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 March 31, 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 March 31, 1998:
Common Stock, $5 par value -- outstanding 2,061,738 shares
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
INDEX
PAGE
PART I. FINANCIAL INFORMATION
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
Informations 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 March 31, 1998 and is in-
corporated herein by referance 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 15
PART I. FINANCIAL INFORMATION
Item 1: Financial Statements
<TABLE>
<CAPTION>
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31 Dec. 31
1998 1997
ASSETS
<S> <C>
<C>
Cash and due from banks $ 27,078,563 $ 32,997,157
Int.-bearing deposits with other financial institutions 1,672,444 1,421,298
Federal funds sold 14,100,000 0
Securities held to maturity, fair value of
$8,722,817 in 1998 and $9,224,028 in 1997 8,722,817 9,224,028
Securities available for sale, at fair value 201,287,311 185,302,745
Loans, net of unearned income and deferred fees292,569,421 296,976,769
Allowance for loan losses (4,197,167) (4,145,422)
Loans, net 288,372,254
292,831,347
Bank premises and equipment, net 10,154,916 10,219,043
Intangible assets,
net of accumulated amortization 6,668,805 6,815,631
Other assets 10,817,144
10,123,203
Total assets $568,874,254
$548,934,452
LIABILITIES
Deposits: Non-interest bearing $ 83,054,856 $ 94,656,560
Interest bearing 378,233,801 356,387,782
Total deposits 461,288,657 451,044,342
Securities sold under agreement to repurchase 21,787,065 9,447,856
Federal Home Loan Bank Advances 10,000,000 16,300,000
Other liabilities 13,293,251 10,505,077
Total liabilities 506,368,973 487,297,275
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 10,101,804
Retained earnings 39,345,096 38,236,025
Treasury stock, at cost (88,329 shares in 1998 and 80,538 in 1997)(2,367,919)
(2,032,886)
Accumulated Other Comprehensive Income 4,675,965 4,581,899
Total shareholders' equity 62,505,281 61,637,177
Total liabilities & shareholders' equity $568,874,254 $548,934,452
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
3 Months Ended
March 31
INTEREST INCOME 1998 1997
<S> <C> <C>
Loans $6,601,795 $6,399,111
Securities 3,085,156 2,982,059
Federal funds sold 145,979 69,591
Interest bearing deposits 97,314 46,127
Total interest income 9,930,244 9,496,888
INTEREST EXPENSE
Deposits 3,733,259 3,488,028
Securities sold under agreement
to repurchase and funds borrowed 436,234 339,960
Total interest expense 4,169,493 3,827,988
Net interest income 5,760,751 5,668,900
Provision for loan losses 200,000 200,000
Net interest income after
provision for loan losses 5,560,751 5,468,900
Realized gains-security trans., Net 147,385 0
Other operating income 1,844,598 1,670,299
Total other operating income 1,991,983 1,670,299
Other operating expenses 4,931,619 4,914,434
Income before income taxes 2,621,115 2,224,765
Income taxes 872,906 747,261
Net Income $1,748,209 $1,477,504
Net Income per Share $.85 $0.71
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
<TABLE>
<CAPTION>
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
March 31
1998 1997
OPERATING ACTIVITIES
<S> <C>
<C>
Net income $ 1,748,209 $ 1,477,504
Adjustments to reconcile net income to net cash
provided by operating activities:
Amortization of intangible assets 146,826 146,826
Provision for loan losses 200,000 200,000
Depreciation and amortization 375,910 380,134
Amortization and discount on securities, net 21,393 78,874
Gain on sales of securities, net (147,385) 0
(Increase) decrease in other assets (693,941) (1,082,149)
Increase (decrease) other liabilities 2,729,281 (2,189,132)
Net cash provided (used) by operating activities 4,380,293 (987,943)
INVESTING ACTIVITIES
Proceeds from maturities of securities - AFS 13,639,209 6,808,442
Proceeds from maturities of securities -HTM 822,130 2,067,168
Proceeds from sales of securities - AFS 6,080,716 240
Purchases of securities - AFS (35,423,066) (5,000,000)
Purchases of securities - HTM (320,920) (3,550,572)
Purchases of premises and equipment, net (311,783) (172,145)
Loans, net of repayments and other reductions 3,973,136 (2,862,312)
Proceeds from sales of student loans 285,957 508,332
Net cash (used) by investing activities (11,254,621) (2,200,849)
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
NOW, savings and insured money market accounts(3,523,166) 7,510,672
Net increase (decrease) in certificates of
deposit and individual retirement accounts 13,767,481 2,818,399
Net increase (decrease) in securities sold under
agreements to repurchase 12,339,209 (5,048,234)
Net Increase (decrease) in Federal Home Loan Bank advances (6,300,000) 0
Sale of treasury shares 0 0
Purchase of treasury shares (335,033) 0
Cash dividends paid (641,611) (580,220)
Net cash provided (used) by financing activities 15,306,880 4,700,617
Net increase (decrease) in cash and
cash equivalents 8,432,552 1,511,825
Cash and cash equivalents at beginning of year 34,418,455 31,755,294
Cash and cash equivalents at end of period $42,851,007 $33,267,119
See Accompanying Notes to Condensed Consolidated Financial Statements
</TABLE>
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 March 31, 1998 and December 31,
1997, and results of operations and cash flows for the three month
periods ended March 31, 1998 and 1997.
3. Net income per share for the periods presented have been computed
by dividing net income by 2,061,741 weighted average shares
outstanding for the three month period ended March 31, 1998 and
2,072,214 weighted average shares outstanding for the three month
period ended March 31, 1997.
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 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 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. In
addition, the FASB is considering certain amendments and
interpretations of SFAS No. 125 which, if enacted in the future,
could affect the accounting for transactions within their scope.
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 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 three-month periods ended March 31,
1998 and 1997 was $1,842,275 and $219,375, respectively. The
following summarizes the components of other comprehensive income:
<TABLE>
<CAPTION>
Unrealized Gains or Losses on Securities:
<S> <C>
Unrealized holding losses during the
three months ended March 31, 1997,
net of tax (pre-tax amount of ($2,108,439)) $ (1,258,129)
Reclassification adjustment for gains or
losses realized in net income during the
three months ended March 31, 1997, net of
tax (pre-tax amount of $0) 0
Other comprehensive income-three months ended
March 31, 1997 $ (1,258,129)
Unrealized holding gains during the
three months ended March 31, 1998,
net of tax (pre-tax amount of $304,005) $ 182,585
Reclassification adjustment for gains
realized in net income during the
three months ended March 31, 1998, net of
tax (pre-tax amount of $147,385) (88,519)
Other comprehensive income-three months ended
March 31, 1998 $ 94,066
</TABLE>
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.
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operation
Total assets at March 31, 1998 were $568.9 million, an increase of
$19.9 million or 3.63% from the beginning of the year. This first quarter
growth is reflected in overnight investments (Federal Funds Sold and
Interest Bearing Deposits) and the securities portfolio which have
increased $14.4 million and $15.5 million respectively.
The Available for Sale segment of the securities portfolio totaled
$201.3 million as compared to $185.3 million at the beginning of the year,
an increase of 8.63%. At amortized cost, increases in Federal Agency Bonds
($13.2 million), Corporate Bonds ($5.1 million) and Mortgage Backed
Securities ($559 thousand) were somewhat offset by a $2.9 million decrease
in Municipal Bonds. The allowance valuation for Available for Sale
securities has increased $157 thousand since year end 1997. The Held to
Maturity segment of the portfolio consisting primarily of Municipal
Obligations totaled $8.7 million at March 31, 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 March 31, 1998
are set forth in the following tables:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE HELD TO
MATURITY
Amortized Fair Amortized Fair
Cost Value Cost Value
<S> <C> <C>
<C> <C>
U.S. Treasury and other
U.S. Govt. Agencies $106,812,193$106,893,238 $ - $ -
Mtg. Backed Securities 55,579,850 56,069,283 - -
Obligations of states and
Political subdivisions 22,462,47722,665,347 8,658,327 8,658,327
Other bonds and notes 5,188,660 5,137,470 64,490 64,490
Corporate Stocks 3,458,642 10,521,973 - -
$193,501,822$201,287,311 $ 8,722,817 $ 8,722,817
</TABLE>
The carrying value and weighted average yields based on amortized
cost by years to maturity for securities available for sale as of March 31,
1998 are as follows (excluding corporate stocks):
<TABLE>
<CAPTION>
Maturing
Within One Year After One, Within Five
Amount Yield Amount Yield
<S> <C> <C>
<C> <C>
U.S. Treasury and other
U.S. Government Agencies$ 17,044,5306.68% $ 51,172,708 6.08%
Mortgage Backed Securities - - 3,282,689 6.69%
Obligations of states and
political subdivisions 5,571,307 4.49% 9,795,869 4.64%
Other bonds and notes - - 2,556,220 6.28%
Total $ 22,615,837 6.14% $ 66,807,486 5.91%
</TABLE>
<TABLE>
<CAPTION>
Maturing
After Five, Within Ten After Ten Years
Amount Yield Amount Yield
<S> <C> <C>
<C> <C>
U.S. Treasury and other
U.S. Government Agencies$ 38,676,0006.63% $ - -
Mortgage Backed Securities - - 52,786,594 7.40%
Obligations of states and
political subdivisions 5,594,914 4.23% 1,703,257 3.09%
Other bonds and notes 2,581,250 6.31% - -
Total $ 46,852,164 6.36% $ 54,489,851 7.32%
</TABLE>
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 March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Maturing
Within One Year After One, Within Five
Amount Yield Amount Yield
<S> <C> <C>
<C> <C>
Obligations of states and
political subdivisions $ 6,036,609 3.92% $ 1,467,040 5.19%
Other bonds and notes - - - -
Total Bonds $ 6,036,609 3.92% $ 1,467,040 5.19%
</TABLE>
<TABLE>
<CAPTION>
Maturing
After Five, Within Ten After Ten Years
Amount Yield Amount Yield
<S> <C> <C>
<C> <C>
Obligations of states and
political subdivisions $ 1,154,678 3.93% $ - -
Other bonds and notes 64,490 8.25% - -
Total $ 1,219,168 4.16% $ - -
</TABLE>
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 March 31, 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:
<TABLE>
<CAPTION>
AVAILABLE FOR SALE
Unrealized Unrealized
Gains Losses
<S> <C> <C>
U.S. Treasury and other
U.S. Govt. Agencies $ 301,424 $ 220,379
Mtg. Backed Securities 520,331 30,898
Obligations of states and
Political subdivisions 240,894 38,024
Other bonds and notes 58 51,248
Corporate Stocks 7,063,331 -
$8,126,038 $ 340,549
</TABLE>
Realized net gains on sales of securities Available for Sale for the
three-month period ended March 31, 1998 were $147,385.
Included in the Corporate Stocks component in the above tables are
51,730 shares of SLM Holding Corp., formerly known as Student Loan
Marketing Association ("Sallie Mae") at a cost basis of $4,732 and fair
value of $2,256,721. 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 March 31, 1998, the bank's
equity portfolio held listed securities totaling $89,538 at cost with a
total fair value of $4,875,155. 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 17,972 shares of the
Federal Home Loan Bank of New York valued at $498,200 and $1,797,200
respectively. Management has no current plans for selling these
securities.
Total loan balances have decreased $4.4 million or 1.48% since the
beginning of the year. Of this decline, approximately $3.7 million is in
the business loan segment of our portfolio due to some large paydowns on
lines of credit. Total consumer loans are down $1.6 million centered
primarily in consumer installment loans and home equity loans which
declined $830 thousand and $895 thousand respectively. Additionally, there
was a $611 thousand seasonal decline in credit card oustandings. As
regards consumer installment loans, have begun to see an increase in
indirect auto financing activity which represents a major part of that
portfolio. We also introduced new home equity products late in the first
quarter in an effort to remain competitive in that area. The decreases
noted above were somewhat offset during the quarter with seasonal increases
in the student loan portfolio ($762 thousand), as well as a $909 thousand
increase in the mortgage portfolio where activity continues to be strong.
Total deposits at March 31, 1998 were $461.3 million as compared to
$451.0 million at the beginning of the year, an increase of $10.2 million
or 2.27%. While public fund balances were up $14.1 million, these
increases were somewhat offset by lower personal and non-personal balances
($1.6 million decrease) and a $2.3 million decrease in official checks
outstanding.
Of the $12.3 million increase in securities sold under agreements to
repurchase, $9.5 million is related to a term repurchase agreement with the
Federal Home Loan Bank which was used to leverage the purchase of a Federal
Agency bond.
Net earnings for the first quarter of 1998 were $1.748 million, an
increase of $271 thousand (18.32%) from the prior year. Net earnings per
share for the period were $0.85 on 2,061,741 average shares outstanding
versus $0.71 on 2,072,214 average shares outstanding the prior year.
Earnings for the first quarter were enhanced by realized after tax gains of
$89 thousand on the sale of approximately $5.9 million of municipal
obligations. In addition to the above, earnings for the first quarter of
1998 were positively impacted by a $92 thousand increase in Net Interest
Income as well as a $174 thousand (10.44%) increase in Other Operating
Income. Operating Expenses on the other hand increased only $17 thousand
(0.35%).
As indicated on the Condensed Consolidated Statement of Cash Flows,
cash and cash equivalents have increased $8.4 million since the beginning
of the year. In addition to cash provided by operating activities ($4.4
million), other primary sources of cash flow during the three month period
ended March 31, 1998 included proceeds from the sale and maturity of
investment securities ($20.5 million), an increase in deposit accounts
($10.2 million), an increase in securities sold under agreement to
repurchase ($12.3 million), and a $4.3 million reduction in net loan
balances. Cash proceeds generated from the above sources have been used
primarily to fund the purchase of investment securities ($35.7 million) and
repay overnight advances from the Federal Home Loan Bank ($6.3 million),
with excess funds invested in overnight Fed Funds and interest bearing
deposits.
During the three months ended March 31, 1998, the company acquired
7,791 treasury shares at an average price of $43.00 per share. No treasury
shares have been sold thusfar in 1998. During the quarter, the Company
declared a cash dividend of $0.31 per share.
Based upon loans outstanding, past experience, as well as an ongoing
review of the risk inherent in our loan portfolio, management has
maintained the loan loss provision for the first three months at $200
thousand which is equal to the amount expensed during the first three
months of 1997. At 212% of non-performing loans and 1.43% of total loans,
the Allowance for Loan Losses is viewed by management as adequate relative
to risk. Non-performing loans at March 31, 1998 constituted 0.68% of total
loans.
Changes in the allowance for loan losses for the three months ended
March 31, 1998 is as follows:
<TABLE>
<CAPTION>
March 31, 1998
Amount (000's)
<S> <C>
<C>
Balance at beginning of period $ $ 4,145
Charge-offs:
Domestic:
Commercial, financial and agricultural 9
Commercial mortgages 0
Residential mortgages 4
Consumer loans 167 $ 180
Recoveries:
Domestic:
Commercial, financial and agricultural $ 5
Commercial mortgages 0
Residential mortgages 0
Consumer loans 27
$ 32
Net charge-offs $ 148
Additions charged to operations 200
Balance at end of period $ 4,197
Ratio of net charge-offs during the period
to average loans outstanding during the period .05%
</TABLE>
Included in the allowance for loan losses at March 31, 1998 is an
allowance for impaired loans of $223 thousand versus $239 thousand at the
beginning of the year. The total recorded investment in these loans at
March 31, 1998 and December 31,1997 was $1.058 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 March 31, 1998, the allocation of the allowance for loan losses is
as follows:
<TABLE>
<CAPTION>
Reported Period
March 31, 1998
Balance at end of period
applicable to:
Percent of Loans in each
Amount Category to Total Loans
<S> <C> <C>
Domestic:
Commercial, financial
and agricultural 1,324,824 33.73%
Commercial mortgages 127,522 2.04%
Residential mortgages 24,615 25.50%
Consumer loans 708,371 38.73%
Unallocated: 2,011,835 N/A
Total $4,197,167 100.00%
</TABLE>
For the periods ended March 31, 1998 and December 31, 1997, the
following table summarized the Company's non-accrual and past due loans:
<TABLE>
<CAPTION>
Amounts (000's)
March 31, 1998 December 31, 1997
<S> <C>
<C>
Non-accrual loans $ 1,045 $ 930
Accruing loans past due$ 938 $ 688
90 days or more
</TABLE>
At March 31, 1998, the Company has no commercial loans for which
payments are presently current but the borrowers are currently experiencing
severe financial difficulties. At March 31, 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 March 31, 1998, the Company's consolidated leverage ratio was
9.31%. The Tier I and Total Risk Adjusted Capital ratios were 16.23% and
17.48%,
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 phase 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. As of
March 31, 1998, the awareness phase was complete and the assessment phase
90% complete. The financial implications to the Company will be determined
upon completion of the assessment phase of the project.
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 chairman of the board,
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 March 31,1998 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 March 31, 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. 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 to April 9, 1997
are incorporated herein by reference to Exhibit A of the
registrant's Form 10-Q for the quarter ended June 30, 1997,
File No.0-13888.
(27) Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
During the quarter ended March 31, 1998, no reports on Form
8-K or amendments to any previously-filed Form 8-K were
filed 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: May 14, 1998 /s/ Jan P.
Updegraff
Jan P. Updegraff
President & CEO
DATE: May 14, 1998 /s/ John R.
Battersby Jr.
John R. Battersby Jr.
Treasurer
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
REGISTRANT'S UNAUDITED QUARTERLY FINANCIAL STATEMENTS AND DISCLOSURES FOR THE
PERIOD ENDED MARCH 31, 1998 AS PRESENTED IN ITS FIRST QUARTER 1998 FORM 10-Q AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS AND
DISCLOSURES.
</LEGEND>
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