CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

See accompanying notes to condensed consolidated financial statements.

4. Other Comprehensive Income

The review that follows focuses on the significant factors affecting the financial condition and results of operations of Chemung Financial Corporation during the three month and nine month periods ended September 30, 2000, with comparisons to the comparable period in 1999 as applicable. The condensed consolidated interim financial statements and related notes, as well as the 1999 Annual Report to Shareholders', should be read in conjunction with this review. Amounts in prior period condensed consolidated interim financial statements are reclassified whenever necessary to conform to the current period presentation.

Statements included in this review and in future filings by Chemung Financial Corporation with the Securities and Exchange Commission, in Chemung Financial Corporation press releases, and in oral statements made with the approval of an authorized executive officer, which are not historical or current facts, are "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Chemung Financial Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, in some cases have affected and in the future could affect Chemung Financial Corporation's actual results, and could cause Chemung Financial Corporation's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation to subsequently revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

Passage of the Gramm-Leach-Bliley Act during the fourth quarter of 1999 permitted qualified bank holding companies to elect to become financial holding companies and to engage in expanded financial activities. During the second quarter of 2000, Chemung Financial Corporation exercised this election, and on June 22, 2000 received approval from the Federal Reserve Bank of New York. This provides the Company with the flexibility to offer a wider array of financial services, such as insurance products, mutual funds, and brokerage services. This will allow us to better serve the needs of our clients as well as provide an additional potential source of non-interest income.

Total assets at September 30, 2000 were $679.4 million, an increase of $26.2 million or 4.0% since the beginning of the year. The most significant change has been an increase in earning assets of $31.8 million or 5.3%. This change is the result of a $29.3 million or 8.1% increase in our loan portfolio, and a $10.9 million increase in overnight investments, offset somewhat by an $8.4 million or 3.6% decrease in our securities portfolio.

The Available for Sale segment of the securities portfolio at September 30, 2000 totaled $220.3 million as compared to $227.4 million at the beginning of the year, a decrease of 3.1%. At amortized cost, decreases in Federal Agency Bonds ($20.4 million), U.S. Treasury Notes ($1.5 million) and Municipal Bonds ($2.4 million) were somewhat offset by increases in Mortgage Backed Securities ($13.0 million), Corporate Bonds ($1.8 million) and a $400 thousand equity investment in Statewide Zone Capital Corporation of New York, a corporation formed to promote economic activity through loan programs offered to businesses located within Economic Development Zones throughout New York State. The pre-tax valuation adjustment for net unrealized gains (losses) within the available for sale securities portfolio improved by $2.0 million from a net loss of $504 thousand at December 31, 1999 to a net gain of $1.5 million at September 30, 2000. Much of the above changes are reflective of the fact that during the third quarter, the Company sold approximately $25.0 million of lower yielding Agency bonds and replaced those investments with higher yielding Mortgage Backed Securities, Federal Agency and Corporate Bonds. The Held to Maturity segment of the portfolio, consisting primarily of Municipal Obligations, totaled $7.3 million as compared to $8.6 million at the end of 1999, a decrease of $1.3 million or 15.6%.

As noted above, total loans have increased $29.3 million or 8.1% since the beginning of the year. $18.9 million or 64.6% of this increase has occurred in business loans, which have grown 14.4% since the beginning of the year. Total consumer loans have increased by $9.0 million or 6.7%, the most significant factor being the growth in indirect auto loans. While mortgage activity has been somewhat slow, we have seen an increase of $1.3 million or 1.4% since year end 1999.

The growth in earning assets has been funded by a $52.3 million or 10.9% increase in deposits since year end. Demand deposits are up $9.5 million or 9.6%, while interest bearing deposits have increased $42.9 million or 11.2%. Since year end, public fund balances have grown by $26.9 million, with personal and non-personal balances increasing $25.4 million. The growth in deposits, as well as proceeds from maturities and paydowns in the bond portfolio, has not only funded the growth in earning assets experienced during the first nine months of this year, but has also enabled us to reduce overnight advances from the Federal Home Loan Bank by $29.7 million.

Net income for the third quarter totaled $2.208 million, an increase of $70 thousand or 3.3% as compared to third quarter 1999 results. Earnings per share increased from $0.52 during the third quarter of 1999 to $0.54 in the third quarter of 2000. As noted under the discussion of financial condition, during the quarter the Company sold approximately $25.0 million of securities, realizing a pre-tax loss of $58 thousand. Excluding the after-tax impact of this transaction, all other net operating earnings were up $105 thousand or 4.9%. With proceeds from this sale re-invested at a yield approximately 205 basis points higher than the yield on the securities sold, this transaction will positively impact future earnings.

Net interest income after the provision for loan losses increased $61 thousand or 1.0%. Total interest and dividend income on earning assets was $12.261 million as compared to $11.142 million in the third quarter of 1999. This increase is attributable to both a $25.4 million increase in average earning assets and a 43 basis point increase in yield on those assets from 7.40% to 7.83%. The increase in average earning assets was generated by a $39.4 million increase in average loans, offset by a $6.1 million decrease in the average securities portfolio balances and a $7.9 million decrease in average overnight investment of excess funds. Total average funding liabilities have increased $26.8 million or 4.7% when compared to the third quarter of 1999. The interest expense associated with these liabilities totaled $5.751 million as compared to $4.748 million during the third quarter of 1999. The cost of funds, including the effect of non-interest bearing funding sources (such as demand deposits), increased 53 basis points from 3.30% to 3.83%. Net interest margin, which is net interest income divided by average earning assets, was 4.16% during the third quarter of 2000 compared to 4.25% during the third quarter of 1999.

Non-interest income, excluding securities gains, increased $184 thousand or 7.7%. Income from our trust and investment services division, the largest component of non-interest income, is up $42 thousand or 3.5%. Other significant increases were realized in credit card merchant earnings (+$61 thousand), service charges (+$93 thousand) and checkcard interchange income (+$28 thousand). Income from our equity investment in Cephas Capital Partners LLP was $41 thousand lower than a year ago due to the fact that in 1999 this partnership realized a $161 thousand gain on an equity holding, our portion of that gain being approximately $40 thousand.

Operating expenses have increased $324 thousand or 6.1%. Significant items influencing this include increases in salaries and benefits (+$122 thousand), credit card processing fees (+$60 thousand) and equipment service costs (+$64 thousand).

While pre-tax earnings were down $139 thousand, the Company's income tax expense was approximately $209 thousand lower than the third quarter of 1999. The reasons for this tax reduction include a significantly higher level of tax exempt loans in 2000 compared to 1999 as well as a N.Y.S. tax credit related to our $400 thousand investment in the Statewide Zone Capital Corporation of New York. Additionally, during the third quarter of 1999 we recognized $87 thousand in additional tax expense related to the impact of phased in New York State tax rate reductions on deferred tax assets and liabilities.

Net income for the nine month period ended September 30, 2000 was $6.290 million, a 4.1% increase as compared to September 30, 1999 results. Earnings per share increased 5.5%, from $1.46 to $1.54 on 44,663 fewer average shares outstanding. Pre-tax gains on the sale of securities in 1999 totaled $150 thousand as compared to a loss of $57 thousand in 2000. Excluding the after-tax impact of these gains and losses, all other net operating earnings were up approximately 6.3%. Year to date comparative results have been impacted by higher volumes of average earning assets offset to some extent by lower interest margins, as well as increased non-interest income and operating expenses.

Net interest income after the provision for loan losses is up $587 thousand or 3.2% as compared to the first nine months of 1999. Total interest and dividend income on earning assets was $35.648 million as compared to $32.552 million a year earlier. On average, total earning assets increased by $28.5 million or 4.9%, and the yield on these assets was up 32 basis points from 7.40% to 7.72%. The increase in average earning assets was primarily due to a $38.9 million or 11.3% increase in average loans outstanding. Additionally, investment securities were up $902 thousand on average, while overnight investment of excess funds declined $11.2 million. Interest expense for the nine month period ended September 30, 2000 totaled $16.327 million as compared to $13.847 million a year ago. This increase is reflective of both a $27.6 million or 4.9% increase in average funding liabilities, as well as a 40 basis point increase in the cost of funds, from 3.28% to 3.68%. The above yields and costs have resulted in a 7 basis point decline in net interest margin, from 4.25% to 4.18%.

Non-interest income, excluding securities gains and losses, has increased $708 thousand or 10.6% to $7.395 million. Income from our trust and investment services division is up $267 thousand or 7.7% to $3.758 million. We have seen other significant increases in credit card merchant earnings (+$164 thousand), service charges (+$168 thousand) and checkcard interchange income (+$98 thousand).

Operating expenses year to date have increased $1.028 million or 6.5%. Salaries and benefits, the largest operating expense item, has increased $259 thousand to $8.071 million. Other expense items which have significantly impacted this increase include advertising (+$82 thousand), Federal Reserve charges (+$85 thousand), credit card processing costs (+$129 thousand) and equipment service (+ $117 thousand).

While income before taxes has grown $59 thousand or 0.6%, the income tax expense is $190 thousand lower than a year ago for reasons noted earlier in this discussion.

During the first nine months of 2000, cash and cash equivalents increased by $4.8 million as compared to an increase of $1.3 million during the first nine months of 1999. In addition to cash provided by operating activities, other primary sources of cash in 2000 included an increase in deposits ($52.3 million), proceeds from maturities, sales and principal payments on securities ($41.5 million), and proceeds from the sale of student loans ($2.2 million). In addition to cash provided by operating activities, the primary cash flow sources in 1999 included an increase in deposits ($36.3 million), proceeds from maturities, sales and principal payments on securities ($58.9 million), and the sale of student loans ($2.3 million).

Cash generated in both years has been used primarily to fund growth in earning assets as well as reduce Federal Home Loan Bank advances. During the first nine months of 2000, the purchase of securities and the funding of loans, net of repayments, totaled $31.3 million and $32.0 million, respectively. Also, during the first nine months of 2000 Federal Home Loan Bank advances were reduced by $29.7 million. Other significant uses of cash during the first nine months of 2000 included the payment of cash dividends ($2.5 million) and investment in premises and equipment ($2.7 million). During the first nine months of 1999, the purchase of securities and funding of loans, net of repayments, totaled $67.2 million and $27.1 million, respectively. Also, during the first nine months of 1999 Federal Home Loan Bank advances were reduced by $4.0 million. In addition to the above, the Company paid $2.2 million in cash dividends and invested $2.4 million in premises and equipment during the first nine months of 1999.

During the first nine months of 2000, the Company acquired 8,232 treasury shares at an average price of $22.41 per share, and issued from treasury 4,802 shares to fund a distribution related to our directors' deferred compensation plan. During the third quarter, the Company declared a cash dividend of $0.22 per share, a 15.8% increase when compared to the $0.19 per share dividend declared during the third quarter of 1999. Cash dividends declared year to date total $0.64 per share as compared to $0.55 per share last year, an increase of 16.4%.

As of September 30, 2000, the Company's consolidated leverage ratio was 9.60%. Tier I and Total Risk Adjusted Capital ratios were 15.23% and 16.34%, respectively. All of the above ratios are in excess of the requirements for being considered "well capitalized" by the FDIC, the Federal Reserve and the New York State Banking Department.

Based upon loans outstanding, past experience, as well as an ongoing review of the risk inherent in our loan portfolio, the amount expensed to the loan loss provision for the first nine months of 2000 totaled $563 thousand as compared to $533 thousand expensed during the first nine months of 1999. At 1.20% of total loans at September 30, 2000, the allowance for loan losses is viewed by management as reasonable and adequate relative to the inherent risk of loss in the loan portfolio. The allowance for loan losses to total loans at December 31, 1999 was 1.30%. Non-performing loans on September 30, 2000 constituted 0.39% of total loans as compared to 1.35% on September 30, 1999 and 0.39% on December 31, 1999. The reduction of non-performing loans from September 30, 1999 to September 30, 2000 relates primarily to one real estate secured commercial loan which was paid in full during the fourth quarter of 1999.

The provision for loan losses in both the year to date and quarter to date periods of 2000 are relatively consistent with 1999. This is primarily due to the continued growth in the loan portfolio and the changing mix of the portfolio, with an increasing percentage of the overall loan portfolio in commercial related loans and consumer loans. These categories of loans generally have more inherent credit risk than residential 1-4 family loans.

Changes in the allowance for loan losses for the nine month periods ended September 30, 2000 and 1999, are as follows (in thousands of dollars):

At September 30, 2000 and December 31, 1999, the following table summarizes the Company's non-accrual, past due and troubled debt restructured loans (in thousands):

At September 30, 2000, the Company has no commercial loans for which payments are presently current but the borrowers are currently experiencing severe financial difficulties. At September 30, 2000, no loan concentrations to borrowers engaged in the same or similar industries exceeded 10% of total loans and the Company has no interest-bearing assets other than loans that meet the non-accrual, past due, restructured or potential problem loan criteria.

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 and on other interest bearing liabilities is affected by changes to market interest rates. Additionally, because of assumptions made relative 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, chief 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, 2000 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. The ALCO recognizes that the assumptions made are inherently uncertain.

Additionally, 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 shareholders in the event of adverse changes to interest rates, and as of September 30, 2000 exposure to changing interest rates is within the risk limits established.

There have been no material changes in the Company's interest rate risk position since December 31, 1999. Other types of market risk, such as foreign exchange rate risk and commodity price risk do not arise in the normal courses of the Company's business activities.