EXHIBIT A
TABLE OF QUARTERLY MARKET PRICE RANGES
Market Prices of Chemung Financial Corporation Stock
During Past Three Years (dollars)
------------------------------------------------------------
- -----
1996 1995 1994
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Hi -- Lo Hi -- Lo Hi -- Lo
1st Quarter 28 3/4 - 27 26 1/4 - 25 24 5/8 - 23
2nd Quarter 31 1/2 - 30 26 1/4 - 25 26 - 23 3/4
3rd Quarter 33 1/4 - 30 3/8 25 3/4 - 25 1/4 26 3/4 - 24 1/2
4th Quarter 35 3/4 - 33 27 3/4 - 25 26 - 24 3/4
EXHIBIT B
TABLE OF DIVIDENDS PAID
Dividends Paid by Chemung Financial Corporation
During Past Three Years
- ----------------------------------------------------------------------
1996 1995 1994
- ----------------------------------------------------------------------
January $ .2500 $.2400 $.2275
April 1 .2500 .2400 .2275
July 1 .2500 .2400 .2275
October 1 .2800 .2500 .2400
- ---------------------------------------------------------------------------
- -
$1.0300 $.9700 $.9225
As of December 31, 1996 there were 833 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 FINANCIAL DATA EXHIBITS
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The purpose of this discussion is to focus on information about the
financial condition and results of operations of Chemung Financial
Corporation 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 OCorporationO) is a one-bank holding
company with its only subsidiary being Chemung Canal Trust Company (the
OBankO), 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 Omarket areasO. 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 BankOs 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 chairman of the board, president, senior
lending officer, commercial loan officer, mortgage officer, consumer loan
officer, and 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 OActO), and is subject to the
supervision of the Board of Governors of the Federal Reserve System (the
OFederal Reserve BoardO). Generally, the Act limits the business of bank
holding companies to banking, or managing or controlling banks, performing
certain servicing activities for subsidiaries, and engaging in such other
activities as the Federal Reserve Board may determine to be closely related
to banking and a proper incident thereto.
The Bank is chartered under the laws of New York State and is supervised by
the New York State Banking Department.
The Federal Deposit Insurance Corporation Improvement Act of 1991
(OFDICIAO) was passed in order to protect depositors and taxpayers from the
excesses of the S&L problems of the 1980Os. 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 Bank, many
of these competitors are not subject to regulation as extensive as that
described under the OSupervision and RegulationO section and, as a result,
they may have a competitive advantage over the Corporation in certain
respects. This is particularly true of credit unions, as their pricing is
not encumbered by income taxes.
Competition for the BankOs fiduciary services comes primarily from
brokerage firms and independent investment advisors. This is considered
very significant competition, as these firms devote much of their
considerable resources toward gaining larger positions in this market.
Trust Assets Under Administration, however, totaled $1,054 million at
market December 31, 1996, compared to $993 million a year earlier.
Relative to the BankOs total assets, when compared with peer commercial
banks, the Trust Department is unusually large and favorable in terms of
generating non-interest income.
During 1996, as well as 1995 and 1994, the Investment Services Division
noted a continued increase in the competition for personal and corporate
investment management services in our market areas. 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. Marketing efforts introduced in 1996 included sales
and referral incentives designed to maximize results from the Bank's branch
system.
Employees
The Corporation and its Banking subsidiary had 289 full-time equivalent
employees (FTEOs) on December 31, 1996 versus 281 at the beginning of the
year. The employment trend is relatively stable.
Balance Sheet Comments
Average earning assets for 1996 grew by $22.4 million or 5.0% to $469.5
million, compared to $447.1 million in 1995 and $394.7 million in 1994.
Commercial and consumer loan balances grew $14.1 million and 7.36%,
respectively, while the mortgage portfolio increased $6.5 million (9.1%).
Average total loan balances were $273.9 million versus $249.1 million
during 1995 (up 9.9%) and $221.4 million during 1994. The 1994 acquisition
of the Columbia branches from the RTC and the purchase of Owego at year-end
1994, had only minor impact upon the average loan balances in 1995, but
began to show improved results in 1996, particularly in home equity loan
services.
During the fourth quarter of 1996, management elected to borrow $10 million
maturing in two years from the Federal Home Loan Bank for the purpose of
funding an equal amount of U.S. Government Agency notes. This leveraging
strategy provided an annualized net interest spread of 135 basis points.
Non-performing loans at year end decreased to $1.720 million vs $1.800
million at the end of 1995, and represented 0.61% of total outstandings
compared to 0.68% on 12/31/95 and 0.66% on 12/31/94. Net loan losses were
$667 thousand or 0.24% of average outstandings, compared to $264 thousand
in 1995 and $624 thousand in 1994. The loan loss reserve at 12/31/96 was
1.40% of outstandings and, at 231% of non-performing loans versus 217% a
year ago and 232% in 1994, is felt by management to be adequate.
Exhibit I
Balance Sheet Comparisons
Average Balance Sheet Growth Rates
(in millions) 1996 1995 1994 1993 1992 1991 1 yr 5 yrs
Total Asset $ 518.5 $ 495.2 $ 431.2 $ 397.7 $ 387.0 $ 357.4 4.7% 7.8%
Earning Assets 469.5 447.1 394.7 368.4 358.3 328.0 5.0%
7.4%
Loans 273.9 249.1 221.4 224.1 221.0 219.1 10.0%
4.6%
Investments 195.6 198.0 173.3 144.3 137.3 108.9 -1.2%
12.4%
Deposits 440.9 424.4 374.6 347.0 338.5 319.4 3.9% 6.7%
Tangible Equity 46.4 41.7 38.2 37.0 34.2 31.5 11.3% 8.1%
Ending Balance Sheet
(in millions)
Total Assets $ 532.2 $ 501.9 $ 494.3 $ 398.1 $ 385.8 $ 381.7 6.0%
6.9%
Earning Assets 474.6 446.3 448.9 369.2 356.4 350.7 6.3%
6.2%
Loans - Net 279.7 259.1 232.9 218.8 214.9 224.8 8.0%
4.5%
Investments 196.3 189.6 212.1 147.1 138.0 123.1 3.5%
9.8%
Deposits 439.6 426.9 432.3 342.9 339.2 325.8 3.0% 6.2%
Tangible Equity 48.7 44.9 37.2 38.3 35.5 32.3 8.5% 8.6%
Allowance For Loan Losses 3.98 3.90 3.60 3.50 3.40 2.80 2.1% 7.3%
Securities
The board-approved Funds Management Policy includes an investment portfolio
policy which 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 ability to hold to maturity.
Marketable securities are classified as Available for Sale while local
direct investment in municipal obligations are classified as Held to
Maturity. The Available for Sale segment of the securities portfolio at
December 31, 1996, was $185.4 million compared to $171.9 million a year
earlier and $188.8 million at the end of 1994. The components of the net
appreciation are set forth in the following table:
Amortized Fair Appreciation
Cost Value (Depreciation)
(in thousands)
U.S. Treasury Securities $ 52,721 $ 52,764 $ 43
Obligations of other U.S.
Government Agencies 51,832 51,803 (29)
U.S. Government Agency
Mortgage-backed pools 50,193 50,109 (84)
Obligations of states and
political subdivisions 20,257 20,500 243
Other bonds and notes 1,179 1,193 14
Corporate stocks 3,662 8,996 5,334
Totals $ 179,844 $ 185,365 $ 5,521
Included in the above table are 16,621 shares of Student Loan marketing
Association ("SALLIE MAE") at a cost basis of $5,321 and fair value of
$1,547,830. 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 12/31/96, the banking subsidiary's
portfolio held marketable equities totalling $89,540 at cost with a total
fair value of $3,854,835 The shares, other than SALLIE MAE, 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 17,972
shares of the Federal Home Loan Bank of New York. They are valued at
$498,200 and $1,797,200, respectively. Management has no current plans for
selling these investments.
Capital Resources and Dividends
The Corporation continues to maintain a strong capital position. Tangible
shareholdersO equity at December 31, 1996, was $48.7 million or 9.15% of
total assets compared to $44.9 million or 8.95% of total assets at the end
of 1995 and $37.2 million or 7.52% of assets at the end of 1994. As of
December 31, 1996, the Corporation's total Weighted Risk Adjusted Capital
Ratio was 16.87% compared with 16.46% at 12/31/95 and 15.03% at the end of
1994. The leverage ratio (Average Tier I Capital/Average Assets) was 8.97%
at year end versus 8.52% in 1995 and 7.69% in 1994. Management's strategy
for leveraging the Corporation's capital is to maintain the leverage ratio
between 7.50% and 8.50%.
Performance Summary
Net income for 1996 was impacted by 1) higher loan volumes 2) lower average
interest rates 3) higher levels of non-interest income, and 4) lower non-
interest expenses.
Chemung Financial's net profits before dividends for 1996 were $6.158
million versus $5.602 million, up $556 thousand (9.9%) or $2.96 versus
$2.68 per share (10.5%) on 8.4 thousand fewer average shares outstanding.
During 1994 the Corporation earned $2.45, up 3.4% from 1993. Quarterly
dividends declared totaled $1.06 per share vs 1995's $0.98 and $0.935 in
1994.
Under FDIC Risk-Related Premium System Rules, 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 1996 were $253 thousand vs $538 thousand
in 1995 and $796 thousand in 1994.
Included in 1996 FDIC charges was 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 are now merged. $29 million of the Bank's deposits were subjected to
the $191 thousand assessment in the fourth quarter of 1996. In December,
the Bank received notification from the FDIC that it remains well
capitalized. The 1997 FDIC insurance premium will be accrued at an annual
rate of $80 thousand for total insured deposits.
During 1996, the Bank's loan loss provision totaled $742 thousand, up $178
thousand from $564 thousand in 1995 and $624 thousand in 1994. The
increase is a reflection of management's ongoing evaluation of the risk
inherent in the portfolio. During 1995, management determined that based
upon its review of the inherent risk, no provisions should be added to the
reserve during November and December of that year, and $102 thousand of the
loan loss reserve was returned to pretax income. This was a reflection of
the very strong business environment and consistently favorable loan
experience of that year.
The average interest rate on earning assets was 7.99% during 1996 versus
8.07% in 1995 and 7.49% in 1994. The interest expense on the Bank's
liabilities also increased to 4.00% in 1996 versus 3.95% in 1995 and 3.23%
in 1994. This delivered a net interest spread of 3.99% versus 4.12% a year
earlier and 4.26% in 1994. The net interest margin declined 10 basis
points to 4.79%. Noninterest income totaled $7.105 million versus $6.736
million in 1995 and $5.685 million in 1994. Trust department income, at
$3.718 million in 1996 versus $3.678 million in 1995 and $3.323 million in
1994 is the largest segment of non-interest income. $610 thousand in net
securities gains were realized during 1996 as management continued to move
more proactively from a strategy with emphasis upon liquidity to an
investment approach with higher yield potential. Investments 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.
Exhibit II
Growth Rates
Earnings (in thousands) 1996 1995 1994 1993 1992 1991 1 yr 5 yrs
Net Interest Income $ 22,468 $ 21,849 $ 19,304 $ 18,672 $ 18,339 $ 16,557 2.8% 6.3%
Loan Loss Provision 742 564 624 907 902 625 31.6% 3.5%
Net Interest Income after Loan
Loss Provision 21,726 21,285 18,680 17,765 17,437 15,932 2.1% 6.4%
Trust Department Income 3,719 3,678 3,323 3,294 3,176 2,708 1.1%
6.5%
Securities Gains (Losses), net 610 531 140 821 105 (506) 14.9% -2.0%
Other Income 2,777 2,527 2,222 2,004 1,691 1,621 9.9% 11.4%
Total Non-Interest Income 7,106 6,736 5,685 6,119 4,972 3,823
5.5% 13.2%
Non Interest Expense 19,408 19,560 17,375 15,627 15,287 14,902 -0.8%
5.4%
Pretax Income 9,424 8,461 6,990 8,257 7,122 4,853 11.4% 14.2%
Income Taxes 3,266 2,859 2,342 2,830 2,296 1,241 14.3% 21.4%
Net Operating Income 6,158 5,602 4,648 5,427 4,826 3,612 9.9%
11.3%
Effect of Accounting Change 0 0 0 (933) 0 0 N/A N/A
Net Income 6,158 5,602 4,648 4,494 4,826 3,612 9.9% 11.3%
Exhibit III
Selected Financial Data Growth Rates
Per Share Data 1996 1995 1994 1993 1992 1991 1 yr 5 yrs
Net Operating Income $ 2.96 $ 2.68 $ 2.45 $ 2.87 $ 2.55 $ 1.90 10.4%
9.3%
Net Income 2.96 2.68 2.45 2.37 2.55 1.90 10.4% 9.3%
Dividends Declared 1.06 0.98 0.935 0.875 0.82 0.76 8.2% 6.9%
Tangible Book Value 23.51 21.57 17.75 20.25 18.75 17.02 9.0% 6.7%
Market Price 12/31 34.00 27.75 25.50 23.00 18.50 18.25 22.5%
13.3%
Average Shares O/S (thousands) 2,079 2,088 1,899 1,894 1,894 1,899
- -0.4% 1.8%
Exhibit IV
Selected Ratios 1996 1995 1994 1993 1992
Return on average assets 1.19% 1.13% 1.08% 1.13% 1.25%
Return on average tangible equity 13.27% 13.43% 12.17% 12.15%
14.11%
Dividend yield 12/31 3.29% 3.60% 3.76% 3.96% 4.54%
Dividend payout 35.78% 36.52% 38.22% 36.86% 32.17%
Leverage ratio 8.97% 8.52% 7.69% 9.63% 9.20%
Tier I capital to risk adjusted assets 15.61% 15.21% 13.71% 15.66%
14.80%
Total capital to risk adjusted assets 16.87% 16.46% 15.03% 17.09%
16.22%
Loans to deposits 64.53% 61.61% 54.71% 64.83% 64.38%
Loan reserve to outstanding loans 1.40% 1.48% 1.52% 1.57%
1.56%
Loan reserve to
non-performing loans 231% 217% 232% 186% 178%
Non-performing loans to
outstanding loans 0.61% 0.68% 0.66% 0.85% 0.87%
Net interest rate spread 3.99% 4.12% 4.26% 4.42% 4.35%
Net interest margin 4.79% 4.89% 4.89% 5.07% 5.12%
Exhibit V
Changes Due To Volume and Rate
The following table demonstrates the impact on net interest income of the
changes in the volume of earning assets and interest-bearing liabilities and
changes in rates earned and paid by the Bank. For purposes of constructing this
table, earning asset averages include non-performing loans. Therefore, the
impact of lower levels of non-performing loans is reflected in the change due to
rate, but does not affect changes due to volume.
1996 vs 1995 1995 vs 1994
Increase Increase
(Decrease) (Decrease)
Total Due to Due to Total Due to Due to
Change Volume Rate Change Volume Rate
Interest Income (thousands)
Loans $ 1,446 $ 2,310 $ (864) $ 3,862 $ 2,607 $ 1,255
Taxable investment
securities 332 74 258 2,198 1,273 925
Tax-exempt investment
securities (46) 41 (87) 144 150 (6)
Federal funds sold (136) (104) (32) 79 (81) 160
Interest-bearing deposits (162) (129) (33) 215 145 70
Total Interest Income $ 1,434 $ 2,192 $ (758) $ 6,498 $ 4,094 $
2,404
Interest Expense (thousands)
Demand deposits $ (12) $ 16 $ (28) $ 58 $ (1) $ 59
Savings deposits (466) (289) (177) 630 180 450
Time deposits 1,318 1,307 11 2,862 1,580 1,282
Federal funds purchased
and securities sold
under agreement to
repurchase (24) 73 (97) 401 179 222
Total Interest Expense $ 816 $ 1,107 $ (291) $ 3,951 $ 1,938 $
2,013
Net Interest Income $ 618 $ 1,085 $ (467) $ 2,547 $ 2,156 $ 391
Under Federal Reserve regulations (see Note 16 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,
1996, 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, 1996, $7,964,762 was available for
the declaration of dividends.
Cash dividends declared amounted to $2.203 million in 1996 versus $2.045 million
in 1995 and $1.777 million in 1994. Dividends declared amounted to 35.8% of net
earnings compared to 36.5% and 38.2% of 1995 and 1994 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 amount of $4.94 million and
$2.46 million, respectively, at December 31, 1996, which accounts 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 purchased goodwill 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 1996, 16,915 shares were
purchased at a total cost of $514,599 or an average price of $30.42 per share.
Early in 1996, 7,280 shares of treasury stock were sold at a price of $27.75 per
share to fund profit sharing requirements. 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.
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 $38.616 million in 1996. Net
purchases of equipment were $862.7 thousand. During 1995, proceeds from
maturities and sales of securities and student loans were less than purchases of
securities and loan originations net of repayments and net purchases of premises
and equipment by $356 thousand. Net purchases of premises and equipment during
1995 were $3.013 million, including $540 thousand for real estate. In 1994, net
cash used by investing activities was $85.1 million. The 1994 figure, however,
was distorted by the 1/1/94 adoption of FASB #115 (Mark to market) and the
management's decision to assign most marketable securities to the AFS category.
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 $21.3 million in 1996,
compared to a negative $4.495 million during 1995 and a positive $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 $7.4 million in 1996, compared to $14.3 million
in 1995, while certificates of deposit and individual retirement accounts
increased $20.1 million compared to $8.9 million in 1995. Additionally, long-
term borrowings increased $10 million when the bank borrowed $10 million from
the Federal Home Loan Bank. The Loan has a two year maturity and was part of a
matched funding leveraging strategy.
Liquidity and Sensitivity
The term OliquidityO 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 OliquidityO in the
BankOs 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 BankOs Asset/Liability Committee (ALCO) has the strategic
responsibility for setting the policy guidelines on acceptable exposure. The
ALCO is made up of the chairman of the board, president, senior lending officer,
senior marketing officer, financial officer, and others representing key
functions.
During 1993, the Bank became a member of the Federal Home Loan Bank of New York
(OFHLBO). The primary reasons for joining the FHLB were to enhance managementOs
ability to satisfy future liquidity needs and to have an additional alternate
for investing excess reserves. Having invested $1.797 million in FHLB common
stock, the Bank maintained a credit line of $52,496,600 at December 31, 1996.
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 OcontractualO gap. Contractual
gap measures the stated repricing and maturity of assets and liabilities. At
December 31, 1996, the cumulative one-year contractual gap for the Bank was a
negative $160.9 million versus a negative $121.5 million a year earlier and a
negative $111.4 at the end of 1994. This indicates that $160.9 million of
earning assets could reprice after the source of funds reprice. It is highly
unlikely that this would happen, however, and there is no historical precedent
for it.
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 1996, 1995 and 1994 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. Short term
rates (6 month U.S. Treasury Bills) ranged between 4.90% - 5.35% during 1996.
December 31, 1996 Rate Sensitive
Contractual Amounts 1 to 90 91 to 365 1 to 5 Over 5
(Thousands) days days years years
Earning assets:
Loans $ 100,736 $ 22,055 $ 90,818 $ 69,426
Securities 6,726 16,334 86,728 76,271
Federal funds 500
Other (Equities) 7,698
Total earning assets $ 115,660 $ 38,389 $ 177,546 $ 145,697
Net sources:
NOW accounts $ 45,812
Insured Money Market 43,516
Time certificates
under $100 thousand 36,092 52,886 49,221 38
Time certificates
over $100 thousand 26,369 6,647 3,754
Savings 89,296
Long term borrowing 10,000
Repurchase agreements 14,371
Total sources $ 255,456 $ 59,533 $ 62,975 $ 38
Incremental gap -139,796 -21,144 114,571 145,659
Percent of earning assets -120.9 -55.1 64.5 100
Cumulative gap -139,796 -160,940 -46,369 99,290
Percent of total assets -29.3 -33.7 -9.7 20.8
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 committeeOs economic and interest-rate assumptions and the Annual
Budget. It is the responsibility of the ALCO to modify prudently any and
all asset/liability.
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 managementOs 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 managementOs evaluation of
commercial loans as carrying a greater level of inherent risk.
/S/ Jan P. Updegraff
Jan P. Updegraff
President and
Chief Operating Officer
EXHIBIT D
CONSOLIDATED FINANCIAL STATEMENTS AND
INDEPENDENT AUDITORS' REPORT
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, 1996 and 1995, and
the related consolidated statements of income, shareholdersO equity and
cash flows for each of the years in the three-year period ended December
31, 1996. These consolidated financial statements are the responsibility
of the CompanyOs 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, 1996 and 1995, and the
results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Syracuse, New York
January 24, 1997
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
Assets December 31
1996 1995
Cash and due from banks $ 31,103,374 27,293,592
Interest-bearing deposits with other
financial institutions 151,920 90,206
Federal funds sold 500,000 10,000,000
Securities available for sale, at fair value 185,365,478 171,882,062
Securities held to maturity, fair value of
$10,351,440 in 1996 and $7,581,519 in 1995 10,351,840 7,582,062
Loans, net of unearned income and deferred fees 283,720,981 263,001,304
Allowance for loan losses (3,975,000) (3,900,000)
Loans, net 279,745,981 259,101,304
Premises and equipment, net 9,712,633 10,290,702
Other assets 7,878,811 7,662,639
Intangible assets, net of accumulated amortization 7,402,934
7,990,237
Total assets $ 532,212,971 $ 501,892,786
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing 86,049,289 83,591,381
Interest-bearing 353,600,054 343,287,511
Total deposits 439,649,343 426,878,892
Securities sold under agreements to repurchase 14,371,140
13,381,581
Long term borrowing 10,000,000 -
Accrued interest payable 1,152,791 1,059,102
Dividends payable 580,220 520,462
Other liabilities 10,339,278 7,153,851
Total liabilities 476,092,772 448,993,888
Commitments and contingencies (note 15)
Shareholders' equity:
Common stock, $5.00 par value per share;
authorized 3,000,000 shares, issued: 2,150,067 10,750,335
10,750,335
Surplus 10,101,804 10,068,563
Retained earnings 33,885,269 29,930,969
Treasury stock, at cost (1996 - 77,853 shares; (1,925,118)
(1,579,298)
1995 - 68,218 shares)
Net unrealized gain on securities
available for sale, net of taxes 3,307,909 3,728,329
Total shareholders' equity 56,120,199 52,898,898
Total liabilities and shareholders' equity $ 532,212,971 $
501,892,786
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 1996 1995 1994
Interest income:
Loans $ 25,313,778 23,867,713 20,006,304
Securities 11,651,818 11,365,927 9,023,516
Federal funds sold 350,005 485,979 407,259
Interest-bearing deposits 195,181 357,090 142,882
Total interest income 37,510,782 36,076,709 29,579,961
Interest expense:
Deposits 14,286,189 13,446,125 9,895,852
Borrowed funds 176,126 7,538 8,366
Securities sold under agreements to repurchase 580,354 773,264
372,133
Total interest expense 15,042,669 14,226,927 10,276,351
Net interest income 22,468,113 21,849,782 19,303,610
Provision for loan losses 741,662 564,380 623,772
Net interest income after provision for loan losses 21,726,451
21,285,402 18,679,838
Other operating income:
Trust department income 3,718,851 3,677,622 3,322,643
Service charges on deposit accounts 1,611,409 1,502,971
1,318,448
Net gain on sales of securities 609,596 530,953 140,001
Credit card merchant earnings 519,039 494,821 436,246
Other 646,603 529,413 467,856
7,105,498 6,735,780 5,685,194
Other operating expenses:
Salaries and wages 7,926,874 7,658,865 6,848,952
Pension and other employee benefits 1,976,814 2,214,273
1,824,114
Net occupancy expenses 1,629,539 1,586,077 1,440,755
Furniture and equipment expenses 1,592,873 1,475,543
1,270,385
Other 6,281,664 6,625,056 5,990,536
19,407,764 19,559,814 17,374,742
Income before income taxes 9,424,185 8,461,368 6,990,290
Income taxes 3,266,662 2,859,476 2,342,765
Net income` $ 6,157,523 5,601,892 4,647,525
Weighted average shares outstanding 2,079,312 2,087,751
1,899,488
Net income per common share: $ 2.96 2.68 2.45
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, 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 taxes of $1,910,980
Issuance of 193,368 shares 966,840 3,577,308 - - - 4,544,148
in acquisition
Net income - 4,647,525 - 4,647,525
Cash dividends declared - - (1,776,606) - - (1,776,606)
($.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
Net income - - 6,157,523 - - 6,157,523
Cash dividends declared - - (2,203,223) - - (2,203,223)
($1.06 per share)
Purchase of 16,915 shares of - - - (514,599) - (514,599)
treasury stock
Sale of 7,280 shares of treasury stock - 33,241 - 168,779 - 202,020
Change in net unrealized gain (loss) - - - - (420,420) (420,420)
on securities available for sale, net of
taxes of $312,318
Balances a December 31, 1996 $10,750,335 10,101,804 33,885,269
(1,925,118) 3,307,909 56,120,199
See accompanying notes to consolidated financial statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1996 1995 1994
Cash flows from operating activities
Net income $ 6,157,523 5,601,892 4,647,525
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 587,303 587,303 232,003
Deferred income taxes (387,248) (168,577) 98,614
Provision for loan losses 741,662 564,380 623,772
Depreciation and amortization 1,440,752 1,250,236 986,183
Amortization and discount on securities, net 303,365 (458,579) (1,077,616)
Gain on sales of securities, net (609,596) (530,953) (140,001)
(Increase) decrease in other assets (216,172) 289,799 (1,968,603)
Increase (decrease) in accrued interest payable 93,689 164,706 215,747
Increase (decrease) in other liabilities 3,572,676 2,553,784
(201,391)
Net cash provided by operating activities 11,683,954 9,853,991
3,416,233
Cash flows from investing activities:
Proceeds from sales of securities available 57,617,458 15,958,448
19,955,253
for sale
Proceeds from maturities of and principal 6,035,978 7,261,930
5,651,201
collected on securities held to maturity
Proceeds from maturities of and principal 52,023,153 94,781,598
69,972,928
collected on securities available for sale
Purchases of securities available for sale (123,238,318) (78,373,282)
(156,905,963)
Purchases of securities held to maturity (8,805,672) (10,202,780)
(11,841,859)
Cash of acquired bank, net of cash paid - - 2,894,434
Purchases of premises and equipment, net (862,683) (3,013,636)
(1,999,522)
Loan originations, net of repayments and (24,578,050) (29,563,052)
(9,324,698)
other reductions
Proceeds from sales of student loans 3,191,711 2,794,848 2,507,848
Deposit acquisition premium - - (5,965,793)
Net cash used by investing activities $ (38,616,423) (355,926)
(85,056,171)
(Continued)
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31 1996 1995 1994
Cash flows from financing activities:
Net increase (decrease) in demand deposits, $ (7,366,182) (14,320,289)
328,981
NOW accounts, savings accounts, and insured
money market accounts
Net increase (decrease) in certificates of 20,136,632 8,928,461
6,928,120
deposit and individual retirement account
Net increase (decrease) in securities sold 989,559 3,177,796
(2,341,784)
under agreements to repurchase
Net increase (decrease) in long term borrowings 10,000,000 - -
Purchases of treasury stock (514,599) (299,749) -
Sale of treasury stock 202,020 - 172,500
Cash dividends paid (2,143,465) (1,981,078) (1,751,148)
Deposits of acquired branches - - 45,628,085
Net cash provided (used) by financing 21,303,965 (4,494,859) 48,964,754
activities
Net increase (decrease) in cash and cash (5,628,504) 5,003,206
(32,675,184)
equivalents
Cash and cash equivalents, beginning of year 37,383,798 32,380,592
65,055,776
Cash and cash equivalents, end of year $ 31,755,294 37,383,798
32,380,592
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 3,832,329 2,937,581 2,464,816
Interest $ 14,948,980 14,062,221 10,052,237
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, 1996 AND 1995
(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
Management determines the appropriate classification of securities at the
time of purchase. If management has the intent and the Corporation has the
ability at the time of purchase to hold securities until maturity, they are
classified as held to maturity and carried at amortized cost. Securities
to be held for indefinite periods of time 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.
A decline in the fair value of any available for sale or held to maturity
security below amortized cost that is deemed other than temporary is
charged to earnings resulting in the establishment of a new cost basis for
the security. Premiums and discounts are amortized or accreted over the
life of the related security as an adjustment of yield using the interest
method. Dividend and interest income are recognized when earned.
Loans
Loans are stated at the amount of unpaid principal balance less unearned
discounts and net deferred 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. Loans may also be placed
in non-accrual if management believes such classification is warranted for
other purposes. Loan origination fees and certain loan origination costs
are deferred and amortized over the life of the loan using the interest
method.
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. The level of the allowance is based on
managementOs 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
BankOs allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about
information available to them at the time of their examination.
Management, considering current information and events regarding the
borrower's ability to repay their obligations, considers a loan to be
impaired when it is probable that the Corporation will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
When a loan is considered to be impaired, the amount of the impairment is
measured based on the present value of expected future cash flows
discounted at the loan's effective interest rate or, as a practical
expedient, at the loan's observable market price or the fair value of
collateral if the loan is collateral dependent. Residential mortgage loans
and consumer loans are evaluated collectively since they are homogeneous
and generally carry smaller balances. 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.
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
The BankOs funding policy is to contribute amounts to the plan sufficient
to meet minimum regulatory funding requirements, plus such additional
amounts as the Bank may determine to be appropriate from time to time.
Postretirement Benefits
In addition to pension benefits, the Bank provides health care and life
insurance benefits for retired employees. The estimated costs of providing
benefits are accrued over the years the employees render services necessary
to earn those benefits.
Intangible Assets
Goodwill, which represents the excess of purchase price over the fair value
of identifiable assets acquired, 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 impaired.
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, interest-
bearing deposits with other financial institutions, federal funds sold, and
U.S. Treasury securities with original terms to maturity of 90 days or
less.
Securities Sold Under Agreements to Repurchase
The Corporation enters into sales of U.S. Treasury securities under
agreements to repurchase. These agreements are treated as financings, and
the obligations to repurchase securities sold are reflected as liabilities
in the consolidated balance sheets. The amount of the securities
underlying the agreements remains in the asset account. The Corporation
has agreed to repurchase securities identical to those sold.
Financial Instruments With Off-Balance Sheet Risk
The Corporation does not engage in the use of derivative financial
instruments and the CorporationOs 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 yearOs consolidated financial statements are
reclassified whenever necessary to conform with the current yearOs
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 CorporationOs 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 CorporationOs unaudited proforma condensed consolidated results of
operations for the year ended December 31, 1994 is presented below. This
proforma information has been prepared assuming that the acquisition of
Owego had been effective January 1, 1994. 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.
Year ended
December 31, 1994
Proforma
(in thousands except per share amounts)
Net interest income $ 20,773
Net income $ 4,291
Weighted average common shares outstanding $ 2,092
Net income per share $ 2.05
(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, 1996 was $7,901,000, of which
$2,404,000 was required to be on deposit with the Federal Reserve Bank; the
remainder, $5,497,000, was represented by cash on hand.
(4) Securities
Amortized cost and fair value of securities available for sale at December
31, 1996 and 1995 are as follows:
1996 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury securities $ 52,721,091 52,763,618 77,579,182
78,516,356
Obligations of other U.S.
Government agencies 51,831,740 51,803,452 29,692,008
30,258,315
Mortgage backed securities 50,193,422 50,109,133 30,647,029
30,573,376
Obligations of states and
political subdivisions 20,257,203 20,499,918 22,300,655
22,702,964
Other bonds and notes 1,178,422 1,192,889 2,940,655 3,013,545
Corporate stocks 3,662,274 8,996,468 2,468,469 6,817,506
$ 179,844,152 185,365,478 165,627,998 171,882,062
Amortized cost and fair value of securities held to maturity at December 31,
1996 and 1995 are as follows:
1996 1995
Amortized Fair Amortized Fair
Cost Value Cost Value
Obligations of states and
political subdivisions $ 10,275,184 10,275,184 7,572,044
7,572,044
Other bonds and notes 76,656 76,256 10,000 9,475
$ 10,351,840 10,351,440 7,582,044 7,581,519
Included in corporate stocks at December 31, 1996 and 1995 is the Bank's
required investment in the stock of the Federal Home Loan Bank with a cost of
$1,797,200 and $1,481,300, respectively. This investment allows the Bank to
maintain a $52,496,600 line of credit with the Federal Home Loan Bank.
Gross unrealized gains and gross unrealized losses on securities available
for sale at December 31, 1996 and 1995 were as follows:
1996 1995
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
U.S. Treasury securities $ 276,003 233,476 945,697 8,523
Obligations of other U.S.
Government agencies 338,193 366,481 571,096 4,789
Mortgage backed securities 135,219 219,508 22,393 96,046
Obligations of states and
political subdivisions 260,656 17,941 421,180 18,871
Other bonds and notes 14,467 - 72,903 14
Corporate stocks 5,334,194 - 4,349,037 -
$ 6,358,732 837,406 6,382,307 128,243
Gross unrealized gains and gross unrealized losses on securities held to
maturity at December 31, 1996 and 1995 were as follows:
1996 1995
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
Other bonds and notes - 400 - 525
Gross realized gains on sales of securities were $613,190, $530,953, and
$140,001 for the years ended December 31, 1996, 1995 and 1994,
respectively. Gross realized losses on sales of securities were $3,594
for the year ended December 31, 1996. There were no realized losses on
sales of securities for the years ended December 31, 1995 and 1994.
Interest and dividends on securities for the years ended December 31,
1996, 1995 and 1994 were as follows:
1996 1995 1994
Taxbable
U.S. Treasury securities $ 4,002,636 6,087,187 5,152,024
Obligations of other U.S.
Government agencies 3,252,513 2,918,058 1,739,701
Mortgage backed securities 2,590,587 240,143 -
Other bonds and notes 174,419 433,230 614,390
Corporate stocks 271,614 281,145 255,723
Exempt from federal taxation -
obligations of states and
political subdivisions 1,360,049 1,406,164 1,261,678
$ 11,651,818 11,365,927 9,023,516
The amortized cost and fair value by years to maturity as of December
31, 1996 for debt 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 $ 8,514,687 8,522,205 44,206,404 44,241,413
Obligations of other U.S.
Government agencies 2,497,447 2,497,345 26,854,651 26,922,807
Obligations of states and
political subdivisions 3,397,868 3,432,663 13,463,194 13,681,452
Other bonds and notes 999,760 1,011,875 178,662 181,014
Total $ 15,409,762 15,464,088 84,702,911 85,026,686
Maturing
After Five, But
Within Ten Years After Ten Years
Amortized Fair Amortized Fair
Cost Value Cost Value
Obligations U.S.
Government agencies $ 22,479,642 22,383,300 - -
Mortgage backed securities 4,340,958 4,317,857 45,852,464 45,791,276
Obligations of states and
political subdivisions 2,763,781 2,758,218 632,360 627,585
Total $ 29,584,381 29,459,375 46,484,824 46,418,861
The amortized cost and fair value by years to maturity as of December 31, 1996
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 $ 7,595,888 7,595,888 1,917,000 1,917,000
Other bonds and notes - - 5,000 4,600
Total $ 7,595,888 7,595,888 1,922,000 1,921,600
Maturing
After Five, But
Within Ten Years After Ten Years
Amortized Fair Amortized Fair
Cost Value Cost Value
Obligations of states and
political subdivisions $ 762,296 762,296 - -
Other bonds and notes 71,656 71,656 - -
Total $ 833,952 833,952 - -
The fair value of securities pledged to secure public funds on deposit or
for other purposes as required by law was $107,381,997 at December 31, 1996
and $95,913,200 at December 31, 1995. U.S. Treasury securities totaling
$13,000,000 and $18,380,000 (fair value of $12,951,250 and
$18,616,689),GNMA's totaling $10,844,688 (fair value of $11,283,339), SLMA
totaling $2,000,000 (fair value of $1,970,000) were pledged to secure
Master repurchase agreements at December 31, 1996 and 1995, 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 shareholdersO equity
at December 31, 1996 or 1995. 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, 1996 1995
Residential mortgages $ 69,440,000 61,070,320
Commercial mortgages 8,959,555 10,799,467
Commercial, financial and agricultural 92,467,486 89,785,341
Leases 89,758 -
Consumer loans 113,003,980 101,687,175
Net deferred fees and unearned income (239,798) (340,999)
$ 283,720,981 263,001,304
During 1996, 1995 and 1994, the Corporation sold $3,191,711, $2,794,848
and $2,507,848, respectively, of education loans at par to the Student
Loan Marketing Association.
The CorporationOs market area encompasses the New York State counties of
Chemung, Steuben, Schuyler and Tioga. Substantially all of the
CorporationOs outstanding loans are with borrowers living or doing business
within 25 miles of the branches in these counties. The CorporationOs
concentrations of credit risk are reflected in the preceding table. The
concentrations of credit risk with standby letters of credit, committed
lines of credit and commitments to originate new loans, generally follow
the loan classifications in the schedule. Other than general economic
risks, management is not aware of any material concentrations of credit
risk to any industry or individual borrower.
The principal balances of loans not accruing interest totaled $1,493,607
and $1,119,671 at December 31, 1996 and 1995, respectively. There were no
loans with modified payment terms because of the borrowersO financial
difficulties at December 31, 1996 and 1995. The effect of nonaccrual loans
on interest income for the years ended December 31, 1996, 1995 and 1994 was
not material. The Bank is not committed to advance additional funds to
these borrowers. Other real estate owned at December 31, 1996 amounted to
$271,331 and at December 31, 1995, amounted to $175,922.
Transactions in the allowance for loan losses for the years ended December
31, 1996, 1995 and 1994 were as follows:
1996 1995 1994
Balances at January 1 $ 3,900,000 3,599,968 3,500,000
Provision charged to operations 741,662 564,380 623,772
Loans charged off (754,360) (373,261) (717,511)
Recoveries 87,698 108,913 93,739
Allowance of Owego
at time of acquisition - - 99,968
$ 3,975,000 3,900,000 3,599,968
[CAPTION]
At December 31, 1996 and 1995, the recorded investment in loans that are
considered to be impaired totaled $1,700,600 and $879,539 respectively.
Included in the 1996 amount are impaired loans of $798,702 for which the
related allowance for loan losses is $340,949 and $901,898 of impaired
loans with no related allowance for loan losses. The 1995 amount
includes $530,811 in impaired loans with a related allowance for loan
losses of $198,618 and $348,728 with no related allowance. The average
recorded investment in impaired loans during 1996 and 1995 were
$1,620,774 and $722,055 respectively. The effect on interest income for
impaired loans was not material to the consolidated financial statements
in 1996 or 1995.
(6) Premises and Equipment
Premises and equipment at December 31, 1996 and 1995 are as follows:
1996 1995
Land $ 2,106,408 2,106,408
Buildings 10,166,115 9,883,468
Equipment and furniture 12,003,849 11,463,538
Leasehold improvements 399,534 396,478
24,675,906 23,849,892
Less accumulated depreciation 14,963,273 13,559,190
$ 9,712,633 10,290,702
(7) Deposits
Interest-bearing deposits include certificates of deposit in
denominations of $100,000 or more aggregating $36,770,362 and
$21,462,087 at December 31, 1996 and 1995, respectively. Interest
expense on such certificates was $2,215,271, $1,057,353, and $559,034
for 1996, 1995 and 1994, respectively.
(8) Securities Sold Under Agreements to Repurchase
The agreements have maturities of 2 days at December 31, 1996 and 4 to 34
days at December 31, 1995, and a weighted average interest rate of 6.04% at
December 31, 1996 and 5.33% at December 31, 1995. The maximum amounts
outstanding at any one month-end and average amount under these agreements
during 1996 were $15,953,161 and $12,270,169, respectively. 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
securities underlying the agreements were under the Trust Department's
control as custodian.
(9) Long Term Borrowing
Long term borrowing at December 31, 1996, consisted of a $10,000,000,
6.18%, Federal Home Loan Bank advance with a maturity date of October 16,
1998.
(10) Income Taxes
Total income taxes for the years ended December 31, 1996, 1995 and 1994
were allocated as follows:
1996 1995 1994
Income before income taxes
and cumulative effect of
accounting change $ 3,266,662 2,859,476 2,342,765
Shareholders' equity for change in
unrealized gain (loss) on securities (312,318) 2,645,891 (120,156)
$ 2,954,344 5,505,367 2,222,609
For the years ended December 31, 1996, 1995 and 1994, income tax expense
attributable to income from operations consists of:
1996 1995 1994
Current:
State $ 792,674 646,080 499,305
Federal 2,861,236 2,381,973 1,744,846
3,653,910 3,028,053 2,244,151
Deferred (387,248) (168,577) 98,614
$ 3,266,662 2,859,476 2,342,765
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:
1996 1995 1994
Tax computed at statutory rate $ 3,204,223 2,876,865 2,376,699
Tax exempt interest (465,955) (486,208) (435,678)
Dividend exclusion (34,151) (33,594) (32,362)
State taxes, net of federal benefit 476,584 408,610 345,813
Nondeductible interest expense 52,262 55,582 41,829
Other items, net 33,699 38,221 46,464
Actual tax expense $ 3,266,662 2,859,476 2,342,765
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at
December 31, 1996 and 1995 are presented below:
Deferred tax assets: 1996 1995
Allowance for loan losses-book 1,593,518 1,558,903
Accrual for postretirement benefits
other than pensions 767,119 732,372
Deferred loan fees 84,760 113,647
Deferred compensation and directors fees 500,728 369,611
Pensions 126,499 56,494
Other 135,360 124,235
Total gross deferred tax assets $ 3,207,984 2,955,262
Deferred tax liabilities:
Bond discount 22,409 53,750
Depreciation 421,097 410,007
Allowance for loan losses-tax 300,738 378,706
Net unrealized gains on securities 2,213,417 2,525,735
Other 22,465 58,772
Total gross deferred tax liabilities 2,980,126 3,426,970
Net deferred tax asset (liability) $ 227,858 (471,708)
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.
(11) 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, 1996 and 1995:
<CAPTION
1996 1995
Actuarial present value of accumulated benefit
obligation, including vested benefits of
$9,493,865 and $9,488,826 in 1996
and 1995 respectively $ (9,666,905) (9,956,932)
Projected benefit obligation for service
rendered to date (11,881,414) (12,211,661)
Plan assets at fair value 15,036,423 14,042,435
Excess of plan assets over the projected
benefit obligation 3,155,009 1,830,774
Unrecognized net obligation 769,566 839,454
Unrecognized net gain (4,623,648) (3,241,671)
Unrecognized prior service cost 556,163 598,945
Prepaid (accrued) pension cost $ (142,910) 27,502
Net periodic pension cost included the following components:
Years ended December 31,
1996 1995 1994
Service cost - benefits earned
during the year $ 346,403 293,048 271,218
Interest cost on projected
benefit obligation 825,891 798,518 757,327
Actual return on plan assets (1,459,973) (2,436,581) (131,585)
Net amortization and deferral 458,091 1,542,093 (780,715)
Net periodic pension cost $ 170,412 197,078 116,245
Assumptions used in determining pension amounts are as follows:
1996 1995
Discount rate for benefit obligations 7.5% 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 planOs assets at December 31, 1996 and 1995 are invested in common and
preferred stocks, U.S. Government securities, and corporate bonds and
notes. 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 employeeOs current earnings. Expense under the
plan totaled $550,854, $499,343, and $423,161 for the years ended December
31, 1996, 1995 and 1994, respectively.
(12) 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 BankOs expressed intent to increase the retiree contribution rate
annually for the expected general inflation rate for that year. The BankOs
policy is to fund the cost of medical benefits in amounts determined at the
discretion of management.
The following table presents the planOs funded status reconciled with
amounts recognized in the CorporationOs consolidated balance sheet at
December 31, 1996 and 1995:
1996 1995
Accumulated postretirement benefit
obligation:
Retirees $ (965,000) (807,185)
Fully eligible active plan participants (86,000) (114,090)
Other active plan participants (577,000) (1,061,074)
(1,628,000) (1,982,349)
Unrecognized net (gain) loss (264,822) 168,896
Accrued postretirement benefit cost
included in other liabilities $(1,892,822) (1,813,453)
Net periodic postretirement benefit cost included the following
components:
Years ended December 31 1996 1995 1994
Service cost $ 42,000 75,728 44,407
Interest cost 112,000 127,308 114,642
Net periodic postretirement benefit cost $ 154,000 203,036 159,049
For measurement purposes, a 11.5% and 9.5% 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 1996; 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 7.5% at December 31, 1996 and 7% at December 31, 1995.
(13) 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, 1996 and 1995:
1996 1995
Balance at beginning of year $ 8,427,604 7,174,106
Additions 20,889,397 26,333,212
Amounts collected (20,890,464) (25,079,714)
Balance at end of year $ 8,426,537 8,427,604
(14) 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,
1996 1995 1994
Stationery and supplies $ 469,008 437,253 445,691
Credit card computer costs 601,571 554,676 475,238
Data processing service 554,005 690,980 624,556
FDIC insurance premiums 253,220 538,279 795,913
Advertising 448,640 444,637 395,425
Amortization of intangible assets 587,303 587,303 232,003
(15) 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
$2,751,992, $87,280,030 and $4,684,956, respectively, at December 31, 1996.
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 the year 2000 and may be extended on
a year-to-year basis.
(16) ShareholdersO 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, 1996, 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 31,1996, $7,964,762 was available for
the declaration of dividends.
(17) Parent Company Financial Information
Condensed parent company only financial statement information of Chemung
Financial Corporation is as follows:
Balance Sheets
December 31 1996 1995
Assets:
Cash on deposit with subsidiary bank $ 31,318 195,586
Investment in subsidiary bank 54,801,058 52,274,720
Dividend receivable 580,220 520,462
Securities available for sale 1,298,403 455,947
Total assets $ 56,710,999 53,446,715
Liabilities and shareholders' equity:
Dividend payable 580,220 520,462
Deferred tax liability 10,580 27,355
Total liabilities 590,800 547,817
Shareholders' equity:
Common stock 10,750,335 10,750,335
Surplus 10,101,804 10,068,563
Retained earnings 33,885,269 29,930,969
Treasury stock, at cost (1,925,118) (1,579,298)
Net unrealized gain (loss) on securities
available for sale 3,307,909 3,728,329
Total shareholders' equity 56,120,199 52,898,898
Total liabilities and shareholders' equity $ 56,710,999 53,446,715
Statements of Income
Years Ended December 31, 1996 1995 1994
Income:
Interest and dividends $ 14,378 23,031 23,768
Gain on sale of securities 35,538 112,500 140,001
Dividends from subsidiary bank 3,203,223 2,045,513 2,976,606
Income before equity in undistributed
earnings of subsidiary bank 3,253,139 2,181,044 3,140,375
Equity in undistributed earnings of
subsidiary bank 2,922,189 3,472,647 1,569,926
Income before income taxes 6,175,328 5,653,691 4,710,301
Income taxes 17,805 51,799 62,776
Net Income $ 6,157,523 5,601,892 4,647,525
Statements of Cash Flows
December 31, 1996 1995 1994
Cash flows from operating activities:
Net income $ 6,157,523 5,601,892 4,647,525
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net
income of subsidiary (2,922,189) (3,472,647) (1,569,926)
(Increase) decrease in dividend
receivable (59,738) (1,135,565) (1,225,458)
Gain on sale of securities, net (35,538) (112,500) (140,001)
Decrease in payable to
Owego shareholders - (1,164,883) -
Net cash provided by
operating activities 3,140,038 1,987,427 1,712,140
Cash flows from investing activities:
Proceeds from sales of securities
available for sale 151,738 215,628 271,234
Purchases of securities available for
sale (1,000,000) - (221,193)
Payment to subsidiary for prior
year's taxes - - (146,035)
Net cash provided (used)
by investing activities (848,262) 215,628 (95,994)
Cash flows from financing activities:
Cash dividends paid (2,143,465) (1,981,078) (1,751,148)
Purchases of treasury stock (514,599) (299,749) -
Sale of treasury stock 202,020 - 172,500
Net cash used by financing
activities (2,456,044) (2,280,827) (1,578,648)
Increase (decrease) in cash
and cash equivalents (164,268) (77,772) 37,498
Cash and cash equivalents at
beginning of year 195,586 273,358 235,860
Cash and cash equivalents at
end of year $ 31,318 195,586 273,358
(18) 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 currently
being offered for loans with similar terms and credit quality.
Deposits
The fair values disclosed for demand deposits, savings accounts and
money market accounts are, by definition, equal to the amounts payable
on demand at the reporting date (i.e., their carrying values).
The fair value of fixed maturity certificates of deposits is estimated
using a discounted cash flow approach that applies interest rates
currently being offered on certificates to a schedule of weighted
average expected monthly maturities on time deposits.
Repurchase Agreements
These instruments bear variable rates and therefore the carrying value
approximates fair value.
Long Term Borrowing
These instruments bear a stated rate of interest to maturity and therefore
the fair value is based on a discounted cash flow to maturity.
Commitments to Extend Credit
The fair value of commitments to extend credit are based on fees currently
charged to enter into similar agreements, the counter party's credit
standing and discounted cash flow analysis. The fair value of these
commitments to extend credit approximates the recorded amounts of the
related fees and is not material at December 31, 1996 and 1995.
The estimated fair value of the CorporationOs financial instruments as of
December 31, 1996 and 1995 are as follows (dollars in thousands):
1996 1995
Carrying Fair Carrying Fair
Amount Value(1) Amount Value(1)
Financial assets:
Cash and cash equivalents $ 31,103 31,103 27,294 27,294
Federal Home Loan Bank 152 152 90 90
Federal funds sold 500 500 10,000 10,000
Securities 195,717 195,717 179,464 179,464
Net loans 279,746 281,965 259,101 259,310
Total Earning Assets 507,218 509,437 475,949 476,158
Fixed assets 9,713 9,713 10,291 10,291
Other assets 15,282 15,282 15,653 15,653
Total assets $ 532,213 534,432 501,893 502,102
1996 1995
Carrying Fair Carrying Fair
Amount Value(1) Amount Value(1)
Financial liabilities:
Deposits:
Demand, savings,
NOW and money
market accounts $ 264,641 264,641 272,057 272,057
Time certificates 175,008 175,293 154,822 156,268
Total deposits 439,649 439,934 426,879 428,325
Repurchase agreements 14,371 14,371 13,382 13,382
Long term borrowing 10,000 10,034 - -
Other liabilities 12,073 12,073 8,733 8,733
Total liabilities 476,093 476,412 448,994 450,440
Equity 56,120 58,020 52,899 51,662
Total liabilities and
equity $ 532,213 534,432 501,893 502,102
<FN>
<FN1>
(1) Fair value estimates are made at a specific point in time, based on
relevant market information and information about the financial instrument.
These estimates are subjective in nature and involve uncertainties and
matters of significant judgment and, therefore, cannot be determined with
precision. Changes in assumptions could significantly affect the
estimates.
</FN>
(19) Regulatory Capital Requirement
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken,
could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework
for prompt corrective action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Corporation and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1996, that the Corporation and the Bank meet
all capital adequacy requirements to which they are subject.
The actual capital amounts and ratios of the Corporation and the Bank are
also presented in the following table:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1996
Total Capital (to risk weighted assets):
Consolidated $ 49,048,781 16.87% $ 23,265,476 8.00% N/A N/A
Subsidiary $ 47,729,551 16.49% $ 23,162,443 8.00% $ 28,953,054
10.00%
Tier 1 Capital (to risk weighted assets):
Consolidated $ 45,409,356 15.61% $ 11,632,738 4.00% N/A N/A
Subsidiary $ 44,106,026 15.23% $ 11,581,222 4.00% $ 17,371,832
6.00%
Tier 1 Capital (to average assets):
Consolidated $ 45,409,356 8.97% $ 15,186,375 3.00% N/A N/A
Subsidiary $ 44,106,026 8.72% $ 15,173,735 3.00% $ 25,289,558
5.00%
As of December 31, 1995
Total Capital (to risk weighted assets):
Consolidated $ 44,571,233 16.46% $ 21,661,035 8.00% N/A N/A
Subsidiary $ 43,982,583 16.27% $ 21,629,590 8.00% $ 27,036,988
10.00%
Tier 1 Capital (to risk weighted assets):
Consolidated $ 41,180,332 15.21% $ 10,830,518 4.00% N/A N/A
Subsidiary $ 40,596,535 15.02% $ 10,814,795 4.00% $ 16,222,193
6.00%
Tier 1 Capital (to average assets):
Consolidated $ 41,180,332 8.52% $ 14,498,509 3.00% N/A N/A
Subsidiary $ 40,596,535 8.41% $ 14,486,089 3.00% $ 24,143,482
5.00%