EX-13 3 exh132000.htm CHEMUNG FINANCIAL CORP. ANNUAL REPORT EXH. A-D UNITED STATES SECURITIES AND EXCHANGE COMMISSION

EXHIBIT A









TABLE OF QUARTERLY MARKET PRICE RANGES





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Market Prices of Chemung Financial Corporation Stock

During Past Three Years (dollars)
 

2000

1999

1998

1st Quarter

18 - 24 1/2

26 1/2 - 29

21 1/2 - 25 1/2

2nd Quarter

19 - 21 1/2

24 - 27

25 3/4 - 30

3rd Quarter

19 1/8 - 20 1/2

24 - 26

26 1/4 - 30

4th Quarter

19 1/4 - 19 3/4

24 1/4 - 25 3/4

22 3/4 - 28



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EXHIBIT B





TABLE OF DIVIDENDS PAID





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Dividends Paid Per Common Share by Chemung Financial Corporation
During Past Three Years
 

2000

1999

1998

January 3

$0.210

$0.170

$0.155

April 3

0.210

0.170

0.155

July 3

0.210

0.190

0.170

October 2

0.220

0.190

0.170

 

$0.850

$0.720

$0.650


As of December 31, 2000 there were 759 registered holders of record of the Corporation' stock. Chemung Financial Corporation common stock is inactively traded in the over-the-counter market.


The quarterly market price ranges for the Corporation's stock for the past three (3) years are based upon actual transactions as reported by brokerage firms which maintain a market or conduct trades in the Corporation's stock and other transactions known by the Corporation's management.

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EXHIBIT C










MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCLUDING FINANCIAL DATA EXHIBITS

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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. Reference should be made to the accompanying consolidated financial statements (including related notes) and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.


Forward-Looking Statements

Statements included in this discussion and in future filings by Chemung Financial Corporation (the "Corporation") with the Securities and Exchange Commission, in Chemung Financial Corporation press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Chemung Financial Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, could cause Chemung Financial Corporation's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Corporation disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.


Description of Business

Passage of the Gramm-Leach-Bliley Act during the fourth quarter of 1999 permitted qualified bank holding companies to elect to become financial holding companies and to engage in expanded financial activities. During the second quarter of 2000, Chemung Financial Corporation exercised this election, and on June 22, 2000 received approval from the Federal Reserve Bank of New York. This provides the Corporation with the flexibility to offer a wider array of financial services, such as insurance products, mutual funds, and brokerage services. This will allow us to better serve the needs of our clients as well as provide an additional source of fee based income. To that end, the Corporation has established a financial services subsidiary, CFS Group, Inc., to be available to provide additional financial services. CFS Group, Inc. has not yet begun operations and the scope of services to be provided is currently under review. As such, Chemung Financial Corporation now operates as a financial holding company with two subsidiaries, Chemung Canal Trust Company (the "Bank"), a full-service community bank with full trust powers, and CFS Group, Inc., a financial services subsidiary.


The financial condition of the Corporation should be examined in terms of the acquisition and deployment of funds within its "market areas". Management defines the market areas of Chemung Canal Trust Company as those areas within a 25-mile radius of its branches in Chemung, Steuben, Schuyler, and Tioga counties, including the northern tier of Pennsylvania. The Corporation's lending policy restricts substantially all lending efforts to these geographical regions.


Management of Credit Risk - Loan Portfolio

The Corporation manages credit risk, while conforming to state and federal laws governing the making of loans, through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.


The Loan Committee of the Board is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the president, two executive vice presidents, credit services division manager, commercial loan manager, consumer loan manager, mortgage loan manager and credit manager, implements the Board-approved loan policy.


Supervision and Regulation

The Corporation, as a financial 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.


CFS Group, Inc. may be subject to other regulatory authorities as determined by activities in which it may be engaged. For example, insurance activities would be regulated by the New York State Insurance Department, while brokerage activities would be subject to regulation by the National Association of Securities Dealers (NASD).


Competition

The Corporation 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 Corporation 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 Corporation, 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 structure is not encumbered by income taxes.


Competition for the Corporation's fiduciary services comes primarily from brokerage firms and independent investment advisors. This is considered to be significant competition, as these firms devote much of their considerable resources toward gaining larger positions in these markets. The market value of trust assets under administration totaled $1.5 billion at both year-end 2000 and 1999. Relative to the Corporation's consolidated assets, the Trust and Investment Division is unusually large and is responsible for the largest component of non-interest revenue.


Employees

The Corporation and its banking subsidiary had 308 full-time equivalent employees (FTE's) on December 31, 2000, versus 303 at the beginning of the year and 291 on December 31, 1998. The employment trend is relatively stable.


Consolidated Balance Sheet Comments

During 2000, total assets grew by $22.6 million or 3.5% to $676.2 million as compared to $653.6 million as of year-end 1999 and $620.1 million at year-end 1998. Total loans, net of unearned income and deferred fees and costs, grew by $34.6 million or 9.6% to $394.6 million. Commercial loan activity was strong throughout the year, with business loans, including commercial mortgages, growing $23.1 million or 17.1%. Total consumer loans increased $9.1 million or 6.8%, the major factor in this growth being an increased volume of indirect auto financings. Residential mortgages, while growing at a somewhat slower pace, ended the year with an increase of $2.3 million or 2.6%. Growth in this portfolio was impacted by a slow housing market throughout much of 2000.


The above increase in loans was offset to some extent by decreases in our total securities portfolio, cash and due from banks, and other assets. The carrying value of the total securities portfolio decreased $6.7 million or 2.8%. At amortized cost, the portfolio was down $13.3 million as proceeds from maturities and paydowns provided funding support for the increase in the loan portfolio. The amortized cost decline was somewhat offset by a $6.6 million increase in unrealized appreciation related to the available for sale portfolio.


The $4.2 million or 13.6% decrease in cash and due from banks is due to lower cash balances on hand at year-end 2000. During the later part of 1999, we began accumulating cash as part of our Year 2000 contingency planning. At December 31, 1999 cash on hand totaled $18.6 million as compared to $8.4 million at December 31, 2000, a decrease of $10.2 million. This decrease was somewhat offset by a higher amount of checks in transit and correspondent bank balances. The $2.2 million decrease in other assets is due primarily to a decrease in net deferred tax assets related to the impact of the appreciation in estimated fair value of our available for sale securities portfolio.


The primary funding source for our asset growth during 2000 was a $29.6 million or 6.1% increase in deposits, from $481.8 million to $511.4 million. Much of this growth was in certificate of deposit balances (including IRA accounts), which increased $23.6 million or 11.6%. We also saw period end increases in non-interest-bearing demand deposits (+$9.0 million or 9.2%) and insured money market accounts (+$2.1 million or 4.1%). The above increases were partially offset by a period end decrease in savings accounts (-$5.0 million or 5.5%). Federal Home Loan Bank advances were down $16.3 million. While term advances increased $5.0 million, overnight advances were reduced by $21.3 million from $29.7 million to $8.4 million. It should be noted that year-end 1999 overnight advances were unusually high due in part to increased cash levels maintained for Year 2000 contingency purposes.




Exhibit I BALANCE SHEET COMPARISONS
(in millions)




Average Balance Sheet




2000




1999




1998




1997




1996




1995


% Change 1999 to 2000

Compounded Annual Growth 5 years

Total Assets

$667.0

$642.3

$584.0

$539.2

$516.2

$494.1

3.8%

6.2%

Earning Assets

617.4

591.6

531.2

490.9

469.5

447.1

4.4%

6.7%

Loans, net of unearned
income and deferred fees and costs



382.8



346.5



311.7



291.3



273.9



249.1



10.5%



9.0%

Investments (1)

234.6

245.0

219.5

199.8

195.6

198.0

-4.2%

3.5%

Deposits

515.2

494.1

467.2

450.2

440.9

424.4

4.3%

4.0%

Wholesale funding

71.8

66.6

37.0

13.1

2.9

N/A

7.8%

N/A

Tier I equity (2)

62.9

57.6

52.6

51.6

46.4

41.7

9.2%

8.6%


(1) Average balances for investments include securities available for sale and securities held to maturity, based on amortized cost, and federal funds sold and interest-bearing deposits.


(2) Average shareholders' equity less intangible assets and accumulated other comprehensive income/loss.




Ending Balance Sheet




2000




1999




1998




1997




1996




1995


% Change 1999 to 2000

Compounded Annual Growth 5 years

Total Assets

$676.2

$653.6

$620.1

$545.5

$529.2

$499.3

3.5%

6.2%

Earning Assets

619.2

597.6

563.5

486.1

474.6

446.3

3.6%

6.8%

Loans, net of unearned
income and deferred fees and costs



394.6



360.0



329.3



296.9



283.7



263.0



9.6%



8.5%

Allowance for loan losses

4.7

4.7

4.5

4.1

4.0

3.9

0.9%

3.8%

Investments (1)

230.7

237.1

243.3

196.8

196.3

189.6

-2.9%

4.0%

Deposits

511.4

481.8

466.1

451.0

439.6

426.9

6.1%

3.7%

Wholesale funding

77.9

94.2

71.4

20.5

10.0

N/A

-17.3%

N/A

Tangible equity (2)

69.3

59.7

59.9

54.8

48.7

44.9

16.1%

9.1%


(1) Investments include securities available for sale, at estimated fair value, securities held to maturity, at amortized cost, and interest-bearing deposits.

(2) Shareholders' equity less intangible assets.


Securities

The Board-approved Funds Management Policy includes an investment portfolio policy which requires that, except for local municipal obligations that are sometimes not rated or carry ratings above "Baa" but below "A" by Moody's or Standard & 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 investments in municipal obligations are classified as Held to Maturity. The Available for Sale portfolio at December 31, 2000, was $222.7 million compared to $227.4 million a year earlier and $235.3 million at the end of 1998. At year-end 2000, the total net unrealized appreciation in the securities available for sale portfolio was $6.069 million, compared to a net unrealized loss of $505 thousand a year ago. This change is primarily reflective of the impact that lower market interest rates had on the fair value of the bond portfolio.


The components of this change are set forth in the following table (in thousands):



At December 31


Amortized Cost

2000 Estimated Fair Value

Unrealized Appreciation (Depreciation)


AmortizedCost

1999 Estimated Fair Value

Unrealized Appreciation (Depreciation)

U.S. Treasury Securities

$ 14,001

$ 14,014

$ 13

$ 15,507

$ 15,341

$ (166)

Obligations of other U.S.
Government agencies


76,567


76,655


88


96,004


92,697


(3,307)

Mortgage-backed securities

87,692

87,129

(563)

77,419

73,747

(3,672)

Obligations of states and
Political subdivisions


18,421


18,532


111


21,359


20,734


(625)

Corporate bonds and notes

12,443

12,185

(258)

10,663

10,129

(534)

Corporate Stocks

7,514

14,192

6,678

6,936

14,735

7,799

Totals

$216,638

$222,707

$ 6,069

$227,888

$227,383

$ (505)


Included in the above table are 27,392 shares of USA Education, Inc. (formerly SLM Holding Corporation) at a cost basis of approximately $3 thousand and estimated fair value of $1.863 million. These shares were acquired as preferred shares of Student Loan Marketing Association ("SALLIE MAE"), a permitted exception to the Government regulation banning bank ownership of equity securities in the original capitalization of the U.S. Government Agency. Later, the shares were converted to common stock as SALLIE MAE recapitalized. Additionally, at December 31, 2000, the Corporation held marketable equities totaling $616 thousand at cost, with a total estimated fair value of $5.397 million. The shares, other than USA Education, Inc., were acquired prior to the enactment of the Banking Act of 1933. Non-marketable equity securities included in the Corporation's portfolio are 10,638 shares of Federal Reserve Bank and 52,450 shares of the Federal Home Loan Bank of New York. They are carried at their cost of $531.9 thousand and $5.245 million, respectively. The fair value of these securities is assumed to approximate their cost. The number of shares of these last two investments is regulated by regulatory policies of the respective institutions.


Asset Quality

Non-performing loans at year-end 2000 totaled $1.707 million as compared to $1.405 million at year-end 1999, an increase of $302 thousand. At year-end 1998, non-performing loans totaled $4.853 million. The large decrease from 1998 to 1999 related primarily to one real estate secured commercial loan which was paid in full during the fourth quarter of 1999. Non-performing loans represented 0.43% of total loans outstanding as of December 31, 2000 compared to 0.39% at the end of 1999 and 1.5% at year-end 1998. Net loan charge offs were $707 thousand or 0.18% of average outstanding loans in 2000, compared to $517 thousand or 0.15% of average outstanding loans in 1999 and $436 thousand or 0.14% of average outstanding loans in 1998. The allowance for loan losses at December 31, 2000 was 1.19% of total outstandings versus 1.30% a year ago and 1.37% at December 31, 1998.


Capital Resources and Dividends

The Corporation continues to maintain a strong capital position. Tangible shareholders' equity at December 31, 2000, was $69.3 million or 10.24% of total assets compared to $59.7 million or 9.13% of total assets a year earlier and $59.9 million or 9.65% at December 31, 1998. Major factors influencing this increase were an increase in undistributed earnings (net income less dividends declared) of $5.3 million and a $3.9 million increase in accumulated other comprehensive income due to the increase in net unrealized gains on available for sale securities. As of December 31, 2000, the Corporation's ratio of Total Capital to Risk Weighted Assets was 16.72% compared with 16.56% a year earlier and 16.67% at December 31, 1998. The Corporation's leverage ratio (Tier I Capital/Average Assets) was 9.91% at December 31, 2000 and 9.49% at December 31, 1999.


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, 2000, the maximum amount available for transfer from the Bank to the Corporation in the form of unusecured loans was $1.8 million. The Bank is subject to legal limitations on the amount of dividends that can be paid to the Corporation without prior regulatory approval. Dividends are limited to retained net profits, as defined by regulations, for the current year and the two preceding years. At December 31, 2000, $11.6 million was available for the declaration of dividends.


Cash dividends declared amounted to $3.473 million in 2000 versus $3.097 million in 1999 and $2.741 million in 1998. Dividends declared during 2000 amounted to 39.7% of net income compared to 36.9% and 37.6% of 1999 and 1998 net income, respectively. It is management's objective to continue generating sufficient capital internally, while retaining an adequate dividend payout ratio.


Treasury Shares

When shares of the Corporation become available in the market, we may purchase them after careful consideration of our capital position. During 2000, 19,068 shares were purchased at a total cost of $397 thousand or an average price of $20.83 per share. In 1999, 58,674 shares were purchased at a total cost of $1.465 million or an average price of $24.96 per share, and in 1998 there were 39,383 shares purchased at a total cost of $984 thousand (average of $24.99 per share).


Performance Summary

Net income for 2000 was affected by 1) higher volumes of average earning assets and total funding liabilities, 2) higher average interest rates on both sides of the balance sheet resulting in a lower net interest margin, 3) higher non-interest income volumes, and 4) higher non-interest expenses.


Consolidated net income for 2000 was $8.755 million versus $8.392 million in 1999, up $364 thousand (4.3%), or $2.14 per share versus $2.03 per share up 5.4% on 37,659 fewer average shares outstanding. In 1998, the Corporation earned $7.297 million. Quarterly dividends declared totaled $0.86 per share versus $0.76 in 1999 and $0.665 in 1998, adjusted for the two-for-one stock split, effected in the form of a 100% stock dividend in June 1998.


Net interest income in 2000 increased $474 thousand or 1.9% over 1999. Total interest and dividend income on earning assets was $47.978 million in 2000 compared to $44.177 million in 1999 and $41.405 million in 1998. This 8.6% increase in 2000 can be attributed to both a $25.8 million or 4.4% increase in average earning assets and a 30 basis point yield increase from 7.47% to 7.77%. The increase in average earning assets is the result of a $36.2 million or 10.5% increase in average loans, which in 2000 comprised 62.0% of total average earning assets as compared to 58.6% a year ago. The increase in average loans was offset by decreases in average securities and overnight investments of $2.7 million and $7.7 million, respectively. Proceeds from these declines helped fund the growth in higher yielding average loans. Total average funding liabilities during 2000 increased by $24.6 million or 4.3%. Time deposits (including IRA accounts) averaged $227.5 million during 2000 as compared to $202.2 million during 1999, an increase of 12.5%. During 2000, average time deposits totaled 46.7% of total interest-bearing liabilities as compared to 43.1% during 1999. Interest expense totaled $22.055 million in 2000 as compared to $18.728 million in 1999 and $17.666 million in 1998. The cost of funds on these average funding liabilities, including the effect of non-interest bearing funding sources (such as demand deposits), increased to 3.72% during 2000 versus 3.30% and 3.45% during 1999 and 1998, respectively. The above yields and costs resulted in a net interest margin in 2000 of 4.20%, compared to 4.30% in 1999 and 4.47% in 1998.


Non-interest income increased $627 thousand to $10.032 million, up 6.7% over 1999. Areas where we saw significant increases included service charges (+ $272 thousand), credit card merchant earnings (+ $223 thousand) and checkcard interchange income (+ $128 thousand). Trust and Investment Services income, at $4.864 million was again the largest component of our non-interest income and registered an increase of $51 thousand. Net gains realized in the Corporation's securities portfolio were $216 thousand compared to $151 thousand in 1999 and $216 thousand in 1998. During the third quarter of 2000, we sold approximately $25 million of Federal Agency bonds at a gross loss of $1.172 million. Much of this loss was offset by the sale of appreciated equities at a gross gain of $1.114 million. The purpose of this strategy was to enhance long-term profitability, as the proceeds were re-invested in bonds with a combined yield 205 basis points higher than the yield on securities sold. Additionally, in December of 2000, we realized a $273 thousand gain on equities held resulting from the spin-off of a portion of Aetna, and the reorganization of the remainder of the company.


Non-interest expenses increased $825 thousand (3.8%) to $22.456 million. Non-interest expenses for 1999 were $21.631 million compared to $20.473 million in 1998. Areas having the most significant impact on this increase included salaries and other employee benefits (+ $183 thousand), credit card processing fees (+ $204 thousand), equipment and software service and data processing (+ $182 thousand), bank relations (+ $81 thousand) and advertising (+ $62 thousand).


During 2000, the Corporation's provision for loan losses totaled $750 thousand, up $77 thousand from $673 thousand in 1999. The change is a reflection of an increase in net charge-offs and non-performing loans during 2000, as well as the continued significant growth in the loan portfolio and management's ongoing evaluation of the risk inherent in the portfolio.


Income tax expense in 2000 totaled $3.994 million, a 4.0% decrease as compared to 1999. Reasons for the lower effective tax rate in 2000 include a significantly higher level of tax-exempt earning assets (primarily an increase in tax-exempt loans) as well as a $100 thousand New York State tax credit related to our $400 thousand investment in Statewide Zone Capital Corporation of New York. Additionally, during 1999, we recognized $87 thousand in additional tax expense related to the impact of phased in New York State tax rate reductions on deferred tax assets and liabilities.


Exhibit II EARNINGS FOR THE YEARS ENDED DECEMBER 31,




(in thousands)




2000




1999




1998




1997




1996




1995


% Change 1999 to 2000

Compounded Annual Growth 5 Years

Net interest income

$25,923

$25,449

$23,739

$23,274

$22,468

$21,849

1.9%

3.5%

Provision for loan losses

750

673

800

850

742

564

11.4%

5.9%

Net interest income after provision for loan losses


25,173


24,777


22,939


22,424


21,726


21,285


1.6%


3.4%

Other operating income:

                

Trust and investment services income


4,864


4,813


4,505


4,079


3,719


3,678


1.1%


5.7%

Securities gains, net

216

151

216

324

610

531

43.0%

-16.5%

Other income

4,952

4,442

3,496

3,065

2,777

2,527

11.5%

14.4%

Total other operating income

10,032

9,405

8,217

7,468

7,106

6,736

6.7%

8.3%

Other operating expenses

22,456

21,631

20,473

19,368

19,408

19,560

3.8%

2.8%

Income before income tax expense


12,749


12,551


10,683


10,524


9,424


8,461


1.6%


8.5%

Income tax expense

3,994

4,159

3,386

3,667

3,266

2,859

-4.0%

6.9%
                 

Net income

$ 8,755

$ 8,392

7,297

6,857

6,158

5,602

4.3%

9.3%



Exhibit III AVERAGE BALANCES AND YIELDS

For the purpose of the table below, nonaccruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. No tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions.


Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential

Year Ended December 31,
 

2000

1999

1998

Assets

Average Balance


Interest

Yield/
Rate

Average Balance


Interest

Yield/ Rate

Average Balance


Interest

Yield/ Rate

Earning assets:

(Dollars in thousands)

Loans

$382,788

33,160

8.66%

346,550

29,446

8.50%

311,679

27,865

8.94%

Taxable securities

201,631

13,087

6.49

204,635

12,718

6.21

173,306

11,188

6.46

Tax-exempt securities

28,359

1,298

4.58

28,094

1,275

4.54

31,118

1,434

4.61

Federal funds sold

2,839

184

6.48

9,870

484

4.90

10,882

590

5.42

Interest-bearing deposits

1,755

249

14.19

2,412

254

10.52

4,186

328

7.83

                   

Total earning assets

617,372

47,978

7.77%

591,561

44,177

7.47%

531,171

41,405

7.80%
                   

Non-earning assets:

                  

Cash and due from banks

24,070

   

24,868

   

25,184

   

Premises and equipment, net

13,040

   

10,689

   

10,154

   

Other assets

12,252

   

9,264

   

7,188

   

Allowance for loan losses

(4,708)

    

(4,620)

    

(4,323)

    

Intangibles and AFS valuation allowance

4,996

   

10,507

   

14,625

   

Total

667,022

   

642,269

   

583,999

   
                   

Liabilities and Shareholders' Equity

                  
                   

Interest-bearing liabilities:

                  

Demand deposits

40,939

518

1.27%

41,596

525

1.26%

$43,456

611

1.41%

Savings and insured money market deposits

141,000

4,367

3.10

151,262

4,342

2.87

143,065

4,284

3.00

Time deposits

227,465

13,010

5.72

202,239

10,230

5.06

190,684

10,351

5.43

Federal Home Loan Bank advances and securities sold under agreements to repurchase


77,459


4,160


5.37


73,946


3,631


4.91


45,258


2,420


5.35

                   

Total interest-bearing liabilities

486,863

22,055

4.53%

469,043

18,728

3.99%

422,463

17,666

4.18%
                   

Non-interest-bearing liabilities:

                  

Demand deposits

105,795

   

99,035

   

89,957

   

Other liabilities

6,308

   

7,892

   

7,601

   

Total liabilities

598,366

   

575,970

   

520,021

   

Shareholders' equity

68,056

   

66,299

   

63,978

   

Total

667,022

   

642,269

   

583,999

   
                   

Net interest income

  

$25,923

    

$25,449

    

$23,739

  
                   

Net interest rate spread

    

3.24%

    

3.48%

    

3.62%
                   

Net interest margin

    

4.20%

    

4.30%

    

4.47%



Exhibit IV CHANGES DUE TO VOLUME AND RATE

The following table demonstrates the impact on net interest income of the changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Corporation. For purposes of constructing this table, average investment securities are at average amortized cost and earning asset averages include non-performing loans. Therefore, the impact of changing levels of non-performing loans is reflected in the change due to rate, but does not affect changes due to volume. No tax equivalent adjustments were made.
 

2000 vs. 1999
Increase/(Decrease)

1999 vs. 1998
Increase/(Decrease)

Interest income (in thousands)

Total Change

Due to Volume

Due to Rate

Total Change

Due to Volume

Due to Rate

Loans

$3,714

3,147

567

1,582

3,004

(1,422)

Taxable investment securities

369

(191)

560

1,530

1,974

(444)

Tax-exempt investment securities

23

12

11

(159)

(138)

(21)

Federal funds sold

(300)

(422)

122

(106)

(52)

(54)

Interest-bearing deposits

(5)

(80)

75

(74)

(165)

91

Total interest income

$3,801

2,466

1,335

2,773

4,623

(1,850)

Interest expense (in thousands)

            

Interest-bearing demand deposits

(7)

(7)

0

(86)

(25)

(61)

Savings and insured money market
deposits


25


(308)


333


58


236


(178)

Time deposits

2,780

1,359

1,421

(121)

607

(728)

Federal Home Loan Bank advances and securities sold under agreements to repurchase



529



178



351



1,211



1,424



(213)

Total interest expense

$3,327

1,222

2,105

1,062

2,242

(1,180)

Net interest income

$ 474

1,244

(770)

1,711

2,381

(670)



Exhibit V



Selected per share data on Common Shares




2000




1999




1998




1997




1996




1995

% Change 1999
To
2000

CompoundedAnnual Growth 5 Years

Net income per share

$2.14

$2.03

$ 1.77

$ 1.66

$ 1.48

$ 1.34

5.4%

9.8%

Dividends declared

0.86

0.76

0.665

0.605

0.53

0.49

13.2%

11.9%

Tangible book value

16.94

14.56

14.59

13.24

11.76

10.79

16.3%

9.4%

Market price at 12/31

19.50

24.50

27.50

21.00

17.00

13.88

-20.4%

7.0%

Average shares outstanding (in thousands)


4,094


4,132


4,116


4,143


4,159


4,176


-0.9%


-0.4%


Exhibit VI

Selected Ratios

2000

1999

1998

1997

1996

Return on average assets

1.31%

1.31%

1.25%

1.27%

1.19%

Return on average tier I equity (1)

13.92%

14.57%

13.88%

14.29%

14.08%

Dividend yield for the year ended

4.51%

3.43%

2.47%

2.95%

3.29%

Dividend payout

39.67%

36.90%

37.56%

36.55%

35.78%

Total capital to risk adjusted assets

16.72%

16.56%

16.67%

17.44%

16.87%

Tier I capital to risk adjusted assets

15.60%

15.36%

15.42%

16.19%

15.61%

Tier I leverage ratio

9.91%

9.49%

9.57%

9.49%

8.97%

Loans to deposits

77.16%

74.72%

70.63%

65.84%

64.53%

Allowance for loan losses to total loans

1.19%

1.30%

1.37%

1.40%

1.40%

Allowance for loan losses to non-performing loans

276%

332%

92.9%

257%

231%

Non-performing loans to total loans

0.43%

0.39%

1.47%

0.54%

0.61%

Net interest rate spread

3.24%

3.48%

3.62%

3.89%

3.99%

Net interest margin

4.20%

4.30%

4.47%

4.74%

4.79%

Efficiency ratio (2)

60.54%

60.09%

61.97%

60.84%

63.41%


(1) Average Tier I Equity is average shareholders' equity less average intangible assets and average accumulated other comprehensive income/loss.


(2) Efficiency ratio is operating expenses adjusted for amortization of intangible assets and donations divided by net interest income plus other operating income adjusted for non-taxable gains on stock donations.


Consolidated Cash Flows

During 2000, cash and cash equivalents decreased $3.909 million as compared to an increase of $3.253 million in 1999 and a $5.599 million decrease in 1998. In addition to cash provided by operating activities, other primary sources of cash in 2000 included proceeds from the sales and maturities of securities and student loans ($58.695 million), and an increase in deposits ($29.614 million). In 1999, the primary sources of cash included proceeds from the sales and maturities of securities and student loans ($84.752 million), proceeds from Federal Home Loan Bank advances, net of repayments ($22.800 million), and an increase in deposits ($15.634 million).


Cash generated from the above activities was used primarily to fund increases in earning assets. During 2000, the purchases of securities and the funding of loans, net of repayments, totaled $42.679 million and $38.105 million, respectively. Other significant uses of cash in 2000 included repayments of Federal Home Loan Bank advances, net of new advances ($16.300 million), purchases of premises and equipment ($2.985 million), payment of cash dividends ($3.436 million), and the purchase of treasury shares ($397 thousand). In 1999, the purchases of securities and funding of loans, net of repayments, totaled $86.084 million and $33.738 million, respectively, and the investment in premises and equipment totaled $3.506 million. Other significant uses of cash in 1999 included the payment of cash dividends ($2.945 million), and the purchase of treasury shares ($1.465 million).


Liquidity and Sensitivity

The term "liquidity" refers primarily to the expected cash flows from assets held and secondarily to borrowings secured by assets of the Corporation. These two sources of liquidity have in the past been sufficient to fund the operations of the Corporation, and the Board of Directors anticipates that they will suffice in the future. For this reason, the term "liquidity" in the Corporation'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 both interest rate risk and liquidity risk. The Corporation's Asset/Liability Committee (ALCO) has the strategic responsibility for setting the policy guidelines on acceptable exposure to these areas. These guidelines contain specific measures and limits regarding these risks, which are monitored on a regular basis. The ALCO is made up of the president, two executive vice presidents, asset liability management officer, senior lending officer, senior marketing officer, chief financial officer, and others representing key functions.


The Corporation is a member of the Federal Home Loan Bank of New York ("FHLB") in order to access borrowings which enhance management's ability to satisfy future liquidity needs. The Corporation's $5.245 million investment in FHLB stock allowed it to maintain a $66.543 million line of credit at December 31, 2000. This compares to $62.726 million at the end of 1999.


Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. For that reason, the ALCO has established tolerance limits based upon a 200 basis point change in interest rates. At December 31, 2000, it is estimated that an immediate 200 basis point decrease in interest rates would negatively impact net interest income by 9.7% and an immediate 200 basis point increase would negatively impact net interest income by 3.0%. Both are within the tolerance limit of 12.0%, established by the ALCO.


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. At December 31, 2000, it is estimated that an immediate 200 basis point increase in interest rates would negatively impact the market value of our capital account by 12.6% and an immediate 200 basis point decrease in interest rates would negatively impact the market value by 4.8%. Both are within the established tolerance limit of 15.0%.


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 2000.

The ALCO is responsible for supervising the preparation and annual revisions of the financial segments of the Annual Budget, which is built upon the committee's economic and interest-rate assumptions. It is the responsibility of the ALCO to modify prudently the Corporation's asset/liability policies.



Recent Accounting Pronouncements

In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133, " Accounting for Derivative Instruments and Hedging Activities." This statement establishes comprehensive accounting and reporting standards for derivative instruments and hedging activities. The Statement requires companies to recognize all derivatives as either assets or liabilities, including certain derivative instruments embedded in other contracts, with the instruments measured at fair value. The accounting for gains and losses resulting from changes in fair value of the derivative instrument depends on the intended use of the derivative and the type of risk being hedged. This Statement, as amended by SFAS Nos. 137 and 138, is effective for all fiscal quarters of fiscal years beginning after June 15,2000. Based on management's evaluation of SFAS No. 133, the adoption of this Statement as of January 1, 2001, will not have a material impact on the Corporation's consolidated financial statements, as the Corporation currently does not have any derivative instruments, including derivative instruments embedded in other contracts.


In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 replaces identically titled SFAS No. 125 and carries forward most of SFAS No. 125's provisions without change. It does revise accounting standards for securitizations and certain other transfers of financial assets and collateral. The Statement is generally applied prospectively to transactions and servicing activities occurring after March 31, 2001, although provisions with respect to collateral and certain disclosure requirements are effective for fiscal years ending after December 15, 2000. This Statement is not expected to have a material impact on the consolidated financial statements of the Corporation.











John R. Battersby, Jr.
Treasurer and Chief Financial Officer








To our Shareholders:


The consolidated financial statements appearing in this annual report have been prepared by the Corporation in accordance with accounting principles generally accepted in the United States of America. The primary responsibility for the integrity of the financial information included in this report rests with management. The opinion of KPMG LLP, the Corporation's independent accountants, on those consolidated financial statements is included herein.


The Corporation and its subsidiaries maintain a system of internal accounting controls that is designed to provide reasonable assurance that assets are safeguarded, that transactions are executed in accordance with management's authorization and are properly recorded, and that accounting records are adequate for preparation of consolidated financial statements and other financial information.


The Internal Auditing Department is charged with the responsibility of verifying accounting records and reviewing internal controls. The internal auditor reports directly to the Audit Committee of the Board of Directors whose members are all non-employee directors. The Committee meets with management, the internal auditor and the independent auditors in conjunction with its review of matters relating to the consolidated financial statements and the internal audit program. The independent auditors and the internal auditor meet with the Audit Committee without the presence of management.






Jan P. Updegraff

President and Chief Executive Officer







John R. Battersby, Jr.

Treasurer and Chief Financial Officer

(THIS PAGE INTENTIONALLY LFFT BLANK)





EXHIBIT D













CONSOLIDATED FINANCIAL STATEMENTS AND
REPORT OF INDEPENDENT AUDITORS

(THIS PAGE INTENTIONALLY LEFT BLANK)





Independent Auditors' Report









The Board of Directors and Shareholders
Chemung Financial Corporation and Subsidiaries:


We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation and subsidiaries (the Corporation) as of December 31, 2000 and 1999, 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, 2000. These consolidated financial statements are the responsibility of the Corporation'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 auditing standards generally accepted in the United States of America. 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 subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000, in conformity with accounting principles generally accepted in the United State of America.



//KPMG LLP//

Syracuse, New York

February 2, 2001

(THIS PAGE INTENTIONALLY LEFT BLANK)

 

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
 

DECEMBER 31

ASSETS

2000

1999
     

Cash and due from banks

$ 26,726,373

30,926,401

Interest-bearing deposits with other financial institutions

1,437,728

1,146,495

Total cash and cash equivalents

28,164,101

32,072,896

     

Securities available for sale, at estimated fair value

222,707,143

227,383,641

Securities held to maturity, estimated fair value of $6,774,036 at December 31, 2000 and $8,606,703 at December 31, 1999



6,565,869



8,606,703

Loans, net of unearned income and deferred fees and costs

394,571,609

359,963,407

Allowance for loan losses

(4,707,868)

(4,665,093)

Loans, net

389,863,741

355,298,314

Premises and equipment, net

13,597,641

12,121,667

Other assets

10,284,605

12,478,828

Intangible assets, net of accumulated amortization

5,053,723

5,641,025

Total assets

$676,236,823

653,603,074

     

LIABILITIES AND SHAREHOLDERS' EQUITY

    
     

Deposits:

    

Non-interest-bearing

$107,289,840

$ 98,292,851

Interest-bearing

404,097,917

383,480,838

Total deposits

511,387,757

481,773,689

Securities sold under agreements to repurchase

49,406,826

49,946,491

Federal Home Loan Bank advances

33,400,000

49,700,000

Accrued interest payable

2,126,723

1,609,842

Dividends payable

886,729

849,257

Other liabilities

4,717,273

4,411,912

Total liabilities

601,925,308

588,291,191

Commitments and contingencies (note 13)

    
     

Shareholders' equity:

    

Common stock, $.01 par value per share, authorized

    

10,000,000 shares; issued 4,300,134 shares at December 31, 2000 and 1999


43,001


43,001

Capital surplus

22,011,527

21,941,629

Retained earnings

53,347,621

48,065,946

Treasury stock, at cost (269,549 shares at December 31, 2000; 256,054 shares at December 31, 1999)


(4,735,401)

(4,435,629)

Accumulated other comprehensive income (loss)

3,644,767

(303,064)

Total shareholders' equity

74,311,515

65,311,883

Total liabilities and shareholders' equity

$676,236,823

653,603,074

     

See accompanying notes to consolidated financial statements.

 

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
       

YEARS ENDED DECEMBER 31

2000

1999

1998
       

Interest and dividend income:

      

Loans

$33,159,628

29,446,584

27,865,497

Securities

14,385,016

13,992,910

12,621,909

Federal funds sold

184,377

483,552

589,976

Interest-bearing deposits

248,942

253,724

327,927

Total interest and dividend income

47,977,963

44,176,770

41,405,309

       

Interest expense:

      

Deposits

17,894,382

15,096,420

15,246,674

Borrowed funds

1,400,290

1,044,567

736,493

Securities sold under agreements to repurchase


2,760,186


2,586,552


1,683,244

Total interest expense

22,054,858

18,727,539

17,666,411

       

Net interest income

25,923,105

25,449,231

23,738,898

       

Provision for loan losses

750,000

672,669

800,000

Net interest income after provision for loan losses


25,173,105


24,776,562


22,938,898

       

Other operating income:

      

Trust & investment services income

4,864,149

4,812,723

4,504,569

Service charges on deposit accounts

2,489,887

2,217,859

2,010,639

Net gain on sales of securities

216,053

150,585

215,993

Credit card merchant earnings

992,578

769,586

630,968

Other

1,469,545

1,454,253

854,850

Total other operating income

10,032,212

9,405,006

8,217,019

       

Other operating expenses:

      

Salaries and wages

9,088,950

8,928,490

8,290,133

Pension and other employee benefits

1,660,475

1,637,612

1,939,033

Net occupancy expenses

1,878,329

1,838,431

1,739,063

Furniture and equipment expenses

1,893,852

1,713,266

1,655,776

Other

7,934,537

7,513,238

6,848,747

Total other operating expenses

22,456,143

21,631,037

20,472,752

Income before income tax expense

12,749,174

12,550,531

10,683,165

Income tax expense

3,994,075

4,159,030

3,386,027

Net income

$ 8,755,099

8,391,501

7,297,138

       

Weighted average shares outstanding

4,094,489

4,132,148

4,116,405

       

Basic earnings per share

$2.14

$2.03

$1.77


See accompanying notes to consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
 




Common Stock



Capital Surplus



Retained Earnings



Treasury Stock

Accumulated Other Comprehensive Income (Loss)




Total

Balances at December 31, 1997

$10,750,335

10,101,804

38,236,025

(2,032,886)

4,581,899

61,637,177

             

Comprehensive Income:

            

Net income

-

-

7,297,138

-

-

7,297,138

Other comprehensive income

-

-

-

-

812,890

812,890

Total comprehensive income

          

8,110,028

Reduction of par value from $5.00 to $0.01 per share


(10,728,834)


10,728,834


-


-


-


-

Two-for-one stock split in the form of a 100% stock dividend


21,500


-


(21,500)


-


-


-

Cash dividends declared ($.665 per share)

-

-

(2,740,672)

-

-

(2,740,672)

Purchase of 39,383 shares of treasury stock

-

-

-

(984,284)

-

(984,284)

Sale of 3,079 shares of treasury stock

-

21,162

-

46,216

-

67,378

             

Balances at December 31, 1998

$ 43,001

20,851,800

42,770,991

(2,970,954)

5,394,789

66,089,627

             

Comprehensive Income:

            

Net income

-

-

8,391,501

-

-

8,391,501

Other comprehensive loss

-

-

-

-

(5,697,853)

(5,697,853)

Total comprehensive income

          

2,693,648

Restricted stock units for directors' deferred compensation plan


-


1,089,829


-


-


-


1,089,829

Cash dividends declared ($.76 per share)

-

-

(3,096,546)

-

-

(3,096,546)

Purchase of 58,674 shares of treasury stock

-

-

-

(1,464,675)

-

(1,464,675)
             

Balances at December 31, 1999

$ 43,001

21,941,629

48,065,946

(4,435,629)

( 303,064)

65,311,883

             

Comprehensive Income:

            

Net income

-

-

8,755,099

-

-

8,755,099

Other comprehensive income

-

-

-

-

3,947,831

3,947,831

Total comprehensive income

          

12,702,930

Restricted stock units for directors' deferred compensation plan


-


159,332

-

-

-

159,332

Cash dividends declared ($.86 per share)

-

-

(3,473,424)

-

-

(3,473,424)

Distribution of restricted stock units for directors' deferred compensation plan



(89,434)



97,341



7,907

Purchase of 19,068 shares of treasury stock

-

-

-

(397,113)

-

(397,113)
             

Balances at December 31, 2000

$ 43,001

22,011,527

53,347,621

(4,735,401)

3,644,767

74,311,515


See accompanying notes to consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31

2000

1999

1998
       

Cash flows from operating activities:

      

Net income

$ 8,755,099

8,391,501

7,297,138

Adjustments to reconcile net income to net cash provided by operating activities:

Amortization of intangible assets

587,302

587,303

587,303

Provision for deferred tax expense (benefit)

364,908

45,955

(554,345)

Provision for loan losses

750,000

672,669

800,000

Depreciation and amortization

1,508,703

1,468,561

1,459,446

Amortization of premiums and accretion of discounts on securities, net


143,105


473,074


321,469

Net gain on sales of securities

(216,053)

(150,585)

(215,993)

Increase in other assets

(658,738)

(4,245,934)

(1,489,386)

Increase in accrued interest payable

516,881

181,282

237,151

Restricted stock units for directors'
deferred compensation plan


159,332


146,896


-

Increase in other liabilities

313,269

874,023

2,945,355

Net cash provided by operating activities

12,223,808

8,444,745

11,388,138

       

Cash flows from investing activities:

      

Proceeds from sales of securities available for sale


25,222,726

12,239,005

19,174,487

Proceeds from maturities of and principal collected on securities held to maturity


7,140,429

4,529,397

7,054,835

Proceeds from maturities of and principal collected on securities available for sale


23,679,474

65,470,411

78,602,492

Purchases of securities available for sale

(37,579,602)

(79,608,744)

(146,519,981)

Purchases of securities held to maturity

(5,099,603)

(6,475,177)

(4,491,731)

Purchases of premises and equipment

(2,984,677)

(3,505,619)

(1,325,011)

Net increase in loans

(38,104,619)

(33,738,401)

(35,894,863)

Proceeds from sales of student loans

2,651,931

2,513,575

3,180,053

Net cash used in investing activities

(25,073,941)

(38,575,553)

(80,219,719)
       

Cash flows from financing activities:

      

Net increase (decrease) in demand deposits, NOW accounts, savings accounts, and insured money market accounts

 

6,048,487

 

(10,265,077)

 

11,498,217

Net increase in certificates of deposit and individual retirement accounts


23,565,581

25,899,404

3,596,803

Net (decrease) increase in securities sold under agreements to repurchase


(539,665)

(640,878)

41,139,513

Federal Home Loan Bank advances

13,400,000

29,700,000

26,900,000

Repayments of Federal Home Loan Bank advances

(29,700,000)

(6,900,000)

(16,300,000)

Purchase of treasury stock

(397,113)

(1,464,675)

(984,284)

Sale of treasury stock

-

-

67,378

Cash dividends paid

(3,435,952)

(2,944,859)

(2,684,712)

Net cash provided by financing activities

8,941,338

33,383,915

63,232,915

 

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (con't)
       

Net (decrease) increase in cash and cash equivalents


(3,908,795)


3,253,107


(5,598,666)

       

Cash and cash equivalents, beginning of year

32,072,896

28,819,789

34,418,455

       

Cash and cash equivalents, end of year

$28,164,101

32,072,896

28,819,789

       

Supplemental disclosure of cash flow information:

      

Cash paid during the year for:

      

Interest

$21,537,977

18,546,257

17,429,260

Income taxes

$ 3,608,962

7,048,403

1,201,696

       
       

Supplemental disclosure of non-cash activity:


   

Transfer of loans to other real estate owned

$ 137,261

398,667

403,317

Issuance of restricted stock units under directors' deferred compensation plan


$ -


942,933


-

Adjustment to securities available for sale to fair value, net of tax


$ 3,947,831


(5,697,853)


812,890



See accompanying notes to consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 and 1998

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


ORGANIZATION

Chemung Financial Corporation (the Corporation), through its wholly owned subsidiaries, Chemung Canal Trust Company (the Bank) and CFS Group, Inc.(a financial services company expected to commence operations in 2001), provides a wide range of banking, financing, fiduciary and other financial 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 its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.


The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.


SECURITIES

Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized cost. Securities to be held for indefinite periods of time or not intended to be held to maturity are classified as available for sale and carried at fair value. Unrealized holding gains and losses, net of the related tax effects, on securities classified as available for sale are excluded from earnings and are reported as accumulated other comprehensive income (loss) in shareholders' equity until realized. Realized gains and losses are determined using the specific identification method.


A decline in the fair value of any available for sale or held to maturity security below amortized cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment of yield using the interest method. Dividend and interest income are recognized when earned.


LOANS

Loans are stated at the amount of unpaid principal balance less unearned discounts and net deferred origination fees and costs. The Corporation has the ability and intent to hold its loans for the foreseeable future, except for student loans which are sold to a third party from time to time upon reaching repayment status.


Interest on loans is accrued and credited to operations on the interest method. The accrual of interest is discontinued and previously accrued interest is reversed when commercial loans become 90 days delinquent and, when consumer, mortgage and home equity loans, which are not guaranteed by government agencies, become 120 days delinquent. Loans may also be placed on non-accrual if management believes such classification is warranted for other purposes. Loan origination fees and certain direct loan origination costs are deferred and amortized over the life of the loan as an adjustment to yield, using the interest method.


ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is maintained at a level considered adequate to provide for probable loan losses. The allowance is increased by provisions charged to earnings and recoveries of loans previously charged off, and reduced by loan charge-offs. The adequacy of the allowance is based on management's evaluation of the inherent risk of loss in the loan portfolio, which includes consideration of prevailing economic conditions, past loss experience, the level of non-performing loans, delinquency levels and other factors pertinent to estimating losses inherent in the portfolio. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowances may be necessary based on changes in economic conditions, particularly in New York State. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.


Management, considering current information and events regarding the borrower's ability to repay their obligations, considers a loan to be impaired when it is probable that the Corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. When a loan is considered to be impaired, the amount of the impairment is measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or, as a practical expedient, at the loan's observable market price or the fair value of collateral, less the estimated costs to sell if the loan is collateral dependent. Residential mortgage loans and consumer loans are evaluated collectively since they are homogeneous and generally carry smaller balances. All loans restructured in a troubled debt restructuring are also considered impaired loans. In general, interest income on impaired loans is recorded on a cash basis when collection in full is reasonably expected. If full collection is uncertain, cash receipts are applied first to principal then to interest income.


PREMISES AND EQUIPMENT

Land is carried at cost, while buildings and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to current operations under accelerated and straight-line methods over the estimated useful lives of the assets, which range from 15 to 50 years for buildings and from 3 to 10 years for equipment and furniture. Amortization of leasehold improvements and leased equipment is recognized on the straight-line method over the shorter of the lease term or the estimated life of the asset.


OTHER REAL ESTATE

Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at the lower of the carrying value of the loan or estimated fair value of the property at the time of acquisition. Write downs from cost to estimated fair value which are required at the time of foreclosure are charged to the allowance for loan losses. Subsequent to acquisition, other real estate is carried at the lower of the carrying amount or fair value less estimated costs to dispose. Subsequent adjustments to the carrying values of such properties resulting from declines in fair value are charged to operations in the period in which the declines occur. Other real estate owned at December 31, 2000, amounted to $61,693 and at December 31, 1999, amounted to $535,699.


INCOME TAXES

The Corporation files a consolidated tax return on the accrual method. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled, or the tax carryforwards are expected to be utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.


TRUST AND INVESTMENT SERVICES INCOME

Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Corporation. Trust and Investment Services income is recognized on the accrual method based on contractual rates applied to the balances of individual trust accounts. Market value of trust assets under administration totaled $1.519 billion at December 31, 2000, and $1.486 billion at December 31, 1999.


PENSION PLAN

Pension costs, based on actuarial computations of current and future benefits for employees, are charged to current operating results. The Corporation's funding policy is to contribute amounts to the plan sufficient to meet minimum regulatory funding requirements, plus such additional amounts as the Corporation may determine to be appropriate from time to time.


POSTRETIREMENT BENEFITS

In addition to pension benefits, the Corporation 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 the purchase price over the fair value of identifiable assets acquired in 1995, is being amortized over 15 years on a straight-line basis. Deposit base intangible, resulting from the Corporation's purchase of deposits from the Resolution Trust Company in 1994, is being amortized over the expected useful life of 15 years on a straight-line basis. Amortization periods are monitored to determine if events and circumstances require such periods to be reduced. Periodically, the Corporation reviews its goodwill and deposit base intangible assets for events or changes in circumstances that may indicate that the carrying amount of the asset is impaired.


BASIC EARNINGS PER SHARE

Basic earnings per share was computed on the basis of the weighted average number of common shares outstanding, retroactively adjusted for stock splits and dividends. Issuable shares (such as those related to directors' restricted stock units) are considered outstanding and are included in the computation of basic earnings per share.


CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and amounts due from banks, interest-bearing deposits with other financial institutions, federal funds sold, and U.S. Treasury securities with original terms to maturity of 90 days or less.


SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Corporation enters into sales of 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 Corporation's control.


OTHER FINANCIAL INSTRUMENTS

The Corporation is a party to certain other financial instruments with off-balance sheet risk such as commitments under standby letters of credit, unused portions of lines of credit and commitments to fund new loans. The Corporation's policy is to record such instruments when funded.


OTHER COMPREHENSIVE INCOME

Comprehensive income at the Corporation represents net income plus other comprehensive income or loss, 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 or loss represents the net unrealized holding gains or losses on securities available for sale as of the consolidated balance sheet dates, net of the related tax effect.


Comprehensive income for the years ended December 31, 2000, 1999, and 1998 was $12,702,930, $2,693,648, and $8,110,028, respectively. The following summarizes the components of other comprehensive income (loss):

Unrealized net holding gains during the year ended December 31, 2000, net of tax (pre-tax amount of $6,789,197)


$4,077,592

Reclassification adjustment for net gains realized in net income during the year ended December 31, 2000, net of tax (pre-tax amount of $216,053)


( 129,761)

Other comprehensive income for the year ended December 31, 2000

$ 3,947,831

   

Unrealized net holding losses during the year ended December 31, 1999, net of tax (pre-tax amount of $(9,336,350))


$(5,607,412)

Reclassification adjustment for net gains realized in net income during the year ended December 31, 1999, net of tax (pre-tax amount of $150,585)


( 90,441)

Other comprehensive loss for the year ended December 31, 1999

$(5,697,853)
   

Unrealized net holding gains during the year ended December 31, 1998, net of tax (pre-tax amount of $1,569,456)


$ 942,615

Reclassification adjustment for net gains realized in net income during the year ended December 31, 1998, net of tax (pre-tax amount of $215,993)


(129,725)

Other comprehensive income for the year ended December 31, 1998

$ 812,890



SEGMENT REPORTING


The Corporation's operations are solely in the financial services industry and include the provision of traditional commercial banking services. The Corporation operates primarily in the geographical regions of Chemung, Steuben, Schuyler, and Tioga counties, including the northern tier of Pennsylvania. Management makes operating decisions and assesses performance based on an ongoing review of the Corporation's commercial banking operations, which constitute the Corporation's only reportable segment.

RECLASSIFICATION


Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform with the current year's presentation.


ACCOUNTING STANDARDS


In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards (SFAS) No. 133, " Accounting for Derivative Instruments and Hedging Activities." This statement establishes comprehensive accounting and reporting standards for derivative instruments and hedging activities. The Statement requires companies to recognize all derivatives as either assets or liabilities, including certain derivative instruments embedded in other contracts, with the instruments measured at fair value. The accounting for gains and losses resulting from changes in fair value of the derivative instrument depends on the intended use of the derivative and the type of risk being hedged. This Statement, as amended by SFAS Nos. 137 and 138, is effective for all fiscal quarters of fiscal years beginning after June 15,2000. Based on management's evaluation of SFAS No. 133, the adoption of this Statement as of January 1, 2001, will not have a material impact on the Corporation's consolidated financial statements, as the Corporation currently does not have any derivative instruments, including derivative instruments embedded in other contracts.


In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS No. 140 replaces identically titled SFAS No. 125 and carries forward most of SFAS No. 125's provisions without change. It does revise accounting standards for securitizations and certain other transfers of financial assets and collateral. The Statement is generally applied prospectively to transactions and servicing activities occurring after March 31, 2001, although provisions with respect to collateral and certain disclosure requirements are effective for fiscal years ending after December 15, 2000. This Statement is not expected to have a material impact on the consolidated financial statements of the Corporation.


(2) RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS


The Corporation is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank of New York. The amount of this reserve requirement was $500,000 at December 31, 2000.



(3) SECURITIES


Amortized cost and estimated fair value of securities available for sale at December 31, 2000 and 1999, are as follows:
 

2000

  

1999

  
 


Amortized Cost

Estimated Fair Value


Amortized Cost

Estimated Fair Value

U.S. Treasury securities

$ 14,000,787

14,014,040

15,507,454

15,341,305

Obligations of other U.S. Government agencies


76,567,432


76,655,432


96,004,009


92,696,922

Mortgage-backed securities

87,691,888

87,129,166

77,418,683

73,747,174

Obligations of states and political subdivisions


18,420,899


18,531,434


21,358,536


20,733,805

Corporate bonds and notes

12,443,061

12,185,427

10,663,352

10,129,626

Corporate stocks

7,514,534

14,191,644

6,936,209

14,734,809

Total

$216,638,601

222,707,143

227,888,243

227,383,641


Included in corporate stocks at both December 31, 2000 and 1999, is the Corporation's required investment in the stock of the Federal Home Loan Bank of New York (FHLB) carried at its cost basis of $5,245,000. This investment allowed the Corporation to maintain a $66,543,300 line of credit with the FHLB at December 31, 2000, and $62,726,000 at December 31, 1999. Other equities required in the Corporation portfolio include 10,638 shares of Federal Reserve Bank stock carried at $531,900 at December 31, 2000, and 10,572 shares carried at $528,600 at December 31, 1999.


Gross unrealized gains and losses on securities available for sale at December 31, 2000 and 1999, were as follows:
 

2000

  

1999

  
 

Unrealized

Unrealized

Unrealized

Unrealized
 

Gains

Losses

Gains

Losses
         

U.S. Treasury securities

$ 29,913

16,660

1,872

168,021

Obligations of other U.S. Government agencies

413,738

325,738

-

3,307,087

Mortgage-backed securities

239,965

802,687

5,511

3,677,020

Obligations of states and other political subdivisions

192,953

82,418

15,321

640,052

Corporate bonds and notes

101,166

358,800

-

533,726

Corporate stocks

6,679,193

2,083

7,798,600

-

Total

$7,656,928

1,588,386

7,821,304

8,325,906


Gross realized gains on sales of securities available for sale were $1,388,358, $150,585, and $215,993 for the years ended December 31, 2000, 1999 and 1998, respectively. Gross realized losses on sales of securities available for sale were $1,172,305 for the year ended December 31, 2000. There were no realized losses on sales of securities available for sale for the years ended December 31, 1999 and 1998.


Securities held to maturity of $6,565,869 and $8,606,703 at December 31, 2000 and 1999, respectively, represent non-marketable obligations of political subdivisions, usually local municipalities. Estimated fair value at December 31, 2000 and 1999 was $6,774,036 and $8,606,703, respectively. There were no sales of securities held to maturity in 2000, 1999 or 1998. The contractual maturity of these securities at amortized cost is as follows at December 31, 2000: $2,941,940 (fair value of $2,948,649) within one year, $2,248,604 (fair value of $2,299,264) after one year but within five years, $1,075,325 (fair value of $1,165,201) after five years but within ten years and $300,000 (fair value of $360,922) greater than ten years.




Interest and dividend income on securities for the years ended December 31, 2000, 1999 and 1998 was as follows:
 

2000

1999

1998

Taxable:

      

U. S. Treasury securities

$ 767,261

1,119,844

1,920,930

Obligations of other U.S. Government agencies

5,674,224

5,227,780

4,659,247

Mortgage-backed securities

5,190,539

5,201,842

3,801,800

Corporate bonds and notes

816,503

631,480

391,720

Corporate stocks

638,503

536,980

414,602
       

Exempt from Federal taxation:

      

Obligations of states and political subdivisions

1,297,986

1,274,984

1,433,610

Total

$14,385,016

13,992,910

12,621,909


The amortized cost and estimated fair value by years to contractual maturity (mortgage-backed securities are shown as maturing based on the estimated average life at the projected prepayment speed) as of December 31, 2000, for debt securities available for sale are as follows:
 

Maturing
 


Within One Year

After One, But
Within Five Years

  
 

Amortized

Fair

Amortized

Fair
 

Cost

Value

Cost

Value

U.S. Treasury securities

$11,001,650

10,984,990

2,999,137

3,029,050

Obligations of other U.S. Government agencies

1,999,635

1,997,820

44,597,569

44,548,612

Mortgage-backed securities

-

-

67,910,826

67,369,170

Obligations of states and political subdivisions

1,016,920

1,020,519

4,624,974

4,675,483

Corporate bonds and notes

-

-

2,497,617

2,489,825

Total

$14,018,205

14,003,329

122,630,123

122,112,140
 
 
 

Maturing
 

After Five, But
Within Ten Years


After Ten Years
 
 

Amortized

Fair

Amortized

Fair
 

Cost

Value

Cost

Value

U.S. Treasury securities

$ -

-

-

-

Obligations of other U.S. Government agencies

28,692,102

28,827,220

1,278,126

1,281,780

Mortgage-backed securities

8,574,717

8,452,679

11,206,345

11,307,317

Obligations of states and political subdivisions

11,365,415

11,433,361

1,413,590

1,402,071

Corporate bonds and notes

2,589,631

2,556,375

7,355,813

7,139,227

Total

$51,221,865

51,269,635

21,253,874

21,130,395


Actual maturities may differ from contractual maturities above because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $167,221,355 at December 31, 2000, and $176,737,390 at December 31, 1999. This includes mortgage backed securities totaling $27,991,093 and $9,125,075 (fair value of $27,976,040 and $8,791,440), U.S. Treasury securities totaling $0 and $2,000,000 (fair value of $0 and $1,970,246), and obligations of other U.S. Government agencies totaling $38,475,000 and $59,689,815 (fair value of $38,271,246 and $57,457,985) pledged to secure securities sold under agreements to repurchase at December 31, 2000 and 1999, respectively.


There are no securities of a single issuer (other than securities of the U.S. Government and its agencies) that exceed 10% of shareholders' equity at December 31, 2000 or 1999.


The Corporation has equity investments in Southern Tier Business Development, LLC and Cephas Capital Partnership, LP. These small business investment companies were established for the purpose of providing financing to small businesses in market areas served by the Corporation, 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, 2000 and 1999 totaled $2,392,143 and $2,175,866, respectively, are included in other assets, and are accounted for 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,

2000

1999

Residential mortgages

$ 92,626,675

90,317,970

Commercial mortgages

43,272,341

43,759,933

Commercial, financial and agricultural

115,018,904

91,276,599

Leases, net

157,394

267,746

Consumer loans

143,742,646

134,616,556

Net deferred origination fees and costs
and unearned income


(246,351)


(275,397)
 

$394,571,609

359,963,407


Included in consumer loans are student loans totaling $3,853,277 at December 31, 2000 and $3,415,897 at December 31, 1999, which are considered held for sale once these loans enter repayment status.


Residential mortgages totaling $79,067,465 at December 31, 2000, and $82,364,702 at December 31, 1999, were pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLB.


The Corporation's market area encompasses the New York State counties of Chemung, Steuben, Schuyler and Tioga. Substantially all of the Corporation's outstanding loans are with borrowers living or doing business within 25 miles of the Corporation's branches in these counties. The Corporation's concentrations of credit risk are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans, generally follow the loan classifications in the table above. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.


The following table summarizes the Corporation's non-performing loans at December 31, 2000 and 1999:
 

2000

1999

Non-accrual loans

$1,078,240

640,051

Troubled debt restructurings

404,476

483,217

Loans 90 days or more past due and still accruing
interest


223,974


281,273
 

$1,706,690

1,404,541


The effect of nonaccrual loans on interest income for the years ended December 31, 2000, 1999 and 1998 was not material. The Corporation is not committed to advance additional funds to borrowers with non-performing loans.




Transactions in the allowance for loan losses for the years ended December 31, 2000, 1999 and 1998 were as follows:
 

2000

1999

1998

Balances at January 1

$4,665,093

4,509,185

4,145,422

Provision charged to operations

750,000

672,669

800,000

Loans charged off

(853,409)

(690,034)

(593,704)

Recoveries

146,184

173,273

157,467

Balances at December 31

$4,707,868

4,665,093

4,509,185


At December 31, 2000 and 1999, the recorded investment in loans that are considered to be impaired totaled $816,326 and $761,016, respectively. Included in the 2000 amount are impaired loans of $367,951 for which the related allowance for loan losses is $200,839. The 1999 amount includes $360,689 of impaired loans with a related allowance for loan losses of $149,924. The average recorded investment in impaired loans during 2000, 1999 and 1998 was $744,081, $3,171,533 and $2,837,325, respectively. The effect on interest income for impaired loans was not material to the consolidated financial statements in 2000, 1999 or 1998.


(5) PREMISES & EQUIPMENT

Premises and equipment at December 31, 2000 and 1999 are as follows:
 

2000

1999

Land

$ 2,681,408

$ 2,681,408

Buildings

15,030,100

13,222,838

Equipment and furniture

16,044,062

14,927,263

Leasehold improvements

431,448

431,448

 

34,187,018

31,262,957

Less accumulated depreciation

20,589,377

19,141,290

 

$13,597,641

$12,121,667

(6) DEPOSITS


A summary of deposits at December 31, 2000 and 1999 is as follows:

 

2000

1999

Non-interest-bearing demand deposits

$107,289,840

98,292,851

Interest-bearing demand deposits

39,128,338

39,186,892

Insured money market accounts

53,146,665

51,057,232

Savings deposits

84,959,734

89,939,115

Time deposits

226,863,180

203,297,599
 

$511,387,757

481,773,689


Time deposits include certificates of deposit in denominations of $100,000 or more aggregating $65,082,752 and $57,063,792 at December 31, 2000 and 1999, respectively. Interest expense on such certificates was $4,163,041, $2,777,298 and $2,420,835 for 2000, 1999 and 1998, respectively.


Scheduled maturities of time deposits at December 31, 2000, are summarized as follows:

2001

$154,848,088

2002

50,257,808

2003

11,671,749

2004

4,201,484

2005

5,780,540

2006 and thereafter

103,511

 

$226,863,180


(7) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

A summary of securities sold under agreements to repurchase as of and for the years ended December 31, 2000, 1999 and 1998 is as follows:
 

2000

1999

1998

Securities sold under agreements to
repurchase:

      

Balance at December 31

$49,406,826

49,946,491

50,587,369

Maximum month-end balance

$51,003,367

53,731,116

50,587,369

Average balance during year

$50,110,845

51,900,947

32,166,417

Weighted-average rate at December 31

5.75%

4.97%

4.80%

Average rate paid during year

5.51%

4.98%

5.23%


The agreements have remaining contractual maturities of 2 days to 7.9 years at December 31, 2000, with a weighted-average contractual maturity of 5.1 years. Certain of the agreements have call features. At December 31, 2000, the weighted-average period to the next call date is approximately ten months.


(8) FEDERAL HOME LOAN BANK ADVANCES


Federal Home Loan Bank advances at December 31, 2000, 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, a $5,000,000, 5.41%, five year advance with a maturity date of December 29, 2005, callable on or after December 29, 2002, and an $8,400,000, 5.85%, overnight advance with a maturity date of January 2, 2001.


(9) INCOME TAXES


For the years ended December 31, 2000, 1999 and 1998, income tax expense attributable to income from operations consisted of the following:
 

2000

1999

1998

Current:

      

State

$ 195,635

481,750

449,653

Federal

3,433,532

3,631,325

3,490,719

 

3,629,167

4,113,075

3,940,372

Deferred expense(benefit)

364,908

45,955

(554,345)
 

$3,994,075

4,159,030

3,386,027



Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income tax expense as follows:
 

2000

1999

1998

Tax computed at statutory rate

$4,334,719

4,267,180

3,632,276

Tax-exempt interest

(641,915)

(522,865)

(527,353)

Dividend exclusion

(57,865)

(55,707)

(53,988)

State taxes, net of Federal benefit

207,909

371,094

241,864

Nondeductible interest expense

87,796

64,792

68,089

Other items, net

63,431

34,536

25,139

Actual income tax expense

$3,994,075

4,159,030

3,386,027


The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999, are presented below:
 

2000

1999

Deferred tax assets:

    

Allowance for loan losses-book

$1,833,715

1,817,054

Accrual for postretirement benefits other than pensions

750,598

750,595

Deferred loan fees

94,221

104,924

Deferred compensation and directors' fees

691,179

655,745

Net unrealized losses on securities available for sale

-

201,538

Interest on non-accrual loans

24,525

50,271

Other

76,237

93,194

Total gross deferred tax assets

3,470,475

3,673,321

     

Deferred tax liabilities:

    

Depreciation

178,370

207,048

Prepaid pension

276,766

54,137

Net unrealized gains on securities available for sale

2,423,776

-

Other

169,649

-

Total gross deferred tax liabilities

3,048,561

261,185

Net deferred tax asset

$ 421,914

3,412,136



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 Corporation has a noncontributory defined benefit pension plan covering substantially all employees. The plan's defined benefit formula generally bases payments to retired employees upon their length of service multiplied by a percentage of the average monthly pay over the last five years of employment.


The following table presents (1) change in the plan's projected benefit obligation and plan assets, and (2) the plan's funded status reconciled with amounts recognized in the Corporation's consolidated balance sheet at December 31, 2000 and 1999:
 

2000

1999

Changes in projected benefit obligation:

    

Projected benefit obligation at beginning of year

$ 13,021,081

14,549,204

Service cost

297,927

320,308

Interest cost

990,817

986,425

Plan amendments

-

384,407

Actuarial loss (gain)

607,380

(2,335,605)

Benefits paid

(919,183)

(883,658)

Projected benefit obligation at end of year

$ 13,998,022

13,021,081

     

Changes in fair value of plan assets:

    

Fair value of plan assets at beginning of year

20,423,565

19,209,845

Actual return on plan assets

(108,791)

2,135,378

Expenses paid

(40,570)

(38,000)

Benefits paid

(919,183)

(883,658)

Fair value of plan assets at end of year

$ 19,355,021

20,423,565

     

Funded status:

    

Plan assets in excess of projected benefit
obligation at end of year


5,356,999


7,402,484

Unrecognized net transition obligation being
recognized over 10 years

490,014


559,902

Unrecognized prior service cost

721,391

796,207

Unrecognized net actuarial gain

(5,595,059)

(8,398,893)

Prepaid pension cost

$ 973,345

359,700



Net periodic pension income in 2000, 1999 and 1998 is comprised of the following:
 

2000

1999

1998

Service cost, benefits earned during the year

$ 297,927

320,308

359,955

Interest cost on projected benefit obligation

990,817

986,425

921,621

Expected return on plan assets

(1,499,853)

(1,437,813)

(1,395,769)

Net amortization and deferral

(402,536)

(272,260)

(89,848)

Net periodic pension income

($ 613,645)

(403,340)

(204,041)




The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2000, 1999 and 1998 were as follows:
 

2000

1999

1998

Discount rate

7.50%

8.00%

6.75%

Expected long-term rate of return on assets

7.50%

7.50%

8.50%

Assumed rate of future compensation increase

5.00%

5.00%

5.00%


The plan's assets at December 31, 2000 and 1999, are invested in common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds.


The Corporation 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 Corporation matches at the rate of 50% of the first 6% of an eligible employee's current earnings. Expense under the plan totaled $681,193, $620,279, and $633,019 for the years ended December 31, 2000, 1999 and 1998, respectively.


The Corporation 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 Corporation's expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year.


The following table presents (1) changes in the plan's accumulated postretirement benefit obligation and (2) the plan's funded status reconciled with amounts recognized in the Corporation's consolidated balance sheet at December 31, 2000 and 1999:

Changes in accumulated postretirement benefit obligation:

2000

1999

Accumulated postretirement benefit obligation at beginning
of year


$ 2,543,000


2,214,000

Service cost

23,000

42,000

Interest cost

181,000

174,000

Participant contributions

88,340

70,320

Plan amendments

-

422,000

Actuarial gain

(74,829)

(145,234)

Benefits paid

(320,094)

(234,086)

Accumulated postretirement benefit obligation at end of
year

$ 2,440,417

2,543,000

     

Accrued postretirement benefit cost:

    

Unfunded postretirement benefit obligation end of year

($2,440,417)

(2,543,000)

Unrecognized prior service cost

380,000

408,000

Unrecognized net actuarial loss

133,669

208,498

Accrued postretirement benefit cost at end of year,
included in other liabilities


($1,926,748)


(1,926,502)




The components of net periodic post-retirement benefit cost for the years ended December 31, 2000, 1999 and 1998 are as follows:
 

2000

1999

1998

Service cost

$ 23,000

42,000

42,000

Interest cost

181,000

174,000

144,000

Net amortization and deferral

28,000

22,000

-

Net periodic postretirement benefit cost

$232,000

238,000

186,000


The postretirement benefit obligation was determined using a discount rate of 7.50% for 2000 and 8.00% for 1999. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation initially ranged from 7.3% to 7.9% in 2000, depending on the specific plan, and was decreased to 5.5% in the year 2005 and thereafter, over the projected payout of benefits. The health care cost trend rate assumption can have a significant effect on the amounts reported. If the health care cost trend rate was increased one percent in each year, the accumulated postretirement benefit obligation as of December 31, 2000, would have increased by 4.9%, and the aggregate of service and interest cost would have increased by 4.4%. If the health care cost trend rate was decreased one percent in each year, the accumulated postretirement benefit obligation as of December 31, 2000, would have decreased by 4.4%, and the aggregate of service and interest cost would have decreased by 3.9%. However, the plan limits the increase in the Corporation's annual contributions to the plan for most participants to the increase in base compensation for active employees.


The Corporation also sponsors an Executive Supplemental Pension Plan for certain current and former executive officers to restore certain pension benefits that may be reduced due to limitations under the Internal Revenue Code. The benefits under this plan are unfunded and as of December 31, 2000 and 1999, the projected benefit obligation was $555,936 and $437,380, respectively. As of December 31, 2000 and 1999, the Corporation had an accrued benefit liability of $262,777 and $220,708, respectively, related to this plan. The Corporation recorded an expense of $62,989, $44,138 and $14,170 related to this plan during 2000, 1999 and 1998, respectively.

(11) RELATED PARTY TRANSACTIONS

Members of the Board of Directors, certain Corporation officers, and their immediate families directly, or through entities in which they are principal owners (more than 10% interest), were customers of, and had loans and other transactions with, the Corporation in the ordinary course of business. All loans and commitments included as part of such transactions were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons. These loans and commitments, which did not involve more than normal risk of collectibility or present other unfavorable features, are summarized as follows for the years ended December 31, 2000 and 1999:
 

2000

1999

Balance at beginning of year

$ 7,218,807

7,557,687

Additions

85,567,181

24,824,104

Amounts collected

(77,647,228)

(25,162,984)

Balance at end of year

$15,138,760

7,218,807


(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:
 

2000

1999

1998

Data processing services

$2,176,368

1,979,254

1,618,091

Advertising

708,449

646,594

398,208

Amortization of intangible assets

587,302

587,303

587,303


(13) COMMITMENTS AND CONTINGENCIES

In the normal course of business, there are outstanding various commitments and contingent liabilities, such as commitments to extend credit, which are not reflected in the accompanying consolidated financial statements. Commitments to outside parties under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans totaled $2,538,946, $121,482,176 and $9,516,697, respectively, at December 31, 2000. Commitments to outside parties under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans totaled $3,306,032, $118,164,973 and $8,074,147, respectively, at December 31, 1999. Because many commitments and almost all standby letters of credit expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. Loan commitments and unused lines of credit have off balance sheet credit risk because only origination fees are recognized on the consolidated balance sheet until commitments are fulfilled or expire. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and collateral or other security is of no value. The Corporation does not anticipate losses as a result of these transactions. These commitments also have off balance sheet interest rate risk in that the interest rate at which these commitments were made may not be at market rates on the date the commitments are fulfilled.


At December 31, 2000, the Corporation had outstanding commitments totaling $956,698 to fund equity investments in small business investment companies.

The Corporation has employment contracts with certain of its senior officers, which expire at various dates through 2003 and may be extended on a year-to-year basis.


In the normal course of business, there are various outstanding legal proceedings. In the opinion of management, the aggregate amount involved in such proceedings is not material to the financial condition or results of operations of the Corporation.


(14) SHAREHOLDERS' EQUITY


Under Federal Reserve regulations, the Bank is limited to the amount it may loan to the Corporation, unless such loans are collateralized by specific obligations. At December 31, 2000, the maximum amount available for transfer from the Bank to the Corporation in the form of unsecured loans was $1,774,883. The Bank is also subject to legal limitations on the amount of dividends that can be paid to the Corporation without prior regulatory approval. Dividends are limited to retained net profits, as defined by regulations, for the current year and the two preceding years. At December 31, 2000, $11,575,713 was available for the declaration of dividends from the Bank to the Corporation.


(15) PARENT COMPANY FINANCIAL INFORMATION

Condensed parent company only financial statement information of Chemung Financial Corporation is as follows:

BALANCE SHEETS - DECEMBER 31

2000

1999

Assets:

    

Cash on deposit with subsidiary bank

$ 911,957

$ 29,669

Investment in subsidiary-Chemung Canal Trust Company

69,599,138

61,907,440

Investment in subsidiary-CFS Group

250,000

-

Dividends receivable

886,729

949,257

Securities available for sale, at estimated fair value

1,154,920

1,102,481

Other assets

2,422,256

2,188,718

Total assets

$75,225,000

$66,177,565

     

Liabilities and shareholders' equity:

    

Dividend payable

886,729

849,257

Other liabilities

26,756

16,425

Total liabilities

913,485

865,682

Shareholders' equity:

    

Total shareholders' equity

74,311,515

65,311,883

Total liabilities and shareholders' equity

$75,225,000

$66,177,565


STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
 

2000

1999

1998

Interest and dividend income

$ 88,450

93,060

112,375

Other income

216,277

177,530

2,533

Dividends from subsidiary bank

4,918,121

4,496,546

3,137,387

Income before equity in undistributed earnings of
subsidiary bank


5,222,848


4,767,136


3,252,295

Equity in undistributed earnings of subsidiary
bank


3,692,888


3,759,448


4,126,662

Operating expenses

96,989

76,032

78,546

Income before income tax expense

8,818,747

8,450,552

7,300,411

Income tax expense

63,648

59,051

3,273

Net Income

$8,755,099

8,391,501

7,297,138



STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
 

2000

1999

1998

Cash flows from operating activities:

      

Net Income

$8,755,099

8,391,501

7,297,138

Adjustments to reconcile net income to net cash
provided by operating activities:

      

Equity in undistributed earnings of subsidiary
bank


(3,692,888)


(3,759,448)


(4,126,663)

Decrease (increase) in dividend receivable

62,528

(151,687)

(155,959)

Increase in other assets

(234,515)

(388,436)

(956,199)

Increase (decrease) in other liabilities

18,238

13,520

(9,685)

Distribution of restricted stock units for
directors' deferred compensation plan


106,883


-


-

Net cash provided by operating activities

5,015,345

4,105,450

2,048,632

       

Cash flow from investing activities:

      

Investment in subsidiary CFS Group

(250,000)

-

-

Purchase of securities available for sale

(49,992)

-

-

Net cash used in investing activities

(299,992)

-

-

       

Cash flow from financing activities:

      

Cash dividends paid

(3,435,952)

(2,944,859)

(2,681,428)

Purchase of treasury stock

(397,113)

(1,464,675)

(984,284)

Sale of treasury stock

-

-

67,378

Net cash used in financing activities

(3,833,065)

(4,409,534)

(3,598,334)

       

Increase (decrease) in cash and cash
equivalents


882,288


(304,084)


(1,549,702)

Cash and cash equivalents at beginning of year

29,669

333,753

1,883,455

       

Cash and cash equivalents at end of year

$ 911,957

29,669

333,753


(16) FAIR VALUES OF FINANCIAL INSTRUMENTS


The following methods and assumptions were used to estimate the fair value of each class of financial instruments:


Short-Term Financial Instruments

For those short-term instruments that generally mature in ninety days or less, the carrying value approximates fair value.


Securities

Fair values for securities are based on either 1) quoted market prices, 2) dealer quotes, 3) a correspondent bank's pricing system, or 4) discounted cash flows to maturity. For certain securities, such as equity investments in the FHLB and Federal Reserve Bank, and non-marketable obligations of political subdivisions, fair value is estimated to approximate amortized cost.


Loans Receivable

For variable-rate loans that reprice frequently, fair values approximate carrying values. The fair values for other loans are estimated through discounted cash flow analysis using interest rates currently being offered for loans with similar terms and credit quality.


Deposits

The fair values disclosed for demand deposits, savings accounts and money market accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying values).


The fair value of fixed maturity certificates of deposits is estimated using a discounted cash flow approach that applies interest rates currently being offered on certificates to a schedule of weighted average expected monthly maturities on time deposits.


Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

These instruments bear both variable and stated rates of interest. Therefore, the carrying value approximates fair value for the variable rate instruments and stated rate instruments are based on discounted cash flows 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 discounted cash flows to maturity.


Commitments to Extend Credit

The fair value of commitments to extend credit is based on fees currently charged to enter into similar agreements, the counterparty'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, 2000 and 1999.


Accrued Interest Receivable and Payable

For these short term instruments, the carrying value approximates fair value.


The estimated fair value of the Corporation's financial instruments as of December 31, 2000 and 1999 are as follows (dollars in thousands):
 

2000

1999


Financial assets:

Carrying Amount

Estimated Fair Value (1)

Carrying Amount

Estimated Fair Value (1)

Cash and due from banks

$ 26,726

26,726

30,926

30,926

Interest-bearing deposits

1,438

1,438

1,146

1,146

Securities

229,273

229,481

235,990

235,990

Net loans

389,864

389,914

355,298

350,624

Accrued interest receivable

4,266

4,266

4,143

4,143

Financial liabilities:

        

Deposits:

        

Demand, savings, NOW and
insured money market accounts


$284,525


284,525


278,476


278,476

Time deposits

226,863

228,167

203,298

202,791

Repurchase agreements

49,407

49,768

49,946

49,610

Federal Home Loan Bank advances

33,400

33,104

49,700

49,239

Accrued interest payable

2,127

2,127

1,610

1,610

Dividends payable

887

887

849

849


(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgement and, therefore, can not be determined with precision. Changes in assumptions could significantly affect the estimates.


(17) REGULATORY CAPITAL REQUIREMENTS


The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.


Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets (all as defined in the applicable regulations). Management believes that, as of December 31, 2000 and 1999, the Corporation and the Bank met all capital adequacy requirements to which they were subject.


As of December 31, 2000, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank's or the Corporation's capital category.



The actual capital amounts and ratios of the Corporation and the Bank are presented in the following table:
 


Actual

Required To Be Adequately Capitalized

  

Required To Be Well Capitalized
 

Amount

Ratio

  

Amount

  

Ratio

  

Amount

  

Ratio

As of December 31, 2000

                    

Total Capital(to Risk Weighted Assets):

                    

Consolidated

$70,320,895

16.72%

>

$33,644,058

>

8.00%

>

$42,055,073

>

10.00%

Bank

$65,630,113

15.74%

>

$33,360,761

>

8.00%

>

$41,700,951

>

10.00%

Tier 1 Capital(to Risk Weighted Assets):

                    

Consolidated

$65,613,026

15.60%

>

$16,822,029

>

4.00%

>

$25,233,044

>

6.00%

Bank

$60,922,244

14.61%

>

$16,680,380

>

4.00%

>

$25,020,571

>

6.00%

Tier 1 Capital(to Average Assets):

                    

Consolidated

$65,613,026

9.91%

>

$19,860,783

>

3.00%

>

$33,101,305

>

5.00%

Bank

$60,922,244

9.25%

>

$19,759,072

>

3.00%

>

$32,931,787

>

5.00%
                     

As of December 31, 1999

                    

Total Capital(to Risk Weighted Assets):

                    

Consolidated

$64,639,014

16.56%

>

$31,228,519

>

8.00%

>

$39,035,648

>

10.00%

Bank

$61,254,697

15.82%

>

$30,967,904

>

8.00%

>

$38,709,879

>

10.00%

Tier 1 Capital(to Risk Weighted Assets):

                    

Consolidated

$59,973,921

15.36%

>

$15,614,259

>

4.00%

>

$23,421,389

>

6.00%

Bank

$56,589,604

14.62%

>

$15,483,952

>

4.00%

>

$23,225,928

>

6.00%

Tier 1 Capital(to Average Assets):

                    

Consolidated

$59,973,921

9.49%

>

$18,952,873

>

3.00%

>

$31,588,122

>

5.00%

Bank

$56,589,604

9.00%

>

$18,861,294

>

3.00%

>

$31,435,490

>

5.00%