UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarterly period ended SEPTEMBER 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 0-13888
CHEMUNG FINANCIAL CORPORATION
-----------------------------
(Exact name of registrant as specified in its charter)
New York 16-1237038
-------------------------- -------------------
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.
One Chemung Canal Plaza, Elmira, NY 14902
----------------------------------- --------
(Address of principal executive offices) (Zip Code)
(607) 737-3711
---------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES XX NO
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of September 30, 1998:
COMMON STOCK, $.01 PAR VALUE -- OUTSTANDING 4,115,005 SHARES
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
---------------------------------------------
INDEX
PART I. FINANCIAL INFORMATION
PAGE
Item 1: FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets 1
Condensed Consolidated Statements of Income 2
Condensed Consolidated Statement of Cash Flows 3
Notes to Condensed Consolidated Financial Statements 4
Item 2: Management's Discussion and Analysis of Financial
Condition and Results of Operations 6
Item 3: Quantitative and Qualitative disclosures about
Market Risk
Information responsive to this Item is set forth
in "Management's Discussion of Operations and
Financial Condition" of the quarterly 10-Q for
the period ended September 30, 1998 and is in-
corporated herein by reference to Interest Rate Risk 12
PART II. OTHER INFORMATION
Item 6: Exhibits and Reports on Form 8-K 14
All other items required by Part II are either
inapplicable or would require an answer which
is negative.
SIGNATURES 16
PART I. FINANCIAL INFORMATION
Item 1: FINANCIAL STATEMENTS
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
Sept. 30, Dec. 31,
1998 1997
---------- --------
ASSETS
Cash and due from banks $ 25,865,279 $ 32,997,157
Int.-bearing deposits 1,221,945 1,421,298
Federal funds sold 10,000,000 0
Securities held to maturity, fair value of
$6,188,829 in 1998 and $9,224,028 in 1997 6,188,829 9,224,028
Securities available for sale, at fair value 200,786,098 185,302,745
Loans, net of unearned income and deferred fees 324,335,562 296,976,769
Allowance for loan losses (4,384,724) (4,145,422)
------------ ------------
Loans, net
319,950,838 292,831,347
Bank premises and equipment, net 10,104,486 10,219,043
Intangible assets,
net of accumulated amortization 6,375,154 6,815,631
Other assets 11,729,467 10,123,203
------------ ------------
Total assets $592,222,096 $548,934,452
============ ============
LIABILITIES
Deposits: Non-interest bearing $ 86,931,633 $ 94,656,560
Interest bearing 382,107,745 356,387,782
------------ ------------
Total deposits 469,039,378 451,044,342
Securities sold under agreement to repurchase 35,940,37 29,447,856
Federal Home Loan Bank Advances 10,000,000 16,300,000
Other liabilities 12,301,412 10,505,077
------------ ------------
Total liabilities 527,281,162 487,297,275
------------ ------------
SHAREHOLDERS' EQUITY
Common Stock, $0.01 pv per share-1998 $5.00 pv
per share 1997;authorized 10,000,000 issued:
4,300,134-1998;authorized 3,000,000 issued:
2,150,067-1997 43,001 10,750,335
Surplus 20,830,638 10,101,804
Retained earnings 41,471,036 38,236,025
Treasury stock, at cost (185,129 shares in
1998 and 161,076 in 1997*) (2,615,137) (2,032,886)
Accumulated Other Comprehensive Income 5,211,396 4,581,899
----------- ------------
Total shareholders' equity 64,940,934 61,637,177
Total liabilities & shareholders' equity $592,222,096 $548,934,452
============ ============
*ADJUSTED TO REFLECT A 2-FOR-1 STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND
EFFECTIVE 6/1/98
See Accompanying Notes to Condensed Consolidated Financial Statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
9 MONTHS ENDED 3 MONTHS ENDED
SEPT. 30, SEPT. 30,
INTEREST INCOME 1998 1997 1998 1997
----------- ----------- ----------- ----------
Loans $20,747,883 $19,857,579 $ 7,243,947 $ 6,813,992
Securities 9,442,108 9,144,038 3,196,977 3,015,222
Federal funds sold 423,266 205,075 159,753 83,369
Interest bearing deposits 202,945 191,776 42,506 85,944
----------- ---------- ---------- ----------
Total interest income 30,816,202 29,398,468 10,643,183 9,998,527
----------- ---------- ---------- ----------
INTEREST EXPENSE
Deposits 11,553,221 11,022,375 3,954,979 3,760,273
Securities sold under
agreement to repurchase
and funds borrowed 1,613,694 1,004,198 661,294 334,986
----------- ---------- ---------- ----------
Total interest expense 13,166,915 12,026,573 4,616,273 4,095,259
----------- ---------- ---------- ----------
Net interest income 17,649,287 17,371,895 6,026,910 5,903,268
Provision for loan losses 600,000 738,583 200,000 288,583
----------- ---------- ---------- ----------
Net interest income after
provision for loan losses 17,049,287 16,633,312 5,826,910 5,614,685
----------- ---------- ---------- ----------
Realized gains-sec. trans., net 215,993 143,010 68,598 111,466
Other operating income 5,755,952 5,114,746 2,067,166 1,730,236
----------- ---------- ---------- ----------
Total other operating income 5,971,945 5,257,756 2,135,764 1,841,702
Other operating expenses 15,283,937 14,749,399 5,169,854 4,931,753
----------- ---------- ---------- ----------
Income before income taxes 7,737,295 7,141,669 2,792,820 2,524,634
Income taxes 2,440,967 2,459,065 877,167 881,474
------------ ---------- ---------- ----------
NET INCOME $5,296,328 $ 4,682,604 $ 1,915,653 $ 1,643,160
============ =========== =========== ===========
BASIC EARNINGS PER SHARE $1.29 $1.13 $0.47 $0.40
*ADJUSTED TO REFLECT A 2-FOR-1 STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND
EFFECTIVE 6/1/98
See Accompanying Notes to Condensed Consolidated Financial Statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
Sept. 30,
1998 1997
----------- -----------
OPERATING ACTIVITIES
- --------------------
Net income $ 5,296,328 $ 4,682,604
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 440,477 440,477
Provision for loan losses 600,000 738,583
Depreciation and amortization 1,127,729 1,140,402
Amortization and discount on securities, net 150,237 223,813
Gain on sales of securities, net (215,993) (143,010)
Increase in other assets (1,606,264) (1,229,552)
Increase (decrease) other liabilities 1,319,641 (1,834,817)
------------ ------------
Net cash provided by operating activities 7,112,155 4,018,500
INVESTING ACTIVITIES
- --------------------
Proceeds from maturities of securities - AFS 49,673,891 24,917,456
Proceeds from maturities of securities -HTM 6,194,839 10,837,142
Proceeds from sales of securities - AFS 19,174,370 10,288,578
Purchases of securities - AFS (83,217,743) (37,228,605)
Purchases of securities - HTM (3,159,640) (6,631,320)
Purchases of premises and equipment, net (1,013,172) (1,194,166)
Loans, net of repayments and other reductions (30,478,543) (13,294,206)
Proceeds from sales of student loans 2,759,052 2,943,718
------------ ------------
Net cash used by investing activities (40,066,946) (9,361,403)
------------ ------------
FINANCING ACTIVITIES
- --------------------
Net increase in demand deposits,
NOW, savings and insured money
market accounts 5,437,507 1,213,272
Net increase in certificates of
deposit and individual retirement accounts 12,557,529 14,450,047
Net increase (decrease) in securities sold
under agreements to repurchase 26,492,516 (1,877,109)
Net decrease in Federal Home Loan
Bank advances (6,300,000) 0
Purchase of treasury shares (582,251) (15,750)
Cash dividends paid (1,981,741) (1,802,826)
------------ ------------
Net cash provided by financing activities 35,623,560 9,541,090
------------ -----------
Net increase (decrease) in cash and
cash equivalents 2,668,769 4,198,187
Cash and cash equivalents at beginning of year 34,418,455 31,755,294
------------ ------------
Cash and cash equivalents at end of period $37,087,224 $35,953,481
============ ============
See Accompanying Notes to Condensed Consolidated Financial Statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies
Basis of Presentation
Chemung Financial Corporation (the Company) operates as a bank holding
company. Its only subsidiary is Chemung Canal Trust Company (the
Bank).The consolidated financial statements include the accounts of
the Company and its wholly owned subsidiary, the Bank. All material
intercompany accounts and transactions have been eliminated in the
consolidation.
2. The condensed consolidated financial statements included herein
reflect all adjustments which are, in the opinion of management, of a
normal recurring nature and necessary to present fairly the Company's
financial position as of September 30, 1998 and December 31, 1997, and
results of operations and cash flows for the three and nine month
periods ended September 30, 1998 and 1997.
3. Net income per share for the periods presented have been computed by
dividing net income by 4,120,832 (4,147,483) weighted average shares
outstanding for the nine month periods ended September 30, 1998 and
1997 and 4,115,538 (4,144,128) weighted average shares outstanding for
the three month periods ended September 30, 1998 and 1997,
respectively. (adjusted to reflect a 2for 1 stock split in the
form of a 100% stock dividend effective 6/1/98).
4. Goodwill, which represents the excess of purchase price over the fair
value of identifiable assets acquired, is being amortized over 15
years on the straightline 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 Company 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.
5. Effective January 1, 1998 the Company adopted the remaining provisions
of SFAS No. 125, "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities," which relate to the
accounting for securities lending, repurchase agreements, and other
secured financing activities. These provisions, which were delayed for
implementation by SFAS No. 127, are not expected to have a material
impact on the Company.
On January 1, 1998, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive
Income. This statement establishes standards for reporting and
display of comprehensive income and its components. Comprehensive
income includes the reported net income of a company adjusted for
items that are currently accounted for as direct entries to equity,
such as the mark to market adjustment on securities available for
sale, foreign currency translation items and minimum pension liability
adjustments. At the Company, comprehensive income represents net
income plus other comprehensive income, which consists of the net
change in unrealized gains or losses on securities available for sale
for the period. Accumulated other comprehensive income represents the
net unrealized gains or losses on securities available for sale as of
the balance sheet dates.
Comprehensive income for the nine-month and three-month periods ended
September 30, 1998 and 1997 were $5,925,825 ($1,997,785) and
$5,893,911 ($2,575,671), respectively. The following summarizes the
components of other comprehensive income:
Unrealized Gains or Losses on Securities:
-----------------------------------------
Unrealized holding gains during the nine months
ended September 30, 1997, net of tax (pre-tax
amount of $2,159,838) $1,297,199
Reclassification adjustment for gains realized
in net income during the nine months ended
September 30, 1997, net of tax (pre-tax
amount of $143,010) (85,892)
-----------
Other comprehensive income-nine months
ended September 30, 1997 $1,211,307
==========
Unrealized holding gains during the nine months
ended September 30, 1998, net of tax (pre-tax
amount of $1,264,106) $ 759,222
Reclassification adjustment for gains realized
in net income during the nine months ended
September 30, 1998, net of tax (pre-tax
amount of $215,993) (129,725)
-----------
Other comprehensive income-nine months ended
September 30, 1998 $ 629,497
============
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information. SFAS No. 131 requires
publicly held companies to report financial and other information
about key revenue producing segments of the entity for which such
information is available and is utilized by the chief operation
decision maker. Specific information to be reported for individual
segments includes profit or loss, certain revenue and expense items
and total assets. A reconciliation of segment financial information
to amounts reported in the financial statements would be provided.
SFAS No. 131 is effective for the Company in 1998 and will not have an
impact on the Company's financial position or results of operation.
In February, 1998 the FASB issued SFAS No. 132, Employers' Disclosure
about Pensions and Other Post Retirement Benefits. This statement
revises employers' disclosures about pension and other post retirement
benefit plans. It does not change the measurement or recognition of
these plans. The statement is effective for the Company in 1998 and
will not impact the Company's financial position and results of
operations.
In June, 1998, the FASB issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities. This statement establishes
comprehensive accounting and reporting requirements for derivative
instruments and hedging activities. The statement requires (companies
or banks) to recognize all derivatives as either assets or
liabilities, with the instruments measured at fair value. The
accounting for gains and losses resulting from changes in fair value
of the derivative instrument, depends on the intended use of the
derivative and the type of risk being hedged. This statement is
effective for all fiscal quarters beginning January 1, 2000 for
calendar year (companies or banks). Earlier adoption, however, is
permitted.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
Total assets at September 30, 1998 were $592.2 million, which represents a
$43.3 million or 7.91% increase since the beginning of the year. The growth
which has taken place during the first nine months of this year is reflected
primarily in the loan and securities portfolios which have increased $27.4
million and $12.4 million respectively.
The Available for Sale segment of the securities portfolio totaled $200.8
million as compared to $185.3 million at the beginning of the year, an increase
of 8.4%. At amortized cost, increases in Federal Agency Bonds ($22.3 million),
Corporate Bonds ($9.6 million) and equity securities ($418 thousand) were
somewhat offset by decreases in U.S. Treasury Notes and Municipal Bonds
totalling $13.2 million and $7.5 million respectively. The allowance valuation
for Available for Sale securities has increased by $1.0 million since year end
as unrealized gains in the bond portfolio have risen in conjunction with the
decline in interest rates. The Held to Maturity segment of the portfolio
consisting primarily of Municipal Obligations totaled $6.2 million at September
30, 1998 versus $9.2 million at the beginning of the year.
Amortized cost and fair value, maturity duration, and unrealized gains and
losses for the components in each of the Available for Sale and Held to Maturity
categories of the securities portfolio at September 30, 1998 are set forth in
the following tables:
AVAILABLE FOR SALE HELD TO MATURITY
Amortized Fair Amortized Fair
Cost Value Cost Value
------------ ----------- ---------- ---------
U.S. Treasury and other
U.S. Govt. Agencies $102,844,544 $104,251,841 $ 0 $ 0
Mtg. Backed Securities 54,804,603 55,466,713 0 0
Obligations of states and
Political subdivisions 20,896,858 21,423,807 6,124,338 6,124,338
Other bonds and notes 9,686,144 9,743,745 64,490 64,490
Corporate Stocks 3,876,964 9,899,991 0 0
------------ ------------ ---------- --------
$192,109,114 $200,786,098 $6,188,829 $6,188,829
The carrying value and weighted average yields based on amortized cost by
years to maturity for securities available for sale as of September 30, 1998 are
as follows (excluding corporate stocks):
Maturing
Within One Year After One, Within Five
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury and other
U.S. Government Agencies $ 24,643,455 6.48% $ 57,408,320 6.07%
Mortgage Backed Securities 0 0 2,395,878 6.69%
Obligations of states and
political subdivisions 4,834,210 4.72% 6,944,946 4.72%
Other bonds and notes 0 0 2,540,625 6.25%
------------ ----- ------------ -----
Total $ 29,477,665 6.19% $ 69,289,769 5.96%
Maturing
After Five, Within Ten After Ten Years
Amount Yield Amount Yield
------ ----- ------ -----
U.S. Treasury and other
U.S. Government Agencies $ 22,200,066 6.88% $ 0 0
Mortgage Backed Securities 0 0 53,070,835 7.33%
Obligations of states and
political subdivisions 5,910,982 4.78% 3,733,669 5.05%
Other bonds and notes 2,665,625 7.41% 4,537,496 6.88%
------------ ----- ---------- -----
Total $ 30,776,673 6.53% $ 61,342,000 7.16%
Mortgage-backed securities are expected to have shorter average lives than
their contractual maturities as shown above, because borrowers may repay
obligations with or without call or prepayment penalties.
The amortized cost and weighted average yields by years to maturity for
securities held to maturity as of September 30, 1998 are as follows:
Maturing
Within One Year After One, Within Five
Amount Yield Amount Yield
------ ----- ------ -----
Obligations of states and
political subdivisions $ 3,309,505 3.95% $ 1,342,830 4.94%
Other bonds and notes 0 0 0 0
----------- ----- ----------- -----
Total Bonds $ 3,309,505 3.95% $ 1,342,830 4.94%
Maturing
After Five, Within Ten After Ten Years
Amount Yield Amount Yield
------ ----- ------ -----
Obligations of states and
political subdivisions $ 1,472,003 4.00% $ 0 0
Other bonds and notes 64,490 8.25% 0 0
----------- ----- ------- -----
Total $ 1,536,493 4.18% $ 0 0
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
September 30, 1998 in either the Available for Sale or Held to Maturity
categories.
Gross unrealized gains and gross unrealized losses on securities Available
for Sale were as follows:
AVAILABLE FOR SALE
------------------
Unrealized Unrealized
Gains Losses
---------- ---------
U.S. Treasury and other
U.S. Govt. Agencies $ 1,407,297 $ 0
Mtg. Backed Securities 691,712 29,602
Obligations of states and
Political subdivisions 526,949 0
Other bonds and notes 119,918 62,317
Corporate Stocks 6,023,027 0
----------- --------
$ 8,768,903 $ 91,919
Realized net gains on sales of securities Available for Sale for the nine
month period ended September 30, 1998 were $215,993 as compared to $143,010
through September 30, 1997.
Included in the Corporate Stocks component in the above tables are 50,879
shares of SLM Holding Corp., formerly known as Student Loan Marketing
Association ("Sallie Mae") at a cost basis of $4,654 and fair value of
$1,650,413. These shares were acquired as preferred shares (a permitted
exception to the U.S. 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 September 30, 1998, the Bank's equity portfolio held listed
securities totaling $89,538 at cost with a total fair value of $4,441,081. 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 22,156 shares of the Federal Home Loan Bank of New York valued at $498,200
and $2,215,600 respectively. Management has no current plans for selling these
securities.
In total, loan balances have increased $27.4 million or 9.2% since the
beginning of the year. Approximately 4.3% of this growth is in the commercial
portfolio which has increased by $11.9 million or 11.5% during 1998. Consumer
loans have increased $8.5 million or 7.5% as a result of strong demand in
indirect auto financing and growth in our term home equity product. The
mortgage portfolio has grown by $7.0 million or 8.8% and the activity continues
to be strong.
Total deposits at September 30, 1998 were $469.0 million as compared to
$451.0 million at the beginning of the year, an increase of $18.0 million or
4.0%. Public fund balances were up $16.6 million with personal and non-personal
balances increasing by $4.1 million. The above were somewhat offset by a $2.7
million decrease in official checks outstanding.
Of the $26.5 million increase in securities sold under agreements to
repurchase, $24.5 million is related to term repurchase agreements with the
Federal Home Loan Bank used to leverage the purchase of Federal Agency Bonds as
well as a portion of the $9.2 million loan purchase made during the second
quarter.
Net earnings for the third quarter were $1.916 million as compared to
$1.643 million for the third quarter of 1997, a 16.6% increase. Net earnings
per share for the quarter increased by $0.07 or 17.5% when compared to last
year. While gains were seen in both net interest income ($212 thousand) and
other operating income ($337 thousand), they were somewhat offset by a $238
thousand or 4.8% increase in operating expenses. While pre-tax earnings were
$268 thousand higher than last year, our income tax expense was $4 thousand
lower as a result of tax minimization strategies implemented during the second
quarter of this year.
Net earnings for the nine month period ended September 30, 1998 were $5.296
million, a $614 thousand or 13.1% increase over last years nine month results.
Net earnings per share for the nine month period were $1.29 versus $1.13 the
prior year, an increase of 14.2% on 26,651 fewer average shares outstanding.
Earnings for the first nine months were enhanced by a $73 thousand increase in
realized gains on securities transactions. In addition to the above, earnings
for the first nine months of 1998 have been positively impacted by a $416
thousand increase in net interest income, reflective of a $33.8 million increase
in average earning assets, as well as a $641 thousand increase in other
operating income. The primary factors influencing this increase include higher
levels of fiduciary income ($342 thousand), an insurance settlement related to a
May 1997 fire ($114 thousand), Mastercard and Visa merchant discount fees ($84
thousand), checkcard income ($58 thousand) and service charges ($60 thousand).
Operating expenses for the first nine months of 1998 are $535 thousand or 3.6%
higher than a year ago. The major factors influencing this increase were higher
expenses related to Other Real Estate Owned "OREO" ($240 thousand), salaries and
employee benefits ($186 thousand) and credit card processing costs ($117
thousand). While our pre-tax income has improved by $596 thousand, income tax
expense for the first nine months of 1998 is $18 thousand lower due to the tax
minimization strategies implemented during the second quarter.
As indicated on the Condensed Consolidated Statement of Cash Flows, cash
and cash equivalents have increased $2.7 million since the beginning of the
year. In addition to cash provided by operating activities ($7.1 million), other
primary sources of cash flow during the nine month period ended September 30,
1998 included proceeds from the sale and maturity of investment securities
($75.0 million), an increase in deposit accounts ($18.0 million) and an increase
in securities sold under agreement to repurchase ($26.5 million). Cash proceeds
generated from the above sources have been used primarily to fund the purchase
of investment securities ($86.4 million), the increase in loans, net of
repayments ($30.5 million), the payment of cash dividends ($2.0 million) and the
repayment of overnight advances from the Federal Home Loan Bank ($6.3 million).
On May 13, 1998, the shareholders of the Company approved an increase in
the authorized number of shares from 3,000,000 to 10,000,000 and a reduction in
par value from $5.00 to $0.01 per share. On that same date, the Board of
Directors approved a 2 for 1 stock split in the form of a 100% stock dividend
resulting in an increase in the number of shares issued from 2,150,067 to
4,300,134.
During the nine months ended September 30, 1998, the Company acquired 24,053
Treasury shares at an average price of $24.21 per share (adjusted for the above
mentioned split). No treasury shares have been sold thus far in 1998. During
the quarter, the Company declared a cash dividend of $0.17 per share. Cash
dividends declared year to date total $0.495 per share as compared to $0.45 per
share during the same period last year.
Based upon loans outstanding, past experience, as well as an ongoing review
of the risk inherent in our loan portfolio, the loan loss provision for the
first nine months of 1998 was $600 thousand as compared to $739 thousand one
year ago. At 274% of non-performing loans and 1.35% of total loans, the
Allowance for Loan Loss is viewed by management as adequate relative to risk.
Non-performing loans at September 30, 1998 constituted 0.49% of total loans.
Changes in the allowance for loan losses for the nine months ended
September 30, 1998 is as follows:
September 30, 1998
Amount (000's)
---------------
Balance at beginning of period $ 4,145
Charge-offs:
Domestic:
Commercial, financial and agricultural $ 13
Commercial mortgages 0
Residential mortgages 21
Consumer loans 437 $ 471
Recoveries:
Domestic:
Commercial, financial and agricultural $ 19
Commercial mortgages 0
Residential mortgages 0
Consumer loans 92
------
$ 111
-------
Net charge-offs $ 360
Additions charged to operations 600
Balance at end of period $ 4,385
------
Ratio of net charge-offs during the period
to average loans outstanding during the period .12%
Included in the allowance for loan losses at September 30, 1998 is an
allowance for impaired loans of $675 thousand versus $239 thousand at the
beginning of the year. The total recorded investment in these loans at September
30, 1998 and December 31,1997 was $4.594 million and $951 thousand respectively.
Management distinguishes between impaired and non-accrual loans as follows:
Impaired Loans - A loan would be considered impaired when it is probable that
after having considered current information and events regarding the borrower's
ability to repay their obligations, the corporation will be unable to collect
all amounts due according to the contractual terms of the loan agreement.
Non-Accrual Loans - A loan is placed on non-accrual when it becomes past due and
is referred to legal counsel, or in the case of a commercial loan which becomes
90 days delinquent, or in the case of a consumer loan (not guaranteed by a
government agency) or a real estate loan which becomes 120 days delinquent
unless, because of collateral or other circumstances, it is deemed to be
collectible. When placed on non-accrual, previously accrued interest is
reversed. Loans may also be placed in non-accrual if management believes such
classification is warranted for other reasons.
At September 30, 1998, the allocation of the allowance for loan losses is
as follows:
Reported Period
September 30, 1998
------------------
Balance at end of period
applicable to:
Percent of Loans in each
Amount Category to Total Loans
------ ------------------------
Domestic:
Commercial, financial
and agricultural $1,116,169 35.22%
Commercial mortgages 22,380 1.76%
Residential mortgages 9,984 24.98%
Consumer loans 717,188 38.04%
Unallocated: 2,519,003 N/A
---------- -------
Total $4,384,724 100.00%
For the periods ended September 30, 1998 and December 31, 1997, the
following table summarized the Company's non-accrual and past due loans:
Amounts (000's)
---------------
September 30, 1998 December 31, 1997
------------------ ----------------
Non-accrual loans $ 954 $ 930
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Accruing loans past due 90 days
or more $ 647 $ 688
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At September 30, 1998, the Company has no commercial loans for which
payments are presently current but the borrowers are currently experiencing
severe financial difficulties. At September 30, 1998, no loan concentrations to
borrowers engaged in the same or similar industries exceeded 10% of total loans
and the Corporation has no interest-bearing assets other than loans that meet
the non-accrual, past due, restructured or potential problem loan criteria.
On September 30, 1998, the Company's consolidated leverage ratio was 9.18%.
The Tier I and Total Risk Adjusted Capital ratios were 15.30% and 16.55%,
respectively.
SIGNIFICANT ISSUE - YEAR 2000
During 1997, management advised its Board of Directors of the many
issues surrounding the approach of January 1, 2000. Nearly all computer
hardware and software developed during the current century, have been programmed
with two digit reference to each year. Such hardware and software, if not
upgraded by January 1, 2000, may become useless. Management is undergoing a
five phase project to respond to this issue, with major emphasis upon
identifying all applications and data bases supporting the Bank's mission
critical applications. The five phases are awareness, assessment, renovation,
validation and implementation, and will seek to neutralize not only the Bank's
vulnerability, but to determine the financial capacity of its vendors, determine
alternate vendors, and evaluate the capacity of its customers to respond to this
challenge. A committee continues to direct the Company's Year 2000 activities
under the framework of the FFIEC's Five Step Program. Testing of critical
applications has begun and is expected to be substantially completed by year end
1998, with testing of other non-critical applications expected to be completed
by March 31, 1999. The Company has begun evaluating Year 2000 readiness of its
commercial loan applicants as part of the loan underwriting process and is
calling upon major existing borrowers to assess their readiness and identify
potential problems.
In addition, the Company is currently formulating a contingency plan for
business continuation in the event of Year 2000 systems failures. This
contingency plan will be based upon the Company's existing disaster recovery
plan with modifications for Year 2000 risks. The Company expects to complete
its systems contingency plan by March 1999.
Significant Year 2000 failures in the Company's systems or in the
systems of third parties (or third parties upon whom they depend) could have a
material adverse effect on the Company's financial condition and results of
operation. The Company believes that its reasonably likely worse case Year 2000
scenario is (i) a material increase in the Company's credit losses due to Year
2000 problems for the Company's borrowers and obligors, and (ii) disruption in
financial markets causing liquidity stress to the Company. The magnitude of
these potential credit losses and disruption cannot be determined at this time.
It is expected that costs associated with Year 2000 readiness including
hardware and software upgrades as well as costs of testing will be approximately
$200,000.
INTEREST RATE RISK
The Company realizes a major source of income by acting as intermediary
between borrowers and savers. The differential or spread between interest
earned on earning assets, primarily loans and investments, and the interest paid
to depositors is affected with changes to market interest rates. Additionally,
because of assumptions made to the Company's loan and investment portfolios and
to its deposit base, changes in interest rates can materially affect the
projected maturities of these balance sheet classes and thus alter the Company's
sensitivity to future changes in interest rates.
The Bank's Asset/Liability Committee (ALCO) has the strategic
responsibility for setting the policy guidelines on acceptable interest rate
risk exposure. The ALCO is made up of the chief executive officer, executive
vice presidents, senior lending officer, senior marketing officer, financial
officer and others representing key functions. All guidelines set by this
committee are board approved. The ALCO's primary focus is on maintaining
consistent growth in net interest income with an acceptable level of volatility
as a result of changes to interest rates. As of September 30,1998 the exposure
to changing interest rates is within the guidelines established by the ALCO.
The Company uses an industry standard earnings simulation model as its
primary method to identify and manage its interest rate risk profile. The model
is based on projected cash flows using historical data for all financial
instruments. Also incorporated into the model are assumptions of deposit rates
and balances in relation to changes in interest rates. These assumptions are
based on internal historical data. In recent years core deposits (NOW accounts,
Insured Money Market Accounts and Savings accounts) have not been re-priced with
movements of interest rates in the negotiable securities markets. The ALCO
recognizes that the assumptions made are inherently uncertain.
The ALCO uses static gap analysis as a secondary method of identifying and
managing the Company's interest rate risk profile. Gap analysis measures the
difference between the assets and liabilities re-pricing and maturing within
specific time periods, called buckets. A positive gap indicates more rate
sensitive assets are due to either re-price or mature than rate sensitive
liabilities in a specific bucket. This would indicate that the Company should
have rising earnings in periods of rising interest rates and falling earnings in
periods of falling rates.
The ALCO recognizes the limitations of static gap analysis. Primarily it
does not take into account the effect of interest rate movements and the
competitive market forces on the re-pricing and maturity characteristics of
interest-earning assets and interest-bearing liabilities. For these reasons,
and for the recent practicality of using earnings simulation models gap analysis
has fallen out of favor with the risk management community.
Lastly, the ALCO monitors the expected fluctuation of the Company's market
value of equity with changes to interest rates. Appropriate risk limits have
been established to protect the bank's shareholders in the advent of adverse
changes to interest rates, and as of September 30, 1998 exposure to changing
interest rates is within the risk limits established.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Applicable Exhibits
(3.1) Certificate of Incorporation is filed as Exhibit 3.1 to
Registrant's Registration Statement on Form S-14, Registration
No. 295743, and is incorporated herein by reference.
Certificate of Amendment to the Certificate of Incorporation,
filed with the Secretary of State of New York on April 1, 1988, is incorporated
herein by reference to Exhibit A of the registrant's Form 10-K for the year
ended December 31, 1988, File No. 0-13888.
(3.2) Bylaws of the Registrant, as amended to April 8, 1998 are
incorporated herein by reference to Exhibit A of the registrant's
Form 10-Q for the quarter ended June 30, 1998,
File No. 0-13888.
(27) Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
During the quarter ended September 30, 1998, no reports on Form
8K or amendments to any previously-filed Form 8-K
were file by the registrant.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned there to duly authorized.
CHEMUNG FINANCIAL CORPORATION
DATE: November 12, 1998 Jan P. Updegraff
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President & CEO
DATE: November 12, 1998 John R. Battersby Jr.
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Treasurer