-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VKw45/7F050T5W3xCOYrrroUsvn1eJYuqR5yntfj+rSOX4A2I8/H8w0Q9iYJjzB2 aLooCkMgfT9qTOV8YVqwTA== 0000763563-97-000015.txt : 19970321 0000763563-97-000015.hdr.sgml : 19970321 ACCESSION NUMBER: 0000763563-97-000015 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: CHEMUNG FINANCIAL CORP CENTRAL INDEX KEY: 0000763563 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 161237038 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-13888 FILM NUMBER: 97560020 BUSINESS ADDRESS: STREET 1: ONE CHEMUNG CANAL PLZ STREET 2: P O BOX 1522 CITY: ELMIRA STATE: NY ZIP: 14902 BUSINESS PHONE: 6077373711 MAIL ADDRESS: STREET 1: ONE CHEMUNG CANAL PLZ STREET 2: P O BOX 1522 CITY: ELMIRA STATE: NY ZIP: 14902 10-K 1 1996 FORM 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1996 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 (Exact name of registrant as specified in its charter) NEW YORK 16-123703-8 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) One Chemung Canal Plaza, P.O. Box 1522 Elmira, New York 14902 (Address of principal executive offices) (Zip Code) 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 $5 a share (Title of class) 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. YES X NO The aggregate market value of Common Stock held by nonaffiliates on February 28, 1997 was $46,989,729 As of February 28, 1997 there were 2,072,214 shares of Common Stock, $5 par value outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference into Parts I, II and IV. Portions of the Proxy Statement for the Annual Shareholders meeting to be held on April 8, 1997 are incorporated by reference into Parts III and IV. PART I ITEM 1. BUSINESS (a) General development of business 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. 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. Exhibits I through IV included in "Management's Discussion and Analysis of Financial Condition and Results of Operation" ("MD&A") for the Corporation's Annual Report to Shareholders for the year ended December 31, 1996, sets forth financial information with respect to bank-related industry segments. The MD&A including Exhibits I through IV are 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, 1996. 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 1996, 1995, and 1994. Employees As of December 31, 1996, the Bank employed 289 persons on a full-time equivalent basis. (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 In June 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. SFAS No. 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishment of liabilities occurring after December 31, 1996 and is based on consistent application of a "financial components approach" that focuses on control. The Statement provides consistent standards for distinguishing transfers of financial assets that are sales from transfers that are secured borrowings. In December 1996, FASB deferred for one year the effective date of SFAS No. 125 as it relates to transfers of financial assets and secured borrowings and collateral. Management does not believe that the adoption of SFAS No. 125 will have a material impact on its financial condition or results of operations. 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 December 31, 1996 1995 1994 Average Yield/ Average Yield/ Average Yield/ Balance Interest Rate Balance Interest Rate Balance Interest Rate Assets Interest earning assets: Loans $ 273,904 25,314 9.24% $249,149 23,868 9.58% $221,419 20,006 9.04% Taxable securities 156,378 10,292 6.58 155,238 9,960 6.42 134,524 7,762 5.77 Tax-exempt securitie 28,883 1,360 4.71 28,051 1,406 5.01 25,054 1,262 5.04 Federal funds sold 6,522 350 5.37 8,434 486 5.76 10,236 407 3.98 Interest-bearing deposits 3,808 195 5.13 6,267 357 5.70 3,478 143 4.11 Total interest earning assets 469,495 37,511 7.99% 447,139 36,077 8.07% 394,711 29,580 7.49% Non-interest earning assets: Cash and due from banks 23,501 23,442 21,657 Premises and equipment, net 10,146 9,657 7,451 Other assets 7,003 6,922 5,506 Less allowance for loan losses (3,932) (3,876) (3,419) Excess of cost over fair value of net assets acquired, net of accumulated amortization 12,247 11,969 5,339 Total $ 518,460 $ 495,253 $ 431,245 Liabilities and Shareholders' Equity Interest bearing liabilities: Demand deposits $ 44,261 719 1.63% $ 43,312 731 1.69% $ 43,372 673 1.55% Savings deposits 139,219 3,942 2.83 149,257 4,408 2.95 142,819 3,778 2.65 Time deposits 177,537 9,625 5.42 153,433 8,307 5.41 121,783 5,445 4.47 Federal funds purchased and securities sold under agreement to repurchase 15,213 757 4.97 13,846 781 5.64 9,975 380 3.81 Total interest bearing liabilities 376,230 15,043 4.00% 359,848 14,227 3.95% 317,949 10,276 3.23% Non-interest bearing liabilities: Demand deposits 79,901 78,406 66,635 Other 8,181 6,995 5,106 464,312 445,249 389,690 Shareholders' equity 54,148 50,004 41,555 Total $ 518,460 $ 495,253 $ 431,245 Net interest earnings $ 22,468 $ 21,850 $ 19,304 Net yield on interest earning assets 4.79% 4.89% 4.89%
For the purpose of these computations, nonaccruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. The yields for securities were calculated using average amortized cost of securities. 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 earned and interest paid resulting from changes in volume and changes in rates:
1996 Compared to 1995 1995 Compared to 1994 Increase (Decrease) Due to (1) Increase (Decrease) Due to (1) Volume Rate Net Volume Rate Net (In Thousands of Dollars) (In Thousands of Dollars) Interest earned on: Loans $ 2,310 (864) 1,446 2,607 1,255 3,862 Taxable securities 74 258 332 1,273 925 2,198 Tax-exempt securities 41 (87) (46) 150 (6) 144 Federal funds sold (104) (32) (136) (81) 160 79 Interest-bearing deposit (129) (33) (162) 145 70 215 Total interest earning assets $ 2,191 (757) 1,434 4,094 2,404 6,498 Interest paid on: Demand deposits 16 (28) (12) (1) 59 58 Savings deposits (289) (177) (466) 180 450 630 Time deposits 1,307 11 1,318 1,580 1,282 2862 Federal funds purchased and securities sold under agreement to repurchase 73 (97) (24) 179 222 401 Total interest bearing liabilities $ 1,107 (291) 816 1,938 2,013 3,951 (1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
Securities Portfolio The following table sets forth the carrying amount of securities at the dates indicated:
December 31, 1996 1995 1994 (In Thousands of Dollars) U.S. Treasury and other U.S. Government Agencies $ 104,567 108,775 163,238 Mortgage Backed Securities 50,109 30,573 0 State and political subdivisions 30,775 30,275 28,085 Other bonds and notes 1,270 3,023 7,181 Corporate stocks 8,996 6,818 5,493 Total $ 195,717 179,464 203,997
Included in the above table are $185,365, $171,882 and $188,828 of securities available for sale at December 31, 1996, 1995 and 1994, respectively. The following tables set forth the maturities of securities at December 31, 1996 and the weighted average yields of such securities (calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security). Federal tax equivalent adjustments have been made in calculating yields on municipal obligations.
Maturing Within After One, But One Year Within Five Years Amount Yield Amount Yield (In Thousands of Dollars) C> U.S. Treasury and other U.S. Government Agencies $ 11,020 6.16% $ 71,164 6.33% Mortgage Backed Securities - - - - State and political subdivisions 11,029 4.31 15,598 4.78 Other bonds and notes 1,012 8.86 186 7.27 Total $ 23,061 5.39% $ 86,948 6.06% Maturing After Five, But After Within Ten Years Ten Years Amount Yield Amount Yield (In Thousands of Dollars) U.S. Treasury and other U.S. Government Agencies $ 22,383 7.12% - - % Mortgage Backed Securities 4,318 6.69 45,791 7.86 State and political subdivisions 3,520 5.02 628 4.85 Other bonds and notes 72 8.25 - - Total $ 30,293 6.82% $46,419 7.82%
Loan Portfolio The following table shows the Corporation's loan distribution at the end of each of the last five years:
December 31, 1996 1995 1994 1993 1992 (In Thousands of Dollars) Commercial, financial and agricultural $ 92,557 89,785 75,006 69,484 63,360 Real estate mortgages 78,400 71,870 67,912 71,345 81,431 Consumer loans 113,004 101,687 94,181 82,028 74,258 Total $ 283,961 263,342 237,099 222,857 219,049
The following table shows the maturity of loans (excluding residential real estate mortgages and consumer loans) outstanding as of December 31, 1996. Also provided are the amounts due after one year classified according to the sensitivity to changes in interest rates:
After One Within But Within After One Year Five Years Five Years Total Commercial, financial and agricultural $ 33,098 20,014 39,445 92,557 Loans maturing after one year with: Fixed interest rates 12,277 7,940 Variable interest rates 7,737 31,505 Total $ 20,014 39,445
Nonaccrual and Past Due Loans The following table summarizes the Corporation's nonaccrual and past due loans:
December 31, 1996 1995 1994 1993 1992 (In Thousands of Dollars) Nonaccrual loans (1) $ 1,494 1,119 1,201 1,605 1,321 Accruing loans past due 90 days or more $ 226 681 354 274 588
Information with respect to nonaccrual loans at December 31, 1996, 1995 and 1994 is as follows:
December 31, 1996 1995 1994 (In Thousands of Dollars) Nonaccrual loans $ 1,494 1,119 1,201 Interest income that would have been recorded under original terms 278 200 342 Interest income recorded during the period 58 52 58 (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 nonaccrual nd previously accrued interest is reversed unless, because of collateral or other circumstances, it is deemed to be collectible. Loans may also be placed in nonaccrual if management believes such classification is warranted for other reasons.
Potential Problem Loans At December 31, 1996, the Corporation has no commercial loans for which payments are presently current but the borrowers are currently experiencing severe financial difficulties. Those loans are subject to constant management attention and their classification is reviewed by the Board of Directors at least semi-annually. Loan Concentrations At December 31, 1996, the Corporation has no loan concentrations to borrowers engaged in the same or similar industries that exceed 10% of total loans. Other Interest-Bearing Assets At December 31, 1996, the Corporation has no interest-bearing assets other than loans that meet the nonaccrual, past due, restructured or potential problem loan criteria. Summary of Loan Experience This table summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 1996:
Year Ended December 31, 1996 1995 1994 1993 1992 (In Thousands of Dollars) Balance at beginning of period $ 3,900 3,600 3,500 3,400 2,800 Charge-offs: Commercial, financial and agricultural 195 82 282 550 61 Real estate mortgages 1 5 14 - - Consumer loans 538 286 422 346 382 Home equity 20 - - - - 754 373 718 896 443 Recoveries: Commercial, financial and agricultural 16 16 18 10 100 Consumer loans 71 93 76 79 41 87 109 94 89 141 Net charge-offs 667 264 624 807 302 Allowance of acquired bank at time of acquisition - - 100 - - Additions charged to operations (1) 742 564 624 907 902 Balance at end of period $ 3,975 3,900 3,600 3,500 3,400 Ratio of net charge-offs during period to average loans outstanding (2) .24% .11% .28% .36% .14% (1) The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience, growth in the loan portfolio and management's estimation of future potential losses. The risk elements in the various portfolio categories are not considered to be any greater in 1996 than in prior years. The net charge-offs to total loans have averaged 0.23% over the last five years and the highest percentage in any of those years was 0.36%. (2) Daily balances were used to compute average outstanding loan balances.
This table sumarized the Corporation's allocation of the allowance for loan losses for each year in the five-year period ended December 31, 1996:
Amount (in thousands) and Percent of Loans by Category to Total Loans Balance at end of Period Applicable to: 1996 % 1995 % 1994 % 1993 % 1992 % Domestic: $2,245 100.0 1,830 100.0 2,857 100.0 3,274 100.0 2,158 100.0% Commercial, financial and agricultural 1,472 32.3 1,042 33.0 2,108 31.0 2,620 30.2 1,625 28.6 Commercial mortgages 249 3.2 305 4.1 282 5.0 247 6.5 112 6.7 Residential mortgages 21 24.5 16 23.6 16 23.6 13 25.5 34 30.4 Consumer loans 503 40.0 467 39.3 451 40.4 394 37.8 387 34.3 Unallocated: 1,730 N/A 2,070 N/A 743 N/A 226 N/A 1,242 N/A Total $3,975 100.0 3,900 100.0 3,600 100.0 3,500 100.0 3,400 100.0
Deposits The average daily amounts of deposits and rates paid on such deposits is summarized for the periods indicated in the following table:
Year Ended December 31, 1996 1995 1994 Amount Rate Amount Rate Amount Rate (In Thousands of Dollars) Noninterest-bearing demand deposits $ 79,901 - % 78,406 - % 66,635 - % Interest-bearing demand deposits 44,261 1.63 43,312 1.69 43,372 1.55 Savings deposits 139,219 2.83 149,257 2.95 142,819 2.65 Time deposits 177,537 5.42 153,433 5.41 121,783 4.47 $ 440,918 424,408 374,609
Scheduled maturities of certificates of deposit with a remaining term greater than one year at December 31, 1996 are summarized as follows:
Time Certificates of Deposits (In Thousands of Dollars) 1998 $34,289 1999 13,092 2000 6,502 2001 3,693 2002 and thereafter 38 $57,614
Maturities of certificates of deposit $100,000 or more outstanding at December 31, 1996 are summarized as follows:
Time Certificates of Deposits (In Thousands of Dollars) 3 months or less $26,369 Over 3 through 12 months 6,647 Over 12 months 3,754
There were no other time deposits of $100,000 or more. 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, 1996 1995 1994 Return on average assets 1.19% 1.13% 1.08% Return on average equity 11.37 11.20 11.18 Return on beginning equity 11.64 12.25 12.13 Dividend payout ratio 35.78 36.52 38.23 Average equity to average assets ratio 10.44 10.10 9.64 Year-end equity to year-end assets ratio 10.54 10.54 9.25
Short-Term Borrowings For each of the three years in the period ended December 31, 1996, the average outstanding balance of short-term borrowings did not exceed 30% of shareholders' equity. 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 five (5) 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 46,350 square feet. The office building adjacent to the main office was acquired during 1995 and consists of approximately 18,213 square feet of which 13,711 square feet are occupied by operating departments of the Bank and 4,502 square feet are leased. The leased automated teller facility spaces total approximately 150 square feet. The Bank holds two (2) of its branch facilities (Arnot Mall Office and Bath Office) and three (3) automated teller facilities (Elmira/Corning Regional Airport, Elmira College and WalMart Store) 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 subsidiary 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 REGISTRANTS SECURITIES 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, 1996, 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 1996 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 29, 1997 was 823. ITEM 6. SELECTED FINANCIAL DATA The Selected Financial Data Exhibit 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, 1996 is incorporated herein by reference to Exhibit C of Exhibit Listing 13. 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, 1996 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, 1996 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, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS OF THE REGISTRANT The information set forth under the captions "Nominees For Election of Directors" and "Executive Officers" and the Section 16(a) disclosure set forth under the caption "Security Ownership of Management", as presented in the registrant's Proxy Statement, dated March 10, 1997, relating to the Annual Meeting of Shareholders to be held on April 8, 1997, is incorporated herein by reference. 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 March 10, 1997, relating to the Annual Meeting of Shareholders to be held on April 8, 1997, is incorporated herein by reference. 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 March 10, 1997, relating to the Annual Meeting of Shareholders to be held on April 8, 1997, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth under the caption "Certain Transactions", presented in the registrant's Proxy Statement, dated March 10, 1997, relating to the Annual Meeting of Shareholders to be held on April 8, 1997, is incorporated herein by reference. 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 subsidiary, included in the Annual Report of the registrant to its shareholders as of December 31, 1996 and 1995, and for each of the years in the three-year period ended December 31, 1996 are incorporated by reference in Item 8: - Independent Auditors' Report - Consolidated Balance Sheets - December 31, 1996 and 1995 - Consolidated Statements of Income - Years ended December 31, 1996, 1995 and 1994 - Consolidated Statements of Shareholders' Equity - Years ended December 31, 1996, 1995 and 1994 - Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994 - Notes to Consolidated Financial Statements - December 31, 1996 and 1995 (2) List of Financial 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 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, is incorporated herein by reference to Exhibit A of the Registrant's Form 10-K for the year ended December 31, 1988, File No. 0-13888. (3.2) -- Bylaws of the Registrant, as amended February 14, 1996, are incorporated herein by reference to Exhibit A of the Registrant's Form 10-Q for the period ended September 31, 1996, File No. 0-13888. Exhibit (13) -- Annual Report to Shareholders for the year ended December 31, 1996. -- Table of Quarterly Market Price Ranges. EXHIBIT A -- Table of Dividends Paid. EXHIBIT B -- Management's Discussion and Analysis of EXHIBIT C Financial Condition and Results of Operations including the Selected Financial Data Exhibit. -- Consolidated Financial Statements and EXHIBIT D Independent Auditors' Report. Exhibit (21) -- Subsidiaries of the registrant. EXHIBIT E Exhibit (22) -- Registrant's Notice of Annual Meeting, EXHIBIT F Proxy Statement dated March 10, 1997, and Proxy Form Exhibit (27) -- Financial Disclosure Schedule (EDGAR version only) (b) Reports on Form 8-K There were no reports filed on Form 8-K during the three months ended December 31, 1996. (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, 1996 CHEMUNG FINANCIAL CORPORATION ELMIRA, NEW YORK ____________________________________ EXHIBIT LISTING EXHIBIT EXHIBIT 13 Annual Report To Shareholders For The Year Ended December 31, 1996 A - Table of Quarterly Market Price Ranges B - Table of Dividends Paid C - Management's Discussion and Analysis of Financial Condition and Results of Operations Including the Selected Financial Data Exhibit D - Consolidated Financial Statements and Independent Auditors' Report EXHIBIT 21 E - Subsidiaries of the Registrant EXHIBIT 22 F - Notice of Annual Meeting, Proxy Statement dated March 10, 1997, 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 12, 1997 By /s/ John W. Bennett John W. Bennett Chairman and Chief Executive Officer 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 Director March 12, 1997 Robert E. Agan /s/ John W. Bennett Director, Chairman & March 12, 1997 John W. Bennett Chief Executive Officer Director Donald L. Brooks, Jr. Director David J. Dalrymple Director Robert H. Dalrymple /s/ Richard H. Evans Director March 12, 1997 Richard H. Evans Director Natalie B. Kuenkler /s/ Edward B. Hoffman Director March 12, 1997 Edward B. Hoffman /s/ Stephen M. Lounsberry III Director March 12, 1997 Stephen M. Lounsberry III Signature Title Date Director Boyd McDowell II /s/ Thomas K. Meier Director March 12, 1997 Thomas K. Meier /s/ Ralph H. Meyer Director March 12, 1997 Ralph H. Meyer /s/ John F. Potter Director March 12, 1997 John F. Potter /s/ Samuel J. Semel Director March 12, 1997 Samuel J. Semel /s/ Charles M. Streeter, Jr. Director March 12, 1997 Charles M. Streeter, Jr. /s/ Richard W. Swan Director March 12, 1997 Richard W. Swan /s/ William A. Tryon Director March 12, 1997 William A. Tryon Director William C. Ughetta /s/ Jan P. Updegraff Director, President & March 12, 1997 Jan P. Updegraff Chief Operating Officer /s/ Nelson Mooers van den Blink Director March 12, 1997 Nelson Mooers van den Blink /s/ John R. Battersby, Jr. Treasurer and Principal March 12, 1997 Accounting Officer Attest /s/ Jerome F. Denton Secretary March 12, 1997 Jerome F. Denton EX-13 2 ANNUAL REPORT EXHIBIT A TABLE OF QUARTERLY MARKET PRICE RANGES Market Prices of Chemung Financial Corporation Stock During Past Three Years (dollars) ------------------------------------------------------------ - -----
1996 1995 1994 - ------------------------------------------------------------------ Hi -- Lo Hi -- Lo Hi -- Lo 1st Quarter 28 3/4 - 27 26 1/4 - 25 24 5/8 - 23 2nd Quarter 31 1/2 - 30 26 1/4 - 25 26 - 23 3/4 3rd Quarter 33 1/4 - 30 3/8 25 3/4 - 25 1/4 26 3/4 - 24 1/2 4th Quarter 35 3/4 - 33 27 3/4 - 25 26 - 24 3/4
EXHIBIT B TABLE OF DIVIDENDS PAID Dividends Paid by Chemung Financial Corporation During Past Three Years - ----------------------------------------------------------------------
1996 1995 1994 - ---------------------------------------------------------------------- January $ .2500 $.2400 $.2275 April 1 .2500 .2400 .2275 July 1 .2500 .2400 .2275 October 1 .2800 .2500 .2400 - --------------------------------------------------------------------------- - - $1.0300 $.9700 $.9225
As of December 31, 1996 there were 833 registered holders of record of the Corporation's stock. Chemung Financial Corporation's common stock is inactively traded in the over-the-counter market. The quarterly market price ranges for the Corporation's stock for the past three (3) years are based upon actual transactions as reported by brokerage firms which maintain a market or conduct trades in the Corporation's stock and other transactions known by the Corporation's management. EXHIBIT C MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INCLUDING FINANCIAL DATA EXHIBITS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The purpose of this discussion is to focus on information about the financial condition and results of operations of Chemung Financial Corporation which is not otherwise apparent from the consolidated financial statements included in this annual report. Reference should be made to those statements and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis. Description of Business Chemung Financial Corporation (the OCorporationO) is a one-bank holding company with its only subsidiary being Chemung Canal Trust Company (the OBankO), a full-service community bank with full Trust powers. Therefore, the financial condition should be examined in terms of the acquisition and employment of funds within its Omarket areasO. Management defines the market areas of Chemung Canal Trust Company as those areas within a 25-mile radius of branches in these communities. These areas encompass Chemung, Steuben, Schuyler, and Tioga counties, together with the northern tier of Pennsylvania. The BankOs lending policy restricts substantially all lending efforts to these geographical regions. Management of Credit Risk - Loan Portfolio The Bank manages credit risk, while conforming to all state and Federal laws governing the making of loans, through written policies and procedures implemented to ensure loan repayment; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans. The Executive Committee of the Board is designated to receive required loan reports, oversee loan policy, and approve loans above the authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the chairman of the board, president, senior lending officer, commercial loan officer, mortgage officer, consumer loan officer, and financial officer, implements the Board-approved loan policy. Supervision and Regulation The Corporation, as a bank holding company, is regulated under the Bank Holding Company Act of 1956, as amended (the OActO), and is subject to the supervision of the Board of Governors of the Federal Reserve System (the OFederal Reserve BoardO). Generally, the Act limits the business of bank holding companies to banking, or managing or controlling banks, performing certain servicing activities for subsidiaries, and engaging in such other activities as the Federal Reserve Board may determine to be closely related to banking and a proper incident thereto. The Bank is chartered under the laws of New York State and is supervised by the New York State Banking Department. The Federal Deposit Insurance Corporation Improvement Act of 1991 (OFDICIAO) was passed in order to protect depositors and taxpayers from the excesses of the S&L problems of the 1980Os. There are a number of provisions in this act that significantly increase the non-interest operating costs of the Bank. These rules specifically impact the cost of external audit, the mortgage loan product (through appraisal requirements), as well as all other loan products and contain the potential for the regulatory authorities to begin micro-managing banks of all sizes. Thus, regulatory burden continues to be a major impediment to banking profitability. Competition The Bank is subject to intense competition in the lending and deposit gathering aspects of its business from commercial banks, savings banks, savings and loan associations, credit unions; and other providers of financial services, such as money market funds, brokerage firms, investment companies, credit companies and insurance companies. The Bank also competes with nonfinancial 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. The Bank faces significant competition in acquiring quality assets, due to such factors as increased activities by providers of credit cards, and the increased lending powers granted to and employed by thrift institutions and credit unions. The Bank also faces competition in attracting deposits at reasonable prices due to the activities of money market funds; increased activities of non-bank deposit takers, including brokerage firms; and the increased availability of demand deposit type accounts at thrift institutions and credit unions. Unlike the Bank, many of these competitors are not subject to regulation as extensive as that described under the OSupervision and RegulationO section and, as a result, they may have a competitive advantage over the Corporation in certain respects. This is particularly true of credit unions, as their pricing is not encumbered by income taxes. Competition for the BankOs fiduciary services comes primarily from brokerage firms and independent investment advisors. This is considered very significant competition, as these firms devote much of their considerable resources toward gaining larger positions in this market. Trust Assets Under Administration, however, totaled $1,054 million at market December 31, 1996, compared to $993 million a year earlier. Relative to the BankOs total assets, when compared with peer commercial banks, the Trust Department is unusually large and favorable in terms of generating non-interest income. During 1996, as well as 1995 and 1994, the Investment Services Division noted a continued increase in the competition for personal and corporate investment management services in our market areas. Thus, in an effort to position the Fiduciary Division for future growth, we now compliment our more traditional investment alternatives with additional products made available through strategic alliances with various mutual fund and insurance companies. Marketing efforts introduced in 1996 included sales and referral incentives designed to maximize results from the Bank's branch system. Employees The Corporation and its Banking subsidiary had 289 full-time equivalent employees (FTEOs) on December 31, 1996 versus 281 at the beginning of the year. The employment trend is relatively stable. Balance Sheet Comments Average earning assets for 1996 grew by $22.4 million or 5.0% to $469.5 million, compared to $447.1 million in 1995 and $394.7 million in 1994. Commercial and consumer loan balances grew $14.1 million and 7.36%, respectively, while the mortgage portfolio increased $6.5 million (9.1%). Average total loan balances were $273.9 million versus $249.1 million during 1995 (up 9.9%) and $221.4 million during 1994. The 1994 acquisition of the Columbia branches from the RTC and the purchase of Owego at year-end 1994, had only minor impact upon the average loan balances in 1995, but began to show improved results in 1996, particularly in home equity loan services. During the fourth quarter of 1996, management elected to borrow $10 million maturing in two years from the Federal Home Loan Bank for the purpose of funding an equal amount of U.S. Government Agency notes. This leveraging strategy provided an annualized net interest spread of 135 basis points. Non-performing loans at year end decreased to $1.720 million vs $1.800 million at the end of 1995, and represented 0.61% of total outstandings compared to 0.68% on 12/31/95 and 0.66% on 12/31/94. Net loan losses were $667 thousand or 0.24% of average outstandings, compared to $264 thousand in 1995 and $624 thousand in 1994. The loan loss reserve at 12/31/96 was 1.40% of outstandings and, at 231% of non-performing loans versus 217% a year ago and 232% in 1994, is felt by management to be adequate. Exhibit I Balance Sheet Comparisons
Average Balance Sheet Growth Rates (in millions) 1996 1995 1994 1993 1992 1991 1 yr 5 yrs Total Asset $ 518.5 $ 495.2 $ 431.2 $ 397.7 $ 387.0 $ 357.4 4.7% 7.8% Earning Assets 469.5 447.1 394.7 368.4 358.3 328.0 5.0% 7.4% Loans 273.9 249.1 221.4 224.1 221.0 219.1 10.0% 4.6% Investments 195.6 198.0 173.3 144.3 137.3 108.9 -1.2% 12.4% Deposits 440.9 424.4 374.6 347.0 338.5 319.4 3.9% 6.7% Tangible Equity 46.4 41.7 38.2 37.0 34.2 31.5 11.3% 8.1% Ending Balance Sheet (in millions) Total Assets $ 532.2 $ 501.9 $ 494.3 $ 398.1 $ 385.8 $ 381.7 6.0% 6.9% Earning Assets 474.6 446.3 448.9 369.2 356.4 350.7 6.3% 6.2% Loans - Net 279.7 259.1 232.9 218.8 214.9 224.8 8.0% 4.5% Investments 196.3 189.6 212.1 147.1 138.0 123.1 3.5% 9.8% Deposits 439.6 426.9 432.3 342.9 339.2 325.8 3.0% 6.2% Tangible Equity 48.7 44.9 37.2 38.3 35.5 32.3 8.5% 8.6% Allowance For Loan Losses 3.98 3.90 3.60 3.50 3.40 2.80 2.1% 7.3%
Securities The board-approved Funds Management Policy includes an investment portfolio policy which requires that except for local municipal obligations which are sometimes unrated 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". The policy also states that, except for short term U.S. Treasury Bills and/or U.S. Government Agency discount notes, purchases are to be made with the ability to hold to maturity. Marketable securities are classified as Available for Sale while local direct investment in municipal obligations are classified as Held to Maturity. The Available for Sale segment of the securities portfolio at December 31, 1996, was $185.4 million compared to $171.9 million a year earlier and $188.8 million at the end of 1994. The components of the net appreciation are set forth in the following table:
Amortized Fair Appreciation Cost Value (Depreciation) (in thousands) U.S. Treasury Securities $ 52,721 $ 52,764 $ 43 Obligations of other U.S. Government Agencies 51,832 51,803 (29) U.S. Government Agency Mortgage-backed pools 50,193 50,109 (84) Obligations of states and political subdivisions 20,257 20,500 243 Other bonds and notes 1,179 1,193 14 Corporate stocks 3,662 8,996 5,334 Totals $ 179,844 $ 185,365 $ 5,521
Included in the above table are 16,621 shares of Student Loan marketing Association ("SALLIE MAE") at a cost basis of $5,321 and fair value of $1,547,830. These shares were acquired as preferred shares (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 12/31/96, the banking subsidiary's portfolio held marketable equities totalling $89,540 at cost with a total fair value of $3,854,835 The shares, other than SALLIE MAE, were acquired prior to the enactment of the Banking Act of 1933. Other equities included in the bank portfolio are 9,964 shares of Federal Reserve Bank and 17,972 shares of the Federal Home Loan Bank of New York. They are valued at $498,200 and $1,797,200, respectively. Management has no current plans for selling these investments. Capital Resources and Dividends The Corporation continues to maintain a strong capital position. Tangible shareholdersO equity at December 31, 1996, was $48.7 million or 9.15% of total assets compared to $44.9 million or 8.95% of total assets at the end of 1995 and $37.2 million or 7.52% of assets at the end of 1994. As of December 31, 1996, the Corporation's total Weighted Risk Adjusted Capital Ratio was 16.87% compared with 16.46% at 12/31/95 and 15.03% at the end of 1994. The leverage ratio (Average Tier I Capital/Average Assets) was 8.97% at year end versus 8.52% in 1995 and 7.69% in 1994. Management's strategy for leveraging the Corporation's capital is to maintain the leverage ratio between 7.50% and 8.50%. Performance Summary Net income for 1996 was impacted by 1) higher loan volumes 2) lower average interest rates 3) higher levels of non-interest income, and 4) lower non- interest expenses. Chemung Financial's net profits before dividends for 1996 were $6.158 million versus $5.602 million, up $556 thousand (9.9%) or $2.96 versus $2.68 per share (10.5%) on 8.4 thousand fewer average shares outstanding. During 1994 the Corporation earned $2.45, up 3.4% from 1993. Quarterly dividends declared totaled $1.06 per share vs 1995's $0.98 and $0.935 in 1994. Under FDIC Risk-Related Premium System Rules, in order to be considered WELL CAPITALIZED, the FDIC requires a bank's Total Risk Based Capital Ratio to be greater than or equal to 10% AND its Tier 1 Risk Based Capital Ratio to be greater than or equal to 6.00% AND its leverage ratio to be greater than or equal to 5.00%. This designation has been maintained and the Bank's FDIC insurance premiums for 1996 were $253 thousand vs $538 thousand in 1995 and $796 thousand in 1994. Included in 1996 FDIC charges was a one-time charge to banks having deposits insured by the Savings Association Insurance Fund ("SAIF") in order to recapitalize that fund to the same level as the BIF fund. The two funds are now merged. $29 million of the Bank's deposits were subjected to the $191 thousand assessment in the fourth quarter of 1996. In December, the Bank received notification from the FDIC that it remains well capitalized. The 1997 FDIC insurance premium will be accrued at an annual rate of $80 thousand for total insured deposits. During 1996, the Bank's loan loss provision totaled $742 thousand, up $178 thousand from $564 thousand in 1995 and $624 thousand in 1994. The increase is a reflection of management's ongoing evaluation of the risk inherent in the portfolio. During 1995, management determined that based upon its review of the inherent risk, no provisions should be added to the reserve during November and December of that year, and $102 thousand of the loan loss reserve was returned to pretax income. This was a reflection of the very strong business environment and consistently favorable loan experience of that year. The average interest rate on earning assets was 7.99% during 1996 versus 8.07% in 1995 and 7.49% in 1994. The interest expense on the Bank's liabilities also increased to 4.00% in 1996 versus 3.95% in 1995 and 3.23% in 1994. This delivered a net interest spread of 3.99% versus 4.12% a year earlier and 4.26% in 1994. The net interest margin declined 10 basis points to 4.79%. Noninterest income totaled $7.105 million versus $6.736 million in 1995 and $5.685 million in 1994. Trust department income, at $3.718 million in 1996 versus $3.678 million in 1995 and $3.323 million in 1994 is the largest segment of non-interest income. $610 thousand in net securities gains were realized during 1996 as management continued to move more proactively from a strategy with emphasis upon liquidity to an investment approach with higher yield potential. Investments sold or matured were mostly U.S. Treasury securities with the proceeds reinvested primarily in U.S. Government agency notes and U.S. Government agency guaranteed mortgage backed securities. Exhibit II
Growth Rates Earnings (in thousands) 1996 1995 1994 1993 1992 1991 1 yr 5 yrs Net Interest Income $ 22,468 $ 21,849 $ 19,304 $ 18,672 $ 18,339 $ 16,557 2.8% 6.3% Loan Loss Provision 742 564 624 907 902 625 31.6% 3.5% Net Interest Income after Loan Loss Provision 21,726 21,285 18,680 17,765 17,437 15,932 2.1% 6.4% Trust Department Income 3,719 3,678 3,323 3,294 3,176 2,708 1.1% 6.5% Securities Gains (Losses), net 610 531 140 821 105 (506) 14.9% -2.0% Other Income 2,777 2,527 2,222 2,004 1,691 1,621 9.9% 11.4% Total Non-Interest Income 7,106 6,736 5,685 6,119 4,972 3,823 5.5% 13.2% Non Interest Expense 19,408 19,560 17,375 15,627 15,287 14,902 -0.8% 5.4% Pretax Income 9,424 8,461 6,990 8,257 7,122 4,853 11.4% 14.2% Income Taxes 3,266 2,859 2,342 2,830 2,296 1,241 14.3% 21.4% Net Operating Income 6,158 5,602 4,648 5,427 4,826 3,612 9.9% 11.3% Effect of Accounting Change 0 0 0 (933) 0 0 N/A N/A Net Income 6,158 5,602 4,648 4,494 4,826 3,612 9.9% 11.3%
Exhibit III
Selected Financial Data Growth Rates Per Share Data 1996 1995 1994 1993 1992 1991 1 yr 5 yrs Net Operating Income $ 2.96 $ 2.68 $ 2.45 $ 2.87 $ 2.55 $ 1.90 10.4% 9.3% Net Income 2.96 2.68 2.45 2.37 2.55 1.90 10.4% 9.3% Dividends Declared 1.06 0.98 0.935 0.875 0.82 0.76 8.2% 6.9% Tangible Book Value 23.51 21.57 17.75 20.25 18.75 17.02 9.0% 6.7% Market Price 12/31 34.00 27.75 25.50 23.00 18.50 18.25 22.5% 13.3% Average Shares O/S (thousands) 2,079 2,088 1,899 1,894 1,894 1,899 - -0.4% 1.8%
Exhibit IV
Selected Ratios 1996 1995 1994 1993 1992 Return on average assets 1.19% 1.13% 1.08% 1.13% 1.25% Return on average tangible equity 13.27% 13.43% 12.17% 12.15% 14.11% Dividend yield 12/31 3.29% 3.60% 3.76% 3.96% 4.54% Dividend payout 35.78% 36.52% 38.22% 36.86% 32.17% Leverage ratio 8.97% 8.52% 7.69% 9.63% 9.20% Tier I capital to risk adjusted assets 15.61% 15.21% 13.71% 15.66% 14.80% Total capital to risk adjusted assets 16.87% 16.46% 15.03% 17.09% 16.22% Loans to deposits 64.53% 61.61% 54.71% 64.83% 64.38% Loan reserve to outstanding loans 1.40% 1.48% 1.52% 1.57% 1.56% Loan reserve to non-performing loans 231% 217% 232% 186% 178% Non-performing loans to outstanding loans 0.61% 0.68% 0.66% 0.85% 0.87% Net interest rate spread 3.99% 4.12% 4.26% 4.42% 4.35% Net interest margin 4.79% 4.89% 4.89% 5.07% 5.12%
Exhibit V Changes Due To Volume and Rate The following table demonstrates the impact on net interest income of the changes in the volume of earning assets and interest-bearing liabilities and changes in rates earned and paid by the Bank. For purposes of constructing this table, earning asset averages include non-performing loans. Therefore, the impact of lower levels of non-performing loans is reflected in the change due to rate, but does not affect changes due to volume.
1996 vs 1995 1995 vs 1994 Increase Increase (Decrease) (Decrease) Total Due to Due to Total Due to Due to Change Volume Rate Change Volume Rate Interest Income (thousands) Loans $ 1,446 $ 2,310 $ (864) $ 3,862 $ 2,607 $ 1,255 Taxable investment securities 332 74 258 2,198 1,273 925 Tax-exempt investment securities (46) 41 (87) 144 150 (6) Federal funds sold (136) (104) (32) 79 (81) 160 Interest-bearing deposits (162) (129) (33) 215 145 70 Total Interest Income $ 1,434 $ 2,192 $ (758) $ 6,498 $ 4,094 $ 2,404 Interest Expense (thousands) Demand deposits $ (12) $ 16 $ (28) $ 58 $ (1) $ 59 Savings deposits (466) (289) (177) 630 180 450 Time deposits 1,318 1,307 11 2,862 1,580 1,282 Federal funds purchased and securities sold under agreement to repurchase (24) 73 (97) 401 179 222 Total Interest Expense $ 816 $ 1,107 $ (291) $ 3,951 $ 1,938 $ 2,013 Net Interest Income $ 618 $ 1,085 $ (467) $ 2,547 $ 2,156 $ 391
Under Federal Reserve regulations (see Note 16 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, 1996, the maximum amount available for transfer from the Bank to the Corporation in the form of loans was $1,660,655. The Bank is subject to legal limitations on the amount of dividends that can be paid to the Corporation. Dividends are limited to retained net profits, as defined by regulations, for the current year and the two preceding years. At December 31, 1996, $7,964,762 was available for the declaration of dividends. Cash dividends declared amounted to $2.203 million in 1996 versus $2.045 million in 1995 and $1.777 million in 1994. Dividends declared amounted to 35.8% of net earnings compared to 36.5% and 38.2% of 1995 and 1994 net earnings, respectively. It is management's objective to continue generating sufficient capital internally, while retaining an adequate dividend payout ratio. The core deposit intangible and goodwill in the amount of $4.94 million and $2.46 million, respectively, at December 31, 1996, which accounts for the premium paid in connection with the acquisition of three branches from the Resolution Trust Corporation ("RTC") and the Owego National Financial Corporation during 1994, is being amortized over 15 years for both book and tax purposes. Amortization periods are monitored to determine if events and circumstances require such periods to be reduced. With respect to each of the branches acquired from the RTC, management has determined that our purchase of these deposits constituted entrance into major new market areas and provides a basis for concluding that the purchased goodwill benefits will exist beyond a short- term period. Treasury Shares When shares of the Corporation come on the market, we will bid only after careful review of our capital position. During 1996, 16,915 shares were purchased at a total cost of $514,599 or an average price of $30.42 per share. Early in 1996, 7,280 shares of treasury stock were sold at a price of $27.75 per share to fund profit sharing requirements. During 1995, 11,632 shares were purchased at a total cost of $299,749 or an average price of $25.77 per share. In 1994, 7,500 of the treasury shares were sold at a price of $23.00 per share to fund profit sharing requirements. Cash Flow Proceeds from maturities and sales of securities and student loans available for sale trailed purchases of securities and loan originations, net of repayments and net purchases of premises and equipment, by $38.616 million in 1996. Net purchases of equipment were $862.7 thousand. During 1995, proceeds from maturities and sales of securities and student loans were less than purchases of securities and loan originations net of repayments and net purchases of premises and equipment by $356 thousand. Net purchases of premises and equipment during 1995 were $3.013 million, including $540 thousand for real estate. In 1994, net cash used by investing activities was $85.1 million. The 1994 figure, however, was distorted by the 1/1/94 adoption of FASB #115 (Mark to market) and the management's decision to assign most marketable securities to the AFS category. Additionally, in June 1994, the bank acquired $45.6 million in deposits from the RTC. This event resulted in unusually high levels of securities purchases. Net cash provided by financing activities amounted to $21.3 million in 1996, compared to a negative $4.495 million during 1995 and a positive $49.0 million a year earlier, when the purchase of deposits of acquired branches accounted for $45.6 million of the increase. Core deposits (Demand, NOW, Savings and Insured Money Market Accounts) decreased $7.4 million in 1996, compared to $14.3 million in 1995, while certificates of deposit and individual retirement accounts increased $20.1 million compared to $8.9 million in 1995. Additionally, long- term borrowings increased $10 million when the bank borrowed $10 million from the Federal Home Loan Bank. The Loan has a two year maturity and was part of a matched funding leveraging strategy. Liquidity and Sensitivity The term OliquidityO refers primarily to the expected cash flows from assets held for investment and secondarily to borrowings secured by assets held for investments. These two sources of liquidity have in the past been sufficient to fund the operations of the Bank, and the Board of Directors anticipates that they will suffice in the future. For this reason, the term OliquidityO in the BankOs policies does not refer to proceeds from the sale of assets, although the sale of assets held as available for sale is a source of liquidity available to management. Liquidity management involves the ability to meet the cash flow requirements of deposit customers, borrowers, and the operating, investing, and financing activities of the Corporation. Management of interest rate sensitivity seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. As intermediaries between borrowers and savers, commercial banks incur interest rate risk. The BankOs Asset/Liability Committee (ALCO) has the strategic responsibility for setting the policy guidelines on acceptable exposure. The ALCO is made up of the chairman of the board, president, senior lending officer, senior marketing officer, financial officer, and others representing key functions. During 1993, the Bank became a member of the Federal Home Loan Bank of New York (OFHLBO). The primary reasons for joining the FHLB were to enhance managementOs ability to satisfy future liquidity needs and to have an additional alternate for investing excess reserves. Having invested $1.797 million in FHLB common stock, the Bank maintained a credit line of $52,496,600 at December 31, 1996. Interest-rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. A related component of interest rate risk is the expectation that the market value of our capital account will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact component: an institution exposed to earnings erosion is also exposed to shrinkage in market value. Interest rate risk is portrayed below using the OcontractualO gap. Contractual gap measures the stated repricing and maturity of assets and liabilities. At December 31, 1996, the cumulative one-year contractual gap for the Bank was a negative $160.9 million versus a negative $121.5 million a year earlier and a negative $111.4 at the end of 1994. This indicates that $160.9 million of earning assets could reprice after the source of funds reprice. It is highly unlikely that this would happen, however, and there is no historical precedent for it. In recent years, however, core deposits (NOW accounts, Insured Money Market Accounts and Savings accounts) have not been repriced with movements of interest rates in the negotiable securities markets. Rather, the interest paid upon such funding sources during 1996, 1995 and 1994 has been very stable, even with movements in excess of 200 basis points. Short-term and intermediate-term interest rates on U.S. Treasury Securities reached their lowest levels at the beginning of 1994, peaked over 250 basis points higher at the beginning of 1995 and had declined more than 200 basis points by the end of the year. Short term rates (6 month U.S. Treasury Bills) ranged between 4.90% - 5.35% during 1996.
December 31, 1996 Rate Sensitive Contractual Amounts 1 to 90 91 to 365 1 to 5 Over 5 (Thousands) days days years years Earning assets: Loans $ 100,736 $ 22,055 $ 90,818 $ 69,426 Securities 6,726 16,334 86,728 76,271 Federal funds 500 Other (Equities) 7,698 Total earning assets $ 115,660 $ 38,389 $ 177,546 $ 145,697 Net sources: NOW accounts $ 45,812 Insured Money Market 43,516 Time certificates under $100 thousand 36,092 52,886 49,221 38 Time certificates over $100 thousand 26,369 6,647 3,754 Savings 89,296 Long term borrowing 10,000 Repurchase agreements 14,371 Total sources $ 255,456 $ 59,533 $ 62,975 $ 38 Incremental gap -139,796 -21,144 114,571 145,659 Percent of earning assets -120.9 -55.1 64.5 100 Cumulative gap -139,796 -160,940 -46,369 99,290 Percent of total assets -29.3 -33.7 -9.7 20.8
The asset/liability management function of the Bank falls under the authority of the Board of Directors, which has charged the ALCO with responsibility for implementing its funds management policies. The ALCO is responsible for supervising the preparation and annual revisions of the financial segments of the Bank Plan, which is built upon the committeeOs economic and interest-rate assumptions and the Annual Budget. It is the responsibility of the ALCO to modify prudently any and all asset/liability. SFAS 114 does not apply to large groups of small balance, homogeneous loans that are collectively evaluated for impairment. This issuance requires the Corporation to account for a troubled debt restructuring involving a modification of terms at fair value as of the date of the restructuring. The Corporation defines smaller balance, homogeneous loans as consumer loans, residential mortgages, home equity and credit card outstandings. Significant factors impacting managementOs judgment in determining when a loan is impaired include an evaluation of compliance with repayment program, condition of collateral, deterioration in financial strength of borrower or any case when the expected future cash payments may be less than the recorded amount. Commercial loans are placed upon non-accrual status when delinquency reaches 90 days unless collateral is deemed adequate; while consumer, mortgage and home equity loans are considered for non-accrual at 120 days. This is due to managementOs evaluation of commercial loans as carrying a greater level of inherent risk. /S/ Jan P. Updegraff Jan P. Updegraff President and Chief Operating Officer EXHIBIT D CONSOLIDATED FINANCIAL STATEMENTS AND INDEPENDENT AUDITORS' REPORT Independent Auditors' Report The Board of Directors and Shareholders Chemung Financial Corporation and Subsidiary: We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation and subsidiary as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholdersO equity and cash flows for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements are the responsibility of the CompanyOs management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chemung Financial Corporation and subsidiary at December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ KPMG Peat Marwick LLP Syracuse, New York January 24, 1997 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED BALANCE SHEET
Assets December 31 1996 1995 Cash and due from banks $ 31,103,374 27,293,592 Interest-bearing deposits with other financial institutions 151,920 90,206 Federal funds sold 500,000 10,000,000 Securities available for sale, at fair value 185,365,478 171,882,062 Securities held to maturity, fair value of $10,351,440 in 1996 and $7,581,519 in 1995 10,351,840 7,582,062 Loans, net of unearned income and deferred fees 283,720,981 263,001,304 Allowance for loan losses (3,975,000) (3,900,000) Loans, net 279,745,981 259,101,304 Premises and equipment, net 9,712,633 10,290,702 Other assets 7,878,811 7,662,639 Intangible assets, net of accumulated amortization 7,402,934 7,990,237 Total assets $ 532,212,971 $ 501,892,786 Liabilities and Shareholders' Equity Deposits: Noninterest-bearing 86,049,289 83,591,381 Interest-bearing 353,600,054 343,287,511 Total deposits 439,649,343 426,878,892 Securities sold under agreements to repurchase 14,371,140 13,381,581 Long term borrowing 10,000,000 - Accrued interest payable 1,152,791 1,059,102 Dividends payable 580,220 520,462 Other liabilities 10,339,278 7,153,851 Total liabilities 476,092,772 448,993,888 Commitments and contingencies (note 15) Shareholders' equity: Common stock, $5.00 par value per share; authorized 3,000,000 shares, issued: 2,150,067 10,750,335 10,750,335 Surplus 10,101,804 10,068,563 Retained earnings 33,885,269 29,930,969 Treasury stock, at cost (1996 - 77,853 shares; (1,925,118) (1,579,298) 1995 - 68,218 shares) Net unrealized gain on securities available for sale, net of taxes 3,307,909 3,728,329 Total shareholders' equity 56,120,199 52,898,898 Total liabilities and shareholders' equity $ 532,212,971 $ 501,892,786
See accompanying notes to consolidated financial statements. CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31 1996 1995 1994 Interest income: Loans $ 25,313,778 23,867,713 20,006,304 Securities 11,651,818 11,365,927 9,023,516 Federal funds sold 350,005 485,979 407,259 Interest-bearing deposits 195,181 357,090 142,882 Total interest income 37,510,782 36,076,709 29,579,961 Interest expense: Deposits 14,286,189 13,446,125 9,895,852 Borrowed funds 176,126 7,538 8,366 Securities sold under agreements to repurchase 580,354 773,264 372,133 Total interest expense 15,042,669 14,226,927 10,276,351 Net interest income 22,468,113 21,849,782 19,303,610 Provision for loan losses 741,662 564,380 623,772 Net interest income after provision for loan losses 21,726,451 21,285,402 18,679,838 Other operating income: Trust department income 3,718,851 3,677,622 3,322,643 Service charges on deposit accounts 1,611,409 1,502,971 1,318,448 Net gain on sales of securities 609,596 530,953 140,001 Credit card merchant earnings 519,039 494,821 436,246 Other 646,603 529,413 467,856 7,105,498 6,735,780 5,685,194 Other operating expenses: Salaries and wages 7,926,874 7,658,865 6,848,952 Pension and other employee benefits 1,976,814 2,214,273 1,824,114 Net occupancy expenses 1,629,539 1,586,077 1,440,755 Furniture and equipment expenses 1,592,873 1,475,543 1,270,385 Other 6,281,664 6,625,056 5,990,536 19,407,764 19,559,814 17,374,742 Income before income taxes 9,424,185 8,461,368 6,990,290 Income taxes 3,266,662 2,859,476 2,342,765 Net income` $ 6,157,523 5,601,892 4,647,525 Weighted average shares outstanding 2,079,312 2,087,751 1,899,488 Net income per common share: $ 2.96 2.68 2.45
See accompanying notes to consolidated financial statements. CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Unrealized Gain (Loss) On Securities Common Retained Treasury Available Stock Surplus Earnings Stock For Sale Total Balances at December 31, 1993 $ 9,783,495 6,488,330 23,503,671 (1,449,124) - 38,326,372 Net unrealized gain on - - - - 2,786,610 2,786,610 securities available for sale, net of taxes of $1,910,980 Issuance of 193,368 shares 966,840 3,577,308 - - - 4,544,148 in acquisition Net income - 4,647,525 - 4,647,525 Cash dividends declared - - (1,776,606) - - (1,776,606) ($.935 per share) Sale of 7,500 shares - 2,925 - 169,575 - 172,500 of treasury stock Change in net unrealized gain - - - - (2,961,803) (2,961,803) (loss) on securities available for sale, net of taxes of $2,031,136 Balances at December 31, 1994 $10,750,335 10,068,563 26,374,590 (1,279,549) (175,193) 45,738,746 Net income - - 5,601,892 - - 5,601,892 Cash dividends declared - - (2,045,513) - - (2,045,513) ($.98 per share) Purchases of 11,632 shares of - - - (299,749) - (299,749) treasury stock Change in net unrealized gain - - - - 3,903,522 3,903,522 (loss) on securities available for sale, net of taxes of $2,645,891 Balances at December 31, 1995 $10,750,335 10,068,563 29,930,969 (1,579,298) 3,728,329 52,898,898 Net income - - 6,157,523 - - 6,157,523 Cash dividends declared - - (2,203,223) - - (2,203,223) ($1.06 per share) Purchase of 16,915 shares of - - - (514,599) - (514,599) treasury stock Sale of 7,280 shares of treasury stock - 33,241 - 168,779 - 202,020 Change in net unrealized gain (loss) - - - - (420,420) (420,420) on securities available for sale, net of taxes of $312,318 Balances a December 31, 1996 $10,750,335 10,101,804 33,885,269 (1,925,118) 3,307,909 56,120,199
See accompanying notes to consolidated financial statements CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 1996 1995 1994 Cash flows from operating activities Net income $ 6,157,523 5,601,892 4,647,525 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets 587,303 587,303 232,003 Deferred income taxes (387,248) (168,577) 98,614 Provision for loan losses 741,662 564,380 623,772 Depreciation and amortization 1,440,752 1,250,236 986,183 Amortization and discount on securities, net 303,365 (458,579) (1,077,616) Gain on sales of securities, net (609,596) (530,953) (140,001) (Increase) decrease in other assets (216,172) 289,799 (1,968,603) Increase (decrease) in accrued interest payable 93,689 164,706 215,747 Increase (decrease) in other liabilities 3,572,676 2,553,784 (201,391) Net cash provided by operating activities 11,683,954 9,853,991 3,416,233 Cash flows from investing activities: Proceeds from sales of securities available 57,617,458 15,958,448 19,955,253 for sale Proceeds from maturities of and principal 6,035,978 7,261,930 5,651,201 collected on securities held to maturity Proceeds from maturities of and principal 52,023,153 94,781,598 69,972,928 collected on securities available for sale Purchases of securities available for sale (123,238,318) (78,373,282) (156,905,963) Purchases of securities held to maturity (8,805,672) (10,202,780) (11,841,859) Cash of acquired bank, net of cash paid - - 2,894,434 Purchases of premises and equipment, net (862,683) (3,013,636) (1,999,522) Loan originations, net of repayments and (24,578,050) (29,563,052) (9,324,698) other reductions Proceeds from sales of student loans 3,191,711 2,794,848 2,507,848 Deposit acquisition premium - - (5,965,793) Net cash used by investing activities $ (38,616,423) (355,926) (85,056,171) (Continued) CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) Years ended December 31 1996 1995 1994 Cash flows from financing activities: Net increase (decrease) in demand deposits, $ (7,366,182) (14,320,289) 328,981 NOW accounts, savings accounts, and insured money market accounts Net increase (decrease) in certificates of 20,136,632 8,928,461 6,928,120 deposit and individual retirement account Net increase (decrease) in securities sold 989,559 3,177,796 (2,341,784) under agreements to repurchase Net increase (decrease) in long term borrowings 10,000,000 - - Purchases of treasury stock (514,599) (299,749) - Sale of treasury stock 202,020 - 172,500 Cash dividends paid (2,143,465) (1,981,078) (1,751,148) Deposits of acquired branches - - 45,628,085 Net cash provided (used) by financing 21,303,965 (4,494,859) 48,964,754 activities Net increase (decrease) in cash and cash (5,628,504) 5,003,206 (32,675,184) equivalents Cash and cash equivalents, beginning of year 37,383,798 32,380,592 65,055,776 Cash and cash equivalents, end of year $ 31,755,294 37,383,798 32,380,592 Supplemental disclosure of cash flow information: Transfer of securities held to maturity $ - 10,505,646 94,727,116 to securities available for sale Cash paid during the year for: Income Taxes 3,832,329 2,937,581 2,464,816 Interest $ 14,948,980 14,062,221 10,052,237 On December 29, 1994, the Corporation acquired the stock of a commercial bank. In conjunction with this acquisition, liabilities were assumed as follows: Fair value of net assets acquired $ 42,381,450 Cash paid and fair value of common (5,780,938) stock issued Liabilities assumed $ 36,600,512
See accompanying notes to consolidated financial statements. CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 AND 1995 (1) Statement of Accounting Policies Organization Chemung Financial Corporation (the Corporation), through its wholly owned subsidiary, Chemung Canal Trust Company (the Bank), provides commercial banking services to its local market area. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory agencies. As discussed in note 2, at the end of 1994 the Corporation acquired Owego National Financial Corporation (Owego), a commercial bank. Basis of Presentation The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles and include the accounts of the Corporation and the Bank. All significant intercompany balances and transactions eliminated in consolidation. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Securities Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized cost. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale and carried at fair value. Securities held for indefinite periods of time include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk and other factors related to interest rate and resultant prepayment risk changes. Unrealized holding gains and losses, net of the related tax effects, on securities classified as available for sale are excluded from earnings and are reported as a separate component of shareholders' equity until realized. Realized gains and losses are determined using the specific identification method. Transfers of securities between categories are recorded at fair value at the date of transfer. A decline in the fair value of any available for sale or held to maturity security below amortized cost that is deemed other than temporary is charged to earnings resulting in the establishment of a new cost basis for the security. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment of yield using the interest method. Dividend and interest income are recognized when earned. Loans Loans are stated at the amount of unpaid principal balance less unearned discounts and net deferred fees. The Corporation has the ability and intent to hold its loans until maturity except for educational loans which are sold to a third party from time to time upon reaching repayment status. Interest on loans is accrued and credited to operations on the level yield method. The accrual of interest is discounted and previously accrued interest is reversed when commercial loans become 90 days delinquent and, when consumer, mortgage and home equity loans, which are not guaranteed by government agencies, become 120 days delinquent. Loans may also be placed in non-accrual if management believes such classification is warranted for other purposes. Loan origination fees and certain loan origination costs are deferred and amortized over the life of the loan using the interest method. Allowance for Loan Losses The allowance for loan losses is maintained at a level considered adequate to provide for loan losses. The allowance is increased by provisions charged to earnings and recoveries of loans previously charged off, and reduced by loan charge-offs. The level of the allowance is based on managementOs evaluation of potential losses in the loan portfolio, prevailing and anticipated economic conditions, past loss experience, and other factors pertinent to estimating potential losses. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowances may be necessary based on changes in economic conditions, particularly in New York State. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the BankOs allowance for loan losses. Such agencies may require the Bank 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 if the loan is collateral dependent. Residential mortgage loans and consumer loans are evaluated collectively since they are homogeneous and generally carry smaller balances. Impairment losses are included in the allowance for loan losses through a charge to the provision for loan losses. In general, interest income on impaired loans is recorded on a cash basis when collection in full is reasonably expected. If full collection is uncertain, cash receipts are applied first to principal then to interest income. Premises and Equipment Land is carried at cost, while buildings and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is charged to current operations under accelerated and straight-line methods over the estimated useful lives of the assets, which range from 15 to 50 years for buildings and from 3 to 10 years for equipment and furniture. Amortization of leasehold improvements and leased equipment is recognized on the straight-line method over the shorter of the lease term or the estimated life of the assets. Other Real Estate Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at the lower of the carrying value of the loan or estimated fair value of the property at the time of acquisition. Write downs from cost to estimated fair value which are required at the time of foreclosure are charged to the allowance for loan losses. Subsequent to acquisition, other real estate is carried at the lower of the carrying amount or fair value less estimated costs to dispose. Subsequent adjustments to the carrying values of such properties resulting from declines in fair value are charged to operations in the period in which the declines occur. Income Taxes The Corporation files a consolidated return on the accrual method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Trust Department Income Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Corporation. Trust department income is recognized on the accrual method based on contractual rates applied to the balances of individual trust accounts. Pension Plan The BankOs funding policy is to contribute amounts to the plan sufficient to meet minimum regulatory funding requirements, plus such additional amounts as the Bank may determine to be appropriate from time to time. Postretirement Benefits In addition to pension benefits, the Bank provides health care and life insurance benefits for retired employees. The estimated costs of providing benefits are accrued over the years the employees render services necessary to earn those benefits. Intangible Assets Goodwill, which represents the excess of purchase price over the fair value of identifiable assets acquired, is being amortized over 15 years on the straight-line method. Deposit base intangible, resulting from the Bank's purchase of deposits from the Resolution Trust Company in 1994, is being amortized over the expected useful life of 15 years on a straight-line basis. Amortization periods are monitored to determine if events and circumstances require such periods to be reduced. Periodically, the Corporation reviews its goodwill and deposit base intangible assets for events or changes in circumstances that may indicate that the carrying amount of the assets are impaired. Per Share Information Per share data was computed on the basis of the weighted average number of common shares outstanding, retroactively adjusted for stock splits and dividends. Cash and Cash Equivalents Cash and cash equivalents include cash and amounts due from banks, interest- bearing deposits with other financial institutions, federal funds sold, and U.S. Treasury securities with original terms to maturity of 90 days or less. Securities Sold Under Agreements to Repurchase The Corporation enters into sales of U.S. Treasury securities under agreements to repurchase. These agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities in the consolidated balance sheets. The amount of the securities underlying the agreements remains in the asset account. The Corporation has agreed to repurchase securities identical to those sold. Financial Instruments With Off-Balance Sheet Risk The Corporation does not engage in the use of derivative financial instruments and the CorporationOs only financial instruments with off- balance sheet risk are commitments under standby letters of credit, unused portions of lines of credit and commitments to fund new loans. Reclassifications Amounts in the prior yearOs consolidated financial statements are reclassified whenever necessary to conform with the current yearOs presentation. (2) Acquisitions On December 29, 1994, management of the Corporation and of Owego signed the documents required to consummate the previously announced acquisition of Owego. Owego commenced business as a branch of the Bank on January 3, 1995. The total purchase price was $5,780,938, consisting of $1,236,790 in cash and 193,368 shares of the CorporationOs common stock with a fair value of $4,544,148 at the date of acquisition. The acquisition was accounted for under the purchase method, accordingly, all assets and liabilities acquired were recorded at their fair values at the date of acquisition and the results of operations of Owego are included in the consolidated financial statements beginning January 1, 1995. For taxation purposes the acquisition was accounted for as a tax free reorganization. The excess of the cost over the fair value of the net assets acquired (goodwill) of $2,843,750 is being amortized on the straight-line method over a period of 15 years. During 1994, the Bank acquired deposits totaling $45,628,085 from the Resolution Trust Company at a premium of $5,965,793. This deposit base intangible asset is being amortized on the straight-line method over 15 years. The CorporationOs unaudited proforma condensed consolidated results of operations for the year ended December 31, 1994 is presented below. This proforma information has been prepared assuming that the acquisition of Owego had been effective January 1, 1994. Such proforma condensed financial information includes various estimates and is not necessarily indicative of the consolidated results of operations as they might have been had the acquisition been effective as of January 1, 1994.
Year ended December 31, 1994 Proforma (in thousands except per share amounts) Net interest income $ 20,773 Net income $ 4,291 Weighted average common shares outstanding $ 2,092 Net income per share $ 2.05
(3) Restrictions on Cash and Due from Bank Accounts The Bank is required to maintain average reserve balances with the Federal Reserve Bank of New York. The required average total reserve for the 14- day maintenance period beginning December 21, 1996 was $7,901,000, of which $2,404,000 was required to be on deposit with the Federal Reserve Bank; the remainder, $5,497,000, was represented by cash on hand. (4) Securities
Amortized cost and fair value of securities available for sale at December 31, 1996 and 1995 are as follows: 1996 1995 Amortized Fair Amortized Fair Cost Value Cost Value U.S. Treasury securities $ 52,721,091 52,763,618 77,579,182 78,516,356 Obligations of other U.S. Government agencies 51,831,740 51,803,452 29,692,008 30,258,315 Mortgage backed securities 50,193,422 50,109,133 30,647,029 30,573,376 Obligations of states and political subdivisions 20,257,203 20,499,918 22,300,655 22,702,964 Other bonds and notes 1,178,422 1,192,889 2,940,655 3,013,545 Corporate stocks 3,662,274 8,996,468 2,468,469 6,817,506 $ 179,844,152 185,365,478 165,627,998 171,882,062 Amortized cost and fair value of securities held to maturity at December 31, 1996 and 1995 are as follows: 1996 1995 Amortized Fair Amortized Fair Cost Value Cost Value Obligations of states and political subdivisions $ 10,275,184 10,275,184 7,572,044 7,572,044 Other bonds and notes 76,656 76,256 10,000 9,475 $ 10,351,840 10,351,440 7,582,044 7,581,519 Included in corporate stocks at December 31, 1996 and 1995 is the Bank's required investment in the stock of the Federal Home Loan Bank with a cost of $1,797,200 and $1,481,300, respectively. This investment allows the Bank to maintain a $52,496,600 line of credit with the Federal Home Loan Bank. Gross unrealized gains and gross unrealized losses on securities available for sale at December 31, 1996 and 1995 were as follows: 1996 1995 Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses U.S. Treasury securities $ 276,003 233,476 945,697 8,523 Obligations of other U.S. Government agencies 338,193 366,481 571,096 4,789 Mortgage backed securities 135,219 219,508 22,393 96,046 Obligations of states and political subdivisions 260,656 17,941 421,180 18,871 Other bonds and notes 14,467 - 72,903 14 Corporate stocks 5,334,194 - 4,349,037 - $ 6,358,732 837,406 6,382,307 128,243 Gross unrealized gains and gross unrealized losses on securities held to maturity at December 31, 1996 and 1995 were as follows: 1996 1995 Unrealized Unrealized Unrealized Unrealized Gains Losses Gains Losses Other bonds and notes - 400 - 525
Gross realized gains on sales of securities were $613,190, $530,953, and $140,001 for the years ended December 31, 1996, 1995 and 1994, respectively. Gross realized losses on sales of securities were $3,594 for the year ended December 31, 1996. There were no realized losses on sales of securities for the years ended December 31, 1995 and 1994. Interest and dividends on securities for the years ended December 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994 Taxbable U.S. Treasury securities $ 4,002,636 6,087,187 5,152,024 Obligations of other U.S. Government agencies 3,252,513 2,918,058 1,739,701 Mortgage backed securities 2,590,587 240,143 - Other bonds and notes 174,419 433,230 614,390 Corporate stocks 271,614 281,145 255,723 Exempt from federal taxation - obligations of states and political subdivisions 1,360,049 1,406,164 1,261,678 $ 11,651,818 11,365,927 9,023,516
The amortized cost and fair value by years to maturity as of December 31, 1996 for debt securities available for sale are as follows (excluding corporate stocks):
Maturing After One, But Within One Year Within Five Years Amortized Fair Amortized Fair Cost Value Cost Value U.S. Treasury Securities $ 8,514,687 8,522,205 44,206,404 44,241,413 Obligations of other U.S. Government agencies 2,497,447 2,497,345 26,854,651 26,922,807 Obligations of states and political subdivisions 3,397,868 3,432,663 13,463,194 13,681,452 Other bonds and notes 999,760 1,011,875 178,662 181,014 Total $ 15,409,762 15,464,088 84,702,911 85,026,686 Maturing After Five, But Within Ten Years After Ten Years Amortized Fair Amortized Fair Cost Value Cost Value Obligations U.S. Government agencies $ 22,479,642 22,383,300 - - Mortgage backed securities 4,340,958 4,317,857 45,852,464 45,791,276 Obligations of states and political subdivisions 2,763,781 2,758,218 632,360 627,585 Total $ 29,584,381 29,459,375 46,484,824 46,418,861
The amortized cost and fair value by years to maturity as of December 31, 1996 for securities held to maturity are as follows:
Maturing After One, But Within One Year Within Five Years Amortized Fair Amortized Fair Cost Value Cost Value Obligations of states and political subdivisions $ 7,595,888 7,595,888 1,917,000 1,917,000 Other bonds and notes - - 5,000 4,600 Total $ 7,595,888 7,595,888 1,922,000 1,921,600 Maturing After Five, But Within Ten Years After Ten Years Amortized Fair Amortized Fair Cost Value Cost Value Obligations of states and political subdivisions $ 762,296 762,296 - - Other bonds and notes 71,656 71,656 - - Total $ 833,952 833,952 - -
The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $107,381,997 at December 31, 1996 and $95,913,200 at December 31, 1995. U.S. Treasury securities totaling $13,000,000 and $18,380,000 (fair value of $12,951,250 and $18,616,689),GNMA's totaling $10,844,688 (fair value of $11,283,339), SLMA totaling $2,000,000 (fair value of $1,970,000) were pledged to secure Master repurchase agreements at December 31, 1996 and 1995, respectively, see note 8. There are no securities of a single issuer (other than securities of the U.S. Government and its agencies) that exceed 10% of shareholdersO equity at December 31, 1996 or 1995. In November, 1995 the Financial Accounting Standards Board published A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities (Guide). Concurrent with the initial adoption of the Guide, but no later than December 31, 1995, the Corporation was permitted to reassess the appropriateness of the classifications of all securities held at that time and implement reclassifications without calling into question the intent of the Corporation to hold other debt securities to maturity in the future. Effective December 1, 1995 the Corporation transferred securities with amortized costs of $10,505,646 from the held to maturity portfolio to the available for sale portfolio. The net unrealized gain was $154,557. The transferred securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported as a separate component of shareholders' equity, net of related taxes. (5) Loans and Allowance for Loan Losses The composition of the loan portfolio is summarized as follows:
December 31, 1996 1995 Residential mortgages $ 69,440,000 61,070,320 Commercial mortgages 8,959,555 10,799,467 Commercial, financial and agricultural 92,467,486 89,785,341 Leases 89,758 - Consumer loans 113,003,980 101,687,175 Net deferred fees and unearned income (239,798) (340,999) $ 283,720,981 263,001,304
During 1996, 1995 and 1994, the Corporation sold $3,191,711, $2,794,848 and $2,507,848, respectively, of education loans at par to the Student Loan Marketing Association. The CorporationOs market area encompasses the New York State counties of Chemung, Steuben, Schuyler and Tioga. Substantially all of the CorporationOs outstanding loans are with borrowers living or doing business within 25 miles of the branches in these counties. The CorporationOs concentrations of credit risk are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans, generally follow the loan classifications in the schedule. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. The principal balances of loans not accruing interest totaled $1,493,607 and $1,119,671 at December 31, 1996 and 1995, respectively. There were no loans with modified payment terms because of the borrowersO financial difficulties at December 31, 1996 and 1995. The effect of nonaccrual loans on interest income for the years ended December 31, 1996, 1995 and 1994 was not material. The Bank is not committed to advance additional funds to these borrowers. Other real estate owned at December 31, 1996 amounted to $271,331 and at December 31, 1995, amounted to $175,922. Transactions in the allowance for loan losses for the years ended December 31, 1996, 1995 and 1994 were as follows:
1996 1995 1994 Balances at January 1 $ 3,900,000 3,599,968 3,500,000 Provision charged to operations 741,662 564,380 623,772 Loans charged off (754,360) (373,261) (717,511) Recoveries 87,698 108,913 93,739 Allowance of Owego at time of acquisition - - 99,968 $ 3,975,000 3,900,000 3,599,968
[CAPTION] At December 31, 1996 and 1995, the recorded investment in loans that are considered to be impaired totaled $1,700,600 and $879,539 respectively. Included in the 1996 amount are impaired loans of $798,702 for which the related allowance for loan losses is $340,949 and $901,898 of impaired loans with no related allowance for loan losses. The 1995 amount includes $530,811 in impaired loans with a related allowance for loan losses of $198,618 and $348,728 with no related allowance. The average recorded investment in impaired loans during 1996 and 1995 were $1,620,774 and $722,055 respectively. The effect on interest income for impaired loans was not material to the consolidated financial statements in 1996 or 1995. (6) Premises and Equipment Premises and equipment at December 31, 1996 and 1995 are as follows:
1996 1995 Land $ 2,106,408 2,106,408 Buildings 10,166,115 9,883,468 Equipment and furniture 12,003,849 11,463,538 Leasehold improvements 399,534 396,478 24,675,906 23,849,892 Less accumulated depreciation 14,963,273 13,559,190 $ 9,712,633 10,290,702
(7) Deposits Interest-bearing deposits include certificates of deposit in denominations of $100,000 or more aggregating $36,770,362 and $21,462,087 at December 31, 1996 and 1995, respectively. Interest expense on such certificates was $2,215,271, $1,057,353, and $559,034 for 1996, 1995 and 1994, respectively. (8) Securities Sold Under Agreements to Repurchase The agreements have maturities of 2 days at December 31, 1996 and 4 to 34 days at December 31, 1995, and a weighted average interest rate of 6.04% at December 31, 1996 and 5.33% at December 31, 1995. The maximum amounts outstanding at any one month-end and average amount under these agreements during 1996 were $15,953,161 and $12,270,169, respectively. The maximum amounts outstanding at any one month-end and average amount under these agreements during 1995 were $19,677,060 and $13,726,251, respectively. The securities underlying the agreements were under the Trust Department's control as custodian. (9) Long Term Borrowing Long term borrowing at December 31, 1996, consisted of a $10,000,000, 6.18%, Federal Home Loan Bank advance with a maturity date of October 16, 1998. (10) Income Taxes Total income taxes for the years ended December 31, 1996, 1995 and 1994 were allocated as follows:
1996 1995 1994 Income before income taxes and cumulative effect of accounting change $ 3,266,662 2,859,476 2,342,765 Shareholders' equity for change in unrealized gain (loss) on securities (312,318) 2,645,891 (120,156) $ 2,954,344 5,505,367 2,222,609
For the years ended December 31, 1996, 1995 and 1994, income tax expense attributable to income from operations consists of:
1996 1995 1994 Current: State $ 792,674 646,080 499,305 Federal 2,861,236 2,381,973 1,744,846 3,653,910 3,028,053 2,244,151 Deferred (387,248) (168,577) 98,614 $ 3,266,662 2,859,476 2,342,765
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before cumulative effect of change in accounting principle as follows:
1996 1995 1994 Tax computed at statutory rate $ 3,204,223 2,876,865 2,376,699 Tax exempt interest (465,955) (486,208) (435,678) Dividend exclusion (34,151) (33,594) (32,362) State taxes, net of federal benefit 476,584 408,610 345,813 Nondeductible interest expense 52,262 55,582 41,829 Other items, net 33,699 38,221 46,464 Actual tax expense $ 3,266,662 2,859,476 2,342,765
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996 and 1995 are presented below:
Deferred tax assets: 1996 1995 Allowance for loan losses-book 1,593,518 1,558,903 Accrual for postretirement benefits other than pensions 767,119 732,372 Deferred loan fees 84,760 113,647 Deferred compensation and directors fees 500,728 369,611 Pensions 126,499 56,494 Other 135,360 124,235 Total gross deferred tax assets $ 3,207,984 2,955,262 Deferred tax liabilities: Bond discount 22,409 53,750 Depreciation 421,097 410,007 Allowance for loan losses-tax 300,738 378,706 Net unrealized gains on securities 2,213,417 2,525,735 Other 22,465 58,772 Total gross deferred tax liabilities 2,980,126 3,426,970 Net deferred tax asset (liability) $ 227,858 (471,708)
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the carryback period. A valuation allowance is provided 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. (11) Pension Plan The Bank has a noncontributory defined benefit pension plan covering substantially all employees. The plan's defined benefit formula generally bases payments to retired employees upon their length of service multiplied by a percentage of the average monthly pay over the last five years of employment. The following table sets forth the plan's funded status and amounts recognized in the Corporation's consolidated balance sheets at December 31, 1996 and 1995:
Actuarial present value of accumulated benefit obligation, including vested benefits of $9,493,865 and $9,488,826 in 1996 and 1995 respectively $ (9,666,905) (9,956,932) Projected benefit obligation for service rendered to date (11,881,414) (12,211,661) Plan assets at fair value 15,036,423 14,042,435 Excess of plan assets over the projected benefit obligation 3,155,009 1,830,774 Unrecognized net obligation 769,566 839,454 Unrecognized net gain (4,623,648) (3,241,671) Unrecognized prior service cost 556,163 598,945 Prepaid (accrued) pension cost $ (142,910) 27,502
Net periodic pension cost included the following components:
Years ended December 31, 1996 1995 1994 Service cost - benefits earned during the year $ 346,403 293,048 271,218 Interest cost on projected benefit obligation 825,891 798,518 757,327 Actual return on plan assets (1,459,973) (2,436,581) (131,585) Net amortization and deferral 458,091 1,542,093 (780,715) Net periodic pension cost $ 170,412 197,078 116,245
Assumptions used in determining pension amounts are as follows:
1996 1995 Discount rate for benefit obligations 7.5% 7.0% Rate of increase in compensation levels 5.0 5.0 Expected long-term rate of return on assets 8.5 8.5
The planOs assets at December 31, 1996 and 1995 are invested in common and preferred stocks, U.S. Government securities, and corporate bonds and notes. The Bank also sponsors a defined contribution profit sharing, savings and investment plan which covers all employees with a minimum of 1,000 hours of annual service. The Bank matches at the rate of 50% of the first 6% of an eligible employeeOs current earnings. Expense under the plan totaled $550,854, $499,343, and $423,161 for the years ended December 31, 1996, 1995 and 1994, respectively. (12) Other Postretirement Benefit Plans The Bank sponsors a defined benefit health care plan that provides postretirement medical, dental and prescription drug benefits to full-time employees who meet minimum age and service requirements. Postretirement life insurance benefits are also provided to certain employees who retired prior to July 1981. The plan is contributory, with retiree contributions adjusted annually, and contains other cost sharing features such as deductibles and coinsurance. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the BankOs expressed intent to increase the retiree contribution rate annually for the expected general inflation rate for that year. The BankOs policy is to fund the cost of medical benefits in amounts determined at the discretion of management. The following table presents the planOs funded status reconciled with amounts recognized in the CorporationOs consolidated balance sheet at December 31, 1996 and 1995:
1996 1995 Accumulated postretirement benefit obligation: Retirees $ (965,000) (807,185) Fully eligible active plan participants (86,000) (114,090) Other active plan participants (577,000) (1,061,074) (1,628,000) (1,982,349) Unrecognized net (gain) loss (264,822) 168,896 Accrued postretirement benefit cost included in other liabilities $(1,892,822) (1,813,453)
Net periodic postretirement benefit cost included the following components:
Years ended December 31 1996 1995 1994 Service cost $ 42,000 75,728 44,407 Interest cost 112,000 127,308 114,642 Net periodic postretirement benefit cost $ 154,000 203,036 159,049
For measurement purposes, a 11.5% and 9.5% annual rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for non medicare and medicare, respectively, was assumed for 1996; the rate was assumed to decrease gradually to 5.5% by the year 2005 and remains at that level thereafter. A 1% increase in the trend rate for all future years does not have a material effect on the obligation. The weighted-average discount rate used in determining the accumulated postretirement benefit obligations was 7.5% at December 31, 1996 and 7% at December 31, 1995. (13) Related Party Transactions Members of the Board of Directors, certain Bank officers, and their immediate families directly, or indirectly through entities in which they are principal owners (more than a 10% interest), were customers of, and had loans and other transactions with, the Bank in the ordinary course of business. All loans and commitments included in such transactions were made on 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, 1996 and 1995:
1996 1995 Balance at beginning of year $ 8,427,604 7,174,106 Additions 20,889,397 26,333,212 Amounts collected (20,890,464) (25,079,714) Balance at end of year $ 8,426,537 8,427,604
(14) Expenses The following expenses, which exceeded 1% of total revenues (total interest income plus other operating income) in at least one of the years presented, are included in other operating expenses:
Years ended December 31, 1996 1995 1994 Stationery and supplies $ 469,008 437,253 445,691 Credit card computer costs 601,571 554,676 475,238 Data processing service 554,005 690,980 624,556 FDIC insurance premiums 253,220 538,279 795,913 Advertising 448,640 444,637 395,425 Amortization of intangible assets 587,303 587,303 232,003
(15) Commitments and Contingencies In the normal course of business, there are outstanding various commitments and contingent liabilities, such as commitments to extend credit, which are not reflected in the accompanying consolidated financial statements. Commitments to outside parties under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans totaled $2,751,992, $87,280,030 and $4,684,956, respectively, at December 31, 1996. Commitments to outside parties under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans totaled $2,237,793, $85,928,406 and $1,151,988, respectively, at December 31, 1995. The Corporation does not anticipate losses as a result of these transactions. The Bank has employment contracts with certain of its senior officers, which expire at various dates through the year 2000 and may be extended on a year-to-year basis. (16) ShareholdersO 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, 1996, the maximum amount available for transfer from the Bank to the Corporation in the form of loans was $1,660,655. The Bank is subject to legal limitations on the amount of dividends that can be paid to the Corporation. Dividends are limited to retained net profits, as defined by regulations, for the current year and the two preceding years. At December 31,1996, $7,964,762 was available for the declaration of dividends. (17) Parent Company Financial Information Condensed parent company only financial statement information of Chemung Financial Corporation is as follows:
Balance Sheets December 31 1996 1995 Assets: Cash on deposit with subsidiary bank $ 31,318 195,586 Investment in subsidiary bank 54,801,058 52,274,720 Dividend receivable 580,220 520,462 Securities available for sale 1,298,403 455,947 Total assets $ 56,710,999 53,446,715 Liabilities and shareholders' equity: Dividend payable 580,220 520,462 Deferred tax liability 10,580 27,355 Total liabilities 590,800 547,817 Shareholders' equity: Common stock 10,750,335 10,750,335 Surplus 10,101,804 10,068,563 Retained earnings 33,885,269 29,930,969 Treasury stock, at cost (1,925,118) (1,579,298) Net unrealized gain (loss) on securities available for sale 3,307,909 3,728,329 Total shareholders' equity 56,120,199 52,898,898 Total liabilities and shareholders' equity $ 56,710,999 53,446,715
Statements of Income
Years Ended December 31, 1996 1995 1994 Income: Interest and dividends $ 14,378 23,031 23,768 Gain on sale of securities 35,538 112,500 140,001 Dividends from subsidiary bank 3,203,223 2,045,513 2,976,606 Income before equity in undistributed earnings of subsidiary bank 3,253,139 2,181,044 3,140,375 Equity in undistributed earnings of subsidiary bank 2,922,189 3,472,647 1,569,926 Income before income taxes 6,175,328 5,653,691 4,710,301 Income taxes 17,805 51,799 62,776 Net Income $ 6,157,523 5,601,892 4,647,525
Statements of Cash Flows
December 31, 1996 1995 1994 Cash flows from operating activities: Net income $ 6,157,523 5,601,892 4,647,525 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net income of subsidiary (2,922,189) (3,472,647) (1,569,926) (Increase) decrease in dividend receivable (59,738) (1,135,565) (1,225,458) Gain on sale of securities, net (35,538) (112,500) (140,001) Decrease in payable to Owego shareholders - (1,164,883) - Net cash provided by operating activities 3,140,038 1,987,427 1,712,140 Cash flows from investing activities: Proceeds from sales of securities available for sale 151,738 215,628 271,234 Purchases of securities available for sale (1,000,000) - (221,193) Payment to subsidiary for prior year's taxes - - (146,035) Net cash provided (used) by investing activities (848,262) 215,628 (95,994) Cash flows from financing activities: Cash dividends paid (2,143,465) (1,981,078) (1,751,148) Purchases of treasury stock (514,599) (299,749) - Sale of treasury stock 202,020 - 172,500 Net cash used by financing activities (2,456,044) (2,280,827) (1,578,648) Increase (decrease) in cash and cash equivalents (164,268) (77,772) 37,498 Cash and cash equivalents at beginning of year 195,586 273,358 235,860 Cash and cash equivalents at end of year $ 31,318 195,586 273,358
(18) Fair Values of Financial Instruments The following methods and assumptions were used to estimate the fair value of each class of financial instruments: Cash and Cash Equivalents For those short-term instruments that generally mature in ninety days or less, the carrying value approximates fair value. Securities Fair values for securities are based on either 1) quoted market prices, 2) dealer quotes, 3) correspondent bank pricing system, or 4) discounted cash flow to maturity. Loans Receivable For variable-rate loans that reprice frequently, fair values are based on carrying values. The fair values for other loans are estimated through discounted cash flow analyses using interest rates currently being offered for loans with similar terms and credit quality. Deposits The fair values disclosed for demand deposits, savings accounts and money market accounts are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying values). The fair value of fixed maturity certificates of deposits is estimated using a discounted cash flow approach that applies interest rates currently being offered on certificates to a schedule of weighted average expected monthly maturities on time deposits. Repurchase Agreements These instruments bear variable rates and therefore the carrying value approximates fair value. Long Term Borrowing These instruments bear a stated rate of interest to maturity and therefore the fair value is based on a discounted cash flow to maturity. Commitments to Extend Credit The fair value of commitments to extend credit are based on fees currently charged to enter into similar agreements, the counter party's credit standing and discounted cash flow analysis. The fair value of these commitments to extend credit approximates the recorded amounts of the related fees and is not material at December 31, 1996 and 1995. The estimated fair value of the CorporationOs financial instruments as of December 31, 1996 and 1995 are as follows (dollars in thousands):
1996 1995 Carrying Fair Carrying Fair Amount Value(1) Amount Value(1) Financial assets: Cash and cash equivalents $ 31,103 31,103 27,294 27,294 Federal Home Loan Bank 152 152 90 90 Federal funds sold 500 500 10,000 10,000 Securities 195,717 195,717 179,464 179,464 Net loans 279,746 281,965 259,101 259,310 Total Earning Assets 507,218 509,437 475,949 476,158 Fixed assets 9,713 9,713 10,291 10,291 Other assets 15,282 15,282 15,653 15,653 Total assets $ 532,213 534,432 501,893 502,102 1996 1995 Carrying Fair Carrying Fair Amount Value(1) Amount Value(1) Financial liabilities: Deposits: Demand, savings, NOW and money market accounts $ 264,641 264,641 272,057 272,057 Time certificates 175,008 175,293 154,822 156,268 Total deposits 439,649 439,934 426,879 428,325 Repurchase agreements 14,371 14,371 13,382 13,382 Long term borrowing 10,000 10,034 - - Other liabilities 12,073 12,073 8,733 8,733 Total liabilities 476,093 476,412 448,994 450,440 Equity 56,120 58,020 52,899 51,662 Total liabilities and equity $ 532,213 534,432 501,893 502,102 (1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(19) Regulatory Capital Requirement The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory -- and possibly additional discretionary -- actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes, as of December 31, 1996, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. The actual capital amounts and ratios of the Corporation and the Bank are also presented in the following table:
To Be Well Capitalized Under For Capital Prompt Corrective Actual Adequacy Purposes Action Provisions Amount Ratio Amount Ratio Amount Ratio As of December 31, 1996 Total Capital (to risk weighted assets): Consolidated $ 49,048,781 16.87% $ 23,265,476 8.00% N/A N/A Subsidiary $ 47,729,551 16.49% $ 23,162,443 8.00% $ 28,953,054 10.00% Tier 1 Capital (to risk weighted assets): Consolidated $ 45,409,356 15.61% $ 11,632,738 4.00% N/A N/A Subsidiary $ 44,106,026 15.23% $ 11,581,222 4.00% $ 17,371,832 6.00% Tier 1 Capital (to average assets): Consolidated $ 45,409,356 8.97% $ 15,186,375 3.00% N/A N/A Subsidiary $ 44,106,026 8.72% $ 15,173,735 3.00% $ 25,289,558 5.00% As of December 31, 1995 Total Capital (to risk weighted assets): Consolidated $ 44,571,233 16.46% $ 21,661,035 8.00% N/A N/A Subsidiary $ 43,982,583 16.27% $ 21,629,590 8.00% $ 27,036,988 10.00% Tier 1 Capital (to risk weighted assets): Consolidated $ 41,180,332 15.21% $ 10,830,518 4.00% N/A N/A Subsidiary $ 40,596,535 15.02% $ 10,814,795 4.00% $ 16,222,193 6.00% Tier 1 Capital (to average assets): Consolidated $ 41,180,332 8.52% $ 14,498,509 3.00% N/A N/A Subsidiary $ 40,596,535 8.41% $ 14,486,089 3.00% $ 24,143,482 5.00%
EX-21 3 SUBSIDIARY LIST EXHIBIT E CHEMUNG FINANCIAL CORPORATION Subsidiary List Name State of Incorporation Chemung Canal Trust Company New York EX-22 4 PROXY STATEMENT EXHIBIT F NOTICE OF ANNUAL MEETING, PROXY STATEMENT DATED MARCH 10, 1997, AND PROXY FORM March 10, 1997 Dear Shareholder: You are cordially invited to attend the Annual Meeting of Shareholders to be held on Tuesday, April 8, 1997, at 7:00 p.m. at the Elmira Holiday Inn, in the City of Elmira, New York. Following the Meeting, desserts, coffee, tea and other refreshments will be served. The one item on the agenda requiring Shareholders' vote will be the election of six directors. The candidates nominated for three-year terms, all currently serving, are: David J. Dalrymple, Richard H. Evans, Edward B. Hoffman, John F. Potter, William C. Ughetta and Jan P. Updegraff. The attached Proxy Statement sets forth in detail information relating to the nominated candidates as well as those directors continuing in office and additional information relating to the management of the corporation. In addition to the above-noted election, we will review our financial performance for the past year and discuss our plans for 1997. It is important that you be represented at the Meeting whether or not you plan to attend in person. Accordingly, we urge you to mark, sign and date the proxy card enclosed in the mailing envelope sleeve and return it in the envelope provided. Also, if you plan to attend the Meeting, please mark the proxy card where indicated and include the number in your group. Your directors and management look forward to seeing you on April 8. Sincerely yours, /s/ John W. Bennett John W. Bennett Chairman of the Board and Chief Executive Officer One Chemung Canal Plaza P.O. Box 1522 Elmira, New York 14902 Parent Company of Chemung Canal Trust Company NOTICE OF ANNUAL MEETING OF SHAREHOLDERS As directed by the Board of Directors of Chemung Financial Corporation, NOTICE IS HEREBY GIVEN that the Annual Meeting of Shareholders of the Corporation will be held at the Elmira Holiday Inn, One Holiday Plaza, 760 East Water Street, Elmira, New York, Tuesday, April 8, 1997, at 7:00 p.m. for the following purposes: To elect six (6) directors, each to hold office for a term of three years and until their respective successors have been elected and qualified. To transact such other business as may properly come before the Meeting or any adjournments thereof. The Board of Directors has fixed the close of business on February 28, 1997, as the record date for determination of Shareholders entitled to notice of and to vote at this Meeting. Shareholders are requested to date, sign and mail the enclosed proxy in the envelope provided at their earliest convenience. A prompt response will be appreciated and will save the Corporation additional time and expense. BY ORDER OF THE BOARD OF DIRECTORS Jerome F. Denton Secretary March 10, 1997 CHEMUNG FINANCIAL CORPORATION ONE CHEMUNG CANAL PLAZA, P.O. BOX 1522, ELMIRA, NEW YORK PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS, APRIL 8, 1997 Chemung Financial Corporation and its wholly-owned subsidiary, Chemung Canal Trust Company, are incorporated under the laws of the State of New York. For purposes of this proxy statement, financial and other information is presented on a consolidated basis for Chemung Financial Corporation ("Corporation") and Chemung Canal Trust Company ("Bank"). The disclosed information of the Corporation and the Bank should be viewed as though its pertained to one entity, unless otherwise stated. This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors for use at the Annual Meeting of Shareholders (the "Annual Meeting") of Chemung Financial Corporation to be held on Tuesday, April 8, 1997, at 7:00 P.M., at the Elmira Holiday Inn, One Holiday Plaza, 760 East Water Street, Elmira, New York. This Proxy Statement and the accompanying Proxy and Notice of Annual Meeting of Shareholders are being mailed to Shareholders on or about March 10, 1997. A Shareholder granting a proxy has the right to revoke it by a duly executed Proxy bearing a later date, by attending the Annual Meeting and voting in person, or by otherwise notifying the Secretary of the Corporation in writing prior to the Annual Meeting. Only Shareholders of record at the close of business on February 28, 1997, are entitled to receive notice of and to vote at the Annual Meeting. As of February 12, 1997, there were 2,072,214 shares of Common Stock outstanding and entitled to vote. 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 at the Annual Meeting by holders of Common Stock present in person or by proxy and entitled to vote on such election. Any other matter requires the affirmative vote of a majority of votes cast at the meeting, except as otherwise provided in the Corporation's Certificate of Incorporation or By-laws. Only shares affirmatively voted in favor of a nominee will be counted toward the achievement of a plurality. Votes withheld (including non-broker votes) and abstentions are counted as present for the purpose of determining a quorum but are not counted as votes cast. The cost of soliciting proxies will be borne by the Corporation and the Bank. 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 remuneration. American Stock Transfer & Trust Company, the Corporation's transfer agent, will aid the Corporation in the solicitation of proxies and proxy vote tabulations. Nominees, brokerage houses, custodians and fiduciaries will be requested to forward soliciting material to beneficial owners of stock held of record and the Corporation will reimburse such persons for any reasonable expense. ACTION TO BE TAKEN UNDER PROXY: It is proposed that at the Annual Meeting action will be taken on the matters set forth in the accompanying Notice of Annual Meeting and described in this Proxy Statement. Proxies returned by Shareholders and not revoked will be voted for the election of the nominees for directors unless Shareholders instruct otherwise on the Proxy. A Shareholder granting a proxy has the right to revoke it by filing with the Secretary of the Corporation prior to the time such proxy is voted a duly executed proxy bearing a later date, by attending the Annual Meeting and voting in person, or by otherwise notifying the Secretary of the Corporation in writing of such Shareholder's intention to revoke such proxy prior to the time such proxy is voted. The Board of Directors does not know of any other business to be brought before the Annual Meeting, but it is intended that, as to any such other business, a vote may be cast pursuant to the Proxy in accordance with the judgment of the person or persons acting thereunder; and should any herein-named nominee for the office of director become unable to accept nomination or election, which is not anticipated, it is intended that the persons acting under the Proxy will vote for the election in the stead of such nominee of such other person as the Board of Directors may recommend. BOARD OF DIRECTORS: Nominees For Election as Directors Those persons serving as directors of the Corporation and the Bank, being the same individuals, normally serve three-year terms of office, with approximately one-third of the total number of each such Board of Directors to be elected at each Annual Meeting of each such entity. The number of directors to be elected at the 1997 Annual Meeting of Shareholders is six (6) for three-year terms, each to serve for such term and until their respective successors are elected and qualified. The following table sets forth information concerning the Board of Directors' nominees for election as directors at the Annual Meeting and each director continuing in office:
Length of Principal Occupation During Name and Age Service Past 5 Years As Director NOMINEES WITH TERMS EXPIRING IN 2000 David J. Dalrymple Since 1993 President of Dalrymple Holding Age 43 Corporation since December 17, 1993, parent company for several construction companies; formerly Vice President. Richard H. Evans Since 1985 Retired since January 1, 1995; Age 66 formerly Chairman of the Board & Chief Executive Officer of Chas. F. Evans Co., Inc., specialists in commercial roofing. Edward B. Hoffman Since 1993 Partner with Sayles, Evans, Age 65 Brayton, Palmer & Tifft law firm. Length of Principal Occupation During Name and Age Service Past 5 Years As Director NOMINEES WITH TERMS EXPIRING IN 2000 (continued) John F. Potter Since 1991 President of Seneca Beverage Age 51 Corporation, a wholesale distributor of beer, water and soda products. William C. Ughetta Since 1985 Senior Vice President and General Age 64 Counsel of Corning Incorporated, a diversified manufacturing company. Jan P. Updegraff Since 1996 President and Chief Operating Age 54 Officer of the Corporation and Bank since February 14, 1996; formerly Vice President and Treasurer of the Corporation and Executive Vice President of the Bank. DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING IN 1999 John W. Bennett Since 1988 Chairman of the Board and Chief Age 63 Executive Officer of the Corporation and Bank since February 14, 1996; formerly President and Chief Executive Officer of the Corporation and the Bank; also a director of Hardinge Inc. Robert H. Dalrymple Since 1995 Secretary of Dalrymple Holding Age 46 Corporation, a parent company for several construction companies. Natalie B. Kuenkler Since 1985 Director of various community Age 71 organizations. Ralph H. Meyer Since 1985 President and Chief Executive Age 57 Officer of Guthrie Healthcare System, a vertically integrated health care delivery system. Samuel J. Semel Since 1993 President of Chemung Electronics, Age 70 Inc., an electronic and computer consulting firm. Richard W. Swan Since 1985 President of Swan & Sons-Morss Age 48 Co., Inc., an insurance brokerage agency. Length of Principal Occupation During Name and Age Service Past 5 Years As Director DIRECTORS CONTINUING IN OFFICE WITH TERMS EXPIRING IN 1998 Robert E. Agan Since 1986 Chairman of the Board and Chief Age 58 Executive Officer since October 21, 1996 of Hardinge Inc., a world- wide machine tool manufacturer; formerly also President of said Company. Donald L. Brooks, Jr. Since 1985 Physician. Age 68 Stephen M. Lounsberry Since 1995 President of Applied Technology III Manufacturing Corporation since Age 43 July 17, 1996, a manufacturer of railroad lubrication systems; formerly President of Moore & Steele Corporation. Boyd McDowell II Since 1985 Retired; formerly Chairman of the Age 71 Board and Chief Executive Officer of the Corporation and the Bank. Thomas K. Meier Since 1988 President of Elmira College. Age 56 Charles M. Streeter, Jr. Since 1985 President of Streeter Associates, Age 57 Inc., a general building contractor. Nelson Mooers van den Since 1985 Chairman of the Board, Chief Blink Executive Officer and Treasurer of Age 62 The Hilliard Corporation, a motion control equipment, oil reclaimer and filter manufacturer.
Directors and Committee Meetings The Board of Directors of the Corporation held nine (9) regularly scheduled meetings during the year ended December 31, 1996. The Corporation has no standing committees. The Board of Directors of the Bank held twelve (12) regularly scheduled meetings and one special meeting during the year ended December 31, 1996. Among its standing committees, the Board of Directors of the Bank has an Examining Committee, Nominating Committee and a Personnel Committee. The Examining Committee makes an annual examination of the Bank as a whole, reviews the Bank's internal audit and loan review procedures and recommends to the Board of Directors the engagement and dismissal of independent auditors. During 1996 this Committee held three (3) meetings. On December 31, 1996, its members were Messrs. Semel (Chairman), Agan, R. Dalrymple, Evans, Hoffman, Lounsberry, McDowell, Meier and Meyer. The Nominating Committee selects and recommends to the Board of Directors nominees for election to the Board. The Committee will consider written recommendations by Shareholders for nominees for election to the Board if such recommendations are mailed to the Chairman of the Nominating Committee or to the Chairman of the Board of the Corporation at the Corporation's Main Office, One Chemung Canal Plaza, Elmira, New York 14902. There were no Committee meetings held in 1996. On December 31, 1996, its members were Mrs. Kuenkler (Chairman) and Messrs. Agan, Bennett, D. Dalrymple, McDowell, Potter, Streeter, Swan and Updegraff. The Personnel Committee is responsible for the nomination of officers, recommendation of Executive Officer compensation plans, and establishment of guidelines for setting all other officers' salaries. Additional responsibilities include the review and approval of employee benefit programs and employee relation policies and procedures. The Committee held eight (8) meetings in 1996 and on December 31, 1996, its members were Messrs. Meyer (Chairman), Brooks, D. Dalrymple, Evans, Meier, Potter, Swan, Tryon, and Ughetta. During the year ended December 31, 1996, each director of the Corporation and the Bank attended at least 75% of the aggregate of (1) the total number of Board Meetings held and (2) the total number of meetings held by all committees of which such director was a member, with the exceptions of Mr. D. Dalrymple who attended 72%, and Mrs. Kuenkler who attended 67%, of such meetings. Directors Compensation Each director of the Bank who is not an officer or employee of the Bank receives an annual retainer of $5,000 and a fee of $300 for each meeting of the Board of Directors attended. Those directors who are members of one or more committees of the Board of Directors also receive a fee of $300 for each meeting of each committee attended, with the exception of the Chairman of each committee who receives $350. Directors who are not officers or employees of the Corporation receive a fee of $300 for attendance at meetings of the Board of the Corporation which are held on days when there is no meeting of the Board of Directors of the Bank. There were no such meetings held during 1996. Otherwise, directors of the Corporation are not compensated for services rendered by them to the Corporation. It presently is contemplated that such will continue to be the policy of the Corporation. Any director who is entitled to receive a retainer and fees for meetings of the Board of Directors and of committees thereof attended may elect to have all or a portion of said retainer and fees deferred under the Bank's "Deferred Directors Fee Plan". Each participating director may designate, in increments of 10%, the compensation to be deferred, or compensation already deferred, to be allocated to a memorandum Money Market or a memorandum Unit Value Account, or a combination of such accounts. The memorandum Money Market Account of each participating director is credited with the dollar amount of deferral, and interest is compounded quarterly and added to said account at a rate equal to the "Applicable Federal Rate" for short-term debt instruments as computed and published by the Internal Revenue Service for the month immediately preceding the applicable calendar quarter. The memorandum Unit Value Account of each participating director is credited with the dollar amount of deferral, with the aggregate of said deferred amounts being converted to units on a quarterly basis by dividing the aggregate of said deferred amounts by the closing bid price for shares of the Common Stock of the Corporation on such trading dates as described in the Plan. Dividends are credited to said account on the dates and at the rate per unit at which dividends are paid per share on the Corporation's outstanding Common Stock and are then converted to units using the same basis of conversion as for deferred amounts. Within certain time limitations, a participating director may elect to receive deferred fees either in a lump sum or in installments. The aggregate amount of directors' retainers and fees paid and deferred during 1996 was $256,500. No additional compensation was received by any director for special assignments or services. Certain Transactions Some of the directors and officers of the Bank, and some of the corporations and firms with which these individuals are associated, also are customers of the Bank in the ordinary course of business, or are indebted to the Bank in respect to loans of $60,000 or more, and it is anticipated that some of these individuals, corporations and firms will continue to be customers of and indebted to the Bank on a similar basis in the future. All loans extended to such individuals, corporations and firms were made in the ordinary course of business, did not involve more than normal risk of collectibility or present other unfavorable features and were made on substantially the same terms, including interest rates and collateral, as those prevailing at the same time for comparable bank transactions with unaffiliated persons. The Bank has purchased insurance from a CNA Company, American Casualty Company of Reading, Pennsylvania, providing for reimbursement of directors and officers of the Corporation and the Bank for costs and expenses incurred by them in actions brought against them for "wrongful acts" in connection with their duties as directors or officers, including actions as fiduciaries of the Bank's Pension and Profit-Sharing Plans, under the Employee Retirement Income Security Act of 1974. The insurance coverage, which expires in February 1998, costs $18,900 on an annual basis, and has been paid by the Bank. No claims have been made or paid under this insurance. The Bank has retained Sayles, Evans, Brayton, Palmer & Tifft, of which Mr. Hoffman is a partner, for legal services during the last two years and expects to retain Sayles, Evans, Brayton, Palmer & Tifft for legal services during the current year. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS: The following table sets forth information, as of January 31, 1997, with respect to any person who is known by the Corporation to be the beneficial owner of more than five percent of the Corporation's Common Stock:
Name and Address of Number of Shares of Percent of Shares Beneficial Owner Common Outstanding Stock Beneficially Owned Chemung Canal Trust Company 371,8131 17.9% One Chemung Canal Plaza Elmira, NY 14902 Chemung Canal Trust Company Profit-Sharing, Savings and 232,3422 11.2% Investment Plan One Chemung Canal Plaza Elmira, NY 14902 Mary E. Dalrymple 168 Christian Hollow Road 218,2553 10.5%7 Pine City, NY 14871 David J. Dalrymple 274 Upper Coleman Avenue 190,5234, 6 9.2%7 Elmira, NY 14905 Robert H. Dalrymple 875 Upland Drive 179,4075, 6 8.7%7 Elmira, NY 14905
1 Held by the Bank in various fiduciary capacities, either alone or with others. Includes 25,613 shares held with sole voting and dispositive powers, 346,200 shares held with shared power to vote and 184,399 shares held with shared power to dispose. Shares held in a co-fiduciary capacity by the Bank are voted by the co-fiduciary or fiduciaries in the same manner as if the co-fiduciary or fiduciaries were the sole fiduciary. Shares held by the Bank as sole trustee are voted by the Bank only if the trust instrument provides for voting of the shares at the direction of the donor or a beneficiary and such direction is in fact received. 2 Voted by the Bank as trustee as directed by the Plan participants. 3 Includes 115,255 shares held directly and 103,000 shares held by Dalrymple Family Limited Partnership, of which Mary E. Dalrymple, David J. Dalrymple and Robert H. Dalrymple are sole general partners (see footnotes 4 and 5). 4 Includes 46,461 shares held directly, 1,904 shares held as custodian for Mr. Dalrymple's children under the New York State Uniform Gifts to Minors Act, 103,000 shares held by Dalrymple Family Limited Partnership (see footnote 3), and 39,158 shares held by Dalrymple Holding Corporation, of which David J. Dalrymple and Robert H. Dalrymple are officers, directors and principal shareholders (see footnote 5). Excludes 1,988 shares held by Mr. Dalrymple's spouse. 5 Includes 35,345 shares held directly, 1,904 shares held as custodian for Mr. Dalrymple's children under the New York State Uniform Gifts to Minors Act, 103,000 shares held by Dalrymple Family Limited Partnership (see footnote 3), and 39,158 shares held by Dalrymple Holding Corporation (see footnote 4). Excludes 1,345 shares held by Mr. Dalrymple's spouse. 6 Excludes 15,115 shares held by Susquehanna Supply Company of which David J. Dalrymple and Robert H. Dalrymple each own 23.1% of the outstanding common stock. 7 Because of the definition of "beneficial ownership" under Section 13 of The Exchange Act, and the rules and regulations promulgated thereunder, Mary, David and Robert Dalrymple are listed as beneficial owners of many of the same shares. Without such multiple counting, Mary, David and Robert Dalrymples' total aggregate beneficial ownership is approximately 16.6% of the outstanding shares of Common Stock of the Corporation and if deemed to be a member of a "group" within the meaning of Section 13(d)(3) of The Exchange Act, such group would be deemed to hold approximately 16.6% of the outstanding shares of Common Stock of the Corporation. Nothing described herein shall infer or be deemed an admission by such person that such a group exists. SECURITY OWNERSHIP OF MANAGEMENT: As of January 31, 1997, each director or nominee and each Executive Officer named in the Summary Compensation Table herein, individually, and all directors, nominees and Executive Officers as a group beneficially owned Common Stock as reported to the Corporation as of said date as follows (unless otherwise indicated, each of the persons named has sole voting and investment power with respect to the shares listed):
Directors, Nominees and Amount and Nature Percent of Executive Officers of Beneficial Shares Ownership Outstanding* Robert E. Agan 450A * John W. Bennett 8,821B * Donald L. Brooks, Jr. 6,250A * David J. Dalrymple 48,365C 2.33% Robert H. Dalrymple 37,249C 1.80% Richard H. Evans 9,352 * Edward B. Hoffman 1,710A * Natalie B. Kuenkler 6,706D * Stephen M. Lounsberry III 3,845A * Boyd McDowell II 6,418 * Thomas K. Meier 2,000 * Ralph H. Meyer 2,595A * John F. Potter 8,848A, E * Samuel J. Semel 4,522A * Charles M. Streeter, Jr. 10,213A, F * Richard W. Swan 19,188G * William A. Tryon 12,679 * William C. Ughetta 9,000A * Nelson Mooers van den Blink 1,598 * Jan P. Updegraff 3,676B * All Directors, Nominees and 220,673H 10.65% Executive Officers as a group (25 persons)
* Unless otherwise noted, less than 1% per individual. A In addition, Messrs. Agan (4,782), Brooks (290), Hoffman, (1,822), Lounsberry (964), Meyer (3,298), Potter (3,388), Semel (1,450), Streeter (989), and Ughetta (2,807) have credited to their accounts the equivalent of that number of shares shown in parenthesis following their names, of Common Stock in valuation entry form under the Corporation's Deferred Directors Compensation Plan. Deferred fees will be paid solely in cash pursuant to the terms of the Plan and the election of the participant. B Includes all vested 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, who may instruct the trustee as to the voting of such shares. If no instructions are received, the trustee votes the shares in the same proportion as it votes all of the shares for which instructions were received from all Plan participants. The power to dispose of shares is held by Plan participants subject to certain restrictions. Messrs. Bennett and Updegraff have a vested interest in 7,635 and 3,518 such shares held by the Plan, respectively. Under the provisions of the Plan, the trustee holds for the benefit of all employees who participate in the Plan 232,342 shares of the Corporation's Common Stock. C Includes only shares held directly by Messrs. Dalrymple. See Footnote 7 of the SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS table on page 9 for further explanation of shares beneficially held. D Includes 4,131 shares held by Mrs. Kuenkler and another as trustees under the Will of a descendent under which Mrs. Kuenkler is an income beneficiary and as trustee shares voting and dispositive powers. Does not include 75,007 shares owned by The Rathbone Corporation, of which Mrs. Kuenkler is a director. E Includes 5,899 shares owned by Seneca Beverage Corporation, of which corporation Mr. Potter is an officer, director and the principal shareholder. F Includes 5,418 shares owned by Streeter Associates, Inc., of which corporation Mr. Streeter is an officer, director and the principal shareholder. G Includes 5,850 shares owned by Swan & Sons-Morss Co., Inc., of which corporation Mr. Swan is an officer, director and one of the principal shareholders and 205 shares held by Mr. Swan as custodian for his minor children. Does not include 2,158 shares held by others as trustees for a trust of which Mr. Swan is an income beneficiary, as to which shares Mr. Swan disclaims beneficial ownership. H Does not include 10,747 shares owned by spouses of certain officers and directors as to which shares such officers and directors disclaim beneficial ownership. Section 16(a) of the Securities Exchange Act of 1934 requires the Corporation's directors and executive officers, and persons who own more than ten percent of a registered class of the Corporation's equity securities, to file with the Securities and Exchange Commission initial reports of ownership, reports of changes in beneficial ownership, and annual reports involving security transactions pursuant to one or more rules as set forth under Sections 16(a) and 16(b) of the Securities Exchange Act. Directors, executive officers, and greater than ten percent shareholders are required by SEC regulation to furnish the Corporation with copies of all Section 16(a) forms they file. To the Corporation's knowledge, based on review of the copies of such reports furnished to the Corporation and written representations that no other reports were required for the year ended December 31, 1996, all Section 16(a) filing requirements applicable to its executive officers, directors and any ten percent shareholder were complied with, except one filing by Mr. Lounsberry was inadvertently filed late. MANAGEMENT: Directors' Personnel Committee Report on Executive Compensation Under the supervision of the Personnel Committee of the Board of Directors composed entirely of outside directors, the Bank has developed and implemented compensation policies which seek to enhance the profitability of the Bank and the Corporation and thus, Shareholder value while at the same time providing fair and competitive compensation which will attract and retain well-qualified executives. Based upon recommendations of the Personnel Committee, the Board of Directors sets the annual compensation of the Chief Executive and Chief Operating Officers. The Committee also reviews and recommends to the Board of Directors compensation of other senior management as first recommended by the Chief Executive Officer based upon performance and other relevant factors. Aside from the fringe benefit programs in which all Bank employees participate, compensation of all Bank officers and exempt non-officers consists of an annual salary and a management incentive bonus. The management incentive bonus is subject to the terms and conditions of the Management Incentive Plan adopted by the Board of Directors, which provides for the payment of bonuses to participants in accordance with an allocation formula based in part on the Corporation's attainment of specific operating objectives and in part on a subjective review of the participant's individual performance. Additionally, those officers who play a major role in setting and implementing long-term strategies, currently being the Chief Executive Officer and the President, may receive a long-term incentive award. Payment of the long-term incentive award will be deferred for three years following the accrual year and may be further deferred at the election of the participant. The incentive bonus may or may not be deferred at the officer's election. For 1996, the Committee and Board determined at the beginning of the year that incentive bonuses and long-term awards could not be issued unless the Corporation attained net income (after taxes) equal to at least a 1.0% return on average assets and an efficiency ratio of 67% or less, each of which targets were met. For 1996, Messrs. Bennett and Updegraff received incentive bonuses of $25,000 and $15,000, respectively. No long-term awards were issued. Senior Officer participants as a group, including Messrs. Bennett and Updegraff, received incentive bonus awards totaling $191,205 for 1996. In evaluating the performance and recommending the compensation of the Chief Executive Officer and the compensation guidelines for the Bank's other senior management, the committee has taken particular note of management's ability during 1996 in achieving certain profit, growth, and operational objectives which were established by the Board of Directors in the Bank Plan at the beginning of 1996 and compared the Corporation's financial results against the results reported by similar banking businesses in New York and Pennsylvania. The financial and operational measurements considered by the Board were: profits, return on assets, return on equity, new market penetration, new product development, expense control, asset growth, non-interest income, asset quality and asset liability management. There is no specific weight given to any of these factors and there is no formula whereby a certain performance will result in a certain salary. The committee considers total performance and the total financial and operating conditions of the Bank in making its compensation recommendations. Also, in considering the compensation of the Chief Executive and Chief Operating Officers, the committee periodically reviews reports prepared by various organizations which provide comparative information on Executive compensation for a nationwide peer group of independent banks and holding companies having similar asset size. From this review it was determined that the performance of the Bank was within the range reported by its peers and that the compensation paid by the Bank was appropriate in comparison to the peer group. In its review of management performance and compensation, the committee has also taken into account management's consistent commitment to the long-term success of the Corporation and Bank. The committee has recognized that profitability in any one year is considerably impacted by the general economic conditions nationally and in its market areas, over which management has little or no control, and the committee's policy, therefore, is to not over-emphasize, either positively or negatively, a single year's results at the expense of significant, sustained, long-term earnings growth. Based on its evaluation of these factors, the committee believes that the executive management of the Corporation is dedicated to achieving significant improvements in long-term financial performance and that the compensation policies, plans and programs the committee has implemented and administered have contributed to achieving this management focus.
SUBMITTED BY THE DIRECTORS' PERSONNEL COMMITTEE Ralph H. Meyer, Chairman Richard H. Evans Richard W. Swan Donald L. Brooks, Jr. Thomas K. Meier William A. Tryon David J. Dalrymple John F. Potter William C. Ughetta Comparative Return Performance Graph Comparison of Five-Year Cumulative Total Return For Fiscal Years Ending December 31, 1992 - 1996 Among Chemung Financial Corporation, NASDAQ - Composite Index and NASDAQ - Bank Stocks Index (OMITTED GRAPHIC MATERIAL - SEE APPENDIX)
1991 1992 1993 1994 1995 1996 Chemung Financial Corporation 100.00 105.83 136.77 157.68 178.45 226.49 NASDAQ - Composite 100.00 116.38 133.60 130.59 184.67 227.16 NASDAQ - Bank Stocks 100.00 145.55 165.99 165.39 246.32 325.60
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, 1991. The NASDAQ - Composite and Bank Stock indices were obtained from the Center for Research in Security Prices, University of Chicago, Chicago, Illinois. Executive Officers During 1996, the names and positions of the executive officers of the Corporation and the Bank, all serving one-year terms, were as follows:
Name Age Position (served since) John W. Bennett 63 Chairman of the Board and Chief Executive Officer of the Corporation and the Bank (1996); formerly President and Chief Executive Officer of the Corporation and the Bank (1991); and prior thereto President and Chief Operating Officer of the Corporation and the Bank (1988). Jan P. Updegraff 54 President and Chief Operating Officer of the Corporation and the Bank (1996); formerly Vice President and Treasurer of the Corporation and Executive Vice President of the Bank (1990). Daniel F. Agan1 63 Vice President of the Corporation (1988) and Senior Vice President of the Bank (1984). Robert J. Hodgson 51 Vice President of the Corporation (1990) and Senior Vice President of the Bank (1988). James E. Corey III 50 Vice President of the Corporation (1993) and Senior Vice President of the Bank (1993). Joseph J. Tascone 49 Vice President of the Corporation and Senior Vice President of the Bank (1995); and prior thereto Vice President of the Bank (1987). Jerome F. Denton 45 Secretary of the Corporation (1986) and Senior Vice President and Secretary of the Bank (1996).
1 Mr. Daniel F. Agan is a brother of Board member, Robert E. Agan. Executive Compensation The following information indicates compensation paid or accrued by the Bank during 1996 for services rendered by each of the Chief Executive Officer and the four highest-paid executive officers of the Corporation and the Bank whose total compensation exceeded $100,000. At present, the officers of the Corporation are not separately compensated for services rendered by them to the Corporation. It presently is contemplated that such will continue to be the policy of the Corporation.
Summary Compensation Table Annual Compensation All Other Name and Principal Year Salary($) Bonus($)1 Compensation($)2 Position Held John W. Bennett 1996 200,308 25,000 8,541 Chairman of the Board and Chief Executive Officer of 1995 194,000 18,000 8,418 the Corporation and the Bank 1994 185,692 30,000 8,174 Jan P. Updegraff 1996 114,039 15,000 7,342 President and Chief Operating Officer of the 1995 95,385 15,000 6,660 Corporation and the Bank 1994 90,385 25,000 6,266
1 Includes amounts allocated for the year indicated, whether paid or deferred, to such person under the Bank-Wide and Management Incentive Bonus Plans. 2 Includes amounts allocated for the year indicated to such person under the Bank's Profit-Sharing, Savings and Investment Plan. Pension Plan The Bank maintains a non-contributory, defined benefit Pension Plan trusteed and administered by the Bank. The Plan covers all employees who have attained age 20 with one or more years of service and who have one thousand hours of service during the plan year. Under the Plan, the annual benefit payable to qualifying employees upon their retirement is based on the average of their five highest paid consecutive years out of the last ten calendar years of employment. Normal retirement age under the Plan is 65. The Plan also provides for reduced benefit payments for early retirement following age 55. Compensation under the Plan is limited to all of an employee's salary, wages, or other regular payments from the Bank, excluding bonuses, commissions, overtime pay, or other unusual payments. 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% times the above average compensation, plus for each year of credited service to a maximum of 35 years, .65% of the above average compensation to the extent it exceeds 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 (which base was $27,576 for a participant attaining age 65 in 1996). The Bank made contributions to the Pension Plan totaling $262,200 for 1995. Due to a full funding limitation, the Bank made no contribution to the Pension Plan for the years 1996 and 1994. Additionally, effective January 1, 1994, the Bank established a non- qualified Executive Supplemental Pension Plan designed to provide a benefit which, when added to other retirement income, will ensure the payment of a competitive level of retirement income in order to attract, retain and motivate selected executives of the Bank. From time to time the Board of Directors may select executives as participants in the plan. Currently, Mr. Bennett is the only plan participant. This Plan provides an annual benefit equal to the amount, if any, that the benefit which would have been paid under the terms of the Bank's Pension Plan, computed as if the basic Pension Plan benefit formula administered and payable without regard to the special benefit limitations required to comply with Sections 415, 401(a)(17) and other governing sections of the Internal Revenue Code, exceeds the benefit which is payable to the participant under the terms of the Pension Plan on the date of the participant's termination. The following table sets forth the estimated annual benefits under both plans, based upon a straight-life annuity form of pension, payable on retirement at age 65 by a participating employee, assuming final average earnings as shown. Employees become fully vested following 5 years of service.
Average Annual Earnings Annual Benefits upon Retirement with Years of Service Indicated 20 30 351 $100,000 33,415 49,123 56,476 $120,000 40,815 60,023 69,027 $150,000 51,915 76,373 87,852 $190,000 66,715 98,173 112,951 $200,000 70,415 103,623 119,226 1 Maximum number of years allowed under the terms of the Retirement Plan
The previously-noted executive officers of the Corporation and the Bank had the following credited full years of service under the Plan, as of December 31, 1996: John W. Bennett (41) and Jan P. Updegraff (26). Profit-Sharing, Savings and Investment Plan The Bank maintains a Profit-Sharing, Savings and Investment Plan for the benefit of all employees with one or more years of service who have attained one thousand hours of service during the Plan year. The Bank's profit-sharing contribution in any year is determined by the Board of Directors in its discretion. The contribution shall not exceed the maximum amount deductible for income tax purposes for such year. Annual contributions under the Plan are allocated pro rata on the basis of participants' aggregate covered compensation, limited, however, to a maximum of 50% of the defined benefit limit under Code Section 415 (b) (1) (A) in effect as of January 1 of the Plan Year for which the contribution is made (50% of $120,000 or $60,000 for 1996). Participants who have earned at least five years of vesting service may make limited withdrawals from the Plan's Trust Fund from account balances accumulated prior to January 1, 1985. The Plan further provides the opportunity for all participants to contribute up to 10% of pay on a tax-deferred basis with the Bank matching 50% of the first 6% of that contribution. Both the Bank's profit-sharing and matching contributions are invested in the Corporation's Common Stock to the extent available. Participants' accounts are at all times 100% vested, and benefits are payable upon retirement, death, disability, or other termination of employment. The Bank made contributions to the Profit Sharing, Savings and Investment Plan totaling $550,854 for 1996, $499,342 for 1995 and $423,161 for 1994. Employment Contracts The Bank has employment contracts with twenty-one 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, 1998, except for Messrs. Agan, Corey, Tascone and Updegraff whose guaranteed terms end December 31, 1999, and Mr. Bennett whose guaranteed term ends July 1, 1998. 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. Other Compensation Agreements The Bank maintains several contributory and non-contributory medical, life and disability plans covering all officers, as well as all full-time employees. The Bank does not maintain any stock option, stock appreciation rights or stock purchase or award plans for officers or directors. INDEPENDENT PUBLIC ACCOUNTANTS: The accounting firm of KPMG Peat Marwick LLP, 113 South Salina Street, Syracuse, New York 13202 has acted as the Bank's and the Corporation's independent auditors and accountants since 1990 and will so act in 1997. Representatives of KPMG Peat Marwick LLP will be present at the Annual Meeting of Shareholders with the opportunity to make a statement. The representatives will respond to appropriate questions. OTHER BUSINESS: Management knows of no business which will be presented for consideration, other than the matters described in the Notice of Annual Meeting. If other matters are properly presented, the persons designated as proxies intend to vote thereon in accordance with their best judgment. SHAREHOLDER PROPOSALS: Qualified Shareholders desiring to present a proposal at the 1998 Annual Meeting of Shareholders, including a notice of intent to make a nomination at said Meeting, must submit such proposal to the Corporation on or before November 7, 1997. Such proposals must comply in all respects with the rules and regulations of the Securities and Exchange Commission. BY ORDER OF THE BOARD OF DIRECTORS Date: March 10, 1997 One Chemung Canal Plaza Elmira, NY 14902 Jerome F. Denton Secretary CHEMUNG FINANCIAL CORPORATION Subsidiary, Chemung Canal Trust Company Notice of Annual Meeting and Proxy Statement One Chemung Canal Plaza Annual Meeting of P.O. Box 1522 Shareholders to be held Elmira, New York 14902 April 8, 1997 CHEMUNG FINANCIAL CORPORATION ANNUAL MEETING OF SHAREHOLDERS - APRIL 8, 1997 PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF CHEMUNG FINANCIAL CORPORATION John R. Battersby, Darwin C. Farber, and John B. Hintz, each with power of substitution and with all the 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 April 8, 1997 (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: FOR WITHHELD David J. Dalrymple 1. Election of Richard H. Evans Directors Edward B. Hoffman John F. Potter William C. Ughetta Jan P. Updegraff For, except vote withheld from the following nominee(s): __________________________________________________________ I/We will attend the Meeting Number in group ____ 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. EX-27 5 FDS SCHEDULE
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S AUDITED ANNUAL FINANCIAL STATEMENTS AND DISCLOSURES FOR THE PERIOD ENDED DECEMBER 31, 1996 AS PRESENTED IN ITS 4TH QUARTER 1996 FORM 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND DISCLOSURES. 1,000 12-MOS DEC-31-1996 DEC-31-1996 31103 152 500 0 185365 10352 10351 283721 3975 532213 439649 14371 12073 10000 0 0 10750 45370 532213 25314 11652 545 37511 14286 15043 22468 742 610 19408 9424 6158 0 0 6158 2.96 2.96 4.79 1494 226 0 0 3900 754 87 3975 1898 0 2077
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