, the Corporation sold $2,794,848, $2,507,848 and
$2,572,308, respectively, of education loans at par to the Student Loan
Marketing Association.
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 branches in these counties. The Corporation's concentrations of credit
risk are reflected in the preceding schedule. 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 totaled $1,119,671 and
$1,200,547 at December 31, 1995 and 1994, respectively. There were no loans
with modified payment terms because of the borrowers' financial difficulties at
December 31, 1995 and 1994. The effect of nonaccrual loans on interest income
for the years ended December 31, 1995, 1994 and 1993 was not material. The Bank
is not committed to advance additional funds to these borrowers. Other real
estate owned at December 31, 1995 amounted to $175,922 involving one property
and at December 31, 1994, amounted to $171,000 involving four properties. There
was no other real estate owned at December 31, 1993.
Transactions in the allowance for loan losses for the years ended December
31, 1995, 1994 and 1993 were as follows:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Balances at January 1 $ 3,599,968 3,500,000 3,400,000
Provision charged to operations 564,380 623,772 906,739
Loans charged off (373,261) (717,511) (896,100)
Recoveries 108,913 93,739 89,361
Allowance of Owego - 99,968 -
at time of acquisition
- ----------------------------------------------------------------------------------------------------------------
$ 3,900,000 3,599,968 3,500,000
================================================================================================================
As discussed note 1, the Corporation changed its method of accounting for
impairment of loans on January 1, 1995 to adopt the provisions SFAS No. 114,
Accounting for Creditors for Impairment of a Loan, as amended by SFAS No. 118,
Accounting by Creditors for Impairment of Loan - Income Recognition and
Disclosures. At December 31, 1995, the recorded investment in loans that are
considered to be impaired totaled $879,539. Included in this amount was
$530,811 of impaired loans for which the related allowance for loan losses is
$198,618, and $348,728 of impaired loans with no related allowance for loan
losses. The average recorded investment in impaired loans during 1995 was
$722,055. The effect on interest income for impaired loans was not material to
the consolidated financial statements in 1995.
(6) Premises and Equipment
Premises and equipment at December 31, 1995 and 1994 are as follows:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Land $ 2,106,408 2,066,408
Buildings 9,883,468 9,009,746
Equipment and furniture 11,463,538 9,502,219
Leasehold improvements 396,478 317,624
- ----------------------------------------------------------------------------------------------------------------
23,849,892 20,895,997
Less accumulated depreciation 13,559,190 12,368,695
- ----------------------------------------------------------------------------------------------------------------
$ 10,290,702 8,527,302
================================================================================================================
(7) Deposits
Interest-bearing deposits include certificates of deposit in denominations of
$100,000 or more aggregating $21,462,087 and $17,169,048 at December 31, 1995
and 1994, respectively. Interest expense on such certificates was $1,057,353,
$559,034, and $654,522 for 1995, 1994 and 1993, respectively.
(8) Securities Sold Under Agreements to Repurchase
The agreements have maturities from 4 to 34 days at December 31, 1995 and 4 to
97 days at December 31, 1994, and a weighted average interest rate of 5.33% at
December 31, 1995 and 5.30% at December 31, 1994. The maximum amounts
outstanding at any one month-end and average amount under these agreements
during 1995 were $19,677,060 and $13,726,251, respectively. The maximum amounts
outstanding at any one month-end and average amount under these agreements
during 1994 were $15,158,469 and $9,809,991, respectively. The securities
underlying the agreements were under the Trust Department's control as
custodian.
(9) Income Taxes
Total income taxes for the years ended December 31, 1995, 1994 and 1993 were
allocated as follows:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes
and cumulative effect of
accounting change $ 2,859,476 2,342,765 2,830,032
Cumulative effect, at January 1,
1993, of adoption of SFAS 106 - - 643,939
Shareholders' equity for change in
unrealized loss on securities 2,645,891 (120,156) -
- ----------------------------------------------------------------------------------------------------------------
$ 5,505,367 2,222,609 3,473,971
================================================================================================================
For the years ended December 31, 1995, 1994 and 1993, income tax expense
attributable to income from operations before cumulative effect of change in
accounting principle consists of:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Current:
State $ 646,080 499,305 709,967
Federal 2,381,973 1,744,846 2,230,109
- ----------------------------------------------------------------------------------------------------------------
3,028,053 2,244,151 2,940,076
Deferred (168,577) 98,614 (110,044)
- ----------------------------------------------------------------------------------------------------------------
$ 2,859,476 2,342,765 2,830,032
================================================================================================================
Income tax expense differed from the amounts computed by applying the U.S.
Federal statutory income tax rate to income before cumulative effect of change
in accounting principle as follows:
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Tax computed at statutory rate $ 2,876,865 2,376,699 2,804,386
Tax exempt interest (486,208) (435,678) (402,658)
Dividend exclusion (33,594) (32,362) (31,829)
State taxes, net of federal benefit 408,610 345,813 479,566
Nondeductible interest expense 55,582 41,829 33,751
Other items, net 38,221 46,464 (53,184)
- ----------------------------------------------------------------------------------------------------------------
Actual tax expense $ 2,859,476 2,342,765 2,830,032
================================================================================================================
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1994 are presented below:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Allowance for loan losses $ 1,180,197 1,066,814
Accrual for postretirement benefits
other than pensions 732,372 699,494
Deferred loan fees 113,647 185,896
Deferred compensation and directors fees 369,611 322,897
Net unrealized losses on securities - 120,156
Other 180,729 138,535
- ----------------------------------------------------------------------------------------------------------------
Total gross deferred tax assets $ 2,576,556 2,533,792
- ----------------------------------------------------------------------------------------------------------------
Deferred tax liabilities:
Bond discount 53,750 101,715
Depreciation 410,007 389,469
Net unrealized gains on securities 2,525,735 -
Other 58,772 37,002
- ----------------------------------------------------------------------------------------------------------------
Total gross deferred tax liabilities 3,048,264 528,186
- ----------------------------------------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (471,708) 2,005,606
================================================================================================================
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided 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
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 sets forth the plan's funded status and amounts
recognized in the Corporation's consolidated balance sheets at December 31, 1995
and 1994:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$9,488,826 and $9,009,876 in 1995
and 1994 respectively $ (9,956,932) (9,314,611)
Projected benefit obligation for service
rendered to date (12,211,661) (11,573,174)
Plan assets at fair value 14,042,435 11,833,298
Excess of plan assets over the projected
benefit obligation 1,830,774 260,124
Unrecognized net obligation 839,454 909,342
Unrecognized net gain (3,241,671) (1,207,086)
Unrecognized prior service cost 598,945 -
- ----------------------------------------------------------------------------------------------------------------
Prepaid (accrued) pension cost $ 27,502 (37,620)
================================================================================================================
Net periodic pension cost included the following components:
Years ended December 31,
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Service cost - benefits earned
during the year $ 293,048 271,218 265,992
Interest cost on projected
benefit obligation 798,518 757,327 762,002
Actual return on plan assets (2,436,581) (131,585) (245,983)
Net amortization and deferral 1,542,093 (780,715) (599,153)
- ----------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 197,078 116,245 182,858
================================================================================================================
Assumptions used in determining pension amounts are as follows:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Discount rate for benefit obligations 7.0% 7.0%
Rate of increase in compensation levels 5.0 5.0
Expected long-term rate of return on assets 8.5 8.5
The plan's assets at December 31, 1995 and 1994 are invested in common and
preferred stocks, U.S. Government securities, and corporate bonds and notes.
Effective January 1, 1995, retirees' benefits were increased. This amendment
generated prior service cost of $622,106.
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 $499,343,
$423,161 and $406,798 for the years ended December 31, 1995, 1994 and 1993,
respectively.
(11) Other Postretirement Benefit Plans
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 Bank's policy is to fund the cost of medical
benefits in amounts determined at the discretion of management. As
discussed in note 1, the Corporation adopted the provisions of SFAS 106,
Employers' Accounting for Postretirement Benefits Other Than Pensions, as of
January 1, 1993. The effect of adopting SFAS 106 on net income and the net
periodic postretirement cost for the year ended December 31, 1993, was a
decrease of $933,183 and an increase of $108,173, respectively.
The following table presents the plan's funded status reconciled with amounts
recognized in the Corporation's consolidated balance sheet at December 31, 1995
and 1994:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Accumulated postretirement benefit
obligation:
Retirees $ (807,185) (909,058)
Fully eligible active plan participants (114,090) (140,404)
Other active plan participants (1,061,074) (624,166)
- ----------------------------------------------------------------------------------------------------------------
(1,982,349) (1,673,628)
Unrecognized net (gain) loss 168,896 (44,910)
- ----------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost
included in other liabilities $(1,813,453) (1,718,538)
================================================================================================================
Net periodic postretirement benefit cost for 1995 and 1994 included the
following components:
Years ended December 31 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Service cost $ 75,728 44,407 9,889
Interest cost 127,308 114,642 118,284
- ----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost $ 203,036 159,049 218,173
================================================================================================================
For measurement purposes, a 12.5% and 10.5% annual rate of increase in the
per capita cost of covered benefits (i.e., health care cost trend rate) for non
medicare and medicare, respectively, was assumed for 1995; the rate was assumed
to decrease gradually to 5.5% by the year 2005 and remains at that level
thereafter. A 1% increase in the trend rate for all future years does not have
a material effect on the obligation. The weighted-average discount rate used
in determining the accumulated postretirement benefit obligations was 7% at
December 31, 1995 and 1994.
(12) Related Party Transactions
Members of the Board of Directors, certain Bank officers, and their immediate
families directly, or indirectly through entities in which they are principal
owners (more than a 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, 1995 and 1994:
1995 1994
- ----------------------------------------------------------------------------------------------------------------
Balance at beginning of year $ 7,174,106 9,892,451
Additions 26,333,212 26,807,438
Amounts collected (25,079,714) (29,525,783)
- ----------------------------------------------------------------------------------------------------------------
Balance at end of year $ 8,427,604 7,174,106
================================================================================================================
(13) 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:
Years ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Stationery and supplies $ 437,253 445,691 384,124
Credit card computer costs 554,676 475,238 431,421
Data processing service 690,980 624,556 631,531
FDIC insurance premiums 538,279 795,913 768,891
Advertising 444,637 395,425 305,940
Amortization of goodwill and deposit
base intangible 587,303 232,003 -
(14) 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 $2,237,793, $85,928,406 and
$1,151,988, respectively, at December 31, 1995. The Corporation does not
anticipate losses as a result of these transactions.
The Bank has employment contracts with certain of its senior officers, which
expire at various dates through 1999 and may be extended on a year-to-year
basis.
Under pending federal legislation is the proposed one-time special assesment
to recapitalize the SAIF insurance fund. If enacted in its current form, the
assessment is estimated to be between 75 to 80 basis points of SAIF insured
deposits held as of March 31, 1995. Based upon these rates, the Corporation's
pre-tax expense would be approximately $275,000 to $320,000. There is no
assurance that this pending legislation will be enacted into law, therefore, the
FASB has stated that the charge to earnings must be recorded in the period it
is enacted. Accordingly, the Corporation has made no accrual for this potential
obligation.
(15) Shareholders' Equity
Under Federal Reserve regulations, the Bank is limited to the amount it may loan
to the Corporation, unless such loans are collateralized by specific
obligations. At December 31, 1995, the maximum amount available for transfer
from the Bank to the Corporation in the form of loans was $1,660,655. 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
31,1995, $7,857,299 was available for the declaration of dividends.
(16) Parent Company Financial Information
Condensed parent company only financial statement information of Chemung
Financial Corporation is as follows:
Balance Sheets
- ----------------------------------------------------------------------------------------------------------------
December 31 1995 1994
- ----------------------------------------------------------------------------------------------------------------
Assets:
Cash on deposit with subsidiary bank $ 195,586 273,358
Investment in subsidiary bank 52,274,720 44,880,039
Dividend receivable 520,462 1,656,027
Securities available for sale 455,947 590,619
Other assets - 3
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 53,446,715 47,400,046
================================================================================================================
Liabilities and shareholders' equity:
Dividend payable 520,462 456,027
Deferred tax liability 27,355 40,390
Payable to Owego shareholders - 1,164,883
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 547,817 1,661,300
- ----------------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common stock 10,750,335 10,750,335
Surplus 10,068,563 10,068,563
Retained earnings 29,930,969 26,374,590
Treasury stock, at cost (1,579,298) (1,279,549)
Net unrealized gain (loss) on securities
available for sale 3,728,329 (175,193)
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 52,898,898 45,738,746
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 53,446,715 47,400,046
================================================================================================================
Statements of Income
- ----------------------------------------------------------------------------------------------------------------
Years Ended December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Income:
Interest and dividends $ 23,031 23,768 22,806
Gain on sale of securities 112,500 140,001 3
Dividends from subsidiary bank 2,045,513 2,976,606 1,656,528
Income before equity in undistributed
earnings of subsidiary bank 2,181,044 3,140,375 1,679,337
Equity in undistributed earnings of
subsidiary bank 3,472,647 1,569,926 2,814,726
- ----------------------------------------------------------------------------------------------------------------
Income before income taxes 5,653,691 4,710,301 4,494,063
Income taxes 51,799 62,776 -
- ----------------------------------------------------------------------------------------------------------------
Net Income $ 5,601,892 4,647,525 4,494,063
================================================================================================================
Statements of Cash Flows
- ----------------------------------------------------------------------------------------------------------------
December 31, 1995 1994 1993
- ----------------------------------------------------------------------------------------------------------------
Cash flows from operating activities:
Net income $ 5,601,892 4,647,525 4,494,063
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net
income of subsidiary (3,472,647) (1,569,926) (2,814,726)
(Increase) decrease in dividend
receivable 1,135,565 (1,225,458) (32,938)
Gain on sale of securities, net (112,500) (140,001) (3)
Decrease in payable to
Owego shareholders (1,164,883) - -
- ----------------------------------------------------------------------------------------------------------------
Net cash provided by
operating activities 1,987,427 1,712,140 1,646,396
- ----------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 215,628 271,234 31
Purchases of securities available for
sale - (221,193) 116,200
Payment to subsidiary for prior
year's taxes - (146,035) -
- ----------------------------------------------------------------------------------------------------------------
Net cash provided (used)
by investing activities 215,628 (95,994) (116,169)
- ----------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Cash dividends paid (1,981,078) (1,751,148) (1,623,590)
Purchases of treasury stock (299,749) - (65,638)
Sale of treasury stock - 172,500 48,008
- ----------------------------------------------------------------------------------------------------------------
Net cash used by financing
activities (2,280,827) (1,578,648) (1,641,220)
- ----------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash
and cash equivalents (77,772) 37,498 (110,993)
Cash and cash equivalents at
beginning of year 273,358 235,860 346,853
- ----------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at
end of year $ 195,586 273,358 235,860
================================================================================================================
(17) Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the
fair value of each class of financial instruments:
Cash and Cash Equivalents
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.
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 analyses using interest rates currentlybeing 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.
Borrowings
These instruments bear variable rates and therefore the carrying value
approximates fair value.
Commitments to Extend Credit
The fair value to commitments to extend credit are equal to the contract value
of the commitments as the contractual rates and fees approximate those currently
charged to originate similar commitments.
The estimated fair value of the Corporation's financial instruments as of
December 31, 1995 and 1994 are as follows (dollars in thousands):
1995 1994
Carrying Fair Carrying Fair
Amount Value (1) Amount Value (1)
- ----------------------------------------------------------------------------------------------------------------
Financial assets:
Cash and cash equivalents $ 27,294 27,294 24,267 24,267
Securities 179,464 179,464 203,997 203,841
Net loans 259,101 259,310 232,897 231,855
Federal Home Loan Bank 90 90 114 114
Federal funds sold 10,000 10,000 8,000 8,000
- ----------------------------------------------------------------------------------------------------------------
Total Earning Assets 448,655 448,864 445,008 443,810
- ----------------------------------------------------------------------------------------------------------------
Fixed assets 10,291 10,291 8,527 8,527
Other assets 15,653 15,653 16,530 16,530
- ----------------------------------------------------------------------------------------------------------------
Total assets $ 501,893 502,102 494,332 493,134
================================================================================================================
Financial liabilities:
Deposits:
Demand, savings,
NOW and money
market accounts $ 272,057 272,057 286,232 286,232
Time certificates 154,822 156,268 146,039 145,392
- ----------------------------------------------------------------------------------------------------------------
Total deposits 426,879 428,325 432,271 431,624
Borrowings:
Repurchase agreements 13,382 13,382 10,204 10,204
Other liabilities 8,733 8,733 6,118 6,118
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 448,994 450,440 448,593 447,946
Equity 52,899 51,662 45,739 45,188
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and
equity $ 501,893 502,102 494,332 493,134
================================================================================================================
Standby letters of credit $ 2,238 2,238 1,904 1,904
Unused portions of lines
of credit $ 85,928 85,928 75,940 75,940
Commitments to fund new
loans $ 1,152 1,152 572 572
<FN>
<F1>
(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 judgment and, therefore, cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
</FN>
(18) Regulatory Capital Requirement
The Bank is subject to the capital adequacy requirements of the Federal Deposit
Insurance Corporation. The Federal Deposit Insurance Corporation Improvement Act
of 1991, (the FDIC Act), established capital levels for which insured
institutions will be categorized as (in declining order) well capitalized,
adequately capitalized, undercapitalized, significantly undercapitalized, or
critically undercapitalized.
Under the FDIC Act, a "well capitalized" institution must have a risk based
capital ratio of 10 percent, a core capital ratio of 5 percent and a Tier 1
risk-based capital ratio of 6 percent. (The "Tier 1 risk-based capital" ratio
is the ratio of core capital to risk-weighted assets.) The Bank is a well
capitalized institution under the definitions.