EXHIBIT A
TABLE OF QUARTERLY MARKET PRICE RANGES
Market Prices of Chemung Financial Corporation Stock
During Past Three Years (dollars)
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1998 1997 1996
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Hi -- Lo Hi -- Lo Hi -- Lo
1st Quarter 25 1/2 - 21 1/2 18 - 16 13/16 14 3/8 - 13 1/2
2nd Quarter 30 - 25 3/4 17 5/8 - 16 3/4 15 3/4 - 14
3rd Quarter 30 - 26 1/4 18 3/4 - 16 13/16 16 5/8 - 15 3/16
4th Quarter 28 - 22 3/4 23 3/4 - 19 1/8 17 7/8 - 16 1/2
EXHIBIT B
TABLE OF DIVIDENDS PAID
Dividends Paid by Chemung Financial Corporation
During Past Three Years
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1998 1997 1996
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January 2 $.1550 $.1400 $.1250
April 1 .1550 .1400 .1250
July 1 .1700 .1550 .1250
October 1 .1700 .1550 .1400
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$0.6500 $0.5900 $0.5150
As of December 31, 1998 there were 756 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 discussions and analysis.
Description of Business
Chemung Financial Corporation (the "Corporation") is a one-bank holding
company with its only subsidiary being Chemung Canal Trust Company (the
"Bank"), a full-service community bank with full Trust powers. Therefore,
the financial condition should be examined in terms of the acquisition and
employment of funds within its "market areas". Management defines the market
areas of Chemung Canal Trust Company as those areas within a 25-mile radius of
its branches in Chemung, Steuben, Schuyler, and Tioga counties, including the
northern tier of Pennsylvania. The Bank's lending policy restricts
substantially all lending efforts to these geographical regions.
In 1997, the Corporation joined six other bank holding companies in forming a
Small Business Investment Company ("SBIC") as a limited partner. The SBIC is
authorized under The Small Business Equity Investment Act of 1992 and is
registered under the name CEPHAS Capital Partners, LP. The Corporation's
capital commitment to the partnership is $2.475 million, of which $1.758
million had been paid as of December 31, 1998. The objective of the
partnership is to achieve a superior rate of return over a five to ten year life
through the realization and distribution of portfolio capital gains, operating
income and other transaction/advisory fee income.
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 Loan Committee of the Board is designated to receive required loan
reports, oversee loan policy, and approve loans above authorized individual
and Senior Officers Loan Committee lending limits. The Senior Officers Loan
Committee, consisting of the president, two executive vice presidents, senior
lending officer, mortgage officer, and consumer loan officer, implements the
Board-approved loan policy.
Supervision and Regulation
The Corporation, as a bank holding company, is regulated under the Bank
Holding Company Act of 1956, as amended (the "Act"), and is subject to the
supervision of the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board"). Generally, the Act limits the business of bank
holding companies to banking, or managing or controlling banks, performing
certain servicing activities for subsidiaries, and engaging in such other
activities as the Federal Reserve Board may determine to be closely related to
banking and a proper incident thereto.
The Bank is chartered under the laws of New York State and is supervised by
the New York State Banking Department.
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
was passed in order to protect depositors and taxpayers from the excesses of
the S&L problems of the 1980's. There are a number of provisions in this act
that significantly increase the operating costs of the Bank. These rules
specifically impact the cost of external audit, the mortgage loan product
(through appraisal requirements), as well as all other loan products.
Competition
The Bank is subject to intense competition in the lending and deposit gathering
aspects of its business from commercial and thrift banking institutions, credit
unions, and other providers of financial services, such as brokerage firms,
investment companies, insurance companies and Internet vendors. The Bank also
competes with non-financial institutions, including retail stores and certain
utilities that maintain their own credit programs, as well as governmental
agencies that make available loans to certain borrowers. Unlike the Bank,
many of these competitors are not subject to regulation as extensive as that
described under the "Supervision and Regulation" section and, as a result,
they may have a competitive advantage over the Corporation in certain respects.
This is particularly true of credit unions, as their pricing is not encumbered
by income taxes.
Competition for the Bank's fiduciary services comes primarily from brokerage
firms, independent investment advisors, and a non-bank trust company operating
in Steuben County with newly expanded powers. This is considered to be
significant competition, as these firms devote much of their considerable
resources toward gaining larger positions in these markets. Trust assets
under administration, however, totaled $1.4 billion at December 31, 1998,
compared to $1.2 billion a year earlier and nearly $1.1 billion at December 31,
1996. Relative to the Bank's consolidated net assets, the Trust and Investment
Division is unusually large and is responsible for the largest component of non-
interest revenue.
During 1998, as well as 1997 and 1996, the Trust & Investment Division noted a
continued increase in the competition for personal and corporate investment
management services in our market areas. Early in 1998, management formed a
strategic alliance with a third party administrator for the purpose of out-
sourcing retirment fund recordkeeping. The trade off in revenue and expense is
material but the alliance contributed importantly to our efforts to bring first
rate technology to our retirement services clients. We see this strategy as
extremely important in our efforts to remain in the retirement services business
while reducing the requirements for investing in related technology.
Significant Issue - Year 2000
In 1997, management advised its Board of Directors of the many issues
surrounding the approach of January 1, 2000. Nearly all computer hardware
and software developed during the 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 databases 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 Bank's Year 2000 activities
under the framework of the FFIEC's Five Step Program. The first phase of
testing of critical applications was 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 Bank is currenty formulating a contingency plan for business
continuation in the event of Year 2000 systems failures. This contingency plan
will be based upon the Bank's existing disaster recovery plan with modifications
for the Year 2000 risks. The Bank expects to complete its systems contingency
plan by March 1999.
Significant Year 2000 failures in the Bank's systems or in the system's third
parties (or third parties upon whom they depend) could have a material adverse
effect on the Bank's financial condition and results of operation. The Bank
believes that its reasonably likley worse case Year 2000 scenario is (i) a
material increase in the Bank's credit losses due to Year 2000 problems for the
Bank's borrowers and obligors, and (ii) disruption in financial markets causing
liquidity stress to the Bank. 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.
Employees
The Corporation and its Banking subsidiary had 291 full-time equivalent
employees (FTE') on December 31, 1998 versus 281 at the beginning of the year
and 289 on December 31, 1996. The employment trend is relatively stable.
Balance Sheet Comments
Average earning assets for 1998 grew by $41.4 million or 8.4% to $532.5 million,
compared to $491.1 million in 1997 and $469.5 million in 1996. Business loans
and 1-4 family mortgages were very strong throughout the year, with year-end
balances growing $10.04 million (9.2%) and $10.8 million (14.6%) respectively.
Average total loan balances were $311.7 million versus $291.3 million during
1997 and $273.9 million during 1996.
Non-performing loans at year-end increased to $4.853 million at December 31,1998
versus $1.617 million at the end of 1997 and $1.720 million at the end of 1996,
and represented 1.5% of total outstandings compared to 0.54% at the end of 1997
and 0.61% on December 31. 1996. The increase in 1998 relates primarily, to one
real estate secured commercial loan. Net loan losses were $436 thousand or
0.14% of average outstandings, compared to $680 thousand in 1997 and $667
thousand in 1996. The allowance for loan losses at December 31, 1998 was
1.37% of total outstandings versus. 1.40% a year ago and 1.40% at December
31, 1996.
Exhibit I
Balance Sheet Comparisons
Average Balance Sheet Change
(in millions) 1998 1997 1996 1995 1994 1993 1 yr. 5 yrs
Total Assets $587.4 $542.4 $518.5 $495.2 $431.2 $397.7 8.3% 8.1%
Earning Assets 532.5 491.1 469.5 447.1 394.7 368.4 8.4% 7.6%
Loans 311.7 291.3 273.9 249.1 221.4 224.1 7.0% 6.8%
*Investments 220.9 199.8 195.6 198.0 173.3 144.3 10.6% 8.9%
Deposits 467.2 450.2 440.9 424.4 374.6 347.0 3.8% 6.1%
Wholesale Funding 37.0 13.1 2.9 N/A N/A N/A 182.4% N/A
Tier I Equity 57.4 51.6 46.4 41.7 38.2 37.0 11.2% 9.2%
*Average balances for investments are based on amortized cost.
Ending Balance Sheet
(in millions)
1998 1997 1996 1995 1994 1993 1yr 5 yrs
Total Assets $623.7 $548.9 $532.2 $501.9 $494.3 $398.1 13.6% 9.4%
Earning Assets 565.3 486.1 474.6 446.3 448.9 369.2 16.3% 8.9%
Loans - Net 324.8 292.8 279.7 259.1 232.9 218.8 10.9% 8.2%
Investments 245.1 196.8 196.3 189.6 212.1 147.1 24.5% 10.8%
Deposits 466.1 451.0 439.6 426.9 432.3 342.9 3.3% 6.3%
Wholesale Funding 71.4 20.5 10.0 N/A N/A N/A 248.3% N/A
Tangible Equity 59.9 54.8 48.7 44.9 37.2 38.3 9.3% 9.4%
Allowance For Loan
Losses 4.51 4.15 3.98 3.90 3.60 3.50 8.7% 5.2%
Securities
The board-approved Funds Management Policy includes an investment portfolio
policy which requires that, except for local municipal obligations which are
sometimes not rated 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". 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 if the securities portfolio
at December 31, 1998 was $235.3 million compared to $185.3 million a year
earlier and $185.4 million at the end of 1996. At year-end 1998, total
appreciation in the banking subsidiary's securities portfolio was $8.983
million, compared to $7.629 million a year ago. The components of the
appreciation are set forth in the following tables:
1998 1997
(in thousands) Amortized Fair Amortized Fair
Cost Value Appreciation Cost Value Appreciation
U.S. Treasury
Securities $ 23,013 $ 23,295 $ 282 $ 37,188 $ 37,294 $ 106
Obligations of
other U.S.
Government
Agencies 77,787 78,233 446 56,565 56,677 112
U.S Government
Agency Mortgage-
backed pools 89,245 89,593 348 55,021 55,603 582
Obligations of
states and
political
subdivisions 20,967 21,432 465 25,361 25,800 439
Other bonds
and notes 9,682 9,705 23 80 80 0
Corporate Stocks 5,617 13,036 7,419 3,459 9,849 6,390
Totals $ 226,311 $235,294 $ 8,983 $ 177,674 $185,303 $ 7,629
Included in the above table are 49,604 shares of SLM Holding Corporation at a
cost basis $4,538 and fair market value of $2,380,992. These shares were
acquired as preferred shares of Student Loan Marketing Agency ("SALLIE MAE")
a permitted exception to the Government regulation banning bank ownership of
equity securities in the original capitalization of the U.S. Government Agency.
Later, the shares were converted to common stock as SALLIE MAE recapitalized.
Additionally, at December 31, 1998, the Banking subsidiary's portfolio held
marketable equities totaling $89,538 with a total fair value of $5,102,582.
The shares, other than SLM Holding Corp., 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 39,556 shares of the Federal Home Loan
Bank of New York. They are valued at $498,200 and $3,955,600, respectively.
The number of shares of these last two investments is regulated by regulatory
policies of the respective institutions.
Capital Resources and Dividends
The Corporation continues to maintain a strong capital position. Tangible
shareholders' equity at December 31, 1998 was $59.9 million or 9.60% of total
assets compared to $54.8 million or 9.98% of total assets a year earlier and
$48.7 million or 9.15% at December 31, 1996. As of December 31, 1998, the
Corporation's total Risk Weighted Adjusted Capital Ratio was 16.67% compared
with 17.44% a year earlier and 16.87% at December 31, 1996. The leverage ratio
(Average Tier I Capital/Average Assets) was 9.51% during 1998 and 9.49% in 1997.
Management's strategy for employing the Corporation's capital is to maintain the
leverage ratio as low as possible but at a level in excess of the requirements
for being considered well capitalized by the FDIC, the Federal Reserve, and the
New York State Banking Department. Term borrowings and repurchase agreements
with the Federal Home Loan Bank were the funding source for this strategy.
Under Federal Reserve regulations (see Note 14 to the consolidated financial
statements), the Bank is limited to the amount it may loan to the Corporation,
unless such loans are collateralized by specific obligations. At December 31,
1998, 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, 1998, $8,794,583 was available for
the declaration of dividends.
At the May annual meeting of the Corporation's shareholders, the authorized
number of common shares was increased from 3,000,000 to 10,000,000 and the
par value reduced from $5.00 to $0.01 per share. The Corporation's board
declared a two for one stock split, payable in the form of a 100% stock
dividend to shareholders effective in June 1998. Per share and dividend
information has been restated to reflect the stock split.
Cash dividends declared amounted to $2.741 million in 1998 versus $2.506
million in 1997 and $2.203 million in 1996. Dividends declared during 1998
amounted to 37.56% of net earnings compared to 36.6% and 35.8% of 1997 and
1996 net earnings, respectively. It is management's objective to continue
generating sufficient capital internally, while retaining an adequate dividend
payout ratio.
Performance Summary
Net income for 1998 was impacted by 1) higher loan volumes 2) higher volumes
in investment securities 3) lower average interest rates on both sides of the
balance sheet 4) higher volumes of non-interest income and 5) higher non-
interest expenses. Consolidated net income for 1998 was $7.297 million
versus $6.857 million, up $440 thousand (6.4%) or $1.77 per share versus $1.66
per share (up 6.6%) on 26,684 fewer average shares outstanding. In 1996, the
Corporation earned $6.158 million versus $5.602 million in 1995. Quarterly
dividends declared totaled $0.665 per share versus $0.605 in 1997 and $0.53
in 1996, adjusted for the two for one stock split effective in June 1998.
Non-interest income increased $749 thousand to $8.217 million, up 10.0% over
1997. Trust and Investment fees, at $4.505 were again the largest component
and registered the largest (10.4%) increase. The primary reason for this
result was major increases in the pricing of both common stocks and debt
securities managed by the department. Gains realized in the Bank's investment
securities portfolio were $216 thousand compared to $324 thousand in 1997 and
$610 thousand in 1996.
Non-interest expenses increased $1.105 million (5.7%) to $20.5 million. Non-
interest expenses for 1997 were $19.4 million compared to the same amount in
1996. These expenses were negatively impacted by a $159 thousand increase in
the Bank's self insured healthcare costs, a $319 thousand increase in other
real estate expenses, a $225 thousand increase in credit card processing, and
a $123 thousand increase in rent expense.
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 I 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 1998 were $69 thousand versus $71 thousand in 1997
and $253 thousand in 1996.
During 1998, the Bank's provision for loan losses totaled $800 thousand, down
$50 thousand from $850 thousand in 1997 and $742 thousand in 1996. The change
is a reflection of management's ongoing evaluation of the risk inherent in the
portfolio. Also, during 1998, several properties were taken into Other Real
Estate ("ORE") as a result of foreclosures. The ORE expenses resulting from
these situations totaled $394,471 compared to $75,243 in 1997 and $17,927 in
1996.
Exhibit II
Change
Earnings (in thousands) 1998 1997 1996 1995 1994 1993 1 yr. 5 yrs
Net Interest Income $ 23,739 $ 23,274 $ 22,468 $ 21,849 $ 19,304 $ 18,672 2.0% 4.9%
Loan Loss Provision 800 850 742 564 624 907 -5.9% -2.5%
Net Interest Income After
Loan Loss Provision 22,939 22,424 21,726 21,285 18,680 17,765 2.3% 5.2%
Non-interest Income
Trust Department Income 4,505 4,079 3,719 3,678 3,323 3,294 10.4% 6.5%
Securities Gains, net 216 324 610 531 140 821-33.3%-23.4%
Other Income 3,496 3,065 2,777 2,527 2,222 2,004 14.1% 11.8%
Total Non-Interest Income 8,217 7,468 7,106 6,736 5,685 6,119 10.0% 6.1%
Operating Expense 20,473 19,368 19,408 19,560 17,375 15,627 5.7% 5.6%
Pretax income 10,683 10,524 9,424 8,461 6,990 8,257 1.5% 5.3%
Effect of Accounting Change 0 0 0 0 0 (933) N/A N/A
Income Taxes 3,386 3,667 3,266 2,859 2,342 2,830 -7.7% 3.7%
Net Income $ 7,297 6,857 6,158 5,602 4,648 4,494 6.4% 10.2%
The average interest rate on earning assets was 7.78% during 1998 versus 8.02%
in 1997 and 7.99% in 1996. The interest expense on the Bank's liabilities
increased to 4.18% in 1998 compared to 4.13% in 1997 and 4.00% in 1996. This
resulted in a net interest spread of 3.60% versus 3.89% in 1997 and 3.99% in
1996. The net interest margin declined 28 basis points to 4.46%, compared to
4.74% in 1997 and 4.79% in 1996.
Exhibit III
Changes due to Volume and Rate
The following table demonstrates the impact on net interest income of the
changes in the volume of earning assets and interest-bearing liabilities and
changes in rates earned and paid by the 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.
1998 vs 1997 1997 vs 1996
Increase Increase
(Decrease) (Decrease)
Interest Income
(thousands) Total Due to Due to Total Due to Due to
Change Volume Rate Change Volume Rate
Loans $ 1,185 $ 1,836 $ (651) $ 1,366 $ 1,591 $ (225)
Taxable investment
securities 559 1,017 (458) 337 82 255
Tax-exempt investment
securities (8) (2) (6) 82 105 (23)
Federal funds sold 290 293 (3) (50) (57) 7
Other Investments 3 3 0 0 0 0
Interest bearing deposits 7 (80) 87 126 90 36
Total Interest Income $ 2,036 $ 3,067 $(1,031) $ 1,861 $ 1,811 $ 50
Interest Expense
(thousands)
Demand deposits $ (64) $ (23) $ (41) $ (44) $ 12 $ (56)
Savings deposits 390 229 161 (48) (117) 69
Time deposits 164 272 (108) 562 446 116
Federal funds purchased
and securities sold under
agreement to repurchase 1,078 1,126 (48) 585 491 94
Total Interest Expense $ 1,568 $ 1,604 $ (36) $ 1,055 $ 832 $ 223
Net Interest Income $ 468 $ 1,463 $ (995) $ 806 $ 979 $ (173)
Intangible assets
The core deposit intangible and goodwill in the amount of $4.1 million and $2.1
million, respectively, at December 31, 1998, which accounts for the premium paid
in connection with the acquisition of three branches from the Resolution Trust
Corporation ("RTC") and the acquisition of Owego National Financial Corporation
during 1994, 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 1998, 39,383 shares were
purchased at a total cost of $984,284 or an average price of $24.99 per share.
In 1997, 5,370 shares were purchased at a total cost of $107,768 or an average
adjusted price of $20.07 per share, and in 1996 there were 33,830 shares
purchased at a total cost of $514,599 ($15.21 per share).
Exhibit IV
Change
Selected data on Common Shares
(Adjusted for two for one
stock split) 1998 1997 1996 1995 1994 1993 1 yr. 5 yrs
Net Income $ 1.77 $ 1.66 $ 1.48 $ 1.34 $ 1.23 $ 1.44 6.6% 4.2%
Dividends Declared 0.665 0.605 0.53 0.49 0.467 0.437 9.9% 8.7%
Tangible Book Value 14.59 13.24 11.76 10.79 8.88 10.13 10.2% 7.6%
Market Price 12/31 27.50 21.00 17.00 13.88 12.75 11.50 31.0% 19.0%
Average Shares 4,116 4,143 4,159 4,176 3,798 3,788 -0.7% 1.7%
Exhibit V
Selected Ratios 1998 1997 1996 1995 1994
Return on average Assets 1.24% 1.26% 1.19% 1.13% 1.08%
Return on average tier I equity 13.88% 14.29% 14.08% 14.26% 12.49%
Dividend Yield 12/31 2.47% 2.95% 3.29% 3.60% 3.76%
Dividend payout 37.56% 36.55% 35.78% 36.52% 38.22%
Tier I capital to risk
adjusted assets 15.42% 16.19% 15.61% 15.21% 13.71%
Tier I leverage ratio 9.51% 9.49% 8.97% 8.52% 7.69%
Total capital to risk
adjusted assets 16.67% 17.44% 16.87% 16.46% 15.03%
Loans to deposits 70.63% 65.84% 64.53% 61.61% 54.71%
Loan reserve to outstanding
loans 1.37% 1.40% 1.40% 1.48% 1.52%
Loan reserve to non-performing
loans 92.9% 257% 231% 217% 232%
Non-performing loans to
outstanding loans 1.47% 0.54% 0.61% 0.68% 0.66%
Net interest rate spread 3.60% 3.89% 3.99% 4.12% 4.26%
Net interest margin 4.46% 4.74% 4.79% 4.89% 4.89%
Efficiency ratio
(adj. for intangibles) 61.97% 60.84% 63.41% 66.12% 68.34%
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 $80.220 million in 1998. The
same areas trailed by $12.551 million in 1997. Net purchases of equipment
during 1998 and 1997 were $1.325 million, and $1.990 million, respectively.
During 1996, proceeds from maturities and sales of securities and student loans
were less than purchases of securities and loan originations net of repayment
and net purchases of premises and equipment by $38.304 million. Net purchases
of premises and equipment during 1996 were $862.7 thousand.
Net cash provided by financing activities amounted to $63.233 million in 1998,
compared to $10.219 million in 1997 and $21.304 million in 1996. Core deposits
(demand, NOW, Savings and Insured Money Market Accounts) increased $11.5 million
in 1998 compared to an increase of $11.6 million in 1997.
Liquidity and Sensitivity
The term "liquidity" refers primarily to the expected cash flows from assets
held for investment and secondarily to borrowings secured by assets held for
investments. These two sources of liquidity have in the past been sufficient
to fund the operations of the Bank, and the Board of Directors anticipates
that they will suffice in the future. For this reason, the term "liquidity"
in the Bank's policies does not refer to proceeds from the sale of assets,
although the sale of assets held as available for sale is a source of liquidity
available to management.
Liquidity management involves the ability to meet the cash flow requirements of
deposit customers, borrowers, and the operating, investing, and financing
activities of the Corporation. Management of interest rate sensitivity seeks
to avoid fluctuating net interest margins and to enhance consistent growth of
net interest income through periods of changing interest rates.
As intermediaries between borrowers and savers, commercial banks incur interest
rate risk. The Bank's Asset/Liability Committee (ALCO) has the strategic
responsibility for setting the policy guidelines on acceptable exposure. The
ALCO is made up of the president, asset liability management officer, senior
lending officer, senior marketing officer, chief accounting officer and others
representing key functions.
The Bank is a member of the Federal Home Loan Bank of New York ("FHLB") in order
to enhance management's ability to satisfy future liquidity needs and to have an
additional alternative for investing excess reserves. The Bank's $3.956 million
investment in FHLB stock allowed it to maintain a $56.696 million line of credit
at December 31, 1998. This compares to $46.977 million at the end of 1997.
Interest rate risk is the risk that net interest income will fluctuate as a
result of a change in interest rates. It is the assumption of interest rate
risk, along with credit risk, that drives the net interest margin of a financial
institution.
A related component of interest rate risk is the expectation that the market
value of our capital account will fluctuate with changes in interest rates.
This component is a direct corollary to the earnings-impact component: an
institution exposed to earnings erosion is also exposed to shrinkage in market
value.
Interest rate risk is portrayed below using the "contractual" gap. Contractual
gap measures the stated repricing and maturity of assets and liabilities. At
December 31, 1998, the cumulative one-year contractual gap for the Bank was a
negative $173.9 million versus a negative $176.0 million a year earlier and a
negative $160.9 million at the end of 1996. This means that $173.9 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.
December 31, 1998 Rate Sensitive
Contractual Amounts
(Thousands) 1 to 90 Days 91 to 365 Days 1 to 5 Years Over 5 Years
Earning Assets:
Loans $ 85,270 $ 20,311 $ 113,392 $ 105,902
Securities 8,501 22,898 71,860 125,660
Other (Equities) 13,036
Total earning assets $ 106,807 $ 43,209 $ 185,252 $ 231,562
Net sources:
NOW accounts $ 38,128
Insured Money Market 58,133
Time certificates
under $100 thousand 39,231 58,264 48,331 59
Time certificates
over $100 thousand 20,304 7,466 4,666 201
Savings 89,448
FHLB advances 6,900 20,000
Repurchase Agreements 6,087 15,000 29,500
Total sources $ 258,231 65,730 67,997 49,760
Incremental gap -151,424 -22,521 117,255 181,802
Percent of earning
assets -141.7% -52.1% 63.3% 78.5%
Cumulative gap -151,424 -173,945 -56,690 125,112
Percent of total assets -24.3% -27.9% -9.1% 20.1%
In recent years core deposits (NOW accounts, Insured Money Market Accounts and
Savings accounts) have not been repriced with movements of interest rates in the
negotiable securities markets. Rather, the interest paid upon such funding
sources during 1998, 1997 and 1996 has been quite stable, even with movements
in excess of 200 basis points. Short term rates (6 month U.S. Treasury Bills)
ranged between 4.15% - 5.16% during 1998 and 5.03% - 5.45% during 1997.
Management does recognize the need for certain hedging strategies during periods
of anticipated higher fluctuations in interest rates and the Board-approved
Funds Management Policy provides for limited use of certain derivatives in asset
liability management. These strategies were not employed during 1998.
The ALCO is responsible for supervising the preparation and annual revisions of
the financial segments of the Bank Plan, which is built upon the committee's
economic and interest-rate assumptions and the Annual Budget. It is the
responsibility of the ALCO to modify prudently any and all asset/liability
policies.
Effective January 1, 1998 the Company adopted the remaining provisions of
Statement of Financial Accounting Standards 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.
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.
Jan P. Updegraff
President and Chief Executive Officer
EXHIBIT D
CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT AUDITORS
Independent Auditors' Report
The Board of Directors and Shareholders
Chemung Financial Corporation and Subsidiary:
We have audited the accompanying consolidated balance sheets of Chemung
Financial Corporation and subsidiary as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 1998. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Chemung Financial
Corporation and subsidiary at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
Syracuse, New York
January 20, 1999
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
Assets December 31 1998 1997
Cash and due from banks $ 27,515,582 32,997,157
Interest-bearing deposits with other
financial institutions 1,304,207 1,421,298
Securities available for sale, at fair value 235,293,736 185,302,745
Securities held to maturity, fair value of
$6,660,923 in 1998 and $9,224,028 in 1997 6,660,923 9,224,028
Loans, net of unearned income and deferred fees 329,255,342 296,976,769
Allowance for loan losses (4,509,185) (4,145,422)
Loans, net 324,746,157 292,831,347
Premises and equipment, net 10,084,608 10,219,043
Other assets 11,826,068 10,123,203
Intangible assets, net of accumulated
amortization 6,228,328 6,815,631
Total assets $ 623,659,609 548,934,452
Liabilities and Shareholders' Equity
Deposits:
Noninterest-bearing $ 101,908,083 94,656,560
Interest-bearing 364,231,279 356,387,782
Total deposits 466,139,362 451,044,342
Securities sold under agreements to repurchase 50,587,369 9,447,856
Federal Home Loan Bank advances 26,900,000 16,300,000
Accrued interest payable 1,428,560 1,191,409
Dividends payable 697,570 641,611
Other liabilities 11,817,121 8,672,057
Total liabilities 557,569,982 487,297,275
Commitments and contingencies (note 13)
Shareholders' equity:
Common stock, $.01 par value per share;
authorized 10,000,000 in 1998, 6,000,000
in 1997;Issued and o/s 4,300,134
in 1998 and 1997 43,001 10,750,335
Capital Surplus 20,851,800 10,101,804
Retained earnings 42,770,991 38,236,025
Treasury stock, at cost (197,380 shares in 1998;
161,076 shares in 1997) (2,970,954) (2,032,886)
Accumulated Other Comprehensive Income 5,394,789 4,581,899
Total shareholders' equity 66,089,627 61,637,177
Total liabilities and shareholders' equity $ 623,659,609 548,934,452
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 1998 1997 1996
Interest income:
Loans $ 27,865,497 26,679,426 25,313,778
Securities 12,621,909 12,070,919 11,651,818
Federal funds sold 589,976 300,359 350,005
Interest-bearing deposits 327,927 321,265 195,181
Total interest income 41,405,309 39,371,969 37,510,782
Interest expense:
Deposits 15,246,674 14,756,046 14,286,189
Borrowed funds 736,493 659,753 176,126
Securities sold under agreements
to repurchase 1,683,244 682,065 580,354
Total interest expense 17,666,411 16,097,864 15,042,669
Net interest income 23,738,898 23,274,105 22,468,113
Provision for loan losses 800,000 850,100 741,662
Net interest income after
provision for loan losses 22,938,898 22,424,005 21,726,451
Other operating income:
Trust department income 4,504,569 4,078,880 3,718,851
Service charges on deposit accounts 2,010,639 1,906,931 1,611,409
Net gain on sales of securities 215,993 323,989 609,596
Credit card merchant earnings 630,968 536,735 519,039
Other 854,850 621,273 646,603
8,217,019 7,467,808 7,105,498
Other operating expenses:
Salaries and wages 8,290,133 8,041,859 7,926,874
Pension and other employee benefits 1,939,033 2,033,962 1,976,814
Net occupancy expenses 1,739,063 1,562,568 1,629,539
Furniture and equipment expenses 1,655,776 1,651,675 1,592,873
Other 6,848,747 6,077,630 6,281,664
20,472,752 19,367,694 19,407,764
Income before income taxes 10,683,165 10,524,119 9,424,185
Income taxes 3,386,027 3,666,899 3,266,662
Net income $ 7,297,138 6,857,220 6,157,523
Weighted average shares outstanding 4,116,405 4,143,089 4,158,624
Net income per common share: $ 1.77 1.66 1.48
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
Accumulated Other
Common Capital Retained Treasury Comprehensive
Stock Surplus Earnings Stock Income Total
Balances at December 31, 1995 $ 10,750,335 10,068,563 29,930,969 (1,579,298) 3,728,329 52,898,898
Comprehensive Income:
Net income - - 6,157,523 - - 6,157,523
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes - - - - (420,420) (420,420)
Total comprehensive income 5,737,103
Cash dividends declared
($.53 per share) - - (2,203,223) - - (2,203,223)
Purchases of 33,830 shares of
treasury stock - - - (514,599) - (514,599)
Sale of 14,560 shares of
treasury stock - 33,241 - 168,799 - 202,020
Balances at December 31, 1996 $ 10,750,335 10,101,804 33,885,269 (1,925,118) 3,307,909 56,120,199
Comprehensive Income
Net income - - 6,857,220 - - 6,857,220
Change in net unrealized gain
(loss) on securities available
for sale, net of taxes - - - - 1,273,990 1,273,990
Total comprehensive income 8,131,210
Cash dividends declared
($.605 per share) - - (2,506,464) - - (2,506,464)
Purchase of 5,370 shares of
treasury stock - - - (107,768) - (107,768)
Balances a December 31, 1997 $ 10,750,335 10,101,804 38,236,025 (2,032,886) 4,581,899 61,637,177
Comprehensive Income:
Net income - - 7,297,138 - - 7,297,138
Change in net unrealized gain
(loss) on securities available
for sales, net of taxes - - - - 812,890 812,890
Total comprehensive income 8,110,028
Reduction of Par Value from
$5.00 to $0.01 per share (10,728,834) 10,728,834 - - - -
Two for one stock split 21,500 - (21,500) - - -
Cash dividends declared
($.665 per share) - - (2,740,672) - - (2,740,672)
Purchase of 39,383 shares of
treasury stock - - - (984,284) - (984,284)
Sale of 3,079 shares of
treasury stock - 21,162 - 46,216 - 67,378
Balances at December 31, 1998 $ 43,001 20,851,800 42,770,991 (2,970,954) 5,394,789 66,089,627
See accompanying notes to consolidated financial statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1998 1997 1996
Cash flows from operating activities:
Net income $ 7,297,138 6,857,220 6,157,523
Adjustments to reconcile net income
to net cash provided by operating
activities:
Amortization of intangible assets 587,303 587,303 585,303
Deferred income taxes (554,345) (260,933) (387,248)
Provision for loan losses 800,000 850,100 741,662
Depreciation and amortization 1,459,446 1,483,178 1,440,752
Amortization and discount
on securities, net 321,469 248,288 303,365
Gain on sales of securities, net (215,993) (323,989) (609,596)
(Increase) in other assets (1,702,865 (2,244,392) (216,172)
Increase in accrued interest payable 237,151 38,618 93,689
Increase (decrease) in other liabilities 3,158,834 (2,239,841) 3,260,358
Net cash provided by operating
activities $ 11,388,138 4,995,552 11,371,636
Cash flows from investing activities:
Proceeds from sales of securities
available for sale $ 19,174,487 24,071,461 57,617,458
Proceeds from maturities of and
principal collected on securities
held to maturity 7,054,835 12,226,947 6,035,978
Proceeds from maturities of and
principal collected on securities
available for sale 78,602,492 30,683,353 52,023,153
Purchases of securities available
for sale (146,519,981) (52,508,840) (122,926,000)
Purchases of securities held
to maturity (4,491,731) (11,099,132) (8,805,672)
Purchases of premises and equipment, net (1,325,011) (1,989,588) (862,683)
Loan net of repayments and other
reductions (35,894,863) (17,235,072) (24,578,050)
Proceeds from sales of student loans 3,180,053 3,299,607 3,191,711
Net cash (used) by investing
activities $ (80,219,719) (12,551,264) (38,304,105)
Cash flows from financing activities:
Net increase (decrease) in demand
deposits, NOW accounts, savings
accounts, and insured money market
accounts $ 11,498,217 11,603,559 (7,366,182)
Net increase (decrease) in
certificates of deposit and
individual retirement accounts 3,596,803 (208,560) 20,136,632
Net increase (decrease) in
securities sold under agreements
to repurchase 41,139,513 (4,923,284) 989,559
Increase in Federal Home Loan
Bank advances 26,900,000 6,300,000 10,000,000
Repayments of Federal Home Loan
Bank advances (16,300,000) - -
Purchases of treasury stock (984,284) (107,768) (514,599)
Sale of treasury stock 67,378 - 202,020
Cash dividends paid (2,684,712) (2,445,074) (2,143,465)
Net cash provided by financing
activities $ 63,232,915 10,218,873 21,303,965
Net increase (decrease) in cash
and cash equivalents $ (5,598,666) 2,663,161 (5,628,504)
Cash and cash equivalents,
beginning of year 34,418,455 31,755,294 37,383,798
Cash and cash equivalents,
end of year $ 28,819,789 34,418,455 31,755,294
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Income Taxes $ 1,201,696 3,748,867 3,832,329
Interest $ 17,429,260 16,059,256 14,948,980
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
(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.
Basis of Presentation
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles and include the
accounts of the Corporation and the Bank. All significant intercompany balances
and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Securities
Management determines the appropriate classification of securities at the time
of purchase. If management has the intent and the Corporation has the ability
at the time of purchase to hold securities until maturity, they are classified
as held to maturity and carried at amortized cost. Securities to be held for
indefinite periods of time 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 accumulated other comprehensive income
in shareholders' equity until realized. Realized gains and losses are
determined using the specific identification method.
A decline in the fair value of any available for sale or held to maturity
security below amortized cost that is deemed other than temporary is charged
to earnings resulting in the establishment of a new cost basis for the security.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment of yield using the interest method. Dividend and
interest income are recognized when earned.
Loans
Loans are stated at the amount of unpaid principal balance less unearned
discounts and net deferred origination fees and costs. The Corporation has the
ability and intent to hold its loans 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 in the interest method.
The accural 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 on non-accrual if
management believes such classification is warrented for other purposes. Loan
origination fees and certain direct loan orgination costs are deferred and
amortized over the life of the loan as an adjustment of yield, using the
interest method.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level considered adequate to
provide for probable future 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
management's evaluation of potential losses in the loan portfolio, prevailing
and anticipated economic conditions, past loss experience, and other factors
pertinent to estimating losses inherent in the portfolio. Management believes
that the allowance for loan losses is adequate. While management uses available
information to recognize losses on loans, future additions to the allowances may
be necessary based on changes in economic conditions, particularly in New York
State. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan
losses. Such agencies may require the Corporation to recognize additions to the
allowance based on their judgments about information available to them at the
timee 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 con-
sidered 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. Res-
idential mortgage loans and consumer loans are evaluated collectively since they
are homogeneous and generally carry smaller balances. Impairment losses are in-
cluded 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 building 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 the buildings and from
3 to 10 years for the equipment and furniture. Amortization of leasehold im-
provements and leased equipment is recognized on the straight-line method over
the shorter of the lease term or the estimated life of the asset.
Other Real Estate
Real estate acquired through foreclosure or deed in lieu of foreclosure is re-
corded at the lower of the carrying amount of 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 future tax consequences
attributable to temporary differences between the financial statements carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be recovered
or settled. 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
On January 1, 1998, the Company adopted SFAS No. 132, "Employers' Disclosure
about Pensions and Other Post Retirement Benefits". SFAS No. 132 revises
employers' disclosures about pensions and other post retirement benefit plans.
SFAS No. 132 does not change the method of accounting for such plans.
The Bank's funding policy is to contribute amounts to the plan sufficient to
meet minimum regulatory funding requirements, plus such additional amounts as
the Bank may determine to be appropriate from time to time.
Postretirement Benefits
In addition to pension benefits, the Bank provides health care and life
insurance benefits for retired employees. The estimated costs of providing
benefits are accrued over the years the employees render services necessary
to earn those benefits.
Intangible Assets
Goodwill, which represents the excess of purchase price over the fair value of
identifiable assets acquired in 1995, is being amortized over 15 years on the
straight-line method. Deposit base intangible, resulting from the Bank's
purchase of deposits from the Resolution Trust Company in 1994, is being
amortized over the expected useful life of 15 years on a straight-line basis.
Amortization periods are monitored to determine if events and circumstances
require such periods to be reduced. Periodically, the Corporation reviews its
goodwill and deposit base intangible assets for events or changes in
circumstances that may indicate that the carrying amount of the assets are
impaired.
Per Share Information
Basic earnings per share were 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. The agreements are treated as financings, and the obligations
to repurchase securities sold are reflected as liabilities in the consolidated
balance sheets. The amount of the securities underlying the agreements remains
in the asset account. The Corporation has agreed to repurchase securities
identical to those sold. The securities underlying the agreements were under
the Bank's control.
Financial Instruments With Off-Balance Sheet Risk
The Corporation does not engage in the use of derivative financial instruments
and the Corporation's only financial instruments with off-balance sheet risk are
commitments under standby letters of credit, unused portions of line of credit
and commitments to fund new loans.
Other Comprehensive Income
On January 1, 1998, the Corporation 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. At the Corporation, comprehensive income represents
net income plus other comprehensive income, which consists of the net change in
unrealized holding gains or losses on securities available for sale, net of the
related tax effect. Accumulated other comprehensive income represents the net
unrealized holding gains or losses on securities available for sale as of the
balance sheet dates, net of the related tax effect.
Comprehensive income for the years ended December 31, 1998, 1997, and 1996 were
$8,110,028, $8,131,210 and $5,737,103, respectively. The following summarizes
the components of other comprehensive income:
Unrealized Gains or Losses on Securities
Unrealized holding gains during the twelve
months ended December 31, 1998,
net of tax (pre-tax amount of $1,569,456) $ $942,615
Reclassification adjustment for gains realized
in net income during the twelve months ended
December 31, 1998, net of tax (pre-tax amount of $215,993) (129,725)
Other comprehensive income-twelve months ended December 31, 1998 $ 812,890
Unrealized holding gains during the twelve months ended
December 31, 1997, net of tax (pre-tax amount of $2,445,185) $ 1,468,578
Reclassification adjustment for gains realized
in net income during the twelve months ended
December 31, 1997, net of tax (pre-tax amount of $323,989) (194,588)
Other comprehensive income-twelve months ended December 31, 1997 $ 1,273,990
Unrealized holding gains during the twelve months ended
December 31, 1996, net of tax (pre-tax amount of ($92,139) $ (55,202)
Reclassification adjustment for gains realized
in net income during the twelve months ended
December 31, 1996, net of tax (pre-tax amount of $609,596) (365,218)
Other comprehensive income-twelve months ended December 31, 1996 $ (420,420)
Segment Reporting
During 1998, the Company adopted SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information". This statement requires the Company to
report financial and other information about key revenue-producing segments
of the Company for which such information is available and is utilized by the
chief operating decision maker. Specific information to be reported for
individual segments include profit and loss, certain revenue and expense items,
and total assets. A reconciliation of segment financial information to amounts
reported in the financial statements is also provided. This standard did not
result in significant changes in the Company's reporting.
The Company's operations are solely in the financial services industry and
include the provision of traditional commercial banking services. The Company
operates primarily in the geographical regions of Chemung, Steuben, Schuyler,
and Tioga counties, including the northern tier of Pennsylvania. The Company
has identified separate operating segments, however, these segments did not meet
the quantitative threshold for separate disclosure.
Reclassifications
Amounts in the prior year's consolidated financial statements are reclassified
whenever necessary to conform with the current year's presentation.
(2) 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 31, 1998 was $9,029,000, of which
$1,922,000 was required to be on deposit with the Federal Reserve Bank; the
remainder, $7,107,000, was represented by cash on hand.
(3) Securities
Amortized cost and fair value of securities available for sale at December
31, 1998 and 1997 are as follows:
1998 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
U.S. Treasury securities $ 23,012,62 23,294,865 37,188,035 37,293,793
Obligations of other U.S.
Government agencies 77,787,530 78,233,115 56,565,434 56,676,787
Mortgage backed securities 89,245,351 89,592,665 55,020,829 55,602,615
Obligations of states and
political subdivisions 20,967,461 21,431,874 25,361,080 25,800,408
Other bonds and notes 9,681,590 9,704,695 79,671 79,963
Corporate stocks 5,616,847 13,036,522 3,458,827 9,849,179
$ 226,311,403 235,293,736 177,673,876 185,302,745
Amortized cost and fair value of securities held to maturity at December 31,
1998 and 1997 are as follows:
1998 1997
Amortized Fair Amortized Fair
Cost Value Cost Value
Obligations of states and
political subdivisions $ 6,603,598 6,603,598 9,154,538 9,154,538
Other bonds and notes 57,325 57,325 69,490 69,490
$ 6,660,923 6,660,923 9,224,028 9,224,028
Included in corporate stocks at December 31, 1998 and 1997 is the Bank's
required investment in the stock of the Federal Home Loan Bank carried at its
cost basis of $3,955,600 and $1,797,200, respectively. This investment allows
the Bank to maintain a $56,695,500 line of credit with the Federal Home Loan
Bank at December 31, 1998 and $46,976,500 at December 31, 1997.
Gross unrealized gains and gross unrealized losses on securities available for
sale at December 31, 1998 and 1997 were as follows:
1998 1997
Unrealized Unrealized Unrealized Unrealized
Gains Losses Gains Losses
<S
U.S. Treasury securities $ 282,241 - 126,876 21,118
Obligations of other U.S.
Government agencies 479,935 34,350 242,668 131,315
Mortgage backed securities 506,296 158,982 626,925 45,139
Obligations of states and
political subdivisions 470,174 5,761 439,540 212
Other bonds and notes 105,225 82,120 292 -
Corporate stocks 7,419,675 - 6,390,352 -
$ 9,263,546 281,213 7,826,653 197,784
There were no gross unrealized gains and gross unrealized losses on securities
held to maturity at December 31, 1998 and 1997.
Gross realized gains on sales of securities were $215,993, $323,989, and
$613,190 for the years ended December 31, 1998, 1997 and 1996, 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, 1998 and 1997.
Interest and dividends on securities for the years ended December 31, 1998,
1997 and 1996 were as follows:
1998 1997 1996
Taxable:
U.S. Treasury securities $ 1,920,930 2,821,733 4,002,636
Obligations of other U.S.
Government agencies 4,659,247 3,670,414 3,252,513
Mortgage backed securities 3,801,800 3,727,722 2,590,587
Other bonds and notes 391,720 48,984 174,419
Corporate stocks 414,602 360,184 271,614
Exempt from federal taxation:
Obligations of states and
political subdivisions 1,433,610 1,441,882 1,360,049
$ 12,621,909 12,070,919 11,651,818
The amortized cost and fair value by years to contractual maturity as of
December 31, 1998 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 $ 12,507,267 12,549,250 10,505,357 10,745,615
Obligations of other U.S.
Government agencies 5,000,000 4,998,450 48,650,064 48,816,465
Mortgage backed securities - - 1,956,688 1,981,767
Obligations of states and
political subdivisions 4,784,869 4,833,151 5,844,919 5,992,926
Other bonds and notes - - 2,495,496 2,515,625
Total $ 22,292,136 22,380,851 69,452,524 70,052,398
Maturing
After Five, But
Within Ten Years After Ten Years
Amortized Fair Amortized Fair
Cost Value Cost Value
Obligations U.S.
Government agencies $ 24,137,466 24,418,200 - -
Mortgage backed securities - - 87,288,663 87,610,898
Obligations of states and
political subdivisions 6,725,761 6,890,410 3,611,912 3,715,387
Other bonds and notes 2,620,807 2,657,825 4,565,287 4,531,245
Total $ 33,484,34 33,966,435 95,465,862 95,857,530
</TALBLE>
The amortized cost and fair value by years to maturity as of December 31, 1998
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 $ 3,467,384 3,467,384 1,849,284 1,849,284
Other bonds and notes - - - -
Total $ 3,467,384 3,467,384 1,849,284 1,849,284
Maturing
After Five, But
Within Ten Years After Ten Years
Amortized Fair Amortized Fair
Cost Value Cost Value
Obligations of states and
political subdivisions $ 1,286,930 1,286,930 - -
Other bonds and notes 57,325 57,325 - -
Total $ 1,344,255 1,344,255 - -
Expected maturities will differ from contractual maturities because issuers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
The fair value of securities pledged to secure public funds on deposit or for
other purposes as required by law was $160,490,195 at December 31, 1998 and
$103,131,459 at December 31, 1997. Also, U.S. Treasury securities totaling
$2,000,000 and $13,000,000 (fair value of $2,073,760 and $13,044,720), GNMA's
totaling $13,328,093 and $12,185,770 (fair value of $13,622,012 and
$12,625,864), Federal Agency Securities totaling $62,023,789 and $2,000,000
(fair value of $62,965,881 and $1,992,500) were pledged to secure repurchase
agreements and Federal Homa Loan Bank Advances at December 31, 1998 and 1997,
respectively, see note 7.
There are no securities of a single issuer (other than securities of the U.S.
Government and its agencies) that exceed 10% of shareholders' equity at
December 31, 1998 or 1997.
In 1997, the Bank declared a special dividend payable to the Corporation for
the purpose of funding equity investments in Southern Tier Business Development,
LLC and Cephas Capital Partners, LP. These small investment companies
("SBIC's") were established for the purpose of providing financing to small
businesses in areas served, including minority-owned small businesses and those
that will create jobs for the low to moderate income levels in the targeted
areas. These investments as of December 31, 1998 and 1997 totaled $1,800,282
and $844,875, respectively, and are included in other assets under the equity
method of accounting.
(4) Loans and Allowance for Loan Losses
The composition of the loan portfolio is summarized as follows:
December 31, 1998 1997
Residential mortgages $ 84,554,079 73,756,609
Commercial mortgages 4,989,429 5,996,380
Commercial, financial and agricultural 113,478,081 102,402,506
Leases, net 387,697 413,487
Consumer loans 126,096,779 114,592,615
Net deferred origination fees and
unearned income (250,723) (184,828)
$ 329,255,342 296,976,769
During 1998, 1997 and 1996, the Corporation sold $3,180,053, $3,299,607 and
$3,191,711, respectively, of education loans at par to the Student Loan
Marketing Association. The Corporation's market area encompasses the New York
State counties of Chemung, Steuben, Schuyler and Tioga including the northern
tier of Pennsylvania. Substantially all of the Corporation's outstanding loans
are with borrowers living or doing business within 25 miles of the branches in
these counties. The Corporation's concentrations of credit risk are reflected
in the preceding table. The concentrations of credit risk with standby letters
of credit, committed lines of credit and committments to originate new loans,
generally follow the loan classifications in the schedule. Other than general
econmic risks, management is not aware of any material concentrations of credit
risk to any industry or individual borrower.
The principal balances of loans not accruing interest, including the impaired
loans described below, totaled $4,458,393 and $929,697 at December 31, 1998 and
1997, respectively. The increase in 1998 relates primarily to one real estate
secured commercial loan. There were no loans with modified payment terms
because of the borrowers' financial difficulties at December 31, 1998 and 1997.
The effect of nonaccrual loans on interest income for the years ended December
31, 1998, 1997 and 1996 was not material. The Bank is not committed to advance
additional funds to these borrowers. Other real estate owned at December 31,
1998 amounted to $651,268 and at December 31, 1997, amounted to $527,127.
Transactions in the allowance for loan losses for the years ended December
31, 1998, 1997 and 1996 were as follows:
1998 1997 1996
Balances at January 1 $ 4,145,422 3,975,000 3,900,000
Provision charged to operations 800,000 850,100 741,662
Loans charged off (593,704) (770,389) (754,360)
Recoveries 157,467 90,711 87,698
$ 4,509,185 4,145,422 3,975,000
At December 31, 1998 and 1997, the recorded investment in loans that are
considered to be impaired totaled $4,569,242 and $951,000 respectively.
Included in the 1998 amount are impaired loans of $4,321,019 for which the
related allowance for loan losses is $993,207. The 1997 amount includes
$707,404 of impaired loans with a related allowance for loan losses of
$238,934. The average recorded investment in impaired loans during 1998,
1997 and 1996 was $2,837,325, $1,201,217 and $1,620,774, respectively. The
effect on interest income for impaired loans was not material to the
consolidated financial statements in 1998, 1997 or 1996.
(5) Premises and Equipment
Premises and equipment at December 31, 1998 and 1997 are as follows:
1998 1997
Land $ 2,106,408 2,106,408
Buildings 11,644,535 11,250,664
Equipment and furniture 13,658,373 12,843,138
Leasehold improvements 429,020 399,534
27,838,336 26,599,744
Less accumulated depreciation 17,753,728 16,380,701
$ 10,084,608 10,219,043
(6) Deposits
Interest-bearing deposits include certificates of deposit in denominations of
$100,000 or more aggregating $32,636,701 and $31,014,878 at December 31, 1998
and 1997, respectively. Interest expense on such certificates was $2,420,835,
$2,279,576, and $2,215,271 for 1998, 1997 and 1996, respectively.
Scheduled maturities of certificates of deposit at December 31,1998 are
summarized as follows:
Time Certificates of Deposit
1999 $118,729,955
2000 41,141,654
2001 11,274,194
2002 3,505,044
2003 2,529,255
2004 and thereafter 260,918
$177,441,020
(7) Securities Sold Under Agreements to Repurchase
The agreements have maturities of 4 days to 10 years at December 31, 1998 and
2 days to 350 days at December 31, 1997, and a weighted average interest rate
of 4.80% at December 31, 1998 and 5.17% at December 31, 1997. The maximum
amounts outstanding at any one month-end and average amount under these
agreements during 1998 were $50,587,368 and $32,166,417, respectively.
The maximum amounts outstanding at any one month-end and average amount under
these agreements during 1997 were $16,482,934 and $13,502,272, respectively.
(8) Federal Home Loan Bank Advances
Federal Home Loan Bank advances at December 31, 1998, consisted of a
$10,000,000, 4.90%, five year advance with a maturity date of October
2, 2003, a $10,000,000, 4.41%, ten year advance with a maturity date of
October 20, 2008, callable on or after October 20, 2001, and a $6,900,000,
4.25%, four day advance with a maturity date of January 4, 1999.
(9) Income Taxes
Total income taxes for the years ended December 31, 1998, 1997 and 1996 were
allocated as follows:
1998 1997 1996
Income before income taxes $ 3,386,027 3,666,899 3,266,662
Shareholders' equity for deferred
compensation paid in stock (10,477) - -
Shareholders' equity for change in
unrealized gain (loss) on securities 540,573 833,553 (312,318)
$ 3,916,123 4,500,452 2,954,344
For the years ended December 31, 1998, 1997 and 1996, income tax expense
attributable to income from operations consists of:
1998 1997 1996
Current:
State $ 449,653 871,137 792,674
Federal 3,490,719 3,056,695 2,861,236
3,940,372 3,927,832 3,653,910
Deferred (554,345) (260,933) (387,248)
$ 3,386,027 3,666,899 3,266,662
Income tax expense differed from the amounts computed by applying the U.S.
Federal statutory income tax rate to income before income taxes as follows:
1998 1997 1996
Tax computed at statutory rate $ 3,632,276 3,578,200 3,204,223
Tax exempt interest 527,353) (499,677) (465,955)
Dividend exclusion (53,988) (50,369) (34,151)
State taxes, net of federal benefit 241,864 549,418 476,584
Nondeductible interest expense 68,089 66,403 52,262
Other items, net 25,139 22,924 33,699
Actual tax expense $ 3,386,027 3,666,899 3,266,662
The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and deferred tax liabilities at December 31, 1998 and
1997 are presented below:
1998 1997
Deferred tax assets:
Allowance for loan losses-book $ 1,800,968 1,655,682
Accrual for postretirement benefits
other than pensions 812,079 780,350
Deferred loan fees 96,851 68,714
Deferred compensation and directors fees 623,570 584,019
Pensions 96,307 176,320
Interest on non-accrual loans 119,330 53,835
Other 44,066 60,733
Total gross deferred tax assets 3,593,171 3,379,693
Deferred tax liabilities:
Bond discount (103,624) 72,508
Depreciation 282,044 349,554
Allowance for loan losses-tax 133,166 233,040
Net unrealized gains on securities 3,587,543 3,046,970
Other 25,032 22,383
Total gross deferred tax liabilities 3,924,161 3,724,455
Net deferred tax asset (liability) $ (330,990) (344,762)
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the loss
carryback period. A valuation allowance is recognized when it is more likely
than not that some portion of the deferred tax assets will not be realized.
In assessing the need for a valuation allowance, management considers the
scheduled reversal of the deferred tax liabilities, the level of historical
taxable income and projected future taxable income over the periods in which
the temporary differences comprising the deferred tax assets will be deductible.
Based on its assessment, management determined that no valuation allowance is
necessary.
(10) Pension Plan and Other Benefit Plans
The Bank has a noncontributory defined benefit pension plan covering
substantially all employees. The plan's defined benefit formula generally
bases payments to retired employees upon their length of service multiplied
by a percentage of the average monthly pay over the last five years of
employment.
The Bank sponsors a defined benefit health care plan that provides
postretirement medical, dental and prescription drug benefits to full-time
employees who meet minimum age and service requirements. Postretirement life
insurance benefits are also provided to certain employees who retired prior
to July 1981. The plan is contributory, with retiree contributions adjusted
annually, and contains other cost sharing features such as deductibles and
coinsurance. The accounting for the plan anticipates future cost-sharing
changes to the written plan that are consistent with the Bank's expressed
intent to increase the retiree contribution rate annually for the expected
general inflation rate for that year. The Bank's policy is to fund the cost
of medical benefits in amounts determined at the discretion of management.
The following table presents (1) changes in the plan's accumulated benefit
obligation and plan assets and (2) the plan's funded status reconciled with
amounts recognized in the Company's consolidated balance sheet at December
31, 1998 and 1997:
1998 1997
Change in projected benefit obligation:
Projected benefit obligation at beginning of year $13,370,944 11,881,414
Service cost 359,955 324,126
Interest cost 921,621 872,423
Actuarial loss 633,329 898,243
Benefits paid (736,645) (605,262)
Projected benefit obligation at end of year 14,549,204 13,370,944
Change in fair value of plan assets:
Fair value of plan assets at beginning of year 16,777,650 15,036,423
Actual return on plan assets 3,201,812 2,362,605
Expenses paid (32,972) (16,116)
Benefits paid (736,645) (605,262)
Fair value of plan assets at end of year 19,209,845 16,777,650
Funded Status:
Plan assets in excess of projected benefit
obligation at end of year $ 4,660,641 3,406,706
Unrecognized net asset being recognized
over 10 years 629,790 699,678
Prior service cost not yet recognized
in net periodic pension costs 470,599 513,381
Unrecognized net actuarial (gain) (5,804,670) (4,867,446)
Accrued pension costs, included in
other liabilities $ (43,640) (247,681)
Net pension cost in 1998, 1997, and 1996 is comprised of the following:
1998 1997 1996
Components of net periodic benefit cost:
Service cost, benefit earned during the year $ 359,955 324,126 346,403
Interest cost on projected benefit obligation 921,621 872,423 825,891
Expected return on plan assets (1,395,769) (1,104,424) (1,060,451)
Net amortization and deferral (89,848) 12,646 58,569
Net periodic pension cost $ (204,041) 104,771 170,412
The principal actuarial assumptions used in 1998, 1997 and 1996 were as follows:
1998 1997 1996
Discount rate 6.75% 7.00% 7.50%
Expected long-term rate of return on assets 8.50% 8.50% 8.50%
Assumed rate of future compensation increase 5.00% 5.00% 5.00%
The plan's assets at December 31, 1998 and 1997 are invested in common and
preferred stocks, U.S. Government securities, corporate bonds and notes, and
mutual funds. The Bank also sponsors a defined contribution profit sharing,
savings and investment plan which covers all employees with a minimum of
1,000 hours of annual service. The Bank matches at the rate of 50% of the
first 6% of an eligible employee's current earnings. Expense under the plan
totaled $633,019, $591,669, and $550,854 for the years ended December 31, 1998,
1997 and 1996, respectively.
The following table presents (1) changes in the plan's accumulated
postretirement benefit obligation and plan assets and (2) the plan's funded
status reconciled with amounts recognized in the Company's consolidated balance
sheet at December 31, 1998 and 1997:
1998 1997
Change in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation at
beginning of year $ 1,848,000 1,628,000
Service cost 42,000 40,000
Interest cost 144,000 117,000
Participants contributions 56,940 53,940
Actuarial loss 535,405 84,149
Benefits paid (412,345) (75,089)
Accumulated postretirement benefit obligation at end
of year 2,214,000 1,848,000
Accrued postretirement benefit cost:
Accrued postretirement benefit cost at end
of year 2,214,000 1,848,000
Unrecognized net actuarial gain (loss) (361,732) 173,673
Accrued postretirement benefit cost at end of year,
included in other liabilit
Investment in subsidiary bank 62,758,019 57,824,425
Dividend receivable 797,570 641,611
Securities available for sale 1,099,148 1,094,697
Other assets 1,801,074 844,875
Total assets 66,789,564 62,289,063
Liabilities and shareholders' equity:
Dividend payable 697,570 641,611
Reserve for income taxes (12,335) 0
Service cost $ 42,000 40,000 42,000
Interest cost 144,000 117,000 112,000
Net amortization and deferral - (7,000) -
Net periodic postretirement cost $ 186,000 150,000 154,000
The postretirement benefit obligation was determined using a discount rate of
6.75% for 1998 and 7.0% for 1997. The assumed health care cost trend rate used
in measuring the accumulated postretirement benefit obligation initially ranged
from 7.9% to 9.5% in 1999, depending on the specific plan, and was decreased to
5.5% in 2005 and thereafter, over the projected payout of benefits. The health
care cost trend rate assumption can have a significant effect on the amounts
reported. If the health care cost trend rate were decreased one percent, the
accumulated postretirement benefit obligation as of December 31, 1998 would
have increased by 7.0%, and the aggregate of service and interest cost would
increase by 4.8%. If the health care cost trend rate were decreased one
percent, the accumulated postretirement benefit obligation as of December 31,
1998 would have decreased by 6.8% and the aggregate of service and interest
cost would have decreased by 3.2%. However, the plan limits the increase in the
Bank's annual contributions to the plan for most participants to the increase in
base compensation for active employees.
(11) Related Party Transactions
Members of the Board of Directors, certain Bank officers, and their immediate
families directly, or indirectly through entities in which they are principal
owners (more tha 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 sub
stantially the same terms, including interest rates and collateral, as those
prevailing at the time for commparable transactions with other persons. These
loans and commitments, which did not involve more than the normal risk of
collectibility or present other unfavorable features, are summarized as follows
for the years ended December 31, 1998 and 1997:
1998 1997
Balance at beginning of year $ 9,078,914 8,426,537
Additions 24,545,805 27,755,844
Amounts collected (26,067,032) (27,103,467)
Balance at end of year $ 7,557,687 9,078,914
(12) Expenses
The following expenses, which exceeded 1% of total revenues (total interest
income plus other operating income) in at least one of the years presented, are
included in other operating expenses:
Years ended December 31
1998 1997 1996
Stationery and supplies $ 437,882 389,139 469,008
Data processing service 1,618,091 1,358,882 1,155,576
Advertising 398,208 364,914 448,640
Amortization of intangible assets 587,303 587,303 587,303
(13) Commitments and Contingencies
In the normal course of business, there are outstanding various commitments and
contingent liabilities, suchas commitments to extend credit, which are not re-
flected 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 $1,439,623, $100,372,761 and
$9,513,063, respectively, at December 31, 1998. Commitments to outside parties
under standby letters of credit, unused portions of lines of credit, and com-
mitments to fund new loans totaled $3,180,233, $88,607,434 and $2,429,427,
respectively, at December 31, 1997. Because many commitments and almost all
letters of credit expire without being funded in whole or in part, the contract
amounts are not estimates of future cash flows. Loan commitments have off
balance sheet credit risk because only origination fees are recognized in the
balance sheet until commitments are fulfilled or expire. The credit risk
amounts are equal to the contractual amounts, assuming the amount are fully
advanced and collateral or other security is of no value. The Corporation does
not anticipate losses as a result of these transactions.
At December 31, 1998, the Corporation had outstanding commitments totaling
$877,218 to fund equity investments in Small Business Investment Companies.
The Bank has employment contracts with certain of its senior officers, which
expire at various dates through the year 2001 and may be extended on a year-to-
year basis.
(14) Shareholders' Equity
Under Federal Reserve regulations, the Bank is limited to the amount it may loan
to the Corporation, unless such loans are collaterlized by specific obligations.
At December 31, 1998, 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 reg-
ulations, for the current year and the two preceding years. At December 31,
1998, $8,794,583 was available for the declaration of dividends.
(15) Parent Company Financial Information
Condensed parent company only financial statement information of Chemung
Financial Corporation is as follows:
Balance Sheets
December 31 1998 1997
Assets:
Cash on deposit with subsidiary bank $ 333,753 1,883,455
Investments in subsidiary bank 62,758,019 57,824,425
Dividend receivable 797,570 641,611
Securities available for sale 1,099,148 1,094,697
Other assets 1,801,074 844,875
Total assets 66,789,564 62,289,063
Liabilities and shareholders' equity:
Dividend payable 697,570 641,611
Reserve for income taxes (12,335) 0
Deferred tax liability 14,702 10,275
Total liabilities 699,937 651,886
Shareholders' equity:
Total shareholders' equity 66,089,627 61,637,177
Total liabilities and shareholders'
equity $ 66,789,564 62,289,063
Statements of Income
Years Ended December 31, 1998 1997 1996
Income:
Interest and dividends $ 112,375 111,341 14,378
Gain on sale of securities - 28,981 35,378
Other income 2,533 - -
Dividends from subsidiary bank 3,137,387 5,006,464 3,203,223
Income before equity in
undistributed earnings of
subsidiary bank 3,252,295 5,146,786 3,253,139
Equity in undistributed earnings
of subsidiary bank 4,126,662 1,749,017 2,922,189
Operating expenses 78,546 - -
Income before income taxes 7,300,411 6,895,803 6,175,328
Income taxes 3,273 38,583 17,805
Net Income $7,297,138 6,857,220 6,157,523
Statements of Cash Flows
December 31 1998 1997 1996
Cash flows from operating activities:
Net Income $ 7,297,138 6,857,220 6,157,523
Adjustments to reconcile net income
to net cash provided by operating
activities:
Equity in undistributed net
income of subsidiary (4,126,663) (1,749,017) (2,922,189)
(Increase) in dividend receivable (155,959) (61,391) (59,738)
Gain on sale of securities, net - (28,980) (35,538)
Increase in other assets (956,199) (844,875) -
Decrease in other liabilities (9,685) - -
Net cash provided by
operating activities 2,048,632 4,172,957 3,140,038
Cash flow from investing activities:
Proceeds from sales of securities
available for sale - 232,022 151,738
Purchases of securities available for sale - - (1,000,000)
Net cash provided (used)
by investing activities - 232,022 (848,262)
Cash flows from financing activities:
Cash dividends paid (2,681,428) (2,445,074) (2,143,465)
Purchases of treasury stock (984,284) (107,768) (514,599)
Sale of treasury stock 67,378 - 202,020
Net cash used by financing
activities (3,598,334) (2,552,842) (2,456,044)
Increase (decrease) in cash
and cash equivalents (1,549,702) 1,852,137 (164,268)
Cash and cash equivalents at
beginning of year 1,883,455 31,318 195,586
Cash and cash equivalents at
end of year $ 333,753 1,883,455 31,318
(16) 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 both variable and stated rates of interest. Therefore,
the carrying value approximates fair value for the variable rate instruments
and stated rate instruments are based on a discounted cash flow to maturity.
Federal Home Loan Bank Advances
These instruments bear a stated rate of interest to maturity and therefore the
fair value is based on a discounted cash flow to maturity.
Commitments to Extend Credit
The fair value of commitments to extend credit are based on fees currently
charged to enter into similar agreements, the counter party's credit standing
and discounted cash flow analysis. The fair value of these commitments to
extend credit approximates the recorded amounts of the related fees and is not
material at December 31, 1998 and 1997.
The estimated fair value of the Corporation's financial instruments as of
December 31, 1998 and 1997 are as follows (dollars in thousands):
1998 1997
Carrying Fair Carrying Fair
Amount Value (1) Amount Value (1)
Financial assets:
Cash and cash equivalents $ 27,516 27,516 32,997 32,997
Interest-bearing deposits 1,304 1,304 1,421 1,421
Securities 241,955 241,955 194,527 194,527
Net loans 324,746 328,370 292,831 294,877
Financial liabilities:
Deposits:
Demand, savings,
NOW and money
market accounts $ 287,617 287,617 277,243 277,243
Time certificates 178,522 180,080 173,801 174,394
Repurchase agreements 50,587 50,867 9,448 9,475
Federal Home Loan
Bank advances 26,900 26,961 16,300 16,345
<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>
(17) Regulatory Capital Requirement
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory -- and possibly
additional discretionary -- actions by regulators that, if undertaken, could
have a direct material effect on the consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of the Bank's assets, liabilities, and certain off balance sheet items
as calculated under regulatory accounting practices. The capital amounts and
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 (all as defined in the
applicable regulations). Management believes, as of December 31, 1998, and
1997, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 1998, the most recent notification from the Federal Reserve
Bank of New York categorized the Bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized well capitalized the
Bank must maintain minimum total risk-based, Tier 1 risk based, Tier 1 leverage
ratios as set forth in the table. There have been no conditions or events since
that notification that management believes have changed the bank's category.
The actual capital amounts and ratios of the Corporation and the Bank are also
presented in the following table:
For Capital To Be Well
Actual Adequacy Purposes Capitalized
Amount Ratio Amount Ratio Amount Ratio
As of December 31, 1998
Total Capital (to risk weighted assets):
Consolidated $ 58,883,505 16.67% > $ 28,261,391 > 8.00% > $ 35,326,739 > 10.00%
Subsidiary $ 55,534,144 15.85% > $ 28,028,918 > 8.00% > $ 35,036,147 > 10.00%
Tier 1 Capital (to risk weighted assets):
Consolidated $ 54,466,510 15.42% > $ 14,130,696 > 4.00%> $ 21,196,044 > 6.00%
Subsidiary $ 51,153,025 14.60% > $ 14,014,459 > 4.00%> $ 21,021,688 > 6.00%
Tier 1 Capital (to average assets):
Consolidated $ 54,466,510 9.51% > $ 17,182,616 > 3.00%> $ 28,637,693 > 5.00%
Subsidiary $ 51,153,025 8.97% > $ 17,109,609 > 3.00%> $ 28,516,015 > 5.00%
As of December 31, 1997
Total Capital (to risk weighted assets):
Consolidated $ 54,121,842 17.44% > $ 24,824,997 > 8.00%> $ 31,031,246 > 10.00%
Subsidiary $ 50,300,617 16.31% > $ 24,669,976 > 8.00%> $ 30,837,470 > 10.00%
Tier 1 Capital (to risk weighted assets):
Consolidated $ 50,239,646 16.19% > $ 12,412,499 > 4.00%> $ 18,618,749 > 6.00%
Subsidiary $ 46,442,344 15.06% > $ 12,334,988 > 4.00%> $ 18,502,482 > 6.00%
Tier 1 Capital (to average assets):
Consolidated $ 50,239,646 9.49% > $ 15,875,493 > 3.00%> $ 26,459,155 > 5.00%
Subsidiary $ 46,442,344 8.80% > $ 15,837,213 > 3.00%> $ 26,395,355 > 5.00%