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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE For the fiscal year ended December 31, 2001 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from _____________ to _____________ Commission File Number 0-13888 CHEMUNG FINANCIAL CORPORATION NEW YORK 16-123703-8 One Chemung Canal Plaza, P.O. Box 1522 14902 Registrant's telephone number, including area code: (607) 737-3711 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.01 a share (Title of class) X NO
X
SECURITIES EXCHANGE ACT OF 1934
(State or other jursidiction of
incorporation or organization)
Elmira, New York
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
The aggregate market value of Common Stock held by non-affiliates on February 28, 2002 was $57,793,468
As of February 28, 2002 there were 3,945,566 shares of Common Stock, $0.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31, 2001 are incorporated by reference into Parts I, II and IV.
Portions of the Proxy Statement for the Annual Shareholders meeting to be held on May 15, 2002 are incorporated by reference into Parts III and IV.
(THIS PAGE INTENTIONALLY LEFT BLANK)
PART I
Chemung Financial Corporation (Corporation) was incorporated on January 2, 1985, under the laws of the State of New York. The Corporation was organized for the purpose of acquiring a majority holding of Chemung Canal Trust Company (Bank). The Bank was established in 1833 under the name Chemung Canal Bank, and was subsequently granted a New York State bank charter in 1895. In 1902, the Bank was reorganized as a New York State trust company under the name Elmira Trust Company, which name was changed to Chemung Canal Trust Company in 1903.
On June 1, 1985, after the approval by the New York State Superintendent of Banks and the Board of Governors of the Federal Reserve System of the Plan of Acquisition and holding company application, the Bank became a wholly owned subsidiary of the Corporation. There have been no material changes in the mode of conducting business of either the Corporation or the Bank since the acquisition of the Bank by the Corporation.
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 established a financial services subsidiary, CFS Group, Inc., which commenced operation during September of 2001. 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 Grou
p, Inc., a financial services subsidiary.
The Corporation is subject to applicable federal laws relating to bank holding companies as well as federal securities laws, State Corporation Law and State Banking Law.
(b) Financial information about industry segments
The Corporation and the Bank are engaged only in banking and bank-related businesses. During 2000, the Corporation established a financial services subsidiary, CFS Group, Inc., to provide additional financial services. CFS Group, Inc. began operations during September 2001. Exhibits I through VI included in the Corporation's Annual Report to Shareholders for the year ended December 31, 2001, set forth financial information with respect to the Corporation's financial position and results of operations. Management's Discussion and Analysis of Financial Condition and Results of Operations, including Exhibits I through VI, is incorporated herein by reference.
(c) Narrative description of business
Business
The Bank is a New York State chartered, independent commercial bank, which engages in full-service commercial and consumer banking and trust business. The Bank's services include accepting time, demand and savings deposits including NOW accounts, Super NOW accounts, regular savings accounts, insured money market accounts, investment certificates, fixed-rate certificates of deposit and club accounts. Its services also include making secured and unsecured commercial and consumer loans, financing commercial transactions either directly or participating with regional industrial development and community lending corporations, making commercial, residential and home equity mortgage loans, revolving credit loans with overdraft checking protection, small business loans and student loans. Additional services include renting of safe deposit facilities, selling uninsured annuity and mutual fund investment products, and the use of networked automated teller facilities.
Trust services provided by the Bank include services as executor, trustee under wills and agreements, guardian and custodian and trustee and agent for pension, profit-sharing and other employee benefit trusts as well as various investment, pension, estate planning and employee benefit administrative services.
For additional information, which focuses on the results of operation of the Corporation and the Bank, see Management's Discussion and Analysis of Financial Condition and Results of Operations, incorporated herein by reference.
There have been no material changes in the manner of doing business by the Corporation or the Bank during the fiscal year ended December 31, 2001.
Competition
Six (6) of the Bank's thirteen (13) full-service branches, in addition to the main office, are located in Chemung County. The other seven (7) full-service branches are located in the adjacent counties of Schuyler, Steuben, and Tioga. All facilities are located in New York State.
Within these market areas, the Bank encounters intense competition in its banking business from several other financial institutions offering comparable products. These competitors include other commercial banks (both locally based independent banks and local offices of regional and major metropolitan-based banks), as well as stock savings banks and credit unions. In addition, the Bank experiences competition in marketing some of its services from local operations of insurance companies, brokerage firms and retail financial service businesses.
Dependence Upon a Single Customer
Neither the Corporation nor the Bank is dependent upon a single or limited number of customers.
Research and Development
Expenditures for research and development were immaterial for the years 2001, 2000, and 1999.
Employees
As of December 31, 2001, the Bank employed 315 persons on a full-time equivalent basis.
Excutive Officers
The executive officers of the Corporation are elected annually and hold office until their respective successors have been elected and qualified or until death, resignation or removal by the Board of Directors. Each executive officer of the Corporation is also an executive officer of the Bank. There are no arrangements or understandings between the persons named and any other person pursuant to which such officers were selected.
Name |
Age |
Position (served since) |
||
Jan P. Updegraff |
59 |
President and Chief Executive Officer of the Corporation and the Bank (1998); formerly President and Chief Operating Officer of the Corporation and the Bank (1996); and Vice President and Treasurer of the Corporation and Executive Vice President of the Bank (1990). |
||
James E. Corey III |
55 |
Vice President of the Corporation (1993) and Executive Vice President of the Bank (1998); formerly Senior Vice President of the Bank (1993). |
||
Jerome F. Denton |
50 |
Vice President of the Corporation (1997); formerly Secretary (1986); Executive Vice President of the Bank (1998); formerly Senior Vice President of the Bank (1996). |
||
Thomas C. Karski |
56 |
Vice President of the Corporation (1998) and Senior Vice President of the Bank (1998); formerly Vice President of the Bank (1987). |
||
Joseph P. Manning |
63 |
Vice President of the Corporation (1998) and Senior Vice President of the Bank (1998); formerly Vice President of the Bank (1993). |
||
John R. Battersby, Jr. |
51 |
Senior Vice President, Chief Financial Officer of the Bank (1998); Treasurer of the Corporation and the Bank (1995); formerly Vice President of the Bank (1995). |
||
Jane H. Adamy |
51 |
Secretary of the Corporation (2000) and Vice President and Secretary of the Bank (2000); formerly Vice President of the Bank (1998) and Senior Trust Officer (1993). |
(d) Financial information about foreign and domestic operations and export sales
Neither the Corporation nor the Bank relies on foreign sources of funds or income.
(e) Statistical disclosure by bank holding companies
The following disclosures present summarized statistical data covering the Corporation and the Bank.
Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential
Year Ended December 31,
|
2001 |
2000 |
1999 |
||||||
Assets |
Average Balance |
|
Yield/ |
Average Balance |
|
Yield/ Rate |
Average Balance |
|
Yield/ Rate |
Earning assets: |
(Dollars in thousands) |
||||||||
Loans |
$416,370 |
34,046 |
8.18% |
382,788 |
33,160 |
8.66% |
346,550 |
29,446 |
8.50% |
Taxable securities |
209,630 |
13,486 |
6.43 |
201,641 |
13,087 |
6.49 |
204,635 |
12,718 |
6.21 |
Tax-exempt securities |
24,168 |
1,107 |
4.58 |
28,359 |
1,298 |
4.58 |
28,094 |
1,275 |
4.54 |
Federal funds sold |
6,009 |
271 |
4.51 |
2,839 |
184 |
6.48 |
9,870 |
484 |
4.90 |
Interest-bearing deposits |
2,635 |
212 |
8.05 |
1,755 |
249 |
14.19 |
2,412 |
254 |
10.52 |
|
|
|
|
|
|
|
|
|
|
Total earning assets |
658,812 |
49,122 |
7.46% |
617,382 |
47,978 |
7.77% |
591,561 |
44,177 |
7.47% |
|
|
|
|
|
|
|
|
|
|
Non-earning assets: |
|
|
|
|
|
|
|
|
|
Cash and due from banks |
24,864 |
|
|
24,070 |
|
|
24,868 |
|
|
Premises and equipment, net |
14,137 |
|
|
13,040 |
|
|
10,689 |
|
|
Other assets |
12,000 |
|
|
12,242 |
|
|
9,264 |
|
|
Allowance for loan losses |
(4,832) |
|
|
(4,708) |
|
|
(4,620) |
|
|
Intangibles and AFS valuation allowance |
13,661 |
|
|
4,996 |
|
|
10,507 |
|
|
Total |
718,642 |
|
|
667,022 |
|
|
642,269 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
Demand deposits |
40,553 |
432 |
1.07% |
40,939 |
518 |
1.27% |
41,596 |
525 |
1.26% |
Savings and insured money market deposits |
149,301 |
3,807 |
2.55 |
141,000 |
4,367 |
3.10 |
151,262 |
4,342 |
2.87 |
Time deposits |
238,222 |
12,552 |
5.27 |
227,465 |
13,010 |
5.72 |
202,239 |
10,230 |
5.06 |
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
525,451 |
21,692 |
4.13% |
486,863 |
22,055 |
4.53% |
469,043 |
18,728 |
3.99% |
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
Demand deposits |
105,585 |
|
|
105,795 |
|
|
99,035 |
|
|
Other liabilities |
9,469 |
|
|
6,308 |
|
|
7,892 |
|
|
Total liabilities |
640,505 |
|
|
598,966 |
|
|
575,970 |
|
|
Shareholders' equity |
78,137 |
|
|
68,056 |
|
|
66,299 |
|
|
Total |
718,642 |
|
|
667,022 |
|
|
642,269 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$27,430 |
|
|
$25,923 |
|
|
$25,449 |
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
3.33% |
|
|
3.24% |
|
|
3.48% |
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
4.16% |
|
|
4.20% |
|
|
4.30% |
For the purpose of these computations, non-accruing 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.
The following table sets forth for the periods indicated, a summary of the changes in interest and dividends earned and interest paid resulting from changes in volume and changes in rates (in thousands of dollars):
|
2001 Compared to 2000 |
2000 Compared to 1999 |
||||
|
Increase (Decrease) Due to (1) |
Increase (Decrease) Due to (1) |
||||
|
Volume |
Rate |
Net |
Volume |
Rate |
Net |
Interest and dividends earned on: |
|
|
|
|
|
|
Loans |
$2,795 |
(1,909) |
886 |
3,147 |
567 |
3,714 |
Taxable securities |
520 |
(121) |
399 |
(191) |
560 |
369 |
Tax-exempt securities |
(191) |
0 |
(191) |
12 |
11 |
23 |
Federal funds sold |
156 |
(69) |
87 |
(422) |
122 |
(300) |
Interest-bearing deposits |
96 |
(133) |
(37) |
(80) |
75 |
(5) |
Total earning assets |
$3,376 |
(2,232) |
1,144 |
2,466 |
1,335 |
3,801 |
Interest paid on: |
|
|
|
|
|
|
Demand deposits |
(5) |
(81) |
(86) |
(7) |
0 |
(7) |
Savings and insured money market deposits |
247 |
(807) |
(560) |
(308) |
333 |
25 |
Time deposits |
597 |
(1,055) |
(458) |
1,359 |
1,421 |
2,780 |
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
|
|
|
Total interest-bearing liabilities |
$1,856 |
(2,219) |
(363) |
1,222 |
2,105 |
3,327 |
Net interest income |
$1,520 |
(13) |
1,507 |
1,244 |
(770) |
474 |
Investment Portfolio
The following table sets forth the carrying amount of investment securities at the dates indicated (in thousands of dollars):
|
December 31, |
||
|
2001 |
2000 |
1999 |
U.S. Treasury and other U.S. Government agencies |
$100,129 |
90,669 |
108,038 |
Mortgage-backed securities |
92,993 |
87,129 |
73,747 |
State and political subdivisions |
24,654 |
25,054 |
29,290 |
Corporate bonds and notes |
15,022 |
12,229 |
10,180 |
Corporate stocks |
13,455 |
14,192 |
14,735 |
Total |
$246,253 |
229,273 |
235,990 |
Included in the above table are $239,137, $222,707 and $227,384 (in thousands of dollars) of securities available for sale at December 31, 2001, 2000 and 1999, respectively.
The following table sets forth the maturities of debt securities at December 31, 2001 and the weighted average yields of such securities (all securities are calculated on the basis of the amortized cost and effective yields weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security). Federal tax equivalent adjustments have been made in calculating yields on municipal obligations (in thousands of dollars):
|
Maturing |
|||
|
|
After One, But Within |
||
|
Amount |
Yield |
Amount |
Yield |
U.S. Government agencies |
27,563 |
6.59% |
30,734 |
5.28% |
Mortgage-backed securities |
443 |
6.07% |
10,691 |
6.64% |
State and political subdivisions |
4,865 |
4.74% |
7,322 |
6.76% |
Corporate bonds and notes |
- |
- |
5,249 |
6.30% |
Total |
$32,871 |
6.31% |
$53,996 |
5.84% |
|
Maturing |
|||
|
After Five, But Within |
|
||
|
Amount |
Yield |
Amount |
Yield |
U.S. Government agencies |
$40,264 |
6.04% |
$ 1,569 |
7.27% |
Mortgage-backed securities |
33,607 |
6.01% |
48,251 |
5.98% |
State and political subdivisions |
12,313 |
6.96% |
345 |
8.72% |
Corporate bonds and notes |
2,215 |
8.01% |
7,367 |
6.85% |
Total |
$88,399 |
6.21% |
$57,532 |
6.14% |
Loan Portfolio
The following table shows the Corporation's loan distribution at the end of each of the last five years (in thousands of dollars):
|
December 31, |
||||
|
2001 |
2000 |
1999 |
1998 |
1997 |
Commercial, financial and agricultural |
$188,332 |
158,448 |
135,305 |
113,865 |
102,816 |
Residential mortgages |
101,169 |
92,627 |
90,318 |
89,544 |
79,753 |
Consumer loans |
134,627 |
143,743 |
134,616 |
126,097 |
114,593 |
Total |
$424,128 |
394,818 |
360,239 |
329,506 |
297,162 |
|
Within One Year |
After One But Within Five Years |
After Five Years |
|
Commercial, financial and agricultural |
$ 59,947 |
$ 33,809 |
$ 94,576 |
$188,332 |
Loans maturing after one year with: |
|
|||
Fixed interest rates |
|
$ 22,331 |
$ 22,237 |
|
Variable interest rates |
|
$ 11,478 |
$ 72,339 |
|
Total |
|
$ 33,809 |
$ 94,576 |
|
Non-accrual and Past Due Loans
The following table summarizes the Corporation's non-accrual and past due loans (in thousands of dollars):
|
December 31, |
||||
|
2001 |
2000 |
1999 |
1998 |
1997 |
|
|
|
|
|
|
Non-accrual loans (1) |
$1,490 |
1,078 |
640 |
4,458 |
930 |
Accruing loans past due 90 days or more |
|
|
|
|
|
Information with respect to non-accrual loans at December 31, 2001, 2000 and 1999 is as follows (in thousands of dollars):
|
December 31, |
||
|
2001 |
2000 |
1999 |
Non-accrual loans |
$1,490 |
$1,078 |
$640 |
|
|
|
|
Interest income that would have been recorded under original terms |
|
|
|
|
|
|
|
Interest income recorded during the period |
|
|
|
(1) It is the Corporation's policy that when a past due loan is referred to legal counsel, or in the case of a commercial loan which becomes 90 days delinquent, or in the case of consumer, mortgage or home equity loans not guaranteed by a government agency which becomes 120 days delinquent, the loan is placed in non-accrual and previously accrued interest is reversed unless, because of collateral or other circumstances, it is deemed to be collectible. Loans may also be placed in non-accrual if management believes such classification is warranted for other reasons.
Potential Problem Loans
At December 31, 2001, in addition to non-performing loans, the Corporation, through its loan review function, has identified 19 commercial relationships totaling $7.3 million which it has internally classified as sub-standard. Included in this total are two relationships which total $4.7 million. While in a performing status as of December 31, 2001, these loans, given the current economic climate, have the potential to become non-performing. In addition, at December 31, 2001, there is one relationship totaling $4.6 million internally classified as special mention, for which adverse financial performance and cash flow information became available to management subsequent to December 31, 2001. This new information will cause this relationship to be classified as sub-standard subsequent to December 31, 2001. It is also expected that the loans in this relationship could be placed on non-performing status in the first quarter of 2002. Accordingly, management's attention is focused on th ese credits, which are reviewed on at least a quarterly basis.
Loan Concentrations
At December 31, 2001, the Corporation has no loan concentrations to borrowers engaged in the same or similar industries that exceed 10% of total loans.
Other Earning Assets
At December 31, 2001, the Corporation has no earning assets other than loans that meet the non-accrual, past due, restructured or potential problem loan criteria.
Summary of Loan Loss Experience
This table summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 2001 (in thousands of dollars):
|
Years Ended December 31, |
||||
|
2001 |
2000 |
1999 |
1998 |
1997 |
Allowance for loans losses at beginning of year |
$4,708 |
4,665 |
4,509 |
4,145 |
3,975 |
Charge-offs: |
|
|
|
|
|
Commercial, financial and agricultural |
139 |
65 |
38 |
13 |
77 |
Real estate mortgages |
5 |
4 |
12 |
16 |
53 |
Consumer loans |
806 |
770 |
624 |
552 |
640 |
Home equity |
- |
14 |
16 |
13 |
- |
Total |
950 |
853 |
690 |
594 |
770 |
Recoveries: |
|
|
|
|
|
Commercial, financial and agricultural |
64 |
29 |
43 |
35 |
14 |
Real estate mortgages |
12 |
- |
- |
- |
- |
Consumer loans |
143 |
117 |
130 |
123 |
76 |
Total |
219 |
146 |
173 |
158 |
90 |
Net charge-offs |
731 |
707 |
517 |
436 |
680 |
Provision charged to operations |
1,100 |
750 |
673 |
800 |
850 |
Allowance for loan losses at end of year |
$5,077 |
4,708 |
4,665 |
4,509 |
4,145 |
Ratio of net charge-offs during year to average |
|
|
|
|
|
(1) Daily balances were used to compute average outstanding loan balances.
The allocated portions of the allowance reflect management's estimates of specific known risk elements in the respective portfolios. Among the factors considered in allocating portions of the allowance by loan type are the current levels of past due, non-accrual and impaired loans. The unallocated portion of the allowance represents risk elements in the loan portfolio that have not been specifically identified. Factors considered in determining the appropriate level of unallocated allowance include historical loan loss history, current economic conditions, and loan growth. The following table summarizes the Corporation's allocation of the loan loss allowance for each year in the five-year period ended December 31, 2001:
|
Amount of loan loss allowance (in thousands) and Percent of Loans |
|||||||||
Balance at end of period applicable to: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
|
|
|
|
|
|
|
|
|
Commercial mortgages |
691 |
11.4 |
522 |
11.0 |
334 |
12.2 |
21 |
12.0 |
132 |
14.0 |
Residential mortgages |
368 |
23.8 |
152 |
23.4 |
185 |
25.0 |
88 |
25.7 |
31 |
24.8 |
Consumer loans |
1,290 |
31.8 |
1,536 |
36.4 |
1,416 |
37.4 |
1,007 |
38.3 |
823 |
38.7 |
|
4,709 |
100.0 |
3,907 |
100.0 |
3,162 |
100.0 |
3,197 |
100.0 |
2,388 |
100.0 |
Unallocated |
368 |
N/A |
801 |
N/A |
1,503 |
N/A |
1,312 |
N/A |
1,757 |
N/A |
Total |
$5,077 |
100.0 |
4,708 |
100.0 |
4,665 |
100.0 |
4,509 |
100.0 |
4,145 |
100.0 |
Deposits
The average daily amounts of deposits and rates paid on such deposits is summarized for the periods indicated in the following table (in thousands of dollars):
|
Year Ended December 31, |
|||||
|
2001 |
|
2000 |
|
1999 |
|
|
Amount |
Rate |
Amount |
Rate |
Amount |
Rate |
Non-interest-bearing demand deposits |
$105,585 |
- % |
105,795 |
- % |
99,035 |
- % |
Interest-bearing demand deposits |
40,553 |
1.07 |
40,939 |
1.27 |
41,596 |
1.26 |
Savings and insured money market deposits |
149,301 |
2.55 |
141,000 |
3.10 |
151,262 |
2.87 |
Time deposits |
238,222 |
5.27 |
227,465 |
5.72 |
202,239 |
5.06 |
|
$533,661 |
|
515,199 |
|
494,132 |
|
Scheduled maturities of time deposits at December 31, 2001 are summarized as follows (in thousands of dollars):
2002 |
$178,143 |
2003 |
28,612 |
2004 |
11,499 |
2005 |
5,872 |
2006 |
5,768 |
2007 and thereafter |
22 |
|
$229,916 |
Maturities of time deposits in denominations of $100,000 or more outstanding at December 31, 2001 are summarized as follows (in thousands of dollars):
3 months or less |
$34,905 |
Over 3 through 6 months |
1,640 |
Over 6 through 12 months |
5,388 |
Over 12 months |
15,590 |
|
$57,523 |
Return on Equity and Assets
The following table shows consolidated operating and capital ratios of the Corporation for each of the last three years:
Year Ended December 31, |
2001 |
2000 |
1999 |
Return on average assets |
1.18% |
1.31% |
1.31% |
Return on average equity |
10.87 |
12.86 |
12.66 |
Return on beginning equity |
11.43 |
13.41 |
12.70 |
Dividend payout ratio |
42.20 |
39.67 |
36.90 |
Average equity to average assets ratio |
10.87 |
10.20 |
10.32 |
Year-end equity to year-end assets ratio |
10.92 |
10.99 |
10.00 |
Short-Term Borrowings
For each of the three years in the period ended December 31, 2001, the average outstanding balance of short-term borrowings did not exceed 30% of shareholders' equity.
Securities Sold Under Agreements to Repurchase and Federal Home Loan Bank Advances
Information regarding securities sold under agreements to repurchase and FHLB advances is incorporated herein by reference from note 7 and note 8 to the consolidated financial statements, included as Exhibit D of Exhibit Listing 13.
ITEM 2. PROPERTIES
The Corporation and the Bank currently conduct all their business activities from the Bank's main office, thirteen (13) branch locations situated in a four-county area, owned office space adjacent to the Bank's main office, and seven (7) off-site automated teller facilities (ATMs), three (3) of which are located on leased property. The main office is a six-story structure located at One Chemung Canal Plaza, Elmira, New York, in the downtown business district. The main office consists of approximately 62,000 square feet of space entirely occupied by the Bank. The combined square footage of the thirteen (13) branch banking facilities totals approximately 69,047 square feet. The office building adjacent to the main office was acquired during 1995 and consists of approximately 33,186 square feet of which 30,766 square feet are occupied by operating departments of the Bank and 2,420 square feet are leased. The leased automated teller facility spaces total approximately 150 square feet.
The Bank holds one (1) of its branch facilities (Bath Office), three (3) automated teller facilities (Elmira/Corning Regional Airport, Elmira College and WalMart Store) and an office facility in Binghamton for Trust and Investment business activity under lease arrangements; and owns the rest of its offices including the main office and the adjacent office building.
The Corporation holds no real estate in its own name.
ITEM 3. LEGAL PROCEEDINGS
Neither the Corporation nor its subsidiaries are a party to any material pending legal proceeding required to be disclosed under this item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SHAREHOLDERS
There were no matters submitted to a vote of shareholders during the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
The Corporation's stock is traded in the over-the-counter market. Incorporated herein by reference to portions of the Corporation's Annual Report to Shareholders for the year ended December 31, 2001, are the quarterly market price ranges for the Corporation's stock for the past three (3) years, based upon actual transactions as reported by securities brokerage firms which maintain a market or conduct trades in the Corporation's stock and other transactions known by the Corporation's management. Also incorporated herein by reference to a part of the Corporation's 2001 Annual Report are the dividends paid by the Corporation for each quarter of the last three (3) years. The number of shareholders of record on February 28, 2002 was 702.
ITEM 6. SELECTED FINANCIAL DATA
The Financial Data Exhibits included in Management's Discussion and Analysis of Financial Condition and Results of Operations and presented in the Corporation's Annual Report to Shareholders for the year ended December 31, 2001 are incorporated herein by reference to Exhibit C of Exhibit Listing 13.
OTHER SELECTED FINANCIAL DATA
Unaudited Quarterly Financial Data: |
2001 |
|||
(in thousands except per share data) |
Mar 31 |
Jun 30 |
Sep 30 |
Dec 31 |
|
|
|
|
|
Interest and dividend income |
$12,202 |
$12,469 |
$12,395 |
$12,056 |
Interest expense |
5,797 |
5,687 |
5,330 |
4,877 |
Net interest income |
6,405 |
6,782 |
7,065 |
7,179 |
Provision for loan losses |
188 |
188 |
238 |
487 |
Net interest income after provision for loan losses |
6,217 |
6,594 |
6,827 |
6,692 |
Total other operating income |
2,457 |
2,872 |
3,126 |
1,752 |
Total other operating expenses |
5,889 |
6,020 |
6,030 |
6,112 |
Income before income tax expense |
2,785 |
3,446 |
3,923 |
2,332 |
Income tax expense |
868 |
1,098 |
1,351 |
676 |
Net Income |
$ 1,917 |
$ 2,348 |
$ 2,572 |
$ 1,656 |
|
|
|
|
|
Basic earnings per share |
$ 0.47 |
$ 0.58 |
$ 0.63 |
$ 0.41 |
|
|
|
|
|
|
2000 |
|||
|
Mar 31 |
Jun 30 |
Sep 30 |
Dec 31 |
|
|
|
|
|
Interest and dividend income |
$11,505 |
$11,882 |
$12,261 |
$12,330 |
Interest expense |
5,107 |
5,468 |
5,751 |
5,728 |
Net interest income |
6,398 |
6,414 |
6,510 |
6,602 |
Provision for loan losses |
188 |
188 |
188 |
187 |
Net interest income after provision for loan losses |
6,210 |
6,226 |
6,322 |
6,415 |
Total other operating income |
2,315 |
2,515 |
2,508 |
2,694 |
Total other operating expenses |
5,671 |
5,656 |
5,611 |
5,519 |
Income before income tax expense |
2,854 |
3,085 |
3,219 |
3,590 |
Income tax expense |
896 |
962 |
1,011 |
1,125 |
Net Income |
$ 1,958 |
$ 2,123 |
$ 2,208 |
$ 2,465 |
|
|
|
|
|
Basic earnings per share |
$ 0.48 |
$ 0.52 |
$ 0.54 |
$ 0.60 |
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of Operations presented in the Corporation's Annual Report to Shareholders for the year ended December 31, 2001 is incorporated herein by reference to Exhibit C of Exhibit Listing 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information required by Item 305 of Regulation S-K is included in Management's Discussion and Analysis of Financial Condition and Results of Operations presented in the Corporation's Annual Report to Shareholders for the year ended December 31, 2001 and is incorporated herein by reference to Exhibit C of Exhibit Listing 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Independent Auditors' Report and consolidated financial statements as presented in the Corporation's Annual Report to Shareholders for the year ended December 31, 2001 are incorporated herein by reference to Exhibit D of Exhibit Listing 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT
The information set forth under the captions "Nominees For Election of Directors" and the Section 16(a) disclosure set forth under the caption "Security Ownership of Management", as presented in the registrant's Proxy Statement, dated April 5, 2002, relating to the Annual Meeting of Shareholders to be held on May 15, 2002, is incorporated herein by reference to Exhibit F of Exhibit Listing 22.
EXECUTIVE OFFICERS
The information concerning Executive Officers of the Corporation is incorporated herein by reference from Part I of this Annual Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The information set forth under the captions "Directors Compensation"; "Directors' Personnel Committee Report on Executive Compensation"; "Comparative Return Performance Graph"; "Executive Compensation"; "Pension Plan"; "Profit-Sharing, Savings and Investment Plan"; "Employment Contracts"; and "Other Compensation Agreements", presented in the registrant's Proxy Statement, dated April 5, 2002, relating to the Annual Meeting of Shareholders to be held on May 15, 2002, is incorporated herein by reference to Exhibit F of Exhibit Listing 22.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Security Ownership of Management", presented in the registrant's Proxy Statement, dated April 5, 2002, relating to the Annual Meeting of Shareholders to be held on May 15, 2002, is incorporated herein by reference to Exhibit F of Exhibit Listing 22.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information set forth under the caption "Certain Transactions", presented in the registrant's Proxy Statement, dated April 5, 2002, relating to the Annual Meeting of Shareholders to be held on May 15, 2002, is incorporated herein by reference to Exhibit F of Exhibit Listing 22.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) List of Financial Statements and Independent Auditors' Report
The following consolidated financial statements and Independent Auditors' Report of Chemung Financial Corporation and subsidiaries, included in the Annual Report of the registrant to its shareholders as of December 31, 2001 and 2000, and for each of the years in the three-year period ended December 31, 2001, are incorporated by reference in Item 8:
- |
Independent Auditors' Report |
- |
Consolidated Balance Sheets - December 31, 2001 and 2000 |
- |
Consolidated Statements of Income - Years ended December 31, 2001, 2000 and 1999 |
- |
Consolidated Statements of Shareholders' Equity and Comprehensive Income - Years ended December 31, 2001, 2000 and 1999 |
- |
Consolidated Statements of Cash Flows-Years ended December 31, 2001, 2000 and 1999 |
- |
Notes to Consolidated Financial Statements - December 31, 2001, 2000 and 1999 |
(2) List of Financial Statement Schedules
Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted.
(3) Listing of Exhibits |
||
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|
|
Exhibit (3.1) |
Certificate of Incorporation is filed as Exhibit 3.1 to Registrant's Registration Statement on Form S-14, Registration No. 2-95743, and is incorporated herein by reference. |
|
|
Certificate of Amendment to the Certificate of Incorporation, filed with the Secretary of State of New York on April 1, 1988, incorporated herein by reference to Exhibit A of the Registrant's Form 10-K for the year ended December 31, 1988, File No. 0-13888. |
|
Exhibit (13) |
Annual Report to Shareholders for the year ended December 31, 2001. |
|
|
Table of Quarterly Market Price Ranges. |
EXHIBIT A |
|
Table of Dividends Paid. |
EXHIBIT B |
|
Management's Discussion and Analysis of Financial Condition and Results of Operations including Financial Data Exhibits. Quantitative and Qualitative disclosures about Market Risk |
|
|
Consolidated Financial Statements and Independent Auditors' Report. |
|
Exhibit (21) |
Subsidiaries of the registrant. |
EXHIBIT F |
Exhibit (22) |
Registrant's Notice of Annual Meeting, Proxy Statement dated April 5, 2002, and Proxy Form |
|
(b) Reports on Form 8-K
There were no reports filed on Form 8-K during the three months ended December 31, 2001.
(c) Exhibits
The response to this portion of Item 14 is submitted as a separate section of this report.
(d) Financial Statement Schedules
None
ANNUAL REPORT ON FORM 10-K
ITEM 14(c)
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2001
CHEMUNG FINANCIAL CORPORATION
ELMIRA, NEW YORK
____________________________________
EXHIBIT LISTING |
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EXHIBIT |
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EXHIBIT 13 |
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Annual Report To Shareholders For The Year Ended December 31, 2001 |
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A |
Table of Quarterly Market Price Ranges |
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B |
Table of Dividends Paid |
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C |
Management's Discussion and Analysis of Financial Condition and Results of Operations including Financial Data Exhibits, and the Quantitative and Qualitative Disclosures about Market Risk |
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D |
Consolidated Financial Statements and Independent Auditors' Report |
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EXHIBIT 21 |
F |
Subsidiaries of the Registrant |
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EXHIBIT 22 |
G |
Notice of Annual Meeting, Proxy Statement dated April 5, 2002, and Proxy Form |
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
CHEMUNG FINANCIAL CORPORATION |
DATED: MARCH 13, 2002 |
By /s/ Jan P. Updegraff |
|
Jan P. Updegraff |
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signature |
Title |
Date |
/s/ Robert E. Agan |
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Attest |
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EXHIBIT A
(THIS PAGE INTENTIONALLY LEFT BLANK)
Market Prices of Chemung Financial Corporation Stock
During Past Three Years (dollars)
|
2001 |
2000 |
1999 |
1st Quarter |
19.25 - 20.50 |
18.00 - 24.50 |
26.50 - 29.00 |
2nd Quarter |
19.05 - 23.65 |
19.00 - 21.50 |
24.00 - 27.00 |
3rd Quarter |
22.80 - 29.00 |
19.13 - 20.50 |
24.00 - 26.00 |
4th Quarter |
28.00 - 30.00 |
19.25 - 19.75 |
24.25 - 25.75 |
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.
(THIS PAGE INTENTIONALLY LEFT BLANK)
EXHIBIT B
TABLE OF DIVIDENDS PAID
(THIS PAGE INTENTIONALLY LEFT BLANK)
Dividends Paid Per Common Share by Chemung Financial Corporation
During Past Three Years
|
2001 |
2000 |
1999 |
January 2 |
$0.220 |
$0.210 |
$0.170 |
April 2 |
0.220 |
0.210 |
0.170 |
July 2 |
0.220 |
0.210 |
0.190 |
October 1 |
0.230 |
0.220 |
0.190 |
|
$0.890 |
$0.850 |
$0.720 |
As of December 31, 2001 there were 740 registered holders of record of the Corporation' stock. Chemung Financial Corporation common stock is inactively traded in the over-the-counter market.
(THIS PAGE INTENTIONALLY LEFT BLANK)
EXHIBIT C
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INCLUDING FINANCIAL DATA EXHIBITS
(THIS PAGE INTENTIONALLY LEFT BLANK)
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
Chemung Financial Corporation (the "Corporation"), through its wholly owned subsidiaries, Chemung Canal Trust Company (the "Bank") and CFS Group, Inc. (a financial services company), provides a wide range of banking, financing, fiduciary and other financial services within its local market areas.
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.
Pursuant to recent SEC guidance, management of the Corporation is encouraged to evaluate and disclose those accounting policies that are judged to be critical policies - those most important to the portrayal of the Corporation's financial condition and results, and that require management's most difficult, subjective or complex judgments. Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the level of the allowance required to cover credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. See note 1 to the consolidated financial statements for a description of the Corporation's policy with respect to estimating the level of the allowance for loan losses.
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. is subject to other regulatory authorities as determined by activities in which it may be engaged. For example, insurance activities are regulated by the New York State Insurance Department, while brokerage activities are 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 $1.4 billion at year-end 2001. 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 subsidiaries had 315 full-time equivalent employees (FTE's) on December 31, 2001, versus 308 at the beginning of the year and 303 on December 31, 1999. The employment trend is relatively stable.
Consolidated Balance Sheet Comments
During 2001, total assets grew by $48.8 million or 7.2% to $725.1 million as compared to $676.2 million as of year-end 2000 and $653.6 million at year-end 1999. Total loans, net of unearned income and deferred fees and costs, grew by $29.2 million or 7.4% to $423.8 million. Commercial loan activity, while slowing in the fourth quarter, was strong throughout the first nine months of 2001, with business loans, including commercial mortgages, growing $29.9 million or 18.9% during the year. Residential mortgage activity was particularly strong during the second half of 2001, with balances increasing $8.5 million or 9.2% during the year. This increase can be traced to the lower interest rate environment, which not only encouraged purchase money mortgage financing, but also resulted in increased refinancing activity. Total consumer loans decreased $9.1 million or 6.3% in 2001, the major factor in this decline being a significant slowdown in indirect auto financing activity. This resulted in a $12.0 million or 14.0% decrease in installment loans, which was somewhat offset by a $2.8 million or 6.2% increase in home equity loans.
The carrying value of the total securities portfolio increased $17.0 million or 7.4% to $246.3 million. At amortized cost, the portfolio was up $14.5 million, the result of leveraged purchases during the year, as the Corporation purchased $30.0 million in federal agency bonds and mortgage-backed securities, funded with term repurchase agreements entered into with the Federal Home Loan Bank of New York. Unrealized appreciation related to the available for sale portfolio increased $2.5 million.
Other significant changes in assets included increases of $2.3 million and $1.2 million in cash and due from banks and premises and equipment, respectively. The $2.3 million increase in cash and due from banks is due primarily to higher period-end branch cash balances. The $1.2 million increase in premises and equipment was centered primarily in an $826 thousand investment for renovations and an addition to our Elmira Heights office, as well as $481 thousand for renovations to our Main office.
Primary funding sources for our asset growth during 2001 included increases in deposits, as well as, an increase in securities sold under agreements to repurchase and advances from the Federal Home Loan Bank. In total, deposits increased $9.3 million or 1.8% from $511.4 million to $520.7 million. While period-end public funds deposits (primarily local municipal deposits) were down $21.1 million, all other personal and non-personal balances increased $30.4 million. Much of this growth, excluding public fund balances, was in personal and non-personal savings accounts, up $10.8 million or 13.2% from year-end 2000 to year-end 2001, and certificate of deposit balances (including IRA accounts), which increased $13.8 million or 7.6%. Personal and non-personal non-interest bearing demand deposits increased $7.0 million or 6.8%. The $30.1 million increase in securities sold under agreements to repurchase relates to the additional leveraging during 2001, as additional term repurchase agreements were entered into with
the Federal Home Loan Bank. Federal Home Loan Bank advances were up $4.2 million due to an increase in overnight advances under our line of credit.
Exhibit I BALANCE SHEET COMPARISONS
(in millions)
|
|
|
|
|
|
|
% Change 2000 to 2001 |
Compounded Annual Growth 5 years |
Total Assets |
$718.6 |
$667.0 |
$642.3 |
$584.0 |
$539.2 |
$516.2 |
7.7% |
6.8% |
Earning Assets |
658.8 |
617.4 |
591.6 |
531.2 |
490.9 |
469.5 |
6.7% |
7.0% |
Loans, net of deferred fees and costs, and unearned income |
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|
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|
Investments (1) |
242.4 |
234.6 |
245.0 |
219.5 |
199.8 |
195.6 |
3.4% |
4.4% |
Deposits |
533.7 |
515.2 |
494.1 |
467.2 |
450.2 |
440.9 |
3.6% |
3.9% |
Wholesale funding |
92.9 |
71.8 |
66.6 |
37.0 |
13.1 |
2.9 |
29.4% |
100.0% |
Tier I equity (2) |
68.0 |
62.9 |
57.6 |
52.6 |
51.6 |
46.4 |
8.1% |
7.9% |
(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 goodwill and intangible assets and accumulated other comprehensive income/loss.
|
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|
% Change 2000 to 2001 |
Compounded Annual Growth 5 years |
Total Assets |
$725.1 |
$676.2 |
$653.6 |
$620.1 |
$545.5 |
$529.2 |
7.2% |
6.5% |
Earning Assets(1) |
662.8 |
619.2 |
597.6 |
563.5 |
486.1 |
474.6 |
7.0% |
6.9% |
Loans, net of deferred fees and costs, and unearned income |
|
|
|
|
|
|
|
|
Allowance for loan losses |
5.1 |
4.7 |
4.7 |
4.5 |
4.1 |
4.0 |
7.9% |
5.0% |
Investments (2) |
247.5 |
230.7 |
237.1 |
243.3 |
196.8 |
196.3 |
7.3% |
4.7% |
Deposits |
520.7 |
511.4 |
481.8 |
466.1 |
451.0 |
439.6 |
1.8% |
3.4% |
Wholesale funding |
112.1 |
77.9 |
94.2 |
71.4 |
20.5 |
10.0 |
43.9% |
62.2% |
Tangible equity (3) |
74.7 |
69.3 |
59.7 |
59.9 |
54.8 |
48.7 |
7.8% |
8.9% |
(1) Earning assets include securities available for sale and securities held to maturity based on amortized cost, loans net of deferred origination fees and costs and unearned income, interest-bearing deposits, and federal fund sold.
(2) Investments include securities available for sale, at estimated fair value, securities held to maturity, at amortized cost, federal funds sold and interest-bearing deposits.
(3) Shareholders' equity less goodwill and 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, 2001 was $239.1 million compared to $222.7 million a year earlier and $227.4 million at the end of 1999. At year-end 2001, the total net unrealized appreciation in the securities available for sale portfolio was $8.548 million, compared to $6.069 million 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):
|
|
2001 Estimated Fair Value |
Unrealized Appreciation (Depreciation) |
|
2000 Estimated Fair Value |
Unrealized Appreciation (Depreciation) |
U.S. Treasury securities |
$ - |
$ - |
$ - |
$ 14,001 |
$ 14,014 |
$ 13 |
Obligations of U.S. |
|
|
|
|
|
|
Mortgage-backed securities |
92,539 |
92,993 |
454 |
87,692 |
87,129 |
(563) |
Obligations of states and |
|
|
|
|
|
|
Corporate bonds and notes |
14,705 |
14,831 |
126 |
12,443 |
12,185 |
(258) |
Corporate stocks |
6,982 |
13,455 |
6,473 |
7,514 |
14,192 |
6,678 |
Totals |
$230,589 |
$239,137 |
$ 8,548 |
$216,638 |
$222,707 |
$ 6,069 |
Included in the preceding table are 24,041 shares of USA Education, Inc. (formerly SLM Holding Corporation) at a cost basis of approximately $2 thousand and estimated fair value of $2.020 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, 2001, the Corporation held marketable equities totaling $616 thousand at cost, with a total estimated fair value of $5.036 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 10,700 shares of Federal Reserve Bank stock and 57,100 shares of the Federal Home Loan Bank of New York stock. They are carried at their cost of $535.0 thousand and $5.710 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 2001 totaled $5.633 million as compared to $1.707 million at year-end 2000, an increase of $3.926 million. At year-end 1999, non-performing loans totaled $1.405 million. Non-performing loans represented 1.33% of total loans outstanding as of December 31, 2001 compared to 0.43% at the end of 2000 and 0.39% at year-end 1999. The increase in non-performing loans is reflective of the impact that a slumping economy throughout 2001 had on our commercial clients. Included in the total at year-end 2001 is one relationship totaling $3.480 million, which is greater than 90 days past due and still accruing interest. This relationship is well collateralized, and we anticipate that the delinquency will be resolved in the very near future. Excluding this relationship, all other non-performing loans at year-end 2001 total $2.153 million, or 0.51% of total outstanding loans. Net loan charge offs were $731 thousand or 0.18% of average outstanding loans in 2001, compared to $707 thousand or 0.18% of average outstanding loans in 2000 and $517 thousand or 0.15% of average outstanding loans in 1999. The allowance for loan losses at December 31, 2001 was 1.20% of total outstandings versus 1.19% a year ago and 1.30% at December 31, 1999. In addition to impacting the level of the non-performing loans, the weakness of the economy has also had an impact on the level of internally classified credits, most notably reflected by a significant increase in loans classified as "special mention". Several large loans were added to this category during the second half of 2001, which essentially indicates that while the current credit risk may be relatively minor, there is potential for further weakening of the credit, especially given the weakness in the economy. A more moderate increase in loans classified as "substandard" is primarily due to the addition of one relationship, which was impacted significantly by the recession. In recognition of the increased inherent risk in the Corporation' s loan portfolio and the impact of the current economic environment on our borrowing clients, particularly our commercial customers, the Corporation increased its provision for loan losses in 2001 to $1.100 million as compared to the $750 thousand expensed during 2000. The Corporation anticipates that this higher level of provision may continue into 2002 if the various credit risk indicators noted above continue to show signs of increased inherent risk of loss.
Capital Resources and Dividends
The Corporation continues to maintain a strong capital position. Tangible shareholders' equity at December 31, 2001, was $74.7 million or 10.30% of total assets compared to $69.3 million or 10.24% of total assets a year earlier and $59.7 million or 9.13% at December 31, 1999. Major factors influencing this increase were an increase in undistributed earnings (net income less dividends declared) of $4.9 million and a $1.5 million increase in accumulated other comprehensive income due to the increase in net unrealized gains on available for sale securities. As of December 31, 2001, the Corporation's ratio of Total Capital to Risk Weighted Assets was 16.87% compared with 17.31% a year earlier. The Corporation's leverage ratio (Tier I Capital/Average Assets) was 9.86% at December 31, 2001 and 9.91% at December 31, 2000.
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, 2001, the maximum amount available for transfer from the Bank to the Corporation in the form of unsecured loans was $1.8 million. There were no such loans extended during 2001 and 2000, and none are anticipated during 2002. 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, 2001, $11.0 million was available for the declaration of dividends.
Cash dividends declared amounted to $3.584 million in 2001 versus $3.473 million in 2000 and $3.097 million in 1999. Dividends declared during 2001 amounted to 42.2% of net income compared to 39.7% and 36.9% of 2000 and 1999 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. On May 10, 2001, the Corporation announced that its Board of Directors authorized the repurchase of up to 400,000 shares, or approximately 10% of its outstanding common shares, principally through open market transactions from time to time as market conditions warrant over a two-year period. During 2001, 97,275 shares were purchased at a total cost of $2.343 million or an average price of $24.09 per share. Of the total number of shares purchased during 2001, 45,639 were purchased subsequent to the announcement of the share repurchase program, leaving the Corporation the ability to repurchase approximately 354,000 shares as of December 31, 2001 under the current Board authorization. During 2000, 19,068 shares were purchased at a total cost of $397 thousand or an average price of $20.83 per share, and in 1999 there were 58,674 shares purchased at a tota l cost of $1.465 million (average of $24.96 per share).
Performance Summary
Consolidated net income for 2001 totaled $8.493 million versus $8.755 million in 2000, a decrease of $262 thousand (3.0%), or $2.10 per share versus $2.14 per share, down 1.9% on 43,467 fewer average shares outstanding. In 1999, the Corporation earned $8.392 million. Dividends declared totaled $0.90 per share versus $0.86 in 2000 and $0.76 in 1999.
Performance in 2001 was adversely impacted by a deteriorating economic environment, and the impact of this environment on our clients. In recognition of this, and after a thorough review of our loan portfolio, management decided to increase the provision for loan losses by $350 thousand in 2001, from $750 thousand to $1.1 million, with $300 thousand of this increase recognized in the fourth quarter. Additionally, during the fourth quarter, we recognized a $550 thousand write-down of an investment in a small business investment company limited partnership, Cephas Capital Partners, L.P. ("Cephas"). Our investment in Cephas at December 31, 2001 and December 31, 2000 totaled $2.877 million and $2.351 million, respectively. Because the Corporation's percentage ownership in this partnership exceeds 20%, the equity method of accounting is utilized, such that the Corporation's percentage of the partnership's income is recognized as income on its investment; and likewise, any loss by the partnershi p is recognized as a loss on the Corporation's investment. During the fourth quarter of 2001, Cephas recognized a large loan loss, which resulted in the above write-down. While financing provided by Cephas has greater inherent risk than traditional bank financing, and could result in future write-downs if there are additional loan losses, there also exists the opportunity for greater returns than experienced through traditional bank lending. In total, the increase in the provision for loan losses and the investment write-down adversely impacted net income by approximately $544 thousand or $0.13 per share.
Aside from the above two factors, the Corporation experienced strong growth in average earning assets during the year, resulting in a $1.507 million or 5.8% increase in net interest income. Total interest and dividend income on earning assets was $49.122 million in 2001 compared to $47.978 million in 2000 and $44.177 million in 1999. This 2.4% increase in 2001 can be attributed to a $41.4 million or 6.7% increase in average earning assets, offset to some extent by a 31 basis point decrease in yield from 7.77% to 7.46%. The major factor related to the increase in average earning assets was a $33.6 million or 8.8% increase in average loans, which in 2001 comprised 63.2% of total average earning assets as compared to 62.0% a year ago. Additionally, increases in average securities and overnight investments totaled $3.8 million and $4.1 million, respectively. Total average funding liabilities during 2001 increased by $38.4 million or 6.5%. Total average deposits increased $18.5 million or 3.6%. Time deposits (inc
luding IRA accounts) averaged $238.2 million during 2001, as compared to $227.5 million during 2000, an increase of $10.8 million or 4.7%. On average, insured money market accounts were up $6.9 million or 13.1% due primarily to higher average municipal deposits. Average term repurchase agreements and term borrowings with the Federal Home Loan Bank increased $24.6 million, reflective of additional leveraging during 2001. The above were offset primarily by a $3.6 million decrease in average overnight borrowings through the Federal Home Loan Bank. Interest expense totaled $21.692 million in 2001 as compared to $22.055 million in 2000, and $18.728 million in 1999. The $363 thousand decrease in interest expense during 2001 is reflective of the declining interest rate environment throughout the year. While average funding liabilities increased $38.4 million, the cost of these funds, including the effect of non-interest bearing funding sources (such as demand deposits), decreased to 3.44% during 2001 versus 3.72% a
nd 3.30% during 2000 and 1999, respectively. The above yields and costs resulted in a net interest margin in 2001 of 4.16%, compared to 4.20% in 2000 and 4.30% in 1999.
Non-interest income increased $175 thousand to $10.207 million, up 1.7% over 2000. The total increase was adversely impacted by the above mentioned write-down of an equity investment in Cephas Capital Partners, L.P.. Excluding the impact of that transaction, all other non-interest income was up $725 thousand or 7.2%. Net gains on the sales of securities were up $275 thousand. The interest rate environment during 2001 provided opportunities to realize $491 thousand in pre-tax net gains during the year without a significant sacrifice in yield. Other areas where we saw significant increases included credit card merchant earnings (+ $287 thousand), service charges (+ $125 thousand), checkcard interchange income (+ $106 thousand) and cash management fee income (+ $109 thousand). Trust and Investment Services income, the largest component of non-interest income, was down $262 thousand to $4.537 million. Much of the revenue from this area is based upon asset market values, and this reduction in fee income is reflec
tive of the impact of the general market decline experienced during 2001.
Non-interest expenses increased $1.596 million (7.1%) to $24.052 million. Non-interest expenses for 2000 were $22.456 million compared to $21.631 million in 1999. The area having the most significant impact on the 2001 increase was salaries and benefits, which in 2001 rose $1.094 million or 10.2%. Salaries and wages were up $598 thousand or 7.0% reflective of a higher number of employees throughout the year. Pension and other employee benefits increased $496 thousand or 22.9%, the most significant factors being a $419 thousand reduction in the net periodic pension credit, as well as increases in health insurance and post-retirement medical expenses of $65 thousand and $50 thousand, respectively. In addition to the above, credit card and merchant processing expenses increased $431 thousand, primarily related to an increased volume in merchant deposit activity.
The non-interest expense increase was also impacted by start-up expenses associated with CFS Group, Inc., which commenced operations in September of 2001. Expenses of this subsidiary, relating primarily to staffing, training and other start-up costs, totaled $100 thousand for the year. This subsidiary, which offers a wide array of uninsured financial services including mutual funds, brokerage services, annuity and other insurance products, is expected to provide an important future source of non-interest income growth.
While income before income tax expense decreased $264 thousand, income tax expense in 2001 decreased only $2 thousand to $3.992 million, or an effective tax rate of 32.0% as compared to 31.3% in 2000. The increase in the effective tax rate relates to a lower level of tax-exempt income in 2001, as well as the fact that in 2000 we received a $100 thousand New York State tax credit related to a $400 thousand investment in Statewide Zone Capital Corporation of New York.
Exhibit II EARNINGS FOR THE YEARS ENDED DECEMBER 31,
|
|
|
|
|
|
|
% Change 2000 to 2001 |
|
Net interest income |
$27,430 |
25,923 |
25,449 |
23,739 |
23,274 |
22,468 |
5.8% |
4.1% |
Provision for loan losses |
1,100 |
750 |
673 |
800 |
850 |
742 |
46.7% |
8.2% |
Net interest income after |
|
|
|
|
|
|
|
|
Other operating income: |
|
|
|
|
|
|
|
|
Trust and investment |
|
|
|
|
|
|
|
|
Securities gains, net |
491 |
216 |
151 |
216 |
324 |
610 |
127.1% |
-4.2% |
Other income |
5,179 |
5,017 |
4,442 |
3,496 |
3,065 |
2,777 |
3.2% |
13.3% |
Total other operating income |
10,207 |
10,032 |
9,406 |
8,217 |
7,468 |
7,106 |
1.7% |
7.5% |
Other operating expenses |
24,052 |
22,456 |
21,631 |
20,473 |
19,368 |
19,408 |
7.1% |
4.4% |
Income before income tax |
|
|
|
|
|
|
|
|
Income tax expense |
3,992 |
3,994 |
4,159 |
3,386 |
3,667 |
3,266 |
-0.1% |
4.1% |
|
|
|
|
|
|
|
|
|
Net income |
$ 8,493 |
8,755 |
8,392 |
7,297 |
6,857 |
6,158 |
-3.0% |
6.6% |
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,
|
2001 |
2000 |
1999 |
||||||
Assets |
Average Balance |
|
Yield/ |
Average Balance |
|
Yield/ Rate |
Average Balance |
|
Yield/ Rate |
Earning assets: |
(Dollars in thousands) |
||||||||
Loans |
$416,370 |
34,046 |
8.18% |
382,788 |
33,160 |
8.66% |
346,550 |
29,446 |
8.50% |
Taxable securities |
209,630 |
13,486 |
6.43 |
201,641 |
13,087 |
6.49 |
204,635 |
12,718 |
6.21 |
Tax-exempt securities |
24,168 |
1,107 |
4.58 |
28,359 |
1,298 |
4.58 |
28,094 |
1,275 |
4.54 |
Federal funds sold |
6,009 |
271 |
4.51 |
2,839 |
184 |
6.48 |
9,870 |
484 |
4.90 |
Interest-bearing deposits |
2,635 |
212 |
8.05 |
1,755 |
249 |
14.19 |
2,412 |
254 |
10.52 |
|
|
|
|
|
|
|
|
|
|
Total earning assets |
658,812 |
49,122 |
7.46% |
617,382 |
47,978 |
7.77% |
591,561 |
44,177 |
7.47% |
|
|
|
|
|
|
|
|
|
|
Non-earning assets: |
|
|
|
|
|
|
|
|
|
Cash and due from banks |
24,864 |
|
|
24,070 |
|
|
24,868 |
|
|
Premises and equipment, net |
14,137 |
|
|
13,040 |
|
|
10,689 |
|
|
Other assets |
12,000 |
|
|
12,242 |
|
|
9,264 |
|
|
Allowance for loan losses |
(4,832) |
|
|
(4,708) |
|
|
(4,620) |
|
|
Intangibles and AFS valuation allowance |
13,661 |
|
|
4,996 |
|
|
10,507 |
|
|
Total |
718,642 |
|
|
667,022 |
|
|
642,269 |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
Demand deposits |
40,553 |
432 |
1.07% |
40,939 |
518 |
1.27% |
41,596 |
525 |
1.26% |
Savings and insured money market deposits |
149,301 |
3,807 |
2.55 |
141,000 |
4,367 |
3.10 |
151,262 |
4,342 |
2.87 |
Time deposits |
238,222 |
12,552 |
5.27 |
227,465 |
13,010 |
5.72 |
202,239 |
10,230 |
5.06 |
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total interest-bearing liabilities |
525,451 |
21,692 |
4.13% |
486,863 |
22,055 |
4.53% |
469,043 |
18,728 |
3.99% |
|
|
|
|
|
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
|
|
|
Demand deposits |
105,585 |
|
|
105,795 |
|
|
99,035 |
|
|
Other liabilities |
9,469 |
|
|
6,308 |
|
|
7,892 |
|
|
Total liabilities |
640,505 |
|
|
598,966 |
|
|
575,970 |
|
|
Shareholders' equity |
78,137 |
|
|
68,056 |
|
|
66,299 |
|
|
Total |
718,642 |
|
|
667,022 |
|
|
642,269 |
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
$27,430 |
|
|
$25,923 |
|
|
$25,449 |
|
|
|
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
3.33% |
|
|
3.24% |
|
|
3.48% |
|
|
|
|
|
|
|
|
|
|
Net interest margin |
|
|
4.16% |
|
|
4.20% |
|
|
4.30% |
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.
2001 vs.2000 |
2000 vs. 1999 |
|||||||||||||||
Total Change |
Due to Volume |
Due to Rate |
Total Change |
Due to Volume |
Due to Rate |
|||||||||||
Interest income (in thousands) |
||||||||||||||||
Loans |
$ 886 |
2,795 |
(1,909) |
3,714 |
3,147 |
567 |
||||||||||
Taxable investment securities |
399 |
520 |
(121) |
369 |
(191) |
560 |
||||||||||
Tax-exempt investment securities |
(191) |
(191) |
0 |
23 |
12 |
11 |
||||||||||
Federal funds sold |
87 |
156 |
(69) |
(300) |
(422) |
122 |
||||||||||
Interest-bearing deposits |
(37) |
96 |
(133) |
(5) |
(80) |
75 |
||||||||||
Total interest income |
$1,144 |
3,376 |
(2,232) |
3,801 |
2,466 |
1,335 |
||||||||||
Interest expense (in thousands) |
|
|
|
|
|
|
||||||||||
Interest-bearing demand deposits |
(86) |
(5) |
(81) |
(7) |
(7) |
0 |
||||||||||
Savings and insured money market |
|
|
|
|
|
|
||||||||||
Time deposits |
(458) |
597 |
(1,055) |
2,780 |
1,359 |
1,421 |
||||||||||
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
|
|
|
||||||||||
Total interest expense |
$(363) |
1,856 |
(2,219) |
3,327 |
1,222 |
2,105 |
||||||||||
Net interest income |
$1,507 |
1,520 |
(13) |
474 |
1,244 |
(770) |
|
|
|
|
|
|
|
% Change 2001 |
CompoundedAnnual Growth 5 Years |
Net income per share |
$2.10 |
$2.14 |
$2.03 |
$ 1.77 |
$ 1.66 |
$ 1.48 |
-1.9% |
7.2% |
Dividends declared |
0.90 |
0.86 |
0.76 |
0.665 |
0.605 |
0.53 |
4.7% |
11.2% |
Tangible book value |
18.55 |
16.94 |
14.56 |
14.59 |
13.24 |
11.76 |
9.5% |
9.5% |
Market price at 12/31 |
29.25 |
19.50 |
24.50 |
27.50 |
21.00 |
17.00 |
50.0% |
11.5% |
Average shares outstanding (in thousands) |
|
|
|
|
|
|
|
|
Exhibit VI
Selected Ratios |
2001 |
2000 |
1999 |
1998 |
1997 |
Return on average assets |
1.18% |
1.31% |
1.31% |
1.25% |
1.27% |
Return on average tier I equity (1) |
12.49% |
13.92% |
14.57% |
13.88% |
14.29% |
Dividend yield at year end |
3.15% |
4.51% |
3.43% |
2.47% |
2.95% |
Dividend payout |
42.20% |
39.67% |
36.90% |
37.56% |
36.55% |
Total capital to risk adjusted assets |
16.87% |
17.31% |
17.30% |
17.45% |
17.44% |
Tier I capital to risk adjusted assets |
15.13% |
15.49% |
15.23% |
15.27% |
16.19% |
Tier I leverage ratio |
9.86% |
9.91% |
9.49% |
9.57% |
9.49% |
Loans to deposits |
81.38% |
77.16% |
74.72% |
70.63% |
65.84% |
Allowance for loan losses to total loans |
1.20% |
1.19% |
1.30% |
1.37% |
1.40% |
Allowance for loan losses to non-performing loans |
90.1% |
276% |
332% |
92.9% |
257% |
Non-performing loans to total loans |
1.33% |
0.43% |
0.39% |
1.47% |
0.54% |
Net interest rate spread |
3.33% |
3.24% |
3.48% |
3.62% |
3.89% |
Net interest margin |
4.16% |
4.20% |
4.30% |
4.47% |
4.74% |
Efficiency ratio (2) |
62.06% |
60.54% |
60.09% |
61.97% |
60.84% |
(1) Average Tier I Equity is average shareholders' equity less average goodwill and intangible assets and average accumulated other comprehensive income/loss.
(2) Efficiency ratio is operating expenses adjusted for amortization of goodwill and intangible assets and stock donations divided by net interest income plus other operating income adjusted for non-taxable gains on stock donations.
Consolidated Cash Flows
During 2001, cash and cash equivalents increased $2.217 million as compared to a decrease of $3.909 million in 2000 and a $3.253 million increase in 1999. In addition to cash provided by operating activities, other primary sources of cash in 2001 included proceeds from the sales and maturities of securities and student loans ($153.450 million), a net increase in securities sold under agreements to repurchase ($30.050 million), an increase in deposits ($9.299 million) and an increase in Federal Home Loan Bank advances, net of repayments ($4.200 million). In 2000, the primary sources of cash included proceeds from the sales and maturities of securities and student loans ($58.695 million) and an increase in deposits ($29.614 million). The substantial increase in proceeds from the sales and maturities of securities and student loans is due in large part to a lower interest rate environment which resulted in $83.5 million of federal agency bonds being called during 2001, as well as an accel eration of mortgage-backed securities paydowns. The 2001 increase in securities sold under agreements to repurchase is the result of additional leveraging during 2001.
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 maintained a $73.197 million line of credit at December 31, 2001. This compares to $66.543 million at the end of 2000.
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, 2001, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact net interest income by 13.5% and an immediate 200-basis point increase would negatively impact net interest income by 1.4%. The risk to declining interest rates is slightly over the allowable tolerance of 12.0% established by ALCO. Management attributes this to the overall low level of current interest rates and corresponding large percentage decrease that results when an immediate 200-basis point shock is modeled. Also, the nature of the Corporation's callable US agency portfolio, as well as potential prepayments in the mortgage-
backed securities portfolio and mortgage loan portfolio, results in less interest income in periods of declining interest rates, as called bonds and increased prepayments result in higher levels of repricing of assets at lower rates. Although currently outside of the policy guideline, management is comfortable with this exposure, as an immediate decrease in interest rates across the yield curve is unlikely at this time.
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, 2001, it is estimated that an immediate 200-basis point increase in interest rates would negatively impact the market value of our capital account by 13.6% and an immediate 200-basis point decrease in interest rates would negatively impact the market value by 3.9%. 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 2001.
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 requirements 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, was effective for the Corporation as of January 1, 2001. Based on management's evaluation of SFAS No. 133, the adoption of this Statement did not have any impact on the Corporation's consolida ted financial statements, as the Corporation did not have any derivative instruments, including derivative instruments embedded in other contracts, as of January 1, 2001, or at any time during the year-ended December 31, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supercedes Accounting Principles Board ("APB") No. 16, "Business Combinations," and requires that all business combinations be accounted for under the purchase method of accounting, thus eliminating the pooling-of-interests method of accounting. SFAS No. 141 did not change many of the provisions of APB No. 16 related to the application of the purchase method. However, SFAS No. 141 does specify criteria for recognizing intangible assets separate from goodwill and requires additional disclosures regarding business combinations. SFAS No. 141 is effective for business combinations initiated after June 30, 2001.
SFAS No. 142 requires that acquired intangible assets (other than goodwill) be amortized over their useful economic life, while goodwill and any acquired intangible assets with an indefinite useful economic life would not be amortized, but would be reviewed for impairment on an annual basis based upon guidelines specified in the Statement. SFAS No. 142 currently excludes from its scope unidentifiable intangible assets recorded under SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." The FASB has announced that additional research will be performed to decide whether unidentifiable intangible assets recorded under SFAS No. 72 should be accounted for similarly to goodwill under SFAS No. 142. However, issuance of a final Statement with respect to this matter is not expected until the fourth quarter of 2002.
SFAS No. 142 requires that goodwill be evaluated for impairment no later than December 31, 2002, and annually thereafter. The Corporation expects that the results of the impairment test will conclude that the carrying value of its goodwill is not impaired as of December 31, 2001.
The Corporation adopted SFAS No. 142 on January 1, 2002. At December 31, 2001, the Corporation had goodwill of $1,516,666 related to the acquisition of a bank in 1994. The amortization expense related to this goodwill amounted to $189,583 for the year ended December 31, 2001. In accordance with SFAS No. 142, the Corporation will no longer amortize this goodwill subsequent to December 31, 2001, which will reduce non-interest expenses by $189,583 in 2002, as compared to 2001.
At December 31, 2001, the Corporation also has an intangible asset of approximately $2,949,754 related to the acquisition of deposits from the Resolution Trust Company in 1994. This intangible asset is currently excluded from the scope of SFAS No. 142. The amortization expense related to this intangible asset totaled $397,719 for the year ended December 31, 2001. As noted above, while the FASB is reconsidering the exclusion of this type of intangible asset from the scope of SFAS No. 142, at the present time this intangible asset will continue to be amortized.
John R. Battersby, Jr.
Treasurer and Chief Financial Officer
(THIS PAGE INTENTIONALLY LFFT BLANK)
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 also 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
INDEPENDENT AUDITORS' REPORT
(THIS PAGE INTENTIONALLY LEFT BLANK)
Independent Auditors' Report
The Board of Directors and Shareholders
Chemung Financial Corporation:
We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation and subsidiaries (the Corporation) as of December 31, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America.
//KPMG LLP//
Albany, New York
January 31, 2002
(THIS PAGE INTENTIONALLY LEFT BLANK)
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES |
||
|
DECEMBER 31 |
|
ASSETS |
2001 |
2000 |
|
|
|
Cash and due from banks |
$ 29,023,378 |
$ 26,726,373 |
Interest-bearing deposits with other financial |
|
|
Total cash and cash equivalents |
30,381,377 |
28,164,101 |
|
|
|
Securities available for sale, at estimated fair value |
239,136,669 |
222,707,143 |
Securities held to maturity, estimated fair value |
|
|
Loans, net of deferred origination fees and costs, and unearned income |
|
|
Allowance for loan losses |
(5,077,091) |
(4,707,868) |
Loans, net |
418,677,457 |
389,863,741 |
Premises and equipment, net |
14,750,014 |
13,597,641 |
Goodwill and intangible assets, net of accumulated |
|
|
Other assets |
10,543,328 |
10,284,605 |
Total assets |
$725,071,754 |
$676,236,823 |
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY |
|
|
|
|
|
Deposits: |
|
|
Non-interest-bearing |
$110,805,658 |
$107,289,840 |
Interest-bearing |
409,881,344 |
404,097,917 |
Total deposits |
520,687,002 |
511,387,757 |
Securities sold under agreements to repurchase |
79,457,282 |
49,406,826 |
Federal Home Loan Bank advances |
37,600,000 |
33,400,000 |
Accrued interest payable |
2,106,972 |
2,126,723 |
Dividends payable |
911,772 |
886,729 |
Other liabilities |
5,147,149 |
4,717,273 |
Total liabilities |
645,910,177 |
601,925,308 |
Commitments and contingencies (note 13) |
|
|
|
|
|
Shareholders' equity: |
|
|
Common stock, $.01 par value per share, 10,000,000 shares authorized; 4,300,134 shares issued at December 31, 2001 and 2000 |
|
|
Capital surplus |
22,215,098 |
22,011,527 |
Retained earnings |
58,257,076 |
53,347,621 |
Treasury stock, at cost (335,906 shares at December |
|
|
Accumulated other comprehensive income |
5,161,993 |
3,644,767 |
Total shareholders' equity |
79,161,577 |
74,311,515 |
Total liabilities and shareholders' equity |
$725,071,754 |
$676,236,823 |
|
|
|
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES |
|||
|
|
|
|
YEARS ENDED DECEMBER 31 |
2001 |
2000 |
1999 |
|
|
|
|
Interest and dividend income: |
|
|
|
Loans |
$34,046,041 |
33,159,628 |
29,446,584 |
Securities |
14,593,404 |
14,385,016 |
13,992,910 |
Federal funds sold |
270,611 |
184,377 |
483,552 |
Interest-bearing deposits |
211,613 |
248,942 |
253,724 |
Total interest and dividend income |
49,121,669 |
47,977,963 |
44,176,770 |
|
|
|
|
Interest expense: |
|
|
|
Deposits |
16,791,392 |
17,894,382 |
15,096,420 |
Borrowed funds |
1,333,080 |
1,400,290 |
1,044,567 |
Securities sold under agreements to repurchase |
|
|
|
Total interest expense |
21,692,048 |
22,054,858 |
18,727,539 |
|
|
|
|
Net interest income |
27,429,621 |
25,923,105 |
25,449,231 |
|
|
|
|
Provision for loan losses |
1,100,000 |
750,000 |
672,669 |
Net interest income after provision for loan losses |
|
|
|
|
|
|
|
Other operating income: |
|
|
|
Trust & investment services income |
4,536,702 |
4,798,724 |
4,812,723 |
Service charges on deposit accounts |
2,614,820 |
2,489,887 |
2,217,859 |
Net gain on sales of securities |
490,705 |
216,053 |
150,585 |
Credit card merchant earnings |
1,280,013 |
992,578 |
769,586 |
Other |
1,284,979 |
1,534,970 |
1,454,253 |
Total other operating income |
10,207,219 |
10,032,212 |
9,405,006 |
|
|
|
|
Other operating expenses: |
|
|
|
Salaries and wages |
9,180,638 |
8,582,216 |
8,108,930 |
Pension and other employee benefits |
2,663,166 |
2,167,209 |
2,457,172 |
Net occupancy expenses |
1,946,855 |
1,878,329 |
1,838,431 |
Furniture and equipment expenses |
1,751,991 |
1,893,852 |
1,713,266 |
Other |
8,509,310 |
7,934,537 |
7,513,238 |
Total other operating expenses |
24,051,960 |
22,456,143 |
21,631,037 |
Income before income tax expense |
12,484,880 |
12,749,174 |
12,550,531 |
Income tax expense |
3,991,628 |
3,994,075 |
4,159,030 |
Net income |
$ 8,493,252 |
8,755,099 |
8,391,501 |
|
|
|
|
Weighted average shares outstanding |
4,051,022 |
4,094,489 |
4,132,148 |
|
|
|
|
Basic earnings per share |
$2.10 |
$2.14 |
$2.03 |
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss) |
|
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 |
|
|
|
|
|
|
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 |
Cash dividends declared ($.86 per share) |
- |
- |
(3,473,424) |
- |
- |
(3,473,424) |
Distribution of restricted stock units for directors' deferred compensation plan |
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
Net income |
- |
- |
8,493,252 |
- |
- |
8,493,252 |
Other comprehensive income |
- |
- |
- |
- |
1,517,226 |
1,517,226 |
Total comprehensive income |
|
|
|
|
|
10,010,478 |
Restricted stock units for directors' deferred compensation plan |
|
|
- |
- |
- |
137,878 |
Cash dividends declared ($.90 per share) |
- |
- |
(3,583,797) |
- |
- |
(3,583,797) |
Distribution of restricted stock units for directors' deferred compensation plan |
|
|
|
|
|
|
Sale of 30,130 shares of treasury stock |
|
80,620 |
|
548,851 |
|
629,471 |
Purchase of 97,275 shares of treasury stock |
- |
- |
- |
(2,343,383) |
- |
(2,343,383) |
|
|
|
|
|
|
|
Balances at December 31, 2001 |
$ 43,001 |
22,215,098 |
58,257,076 |
(6,515,591) |
5,161,993 |
79,161,577 |
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES |
|||
YEARS ENDED DECEMBER 31 |
2001 |
2000 |
1999 |
|
|
|
|
Cash flows from operating activities: |
|
|
|
Net income |
$ 8,493,252 |
8,755,099 |
8,391,501 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|||
Amortization of goodwill and intangible assets |
|
|
|
Provision for deferred tax (benefit) expense |
(238,355) |
364,908 |
45,955 |
Provision for loan losses |
1,100,000 |
750,000 |
672,669 |
Depreciation and amortization |
1,574,857 |
1,508,703 |
1,468,561 |
Amortization of premiums and accretion of discounts on securities, net |
|
|
|
Net gain on sales of securities |
(490,705) |
(216,053) |
(150,585) |
Increase in other assets |
(238,380) |
(658,738) |
(4,245,934) |
(Decrease) increase in accrued interest payable |
|
|
|
Expense related to restricted stock units for directors' deferred compensation plan |
|
|
|
(Decrease) increase in other liabilities |
(294,346) |
313,269 |
874,023 |
Net cash provided by operating activities |
10,492,443 |
12,223,808 |
8,444,745 |
|
|
|
|
Cash flows from investing activities: |
|
|
|
Proceeds from sales of securities available for sale |
|
|
12,238,709 |
Proceeds from maturities of and principal collected on securities held to maturity |
|
|
4,529,397 |
Proceeds from maturities of and principal collected on securities available for sale |
|
|
65,470,707 |
Purchases of securities available for sale |
(159,703,735) |
(37,579,602) |
(79,608,744) |
Purchases of securities held to maturity |
(4,295,649) |
(5,099,603) |
(6,475,177) |
Purchases of premises and equipment |
(2,727,230) |
(2,984,677) |
(3,505,619) |
Net increase in loans |
(33,275,746) |
(38,104,619) |
(33,738,401) |
Proceeds from sales of student loans |
3,341,687 |
2,651,931 |
2,513,575 |
Net cash used in investing activities |
(46,552,202) |
(25,073,941) |
(38,575,553) |
|
|
|
|
Cash flows from financing activities: |
|
|
|
Net increase (decrease) in demand deposits, NOW accounts, savings accounts, and insured money market accounts |
6,246,734 |
6,048,487 |
(10,265,077) |
Net increase in certificates of deposit and individual retirement accounts |
|
|
|
Net increase (decrease) in securities sold under agreements to repurchase |
|
|
|
Federal Home Loan Bank advances |
12,600,000 |
13,400,000 |
29,700,000 |
Repayments of Federal Home Loan Bank advances |
(8,400,000) |
(29,700,000) |
(6,900,000) |
Purchase of treasury stock |
(2,343,383) |
(397,113) |
(1,464,675) |
Sale of treasury stock |
629,471 |
- |
- |
Cash dividends paid |
(3,558,754) |
(3,435,952) |
(2,944,859) |
Net cash provided by financing activities |
38,277,035 |
8,941,338 |
33,383,915 |
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES |
|||
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of year |
28,164,101 |
32,072,896 |
28,819,789 |
|
|
|
|
Cash and cash equivalents, end of year |
$30,381,377 |
28,164,101 |
32,072,896 |
|
|
|
|
Supplemental disclosure of cash flow information: |
|
|
|
Cash paid during the year for: |
|
|
|
Interest |
$21,711,799 |
21,537,977 |
18,546,257 |
Income taxes |
$ 4,138,230 |
3,608,962 |
7,048,403 |
|
|
|
|
|
|
|
|
Supplemental disclosure of non-cash activity: |
|
|
|
Transfer of loans to other real estate owned |
$ 20,343 |
137,261 |
398,667 |
Issuance of restricted stock units under directors' deferred compensation plan |
|
|
|
Adjustment of securities available for sale to fair value, net of tax |
|
|
|
See accompanying notes to consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2001, 2000 and 1999
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chemung Financial Corporation (the Corporation), through its wholly owned subsidiaries, Chemung Canal Trust Company (the Bank) and CFS Group, Inc., 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 accounting principles generally accepted in the United States of America 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 accounting principles generally accepted in the United States of America 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 on securities classified as available for sale are excluded from earnings and are reported as accumulated other comprehensive income (loss) in shareholders' equity, net of the related tax effects, until realized. Realized gains and losses are determined using the specific identification method.
Non-marketable equity securities are classified with securities available for sale. Non-marketable equity securities owned by the Corporation at December 31, 2001 and 2000 include Federal Home Loan Bank of New York (FHLB) stock and Federal Reserve Bank (FRB) stock, which are carried at cost since there is no readily available market price for these securities.
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 is 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 status 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 allowance 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 lo an 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, equipment and furniture 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 less estimated costs to dispose at the time of acquisition. Write downs from the carrying value of the loan 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, 2001, amounted to $82,035 and at December 31, 2000, amounted to $61,693.
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, and for unused tax carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled, 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. The market value of trust assets under administration totaled $1.375 billion at December 31, 2001, and $1.519 billion at December 31, 2000.
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
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.
GOODWILL AND INTANGIBLE ASSETS
Goodwill, which represents the excess of the purchase price over the fair value of net assets acquired in 1994, was being amortized over 15 years on a straight-line basis through December 31, 2001. 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. See "RECENT ACCOUNTING PRONOUNCEMENTS" for further information regarding the accounting for goodwill and intangible assets subsequent to December 31, 2001.
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 continue to be carried in the Corporation's securities portfolio. The Corporation has agreed to repurchase securities identical to those sold. The securities underlying the agreements are 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.
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, 2001, 2000, and 1999 was $10,010,478, $12,702,930, and $2,693,648, respectively. The following summarizes the components of other comprehensive income (loss):
Unrealized net holding gains during the year ended December 31, 2001, net of tax (pre-tax amount of $2,969,923) |
|
Reclassification adjustment for net gains realized in net income during the year ended December 31, 2001, net of tax (pre-tax amount of $490,705) |
|
Other comprehensive income for the year ended December 31, 2001 |
$ 1,517,226 |
|
|
Unrealized net holding gains during the year ended December 31, 2000, net of tax (pre-tax amount of $6,789,197) |
|
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) |
|
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)) |
|
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) |
|
Other comprehensive loss for the year ended December 31, 1999 |
$(5,697,853) |
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.
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 requirements 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, was effective for the Corporation as of January 1, 2001. Based on management's evaluation of SFAS No. 133, the adoption of this Statement did not have any impact on the Corporation's consolidated financial statements, as the Co rporation did not have any derivative instruments, including derivative instruments embedded in other contracts, as of January 1, 2001, or at any time during the year ended December 31, 2001.
In July 2001, the FASB issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supercedes Accounting Principles Board ("APB") No. 16, "Business Combinations," and requires that all business combinations be accounted for under the purchase method of accounting, thus eliminating the pooling-of-interests method of accounting. SFAS No. 141 did not change many of the provisions of APB No. 16 related to the application of the purchase method. However, SFAS No. 141 does specify criteria for recognizing intangible assets separate from goodwill and requires additional disclosures regarding business combinations. SFAS No. 141 is effective for business combinations initiated after June 30, 2001.
SFAS No. 142 requires that acquired intangible assets (other than goodwill) be amortized over their useful economic life, while goodwill and any acquired intangible assets with an indefinite useful economic life would not be amortized, but would be reviewed for impairment on an annual basis based upon guidelines specified in the Statement. SFAS No. 142 currently excludes from its scope unidentifiable intangible assets recorded under SFAS No. 72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions." The FASB has announced that additional research will be performed to decide whether unidentifiable intangible assets recorded under SFAS No. 72 should be accounted for similarly to goodwill under SFAS No. 142. However, issuance of a final Statement with respect to this matter is not expected until the fourth quarter of 2002.
SFAS No. 142 requires that goodwill be evaluated for impairment no later than December 31, 2002, and annually thereafter. The Corporation expects that the results of the impairment test will conclude that the carrying value of its goodwill is not impaired as of December 31, 2001.
The Corporation adopted SFAS No. 142 on January 1, 2002. At December 31, 2001, the Corporation had goodwill of $1,516,666 related to the acquisition of a bank in 1994. The amortization expense related to this goodwill amounted to $189,583 for the year ended December 31, 2001. In accordance with SFAS No. 142, the Corporation will no longer amortize this goodwill subsequent to December 31, 2001, which will reduce non-interest expenses by $189,583 in 2002, as compared to 2001.
At December 31, 2001, the Corporation also has an intangible asset of approximately $2,949,754 related to the acquisition of deposits from the Resolution Trust Company in 1994. This intangible asset is currently excluded from the scope of SFAS No. 142. The amortization expense related to this intangible asset totaled $397,719 for the year ended December 31, 2001. As noted above, while the FASB is reconsidering the exclusion of this type of intangible asset from the scope of SFAS No. 142, at the present time this intangible asset will continue to be amortized.
(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, 2001.
(3) SECURITIES
Amortized cost and estimated fair value of securities available for sale at December 31, 2001 and 2000, are as follows:
|
2001 |
2000 |
||
|
|
Estimated Fair Value |
|
Estimated Fair Value |
U.S. Treasury securities |
$ - |
- |
14,000,787 |
14,014,040 |
Obligations of U.S. Government agencies |
98,866,251 |
100,129,417 |
76,567,432 |
76,655,432 |
Mortgage-backed securities |
92,538,928 |
92,992,484 |
87,691,888 |
87,129,166 |
Obligations of states and political subdivisions |
|
|
|
|
Corporate bonds and notes |
14,704,510 |
14,830,561 |
12,443,061 |
12,185,427 |
Corporate stocks |
6,982,327 |
1 3,455,352 |
7,514,534 |
14,191,644 |
Total |
$230,588,909 |
239,136,669 |
216,638,601 |
222,707,143 |
Included in corporate stocks at both December 31, 2001 and 2000, 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 $5,710,000 and $5,245,000, respectively. This investment allowed the Corporation to maintain a $73,197,400 line of credit with the FHLB at December 31, 2001, and $66,543,300 at December 31, 2000. Other required equities in the Corporation's portfolio include 10,700 shares of Federal Reserve Bank stock carried at $535,000 at December 31, 2001, and 10,638 shares carried at $531,900 at December 31, 2000.
Gross unrealized gains and losses on securities available for sale at December 31, 2001 and 2000, were as follows:
|
2001 |
2000 |
||||
|
Unrealized |
Unrealized |
Unrealized |
Unrealized |
||
|
Gains |
Losses |
Gains |
Losses |
||
U.S. Treasury securities |
$ - |
- |
29,913 |
16,660 |
||
Obligations of U.S. Government agencies |
1,336,634 |
73,468 |
413,738 |
325,738 |
||
Mortgage-backed securities |
631,300 |
177,744 |
239,965 |
802,687 |
||
Obligations of states and other political subdivisions |
336,204 |
104,242 |
192,953 |
82,418 |
||
Corporate bonds and notes |
310,123 |
184,072 |
101,166 |
358,800 |
||
Corporate stocks |
6,481,357 |
8,332 |
6,679,193 |
2,083 |
||
Total |
$9,095,618 |
547,858 |
7,656,928 |
1,588,386 |
Gross realized gains on sales of securities available for sale were $528,634, $1,388,358, and $150,585 for the years ended December 31, 2001, 2000 and 1999, respectively. Gross realized losses on sales of securities available for sale were $37,929 and $1,172,305 for the years ended December 31, 2001 and 2000, respectively. There were no realized losses on sales of securities available for sale for the year ended December 31, 1999.
Securities held to maturity of $7,116,489 and $6,565,869 at December 31, 2001 and 2000, respectively, represent non-marketable obligations of political subdivisions, usually local municipalities. Estimated fair value at December 31, 2001 and 2000 was $7,318,438 and $6,774,036, respectively. There were no sales of securities held to maturity in 2001, 2000 or 1999. The contractual maturity of these securities at amortized cost is as follows at December 31, 2001: $3,865,709 (fair value of $3,901,901) within one year, $1,983,510 (fair value of $2,047,036) after one year but within five years, $977,270 (fair value of $1,038,252) after five years but within ten years and $290,000 (fair value of $331,249) greater than ten years.
Interest and dividend income on securities for the years ended December 31, 2001, 2000 and 1999 was as follows:
|
2001 |
2000 |
1999 |
Taxable: |
|
|
|
U. S. Treasury securities |
$ 297,520 |
767,261 |
1,119,844 |
Obligations of U.S. Government agencies |
5,794,805 |
5,674,224 |
5,227,780 |
Mortgage-backed securities |
5,933,499 |
5,190,539 |
5,201,842 |
Corporate bonds and notes |
907,945 |
816,503 |
631,480 |
Corporate stocks |
552,212 |
638,503 |
536,980 |
|
|
|
|
Exempt from Federal taxation: |
|
|
|
Obligations of states and political subdivisions |
1,107,423 |
1,297,986 |
1,274,984 |
Total |
$14,593,404 |
14,385,016 |
13,992,910 |
|
Maturing |
|||
|
|
After One, But |
||
|
Amortized |
Fair |
Amortized |
Fair |
|
Cost |
Value |
Cost |
Value |
Obligations of U.S. Government agencies |
$27,150,523 |
27,562,650 |
$30,517,922 |
30,733,922 |
Mortgage-backed securities |
436,361 |
443,433 |
10,392,766 |
10,690,839 |
Obligations of states and political subdivisions |
980,861 |
999,046 |
5,162,622 |
5,338,798 |
Corporate bonds and notes |
- |
- |
5,072,720 |
5,248,750 |
Total |
$28,567,745 |
29,005,129 |
$51,146,030 |
52,012,309 |
|
||||
|
Maturing |
|||
|
After Five, But |
|
||
|
||||
|
Amortized |
Fair |
Amortized |
Fair |
|
Cost |
Value |
Cost |
Value |
Obligations of U.S. Government agencies |
$39,642,178 |
40,264,095 |
$ 1,555,628 |
1,568,750 |
Mortgage-backed securities |
33,472,881 |
33,606,877 |
48,236,920 |
48,251,335 |
Obligations of states and political subdivisions |
11,298,550 |
11,335,583 |
54,860 |
55,428 |
Corporate bonds and notes |
2,271,988 |
2,214,500 |
7,359,802 |
7,367,311 |
Total |
$86,685,597 |
87,421,055 |
$57,207,210 |
57,242,824 |
The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $184,468,089 at December 31, 2001, and $167,221,355 at December 31, 2000. This includes mortgage-backed securities totaling $32,337,536 and $28,418,761 (fair value of $32,376,437 and $27,976,040), and obligations of U.S. Government agencies totaling $61,763,587 and $38,474,622 (fair value of $62,332,729 and $38,271,246) pledged to secure securities sold under agreements to repurchase at December 31, 2001 and 2000, 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, 2001 or 2000.
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 are anticipated to create jobs for the low to moderate income levels in the targeted areas. As of December 31, 2001 and 2000, these investments totaled $2,967,300 and $2,392,143, 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, |
2001 |
2000 |
Residential mortgages |
$101,168,582 |
$ 92,626,675 |
Commercial mortgages |
48,510,572 |
43,272,341 |
Commercial, financial and agricultural |
139,821,707 |
115,176,298 |
Consumer loans |
134,626,731 |
143,742,646 |
Net deferred origination fees and costs, and unearned income |
(373,044) |
(246,351) |
|
$423,754,548 |
$394,571,609 |
Included in consumer loans are student loans totaling $4,191,072 at December 31, 2001 and $3,853,277 at December 31, 2000, which are considered held for sale once these loans enter repayment status.
Residential mortgages totaling $83,078,601 at December 31, 2001, and $79,067,465 at December 31, 2000, 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, as well as the northern tier of Pennsylvania. Substantially all of the Corporation's outstanding loans are with borrowers living or doing business within 25 miles of the Corporation's branches in these counties. The Corporation's concentrations of credit risk by loan type 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, 2001 and 2000:
|
2001 |
2000 |
Non-accrual loans |
$ 1,490,081 |
$ 1,078,240 |
Troubled debt restructurings |
77,516 |
404,476 |
Loans 90 days or more past due and still accruing interest |
4,065,288 |
223,974 |
|
$ 5,632,885 |
$ 1,706,690 |
The effect of non-accrual loans on interest income for the years ended December 31, 2001, 2000 and 1999 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, 2001, 2000 and 1999 were as follows:
|
2001 |
2000 |
1999 |
Balances at January 1 |
$ 4,707,868 |
4,665,093 |
4,509,185 |
Provision charged to operations |
1,100,000 |
750,000 |
672,669 |
Loans charged-off |
(949,692) |
(853,409) |
(690,034) |
Recoveries |
218,915 |
146,184 |
173,273 |
Balances at December 31 |
$ 5,077,091 |
4,707,868 |
4,665,093 |
At December 31, 2001 and 2000, the recorded investment in loans that are considered to be impaired totaled $746,734 and $816,326, respectively. Included in the 2001 amount are impaired loans of $428,779 for which the related allowance for loan losses is $278,344. The 2000 amount includes $367,951 of impaired loans with a related allowance for loan losses of $200,839. The average recorded investment in impaired loans during 2001, 2000 and 1999 was $849,892, $744,081 and $3,171,533, respectively. The effect on interest income for impaired loans was not material to the consolidated financial statements in 2001, 2000 or 1999.
(5) PREMISES & EQUIPMENT
Premises and equipment at December 31, 2001 and 2000 are as follows:
|
2001 |
2000 |
Land |
$ 2,681,408 |
$ 2,681,408 |
Buildings |
16,433,926 |
15,030,100 |
Equipment and furniture |
17,327,476 |
16,044,062 |
Leasehold improvements |
432,876 |
431,448 |
|
36,875,686 |
34,187,018 |
Less accumulated depreciation |
22,125,672 |
20,589,377 |
|
$14,750,014 |
$13,597,641 |
(6) DEPOSITS
A summary of deposits at December 31, 2001 and 2000 is as follows:
|
2001 |
2000 |
Non-interest-bearing |
$110,805,658 |
$107,289,840 |
Interest-bearing demand deposits |
39,331,058 |
39,128,338 |
Insured money market accounts |
44,598,178 |
53,146,665 |
Savings deposits |
96,036,417 |
84,959,734 |
Time deposits |
229,915,691 |
226,863,180 |
|
$520,687,002 |
$511,387,757 |
Time deposits include certificates of deposit in denominations of $100,000 or more aggregating $57,522,589 and $65,082,752 at December 31, 2001 and 2000, respectively. Interest expense on such certificates was $3,207,552, $4,163,041 and $2,777,298 for 2001, 2000 and 1999, respectively.
Scheduled maturities of time deposits at December 31, 2001, are summarized as follows:
2002 |
$178,142,448 |
2003 |
28,611,412 |
2004 |
11,499,316 |
2005 |
5,872,145 |
2006 |
5,768,125 |
2007 and thereafter |
22,245 |
|
$229,915,691 |
(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, 2001, 2000 and 1999 is as follows:
|
2001 |
2000 |
1999 |
Securities sold under agreements to |
|
|
|
Balance at December 31 |
$79,457,282 |
$49,406,826 |
$49,946,491 |
Maximum month-end balance |
$79,658,810 |
$51,003,367 |
$53,731,116 |
Average balance during year |
$68,653,225 |
$50,110,845 |
$51,900,947 |
Weighted-average rate at December 31 |
4.68% |
5.75% |
4.97% |
Average rate paid during year |
5.20% |
5.51% |
4.98% |
The agreements have remaining contractual maturities of 2 days to 9.2 years at December 31, 2001, with a weighted-average contractual maturity of 3.9 years. Certain of the agreements have call features. At December 31, 2001, the weighted-average period to the earlier of the next call date or the contractual maturity date is approximately seven months.
Information concerning outstanding securities repurchase agreements as of December 31, 2001 is summarized as follows:
|
|
Accrued Interest Payable |
|
Fair Value of Collateral Securities (2) |
Within 90 days |
$ 4,957,282 |
$ - |
0.37% |
$ 10,147,954 |
After 90 days but with one year |
20,000,000 |
148,894 |
3.49% |
20,887,761 |
After one year but within five years |
19,500,000 |
175,597 |
6.17% |
19,905,783 |
After five years but within ten years |
35,000,000 |
138,361 |
5.15% |
36,287,218 |
Total |
$ 79,457,282 |
$ 462,852 |
4.68% |
$ 87,228,716 |
(8) FEDERAL HOME LOAN BANK ADVANCES
Amount |
Weighted-Average Rate |
Maturity |
First Call Date |
$ 12,600,000 |
1.35% |
January 2, 2002 |
- |
10,000,000 |
4.90% |
October 2, 2003 |
- |
5,000,000 |
5.41% |
December 29, 2005 |
December 29, 2002 |
10,000,000 |
4.41% |
October 20, 2008 |
January 20, 2002 |
$ 37,600,000 |
3.65% |
|
|
Residential mortgages totaling $83,078,601 at December 31, 2001, were pledged under a blanket collateral agreement for the Corporation's advances with the FHLB.
(9) INCOME TAXES
For the years ended December 31, 2001, 2000 and 1999, income tax expense attributable to income from operations consisted of the following:
|
2001 |
2000 |
1999 |
Current: |
|
|
|
State |
$ 414,260 |
195,635 |
481,750 |
Federal |
3,815,723 |
3,433,532 |
3,631,325 |
|
4,229,983 |
3,629,167 |
4,113,075 |
Deferred (benefit) expense |
(238,355) |
364,908 |
45,955 |
|
$ 3,991,628 |
3,994,075 |
4,159,030 |
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:
|
2001 |
2000 |
1999 |
Tax computed at statutory rate |
$ 4,244,859 |
4,334,719 |
4,267,180 |
Tax-exempt interest |
(569,665) |
(641,915) |
(522,865) |
Dividend exclusion |
(43,718) |
(57,865) |
(55,707) |
State taxes, net of Federal benefit |
243,268 |
207,909 |
371,094 |
Nondeductible interest expense |
70,417 |
87,796 |
64,792 |
Other items, net |
46,467 |
63,431 |
34,536 |
Actual income tax expense |
$ 3,991,628 |
3,994,075 |
4,159,030 |
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2001 and 2000, are presented below:
|
2001 |
2000 |
Deferred tax assets: |
|
|
Allowance for loan losses-book |
$ 1,977,527 |
1,833,715 |
Accrual for post-retirement benefits other than pensions |
773,433 |
750,598 |
Deferred loan fees |
144,101 |
94,221 |
Deferred compensation and directors' fees |
751,490 |
691,179 |
Interest on non-accrual loans |
40,526 |
24,525 |
Other |
91,311 |
76,237 |
Total gross deferred tax assets |
3,778,388 |
3,470,475 |
Deferred tax liabilities: |
|
|
Depreciation |
120,735 |
178,370 |
Prepaid pension |
327,591 |
276,766 |
Net unrealized gains on securities available for sale |
3,385,768 |
2,423,776 |
Other |
246,017 |
169,649 |
Total gross deferred tax liabilities |
4,080,111 |
3,048,561 |
Net deferred tax (liability) asset |
$ (301,723) |
421,914 |
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) changes 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, 2001 and 2000:
|
2001 |
2000 |
Changes in projected benefit obligation: |
|
|
Projected benefit obligation at beginning of year |
$ 13,998,022 |
13,021,081 |
Service cost |
343,187 |
297,927 |
Interest cost |
1,028,972 |
990,817 |
Actuarial loss |
1,095,926 |
607,380 |
Benefits paid |
(916,119) |
(919,183) |
Projected benefit obligation at end of year |
$ 15,549,988 |
13,998,022 |
|
|
|
Changes in fair value of plan assets: |
|
|
Fair value of plan assets at beginning of year |
19,355,021 |
20,423,565 |
Actual loss on plan assets |
(203,033) |
(108,791) |
Expenses paid |
(37,494) |
(40,570) |
Benefits paid |
(916,119) |
(919,183) |
Fair value of plan assets at end of year |
$ 18,198,375 |
19,355,021 |
|
|
|
Funded status: |
|
|
Plan assets in excess of projected benefit obligation at end of year |
2,648,387 |
5,356,999 |
Unrecognized net transition obligation being recognized over 10 years |
420,126 |
490,014 |
Unrecognized prior service cost |
646,575 |
721,391 |
Unrecognized net actuarial gain |
(2,547,019) |
(5,595,059) |
Prepaid pension cost |
$ 1,168,069 |
973,345 |
Net periodic pension income in 2001, 2000 and 1999 is comprised of the following:
|
2001 |
2000 |
1999 |
Service cost, benefits earned during the year |
$ 343,187 |
297,927 |
320,308 |
Interest cost on projected benefit obligation |
1,028,972 |
990,817 |
986,425 |
Expected return on plan assets |
(1,419,320) |
(1,499,853) |
(1,437,813) |
Net amortization and deferral |
( 147,563) |
(402,536) |
(272,260) |
Net periodic pension income |
$( 194,724) |
(613,645) |
(403,340) |
The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2001, 2000 and 1999 were as follows:
|
2001 |
2000 |
1999 |
Discount rate |
7.00% |
7.50% |
8.00% |
Expected long-term rate of return on assets |
7.50% |
7.50% |
7.50% |
Assumed rate of future compensation increase |
5.00% |
5.00% |
5.00% |
The pension plan's assets at December 31, 2001 and 2000, 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 makes discretionary profit sharing contributions to the plan based on the financial results of the Corporation. The Corporation also makes matching contributions at the rate of 50% of the first 6% of an eligible employee's current earnings contributed to the plan. Expense under the plan totaled $687,724, $681,193, and $620,279 for the years ended December 31, 2001, 2000 and 1999, respectively. The plan's assets at December 31, 2001 and 2000, include 380,712 and 382,180 shares, respectively, of Chemung Financial Corporation common stock, as well as common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds.
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, 2001 and 2000:
Changes in accumulated postretirement benefit obligation: |
2001 |
2000 |
Accumulated postretirement benefit obligation at beginning of year |
$ 2,440,417 |
2,543,000 |
Service cost |
25,000 |
23,000 |
Interest cost |
210,000 |
181,000 |
Participant contributions |
97,059 |
88,340 |
Actuarial loss (gain) |
607,741 |
(74,829) |
Benefits paid |
(310,545) |
(320,094) |
Accumulated postretirement benefit obligation at end of year |
$ 3,069,672 |
2,440,417 |
|
|
|
Accrued postretirement benefit cost: |
|
|
Unfunded postretirement benefit obligation end of year |
$(3,069,672) |
(2,440,417) |
Unrecognized prior service cost |
352,000 |
380,000 |
Unrecognized net actuarial loss |
722,410 |
133,669 |
Accrued postretirement benefit cost at end of year, included in other liabilities |
|
|
The components of net periodic post-retirement benefit cost for the years ended December 31, 2001, 2000 and 1999 are as follows:
|
2001 |
2000 |
1999 |
Service cost |
$ 25,000 |
23,000 |
42,000 |
Interest cost |
210,000 |
181,000 |
174,000 |
Net amortization and deferral |
47,000 |
28,000 |
22,000 |
Net periodic postretirement benefit cost |
$ 282,000 |
232,000 |
238,000 |
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, 2001 and 2000, the projected benefit obligation was $557,671 and $555,936, respectively. As of December 31, 2001 and 2000, the Corporation had an accrued benefit liability of $327,014 and $262,777, respectively, related to this plan. The Corporation recorded an expense of $85,157, $62,989 and $44,138 related to this plan during 2001, 2000 and 1999, 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, 2001 and 2000:
|
2001 |
2000 |
Balance at beginning of year |
$15,034,221 |
$ 7,218,807 |
Additions |
25,833,686 |
85,567,181 |
Amounts collected |
(24,700,933) |
(77,751,767) |
Balance at end of year |
$16,166,974 |
$15,034,221 |
(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:
|
2001 |
2000 |
1999 |
Data processing services |
$2,812,299 |
2,176,368 |
1,979,254 |
Advertising |
729,223 |
708,449 |
646,594 |
Amortization of goodwill and intangible assets |
587,303 |
587,302 |
587,303 |
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 $2,289,691, $126,866,745 and $9,726,476, respectively, at December 31, 2001. 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. 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 s
heet 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, 2001, the Corporation had outstanding commitments totaling $111,375 to fund equity investments in Southern Tier Business Development, LLC.
The Corporation has employment contracts with certain of its senior officers, which expire at various dates through 2004 and may be extended on a year-to-year basis.
In the normal course of business, there are various outstanding legal proceedings involving the Corporation or its subsidiaries. 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, 2001, the maximum amount available for transfer from the Bank to the Corporation in the form of unsecured loans was $1,786,985. 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, 2001, approximately $11.0 million 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 |
2001 |
2000 |
Assets: |
|
|
Cash on deposit with subsidiary bank |
$ 1,015,508 |
911,957 |
Investment in subsidiary-Chemung Canal Trust Company |
74,816,630 |
69,599,138 |
Investment in subsidiary-CFS Group, Inc. |
204,858 |
250,000 |
Dividends receivable |
911,772 |
886,729 |
Securities available for sale, at estimated fair value |
154,044 |
1,154,920 |
Other assets |
3,004,165 |
2,422,256 |
Total assets |
$80,106,977 |
75,225,000 |
|
|
|
Liabilities and shareholders' equity: |
|
|
Dividend payable |
911,772 |
886,729 |
Other liabilities |
33,628 |
26,756 |
Total liabilities |
945,400 |
913,485 |
Shareholders' equity: |
|
|
Total shareholders' equity |
79,161,577 |
74,311,515 |
Total liabilities and shareholders' equity |
$80,106,977 |
75,225,000 |
STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31 |
2001 |
2000 |
1999 |
Interest and dividend income |
$ 87,215 |
88,450 |
93,060 |
Net gain on sales of securities |
60,000 |
- |
- |
Other (loss) income |
(270,166) |
216,277 |
177,530 |
Dividends from subsidiary bank |
5,083,798 |
4,918,121 |
4,496,546 |
Income before equity in undistributed earnings |
|
|
|
Equity in undistributed losses of CFS Group, Inc. |
(45,142) |
- |
- |
Equity in undistributed earnings of Chemung Canal |
|
|
|
Operating expenses |
(105,181) |
(96,989) |
(76,032) |
Income before income tax benefit/expense |
8,389,347 |
8,818,747 |
8,450,552 |
Income tax benefit (expense) |
103,905 |
(63,648) |
(59,051) |
Net Income |
$ 8,493,252 |
8,755,099 |
8,391,501 |
STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31 |
2001 |
2000 |
1999 |
Cash flows from operating activities: |
|
|
|
Net Income |
$ 8,493,252 |
8,755,099 |
8,391,501 |
Adjustments to reconcile net income to net cash |
|
|
|
Equity in undistributed earnings of Chemung Canal |
|
|
|
Equity in undistributed losses of CFS Group, Inc. |
45,142 |
- |
- |
Net gain on sales of securities |
(60,000) |
- |
- |
(Increase) decrease in dividend receivable |
(25,043) |
62,528 |
(151,687) |
Increase in other assets |
(581,442) |
(234,515) |
(388,436) |
Increase in other liabilities |
6,286 |
18,238 |
13,520 |
Distribution of restricted stock units for directors' |
|
|
|
Net cash provided by operating activities |
4,316,217 |
5,015,345 |
4,105,450 |
|
|
|
|
Cash flow from investing activities: |
|
|
|
Investment in CFS Group, Inc. |
- |
(250,000) |
- |
Proceeds from sale of securities available for sale |
1,060,000 |
- |
- |
Purchase of securities available for sale |
- |
(49,992) |
- |
Net cash provided by (used in) investing |
|
|
|
|
|
|
|
Cash flow from financing activities: |
|
|
|
Cash dividends paid |
(3,558,754) |
(3,435,952) |
(2,944,859) |
Purchase of treasury stock |
(2,343,383) |
(397,113) |
(1,464,675) |
Sale of treasury stock |
629,471 |
- |
- |
Net cash used in financing activities |
(5,272,666) |
(3,833,065) |
(4,409,534) |
Increase (decrease) in cash and cash equivalents |
103,551 |
882,288 |
(304,084) |
Cash and cash equivalents at beginning of year |
911,957 |
29,669 |
333,753 |
Cash and cash equivalents at end of year |
$ 1,015,508 |
911,957 |
29,669 |
(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 certificates of deposits is estimated using a discounted cash flow approach that applies interest rates currently being offered on certificates to a schedule of the weighted-average expected monthly maturities.
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
These instruments bear both variable and fixed rates of interest. Therefore, the carrying value approximates fair value for the variable rate instruments and the fair value of fixed rate instruments is 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 counter-party's credit standing and discounted cash flow analysis. The fair value of these commitments to extend credit approximates the recorded amounts of the related fees and is not material at December 31, 2001 and 2000.
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, 2001 and 2000 are as follows (dollars in thousands):
|
2001 |
2000 |
||
|
|
Estimated Fair Value (1) |
|
Estimated Fair Value (1) |
Cash and due from banks |
$ 29,023 |
29,023 |
26,726 |
26,726 |
Interest-bearing deposits |
1,358 |
1,358 |
1,438 |
1,438 |
Securities |
246,253 |
246,455 |
229,273 |
229,481 |
Net loans |
418,677 |
434,981 |
389,864 |
389,914 |
Accrued interest receivable |
4,363 |
4,363 |
4,266 |
4,266 |
Financial liabilities: |
|
|
|
|
Deposits: |
|
|
|
|
Demand, savings, and insured money market accounts |
$290,771 |
290,771 |
284,525 |
284,525 |
Time deposits |
229,916 |
233,514 |
226,863 |
228,167 |
Repurchase agreements |
79,457 |
81,574 |
49,407 |
49,768 |
Federal Home Loan Bank advances |
37,600 |
38,109 |
33,400 |
33,104 |
Accrued interest payable |
2,107 |
2,107 |
2,127 |
2,127 |
Dividends payable |
912 |
912 |
887 |
887 |
(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, cannot 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, 2001 and 2000, the Corporation and the Bank met all capital adequacy requirements to which they were subject.
As of December 31, 2001, 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 Capital |
Required Ratios |
||
|
|
|
Minimum Captital Adequacy |
|
As of December 31, 2001 |
|
|
|
|
Total Capital(to Risk Weighted Assets): |
|
|
|
|
Consolidated |
$77,523,117 |
16.87% |
8.00% |
10.00% |
Bank |
$73,183,569 |
16.04% |
8.00% |
10.00% |
Tier 1 Capital(to Risk Weighted Assets): |
|
|
|
|
Consolidated |
$69,533,164 |
15.13% |
4.00% |
6.00% |
Bank |
$65,209,403 |
14.29% |
4.00% |
6.00% |
Tier 1 Capital(to Average Assets): |
|
|
|
|
Consolidated |
$69,533,164 |
9.86% |
3.00% |
5.00% |
Bank |
$65,209,403 |
9.30% |
3.00% |
5.00% |
|
|
|
|
|
As of December 31, 2000 |
|
|
|
|
Total Capital(to Risk Weighted Assets): |
|
|
|
|
Consolidated |
$73,325,594 |
17.31% |
8.00% |
10.00% |
Bank |
$68,618,632 |
16.34% |
8.00% |
10.00% |
Tier 1 Capital(to Risk Weighted Assets): |
|
|
|
|
Consolidated |
$65,613,026 |
15.49% |
4.00% |
6.00% |
Bank |
$60,922,244 |
14.51% |
4.00% |
6.00% |
Tier 1 Capital(to Average Assets): |
|
|
|
|
Consolidated |
$65,613,026 |
9.91% |
3.00% |
5.00% |
Bank |
$60,922,244 |
9.25% |
3.00% |
5.00% |
EXHIBIT F
CHEMUNG FINANCIAL CORPORATION
Subsidiary List
Name |
State of Incorporation |
Chemung Canal Trust Company |
New York |
CFS Group, Inc. |
New York |
EXHIBIT G
(THIS PAGE INTENTIONALLY LEFT BLANK)
Subsidiaries: Chemung Canal Trust Company
CFS Group, Inc.
April 5, 2002
Dear Shareholder:
You are cordially invited to attend our Annual Meeting of Shareholders at 7:00 p.m. on Wednesday, May 15, 2002, at the Clemens Center in Elmira, New York. Parking will be available in the Chemung Canal Trust Company main lot or in the parking garage located on Gray Street.
In addition to the formal items of business, we will review your Company's financial performance during 2001, discuss this year's first quarter results and plans for 2002, and answer questions from our shareholders. Following the meeting, our officers and staff look forward to enjoying conversation and refreshments with those of you who are able to attend.
It is important for you to be represented at the meeting, whether or not you plan to attend. Please mark, sign and date the enclosed proxy card and return it in the enclosed envelope.
Sincerely yours,
Jan P. Updegraff
President and
Chief Executive Officer
(THIS PAGE INTENTIONALLY LEFT BLANK)
CHEMUNG FINANCIAL CORPORATION
One Chemung Canal Plaza
P.O. Box 1522
Elmira, New York 14902
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
Date/Time: |
7:00 p.m. on Wednesday, May 15, 2002 |
|
Place: |
Clemens Center 116 East Gray Street Elmira, NY 14901 |
|
Items of Business: |
(1) |
Election of five directors, and |
(2) |
Transaction of other business properly brought before the meeting. |
|
Who May Vote: |
Shareholders of record as of March 29, 2002. |
|
Annual Report & Proxy Statement: |
Copies of the 2001 Annual Report & Proxy Statement are enclosed. |
|
Date of Mailing: |
This Notice and the Proxy Statement are being mailed to stockholders on or about April 5, 2002. |
|
BY ORDER OF THE BOARD OF DIRECTORS Jane H. Adamy, Secretary |
April 5, 2002
(THIS PAGE INTENTIONALLY LEFT BLANK)
Questions About the Meeting |
3 |
Election of Directors and Nominee Biographies |
5 |
Standing Director Biographies |
6 |
Security Ownership of Certain Beneficial Owners & Management |
7 |
Personnel Committee Report on Executive Compensation |
11 |
Executive Compensation |
12 |
Pension Plans & Employment Contracts |
13 |
Comparative Return Performance Graph |
15 |
Board of Directors Information |
16 |
Audit Committee Report |
17 |
Other Information |
18 |
Director Business Relationships |
19 |
Section 16(a) Beneficial Ownership Reporting |
19 |
(THIS PAGE INTENTIONALLY LEFT BLANK)
QUESTIONS ABOUT THE MEETING
What do I need to know about Chemung Financial Corporation and Chemung Canal Trust Company?
Chemung Canal Trust Company (the "Bank") is the wholly owned banking subsidiary of Chemung Financial Corporation (the "Corporation"), and unless otherwise stated, financial and other information, which also includes the Corporation's wholly owned subsidiary CFS Group, Inc., is presented on a consolidated basis.
What am I voting on?
You are voting on the re-election of five directors to the Corporation's Board of Directors.
Who may vote?
You may vote if you owned the Corporation's stock at the close of business on March 29, 2002. As of March 12, 2002, there were 3,945,616 shares of common stock outstanding.
How do I vote?
Please vote by signing, dating, and returning each proxy card you receive in the prepaid envelope. Also, indicate in the space provided on the proxy card if you plan to attend the meeting.
Can I change my mind after indicating my vote and returning the proxy card?
Yes. You may change your vote any time before the polls close at or before the annual meeting by:
(a) |
signing and returning another proxy card indicating a later date; or |
(b) |
attending the annual meeting and voting in person; or |
(c) |
revoking your proxy by notifying the Corporate Secretary in writing. |
What if I return my proxy card but do not provide voting instructions?
Properly signed proxies received without voting instructions will be voted FOR the nominee directors.
How are votes counted?
Each share of Common Stock is entitled to one vote. There are no cumulative voting rights. Nominees for director will be elected by a plurality of votes cast. Any other matter requires the affirmative vote of a majority of votes cast except as otherwise provided in the Corporation's Certificate of Incorporation or By-laws. Only shares voted in favor of a nominee will be counted toward the achievement of plurality. Votes withheld (including broker non-votes) and abstentions are counted as present for the purpose of determining a quorum but are not counted as votes cast.
Who pays for the solicitation of proxies?
The cost of soliciting proxies will be borne by the Corporation. In addition to solicitations by mail, some of the directors, officers, and regular employees of the Corporation and the Bank may conduct additional solicitations by telephone and personal contacts without additional remuneration. American Stock Transfer & Trust Company, the
What is the deadline for submitting shareholder proposals?
Shareholders desiring to present proposals in next year's proxy statement and at the 2003 Annual Meeting of Shareholders, including director nominations, must submit their proposal to the Corporate Secretary on or before December 5, 2002. Each shareholder proposal must comply with the rules and regulations of the Securities and Exchange Commission in order to be included in next year's proxy statement.
Who are the Corporation's independent auditors?
The firm of KPMG LLP has acted as the Corporation's independent auditors since 1990, and the directors have appointed KPMG LLP to continue in service throughout 2002. Representatives of KPMG LLP will be present at the Annual Meeting to answer your questions.
Is there any other business to come before the meeting?
Management knows of no other business to be presented for consideration, other than the election of five directors. If other matters are properly presented, the proxies intend to vote in accordance with their best judgment.
How do I obtain an Annual Report on Form 10-K?
You may obtain a copy of Chemung Financial Corporation's 2001 Annual Report on Form 10-K filed with the Securities and Exchange Commission without charge if you would like more detailed information concerning the Corporation. To obtain a copy, write to: Jane H. Adamy, Vice President & Secretary, Chemung Canal Trust Company, One Chemung Canal Plaza, P. O. Box 1522, Elmira, NY 14902, or e-mail your request to our website: www.chemungcanal.com.
ELECTION OF DIRECTORS AND NOMINEE BIOGRAPHIES
Who are the nominees this year?
Robert E. Agan, Stephen M. Lounsberry III, Dr. Thomas K. Meier, Charles M. Streeter, Jr. and Nelson Mooers van den Blink have each been nominated for election to the Corporation's Board of Directors. If elected, each nominee will hold the office of director for three years or until attainment of age 72.
What are the backgrounds of this year's nominees?
ROBERT E. AGAN, Age 63, Director since 1986 |
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Formerly Chairman of the Board and Chief Executive Officer of Hardinge Inc., a worldwide machine tool manufacturer. |
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STEPHEN M. LOUNSBERRY III, Age 48, Director since 1995 |
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President of Applied Technology Manufacturing, a manufacturer of machined industrial and railroad component parts. |
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THOMAS K. MEIER, Age 61, Director since 1988 |
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President of Elmira College. |
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CHARLES M. STREETER, JR., Age 62, Director since 1985 |
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President of Streeter Associates, Inc., a general building contractor. |
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NELSON MOOERS VAN DEN BLINK, Age 67, Director since 1985 |
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Chairman of the Board, Chief Executive Officer and Treasurer of The Hilliard Corporation, a motion control equipment, oil reclaimer and filter manufacturer. |
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STANDING DIRECTOR BIOGRAPHIES
What are the backgrounds of the directors not standing for election this year?
TERM EXPIRING IN 2003: |
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DAVID J. DALRYMPLE, Age 48, Director since 1993 |
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President of Dalrymple Holding Corporation, parent company for several construction materials and highway construction companies. Mr. Dalyrmple is the brother of Robert H. Dalrymple, also a Director of the Corporation. |
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JOHN F. POTTER, Age 56, Director since 1991 |
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President of Seneca Beverage Corporation, a wholesale distributor of beer and water products. |
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WILLIAM C. UGHETTA, Age 69, Director since 1985 |
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Lawyer, of Counsel to the law firm of Sayles & Evans; |
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Formerly Senior Vice President and General Counsel of Corning Incorporated, a diversified manufacturing company; |
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Director of Covance, Inc.; |
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Director of GlobalLift Technologies, Inc.; |
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Vice Chairman of the Board of Trustees of Corning Community College. |
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JAN P. UPDEGRAFF, Age 59, Director since 1996 |
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President and Chief Executive Officer of the Corporation and Bank; |
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Formerly Vice President and Treasurer of the Corporation and Chief Operating Officer and Executive Vice President of the Bank. |
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TERM EXPIRING IN 2004: |
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ROBERT H. DALRYMPLE, Age 51, Director since 1995 |
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Secretary of Dalrymple Holding Corporation, a parent company for several construction materials and highway construction companies. Mr. Dalrymple is the brother of David J. Dalrymple, also a Director of the Corporation. |
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FREDERICK Q. FALCK, Age 53, Director since 1997 |
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President of L.M. Trading Company, an agricultural investment corporation; |
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Vice President of Arnot Realty Corporation; |
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President and former Chairman of The Rathbone Corporation. |
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RALPH H. MEYER , Age 62, Director since 1985 |
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Retired since August 1, 1998; |
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Formerly President and Chief Executive Officer of Guthrie Healthcare System, a vertically integrated health care delivery system. |
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RICHARD W. SWAN , Age 53, Director since 1985 |
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President of Swan & Sons-Morss Co., Inc., an insurance brokerage agency. |
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WILLIAM A. TRYON , Age 71, Director since 1987 |
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Chairman of the Board and Chief Executive Officer of Trayer Products, Inc., an automotive, truck and other industrial parts manufacturer; |
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Financial Representative of Northwestern Mutual Financial Network; |
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Formerly Chairman of Perry & Carroll, Inc., an insurance brokerage agency; |
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Formerly a Director of the Bank from 1964 to 1976. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT |
The following table shows how much of the Corporation's common stock is owned by directors, named executive officers and owners of more than five percent of our outstanding stock as of February 28, 2002.
Name of Beneficial Owner |
Amount & Nature of |
Percent of Shares |
Chemung Canal Trust Company |
528,5771 |
13.4% |
Chemung Canal Trust Company |
369,7902 |
9.4% |
David J. Dalrymple |
632,0413, 5 |
16.0 % |
Robert H. Dalrymple |
591,5164, 5 |
15.0% |
Robert E. Agan |
15,5356 |
* |
James E. Corey III |
8,4617 |
* |
Jerome F. Denton |
8,6407 |
* |
Frederick Q. Falck |
131,3296, 8 |
3.3% |
Stephen M. Lounsberry III |
22,9966 |
* |
Thomas K. Meier |
9,3116 |
* |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT |
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Name of Beneficial Owner (and address if Ownership Exceeds 5%) |
Amount & Nature of Stock Beneficially Owned |
Percent of Shares Outstanding* |
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Ralph H. Meyer |
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|
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John F. Potter |
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|
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Charles M. Streeter, Jr. |
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|
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Richard W. Swan |
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|
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William A. Tryon |
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|
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William C. Ughetta |
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|
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Jan P. Updegraff |
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|
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Nelson Mooers van den Blink |
|
|
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All Directors and Executive Officers as a group (21 persons) |
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|
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* |
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT (Continued)
FOOTNOTES
1 |
Held by the Bank in various fiduciary capacities, either alone or with others. Includes 28,248 shares held with sole voting and dispositive powers, 500,329 shares held with shared power to vote and 306,647 shares held with shared dispositive power. Shares held in a co-fiduciary capacity by the Bank are voted by the co-fiduciary in the same manner as if the co-fiduciary were the sole fiduciary. Shares held by the Bank as sole trustee will be voted by the Bank only if the trust instrument provides for voting of the shares at the direction of the grantor or a beneficiary and the Bank actually receives voting instructions. |
2 |
The Plan participants instruct the Bank as trustee how to vote these shares. If a participant fails to instruct the voting of the shares, the Bank votes these shares in the same proportion as it votes all of the shares for which it receives voting instructions. Plan participants have dispositive power over these shares subject to certain restrictions. |
3 |
Includes 101,407 shares held directly, 3,808 shares held as custodian for Mr. Dalrymple's children, 448,510 shares held by the Dalrymple Family Limited Partnership of which David J. Dalrymple and Robert H. Dalrymple are sole general partners, and 78,316 shares held by Dalrymple Holding Corporation, of which David J. Dalrymple and Robert H. Dalrymple are officers, directors and principal shareholders. Excludes 7,176 shares held by Mr. Dalrymple's spouse as to which Mr. Dalrymple disclaims beneficial ownership. See footnote 5. |
4 |
Includes 64,690 shares held directly, 448,510 shares held by the Dalrymple Family Limited Partnership of which David J. Dalrymple and Robert H. Dalrymple are sole general partners, and 78,316 shares held by Dalrymple Holding Corporation of which David J. Dalrymple and Robert H. Dalrymple are officers, directors and principal shareholders. Excludes 4,600 shares held by Mr. Dalrymple's spouse as to which Mr. Dalrymple disclaims beneficial ownership. See footnote 5. |
5 |
Excludes 30,230 shares held by Susquehanna Supply Company of which David J. Dalrymple and Robert H. Dalrymple each own 23.1% of the outstanding common stock. Because of the definition of "beneficial ownership" under Section 13 of The Exchange Act, David and Robert Dalrymple are each listed as beneficial owners of 526,826 of the same shares. Without such multiple counting, David and Robert Dalrymples' aggregate beneficial ownership would equal 17.67% of the Corporation's outstanding shares. |
6 |
Includes shares that Messrs. Agan (14,635), Falck (3,187), Lounsberry (5,847), Meier (2,311), Meyer (11,666), Potter (11,625), Streeter (5,228), and Ughetta (6,696) have credited to their accounts in memorandum unit form under the Corporation's Deferred Directors Fee Plan. The deferred fees held in memorandum unit form will be paid solely in shares of the Corporation's Common Stock pursuant to the terms of the Plan and the election of the Plan participants. Shares held in memorandum unit form under the Plan have no voting rights. |
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS & MANAGEMENT (Continued) FOOTNOTES |
|
7 |
Includes all shares of Common Stock of the Corporation held for the benefit of each Executive Officer by the Bank as trustee of the Bank's Profit-Sharing, Savings and Investment Plan. Messrs. Updegraff, Corey and Denton have an interest in 7,156, 5,682, and 7,278 such shares held by the Plan, respectively. |
8 |
Includes 1,800 shares held directly and 126,342 shares held in trusts over which Mr. Falck has voting and dispositive power. Excludes 142,463 shares owned by The Rathbone Corporation of which Mr. Falck is an officer and director. |
9 |
Includes 13,894 shares owned by Seneca Beverage Corporation, of which Mr. Potter is an officer, director and principal shareholder. |
10 |
Includes 11,700 shares owned by Swan & Sons-Morss Co., Inc., of which Mr. Swan is an officer, director and one of the principal shareholders, 33,255 shares held in trusts over which Mr. Swan has voting and dispositive power, and 480 shares held by Mr. Swan as custodian for his minor children. Does not include 4,316 shares held by others as trustees for a trust of which Mr. Swan is an income beneficiary or 4,236 shares held by Mr. Swan's spouse as to which Mr. Swan disclaims beneficial ownership. |
11 |
Excludes 2,438 shares held by Mr. Tryon's spouse as to which Mr. Tryon disclaims beneficial ownership. |
12 |
Excludes 500 shares held by Mr. Updegraff's spouse as to which Mr. Updegraff disclaims beneficial ownership. |
13 |
Does not include 25,891 shares owned by spouses of certain officers and directors as to which shares such officers and directors disclaim beneficial ownership. Does not include 526,826 shares included under each of David J. and Robert H. Dalrymple (see footnote 5). Also does not include 102 shares of preferred stock owned by directors, certain officers and their spouses of CCTC Funding Corp., a subsidiary of the Bank, a Real Estate Investment Trust under the Internal Revenue Code. |
PERSONNEL COMMITTEE REPORT ON EXECUTIVE COMPENSATION OF MANAGEMENT
The Personnel Committee of the Board of Directors furnishes the following report on executive compensation:
What is our philosophy of executive compensation?
Under the supervision of the Committee (comprised entirely of outside directors), the Corporation has developed and implemented compensation policies that seek to enhance the profitability of the Bank and the Corporation, thus enhancing shareholder value. The executive compensation program consists of base pay, an annual management incentive bonus, and a long-term incentive bonus. The Committee feels that this philosophy provides fair and competitive compensation that attracts and retains well-qualified executives.
How is the Chief Executive Officer compensated?
The Board of Directors, upon recommendation of the Committee, sets the annual compensation of the Chief Executive Officer. The recommendation of the Committee follows substantial review of comparative information including executive compensation for similarly situated banks and bank holding companies. Key criteria include Return on Average Tier I Equity, Return on Average Assets and dividend performance. The Committee determined that the performance of the Bank was well within the range reported by its peers and that the compensation paid by the Bank was appropriate in comparison to the peer group. Incentive bonus payments to the CEO, based upon performance relative to goals, are determined at year-end. Based upon 2001 performance, Mr. Updegraff received an incentive bonus of $25,000 plus 300 shares of Chemung Financial Corporation stock.
How are other executive officers compensated?
In recommending to the Board of Directors the compensation and bonuses of the executive vice presidents and auditor, the Committee reviews a recommendation by the CEO that is based on a number of factors including individual and organizational performance, merit increases and responsibility levels.
The Committee believes the compensation policies, plans and programs implemented by the Committee have and will contribute to improving the long term financial performance of the Corporation.
William C. Ughetta, Chairman |
Frederick Q. Falck |
Richard W. Swan |
Robert E. Agan |
Thomas K. Meier |
William A. Tryon |
David J. Dalrymple |
Ralph H. Meyer |
EXECUTIVE COMPENSATION
Who are the named executive officers whose compensation exceeds $100,000 for 2001?
Summary Compensation Table |
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Annual Compensation |
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Name and Principal |
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All Other |
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1 |
Includes amounts allocated for the year indicated under the Bank's Profit-Sharing, Savings and Investment Plan. |
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2 |
Includes 300 shares of Chemung Financial Corporation stock with a value of $28.05 per share. |
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NOTE: The officers of the Corporation are not separately compensated for services rendered to the Corporation. |
PENSION PLANS & EMPLOYMENT CONTRACTS
Pension Plans
The following table shows the estimated annual retirement benefits payable from the Chemung Canal Trust Company Pension and Executive Supplemental Pension Plans, based upon a straight-life annuity form of payment, payable on retirement at age 65, and assuming final average earnings as shown. Employees vest fully following 5 years of service, normal retirement age is 65, and reduced benefit payments are available for early retirement at or after age 55.
Average Annual Compensation |
|
|
|
|
|
$100,000 |
24,122 |
32,162 |
40,203 |
47,243 |
54,284 |
$150,000 |
37,997 |
50,662 |
63,328 |
74,493 |
85,659 |
$200,000 |
51,872 |
69,162 |
86,453 |
101,743 |
117,034 |
$250,000 |
65,747 |
87,662 |
109,578 |
128,993 |
148,409 |
$300,000 |
79,622 |
106,162 |
132,703 |
156,243 |
179,784 |
1 Maximum number of years allowed under the terms of the Pension Plan. |
The Pension Plan provides an annual benefit of 1.2% for each year of credited service to a maximum of 25 years; and, for each additional year to a maximum of 10 years, 1% of the above average annual compensation (exclusive of bonuses); plus, for each year of credited service to a maximum of 35 years, 0.65% of average compensation in excess of the average of the taxable wage base in effect under Section 230 of the Social Security Act for each year in the 35-year period ending with the year in which the participant attains Social Security retirement age. The average taxable wage base was $37,214 for a participant attaining age 65 in 2001.
The named executive officers of the Corporation and the Bank had the following credited full years of service under the Plan as of December 31, 2001: Jan P. Updegraff--31, James E. Corey III--14, and Jerome F. Denton--29.
The Bank's non-qualified Executive Supplemental Pension Plan provides a benefit equal to the benefit which would have been paid under the terms of the Bank's Pension Plan without regard to limitations under the Internal Revenue Code less the amount payable under the Pension Plan. From time to time the Board of Directors may select executives as participants in the plan. Currently, Mr. Updegraff is the only active employee participating.
Employment Contracts
The Bank has employment contracts with twenty-three of its senior officers, all vice president level and above. The contracts provide that in the event of termination of any of these officers' employment without cause, the officer shall continue to receive his or her salary at the level then existing and the customary fringe benefits which he or she is then receiving for a period ending December 31, 2004, except for Ms. Deborah Adams, Mrs. Jane Adamy, Mrs. Janice Bennett, and Messrs. Bissonette, Burke, Carr, Cunningham, Hatlee, Kravec and Wirth whose guaranteed terms end December 31, 2003. The contracts further provide that they may be extended by the Board of Directors on a year-to-year basis and also may be terminated for cause upon thirty days' notice.
COMPARATIVE RETURN PERFORMANCE GRAPH
Comparison of Five-Year Cumulative Total Returns For Fiscal Years
Ending December 31, 1997 - 2001 Among Chemung Financial Corporation,
CRSP Total Returns Index for NASDAQ Stock Market (US Companies) and NASDAQ - Bank Stocks Index
(OMITTED GRAPHIC MATERIAL - SEE APPENDIX)
1996 |
1997 |
1998 |
1999 |
2000 |
2001 |
|
Chemung Financial Corporation |
100.00 |
127.04 |
174.59 |
165.34 |
144.30 |
202.56 |
CRSP NASDAQ Composite |
100.00 |
122.48 |
172.68 |
320.89 |
193.01 |
153.15 |
NASDAQ - Bank Stocks |
100.00 |
167.41 |
166.33 |
159.89 |
182.38 |
197.44 |
The cumulative total return includes (i) dividends paid and (ii) changes in the share price of the Corporation's Common Stock and assumes that all dividends were reinvested. The above graph assumes that the value of the investment in Chemung Financial Corporation and each index was $100 on December 31, 1996.
The CRSP Total Returns Index for NASDAQ Stock Market (US Companies) and Bank Stocks indices were obtained from the Center for Research in Security Prices (CRSP), University of Chicago, Chicago, Illinois.
BOARD OF DIRECTORS INFORMATION
How often did the Board meet during fiscal year 2001?
The Board of Directors of the Corporation held ten scheduled and two special meetings and the Board of Directors of the Bank held twelve regularly scheduled meetings and two special meetings during the year ended December 31, 2001.
With the exception of Dr. Meier, who attended 73% of the Corporation's board meetings and 73% of the total Corporation's and Bank's board and committee meetings, each director of the Corporation and the Bank attended at least 75% of the board and committee meetings of which they were members.
What standing Board Committees exist at the Bank?
The following table shows the standing Committees, membership of each, and number of meetings held in 2001.
Name |
Executive |
Loan |
Trust & Employee Benefits |
Portfolio |
Audit |
Personnel |
Agan |
X* |
X |
X |
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D.J.Dalrymple |
X* |
X |
X |
|||
R.H. Dalrymple |
X |
X |
X* |
|||
Falck |
X |
X |
X |
|||
Lounsberry |
X |
X |
X |
|||
Meier |
X |
X |
X |
|||
Meyer |
X* |
X |
X |
|||
Potter |
X |
X* |
X |
|||
Streeter |
X |
X |
X |
|||
Swan |
X |
X |
X |
|||
Tryon |
X |
X |
X |
|||
Ughetta |
X |
X |
X* |
|||
Updegraff |
X |
X |
X |
X |
||
van den Blink |
X |
X |
X |
|||
# of Meetings in 2001 |
5 |
12 |
12 |
4 |
4 |
4 |
*Committee Chair
The
The
The
The
The
The
How are Directors compensated?
Each non-employee director of the Bank receives an annual retainer of $5,500 and a fee of $300 for each meeting of the Board of Directors and its committees attended. The Chair of each committee receives $350 for each committee meeting attended. Only one fee is paid for attendance at meetings that serve both the Corporation and the Bank. Employee directors receive no fees for their services as Directors.
A Deferred Directors Fee Plan for non-employee Directors provides that Directors may elect to defer receipt of all or any part of their fees. Deferrals are credited with either interest compounded quarterly at the Applicable Federal Rate for short-term debt instruments or converted to units which appreciate or depreciate as would an actual share of the Corporation's common stock purchased on the deferral date. Cash deferrals will be paid in cash. Units will be paid in shares of common stock.
AUDIT COMMITTEE REPORT
The Chemung Financial Corporation Board of Directors' Audit Committee is comprised of six directors who are not officers of the Corporation. Under currently applicable rules, all members are considered independent. The Audit Committee operates under a written charter adopted by the Board of Directors.
The Audit Committee held four meetings during 2001. The meetings were designed to facilitate and encourage private communication among the Audit Committee, the internal auditors and the Corporation's independent public accountants, KPMG LLP ("KPMG"). Management is responsible for the Company's internal controls and financial reporting process. The Audit Committee believes that management maintains an effective system of internal controls which results in fairly presented financial statements.
The Audit Committee has reviewed and discussed the Corporation's audited consolidated financial statements for the year ended December 31, 2001, with management and KPMG. The Audit Committee has also discussed with KPMG the matters required by Statement on Auditing Standards No. 61, Communication with Audit Committees. The Audit Committee has received from KPMG the written disclosures and the letter regarding KPMG's independence, as required by Independence Standards Board Standard No. 1, Independence Discussions with Audit Committees. Fees for services provided by the independent accountants for the 2001 fiscal year are as follows: audit fees (including quarterly reviews) - $92,800; financial systems and implementation fees - none; and all other fees (consisting primarily of fees related to income tax services and required audits of employee benefit plans) - $62,305. The Audit Committee discussed KPMG's independence with KPMG and has considered whether the non-audit services provided by K
PMG during the year ended December 31, 2001, were compatible with maintaining KPMG's independence. The Audit Committee has concluded that the non-audit services provided do not impair the independence of KPMG.
Based on the Audit Committee's discussion with management and KPMG, and its review of the information described in the preceding paragraph, the Audit Committee recommended to the Board of Directors that the audited consolidated financial statements be included in Chemung Financial Corporation's Annual Report on Form 10-K for the year ended December 31, 2001, for filing with the Securities and Exchange Commission. The Committee and the Board have also appointed KPMG as the Corporation's independent auditors for 2002.
The Audit Committee of the Board of Directors of Chemung Financial Corporation:
Robert H. Dalrymple, Chairman |
John F. Potter |
Robert E. Agan |
Charles M. Streeter, Jr. |
Stephen M. Lounsberry III |
Nelson Mooers van den Blink |
OTHER INFORMATION
Some of the Bank's directors and officers, and entities with which they are associated, are customers of the Bank in the ordinary course of business and are indebted to the Bank. The Bank anticipates that some of these directors, officers and entities will continue to be customers of and indebted to the Bank on similar terms in the future. All loans to these individuals and entities are made in the ordinary course of business, involve no more than a normal risk of collectibility and are on substantially the same terms, including interest rates and collateral requirements, as those services provided for comparable transactions with unaffiliated persons and entities.
The Bank has purchased and paid for insurance from Continental Casualty Company providing for reimbursement of directors and officers of the Corporation and the Bank for their costs and expenses for claims based on "wrongful acts" in connection with their duties as directors or officers, including actions as fiduciaries of the Bank's Pension and Profit-Sharing Plans. This insurance coverage, expiring in April 2002, has an annual cost of $11,250.
DIRECTOR BUSINESS RELATIONSHIPS
The Bank retained Sayles & Evans, a law firm of which Mr. Ughetta is of counsel, for legal services during 2001 and expects to retain Sayles & Evans for legal services during the current year.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors, certain executive officers, and ten percent shareholders (collectively "Reporting Persons") to file with the Securities and Exchange Commission ("SEC") initial reports of ownership and changes in beneficial ownership (the "Reports"). SEC regulations require Reporting Persons to furnish the Corporation with copies of all Reports filed.
Based solely on review of the Reports furnished to the Corporation and written representation from the Reporting Persons that no other reports were required for the year ended December 31, 2001, the Corporation's Reporting Persons complied with these requirements.
BY ORDER OF THE BOARD OF DIRECTORS
Jane H. Adamy
Secretary
Date: April 5, 2002
One Chemung Canal Plaza
Elmira, New York 14902
www.chemungcanal.com
CHEMUNG FINANCIAL CORPORATION
ANNUAL MEETING OF SHAREHOLDERS - MAY 15, 2002
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
OF CHEMUNG FINANCIAL CORPORATION
John B. Hintz and Daniel Agan, each with power of substitution and with all powers and discretion the undersigned would have if personally present, are hereby appointed the Proxy Agents to represent the undersigned at the Annual Meeting of Shareholders of Chemung Financial Corporation, to be held on May 15, 2002 (including any adjournments or postponements thereof) and to vote all shares of Common Stock of Chemung Financial Corporation which the undersigned is entitled to vote on all matters that properly come before the meeting, subject to any directions indicated.
(To be signed on Reverse Side)
**************************************************************************************
THIS PROXY WILL, WHEN PROPERLY EXECUTED, BE VOTED AS DIRECTED. IF NO DIRECTIONS TO THE CONTRARY ARE GIVEN, THE PROXY AGENTS INTEND TO VOTE FOR THE NOMINEES.
NOMINEES: |
3-year term: |
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FOR |
WITHHELD |
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Stephen M. Lounsberry III |
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Thomas K. Meier |
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Charles M. Streeter, Jr. |
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Nelson Mooers van den Blink |
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For, except vote withheld from the following nominee(s): |
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I/We will attend the Meeting |
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Number in group |
____ |
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______________________ |
DATE |
________ |
___________________ |
DATE |
_________ |
||||
Signature |
Signature If Held Jointly |
NOTE: Please sign exactly as name appears hereon. Joint owners should each sign. When signing as attorney, executor, administrator, trustee, custodian or guardian, please give full title as such.