-----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, A6Kf7E983B7kmCz4TBL1Kcq3ajNT1b9EGoknDVuRxx3wMAdBWXJ+bXMlqd6Nhyr1 ndfbPfZ75NMzzCH6aRWLsA== 0000763563-98-000025.txt : 19981113 0000763563-98-000025.hdr.sgml : 19981113 ACCESSION NUMBER: 0000763563-98-000025 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981112 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-Q SEC ACT: SEC FILE NUMBER: 000-13888 FILM NUMBER: 98744210 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-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarterly period ended SEPTEMBER 30, 1998 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission File No. 0-13888 CHEMUNG FINANCIAL CORPORATION ----------------------------- (Exact name of registrant as specified in its charter) New York 16-1237038 -------------------------- ------------------- (State or other jurisdiction of I.R.S. Employer incorporation or organization) Identification No. One Chemung Canal Plaza, Elmira, NY 14902 ----------------------------------- -------- (Address of principal executive offices) (Zip Code) (607) 737-3711 --------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES XX NO Indicate the number of shares outstanding of each of the issuer's classes of common stock as of September 30, 1998: COMMON STOCK, $.01 PAR VALUE -- OUTSTANDING 4,115,005 SHARES CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY --------------------------------------------- INDEX PART I. FINANCIAL INFORMATION PAGE Item 1: FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets 1 Condensed Consolidated Statements of Income 2 Condensed Consolidated Statement of Cash Flows 3 Notes to Condensed Consolidated Financial Statements 4 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 3: Quantitative and Qualitative disclosures about Market Risk Information responsive to this Item is set forth in "Management's Discussion of Operations and Financial Condition" of the quarterly 10-Q for the period ended September 30, 1998 and is in- corporated herein by reference to Interest Rate Risk 12 PART II. OTHER INFORMATION Item 6: Exhibits and Reports on Form 8-K 14 All other items required by Part II are either inapplicable or would require an answer which is negative. SIGNATURES 16 PART I. FINANCIAL INFORMATION Item 1: FINANCIAL STATEMENTS
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEETS Sept. 30, Dec. 31, 1998 1997 ---------- -------- ASSETS Cash and due from banks $ 25,865,279 $ 32,997,157 Int.-bearing deposits 1,221,945 1,421,298 Federal funds sold 10,000,000 0 Securities held to maturity, fair value of $6,188,829 in 1998 and $9,224,028 in 1997 6,188,829 9,224,028 Securities available for sale, at fair value 200,786,098 185,302,745 Loans, net of unearned income and deferred fees 324,335,562 296,976,769 Allowance for loan losses (4,384,724) (4,145,422) ------------ ------------ Loans, net 319,950,838 292,831,347 Bank premises and equipment, net 10,104,486 10,219,043 Intangible assets, net of accumulated amortization 6,375,154 6,815,631 Other assets 11,729,467 10,123,203 ------------ ------------ Total assets $592,222,096 $548,934,452 ============ ============ LIABILITIES Deposits: Non-interest bearing $ 86,931,633 $ 94,656,560 Interest bearing 382,107,745 356,387,782 ------------ ------------ Total deposits 469,039,378 451,044,342 Securities sold under agreement to repurchase 35,940,37 29,447,856 Federal Home Loan Bank Advances 10,000,000 16,300,000 Other liabilities 12,301,412 10,505,077 ------------ ------------ Total liabilities 527,281,162 487,297,275 ------------ ------------ SHAREHOLDERS' EQUITY Common Stock, $0.01 pv per share-1998 $5.00 pv per share 1997;authorized 10,000,000 issued: 4,300,134-1998;authorized 3,000,000 issued: 2,150,067-1997 43,001 10,750,335 Surplus 20,830,638 10,101,804 Retained earnings 41,471,036 38,236,025 Treasury stock, at cost (185,129 shares in 1998 and 161,076 in 1997*) (2,615,137) (2,032,886) Accumulated Other Comprehensive Income 5,211,396 4,581,899 ----------- ------------ Total shareholders' equity 64,940,934 61,637,177 Total liabilities & shareholders' equity $592,222,096 $548,934,452 ============ ============ *ADJUSTED TO REFLECT A 2-FOR-1 STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND EFFECTIVE 6/1/98 See Accompanying Notes to Condensed Consolidated Financial Statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF INCOME 9 MONTHS ENDED 3 MONTHS ENDED SEPT. 30, SEPT. 30, INTEREST INCOME 1998 1997 1998 1997 ----------- ----------- ----------- ---------- Loans $20,747,883 $19,857,579 $ 7,243,947 $ 6,813,992 Securities 9,442,108 9,144,038 3,196,977 3,015,222 Federal funds sold 423,266 205,075 159,753 83,369 Interest bearing deposits 202,945 191,776 42,506 85,944 ----------- ---------- ---------- ---------- Total interest income 30,816,202 29,398,468 10,643,183 9,998,527 ----------- ---------- ---------- ---------- INTEREST EXPENSE Deposits 11,553,221 11,022,375 3,954,979 3,760,273 Securities sold under agreement to repurchase and funds borrowed 1,613,694 1,004,198 661,294 334,986 ----------- ---------- ---------- ---------- Total interest expense 13,166,915 12,026,573 4,616,273 4,095,259 ----------- ---------- ---------- ---------- Net interest income 17,649,287 17,371,895 6,026,910 5,903,268 Provision for loan losses 600,000 738,583 200,000 288,583 ----------- ---------- ---------- ---------- Net interest income after provision for loan losses 17,049,287 16,633,312 5,826,910 5,614,685 ----------- ---------- ---------- ---------- Realized gains-sec. trans., net 215,993 143,010 68,598 111,466 Other operating income 5,755,952 5,114,746 2,067,166 1,730,236 ----------- ---------- ---------- ---------- Total other operating income 5,971,945 5,257,756 2,135,764 1,841,702 Other operating expenses 15,283,937 14,749,399 5,169,854 4,931,753 ----------- ---------- ---------- ---------- Income before income taxes 7,737,295 7,141,669 2,792,820 2,524,634 Income taxes 2,440,967 2,459,065 877,167 881,474 ------------ ---------- ---------- ---------- NET INCOME $5,296,328 $ 4,682,604 $ 1,915,653 $ 1,643,160 ============ =========== =========== =========== BASIC EARNINGS PER SHARE $1.29 $1.13 $0.47 $0.40 *ADJUSTED TO REFLECT A 2-FOR-1 STOCK SPLIT IN THE FORM OF A 100% STOCK DIVIDEND EFFECTIVE 6/1/98 See Accompanying Notes to Condensed Consolidated Financial Statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended Sept. 30, 1998 1997 ----------- ----------- OPERATING ACTIVITIES - -------------------- Net income $ 5,296,328 $ 4,682,604 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of intangible assets 440,477 440,477 Provision for loan losses 600,000 738,583 Depreciation and amortization 1,127,729 1,140,402 Amortization and discount on securities, net 150,237 223,813 Gain on sales of securities, net (215,993) (143,010) Increase in other assets (1,606,264) (1,229,552) Increase (decrease) other liabilities 1,319,641 (1,834,817) ------------ ------------ Net cash provided by operating activities 7,112,155 4,018,500 INVESTING ACTIVITIES - -------------------- Proceeds from maturities of securities - AFS 49,673,891 24,917,456 Proceeds from maturities of securities -HTM 6,194,839 10,837,142 Proceeds from sales of securities - AFS 19,174,370 10,288,578 Purchases of securities - AFS (83,217,743) (37,228,605) Purchases of securities - HTM (3,159,640) (6,631,320) Purchases of premises and equipment, net (1,013,172) (1,194,166) Loans, net of repayments and other reductions (30,478,543) (13,294,206) Proceeds from sales of student loans 2,759,052 2,943,718 ------------ ------------ Net cash used by investing activities (40,066,946) (9,361,403) ------------ ------------ FINANCING ACTIVITIES - -------------------- Net increase in demand deposits, NOW, savings and insured money market accounts 5,437,507 1,213,272 Net increase in certificates of deposit and individual retirement accounts 12,557,529 14,450,047 Net increase (decrease) in securities sold under agreements to repurchase 26,492,516 (1,877,109) Net decrease in Federal Home Loan Bank advances (6,300,000) 0 Purchase of treasury shares (582,251) (15,750) Cash dividends paid (1,981,741) (1,802,826) ------------ ------------ Net cash provided by financing activities 35,623,560 9,541,090 ------------ ----------- Net increase (decrease) in cash and cash equivalents 2,668,769 4,198,187 Cash and cash equivalents at beginning of year 34,418,455 31,755,294 ------------ ------------ Cash and cash equivalents at end of period $37,087,224 $35,953,481 ============ ============ See Accompanying Notes to Condensed Consolidated Financial Statements
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) 1. Summary of Significant Accounting Policies Basis of Presentation Chemung Financial Corporation (the Company) operates as a bank holding company. Its only subsidiary is Chemung Canal Trust Company (the Bank).The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, the Bank. All material intercompany accounts and transactions have been eliminated in the consolidation. 2. The condensed consolidated financial statements included herein reflect all adjustments which are, in the opinion of management, of a normal recurring nature and necessary to present fairly the Company's financial position as of September 30, 1998 and December 31, 1997, and results of operations and cash flows for the three and nine month periods ended September 30, 1998 and 1997. 3. Net income per share for the periods presented have been computed by dividing net income by 4,120,832 (4,147,483) weighted average shares outstanding for the nine month periods ended September 30, 1998 and 1997 and 4,115,538 (4,144,128) weighted average shares outstanding for the three month periods ended September 30, 1998 and 1997, respectively. (adjusted to reflect a 2for 1 stock split in the form of a 100% stock dividend effective 6/1/98). 4. Goodwill, which represents the excess of purchase price over the fair value of identifiable assets acquired, is being amortized over 15 years on the straightline 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 Company 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 not recoverable. 5. Effective January 1, 1998 the Company adopted the remaining provisions of SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which relate to the accounting for securities lending, repurchase agreements, and other secured financing activities. These provisions, which were delayed for implementation by SFAS No. 127, are not expected to have a material impact on the Company. On January 1, 1998, the Company adopted the provisions of Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement establishes standards for reporting and display of comprehensive income and its components. Comprehensive income includes the reported net income of a company adjusted for items that are currently accounted for as direct entries to equity, such as the mark to market adjustment on securities available for sale, foreign currency translation items and minimum pension liability adjustments. At the Company, comprehensive income represents net income plus other comprehensive income, which consists of the net change in unrealized gains or losses on securities available for sale for the period. Accumulated other comprehensive income represents the net unrealized gains or losses on securities available for sale as of the balance sheet dates. Comprehensive income for the nine-month and three-month periods ended September 30, 1998 and 1997 were $5,925,825 ($1,997,785) and $5,893,911 ($2,575,671), respectively. The following summarizes the components of other comprehensive income:
Unrealized Gains or Losses on Securities: ----------------------------------------- Unrealized holding gains during the nine months ended September 30, 1997, net of tax (pre-tax amount of $2,159,838) $1,297,199 Reclassification adjustment for gains realized in net income during the nine months ended September 30, 1997, net of tax (pre-tax amount of $143,010) (85,892) ----------- Other comprehensive income-nine months ended September 30, 1997 $1,211,307 ========== Unrealized holding gains during the nine months ended September 30, 1998, net of tax (pre-tax amount of $1,264,106) $ 759,222 Reclassification adjustment for gains realized in net income during the nine months ended September 30, 1998, net of tax (pre-tax amount of $215,993) (129,725) ----------- Other comprehensive income-nine months ended September 30, 1998 $ 629,497 ============
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information. SFAS No. 131 requires publicly held companies to report financial and other information about key revenue producing segments of the entity for which such information is available and is utilized by the chief operation decision maker. Specific information to be reported for individual segments includes profit or loss, certain revenue and expense items and total assets. A reconciliation of segment financial information to amounts reported in the financial statements would be provided. SFAS No. 131 is effective for the Company in 1998 and will not have an impact on the Company's financial position or results of operation. In February, 1998 the FASB issued SFAS No. 132, Employers' Disclosure about Pensions and Other Post Retirement Benefits. This statement revises employers' disclosures about pension and other post retirement benefit plans. It does not change the measurement or recognition of these plans. The statement is effective for the Company in 1998 and will not impact the Company's financial position and results of operations. In June, 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement establishes comprehensive accounting and reporting requirements for derivative instruments and hedging activities. The statement requires (companies or banks) to recognize all derivatives as either assets or liabilities, with the instruments measured at fair value. The accounting for gains and losses resulting from changes in fair value of the derivative instrument, depends on the intended use of the derivative and the type of risk being hedged. This statement is effective for all fiscal quarters beginning January 1, 2000 for calendar year (companies or banks). Earlier adoption, however, is permitted. Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION Total assets at September 30, 1998 were $592.2 million, which represents a $43.3 million or 7.91% increase since the beginning of the year. The growth which has taken place during the first nine months of this year is reflected primarily in the loan and securities portfolios which have increased $27.4 million and $12.4 million respectively. The Available for Sale segment of the securities portfolio totaled $200.8 million as compared to $185.3 million at the beginning of the year, an increase of 8.4%. At amortized cost, increases in Federal Agency Bonds ($22.3 million), Corporate Bonds ($9.6 million) and equity securities ($418 thousand) were somewhat offset by decreases in U.S. Treasury Notes and Municipal Bonds totalling $13.2 million and $7.5 million respectively. The allowance valuation for Available for Sale securities has increased by $1.0 million since year end as unrealized gains in the bond portfolio have risen in conjunction with the decline in interest rates. The Held to Maturity segment of the portfolio consisting primarily of Municipal Obligations totaled $6.2 million at September 30, 1998 versus $9.2 million at the beginning of the year. Amortized cost and fair value, maturity duration, and unrealized gains and losses for the components in each of the Available for Sale and Held to Maturity categories of the securities portfolio at September 30, 1998 are set forth in the following tables:
AVAILABLE FOR SALE HELD TO MATURITY Amortized Fair Amortized Fair Cost Value Cost Value ------------ ----------- ---------- --------- U.S. Treasury and other U.S. Govt. Agencies $102,844,544 $104,251,841 $ 0 $ 0 Mtg. Backed Securities 54,804,603 55,466,713 0 0 Obligations of states and Political subdivisions 20,896,858 21,423,807 6,124,338 6,124,338 Other bonds and notes 9,686,144 9,743,745 64,490 64,490 Corporate Stocks 3,876,964 9,899,991 0 0 ------------ ------------ ---------- -------- $192,109,114 $200,786,098 $6,188,829 $6,188,829
The carrying value and weighted average yields based on amortized cost by years to maturity for securities available for sale as of September 30, 1998 are as follows (excluding corporate stocks):
Maturing Within One Year After One, Within Five Amount Yield Amount Yield ------ ----- ------ ----- U.S. Treasury and other U.S. Government Agencies $ 24,643,455 6.48% $ 57,408,320 6.07% Mortgage Backed Securities 0 0 2,395,878 6.69% Obligations of states and political subdivisions 4,834,210 4.72% 6,944,946 4.72% Other bonds and notes 0 0 2,540,625 6.25% ------------ ----- ------------ ----- Total $ 29,477,665 6.19% $ 69,289,769 5.96%
Maturing After Five, Within Ten After Ten Years Amount Yield Amount Yield ------ ----- ------ ----- U.S. Treasury and other U.S. Government Agencies $ 22,200,066 6.88% $ 0 0 Mortgage Backed Securities 0 0 53,070,835 7.33% Obligations of states and political subdivisions 5,910,982 4.78% 3,733,669 5.05% Other bonds and notes 2,665,625 7.41% 4,537,496 6.88% ------------ ----- ---------- ----- Total $ 30,776,673 6.53% $ 61,342,000 7.16%
Mortgage-backed securities are expected to have shorter average lives than their contractual maturities as shown above, because borrowers may repay obligations with or without call or prepayment penalties. The amortized cost and weighted average yields by years to maturity for securities held to maturity as of September 30, 1998 are as follows:
Maturing Within One Year After One, Within Five Amount Yield Amount Yield ------ ----- ------ ----- Obligations of states and political subdivisions $ 3,309,505 3.95% $ 1,342,830 4.94% Other bonds and notes 0 0 0 0 ----------- ----- ----------- ----- Total Bonds $ 3,309,505 3.95% $ 1,342,830 4.94%
Maturing After Five, Within Ten After Ten Years Amount Yield Amount Yield ------ ----- ------ ----- Obligations of states and political subdivisions $ 1,472,003 4.00% $ 0 0 Other bonds and notes 64,490 8.25% 0 0 ----------- ----- ------- ----- Total $ 1,536,493 4.18% $ 0 0
There are no securities of a single issuer (other than securities of the U.S. Government and its agencies) that exceed 10% of shareholders equity at September 30, 1998 in either the Available for Sale or Held to Maturity categories. Gross unrealized gains and gross unrealized losses on securities Available for Sale were as follows:
AVAILABLE FOR SALE ------------------ Unrealized Unrealized Gains Losses ---------- --------- U.S. Treasury and other U.S. Govt. Agencies $ 1,407,297 $ 0 Mtg. Backed Securities 691,712 29,602 Obligations of states and Political subdivisions 526,949 0 Other bonds and notes 119,918 62,317 Corporate Stocks 6,023,027 0 ----------- -------- $ 8,768,903 $ 91,919
Realized net gains on sales of securities Available for Sale for the nine month period ended September 30, 1998 were $215,993 as compared to $143,010 through September 30, 1997. Included in the Corporate Stocks component in the above tables are 50,879 shares of SLM Holding Corp., formerly known as Student Loan Marketing Association ("Sallie Mae") at a cost basis of $4,654 and fair value of $1,650,413. These shares were acquired as preferred shares (a permitted exception to the U.S. 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 September 30, 1998, the Bank's equity portfolio held listed securities totaling $89,538 at cost with a total fair value of $4,441,081. These shares 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 22,156 shares of the Federal Home Loan Bank of New York valued at $498,200 and $2,215,600 respectively. Management has no current plans for selling these securities. In total, loan balances have increased $27.4 million or 9.2% since the beginning of the year. Approximately 4.3% of this growth is in the commercial portfolio which has increased by $11.9 million or 11.5% during 1998. Consumer loans have increased $8.5 million or 7.5% as a result of strong demand in indirect auto financing and growth in our term home equity product. The mortgage portfolio has grown by $7.0 million or 8.8% and the activity continues to be strong. Total deposits at September 30, 1998 were $469.0 million as compared to $451.0 million at the beginning of the year, an increase of $18.0 million or 4.0%. Public fund balances were up $16.6 million with personal and non-personal balances increasing by $4.1 million. The above were somewhat offset by a $2.7 million decrease in official checks outstanding. Of the $26.5 million increase in securities sold under agreements to repurchase, $24.5 million is related to term repurchase agreements with the Federal Home Loan Bank used to leverage the purchase of Federal Agency Bonds as well as a portion of the $9.2 million loan purchase made during the second quarter. Net earnings for the third quarter were $1.916 million as compared to $1.643 million for the third quarter of 1997, a 16.6% increase. Net earnings per share for the quarter increased by $0.07 or 17.5% when compared to last year. While gains were seen in both net interest income ($212 thousand) and other operating income ($337 thousand), they were somewhat offset by a $238 thousand or 4.8% increase in operating expenses. While pre-tax earnings were $268 thousand higher than last year, our income tax expense was $4 thousand lower as a result of tax minimization strategies implemented during the second quarter of this year. Net earnings for the nine month period ended September 30, 1998 were $5.296 million, a $614 thousand or 13.1% increase over last years nine month results. Net earnings per share for the nine month period were $1.29 versus $1.13 the prior year, an increase of 14.2% on 26,651 fewer average shares outstanding. Earnings for the first nine months were enhanced by a $73 thousand increase in realized gains on securities transactions. In addition to the above, earnings for the first nine months of 1998 have been positively impacted by a $416 thousand increase in net interest income, reflective of a $33.8 million increase in average earning assets, as well as a $641 thousand increase in other operating income. The primary factors influencing this increase include higher levels of fiduciary income ($342 thousand), an insurance settlement related to a May 1997 fire ($114 thousand), Mastercard and Visa merchant discount fees ($84 thousand), checkcard income ($58 thousand) and service charges ($60 thousand). Operating expenses for the first nine months of 1998 are $535 thousand or 3.6% higher than a year ago. The major factors influencing this increase were higher expenses related to Other Real Estate Owned "OREO" ($240 thousand), salaries and employee benefits ($186 thousand) and credit card processing costs ($117 thousand). While our pre-tax income has improved by $596 thousand, income tax expense for the first nine months of 1998 is $18 thousand lower due to the tax minimization strategies implemented during the second quarter. As indicated on the Condensed Consolidated Statement of Cash Flows, cash and cash equivalents have increased $2.7 million since the beginning of the year. In addition to cash provided by operating activities ($7.1 million), other primary sources of cash flow during the nine month period ended September 30, 1998 included proceeds from the sale and maturity of investment securities ($75.0 million), an increase in deposit accounts ($18.0 million) and an increase in securities sold under agreement to repurchase ($26.5 million). Cash proceeds generated from the above sources have been used primarily to fund the purchase of investment securities ($86.4 million), the increase in loans, net of repayments ($30.5 million), the payment of cash dividends ($2.0 million) and the repayment of overnight advances from the Federal Home Loan Bank ($6.3 million). On May 13, 1998, the shareholders of the Company approved an increase in the authorized number of shares from 3,000,000 to 10,000,000 and a reduction in par value from $5.00 to $0.01 per share. On that same date, the Board of Directors approved a 2 for 1 stock split in the form of a 100% stock dividend resulting in an increase in the number of shares issued from 2,150,067 to 4,300,134. During the nine months ended September 30, 1998, the Company acquired 24,053 Treasury shares at an average price of $24.21 per share (adjusted for the above mentioned split). No treasury shares have been sold thus far in 1998. During the quarter, the Company declared a cash dividend of $0.17 per share. Cash dividends declared year to date total $0.495 per share as compared to $0.45 per share during the same period last year. Based upon loans outstanding, past experience, as well as an ongoing review of the risk inherent in our loan portfolio, the loan loss provision for the first nine months of 1998 was $600 thousand as compared to $739 thousand one year ago. At 274% of non-performing loans and 1.35% of total loans, the Allowance for Loan Loss is viewed by management as adequate relative to risk. Non-performing loans at September 30, 1998 constituted 0.49% of total loans. Changes in the allowance for loan losses for the nine months ended September 30, 1998 is as follows:
September 30, 1998 Amount (000's) --------------- Balance at beginning of period $ 4,145 Charge-offs: Domestic: Commercial, financial and agricultural $ 13 Commercial mortgages 0 Residential mortgages 21 Consumer loans 437 $ 471 Recoveries: Domestic: Commercial, financial and agricultural $ 19 Commercial mortgages 0 Residential mortgages 0 Consumer loans 92 ------ $ 111 ------- Net charge-offs $ 360 Additions charged to operations 600 Balance at end of period $ 4,385 ------ Ratio of net charge-offs during the period to average loans outstanding during the period .12%
Included in the allowance for loan losses at September 30, 1998 is an allowance for impaired loans of $675 thousand versus $239 thousand at the beginning of the year. The total recorded investment in these loans at September 30, 1998 and December 31,1997 was $4.594 million and $951 thousand respectively. Management distinguishes between impaired and non-accrual loans as follows: Impaired Loans - A loan would be considered impaired when it is probable that after having considered current information and events regarding the borrower's ability to repay their obligations, the corporation will be unable to collect all amounts due according to the contractual terms of the loan agreement. Non-Accrual Loans - A loan is placed on non-accrual when it becomes past due and is referred to legal counsel, or in the case of a commercial loan which becomes 90 days delinquent, or in the case of a consumer loan (not guaranteed by a government agency) or a real estate loan which becomes 120 days delinquent unless, because of collateral or other circumstances, it is deemed to be collectible. When placed on non-accrual, previously accrued interest is reversed. Loans may also be placed in non-accrual if management believes such classification is warranted for other reasons. At September 30, 1998, the allocation of the allowance for loan losses is as follows:
Reported Period September 30, 1998 ------------------ Balance at end of period applicable to: Percent of Loans in each Amount Category to Total Loans ------ ------------------------ Domestic: Commercial, financial and agricultural $1,116,169 35.22% Commercial mortgages 22,380 1.76% Residential mortgages 9,984 24.98% Consumer loans 717,188 38.04% Unallocated: 2,519,003 N/A ---------- ------- Total $4,384,724 100.00%
For the periods ended September 30, 1998 and December 31, 1997, the following table summarized the Company's non-accrual and past due loans:
Amounts (000's) --------------- September 30, 1998 December 31, 1997 ------------------ ---------------- Non-accrual loans $ 954 $ 930 ------- ------ Accruing loans past due 90 days or more $ 647 $ 688 ------- -------
At September 30, 1998, the Company has no commercial loans for which payments are presently current but the borrowers are currently experiencing severe financial difficulties. At September 30, 1998, no loan concentrations to borrowers engaged in the same or similar industries exceeded 10% of total loans and the Corporation has no interest-bearing assets other than loans that meet the non-accrual, past due, restructured or potential problem loan criteria. On September 30, 1998, the Company's consolidated leverage ratio was 9.18%. The Tier I and Total Risk Adjusted Capital ratios were 15.30% and 16.55%, respectively. SIGNIFICANT ISSUE - YEAR 2000 During 1997, management advised its Board of Directors of the many issues surrounding the approach of January 1, 2000. Nearly all computer hardware and software developed during the current century, have been programmed with two digit reference to each year. Such hardware and software, if not upgraded by January 1, 2000, may become useless. Management is undergoing a five phase project to respond to this issue, with major emphasis upon identifying all applications and data bases supporting the Bank's mission critical applications. The five phases are awareness, assessment, renovation, validation and implementation, and will seek to neutralize not only the Bank's vulnerability, but to determine the financial capacity of its vendors, determine alternate vendors, and evaluate the capacity of its customers to respond to this challenge. A committee continues to direct the Company's Year 2000 activities under the framework of the FFIEC's Five Step Program. Testing of critical applications has begun and is expected to be substantially completed by year end 1998, with testing of other non-critical applications expected to be completed by March 31, 1999. The Company has begun evaluating Year 2000 readiness of its commercial loan applicants as part of the loan underwriting process and is calling upon major existing borrowers to assess their readiness and identify potential problems. In addition, the Company is currently formulating a contingency plan for business continuation in the event of Year 2000 systems failures. This contingency plan will be based upon the Company's existing disaster recovery plan with modifications for Year 2000 risks. The Company expects to complete its systems contingency plan by March 1999. Significant Year 2000 failures in the Company's systems or in the systems of third parties (or third parties upon whom they depend) could have a material adverse effect on the Company's financial condition and results of operation. The Company believes that its reasonably likely worse case Year 2000 scenario is (i) a material increase in the Company's credit losses due to Year 2000 problems for the Company's borrowers and obligors, and (ii) disruption in financial markets causing liquidity stress to the Company. The magnitude of these potential credit losses and disruption cannot be determined at this time. It is expected that costs associated with Year 2000 readiness including hardware and software upgrades as well as costs of testing will be approximately $200,000. INTEREST RATE RISK The Company realizes a major source of income by acting as intermediary between borrowers and savers. The differential or spread between interest earned on earning assets, primarily loans and investments, and the interest paid to depositors is affected with changes to market interest rates. Additionally, because of assumptions made to the Company's loan and investment portfolios and to its deposit base, changes in interest rates can materially affect the projected maturities of these balance sheet classes and thus alter the Company's sensitivity to future changes in interest rates. The Bank's Asset/Liability Committee (ALCO) has the strategic responsibility for setting the policy guidelines on acceptable interest rate risk exposure. The ALCO is made up of the chief executive officer, executive vice presidents, senior lending officer, senior marketing officer, financial officer and others representing key functions. All guidelines set by this committee are board approved. The ALCO's primary focus is on maintaining consistent growth in net interest income with an acceptable level of volatility as a result of changes to interest rates. As of September 30,1998 the exposure to changing interest rates is within the guidelines established by the ALCO. The Company uses an industry standard earnings simulation model as its primary method to identify and manage its interest rate risk profile. The model is based on projected cash flows using historical data for all financial instruments. Also incorporated into the model are assumptions of deposit rates and balances in relation to changes in interest rates. These assumptions are based on internal historical data. In recent years core deposits (NOW accounts, Insured Money Market Accounts and Savings accounts) have not been re-priced with movements of interest rates in the negotiable securities markets. The ALCO recognizes that the assumptions made are inherently uncertain. The ALCO uses static gap analysis as a secondary method of identifying and managing the Company's interest rate risk profile. Gap analysis measures the difference between the assets and liabilities re-pricing and maturing within specific time periods, called buckets. A positive gap indicates more rate sensitive assets are due to either re-price or mature than rate sensitive liabilities in a specific bucket. This would indicate that the Company should have rising earnings in periods of rising interest rates and falling earnings in periods of falling rates. The ALCO recognizes the limitations of static gap analysis. Primarily it does not take into account the effect of interest rate movements and the competitive market forces on the re-pricing and maturity characteristics of interest-earning assets and interest-bearing liabilities. For these reasons, and for the recent practicality of using earnings simulation models gap analysis has fallen out of favor with the risk management community. Lastly, the ALCO monitors the expected fluctuation of the Company's market value of equity with changes to interest rates. Appropriate risk limits have been established to protect the bank's shareholders in the advent of adverse changes to interest rates, and as of September 30, 1998 exposure to changing interest rates is within the risk limits established. PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K (a) Applicable Exhibits (3.1) Certificate of Incorporation is filed as Exhibit 3.1 to Registrant's Registration Statement on Form S-14, Registration No. 295743, 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 to April 8, 1998 are incorporated herein by reference to Exhibit A of the registrant's Form 10-Q for the quarter ended June 30, 1998, File No. 0-13888. (27) Financial Data Schedule (EDGAR version only) (b) Reports on Form 8-K During the quarter ended September 30, 1998, no reports on Form 8K or amendments to any previously-filed Form 8-K were file by the registrant. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there to duly authorized. CHEMUNG FINANCIAL CORPORATION DATE: November 12, 1998 Jan P. Updegraff ----------------- ---------------- President & CEO DATE: November 12, 1998 John R. Battersby Jr. ----------------- --------------------- Treasurer EX-27 2
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE REGISTRANT'S UNAUDITED QUARTERLY FINANCIAL STATEMENTS AND DISCLOSURES FOR THE PERIOD ENDED SEPTEMBER 30, 1998 AS PRESENTED IN ITS THIRD QUARTER 1998 FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND DISCLOSURES. 1,000 9-MOS DEC-31-1998 SEP-30-1998 25,865 1,222 10,000 0 200,786 6,189 6,189 324,336 4,385 592,222 469,039 35,940 12,301 10,000 0 0 43 64,898 592,222 20,748 9,442 626 30,816 11,553 13,167 17,649 600 216 15,284 7,737 2,441 0 0 2,441 1.29 1.29 4.50 954 647 0 0 4,145 471 111 4,385 1,866 0 2,519
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