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UNITED STATES [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly period ended JUNE 30, 2004 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-13888 CHEMUNG FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) New York 16-1237038 (State or other jurisdiction of incorporation or organization) I.R.S. Employer Identification No. One Chemung Canal Plaza, Elmira, NY 14901 (Address of principal executive offices) (Zip Code) (607) 737-3711 or (800) 836-3711 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES: XX NO: ___ Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) YES XX NO The number of shares of the registrant's common stock, $.01 par value, outstanding on July 30, 2004 was 3,701,153 PART I. FINANCIAL INFORMATION PAGE Item 1: Financial Statements - Unaudited 1 2 Consolidated Statements of Shareholders' Equity and Comprehensive Income 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3: Item 4: 20 PART II. OTHER INFORMATION 21 Item 2 Changes in Securities and Use of Proceeds 21 Item 4 Submission of Matters to a Vote of Security Holders Item 6: Exhibits and Reports on Form 8-K 22 SIGNATURES 23 Item 1: Financial Statements CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES (UNAUDITED) JUNE 30, DECEMBER 31, ASSETS Cash and due from banks $ 23,478,877 24,985,636 Federal funds sold - 12,400,000 Interest-bearing deposits with other financial Total cash and cash equivalents 23,739,349 38,069,778 Securities available for sale, at estimated fair value 283,768,879 282,920,294 Securities held to maturity, estimated fair value of Loans, net of deferred origination fees and costs, and unearned income Allowance for loan losses (10,322,491) (9,848,259) Loans, net 377,466,538 380,504,987 Premises and equipment, net 17,192,246 17,471,607 Goodwill 1,516,666 1,516,666 Other intangible assets, net 1,955,455 2,154,315 Other assets 13,628,606 11,487,546 Total assets $734,186,500 747,209,483 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing $117,219,790 122,363,563 Interest-bearing 414,593,699 428,687,764 Total deposits 531,813,489 551,051,327 Securities sold under agreements to repurchase 89,894,481 79,034,796 Federal Home Loan Bank advances 25,800,000 25,000,000 Accrued interest payable 1,117,908 1,124,186 Dividends payable 852,079 859,415 Other liabilities 6,563,464 10,146,887 Total liabilities 656,041,421 667,216,611 Shareholders' equity: Common stock, $.01 par value per share, 10,000,000 Capital surplus 22,579,957 22,506,573 Retained earnings 67,217,917 64,750,787 Treasury stock, at cost (595,443 shares at June 30, 2004; 563,546 shares at December 31, 2003) Accumulated other comprehensive income 2,387,806 5,764,302 Total shareholders' equity 78,145,079 79,992,872 Total liabilities and shareholders' equity $734,186,500 747,209,483 See accompanying notes to unaudited consolidated financial statements.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
INDEX
3
5
8
20
21
CONSOLIDATED BALANCE SHEETS
2004
2003
institutions
260,472
684,142
$15,017,599 at June 30, 2004 and $13,357,619 at
December 31, 2003
14,918,761
13,084,290
387,789,029
390,353,246
shares authorized; 4,300,134 issued at June 30,
2004 and December 31, 2003
43,001
43,001
(14,083,602)
(13,071,791)
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
|
Six Months Ended |
Three Months Ended |
||
INTEREST AND DIVIDEND INCOME |
|
|
|
|
|
2004 |
2003 |
2004 |
2003 |
Loans |
$11,919,717 |
$14,216,425 |
5,910,778 |
7,020,298 |
Securities |
6,240,330 |
5,451,286 |
3,012,954 |
2,534,771 |
Federal funds sold |
85,885 |
153,603 |
50,292 |
112,294 |
Interest-bearing deposits |
2,556 |
5,543 |
1,395 |
4,126 |
|
|
|
|
|
Total interest and dividend income |
18,248,488 |
19,826,857 |
8,975,419 |
9,671,489 |
|
|
|
|
|
INTEREST EXPENSE |
|
|
|
|
|
|
|
|
|
Deposits |
3,336,219 |
4,622,555 |
1,615,000 |
2,225,581 |
Borrowed funds |
544,945 |
550,017 |
272,586 |
272,597 |
Securities sold under agreements to repurchase |
|
|
|
|
|
|
|
|
|
Total interest expense |
5,521,046 |
6,922,867 |
2,710,762 |
3,342,871 |
|
|
|
|
|
Net interest income |
12,727,442 |
12,903,990 |
6,264,657 |
6,328,618 |
Provision for loan losses |
833,333 |
2,200,000 |
333,333 |
1,600,000 |
|
|
|
|
|
Net interest income after provision for loan losses |
|
|
|
|
|
|
|
|
|
Other operating income: |
|
|
|
|
Trust & investment services income |
|
|
|
|
Service charges on deposit accounts |
|
|
|
|
Net gain on securities transactions |
218,961 |
950,000 |
- |
410,000 |
Credit card merchant earnings |
631,282 |
555,205 |
320,940 |
283,215 |
Other |
1,352,691 |
1,108,460 |
838,762 |
632,422 |
Total other operating income |
6,704,872 |
6,600,185 |
3,470,881 |
3,434,836 |
|
|
|
|
|
Other operating expenses: |
|
|
|
|
Salaries & wages |
4,593,013 |
4,777,265 |
2,295,287 |
2,386,967 |
Pension and other employee benefits |
1,526,325 |
1,445,270 |
777,601 |
636,916 |
Net occupancy expenses |
1,155,482 |
1,048,155 |
580,040 |
524,078 |
Furniture and equipment expenses |
970,189 |
937,079 |
495,369 |
468,550 |
Amortization of Intangible Assets |
198,860 |
198,860 |
99,430 |
99,430 |
Other |
4,237,530 |
4,138,292 |
2,333,561 |
2,167,293 |
Total other operating expenses |
12,681,399 |
12,544,921 |
6,581,288 |
6,283,234 |
|
|
|
|
|
Income before income tax expense |
5,917,582 |
4,759,254 |
2,820,917 |
1,880,220 |
Income tax expense |
1,741,693 |
1,316,229 |
809,259 |
462,774 |
|
|
|
|
|
Net income |
$ 4,175,889 |
$ 3,443,025 |
2,011,658 |
1,417,446 |
|
|
|
|
|
Weighted average shares outstanding |
3,790,696 |
3,831,356 |
3,782,795 |
3,830,414 |
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share |
$1.10 |
$0.90 |
$0.53 |
$0.37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to unaudited consolidated financial statements.
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME
(UNAUDITED)
|
|
|
|
|
Accumulated Other Comprehensive Income |
|
Balances at December 31, 2002 |
$ 43,001 |
$22,355,407 |
$61,247,551 |
$(11,826,290)) |
$ 7,607,508 |
$79,427,177 |
|
|
|
|
|
|
|
Comprehensive Income: |
|
|
|
|
|
|
Net income |
- |
- |
3,443,025 |
- |
- |
3,443,025 |
Other comprehensive income |
- |
- |
- |
- |
212,324 |
212,324 |
Total comprehensive income |
|
|
|
|
|
3,655,349 |
Restricted stock units for directors' deferred compensation plan |
|
|
|
|
|
|
Cash dividends declared ($.46 per share) |
|
|
|
|
|
|
Distribution of restricted stock units for directors' deferred compensation plan |
|
|
|
|
- |
|
Purchase of 18,038 shares of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2003 |
$ 43,001 |
22,415,717 |
62,959,795 |
(12,302,201) |
7,819,832 |
80,936,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at December 31, 2003 |
$ 43,001 |
22,506,573 |
64,750,787 |
(13,071,791) |
5,764,302 |
79,992,872 |
Comprehensive Income: |
|
|
|
|
|
|
Net income |
- |
- |
4,175,889 |
- |
- |
4,175,889 |
Other comprehensive loss |
- |
- |
- |
- |
(3,376,496) |
(3,376,496) |
Total comprehensive income |
|
|
|
|
|
799,393 |
Restricted stock units for directors' deferred compensation plan |
|
|
|
|
|
|
Cash dividends declared ($.46 per share) |
|
|
|
|
|
|
Purchase of 31,897 shares of treasury stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at June 30, 2004 |
$ 43,001 |
$22,579,957 |
$67,217,917 |
$(14,083,602)) |
$ 2,387,806 |
$78,145,079 |
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
|
Six Months Ended |
|
|
June 30 |
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
2004 |
2003 |
|
|
|
Net income |
$ 4,175,889 |
3,443,025 |
Adjustments to reconcile net income to net cash |
|
|
|
|
|
Amortization of intangible assets |
198,860 |
198,860 |
Provision for loan losses |
833,333 |
2,200,000 |
Depreciation and amortization |
1,138,335 |
1,099,924 |
Net amortization of premiums and discounts on securities |
|
|
Gain on sales of mortgage loans held for sale, net |
(22,146) |
(44,780) |
Proceeds from the sales of mortgage loans held for sale |
1,294,121 |
7,388,205 |
Mortgage loans originated and held for sale |
(1,295,675) |
(7,881,164) |
Net gain on securities transactions |
(218,961) |
(950,000) |
(Increase) decrease in other assets |
(2,072,606) |
856,073 |
Decrease in accrued interest payable |
(6,278) |
(178,152) |
Expense related to restricted stock units for directors' deferred compensation plan |
|
|
Increase (decrease) in other liabilities |
570,787 |
(2,262,876) |
Net cash provided by operating activities |
4,913,612 |
4,846,411 |
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES: |
|
|
Proceeds from sales of securities available for sale |
3,223,248 |
2,237,629 |
Proceeds from maturities of and principal collected on |
|
|
Proceeds from maturities of and principal collected on |
|
|
Purchases of securities available for sale |
(60,649,980) |
(57,607,400) |
Purchases of securities held to maturity |
(6,945,080) |
(1,645,443) |
Purchases of premises and equipment |
(858,974) |
(805,236) |
Net decrease in loans |
570,389 |
6,590,227 |
Proceeds from sales of student loans |
1,589,973 |
6,448,382 |
Net cash (used in) provided by investing activities |
(8,937,982) |
40,070,253 |
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
Net (decrease) increase in demand deposits, NOW accounts, savings accounts, and insured money market accounts |
|
|
Net decrease in time deposits and individual retirement accounts |
|
|
Net increase (decrease) in securities sold under agreements to repurchase |
|
|
Federal Home Loan Bank advances |
800,000 |
- |
Repayments of Federal Home Loan Bank advances |
- |
(15,750,000) |
Purchase of treasury stock |
(1,011,811) |
(494,829) |
Cash dividends paid |
(1,716,095) |
(1,734,738) |
Net cash (used in) provided by financing activities |
(10,306,059) |
2,728,471 |
|
|
|
Net (decrease) increase in cash and cash equivalents |
(14,330,429) |
47,645,135 |
Cash and cash equivalents, beginning of period |
38,069,778 |
29,063,640 |
Cash and cash equivalents, end of period |
$23,739,349 |
76,708,775 |
|
|
|
Supplemental disclosure of cash flow information: |
|
|
Cash paid during the year for: |
|
|
Interest |
$ 5,527,325 |
7,101,019 |
Income Taxes |
$ 3,691,600 |
3,690,205 |
Supplemental disclosure of non-cash activity: |
|
|
Transfer of loans to other real estate owned |
$ 68,454 |
76,323 |
Adjustment of securities available for sale to fair value, net of tax |
|
|
Settlement of pending purchase of security |
$ 2,000,000 |
- |
|
||
See accompanying notes to unaudited consolidated financial statements. |
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
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 to its local market area. The consolidated financial statements include the accounts of the Corporation and its wholly owned subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.
The data in the consolidated balance sheet as of December 31, 2003 was derived from the audited consolidated financial statements in the Corporation's 2003 Annual Report on Form 10-K. That data, along with the other interim financial information presented in the consolidated balance sheets, statements of income, shareholders' equity and comprehensive income, and cash flows should be read in conjunction with the audited consolidated financial statements, including the notes thereto, contained in the 2003 Annual Report on Form 10-K. Amounts in prior periods' consolidated interim financial statements are reclassified whenever necessary to conform to the current period's presentation.
The consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, of a normal recurring nature and necessary to present fairly the Corporation's financial position as of June 30, 2004 and December 31, 2003, and results of operations for the three and six-month periods ended June 30, 2004 and 2003, and changes in shareholders' equity and cash flows for the six-month periods ended June 30, 2004 and 2003. The results for the periods presented are not necessarily indicative of results to be expected for the entire fiscal year or any other interim period.
2. Earnings Per Share
Earnings per share were computed by dividing net income by 3,790,696 and 3,831,356 weighted average shares outstanding for the six-month periods ended June 30, 2004 and 2003, respectively and 3,782,795 and 3,830,414 weighted average shares outstanding for the three-month periods ended June 30, 2004 and 2003, respectively. 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. There were no dilutive common stock equivalents during the three or six-month periods ended June 30, 2004 or 2003.
3. Recent Accounting Pronouncements
In January 2003, the FASB issued FASB Interpretation No. 46 ("FIN No. 46"), "Consolidation of Variable Interest Entities, an interpretation of ARB No. 51." The objective of this interpretation is to provide guidance on how to identify a variable interest entity ("VIE") and determine when the assets, liabilities, noncontrolling interests, and results of operations of a VIE need to be included in a company's consolidated financial statements. A company that holds variable interests in an entity will need to consolidate the entity if the company's interest in the VIE is such that the company will absorb a majority of the VIE's expected losses and/or receive a majority of the entity's expected residual returns, if they occur. FIN No. 46 also requires additional disclosures by primary beneficiaries and other significant variable interest holders. FIN No.46 was effective for all VIE's created after January 31, 2003. However, the FASB had postponed that effective date to December 31, 2003. In December 2003, the FAS
B issued a revised FIN No. 46 ("FIN No. 46R"), which further delayed this effective date until March 31, 2004 for VIE's created prior to February 1, 2003, except for special purpose entities, which must adopt either FIN No. 46 or FIN No. 46R as of December 31, 2003. The Corporation does not have any special purpose entities and the adoption of FIN No. 46 had no impact on the Corporation's consolidated financial statements at December 31, 2003. The adoption of FIN No. 46R at March 31, 2004 did not have a material impact on the Corporation's consolidated financial statements.
The following table presents information relative to the Corporation's core deposit intangible ("CDI") related to the acquisition of deposits from the Resolution Trust Company in 1994:
|
At June 30, 2004 |
At December 31, 2003 |
|
|
|
Original core deposit intangible amount |
$ 5,965,793 |
$ 5,965,793 |
Less: Accumulated amortization |
4,010,338 |
3,811,478 |
|
|
|
Carrying amount |
$ 1,955,455 |
$ 2,154,315 |
Amortization expense for the six months ended June 30, 2004 and 2003 related to the CDI was $198,860. As of June 30, 2004, the remaining amortization period for this CDI was approximately 4.8 years. The estimated amortization expense is $397,719 for each of the years ending December 31, 2004 through 2008, with $165,720 in aggregate amortization expense in years subsequent to 2008.
5. Comprehensive (Loss) Income
Comprehensive income or loss of 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 (loss) income for the three and-six month periods ended June 30, 2004 was $(2,863,070) and $799,393, respectively. Comprehensive income for the three and six-month periods ended June 30, 2003 was $2,001,590 and $3,655,349, respectively. The following summarizes the components of other comprehensive income:
|
Three Months Ended |
|
|
2004 |
2003 |
Unrealized net holding (losses) gains on securities available for sale, net of tax (pre-tax amounts of $(7,984,815) and $1,366,829 for the respective periods indicated) |
|
|
Less: Reclassification adjustment for net gains realized in net income (pre- tax amounts of $0 and $410,000 for the respective periods indicated) |
|
|
Total other comprehensive (loss) income |
$(4,874,728) |
584,144 |
|
|
|
|
Six Months Ended |
|
|
2004 |
2003 |
Unrealized net holding (losses) gains on securities available for sale, net of tax (pre-tax amounts of $(5,311,745) and $1,297,787 for the respective periods indicated) |
|
|
Less: Reclassification adjustment for net gains realized in net income (pre- tax amounts of $218,961 and $950,000 for the respective periods indicated) |
|
|
Total other comprehensive (loss) income |
$(3,376,496) |
212,324 |
6. Components of Quarterly and Annual Net Periodic Benefit Cost
Three Months Ended June 30, |
2004 |
2003 |
Qualified Pension |
|
|
Service cost, benefits earned during the period |
$ 140,500 |
127,750 |
Interest cost on projected benefit obligation |
289,500 |
281,000 |
Expected return on plan assets |
(322,500) |
(289,000) |
Net amortization and deferral |
40,000 |
37,750 |
Net periodic pension expense |
$ 147,500 |
157,500 |
|
|
|
Six Months Ended June 30, |
2004 |
2003 |
Qualified Pension |
|
|
Service cost, benefits earned during the period |
$ 281,000 |
255,500 |
Interest cost on projected benefit obligation |
579,000 |
562,000 |
Expected return on plan assets |
(645,000) |
(578,000) |
Net amortization and deferral |
80,000 |
75,500 |
Net periodic pension expense |
$ 295,000 |
315,000 |
Three Months Ended June 30, |
2004 |
2003 |
Supplemental Pension |
|
|
Service cost, benefits earned during the period |
$ 3,131 |
3,475 |
Interest cost on projected benefit obligation |
10,216 |
11,188 |
Expected return on plan assets |
- |
- |
Net amortization and deferral |
7,958 |
5,995 |
Net periodic pension expense |
$ 21,305 |
20,658 |
|
|
|
Six Months Ended June 30, |
2004 |
2003 |
Supplemental Pension |
|
|
Service cost, benefits earned during the period |
$ 6,262 |
6,950 |
Interest cost on projected benefit obligation |
20,432 |
22,376 |
Expected return on plan assets |
- |
- |
Net amortization and deferral |
15,916 |
11,990 |
Net periodic pension expense |
$ 42,610 |
41,316 |
Three Months Ended June 30, |
2004 |
2003 |
Postretirement, Medical and Life |
|
|
Service cost, benefits earned during the period |
$ 16,500 |
16,500 |
Interest cost on projected benefit obligation |
64,750 |
64,750 |
Expected return on plan assets |
- |
- |
Net amortization and deferral |
31,250 |
31,250 |
Net periodic expense |
$ 112,500 |
112,500 |
|
|
|
Six Months Ended June 30, |
2004 |
2003 |
Postretirement, Medical and Life |
|
|
Service cost, benefits earned during the period |
$ 33,000 |
33,000 |
Interest cost on projected benefit obligation |
129,500 |
129,500 |
Expected return on plan assets |
- |
- |
Net amortization and deferral |
62,500 |
62,500 |
Net periodic expense |
$ 225,000 |
225,000 |
Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations
The review that follows focuses on the significant factors affecting the financial condition and results of operations of Chemung Financial Corporation (the "Corporation") during the three and six month periods ended June 30, 2004, with comparisons to the comparable periods in 2003, as applicable. The unaudited consolidated interim financial statements and related notes, as well as the 2003 Annual Report on Form 10-K, should be read in conjunction with this review. The results for the periods presented are not necessarily indicative of results to be expected for the entire fiscal year or any other interim period.
Forward-looking Statements
This Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by our use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot promise you that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially
different from its expectations because of various factors, including credit risk, interest rate risk, competition, changes in the regulatory environment, and changes in general business and economic trends.
Critical Accounting Policies, Estimates and Risks and Uncertainties
Critical accounting policies include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with accounting principles generally accepted in the United States. As a result, the Corporation is required to make certain estimates, judgements and assumptions that it believes are reasonable based upon the information available. These estimates, judgements and assumptions affect the reported amounts of assets and liabilities at the date of the financial statement and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.
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 probable credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions, the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a signif
icant impact on the overall analysis of the adequacy of the allowance for loan losses. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses.
Total loans, net of unearned income and deferred fees and costs, decreased by $2.6 million or 0.7% from December 31, 2003 to June 30, 2004. Approximately $1.4 million of this decrease was in the consumer loan portfolio, affected primarily by a decrease of $2.1 million in consumer installment loans, offset to some extent primarily by an $804 thousand increase in student loans. The installment loan decrease continues to be impacted by the extremely competitive pricing environment for indirect auto loans. The residential mortgage portfolio has decreased $424 thousand during the first six months of 2004, and total commercial loans, including commercial mortgages were down $710 thousand, impacted by a $1.6 million decrease in floor plan balances.
The composition of the loan portfolio is summarized as follows:
|
June 30, 2004 |
December 31, 2003 |
Residential mortgages |
$ 86,853,815 |
$ 87,277,896 |
Commercial mortgages |
43,948,137 |
43,827,026 |
Commercial, financial and agricultural |
130,752,266 |
131,583,152 |
Consumer loans |
126,234,811 |
127,665,172 |
|
$387,789,029 |
$390,353,246 |
The available for sale segment of the securities portfolio totaled $283.8 million at June 30, 2004, compared to $282.9 million at the end of 2003, an increase of approximately $900 thousand or 3.2%. Unrealized appreciation related to the available for sale portfolio decreased $5.5 million since the beginning of the year, reflective of the impact on the bond portfolio of higher mid to long term rates. At amortized cost, the available for sale portfolio was up $6.4 million since year-end 2003. This increase is primarily reflected in a $13.6 million increase in federal agency bonds, offset to some extent primarily by a $6.2 million decrease in mortgage-backed securities. During the first six months of 2004, the Corporation purchased approximately $44.8 million of federal agency bonds, with approximately $28.2 million of agency bonds being called. Additionally, the Corporation sold a $3.0 million agency bond in March, realizing a pre-tax gain on the sale of $219 thousand. Although the Corporation purchased appro
ximately $15.2 million of mortgage-backed securities during the first six months of this year, this portfolio declined due to the level of paydowns in the portfolio. The held to maturity segment of the portfolio, consisting primarily of local municipal obligations, totaled $14.9 million at amortized cost as of June 30, 2004, an increase of $1.8 million since year-end 2003.
A $2.1 million increase in other assets is related primarily to an increase in net deferred tax assets since the beginning of 2004.
Deposits at June 30, 2004 totaled $531.8 million, a decrease of $19.3 million or 3.5% as compared to December 31, 2003. While period-end non-interest bearing demand deposits were down $5.2 million, most of the decrease in deposits was due to a $14.1 million reduction in interest bearing balances. This decrease in interest bearing balances was impacted primarily by lower insured money market, time and Now account balances, offset to some extent by higher savings account balances. The decrease in interest bearing balances from December 31, 2003 to June 30, 2004 reflects the fact that in the absence of loan growth during the first half of 2004, the Corporation has not been aggressive in the pricing of these deposit products. The $10.9 million increase in securities sold under agreements to repurchase reflects an increase in security purchases leveraged with repurchase agreements through the Federal Home Loan Bank of New York.
Non-performing loans at June 30, 2004 totaled $11.432 million as compared to $12.331 million at December 31, 2003, a decrease of $899 thousand. Loans in non-accrual status decreased $408 thousand. During the first six months of 2004, two commercial relationships totaling $481 thousand were added to the non-accrual category. These additions were offset primarily by principal reductions on other non-accruing commercial loans, as well as a reduced level of mortgage and consumer loans in non-accrual status. A $277 thousand reduction in troubled debt restructurings resulted from the transfer of a relationship in this category at year-end 2003 to non-accrual status during the second quarter of this year. Subsequent to this transfer, $185 thousand of this credit was charged-off. The reduction in non-performing loans was also impacted by a $214 thousand decrease in accruing loans past due 90 days or more, this decrease related primarily to a decrease in residential mortgage loans in this category.
The following table summarizes the Corporation's non-performing assets:
(dollars in thousands) |
June 30, 2004 |
December 31, 2003 |
Non-accrual loans |
$ 11,319 |
11,727 |
Troubled debt restructurings |
- |
277 |
Accruing loans past due 90 days or more |
113 |
327 |
Total non-performing loans |
$ 11,432 |
12,331 |
Other real estate owned |
187 |
357 |
Total non-performing assets |
$ 11,619 |
12,688 |
In addition to non-performing loans, as of June 30, 2004, the Corporation, through its loan review function, has identified 23 commercial loan relationships totaling $17.249 million in potential problem loans, as compared to $16.874 million (22 relationships) at December 31, 2003. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms, and which may result in the disclosure of such loans as non-performing at some time in the future. At the Corporation, potential problem loans are typically loans that are performing but are classified in the Corporation's loan rating system as "substandard". Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on non-accrual, become restructured, or require increased allowance coverage and provisions for loan losses.
Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the historical loan loss experience, review of specific problem loans (including evaluation of the underlying collateral), changes in the composition and volume of the loan portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers' ability to pay. During 2002 and 2003, the Corporation significantly increased the allowance for loan losses through an increased provision for loan loss expense in light of continuing loan quality issues related to the impact of a weak local economic environment on several large commercial relationships. With the level of non-performing relationships beginning to stabilize, and seeing some positive indications of improving business conditions for these clients, the Corporation reduced its provision for loan losses during the second quarter of 2004 to $333 thousand as compared to $1.6 million
during the second quarter of 2003. The year-to-date provision of $833 thousand is down $1.367 million compared to the first six months of 2003. At June 30, 2004, the Corporation's allowance for loan losses totaled $10.322 million, resulting in a coverage ratio of allowance to non-performing loans of 90.3%. The allowance for loan losses is an amount that management believes will be adequate to absorb probable loan losses on existing loans. Net loan charge-offs for the first six months of 2004 totaled $359 thousand as compared to $2.118 million during the first half of 2003. This $1.759 million decrease was due primarily to lower commercial loan charge-offs, as during the first quarter of 2003, the Corporation charged-off $1.9 million of a commercial relationship. The allowance for loan losses to total loans at June 30, 2004 was 2.66% as compared to 2.52% as of December 31, 2003.
(dollars in thousands) |
Six Months Ended June 30 |
|
|
2004 |
2003 |
Balance at beginning of period |
$ 9,848 |
7,674 |
Charge-offs: |
|
|
Commercial, financial and agricultural |
(218) |
(1,991) |
Commercial mortgages |
- |
- |
Residential mortgages |
(2) |
(2) |
Consumer loans |
(267) |
(260) |
Total |
(487) |
(2,253) |
Recoveries: |
|
|
Commercial, financial and agricultural |
20 |
29 |
Commercial mortgages |
- |
- |
Residential mortgages |
- |
2 |
Consumer loans |
108 |
104 |
Total |
128 |
135 |
Net charge-offs |
(359) |
(2,118) |
Provision charged to operations |
833 |
2,200 |
Balance at end of period |
$10,322 |
7,756 |
Results of Operations
Second Quarter of 2004 vs. 2003
Net interest income before the provision for loan losses was down $64 thousand or 1.0%. As compared to the second quarter of 2003, average earning assets increased $8.7 million or 1.3%. However, total interest and dividend income decreased $696 thousand or 7.2% from $9.671 million in the second quarter of 2003 to $8.975 million in the second quarter of 2004, as the yield on earning assets declined 46 basis points from 5.63% to 5.17%. Due primarily to decreases in loans throughout 2003, average loan balances were down $34.8 million or 8.3% compared to second quarter 2003 averages, with the yield down 54 basis points to 6.15%. While the average balance of the securities portfolio increased $61.0 million or 26.7%, the yield on these investments was down 27 basis points to 4.18%. Average fed funds sold and interest-bearing deposits were down $17.5 million, with the yield down 24 basis points to 0.95%.
Total average funding liabilities increased $2.0 million or 0.3% when compared to the second quarter of 2003 due primarily to a $9.4 million increase in average securities sold under agreements to repurchase funded through the Federal Home Loan Bank of New York. This was offset to some extent by a $7.3 million decrease in average deposits. Average non-interest bearing demand deposits were up $8.0 million due to increases in both personal and non-personal average balances. Average time deposits decreased $21.8 million, primarily due to lower average personal balances. The decrease in average time deposits was offset to some extent by increases in average savings and insured money market account balances of $5.5 million and $1.8 million, respectively. Average interest bearing liabilities decreased $6.0 million or 1.1% compared to second quarter 2003 averages, and interest expense decreased $632 thousand or 18.9% as the cost of funds, including the impact of non-interest bearing funding sources (such as demand
deposits), was down 38 basis points to 1.65%. The resulting net interest margin for the second quarter of 2004 of 3.61% was 8 basis points lower than the second quarter 2003 margin of 3.68%.
As discussed more fully under the Asset Quality section of this report, with non-performing loans beginning to stabilize, the provision for loan losses during the second quarter of 2004 totaled $333 thousand as compared to $1.6 million during the second quarter of 2003, a decrease of $1.267 million.
Despite a $410 thousand decrease in net gains on securities transactions, total non-interest income increased $36 thousand or 1.0% when compared to the second quarter of 2003. During the second quarter of 2003, the Corporation realized gains of $410 thousand on the sale of the remaining balance of a previously other-than-temporary impaired corporate bond. There were no such securities gains realized during the second quarter of this year. Excluding the gains on securities transactions, all other non-interest income increased $446 thousand or 14.7%. This increase was significantly impacted by a $152 thousand increase in fee income generated by our Trust and Investment Center, reflective of improved market conditions as compared to last year. Additionally, revenue from our equity investment in Cephas Capital Partners, L.P. increased $181 thousand, which included a $136 thousand gain resulting from an equity position held by Cephas in a company which was subsequently sold. Service charges on deposit accounts in
creased $50 thousand, primarily related to higher fee income generated by a courtesy pay, overdraft privilege program which was introduced during the second quarter of 2003.
Operating expenses were $298 thousand or 4.7% higher than the comparable period last year. Pension and other employee benefits increased $141 thousand, primarily the result of increases in health insurance and profit sharing expenses of $45 thousand and $88 thousand, respectively. The profit sharing expense increase was due to the higher level of net income in 2004 as compared to 2003. Net occupancy expenses increased $56 thousand, impacted by higher real estate taxes, building depreciation, maintenance costs and utilities. The $167 thousand increase in other operating expenses is primarily related to increases in professional services costs, credit card and merchant deposit services processing costs, and marketing and advertising expenses.
The $346 thousand increase in income tax expense is primarily related to the higher level of pre-tax income.
Year-to-Date 2004 vs. 2003
Net income for the six month period ended June 30, 2004 totaled $4.176 million, an increase of $733 thousand or 21.3% as compared to June 30, 2003 results. Earnings per share increased 22.2% from $0.90 to $1.10 per share on 40,660 fewer average shares outstanding. As was the case with second quarter results, the improvement in year-to-date earnings has been impacted primarily by a reduction in the provision for loan loss expense as well as an increase in non-interest income, offset to some extent by lower net interest income and higher operating expenses.
Net interest income before the provision for loan losses was down $177 thousand or 1.4%, with the net interest margin declining 11 basis points from 3.77% to 3.66%, reflective of both lower interest rates and average loan balances. As compared to the first six months of 2003, average earning assets increased $9.6 million or 1.4%. However, total interest and dividend income decreased $1.578 million or 8.0% as the yield on earning assets declined 55 basis points to 5.25%. As noted in the above discussion of second quarter results, due primarily to decreases in loans throughout 2003, average loan balances during the first six months of 2004 were down $37.4 million or 8.8% compared to comparable period averages during 2003, with the yield down 56 basis points to 6.19%. While the average balance of the securities portfolio increased $55.2 million or 23.2%, the yield on these investments was down 34 basis points to 4.28%. Average fed funds sold and interest-bearing deposits were down $8.2 million, with the yield d
own 25 basis points to 0.94%.
Total average funding liabilities increased $3.7 million or 0.6% when compared to the first six months of last year due primarily to a $5.4 million increase in average securities sold under agreements to repurchase funded through the Federal Home Loan Bank of New York. This was offset to some extent by a $1.1 million decrease in overnight advances under our line of credit with the Federal Home Loan Bank, and a $489 thousand decrease in year-to-date average deposits. Average non-interest bearing demand deposits were up $9.4 million as both personal and non-personal average balances increased. Average interest-bearing deposits decreased $9.9 million, impacted primarily by a $21.7 million decrease in average time deposits, offset to some extent primarily by increases in average savings and insured money market account balances of $5.8 million and $4.5 million, respectively. While total average interest bearing liabilities decreased $5.7 million or 1.0% compared to the first six months of 2003, interest expense
decreased $1.402 million or 20.3%, as the cost of funds, including the impact of non-interest bearing funding sources (such as demand deposits), was down 44 basis points to 1.67%.
Due in large part to the decrease in the second quarter provision, the year-to-date provision for loan loss expense has decreased $1.367 million from $2.2 million to $833 thousand.
Despite a $731 thousand decrease in net gains on securities transactions, total non-interest income increased $105 thousand, as with the exception of securities gains, all other non-interest income rose $836 thousand or 14.8%. Similar to the second quarter, and for reasons noted above, the increase was primarily the result of a $209 thousand increase in fee income generated by our Trust and Investment Center, a $306 thousand increase in service charges on deposit accounts, and a $181 thousand increase in revenue from our equity investment in Cephas Capital Partners, L.P. In addition to the above, credit card merchant discount fees increased $76 thousand, and revenue generated by CFS Group, Inc. was up $67 thousand.
Operating expenses were $136 thousand or 1.1% higher than a year ago. Pension and other employee benefits increased $81 thousand, primarily the result of a $107 thousand increase in health insurance expense. Net occupancy expenses were up $107 thousand, impacted by higher real estate taxes, building depreciation, maintenance costs and utilities. The $99 thousand increase in other operating expenses is primarily related to increases in professional services costs and credit card and merchant deposit services processing costs, offset to an extent primarily by lower loan and ORE expenses. Salaries and wages for the first six months of 2004 were $184 thousand lower than a year ago, reflective of reduced staff size.
Income tax expense increased $425 thousand, primarily due to the increased level of pre-tax income during the first half of 2004.
Average Consolidated Balance Sheet and Interest Analysis
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.
|
Three Months Ended |
Three Months Ended |
||||
|
Average |
|
Yield/ |
Average Balance |
|
Yield/ |
Earning assets: |
|
|
|
|
|
|
Loans |
$386,373 |
$5,911 |
6.15% |
$421,136 |
$7,020 |
6.69% |
Taxable securities |
258,758 |
2,759 |
4.29% |
203,031 |
2,275 |
4.49% |
Tax-exempt securities |
30,850 |
255 |
3.32% |
25,554 |
260 |
4.08% |
Federal funds sold |
21,143 |
50 |
0.95% |
37,548 |
112 |
1.20% |
Interest-bearing deposits |
711 |
1 |
0.57% |
1,831 |
4 |
0.88% |
Total earning assets |
697,835 |
8,976 |
5.17% |
689,100 |
9,671 |
5.63% |
|
|
|
|
|
|
|
Non-earning assets: |
|
|
|
|
|
|
Cash and due from banks |
22,987 |
|
|
23,353 |
|
|
Premises and equipment, net |
17,026 |
|
|
17,081 |
|
|
Other assets |
16,030 |
|
|
13,644 |
|
|
Allowance for loan losses |
(10,480) |
|
|
(6,465) |
|
|
AFS valuation allowance |
7,270 |
|
|
12,724 |
|
|
Total |
$750,668 |
|
|
$749,437 |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
Now and super now deposits |
40,434 |
35 |
0.35% |
41,189 |
43 |
0.42% |
Savings and insured money market deposits |
187,969 |
306 |
0.65% |
180,675 |
482 |
1.07% |
Time deposits |
199,265 |
1,274 |
2.57% |
221,078 |
1,700 |
3.08% |
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
|
|
|
Total interest-bearing liabilities |
541,379 |
2,711 |
2.01% |
547,333 |
3,342 |
2.45% |
|
|
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
Demand deposits |
121,276 |
|
|
113,316 |
|
|
Other liabilities |
8,152 |
|
|
7,297 |
|
|
Total liabilities |
670,807 |
|
|
667,946 |
|
|
Shareholders' equity |
79,861 |
|
|
81,491 |
|
|
Total |
$750,668 |
|
|
$749,437 |
|
|
Net interest income |
|
$6,265 |
|
|
$6,329 |
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
3.16% |
|
|
3.18% |
|
|
|
|
|
|
|
Net interest margin |
|
|
3.61% |
|
|
3.68% |
|
Six Months Ended |
Six Months Ended |
||||
|
Average |
|
Yield/ |
Average Balance |
|
Yield/ |
Earning assets: |
|
|
|
|
|
|
Loans |
$387,158 |
$11,920 |
6.19% |
$424,535 |
$14,216 |
6.75% |
Taxable securities |
262,740 |
5,724 |
4.38% |
212,734 |
4,933 |
4.68% |
Tax-exempt securities |
30,429 |
515 |
3.40% |
25,231 |
518 |
4.14% |
Federal funds sold |
18,203 |
86 |
0.95% |
25,732 |
154 |
1.21% |
Interest-bearing deposits |
651 |
3 |
0.93% |
1,301 |
6 |
0.93% |
Total earning assets |
699,181 |
18,248 |
5.25% |
689,533 |
19,827 |
5.80% |
|
|
|
|
|
|
|
Non-earning assets: |
|
|
|
|
|
|
Cash and due from banks |
23,089 |
|
|
23,241 |
|
|
Premises and equipment, net |
17,186 |
|
|
17,207 |
|
|
Other assets |
15,897 |
|
|
14,070 |
|
|
Allowance for loan losses |
(10,277) |
|
|
(7,128) |
|
|
AFS valuation allowance |
8,855 |
|
|
12,629 |
|
|
Total |
$753,931 |
|
|
$749,552 |
|
|
|
|
|
|
|
|
|
Liabilities and Shareholders' Equity |
|
|
|
|
|
|
Interest-bearing liabilities: |
|
|
|
|
|
|
Demand deposits |
42,976 |
77 |
0.36% |
41,572 |
94 |
0.46% |
Savings and insured money market deposits |
187,133 |
659 |
0.71% |
176,793 |
1,019 |
1.16% |
Time deposits |
200,306 |
2,600 |
2.61% |
221,959 |
3,510 |
3.19% |
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
|
|
|
Total interest-bearing liabilities |
543,545 |
5,521 |
2.04% |
549,226 |
6,923 |
2.54% |
|
|
|
|
|
|
|
Non-interest-bearing liabilities: |
|
|
|
|
|
|
Demand deposits |
120,611 |
|
|
111,190 |
|
|
Other liabilities |
9,302 |
|
|
8,294 |
|
|
Total liabilities |
673,458 |
|
|
668,710 |
|
|
Shareholders' equity |
80,473 |
|
|
80,842 |
|
|
Total |
$753,931 |
|
|
$749,552 |
|
|
Net interest income |
|
$12,727 |
|
|
$12,904 |
|
|
|
|
|
|
|
|
Net interest rate spread |
|
|
3.21% |
|
|
3.26% |
|
|
|
|
|
|
|
Net interest margin |
|
|
3.66% |
|
|
3.77% |
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):
|
Three-Months Ended June 30 2004 Compared to Three Months Ended June 2003 |
||
|
Increase (Decrease) Due to (1) |
||
|
Volume |
Rate |
Net |
Interest and dividends earned on: |
|
|
|
Loans |
$(564) |
(545) |
(1,109) |
Taxable securities |
1,131 |
(647) |
484 |
Tax-exempt securities |
201 |
(206) |
(5) |
Federal funds sold |
(42) |
(20) |
(62) |
Interest-bearing deposits |
(2) |
(1) |
(3) |
Total earning assets |
$ 756 |
(1,451) |
(695) |
Interest paid on: |
|
|
|
Demand deposits |
(1) |
(7) |
(8) |
Savings and insured money market deposits |
125 |
(301) |
(176) |
Time deposits |
(159) |
(267) |
(426) |
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
Total interest-bearing liabilities |
$ (36) |
(595) |
(631) |
Net interest income |
$ (5) |
(59) |
(64) |
|
Six-Months Ended June 2004 Compared to Six Months Ended June 2003 |
||
|
Increase (Decrease) Due to (1) |
||
|
Volume |
Rate |
Net |
Interest and dividends earned on: |
|
|
|
Loans |
$(1,181) |
(1,115) |
(2,296) |
Taxable securities |
1,613 |
(822) |
791 |
Tax-exempt securities |
198 |
(201) |
(3) |
Federal funds sold |
(39) |
(29) |
(68) |
Interest-bearing deposits |
(3) |
- |
(3) |
Total earning assets |
$ 772 |
(2,351) |
(1,579) |
Interest paid on: |
|
|
|
Demand deposits |
9 |
(26) |
(17) |
Savings and insured money market deposits |
162 |
(522) |
(360) |
Time deposits |
(318) |
(592) |
(910) |
Federal Home Loan Bank advances and securities sold under agreements to repurchase |
|
|
|
Total interest-bearing liabilities |
$ (70) |
(1,332) |
(1,402) |
Net interest income |
$ (30) |
(147) |
(177) |
Liquidity and Capital Resources
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. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core deposit growth and non-core funding sources, such as time deposits of $100,000 or more, securities sold under agreements to repurchase and other borrowings.
The Corporation is a member of the Federal Home Loan Bank of New York ("FHLB") which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. At June 30, 2004, the Corporation maintained a $74.957 million line of credit with the FHLB, as compared to $74.804 million at June 30, 2003.
Cash generated during the first six months of 2004 was used primarily to fund the purchase of securities totaling $67.6 million as well as a deposit decrease of $19.2 million. Other significant uses of cash during the first half of 2004 included the payment of cash dividends ($1.7 million) and the purchase of treasury shares ($1.0 million). During the first six months of 2003, the purchase of securities totaled $59.3 million. Other significant uses of cash during the first half of 2003 included the repayment of FHLB advances ($15.8 million), a reduction in securities sold under agreements to repurchase ($4.0 million), the payment of cash dividends ($1.7 million) and the purchase of treasury shares ($495 thousand).
Despite a $2.5 million increase in retained earnings from December 31, 2003 to June 30, 2004, the Corporation's total shareholders' equity decreased $1.8 million. This decrease was due primarily to the decline in the market value of the Corporation's bond portfolio, with the after-tax impact of this decrease reflected in a $3.4 million decrease in accumulated other comprehensive income from $5.8 million at December 31, 2003 to $2.4 million at June 30, 2004. The reduction in shareholders' equity was also impacted by purchases of treasury stock during the first six months of 2004 totaling $1.0 million.
As of June 30, 2004, the Corporation's consolidated leverage ratio was 9.76%. The Tier I and Total Risk Adjusted Capital ratios were 16.13% and 18.08%, respectively. All of the above ratios are in excess of the requirements for being considered "well capitalized" by the FDIC, the Federal Reserve and the New York State Banking Department.
When shares of the Corporation become available in the market, the Corporation may purchase them, as market conditions warrant, after careful consideration of its capital position. During the first half of 2004, the Corporation purchased 31,897 shares at an average price of $31.72 per share.
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 marketing officer, chief financial officer, and others representing key functions.
The ALCO is also 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.
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 June 30, 2004, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 12.55% and an immediate 200-basis point increase would negatively impact the next 12 months net interest income by 0.39%. Both are within the Corporation's policy guideline of 15% established by ALCO and management is comfortable with this exposure because the Corporation does not believe that an immediate 200-basis point decrease in interest rates across the yield curve is likely given the current interest rate environment. A more realistic approach includes estimates of an immediate 1
00-basis point decline and an immediate 300-basis point increase in interest rates. When applied, these scenarios estimate a negative impact to net interest income of 4.64% and a negative impact of 1.25% respectively.
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 June 30, 2004, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value of our capital account by 6.85% and an immediate 200-basis point increase in interest rates would negatively impact the market value by 7.26%. 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 have not been employed during the first six months of 2004.
Item 3: Quantitative and Qualitative Disclosures about Market Risk
Information required by this Item is set forth herein in Management's Discussion and Analysis of Financial Condition and Results of Operations under the heading "Interest Rate Risk".
Item 4: Controls and Procedures
The Company's management, including the Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2004. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, the Company's disclosure controls and procedures are effective in alerting them in a timely manner to material information relating to the Corporation required to be included in this report and other reports that it files or submits under the Securities Exchange Act of 1934.
There were no significant changes in the Corporation's internal control over financial reporting that occurred during the Corporation's most recent fiscal quarter that has materially affected, or that are reasonably likely to materially affect, the Corporation's internal control over financial reporting.
PART II. |
OTHER INFORMATION |
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Item 2. |
Changes in Securities and Use of Proceeds |
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(e) |
Issuer Purchases of Equity Securities |
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Maximum number (or approximate dollar value) of shares that may yet be purchased under the plan |
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|
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1/1/04-1/31/04 |
7,500 |
$35.00 |
- |
- |
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2/1/04-2/29/04 |
3,396 |
$34.81 |
- |
- |
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|
3/1/04-3/31/04 |
1,000 |
$32.00 |
- |
- |
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|
Quarter ended 3/31/04 |
11,896 |
$34.73 |
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|
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|
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4/1/04-4/30/04 |
5,936 |
$32.34 |
- |
- |
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|
5/1/04-5/31/04 |
13,600 |
$28.92 |
- |
- |
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6/1/04-6/30/04 |
465 |
$28.73 |
- |
- |
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|
Quarter ended 6/30/04 |
20,001 |
$29.93 |
- |
- |
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|
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Period ended 6/30/2004 |
31,897 |
$31.72 |
- |
- |
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Of the above, 5,000 shares were open-market transactions and the remaining 26,897 shares were direct transactions. |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
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(a) |
May 20, 2004-Annual Meeting |
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The following directors were elected at the Annual Meeting of Shareholders on May 20, 2004: |
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1. |
To elect four directors to serve until the 2007 Annual Meeting of Shareholders listed below: |
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FOR |
WITHELD |
AGAINST |
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|
Robert H. Dalrymple |
3,309,983 |
26,387 |
0 |
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|
Frederick Q. Falck |
3,319,957 |
16,413 |
0 |
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Ralph H. Meyer |
3,316,472 |
19,898 |
0 |
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Richard W. Swan |
3,320,882 |
15,488 |
0 |
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|
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Directors serving after the meeting whose terms expire in 2006: |
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William D. Eggers |
William C. Ughetta |
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David J. Dalrymple |
Jan P. Updegraff |
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John F. Potter |
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Directors serving after the meeting whose terms expire in 2005: |
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Robert E. Agan |
Charles M. Streeter, Jr. |
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Stephen M. Lounsberry III |
Nelson Mooers van den Blink |
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Thomas K. Meier |
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(c) |
Matters voted upon (refer to b) |
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(d) |
Not applicable |
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Item 6. |
Exhibits and Reports on Form 8-K |
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(a) |
Exhibits |
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31.1 Certification of President and Chief Executive Officer of Chemung Financial Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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31.2 Certification of Treasurer and Chief Financial Officer of Chemung Financial Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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32.1 Certification of President and Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. 1350. |
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32.2 Certification of Treasurer and Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. 1350. |
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(b) |
Reports on Form 8-K |
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During the period covered by this report, the Corporation furnished information in the current report on Form 8-K identified below. The information in this current report on Form 8-K was furnished pursuant to Item 12 and, as such, is not deemed to be "filed" for purposes of Section 18 of the Securities Exchange Act of 1934 or otherwise subject to the liabilities of that section. |
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Date of Report |
Item Reported |
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April 14, 2004 |
Item 12 (press release announcing results of operations for the first quarter of 2004). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHEMUNG FINANCIAL CORPORATION
DATE: |
August 6, 2004 |
/s/ Jan P. Updegraff |
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|
Jan P. Updegraff |
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President & CEO |
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DATE: |
August 6, 2004 |
/s/ John R. Battersby Jr. |
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|
John R. Battersby Jr. |
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Treasurer & CFO |
FORM 10 - Q
QUARTERLY REPORT
EXHIBIT INDEX
FOR THE PERIOD ENDING June 30, 2004
CHEMUNG FINANCIAL CORPORATION
ELMIRA, NEW YORK
31.1 Certification of President and Chief Executive Officer of Chemung Financial Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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31.2 Certification of Treasurer and Chief Financial Officer of Chemung Financial Corporation pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934. |
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32.1 Certification of President and Chief Executive Officer of Chemung Financial Corporation pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. 1350. |
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32.2 Certification of Treasurer and Chief Financial Officer of Chemung Financial Corporation pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. 1350. |
EXHBIT 31.1
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CHEMUNG FINANCIAL CORPORATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934.
I, Jan P. Updegraff, certify that:
1. I have reviewed this report on Form 10-Q of Chemung Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 6, 2004
By: /s/ Jan P. Updegraff
President and Chief Executive Officer
EXIBIT 31.2
I, John R. Battersby Jr., certify that:
1. I have reviewed this report on Form 10-Q of Chemung Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: August 6, 2004
By: /s/ John R. Battersby Jr.
Treasurer and Chief Financial Officer
EXHIBIT 32.1
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CHEMUNG FINANCIAL CORPORATION PURSUANT TO RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND 19 U.S.C. @1350.
The undersigned, the, President and Chief Executive Officer of Chemung Financial Corporation (the "Corporation"), hereby certifies that, to his knowledge on the date hereof:
/s/ Jan P. Updegraff
Jan P. Updegraff
President and Chief Executive Officer
August 6, 2004
EXHIBIT 32.2
CERTIFICATION OF TREASURER AND CHIEF FINANCIAL OFFICER OF CHEMUNG FINANCIAL CORPORATION PURSUANT TO RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND 19 U.S.C. @ 1350.
/s/ John R. Battersby, Jr.
John R. Battersby, Jr.
Treasurer and Chief Financial Officer
August 6, 2004