UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2009
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-13888
CHEMUNG FINANCIAL CORPORATION
NEW YORK
16-123703-8
One Chemung Canal Plaza, P.O. Box 1522Elmira, New York
14902
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 $0.01 a share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES [ ] NO [X]
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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 [ ]
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES [ ] NO [ ]
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. [X]
Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
[ ]
Non-accelerated filer
[X]
Accelerated filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Based upon the closing price of the registrant's Common Stock as of June 30, 2009, the aggregate market value of the voting stock held by non-affiliates of the registrant was $38,151,088.
As of February 28, 2010 there were 3,527,135 shares of Common Stock, $0.01 par value outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 5, 2010 are incorporated by reference into Part III, Items 10, 11, 12, 13, and 14 of this Form 10-K.
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ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2009
Form 10-K Item Number:
Page No.
PART I
3
Item 1. Business
Item 1A. Risk Factors
10
Item 1B. Unresolved Staff Comments
12
Item 2. Properties
Item 3. Legal Proceedings
13
Item 4. Submission of Matters to a Vote of Security Holders
PART II
Item 5. Market for Registrant's Common Equity, Related StockholderMatters and Issuer Purchases of Equity Securities
Item 6. Selected Financial Data
15
Item 7. Management's Discussion and Analysis of Financial Condition andResults of Operation
16
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
33
Item 8. Financial Statements and Supplementary Data
Item 9. Changes in and Disagreements with Accountants on Accounting andFinancial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
34
PART III
35
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management,and Related Stockholder Matters
36
Item 13. Certain Relationships and Related Transactions, DirectorIndependence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Index to Consolidated Financial Statements
38
Report of Independent Registered Public Accounting Firm-Crowe Horwath LLP
F-1
SIGNATURES
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Some of the information contained in this report concerning the markets and industry in which we operate is derived from publicly available information and from industry sources. Although we believe that this publicly available information and information provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.
ITEM 1. BUSINESS
Chemung Financial Corporation (the "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 Chemung Canal Trust Company (the "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, and its name was changed to Chemung Canal Trust Company in 1903.
The Corporation has been a financial holding company since June 22, 2000. This provides the Corporation with the flexibility to offer an array of financial services, such as insurance products, mutual funds, and brokerage services. The Corporation believes that this allows it to better serve the needs of its clients as well as provide an additional source of fee based income. To that end, the Corporation established a financial services subsidiary, CFS Group, Inc., which commenced operations during September 2001. As such, the Corporation now operates as a financial holding company with two subsidiaries, Chemung Canal Trust Company, a full-service community bank with full trust powers, and CFS Group, Inc., a subsidiary offering non-banking financial services such as mutual funds, annuities, brokerage services and insurance.
The Securities and Exchange Commission (the "SEC") maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding the Corporation. You may also read and copy materials we file with the SEC at the SEC's Public Reference Room at 100 F St., NE, Washington, D.C. 20549. You may obtain information concerning the operation of the Public Reference Room by calling 1-800-SEC-0330. In addition, we maintain a corporate web site at www.chemungcanal.com. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act and filed with the SEC. These items are available as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. The contents of our web site are not a part of this report. These materials are also available free of charg e by written request to: Jane H. Adamy, Senior Vice President and Secretary, Chemung Canal Trust Company, One Chemung Canal Plaza, Elmira, NY 14901.
Description of Business
Business
The Bank is a New York chartered 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, regular savings accounts, insured money market accounts, investment certificates, fixed-rate certificates of deposit and club accounts. The Bank's 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), and making commercial, residential and home equity mortgage loans, revolving credit loans with overdraft checking protection and small business loans. Additional services include renting safe deposit facilities and the provision of networked automated teller facilities.
Trust services provided by the Bank include services as executor and trustee under wills and agreements, and guardian, custodian, 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.
CFS Group, Inc., a wholly owned subsidiary of the Corporation, commenced operations in September 2001 and offers an array of financial services including mutual funds, full and discount brokerage services, annuity and other insurance products and tax preparation services.
==========================================3==========================================For additional information, which focuses on the results of operations of the Corporation and its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.
There have been no material changes in the manner of doing business by the Corporation or its subsidiaries during the fiscal year ended December 31, 2009.
Market Area and Competition
Seven of the Bank's 23 full-service offices, including the main office, are located in Chemung County, New York. The Bank has thirteen full-service offices located in the adjacent counties of Broome, Schuyler, Steuben, Tioga and Tompkins, with a Trust and Investment Center located in Herkimer County within New York State and 3 full-service offices located in Bradford County, Pennsylvania. The Corporation defines its primary market areas as those areas within a 25-mile radius of its offices in Broome, Chemung, Herkimer, Steuben, Schuyler, Tioga and Tompkins counties, including the northern tier of Pennsylvania. The Bank's lending policy restricts substantially all lending efforts to these geographical regions.
Within these market areas, the Bank encounters intense competition in the lending and deposit gathering aspects of its business from commercial and thrift banking institutions, credit unions and other providers of financial services, such as brokerage firms, investment companies, insurance companies and Internet vendors. The Bank also competes with non-financial 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. Unlike the Bank, many of these competitors are not subject to regulation as extensive as that of the Bank and, as a result, they may have a competitive advantage over the Bank in certain respects. This is particularly true of credit unions because their pricing structure is not encumbered by income taxes.
Competition for the Bank's Trust Department investment services comes primarily from brokerage firms and independent investment advisors. These firms devote much of their considerable resources toward gaining larger positions in these markets. The market value of the Bank's trust assets under administration totaled approximately $1.6 billion at year-end 2009. The Trust and Investment Division is responsible for the largest component of non-interest revenue.
The Corporation is regulated under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is subject to the supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"). As a bank holding company, the Corporation generally may engage in the activities permissible for a bank holding company, which include banking, managing or controlling banks, performing certain servicing activities for subsidiaries, and engaging in other activities that the Federal Reserve Board has determined to be so closely related to banking as to be a proper incident thereto. Because the Corporation also has elected financial holding company status, it may also engage in a broader range of activities that are determined by the Federal Reserve and the Secretary of the Treasury to be financial in nature or incidental to financial activities or activities that are determined by the Federal Reserve Board to be complementary to a financial activity and that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
The Bank is chartered under the laws of New York State and is supervised by the New York State Banking Department ("NYSBD"). The Bank also is a member bank of the Federal Reserve System and, therefore, the Federal Reserve Board serves as its primary federal regulator.
CFS Group, Inc. is subject to supervision by other regulatory authorities as determined by the activities in which it is engaged. Insurance activities are supervised by the New York State Insurance Department, and brokerage activities are subject to supervision by the SEC and the Financial Industry Regulatory Authority ("FINRA").
The Corporation is subject to capital adequacy guidelines of the Federal Reserve Board. The guidelines apply on a consolidated basis and require bank holding companies to maintain a minimum ratio of Tier 1 capital to total assets (or "leverage ratio") of 4%. For the most highly rated bank holding companies, the
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minimum ratio is 3%. The Federal Reserve Board capital adequacy guidelines also require bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of 8%. Any bank holding company whose capital does not meet the minimum capital adequacy guidelines is considered to be undercapitalized, and is required to submit an acceptable plan to the Federal Reserve Board for achieving capital adequacy. In addition, an undercapitalized company's ability to pay dividends to its shareholders and expand its lines of business through the acquisition of new banking or non-banking subsidiaries also could be restricted by the Federal Reserve Board. The Federal Reserve Board may set higher minimum capital requirements for bank holding companies whose circumstances warrant it, such as companies anticipating significant growth or facing unusual risks. As of December 31, 2009, the Corporation's leverag e ratio was 7.89%, its ratio of Tier 1 capital to risk-weighted assets was 11.61% and its ratio of qualifying total capital to risk-weighted assets was 13.22%. The Federal Reserve Board has not advised the Corporation that it is subject to any special capital requirements.
The Bank is subject to leverage and risk-based capital requirements and minimum capital guidelines of the Federal Reserve Board that are similar to those applicable to the Corporation. As of December 31, 2009, the Bank was in compliance with all minimum capital requirements. The Bank's leverage ratio was 7.55%, its ratio of Tier 1 capital to risk-weighted assets was 11.12%, and its ratio of qualifying total capital to risk-weighted assets was 12.73%.
The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Corporation. Under Federal Reserve Board and NYSBD regulations, the Bank may not pay a dividend without prior approval of the Federal Reserve and the NYSBD if the total amount of all dividends declared during such calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two calendar years. As of December 31, 2009, approximately $2.0 million was available for the payment of dividends by the Bank to the Corporation without prior approval, after giving effect to the payment of dividends in the fourth quarter of 2009. The Bank's ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements.
The deposits of the Bank are insured up to regulatory limits by the Federal Deposit Insurance Corporation (the "FDIC") and are subject to the deposit insurance premium assessments of the Deposit Insurance Fund ("DIF"). The FDIC currently maintains a risk-based assessment system under which assessment rates vary based on the level of risk posed by the institution to the DIF. For institutions that have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and its debt rating. For institutions such as the Bank that do not have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and certain financial ratios and other measurements of its financial condition. The assessment rate may, therefore, change after any of these measurements change.
Effective November 17, 2009, the FDIC also amended its regulations to require all insured institutions to prepay their risk-based deposit insurance assessments for the fourth quarter of 2009 and all of 2010, 2011, and 2012. These prepayments were collected on December 30, 2009, along with each institution's regular quarterly risk-based deposit insurance assessment for the third quarter of 2009.
In addition, all institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the FICO bonds mature in 2017. The FDIC's FICO assessment authority is separate from its authority to assess risk-based premiums for deposit insurance. The FICO assessment rate is adjusted quarterly to reflect changes in the assessment bases of the fund and is not risk-based by institution. The FICO assessment rate
=========================================5==========================================
for the first quarter of 2010, due December 30, 2009, was 1.060% of insured deposits.
The Federal Deposit Insurance Reform Act of 2005 also gave a credit to all insured depository institutions to be used as an offset to the institutions' assessments. The Bank received a $598,000 credit, which entirely offset its 2007 and partially offset its 2008 deposit insurance settlement. Due to the full utilization of the credit in 2008, the systemic increase in deposit insurance assessments and the emergency special assessment, the Bank will be subject to increased deposit premium expenses in future periods.
On October 14, 2008, the FDIC announced the Temporary Liquidity Guarantee Program ("TLGP"), which provides unlimited deposit insurance on funds invested in noninterest-bearing transaction deposit accounts in excess of the existing deposit insurance limit of $250,000. Participating institutions will be assessed a $0.10 surcharge per $100 of deposits above the existing deposit insurance limit. The TLGP also provides that the FDIC, for an additional fee, will guarantee qualifying senior unsecured debt issued prior to October 2009 by participating banks and certain qualifying holding companies. The Bank and the Corporation have elected to opt in to both portions of the TLGP.
In 2007, the Federal Reserve Board and SEC issued Regulation R to clarify that traditional banking activities involving some elements of securities brokerage activities, such as most trust and fiduciary activities, may continue to be performed by banks rather than being "pushed" out to affiliates supervised by the SEC. These rules took effect for the Bank on January 1, 2009.
The GLB Act and FCRA also impose requirements regarding data security and the safeguarding of customer information. The Bank is subject to the Interagency Guidelines Establishing Information Security Standards (Security Guidelines), which implement section 501(b) of the GLB Act and section 216 of the FACT Act. The Security Guidelines establish standards relating to administrative, technical, and physical safeguards to ensure the security, confidentiality, integrity and the proper disposal of customer information. The Bank believes it is in compliance with all such standards.
Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries
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from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial Institution, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the GLB Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act, which applies to the Bank, or the BHC Act, which applies to the Corporation.
The Sarbanes-Oxley Act of 2002 implemented a broad range of measures to increase corporate responsibility, enhance penalties for accounting and auditing improprieties at publicly traded companies, and protect investors by improving the accuracy and reliability of corporate disclosures for companies that have securities registered under the Exchange Act, including publicly-held financial holding companies such as the Corporation. It includes very specific additional disclosure requirements and corporate governance rules, and the SEC and securities exchanges have adopted extensive additional disclosures, corporate governance and other related rules pursuant to its mandate. The Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. In addition, the federa l banking regulators have adopted generally similar requirements concerning the certification of financial statements by bank officials.
Home mortgage lenders, including banks, are required under the Home Mortgage Disclosure Act to make available to the public expanded information regarding the pricing of home mortgage loans, including the "rate spread" between the interest rate on loans and certain Treasury securities and other benchmarks. The availability of this information has led to increased scrutiny of higher-priced loans at all financial institutions to detect illegal discriminatory practices and to the initiation of a limited number of investigations by federal banking agencies and the U.S. Department of Justice. The Corporation has no information that it or its affiliates are the subject of any investigation.
In the past two years, declining housing values have resulted in deteriorating economic conditions across the U.S., resulting in significant writedowns in the values of mortgage-backed securities and derivative securities by financial institutions, government sponsored entities, and major commercial and investment banks. This has led to decreased confidence in financial markets among borrowers, lenders, and depositors as well as extreme volatility in the capital and credit markets and the failure of some entities in the financial sector. The Company is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country.
In response to the financial crises affecting the banking system and financial markets, there have been several recent announcements of Federal programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of, the industry.
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. The EESA authorized the U.S. Treasury to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Corporation did not originate or invest in sub-prime assets and, therefore, has not participated in the sale of any of our assets into these programs. EESA also increased the FDIC deposit insurance limit for most accounts from $100,000 to $250,000 through December 31, 2009; this increase was extended to December 31, 2013 by the Helping Families Save Their Homes Act of 2009, which was signed into law on May 20, 2009.
On October 14, 2008, the U.S. Treasury announced that it would purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program"), the U.S. Treasury committed to making $250 billion of capital available (from the $700 billion authorized by the EESA) to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the U.S. Treasury receives warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions are required to adopt the U.S. Treasury's standards for executive compensation and
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corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program, as well as the more stringent executive compensation limits enacted as part of the American Recovery and Reinvestment Act of 2009 (the "ARRA" or "Stimulus Bill"), which was signed into law on February 17, 2009. The Corporation chose not to participate in the TARP Capital Purchase Program.
Employees
As of December 31, 2009, the Corporation and its subsidiaries employed 327 persons on a full-time equivalent basis. None of the Corporation's employees are covered by collective bargaining agreements, and the Corporation believes that its relationship with its employees is good.
Financial Information About Foreign and Domestic Operations and Export Sales
Neither the Corporation nor its subsidiaries relies on foreign sources of funds or income.
Statistical Disclosure by Bank Holding Companies
The following disclosures present certain summarized statistical data covering the Corporation and its subsidiaries. See also Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, of this report for other required statistical data.
Investment Portfolio
The following table sets forth the carrying amount of available for sale and held to maturity investment securities at the dates indicated (in thousands of dollars):
December 31,
2009
2008
2007
Obligations of U.S. Government and U.S Governmentsponsored enterprises
$ 84,621
$ 61,543
$ 81,943
Mortgage-backed securities, residential
93,945
102,933
56,285
Obligations of states and political subdivisions
44,284
24,859
17,963
Corporate bonds and notes
12,185
1,750
2,359
Trust preferred securities
2,261
3,285
2,083
Corporate stocks
5,847
5,324
9,168
Total
$243,143
$199,694
$169,801
Included in the above table are $230,984, $191,255 and $165,321 (in thousands of dollars) of securities available for sale at December 31, 2009, 2008 and 2007, respectively. Also included in the above table are $12,160, $8,439 and $4,480 (in thousands of dollars) of securities held to maturity at December 31, 2009, 2008 and 2007, respectively.
The following table sets forth the carrying amounts and maturities of debt securities at December 31, 2009 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security). Federal tax equivalent adjustments have not been made in calculating yields on municipal obligations (in thousands of dollars):
Maturing
Within One Year
After One, But Within Five Years
Amount
Yield
$ 54,164
2.38%
$ 20,511
2.37%
5,567
3.56%
88,145
4.23%
10,581
2.45%
20,491
2.80%
707
2.21%
11,478
4.40%
-
$ 71,019
2.48%
$140,625
3.76%
After Five, But Within Ten Years
After Ten Years
$ 9,946
3.40%
$ -
- -
233
3.16%
13,012
3.36%
200
5.90%
6.08%
$ 22,959
3.38%
$ 2,694
5.87%
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Loan Portfolio
The following table shows the Corporation's loan distribution at the end of each of the last five years, net of deferred origination fees and costs, and unearned income (in thousands of dollars):
2006
2005
Commercial, financial and agricultural
$121,234
$123,857
$131,219
$138,338
$140,781
Commercial mortgages
120,913
91,882
70,632
54,666
41,571
Residential mortgages
162,087
156,150
159,087
133,286
97,199
Indirect consumer loans
92,902
99,723
89,609
65,853
59,676
Consumer loans
96,467
91,137
86,572
83,733
78,522
Net deferred origination fees and costs, and unearned income
2,250
2,436
2,403
1,788
936
$595,853
$565,185
$539,522
$477,664
$418,685
The following table shows the maturity of loans (excluding residential mortgages, indirect consumer, and consumer loans) outstanding as of December 31, 2009. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates (in thousands of dollars):
After One But Within Five Years
AfterFive Years
$52,308
$57,431
$132,408
$242,147
Loans maturing after one year with:
Fixed interest rates
N/A
$29,445
$ 14,015
$ 43,460
Variable interest rates
27,986
118,393
146,379
$189,839
At December 31, 2009, the Corporation had no loan concentrations to borrowers engaged in the same or similar industries that exceed 10% of total loans.
Allocation of the Allowance for Loan Losses
The allocated portions of the allowance reflect management's estimates of specific known risk elements in the respective portfolios. Management's methodology followed in evaluating the allowance for loan losses includes a detailed analysis of historical loss factors for pools of similarly graded loans, as well as specific collateral reviews of relationships graded special mention, substandard or doubtful with outstanding balances of $1.0 million or greater. Among the factors considered in allocating portions of the allowance by loan type are the current levels of past due, non-accrual and impaired loans, as well as historical loss experience and the evaluation of collateral. In addition, management has formally documented factors considered in determining the appropriate level of unallocated allowance, including current economic conditions, forecasted trends in the credit quality cycle, loan growth, entry into new markets, and industry and peer group trends. Beginning in 2007, these amounts, which had pre viously been shown as unallocated, have been included in the allocated portion of the loan categories to which they relate. The following table summarizes the Corporation's allocation of the loan loss allowance for each year in the five-year period ended December 31, 2009:
Amount of loan loss allowance (in thousands) and Percent of Loansby Category to Total Loans (%)
Balance at end of period applicable to:
%
$3,133
20.3
$3,854
21.9%
$3,955
24.3
$4,122
29.0
$2,990
33.7
3,073
3,058
16.2%
3,113
13.1
2,473
11.4
3,530
10.0
1,125
27.3
753
27.7%
479
29.6
214
28.0
342
23.3
2,636
32.1
1,441
34.2%
906
33.0
574
31.6
846
9,967
100.0
9,106
8,453
7,383
7,708
Unallocated
600
2,070
$9,967
$9,106
$8,453
$7,983
$9,778
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Deposits
The average daily amounts of deposits and rates paid on such deposits is summarized for the periods indicated in the following table (in thousands of dollars):
Year Ended December 31,
Rate
Non-interest-bearing demand deposits
$176,305
-%
$156,191
- %
$146,379
Interest-bearing demand deposits
47,250
0.17%
41,282
0.60%
37,551
0.36%
Savings and insured money market deposits
245,425
0.58%
195,602
1.08%
164,288
1.78%
Time deposits
283,408
2.44%
256,661
3.57%
244,343
4.44%
$752,388
$649,736
$592,561
Scheduled maturities of time deposits at December 31, 2009 are summarized as follows (in thousands of dollars):
2010
$208,698
2011
44,416
2012
16,165
2013
7,163
2014
5,947
Thereafter
78
$282,467
Maturities of time deposits in denominations of $100,000 or more outstanding at December 31, 2009 are summarized as follows (in thousands of dollars):
3 months or less
$ 28,068
Over 3 through 6 months
16,587
Over 6 through 12 months
25,056
Over 12 months
18,898
$ 88,609
Return on Equity and Assets
The following table shows consolidated operating and capital ratios of the Corporation for each of the last three years:
Return on average assets
0.56%
1.00%
0.95%
Return on average equity
6.13%
9.36%
8.58%
Dividend payout ratio
67.30%
42.07%
47.02%
Average equity to average assets ratio
9.19%
10.65%
11.03%
Year-end equity to year-end assets ratio
9.23%
9.90%
11.17%
Short-Term Borrowings
For each of the three years in the period ended December 31, 2009, the average outstanding balance of short-term borrowings did not exceed 30% of shareholders' equity.
Securities Sold Under Agreements to Repurchase and Federal Home Loan Bank ("FHLB") Advances
Information regarding securities sold under agreements to repurchase and FHLB advances is included in notes 9 and 10 to the consolidated financial statements appearing elsewhere in this report.
ITEM 1A. RISK FACTORS
The Corporation's business is subject to many risks and uncertainties. Although the Corporation seeks ways to manage these risks and develop programs to control those that management can, the Corporation ultimately cannot predict the extent to which these risks and uncertainties could affect results. Actual results may differ materially from management's expectations. The material risks and uncertainties that management believes affect the Corporation are discussed below.
Deterioration in local and national economic conditions and variations in interest rates may negatively affect our financial performance. The results of operations for financial institutions, including the Corporation, may be materially and adversely affected by changes in prevailing local and national economic conditions, including declines in real estate market values, rapid increases or decreases in interest rates and changes in the monetary and fiscal policies of the federal government. The national and global economic and credit markets continue to
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experience high levels of volatility and disruption which are particularly acute in the financial sector and may depress overall the market value of financial institutions, limit access to capital, or have a materially adverse effect on the financial condition or results of operations of banking companies in general, including the Corporation. Although the Corporation remains well capitalized, the possible duration and severity of the adverse economic cycle is unknown and may increase the Corporation's exposure to these risks.
The Corporation's profitability is heavily influenced by the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Substantially all of the Bank's loans are to businesses and individuals in the southern tier of New York and northern tier of Pennsylvania, and any decline in the economy of this area could adversely affect results. Like most financial institutions, the Corporation's net interest spread and margin will be affected by general economic conditions and other factors that influence market interest rates and the ability to respond to changes in such rates. At any given time, assets and liabilities may be such that they are affected differently by a given change in interest rates. For additional information, see Part II, Item 7, "Interest Rate Risk."
Our lending exposes us to the risk of losses upon borrower default. A significant source of risk for the Bank arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Loans originated by the Bank can be either secured or unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date o r that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when in fact it is not. The Bank has adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for loan losses and regular review of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss by assessing the likelihood of nonperformance and the value of available collateral, monitoring loan performance and diversifying the Bank's credit portfolio. Such policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Bank's business, financial condition, results of operations or liquidity. For further information regarding asset quality, see Part II, Item 7, "Management of Credit Risk-Loan Portfolio" and "Asset Quality."
We may become subject to future litigation which could adversely affect our financial condition. Neither the Corporation nor its subsidiaries are a party to any material pending legal proceedings. If in the future any legal action is determined adversely to the Corporation, or if any legal action resulted in the Corporation paying a substantial settlement, then such adverse determination or settlement may have a material adverse effect on the Corporation's financial condition.
Our growth strategy may not prove to be successful and our market value and profitability may suffer. As part of the Corporation's strategy for continued growth, we may open additional branches. New branches do not initially contribute to operating profits due to the impact of overhead expenses and the start-up phase of generating loans and deposits. To the extent that additional branches are opened, the Corporation may experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse affect on the Corporation's levels of net income, return on average equity and return on average assets.
In addition, the Corporation may acquire banks and related businesses that it believes provide a strategic fit with its business. To the extent that the Corporation grows through acquisitions, it cannot provide assurance that such strategic decisions will be accretive to earnings.
Strong competition within our industry and market area could hurt our performance and slow our growth. The Corporation faces substantial competition in all phases of its operations from a variety of different competitors. Future growth and success will depend on the ability to compete effectively in this highly competitive environment.
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The Corporation competes for deposits, loans and other financial services with a variety of banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as the Corporation. Many competitors have been in business for many years, have established customer bases, are larger, and have substantially higher lending limits. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. For further information, see Part II, Item 7, "Competition."
We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations. The financial services industry is heavily regulated under both federal and state law. These regulations are primarily intended to protect customers, not creditors or shareholders. As a financial holding company, the Corporation is also subject to extensive regulation by the Federal Reserve, in addition to other regulatory organizations. The ability to establish new facilities or make acquisitions is conditioned upon the receipt of the required regulatory approvals from these organizations. Regulations affecting banks and financial services companies undergo continuous change, and the Corporation cannot predict the ultimate effect of such changes, which could have a material adverse effect on profitability or financial condition. For further information, see Part I, Item 1, "Supervision and Regulation."
We continually encounter technological change and the failure to understand and adapt to these changes could hurt our business. The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The Corporation's future success will depend, in part, on the ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. There can be no assurance that the Corporation will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to customers.
We are subject to security and operational risks relating to our uses of technology. Despite instituted safeguards, the Corporation cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Corporation could be exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.ITEM 2. PROPERTIES
The Corporation and the Bank currently conduct all their business activities from the Bank's main office in Elmira, NY, 22 full-service branch locations and one representative office situated in a seven-county area, owned office space adjacent to the Bank's main office in Elmira, NY and twelve off-site automated teller facilities (ATMs), nine 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 59,342 square feet of space, of which 745 square feet is occupied by the Corporation's subsidiary CFS Group, with the remaining 58,597 square feet entirely occupied by the Bank. The combined square footage of the 22 branch banking facilities totals approximately 110,836 square feet. The office building adjacent to the main office was acquired during 1995 and consists of approximately 33,186 square feet of which 30,766 square feet are occupied by operating de partments of the Bank and 2,420 square feet are leased. The leased automated teller facility spaces total approximately 435 square feet.
=========================================12==========================================
The Bank operates six of its facilities (Bath, Binghamton, Community Corners, Oakdale Mall, Tioga and Vestal Offices) and nine automated teller facilities (four Byrne Dairy Food Stores, Convenient Food Mart, Elmira/Corning Regional Airport, General Revenue Corp., Ithaca College and Quality Beverage) under lease arrangements. The rest of its offices, including the main office and the adjacent office building, are owned by the Bank. All properties owned or leased by the Bank are considered to be in good condition.
The Corporation holds no real estate in its own name.
ITEM 3. LEGAL PROCEEDINGS
Neither the Corporation nor its subsidiaries are a party to any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders during the fourth quarter of 2009.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation's stock is traded in the over-the-counter market under the symbol CHMG.OB.
Below are the quarterly market price ranges for the Corporation's stock for the past two 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.
Market Prices During Past Two Years (dollars)
1st Quarter
$15.00 - $22.00
$24.35 - $28.25
2nd Quarter
$17.25 - $23.00
$25.50 - $28.25
3rd Quarter
$18.75 - $21.25
$22.15 - $26.30
4th Quarter
$19.55 - $23.00
$19.55 - $25.10
Below are the dividends paid quarterly by the Corporation for each share of the Corporation's common stock over the last two years:
January
$0.25
April
0.25
July
October
$1.00
The Bank is also subject to legal limitations on the amount of dividends that can be paid to the Corporation without prior regulatory approval. Dividends are limited to retained net profits, as defined by regulations, for the current year and the two preceding years. At December 31, 2009, approximately $2.0 million was available for the declaration of dividends from the Bank to the Corporation.
As of February 26, 2010 there were 557 registered holders of record of the Corporation's stock.
=============================================13======================================
The table below sets forth the information with respect to purchases made by the Corporation of our common stock during the quarter ended December 31, 2009:
Period
Totalnumber ofsharespurchased
Average pricepaid per share
Total number of sharespurchased as part ofpublicly announcedplans or programs
Maximum number ofshares that may yet bepurchased under theplans or programs
10/1/09-10/31/09
75,564
11/1/09-11/18/09
$20.72
73,557
11/19/09-11/30/09 (1)
100
$22.50
89,900
12/1/09-12/31/09
371
$20.50
89,529
Quarter ended 12/31/09
2,478
$20.76
(1) On November 18, 2009, the Corporation announced that its Board of Directors had authorized the repurchase of up to 90,000 shares, or approximately 2.6% of the Corporation's then outstanding common stock over a twelve month period, expiring November 18, 2010. This program replaced the share repurchase program that had been approved in November of 2008, and expired in November 2009. Purchases will be made from time to time on the open-market or in private negotiated transactions, and will be at the discretion of management. Of the above 2,478 total shares repurchased by the Corporation, 2,478 shares were repurchased through direct transactions.
STOCK PERFORMANCE GRAPH
The above graph compares the yearly change in the cumulative total shareholder return on the Corporation's common stock against the cumulative total return of the NASDAQ Stock Market (U.S. Companies), NASDAQ Bank Stocks Index and SNL $500M - $1B Bank Index for the period of five years commencing December 31, 2004.
Period Ending
Index
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
Chemung Financial Corporation
100.00
97.26
104.05
94.11
69.07
75.18
NASDAQ Composite
101.37
111.03
121.92
72.49
104.31
NASDAQ Bank
95.67
106.20
82.76
62.96
51.31
SNL Bank $500M-$1B
104.29
118.61
95.04
60.90
58.00
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The cumulative total return includes (1) dividends paid and (2) 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, 2004.
The Total Returns Index for NASDAQ Stock Market (U.S. Companies) and Bank Stocks indices were obtained from SNL Financial LC, Charlottesville, VA.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents selected financial data as of and for the years ended December 31, 2005, 2006, 2007, 2008 and 2009. The selected financial data is derived from our audited consolidated financial statements.
The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes.
SUMMARIZED BALANCE SHEET DATA AT DECEMBER 31
Total assets
$975,919
$838,318
$788,874
$739,050
$718,039
Loans, net of deferred fees and costs, andunearned income
595,853
565,185
539,522
477,664
418,685
Investment Securities
243,143
199,694
169,801
191,696
241,566
Federal Home Loan Bank and Federal Reserve Bank stock
3,281
3,155
5,902
3,605
5,356
801,063
656,909
572,600
585,092
524,937
Securities sold under agreements to repurchase
54,263
63,413
31,212
35,024
60,856
Federal Home Loan Bank Advances
20,000
82,400
27,900
40,800
Shareholders' equity
90,086
83,007
88,115
82,298
81,178
SUMMARIZED EARNINGS DATA FOR THE YEARS ENDED DECEMBER 31
Net interest income
$33,155
$30,668
$25,936
$24,546
$24,737
Provision for loan losses
2,450
1,450
1,255
125
1,300
Net interest income after provision for loan losses
30,705
29,218
24,681
24,421
23,437
Other operating income:
Trust and investment services income
8,089
6,834
6,345
4,901
5,095
Securities gains, net
785
589
27
6
Trust Preferred impairment
(2,242)
(803)
Net gains on sales of loans held for sale
259
114
98
103
107
Other income
8,819
10,404
10,176
9,281
7,806
Total other operating income
15,710
17,138
16,629
14,312
13,014
Other operating expenses
39,321
33,968
30,521
29,523
27,315
Income before income tax expense
7,094
12,388
10,789
9,210
9,136
Income tax expense
1,861
4,034
2,621
2,546
Net income
$ 5,233
$ 8,354
$ 7,259
$ 6,589
$ 6,590
SELECTED PER SHARE DATA ON SHARES OF COMMON STOCK AT OR FOR THE YEARS ENDED DECEMBER 31,
2004
% Change 2008To2009
Compounded Annual Growth 5 Years
Net income per share
$ 1.45
$ 2.32
$ 2.02
$ 1.81
$ 1.79
-37.5%
-9.0%
Dividends declared
1.00
0.97
0.96
0.93
1.5%
Tangible book value
20.64
18.96
22.50
22.09
21.35
21.14
8.9%
-0.5%
Market price at 12/31
21.25
20.40
27.25
32.90
30.25
32.50
4.2%
-8.1%
Average shares outstanding(in thousands)
3,603
3,594
3,595
3,642
3,689
3,772
0.3%
- -0.9%
SELECTED RATIOS AT OR FOR THE YEARS ENDED DECEMBER 31,
0.91%
0.92%
Return on average tier I equity (1)
6.97%
11.45%
9.53%
8.60%
8.83%
Dividend yield at year end
4.71%
4.90%
3.67%
2.92%
3.17%
Dividend payout
51.94%
52.68%
Total capital to risk adjusted assets
13.22%
13.58%
15.78%
17.11%
18.06%
Tier I capital to risk adjusted assets
11.61%
11.97%
13.84%
15.12%
16.02%
Tier I leverage ratio
7.89%
8.94%
10.14%
10.80%
10.71%
Loans to deposits
74.38%
86.04%
94.22%
81.64%
79.76%
Allowance for loan losses to total loans
1.67%
1.61%
1.57%
2.34%
Allowance for loan losses to non-performing loans
72.20%
200.40%
236.58%
221.15%
106.97%
Non-performing loans to total loans
2.32%
0.80%
0.66%
0.76%
2.18%
Net interest rate spread
3.49%
3.46%
2.88%
Net interest margin
3.89%
4.05%
3.71%
3.69%
3.74%
Efficiency ratio (2)
82.55%
68.11%
70.03%
74.77%
71.09%
(1) Average Tier I Equity is average shareholders' equity less average goodwill and intangible assets and average accumulated other comprehensive income/loss.
(2) Efficiency ratio is operating expenses adjusted for amortization of intangible assets and stock donations divided by net interest income plus other operating income adjusted for non-taxable gains on stock donations.
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UNAUDITED QUARTERLY DATA
Quarter Ended
(in thousands except per share data)
Mar. 31
June 30
Sept. 30
Dec. 31
Interest and dividend income
$10,655
$11,159
$11,379
$11,297
Interest expense
2,963
2,870
2,844
2,658
7,692
8,289
8,535
8,639
425
375
1,275
7,267
7,914
7,260
8,264
4,221
3,615
4,109
3,764
Total other operating expenses
8,985
10,757
9,259
10,320
2,503
772
2,110
1,708
769
77
594
420
Net Income (1)
$ 1,734
$ 695
$ 1,516
$ 1,288
Basic and diluted earnings per share
$ 0.48
$ 0.19
$ 0.42
$ 0.36
$11,073
$11,378
$11,632
$11,356
4,038
3,820
3,645
3,267
7,035
7,558
7,987
225
6,835
7,333
7,562
7,489
4,727
4,345
4,186
3,880
8,356
8,334
8,133
9,145
3,206
3,344
2,224
1,064
1,072
1,211
688
Net Income
$ 2,142
$ 2,272
$ 2,404
$ 1,536
$ 0.60
$ 0.63
$ 0.67
$ 0.43
(1) The significant decrease in second quarter 2009 net income was due in large part to one-time merger costs associated with the Corporation's acquisition of Canton Bancorp Inc. totalling $1.148 million and a $439 thousand special FDIC insurance assessment.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The purpose of this discussion is to focus on information about the financial condition and results of operations of Chemung Financial Corporation. Reference should be made to the accompanying consolidated financial statements (including related notes) and the selected financial data appearing elsewhere in this report for an understanding of the following discussion and analysis.
Chemung Financial Corporation, through its wholly owned subsidiaries, Chemung Canal Trust Company (the "Bank") and CFS Group, Inc., a financial services company, provides a wide range of banking, financing, fiduciary and other financial services within its local market areas.
Critical accounting policies include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments in making estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with accounting principles generally accepted in the United States of America. As a result, the Corporation is required
=========================================16=========================================
to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statement and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent uncertainty in evaluating the level of the allowance required to cover probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions, the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, h as a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real Estate values in the Corporation's market area did not increase dramatically in the prior several years, and, as a result, any declines in Real Estate values have been modest. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses.
===========================================17=======================================
Management also considers the accounting policy relating to the valuation of goodwill and other intangible assets to be a critical accounting policy. The initial carrying value of goodwill and other intangible assets is determined using estimated fair values developed from various sources and other generally accepted valuation techniques. Estimates are based upon financial, economic, market and other conditions as they existed as of the date of a particular acquisition. These estimates of fair value are the results of judgments made by the Corporation based upon estimates that are inherently uncertain and changes in the assumptions upon which the estimates were based may have a significant impact on the resulting estimates. In addition to the initial determination of the carrying value, on an ongoing basis management must assess whether there is any impairment of goodwill and other intangible assets that would require an adjustment in carrying value and recognition of a loss in the consolidated statement of income. The Corporation determined that goodwill and other intangible assets were not impaired at December 31, 2009.
Management of Credit Risk - Loan Portfolio
The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies and procedures; 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 Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the president & CEO, three executive vice presidents, business client division manager, retail client division manager, commercial loan manager, consumer loan manager, mortgage loan manager and credit manager, implements the Board-approved loan policy.
Competition
The Corporation is subject to intense competition throughout the southern tier of New York State and the northern tier of Pennsylvania in the lending and deposit gathering aspects of its business from commercial and thrift banking institutions, credit unions and other providers of financial services, such as brokerage firms, investment companies, insurance companies and Internet vendors. The Corporation also competes with non-financial 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. Unlike the Corporation, many of these competitors are not subject to regulation as extensive as that of the Corporation and, as a result, they may have a competitive advantage over the Corporation in certain respects. Additionally, the pricing structure of credit unions is not encumbered by income taxes.
Competition for the Corporation's trust and investment services comes primarily from brokerage firms and independent investment advisors. These firms devote considerable resources toward gaining larger positions in these markets. The market value of trust assets under administration by the Corporation totaled approximately $1.6 billion at year-end 2009. The Trust and Investment Division is responsible for the largest component of the Corporation's non-interest revenue.
Financial Condition
Consolidated assets at December 31, 2009 totaled $975.9 million as compared to $838.3 million at year-end 2008, an increase of $137.6 million or 16.4%. As discussed in greater detail below, this increase was due in part to the Corporation's acquisition of Canton Bancorp, Inc. ("Canton") on May 29, 2009, as well as organic deposit growth, and is reflected principally in a $56.1 million increase in cash and cash equivalents, a $30.7 million increase in loans, net of deferred fees and costs and unearned income, and a $43.4 million increase in investment securities. Other increases in period-end assets include increases in goodwill and bank owned life insurance totaling $1.4 million and $2.4 million, respectively, both of these increases associated with the Canton acquisition and a $5.0 million increase in other assets.
As noted above, total loans, net of deferred fees and costs and unearned income increased $30.7 million or 5.4% during 2009 as a result of the Canton acquisition,
========================================18==========================================
with loans at the offices acquired totaling $51.5 million at December 31, 2009. The most significant growth was in commercial loans (including commercial mortgages), which increased $26.5 million, with $23.3 million of this increase related to the Canton acquisition. Residential mortgages increased $5.8 million, including Canton mortgages totaling $14.9 million at December 31, 2009. Indirect consumer loans, consisting principally of indirect auto financing, were down $7.0 million, impacted by the overall decline in the auto industry during 2009. Other consumer loans were up $5.3 million, due primarily to a $7.4 million increase in home equity balances, with home equity loans related to the acquisition totaling $10.9 million. The increase in home equity balances was partially offset by a $2.0 million decrease in student loans, as during the fourth quarter the Corporation sold substantially all of its student loan portfolio. As can be seen from the above, excluding the acquisition of C anton loans, residential mortgages and home equity balances would have decreased approximately $9.1 million and $3.5 million, respectively, due to a slowdown in activity and higher payoffs related to an increase in refinancing activity associated with the low interest rate environment. Additionally, approximately $13.3 million of newly originated mortgages were sold in the secondary market during 2009.
The available for sale segment of the securities portfolio totaled $231.0 million at December 31, 2009, an increase of $39.7 million or 20.8% from December 31, 2008. At amortized cost, the available for sale portfolio increased approximately $38.0 million, including approximately $4.3 million of bond balances related to the Canton acquisition, with unrealized appreciation related to the available for sale portfolio increasing $1.7 million. The increase in the available for sale portfolio was principally due to a $24.4 million increase in federal agency bonds, as well as increases in municipal and corporate bonds totaling $15.0 million and $9.2, respectively, offset in part by an $8.9 million decrease in mortgage-backed securities and a $1.8 million decrease in trust preferred securities. During 2009, the Corporation purchased approximately $105.6 million of federal agency bonds in addition to acquiring $2.1 million in the Canton acquisition. These purchases were partially offset by bond maturities and cal ls totaling $83.3 million. The increase in municipal bonds reflects purchases of $15.9 million and $1.4 million acquired in the Canton acquisition, somewhat offset by maturities and principal payments totaling $2.2 million. The corporate bond increase resulted from purchases totaling $8.0 million as well as $1.7 million of corporate bonds related to the Canton acquisition, partially offset by $500 thousand of maturities. Mortgage-backed securities decreased as paydowns during 2009 exceeded purchases totaling $21.4 million, while the decrease in trust preferred securities resulted from OTTI write-downs. U.S. Treasury bonds were virtually unchanged as purchases of $10.0 million were offset by the sale of $10.0 million of bonds during the year. The increase in unrealized appreciation related to the available for sale portfolio was due in large part to the narrowing of both corporate and municipal credit spreads during the year, as well as an increase in unrealized gains in the Corporation's stock portfolio since year-end 2008. These increases were offset to some extent by the high volume of federal agency bonds called during the year and gains realized during 2009 on the sale of U.S. Treasury bonds. The held to maturity portion of the portfolio, consisting of local municipal obligations, increased approximately $3.7 million as purchases of $12.0 million were partially offset by maturities and principal reductions totaling $8.3 million.
As noted above, cash and cash equivalents increased $56.1 million since December 31, 2008. As discussed below, this increase reflects the significant increase in deposits during 2009 related to both the Canton acquisition as well as organic deposit growth. With this growth in deposits exceeding the increase in net loans and securities, interest bearing deposits at other financial institutions increased $56.1 million, with the vast majority of these funds held in an interest bearing account at the Federal Reserve Bank of New York. While we purchased approximately $173.0 million of securities during 2009, we continue to evaluate alternative investments of these funds with caution given the low interest rate environment and the inherent interest rate risk associated with longer term securities portfolio investments.
A $5.0 million increase in other assets was due in large part to prepaid FDIC insurance assessments totaling $3.9 million, as under a rule adopted by the FDIC on November 12, 2009, all insured depository institutions were required to prepay their estimated quarterly regular risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011 and 2012.
==========================================19========================================
with the Canton acquisition, and $71.9 million due to internal deposit growth. Non-interest bearing demand deposits increased $37.9 million, including demand deposit balances at the three offices acquired from Canton totaling $10.1 million. A $106.2 million increase in interest bearing balances was reflected primarily in a $48.3 million increase in insured money market ("IMMA") balances and a $31.8 million increase in time deposits, as well as increases in savings and NOW balances totaling $17.1 million and $9.0 million, respectively. The increase in IMMA balances was due in part to a $19.7 million increase in public fund balances, as well as a $28.6 million increase in other IMMA balances, including $2.0 million in IMMA deposits related to the Canton acquisition. The increase in time deposits includes $48.3 million of time deposits associated with the Canton acquisition, with all other time deposits down $16.5 million. The increase in savings account balances reflects approximately $ 8.1 million in savings deposits at the three offices acquired from Canton, as well as an increase in other savings balances of $9.0 million, while the increase in NOW accounts includes a $3.3 million increase in public fund balances and a $5.7 million increase in all other NOW accounts, including $3.7 million related to the Canton acquisition.
A $9.1 million decrease in securities sold under agreements to repurchase was due to the repayment of a $10.0 million advance that matured during the second quarter of 2009.
A $4.3 million decrease in other liabilities was principally due to the payment of previously accrued income taxes.
BALANCE SHEET COMPARISONS
(in millions)Average Balance Sheet
% Change 2008 to 2009
Total Assets
$928.8
$837.5
$767.0
$722.0
$715.3
$746.1
10.9%
4.5%
Earning Assets (1)
852.4
757.3
698.6
665.9
661.3
691.9
12.6%
4.3%
Loans, net of deferredfees and costs, andunearned income
586.7
561.6
520.0
449.7
403.4
388.2
8.6%
Investments (2)
265.7
195.7
178.6
216.2
257.9
303.7
35.8%
-2.6%
752.4
649.7
592.6
568.3
530.0
541.8
15.8%
6.8%
Wholesale funding (3)
70.9
78.8
72.2
54.3
87.5
108.1
-10.0%
Tier I equity (4)
75.1
73.0
76.2
76.6
74.6
72.4
2.9%
0.7%
(1) Average earning assets include securities available for sale and securities held to maturity based on amortized cost, loans net of deferred origination fees and costs and unearned income, interest-bearing deposits, Federal Home Loan Bank stock, Federal Reserve Bank stock and federal funds sold.
(2) Average balances for investments include securities available for sale and securities held to maturity, based on amortized cost, Federal Home Loan Bank stock, Federal Reserve Bank stock, federal funds sold and interest-bearing deposits.
(3) Wholesale funding includes Federal Home Loan Bank advances and securities sold under agreements to repurchase funded through the Federal Home Loan Bank.
(4) Average shareholders' equity less goodwill, intangible assets and accumulated other comprehensive income/loss.
(in millions)Ending Balance Sheet
$975.9
$838.3
$788.9
$739.0
$718.0
$722.5
16.4%
6.2%
Earning Assets(1)
893.5
764.6
707.5
668.5
666.1
669.5
16.9%
5.9%
Loans, net of deferred fees and costs, and unearned income
595.9
565.2
539.5
477.7
418.7
381.5
5.4%
9.3%
Allowance for loan losses
9.1
8.5
8.0
9.8
9.9
9.5%
305.0
205.3
176.0
190.8
247.3
292.7
48.6%
0.8%
801.1
656.9
572.6
585.1
524.9
519.6
22.0%
9.0%
Wholesale funding(3)
67.5
77.5
104.9
55.4
94.8
108.0
-12.9%
Tangible equity (4)
74.5
68.0
81.0
79.8
78.3
78.9
-1.2%
Securities
The Board-approved Funds Management Policy includes an investment portfolio policy
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which requires that, except for local municipal obligations that are sometimes not rated or carry ratings above "Baa" but below "A" by Moody's or Standard & Poor's, debt securities purchased for the bond portfolio must carry a minimum rating of "A".
As of December 31, 2009, approximately $1.9 million of single issue trust preferred securities at amortized cost and $1.1 million of collateralized debt obligations consisting of pools of trust preferred securities at amortized cost, had credit ratings below "A". The two single issue trust preferred securities had a rating of "BBB-" by Standard & Poor's and "Baa1" by Moody's, while the trust preferred pools had a rating of "Caa3" by Moody's.
Marketable securities are classified as Available for Sale, while local direct investments in municipal obligations are generally classified as Held to Maturity. The Available for Sale portfolio at December 31, 2009 totaled $231.0 million compared to $191.3 million a year earlier. At year-end 2009, the total net unrealized appreciation in the securities available for sale portfolio was $7.6 million, compared to $5.9 million a year ago. The components of this change are set forth below.
(in thousands)Securities Available for Sale
Amortized Cost
2009Estimated Fair Value
Unrealized Gains (Losses)
2008Estimated Fair Value
Obligations of U.S.Government and U.SGovernment sponsoredenterprises
$ 84,669
$84,621
$ (48)
$ 60,190
$ 1,353
91,894
2,051
100,792
2,141
Obligations of states andpolitical subdivisions
31,280
32,125
845
16,265
16,420
155
11,740
445
2,500
(750)
2,983
(722)
4,809
(1,524)
826
5,021
827
4,497
Totals
$223,392
$230,984
$ 7,592
$185,383
$191,255
$ 5,872
Non-marketable equity securities carried by the Corporation at December 31, 2009 include 15,618 shares of Federal Reserve Bank stock, 23,030 shares of the Federal Home Loan Bank of New York stock and 1,967 shares of the Federal Home Loan Bank of Pittsburgh stock. They are carried at their cost of $781 thousand, $2.303 million and $197 thousand, respectively. The fair value of these securities is assumed to approximate their cost. The number of shares of these two investments is regulated by regulatory policies of the respective institutions.
Asset Quality
Non-Performing Loans
Non-performing loans at year-end 2009 totaled $13.804 million compared to $4.544 million at year-end 2008, an increase of $9.260 million. This increase was principally due to a $6.631 million increase in accruing troubled debt restructurings ("TDR's") that are in compliance with modified terms, as well as a $3.088 million increase in non-accrual loans, partially offset by a $459 thousand decrease in accruing loans 90 days or more past due. Included in the total TDR's at December 31, 2009 are commercial loans totaling $6.832 million and residential mortgages totaling $545 thousand, compared to commercial loan and residential mortgage totals of $746 thousand and $0, respectively, at December 31, 2008. The only concessions made on commercial loan TDR's involve short term deferrals of principal payments, while residential mortgage restructurings include interest rate and payment reductions. Our experience to date in the restructuring of troubled debt has been favorable. The increase in accruing commercial TDR 's was primarily due to the addition of loans to one commercial borrower totaling $6.310 million that were restructured due to working capital and cash flow difficulties experienced by the borrower. Loans to this borrower totaling $972 thousand had been included in non-accrual loans at December 31, 2008; however, at the time of the restructuring in April of 2009 all loans were brought current and have remained current since that time. Loans to this borrower carry guarantees of the United States Department of Agriculture ("USDA") totaling $4.847 million, thereby reducing the Corporation's exposure on these loans to $1.463 million. TDR's are evaluated for impairment based upon the present value of expected future cash flows, with any changes recorded through the provision for loan losses. It is the Corporation's policy that TDR's that have continued to be in compliance with modified terms and conditions for six months and yield a market rate at the time of restructuring not be reported as TDR's in years su bsequent to the year in which the loan was first reported as TDR.
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As noted above, non-accrual loans increased $3.088 million. During 2009, it was the Corporation's policy that commercial loans 90 days past due, and consumer loans and residential mortgages 120 days past due be placed in non-accrual status. A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower. The increase in non-accrual loans was due to a $2.002 million increase in non-accrual residential mortgages and a $1.317 million increase in non-accrual commercial loans, somewhat offset by a $231 thousand decrease in non-accrual consumer loans. The increase in non-accrual residential mortgages was due to the impact of the weakness in the economy and higher unemployment rates, while the increase in non-accrual commercial loans includes $1.799 million of non-accruing commercial loans related to the Canton acquisition. Also included in non-accrual commercial loans is one troubled debt restr ucturing totaling $207 thousand. It is the Corporation's policy that loans remain in non-accrual status until the loans have been brought current and remain current for a period of six months. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal balance has been recovered. The $459 thousand decrease in accruing loans 90 days or more past due was principally due to a $621 thousand decrease in this category of residential mortgages, as more mortgages migrated to non-accrual status during 2009, with this decrease partially offset by a $162 thousand increase in accruing consumer loans 90 days or more past due.
At December 31, 2009, Other Real Estate Owned ("OREO") totaled $649 thousand compared to $324 thousand at December 31, 2008, an increase of $325 thousand, and includes two properties associated with the Canton acquisition totaling $337 thousand. At December 31, 2009 OREO properties consist of 3 residential properties totaling $119 thousand, three commercial properties totaling $236 thousand and undeveloped land totaling $294 thousand.
Impaired Loans
Impaired loans at December 31, 2009 totaled $10.093 million compared to $2.690 million at December 31, 2008. The increase of $7.403 million was due in large part to the above mentioned addition of $6.310 million of loans to one borrower to TDR's, with $4.847 million of this total guaranteed by the USDA. At December 31, 2008, only $973 thousand of loans to this borrower were considered to be impaired. Additionally impacting the increase in impaired loans were loans related to the Canton acquisition totaling $1.799 million. Included in the impaired loan total are loans totaling $3.358 million for which impairment allowances of $845 thousand have been specifically allocated to the allowance for loan losses. As of December 31, 2008, the impaired loan total included $1.664 million for which specific impairment allowances of $1.276 million were allocated to the allowance for loan losses. The decrease in specific allocations from 2008 to 2009 was due in large part to the aforementioned TDR guaranteed by the U SDA, as the restructuring of these loans included additional guarantees, which resulted in a $583 thousand reduction in specific allocations related to that credit. The majority of the Corporation's impaired loans are secured and measured for impairment based on collateral evaluations. It is the Corporation's policy to obtain updated appraisals on loans secured by real estate at the time a loan is determined to be impaired. Prior to the receipt of the updated appraisal, an impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. Upon receipt and review of the updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs. If market conditions warrant, future appraisals are obtained. Real estate values in the Corporation's market area had not increased dramatically in the prior several years, and, as a result, current declines in real estate values have been modest. The appraisals are performed by independent third parties and reflect the properties market value "as is". In determining the amount of any specific allocation or charge-off, the Corporation will make adjustments to reflect the estimated costs to sell the property. In situations where partial charge-offs have been recognized, any balance remaining continues to be reflected as non-performing until the loan has been paid in full. In the case of impaired loans secured by assets other than real estate (i.e. business assets), a collateral valuation is performed using data from the client's most recently received financial statements, and applying discount rates based upon the type of collateral.
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Non-Performing Assets
The following table summarizes the Corporation's non-performing assets (in thousands of dollars):
Non-accrual loans
$ 5,910
$ 2,822
$ 2,225
$ 2,860
$ 8,727
Troubled debt restructurings
7,377
746
830
329
106
Accruing loans past due 90 days or more
517
976
518
421
308
Total non-performing loans
$13,804
$ 4,544
$ 3,573
$ 3,610
$ 9,141
Other real estate owned
649
324
1,819
79
Total non-performing assets
$14,453
$ 4,868
$ 5,429
$ 9,220
Information with respect to interest income on non-accrual and troubled debt restructured loans for the years ended December 31 is as follows (in thousands of dollars):
Interest income that would have been recorded underoriginal terms
$ 932
$ 256
$ 235
Interest income recorded during the period
$ 596
$ 85
$ 59
In addition to non-performing loans, as of December 31, 2009, the Corporation has identified commercial relationships totaling $14.9 million as potential problem loans, as compared to $10.0 million at December 31, 2008. This increase reflects the addition of $2.2 million of potential problem loans acquired in the Canton acquisition as well as a $2.7 million increase in other potential problem loans. This increase was principally due to the addition of three commercial relationships totaling $5.1 million following the receipt of financial information indicating a deterioration in the financial condition of the borrowers, offset by payoffs and principal reductions on other potential problem loans. One loan totaling $571 thousand at December 31, 2008 was reclassified as TDR during 2009. Potential problem loans are loans that are currently performing, but where known information about possible credit problems of the related borrowers causes management to have serious doubts as to the ability of such borrower s to comply with the present loan repayment terms, and which may result in the disclosure of such loans as non-performing at some time in the future. At the Corporation, potential problem loans are typically loans that are performing but are classified in the Corporation's loan rating system as "substandard." Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on non-accrual, become restructured, or require increased allowance coverage and provisions for loan losses.
Included in the Corporation's investment portfolio at December 31, 2009 are two collateralized debt obligations consisting of pools of trust preferred securities issued by other financial institutions. While we continue to receive all contractual payments on these securities, given the continued weakness in the economy, and the financial services sector in particular, there can be no assurance that these securities will not become non-performing at some future date.
Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as historical loan loss experience, review of specific problem loans (including evaluation of the underlying collateral) changes in the composition and volume of the loan portfolio, recent charge-off experience, overall portfolio quality and current economic conditions that may affect the borrowers' ability to pay. Based upon an analysis of these factors, including the aforementioned increases in non-performing and potential problem loans, as well as an increase in net charge-offs, the provision for loan losses increased $1.000 million from $1.450 million in 2008 to $2.450 million in 2009. Net charge-offs in 2009 increased $792 thousand from $797 thousand to $1.589 million. The increase in net charge offs was principally due to a $437 thousand increase in net commercial loan charge-offs and a $350 thousand increase in net consumer loan charge-offs. The incre ase in net commercial loan charge-offs was primarily due to a $354 thousand decrease in recoveries of previously charged-off amounts, with gross commercial charge-offs increasing $83 thousand, while the increase in net consumer loan charge-offs was principally due to increases in installment loan and credit card net charge-offs totaling $325 thousand and $29 thousand, respectively. At December 31, 2009, the Corporation's allowance for loan losses totaled $9.967 million, resulting in a coverage ratio of allowance to non-performing loans of 72.2%. As noted above, included in non-performing loans at December 31, 2009 was a TDR totaling $6.310 million which carried USDA guarantees totaling $4.847 million. Also included in the non-performing loan totals are loans
=========================================23=========================================
with remaining balances totaling $1.177 million on which the Corporation has recognized partial charge-offs in the amount of $905 thousand. Excluding the USDA guaranteed amount and loans for which partial charge-offs have already been recognized from the non-performing total, the coverage ratio of allowance to non-performing loans was 128.1%. The allowance for loan losses to total loans was 1.67% at December 31, 2009 compared to 1.61% as of December 31, 2008, and represents an amount that management believes will be adequate to absorb probable incurred loan losses on existing loans.
SUMMARY OF LOAN LOSS EXPERIENCE
The following summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 2009 (in thousands of dollars):
Years Ended December 31,
Allowance for loan losses at beginning of year
$ 9,106
$ 8,453
$ 7,983
$ 9,778
$ 9,983
Charge-offs:
389
306
793
1,659
1,246
Real estate mortgages
30
4
11
1,400
1,018
482
516
Home equity
23
2
1,842
1,372
1,288
2,145
1,775
Recoveries:
83
437
331
170
138
172
187
257
253
575
503
270
Net charge-offs
1,589
797
1,920
1,505
Provision charged to operations
Allowance for loan losses at end of year
$ 9,967
Ratio of net charge-offs during year to averageloans outstanding (1)
..27%
..14%
..15%
..43%
..37%
(1) Daily balances were used to compute average outstanding loan balances.
Liquidity and Capital Resources
Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, securities sold under agreements to repurchase and other borrowings.
The Corporation is a member of the Federal Home Loan Bank of New York ("FHLB"), which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. At December 31, 2009, the Corporation maintained a $175.8 million line of credit with the FHLB, as compared to $165.7 million at December 31, 2008.
During 2009, cash and cash equivalents increased $56.1 million compared to a decrease of $5.7 million during 2008. In addition to cash provided by operating activities, other major sources of cash during 2009 included proceeds from sales, maturities and principal reductions on securities totaling $135.2 million, a $71.8 million increase in deposits and a $25.4 million decrease in loans. Proceeds from the above were used principally to fund purchases of securities totaling $173.1 million, a $9.1 million reduction in securities sold under agreements to repurchase and $7.7 million to purchase Canton Bancorp, Inc. In this transaction, the Corporation acquired approximately $58.8 million of loans, $10.5 million in cash and cash equivalents, $5.5 million of securities and other assets totaling approximately $6.2 million, and assumed deposits and other liabilities totaling $73.4 million and $553 thousand, respectively. Other significant uses of cash during 2009 included the payment of cash dividends in the amoun t of $3.5 million and purchases of fixed assets totaling $1.8 million.
During 2008, cash and cash equivalents decreased $5.7 million as compared to an increase of $2.8 million during 2007. In addition to cash provided by operating activities, a major source of cash during 2008 was the net cash received in the M&T branch acquisition totaling $43.5 million. The major factors netting to that amount included cash received for the deposits assumed totaling $64.6 million, which was offset by the purchase of $12.6 million of loans, the payment of an $8.4 million premium for the deposits assumed, and the purchase of fixed assets totaling $120 thousand. Other primary sources of cash during 2008 included proceeds from
==========================================24========================================
maturities and principal payments on securities totaling $68.2 million, a $32.2 million increase in securities sold under agreements to repurchase, a $19.4 million increase in other deposits and $2.7 million from net redemptions of FHLB and Federal Reserve Bank stock. Proceeds from the above were used primarily to fund purchases of securities totaling $100.4 million, a $62.4 million net reduction of FHLB advances, an $18.7 million net increase in loans, purchases of fixed assets in the amount of $4.2 million, payment of cash dividends totaling $3.5 million and the purchase of $930 thousand of treasury stock.
As of December 31, 2009, the Corporation's consolidated leverage ratio was 7.89%. The Tier I and Total Risk Adjusted Capital ratios were 11.61% and 13.22%, 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.
Cash dividends declared during 2009 totaled $3.522 million or $1.00 per share compared to $3.515 million or $1.00 per share in 2008 and $3.413 million or $0.97 per share in 2007. Dividends declared during 2009 amounted to 67.3% of net income compared to 42.1% and 47.0% of 2008 and 2007 net income, respectively. It is management's objective to continue generating sufficient capital internally, while retaining an adequate dividend payout ratio to our shareholders.
When shares of the Corporation become available in the market, we may purchase them after careful consideration of our capital position. On November 18, 2009, the Corporation's Board of Directors authorized the repurchase of up to 90,000 shares over a one year period, either through open market or privately negotiated transactions. This program replaced the share repurchase program that had been approved in November of 2008, and expired in November of 2009. Under the program approved in November of 2008, a total of 16,443 treasury shares were purchased. Through December 31, 2009, a total of 471 shares had been purchased under the program approved on November 18, 2009. During 2009, the Corporation purchased 7,778 shares at a total cost of $156 thousand or an average price of $20.08 per share. Additionally, during 2009, 26,381 shares were re-issued from treasury to fund the stock component of directors' 2008 compensation, distributions under the Corporation's directors' deferred stock plan, a stock grant to an executive officer and funding for the Corporation's profit sharing, savings and investment plan. During 2008, the Corporation purchased 37,124 shares at a total cost of $930 thousand or an average price of $25.06 per share, while in 2007, 40,325 treasury shares were purchased at a total cost of $1.239 million or an average price of $30.73 per share.
Off-Balance Sheet Arrangements
In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. The Corporation is also a party to certain financial instruments with off balance sheet risk such as commitments under standby letters of credit, unused portions of lines of credit and commitments to fund new loans. The Corporation's policy is to record such instruments when funded. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are generally used by the Corporation to manage clients' requests for funding and other client needs.
As of December 31, 2009, the Corporation has off-balance sheet arrangements as follows (in thousands of dollars):
Commitment Maturity by Period
Less than 1 Year
1 to 3 Years
3 to 5 Years
More than 5 Years
Standby letters of credit
$ 17,172
$ 8,847
$ 2,737
$ 2,793
$ 2,795
Unused portions of lines of credit (1)
80,429
Commitments to fund new loans
14,567
$112,168
$103,843
(1) Not included in this total are unused portions of home equity lines of credit, credit card lines and consumer overdraft protection lines of credit, since no contractual maturity dates exist for these types of loans. Commitments to outside parties under these lines of credit were $29,696,207, $20,080,206 and $2,927,186, respectively, at December 31, 2009.
Contractual Obligations
As of December 31, 2009, the Corporation is contractually obliged under long-term agreements as follows (in thousands of dollars):
Payments Due by Period
Time Deposits (Note 8)
$ 60,581
$ 13,110
$ 78
Federal Home Loan Bank advances (Note 10)
10,000
Securities sold under agreements torepurchase (Note 9)
16,763
17,500
Operating leases
5,898
577
1,109
1,084
3,128
Other
1,995
367
659
216
Total (1)
$364,623
$226,405
$ 89,943
$ 14,853
$ 33,422
(1) Not included in the above total is the Corporation's obligation regarding the Pension Plan and Other Benefit Plans. Please refer to Part IV Item 15 Note 12 for information regarding these obligations at December 31, 2009.
Net income in 2009 totaled $5.233 million, a decrease of $3.121 million compared to 2008 net income of $8.354 million. Earnings per share were down 37.5% from $2.32 per share to $1.45 per share. This decrease was impacted by the following items; direct acquisition costs associated with the Canton acquisition totaling $1.448 million, a $1.439 million increase in other-than-temporary impairment ("OTTI") charges on trust preferred securities pools carried in the Corporation's investment portfolio, a $2.323 million increase in pension expense, a $1.402 million increase in FDIC insurance (including a second quarter 2009 special assessment of $439 thousand) and a $1.0 million increase in the provision for loan losses. The after-tax impact on net income of these items totaled approximately $4.667 million or $1.30 per share.
Net interest income increased $2.487 million or 8.1% from $30.668 million to $33.155 million, while the net interest margin decreased 16 basis points to 3.89%. The improvement in net interest income resulted from an increase in average earning assets and an 81 basis point decrease in the average cost of interest-bearing liabilities, offset to some extent by a 78 basis point decrease in the average yield on earning assets. A $95.1 million or 12.6% increase in average earning assets reflects a $47.7 million increase in average fed funds sold and interest-bearing deposits at other financial institutions, a $25.1 million increase in average loans and a $22.3 million increase in average securities. Average loans and securities during 2009 related to the Canton acquisition totaled $32.7 million and $2.8 million, respectively. While on average, earning assets increased 12.6%, total interest and dividend income was down $948 thousand or 2.1%, as the average yield on earning assets decreased 78 basis points to 5. 22%.
Total average funding liabilities, including non-interest bearing demand deposits, increased $94.6 million or 12.8% as a $102.7 million increase in average deposits was partially offset by an $8.1 million decrease in average other borrowed funds. Approximately $43.5 million of the increase in average deposits was related to the Canton acquisition. In total, average non-interest bearing deposits increased $20.1 million, while average interest-bearing deposits increased $82.6 million. The increase in average interest-bearing deposits was reflected primarily in higher average insured money market and time deposits of $34.1 million and $26.7 million, respectively. Additionally, average savings and NOW account balances increased $15.7 million and $6.0 million, respectively. The decrease in average other borrowings was due to a $13.6 million decrease in average short term borrowings under the Corporation's line of credit with the FHLB, somewhat offset by a $5.5 million increase in average securities sold unde r agreements to repurchase. While average interest-bearing liabilities increased $74.5 million or 12.8%, interest expense decreased $3.435 million or 23.3%, as the average cost of interest-bearing liabilities decreased 81 basis points from 2.54% to 1.73%.
The 2009 provision for loan losses of $2.450 million was $1.0 million higher than a year ago. As discussed under the Asset Quality section of this report, this increase was principally due to an increase in non-performing and potential problem loans, as well as an increase in net charge-offs, and reflects management's evaluation of the adequacy of the allowance for loan losses based upon a number of factors, including an analysis of historical loss factors, the evaluation of collateral, recent charge-off experience, overall credit quality, the current economic environment and loan growth.
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Non-interest income during 2009 decreased $1.429 million or 8.3% from $17.138 million to $15.709 million. This decrease was significantly impacted by the above mentioned increase in OTTI charges totaling $1.439 million as well as decreases in credit card merchant earnings and a gain on the sale of merchant discount services totaling $1.305 million and $467 thousand, respectively, resulting from the sale of the credit card merchant processing business during the fourth quarter of 2008. While revenue from credit card merchant earnings was down $1.305 million, processing costs related to this business decreased $1.296 million during 2009. The OTTI charges were related to two collateralized debt obligations consisting of pools of trust preferred securities issued by other financial institutions. While we continue to receive all contractual payments on these investments, the increase in OTTI charges reflects deterioration in the credit quality of these securities based upon cash flow evaluations that take in to account several factors, including higher deferrals and defaults by the issuers of the underlying securities, downgrades by rating agencies and the continued weakness in the U.S. economy, and the financial services sector in particular. Excluding the increase in OTTI charges and the reduction in revenue related to the 2008 sale of the credit card merchant processing business, all other sources of non-interest income increased $1.782 million or 11.1%. This increase was due in large part to a $1.255 million increase in Trust and Investment Center fee income due primarily to higher estate fee accruals resulting from a large new estate acquired during the fourth quarter of 2008, as well as improvement in the equities markets during 2009. Other significant increases during 2009 included a $410 thousand increase in check card interchange fee income, a $216 thousand increase in service charges and increases in gains on the sale of mortgages and securities totaling $144 thousand and $195 thousand, respectively . These increases were somewhat offset primarily by a $248 thousand decrease in revenue from the Corporation's equity investment in Cephas Capital Partners, LP, a Small Business Investment Company limited partnership, and a $133 thousand decrease in cash management fee income.
Operating expenses during 2009 increased $5.353 million or 15.8% from $33.968 million to $39.321 million. As noted above, this increase was significantly affected by a $2.323 million increase in the cost of the Corporation's defined benefit pension plan, as well as direct acquisition related costs totaling $1.448 million and a $1.402 million increase in FDIC insurance assessments. The increase in the pension cost was principally the result of a decrease in plan asset values during 2008 resulting from the decline in equity markets during the later half of that year. Direct acquisition costs were primarily related to early termination of Canton data processing contracts, legal and consulting fees and compensation expenses, while the increase in FDIC insurance assessments includes a $439 thousand special assessment during the second quarter of 2009 as well as higher regular quarterly assessments required to fund the FDIC as the result of an increase in bank failures. Excluding the above mentioned items, all other operating expenses increased $180 thousand or 0.5% due principally to a $1.405 million increase in salaries, a $252 thousand increase in health insurance expense and a $239 thousand increase in net occupancy costs. The increase in salaries was principally due to merit increases over the past year, as well as additions to staff resulting from the Manufacturers and Traders Trust Company ("M&T") branch acquisitions in March of 2008 and the Canton acquisition in May of 2009, while the increase in net occupancy costs was also primarily related to those acquisitions. These increases were offset to a large extent by the aforementioned $1.296 million decrease in processing costs related to the sale of the credit card merchant processing business during the fourth quarter of 2008, as well as a $382 thousand decrease in amortization of intangible assets. The decrease in amortization expense was due in large part to higher amortization expense during 2008 related to a portion of the intangible asset assoc iated with the Corporation's purchase of the trust relationships from Partners Trust Bank in May of 2007 due to the expected short life of one large account that later closed during the first quarter of 2008. Additionally, the core deposit intangible related to the Corporation's purchase of three offices from the Resolution Trust Corporation in June of 1994 was fully amortized during the second quarter of 2009.
The $2.174 million decrease in income tax expense was principally due to a $5.295 million decrease in pre-tax income, while the decrease in the effective tax rate from 32.6% to 26.2% resulted primarily from an increase in the relative percentage of tax exempt income to pre-tax income.
Results of Operations 2008 vs. 2007
Consolidated net income in 2008 totaled $8.354 million, an increase of $1.095 million or 15.1% compared to 2007 net income of $7.259 million. Earnings per share increased 14.9% from $2.02 per share to $2.32 per share. Dividends declared per share increased from $0.97 per share to $1.00 per share.
==========================================27========================================
As discussed below, the net income increase resulted principally from increases in net interest income and non-interest income, somewhat offset by an increase in operating expenses.
Net interest income increased $4.732 million or 18.2% from $25.936 million to $30.668 million, with the net interest margin increasing 34 basis points to 4.05%. This improvement in net interest income and margin resulted principally from increases in average loans and securities and an 86 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 28 basis point decrease in the average yield on earning assets. A $58.8 million or 8.4% increase in average earning assets reflected a $41.6 million increase in average loans, as well as increases in average securities and fed funds sold and interest-bearing deposits totaling $14.4 million and $2.8 million, respectively. The increase in average loans reflected growth in all segments of the loan portfolio, with average consumer loans increasing $20.2 million, average commercial loans increasing $11.0 million and average mortgages increasing $10.4 million. Approximately $9.2 million of the increase in average loans was related to the M&T branch acquisition. The increase in average securities was principally due to a $50.0 million leverage transaction completed during the second quarter of 2008. On average, earning assets increased 8.4% with total interest and dividend income increasing $1.563 million or 3.6% despite the average yield on earning assets declining 28 basis points to 6.00%.
Total average funding liabilities, including non-interest bearing demand deposits, increased $62.8 million or 9.3% due to increases in average deposits and other borrowed funds of $57.2 million and $5.6 million, respectively. Approximately $49.5 million of the increase in average deposits was related to the M&T branch acquisition. In total, average non-interest bearing deposits increased $9.8 million, while average interest-bearing deposits increased $47.4 million. The increase in average interest-bearing deposits was reflected primarily in higher average insured money market and time deposits of $24.4 million and $12.3 million, respectively. Additionally, average savings and NOW account balances increased $6.9 million and $3.7 million, respectively. The increase in average other borrowings was due to a $17.6 million increase in average securities sold under agreements to repurchase, offset by decreases in overnight and term advances from the FHLB totaling $10.6 million and $1.3 million, respectivel y. While average interest-bearing liabilities increased $53.0 million or 10.0%, interest expense decreased $3.169 million or 17.7%, as the average cost of interest-bearing liabilities decreased 86 basis points from 3.40% to 2.54%.
The 2008 provision for loan losses of $1.450 million was $195 thousand higher than in 2007. This increase reflected loan growth and a continuing weak economic outlook, and reflected management's evaluation of the adequacy of the allowance for loan losses based upon a number of factors, including an analysis of historical loss factors, the evaluation of collateral, recent charge-off experience, overall credit quality, the current economic environment and loan growth.
Non-interest income during 2008 increased $509 thousand or 3.1% from $16.629 million to $17.138 million. This increase was negatively impacted by an $803 thousand impairment charge on investment securities, as during the fourth quarter of 2008 the Corporation recognized an other-than-temporary impairment ("OTTI") charge on a collateralized debt obligation consisting of a pool of trust preferred securities issued by financial institutions. This security had a cost basis of $1.563 million and a fair value of $760 thousand at December 31, 2008. Despite the fact that we continue to receive all contractual payments on this security, the conclusion that it was OTTI was based on a cash flow analysis with several factors considered, including higher deferrals and defaults by the issuers of the underlying securities, downgrades by rating agencies and the continued weakness in the U.S. economy, and the financial services sector in particular. Excluding this write-down, all other non-interest income increased $1.31 3 million or 7.9%. This increase was due in large part to a $580 thousand increase in gains on securities transactions, a $467 thousand gain resulting from the sale of our credit card merchant processing business in the fourth quarter of 2008 and a $489 thousand increase in Trust and Investment Center fee income. The increase in gains on securities transactions was impacted to a great extent by the initial public offering ("IPO") of Visa, Inc. ("Visa") during the first quarter of this year. As a Visa member institution, the Corporation was issued shares of Visa prior to the IPO, approximately 39% of which were redeemed by Visa following the IPO, resulting in a net pre-tax gain of $411 thousand. The increase in Trust and Investment Center fee income reflects additional revenue resulting from the acquisition of the trust relationships of Partners Trust in May of 2007 and the accrual of trustee fees on a large new estate acquired during the fourth quarter of 2008, partially offset by lower asset market valu es related to the decline in the stock market during 2008. Other significant
========================================28==========================================
increases include a $341 thousand increase in service charges, a $199 thousand increase in check card interchange fee income and a $179 thousand increase in revenue from our equity investment in Cephas Capital Partners, LP, a Small Business Investment Company limited partnership. These increases were partially offset primarily by a $672 thousand decrease in gains on the sale of OREO related to the sale of two commercial properties during 2007.
Operating expenses during 2008 increased $3.448 million or 11.3% from $30.520 million to $33.968 million, with approximately $2.0 million of this increase associated with the M&T branch acquisition in March of 2008, and the acquisition of the trust relationships from Partners Trust in May of 2007. Specific areas having the greatest impact on the total operating expense increase included a $1.041 million increase in salaries and wages, a $796 thousand increase in net occupancy costs, a $682 thousand increase in amortization of intangible assets and a $384 thousand increase in data processing costs. The increase in salaries and wages was primarily related to merit increases during 2008, the aforementioned acquisitions and higher incentive compensation. Higher occupancy expenses were impacted by increased rent expense associated with the branch offices acquired from M&T, as well as a land lease related to a new office to replace our existing Cayuga Heights office. This new office, which was under co nstruction during 2008, was opened in January of 2009. The increase in occupancy costs also reflects higher depreciation and maintenance expenses. The increase in amortization expense is related to acquisitions, and includes $226 thousand of amortization of a portion of the intangible asset related to the Corporation's purchase of the trust relationships from Partners Trust Bank in May of 2007 due to the expected short life of one large account that later closed during the first quarter of 2008. This increase was offset by the payment of fees due under a pre-existing agreement. Higher data processing costs were principally affected by increases in trust department and check card processing costs, higher software maintenance costs and conversion costs associated with the M&T acquisition. In addition to the above, the cost of employee benefits increased $310 thousand, principally due to higher health insurance and payroll tax expenses.
The $505 thousand increase in income tax expense was due primarily to the $1.599 million increase in pre-tax income. The Corporation's effective tax rate was substantially unchanged at 32.6% in 2008 compared to 32.7% in 2007.
EARNINGS FOR THE YEARS ENDED DECEMBER 31,
(in thousands)
$25,257
8.1%
5.6%
1,500
69.0%
10.3%
Net interest income afterprovision for loanlosses
23,757
5.1%
5.3%
Trust and investmentservices income
4,725
18.4%
11.4%
Securities gains (losses),net
602
33.3%
5.5%
Impairment charge oninvestment securities
179.2%
Net gains on sales ofloans held for sale
983
127.2%
- -23.4%
7,958
-15.2%
2.1%
Total other operatingincome
14,268
-8.3%
1.9%
25,482
9.1%
Income before income taxexpense
12,543
- -42.7%
- -10.8%
3,810
-53.9%
-13.4%
$ 8,733
-37.4%
-9.7%
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AVERAGE BALANCES AND YIELDS
For the purpose of the table below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. No tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions.
Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential
Assets
Average Balance
Interest
Yield/Rate
Yield/ Rate
Earning assets:
Loans
$ 586,744
$36,094
6.15%
$ 561,618
$36,662
6.53%
$ 520,027
$36,019
6.93%
Taxable securities
176,255
7,136
169,413
7,886
4.66%
156,897
6,987
4.45%
Tax-exempt securities
37,472
1,132
3.02%
22,055
804
3.65%
20,175
795
3.94%
Federal funds sold
483
1
0.25%
2,898
68
1,127
58
5.18%
Interest-bearing deposits
51,462
127
1,322
18
1.38%
4.84%
Total earning assets
852,416
44,490
5.22%
757,306
45,438
6.00%
698,550
43,875
6.28%
Non-earning assets:
Cash and due from banks
21,855
24,041
22,257
Premises and equipment, net
25,202
23,651
21,821
Other assets
32,915
36,191
26,546
(9,489)
(8,636)
(8,155)
AFS adjustment to fair value
5,875
4,953
6,016
$ 928,774
$ 837,506
$ 767,035
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Now and super now deposits
$ 47,250
$ 41,282
$ 246
$ 37,551
$ 137
1,423
2,115
2,932
6,927
9,169
10,851
Federal Home Loan Bank advances and securities sold under agreements to repurchase
79,166
2,906
87,225
3,240
81,566
4,019
4.93%
Total interest-bearing liabilities
655,249
11,335
1.73%
580,770
14,770
2.54%
527,748
17,939
Non-interest-bearing liabilities:
Demand deposits
176,305
156,191
Other liabilities
11,820
11,323
8,332
Total liabilities
843,374
748,284
682,459
85,400
89,222
84,576
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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 Corporation. For purposes of constructing this table, average investment securities are at average amortized cost and earning asset averages include non-performing loans. Therefore, the impact of changing levels of non-performing loans is reflected in the change due to rate, but does not affect changes due to volume. No tax equivalent adjustments were made.
2009 vs. 2008
2008 vs. 2007
Increase/(Decrease)
Due to
Interest income (in thousands)
Change
Volume
$ (568)
$ 1,598
$(2,166)
$ 643
$ 2,785
$(2,142)
Taxable investment securities
309
(1,059)
899
325
Tax-exempt investment securities
328
485
(157)
9
70
(61)
(67)
(33)
(34)
55
(45)
109
136
(27)
20
(18)
Total interest income
$ (948)
$ 5,342
$(6,290)
$ 1,563
$ 3,583
$(2,020)
Interest expense (in thousands)
$ (167)
$ 31
$ (198)
$ 109
$ 14
$ 95
Savings and insured money marketdeposits
(692)
450
(1,142)
(817)
487
(1,304)
881
(3,123)
(1,682)
526
(2,208)
Federal Home Loan Bank advances andsecurities sold under agreementsto repurchase
(334)
(296)
(38)
(779)
264
(1,043)
Total interest expense
$(3,435)
$ 1,721
$(5,156)
$(3,169)
$ 1,673
$(4,842)
$ 2,487
$ 3,621
$(1,134)
$ 4,732
$ 1,910
As intermediaries between borrowers and savers, commercial banks incur both interest rate risk and liquidity risk. The Corporation's Asset/Liability Committee (ALCO) has the strategic responsibility for setting the policy guidelines on acceptable exposure to these areas. These guidelines contain specific measures and limits regarding these risks, which are monitored on a regular basis. The ALCO is made up of the president & chief executive officer, two executive vice presidents, chief financial officer, asset liability management officer, senior marketing officer, and others representing key functions.
The ALCO is also responsible for supervising the preparation and annual revisions of the financial segments of the annual budget, which is built upon the committee's economic and interest-rate assumptions. It is the responsibility of the ALCO to modify prudently the Corporation's asset/liability policies.
Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. For that reason, the ALCO has established tolerance limits based upon a 200-basis point change in interest rates. At December 31, 2009, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 9.33% and an immediate 200-basis point increase would negatively impact the next 12 months net interest income by 1.41%. Both are within the Corporation's policy guideline of 15% established by ALCO. Given the overall low level of current interest rates and the unlikely event of a 200-basis point decline from this point, management additionally modeled an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates. When applied, it is estimated these scen arios would result in negative impacts to net interest income of 3.47% and 2.06% respectively. Management is comfortable with the level of exposures at these levels.
A related component of interest rate risk is the expectation that the market value of our capital account will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact component: an institution exposed to earnings erosion is also exposed to shrinkage in market value. At December 31, 2009, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value of our capital account by 10.97% and an immediate 200-basis point increase in interest rates would negatively impact the market value by 5.59%. Both are within the established tolerance limit of 15%. Management also modeled the impact to the market value of our capital with an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates, based on the current interest rate environment. When applied, it is estimated these scenarios would result in negative impacts to the market value of our capital of 4.47% and 9.45% respectivel y. Management is also comfortable with the level of exposures at these levels.
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Management does recognize the need for certain hedging strategies during periods of anticipated higher fluctuations in interest rates and the Board-approved Funds Management Policy provides for limited use of certain derivatives in asset liability management. These strategies were not employed during 2009.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the FASB issued guidance that defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This guidance also establishes a fair value hierarchy about the assumptions used to measure fair value and clarifies assumptions about risk and the effect of a restriction on the sale or use of an asset. The guidance was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued guidance that delayed the effective date of this fair value guidance for all nonfinancial assets and nonfinancial liabilities, except those that are recognized or disclosed at fair value on a recurring basis (at least annually) to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years. The Corporation adopted this guidance on January 1, 2009. The effect of adopting this new guidance was not material.
In December 2007, the FASB issued guidance that establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. The Corporation adopted this guidance on January 1, 2009. The new guidance was applied to the Canton acquisition, resulting in the recognition of acquisition costs of $1.448 million in 2009.
In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards Codification ("The Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.
In December 2008, the FASB issued guidance on an employer's disclosures about plan assets of a defined benefit pension or other post-retirement plan. These additional disclosures include disclosure of investment policies and fair value disclosures of plan assets, including fair value hierarchy. The guidance also includes a technical amendment that requires a nonpublic entity to disclose net periodic benefit cost for each annual period for which a statement of income is presented. The Corporation adopted this guidance on January 1, 2009. Upon initial application, provisions of the guidance are not required for earlier periods that are presented for comparative purposes. The new disclosures have been presented in the notes to the consolidated financial statements.
In April 2009, the FASB amended existing guidance for determining whether impairment is other-than-temporary for debt securities. The guidance requires an entity to assess whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) other-than-temporary impairment ("OTTI") related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. Additionally, disclosures about other-than-tempora ry impairments for debt and equity securities were expanded. The Corporation elected to adopt this guidance as of April 1, 2009. At adoption, the Corporation reversed $402 thousand (pre-tax) of previously recognized impairment charges, representing the non-credit portion.
In April 2009, the FASB issued guidance that emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or liability has decreased significantly. Fair value is the price that would be received for an asset sold or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement
==========================================32===========================================
date under current market conditions. When observable transactions or quoted prices are not considered orderly, then little, if any, weight should be assigned to the indication of the asset or liability's fair value. Adjustments to those transactions or prices should be applied to determine the appropriate fair value. The adoption of this guidance on June 30, 2009 did not have a material impact on the results of operations or financial position.
EFFECT OF NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS
In June 2009, the FASB amended previous guidance relating to transfers of financial assets and eliminates the concept of a qualifying special purpose entity. This guidance must be applied as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. This guidance must be applied to transfers occurring on or after the effective date. Additionally, on and after the effective date, the concept of a qualifying special-purpose entity is no longer relevant for accounting purposes. Therefore, formerly qualifying special-purpose entities should be evaluated for consolidation by reporting entities on and after the effective date in accordance with the applicable consolidation guidance. The disclosure provisions were also amended and apply to transfers that occurred both before and after the effective date of this guidance. The effect of adopting th is new guidance is expected to be immaterial.
In June 2009, the FASB amended guidance for consolidation of variable interest entity guidance by replacing the quantitative-based risks and rewards calculation for determining which enterprise, if any, has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity that most significantly impact the entity's economic performance and (1) the obligation to absorb losses of the entity or (2) the right to receive benefits from the entity. Additional disclosures about an enterprise's involvement in variable interest entities are also required. This guidance is effective as of the beginning of each reporting entity's first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. Early adoption is prohibited. The effect of adopting this new guidance is expected to be immaterial.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Corporation's main market risk exposure is to changing interest rates. A discussion of the Corporation's exposure to changing interest rates is included under the heading "Interest Rate Risk" in Management's Discussion and Analysis of Financial Condition and Results of Operations.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Item 15 are filed as part of this report and appear on pages F-1 through F-40.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
The Corporation's management, with the participation of our President and Chief Executive Officer, who is the Corporation's principal executive officer, and our Treasurer and Chief Financial Officer, who is the Corporation's principal financial officer, has evaluated the effectiveness of the Corporation's disclosure controls and procedures as of December 31, 2009. Based upon that evaluation, the President and Chief Executive Officer and the Treasurer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective as of December 31, 2009.
During the fourth fiscal quarter, there have been no changes in the Corporation's internal control over financial reporting that have materially affected, or that are reasonably likely to materially affect, the Corporation's internal control over financial reporting.
=============================================33========================================
We, as members of management of the Corporation, are responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation's internal control over financial reporting is a process designed to provide reasonable assurance to the Corporation's management and Board of Directors regarding the reliability of financial reporting and the preparation of the Corporation's financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditure s of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As of December 31, 2009 management assessed the effectiveness of the Corporation's internal control over financial reporting based on the criteria for effective internal control over financial reporting established in the "Internal Control-Integrated Framework," issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, we assert that the Corporation maintained effective internal control over financial reporting as of December 31, 2009 based on the specified criteria.
Crowe Horwath LLP, an independent registered public accounting firm, which audited the Corporation's 2009 consolidated financial statements included in this report, has issued an audit report on the effectiveness of the Corporation's internal controls over financial reporting.
/s/ Ronald M. Bentley
President and Chief Executive Officer
March 15, 2010
/s/ John R. Battersby, Jr.
Treasurer and Chief Financial Officer
Item 9B. OTHER INFORMATION
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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The names and ages of the executive officers of the Corporation and positions held by each are presented in the following table. Officers are elected annually by the Board of Directors.
Name
Age
Position (served since)
Ronald M. Bentley
57
President and Chief Executive Officer of the Corporation and the Bank (2007); Chief Operating Officer of the Bank (2006); President, Retail Banking at NBT Bancorp, Inc. (2005); Executive Vice President, Retail Banking and Regional President at NBT Bancorp, Inc. (2003).
Mr. Bentley has been with the Company since 2006.
Jane H. Adamy
59
Corporate Secretary of the Corporation and the Bank (2001); Senior Vice President of the Bank (2004); Trust Compliance Officer (2008). Mrs. Adamy has been with the Company since 1972.
John R. Battersby, Jr.
Chief Financial Officer and Treasurer of the Corporation (2003); Executive Vice President, Chief Financial Officer and Treasurer of the Bank (2004). Mr. Battersby has been with the Company since 1988.
Richard G. Carr
56
Senior Vice President of the Bank (2004) responsible for Business Client Service. Mr. Carr has been with the Company since 1997.
James E. Corey III
63
Vice President of the Corporation (1993); Executive Vice President of the Bank (1998); Chief Risk Officer of the Bank (2009). Mr. Corey has been with the Company since 1988.
Michael J. Crimmins
Senior Vice President of the Bank (2006) responsible for Support Services; Vice President of Operations at Elmira Savings and Loan Association (1993-2006); Vice President of Operations at Community Bank (2006). Mr. Crimmins has been with the Company since 2006.
Louis C. DiFabio
46
Senior Vice President of the Bank (2005) responsible for Retail Client Services. Mr. DiFabio has been with the Company since 1987.
Melinda A. Sartori
52
Executive Vice President of the Bank (2002) responsible for Trust and Investment Services. Mrs. Sartori has been with the Company since 1994.
Linda M. Struble
Senior Vice President of the Bank (2000) responsible for Human Resources. Ms. Struble has been with the Company since 1984.
Norman R. Ward
60
Senior Vice President and Chief Auditor of the Corporation and the Bank (2000). Mr. Ward has been with the Company since 1971.
Michael J. Wayne
49
Senior Vice President (2009) responsible for Marketing Services; Vice President of the Bank (2006); Vice President Internal Audit and Risk Management at Elmira Savings and Loan Association (2003); Vice President of Public and Customer Relations at Elmira Savings and Loan Association (1993-2006). Mr. Wayne has been with the Company since 2006.
Additional information responsive to this Item 10 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2010 Annual meeting of Shareholders.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item 11 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2010 Annual Meeting of Shareholders.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND, MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information responsive to this Item 12 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2010 Annual Meeting of Shareholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR INDEPENDENCE
Information responsive to this Item 13 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2010 Annual Meeting of Shareholders.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information responsive to this Item 14 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2010 Annual Meeting of Shareholders.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The following consolidated financial statements of the Corporation appear on pages F-1 through F-40 of this report and are incorporated in Part II, Item 8:
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2009 and 2008
Consolidated Statements of Income for the three years ended December 31, 2009
Consolidated Statements of Shareholders' Equity and Comprehensive Income for thethree years ended December 31, 2009
Consolidated Statements of Cash Flows for the three years ended December 31, 2009
Notes to Consolidated Financial Statements
Exhibit 3.1
Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984. Filed as Exhibit 3.1 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
3.2
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988. Filed as Exhibit 3.2 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
3.3
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998. Filed as Exhibit 3.4 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
3.4
Amended and Restated Bylaws of the Registrant, as amended to October 21, 2009. Filed as Exhibit 3.1 to Registrant's Form 10-Q filed with the SEC on November 9, 2009 incorporated by reference herein.
4.1
Specimen Stock Certificate. Filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended December 31, 2002 and incorporated by reference herein.
10.1
Change of Control Agreement dated September 20, 2006 between Chemung Canal Trust Company and Ronald M. Bentley, President & COO. Filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended September 30, 2006 and incorporated by reference herein.
10.2
Executive Severance Agreement dated September 20, 2006 between Chemung Canal Trust Company and Ronald M. Bentley, President & COO. Filed as Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended September 30, 2006 and incorporated by reference herein.
10.3
Amended and Restated Deferred Directors' Fee Plan. Filed as Exhibit 10.3 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated by reference herein.
=============================================36========================================
10.6
Description of Arrangement for Directors' Fees. Filed as Exhibit 10.6 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated by reference herein.
10.8
Change of Control Agreement dated August 23, 2007 Chemung Canal Trust Company and John R. Battersby, Jr., Executive Vice President, Treasurer & CFO. Filed as Exhibit 10.8 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
10.9
Change of Control Agreement dated August 23, 2007 between Chemung Canal Trust Company and Melinda A. Sartori, Executive Vice President. Filed as Exhibit 10.9 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
10.10
Change of Control Agreement dated August 23, 2007 between Chemung Canal Trust Company and James E. Corey, III, Executive Vice President. Filed as Exhibit 10.10 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
21
Subsidiaries of the Registrant.
23.1
Consent of Crowe Horwath LLP, Independent Registered Public Accounting Firm.
31.1
Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2
Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. 1350.
32.2
Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. 1350.
==============================================37========================================
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages F-1 to F-40
Page
Report of Independent Registered Public Accounting Firm-Crowe HorwathLLP
F-3
Consolidated Statements of Income for the three years endedDecember 31, 2009
F-4
Consolidated Statements of Shareholders' Equity and ComprehensiveIncome for the three years ended December 31, 2009
F-5
Consolidated Statements of Cash Flows for the three years endedDecember 31, 2009
F-6
F-8
============================================38=========================================
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Elmira, New York
We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation as of December 31, 2009 and 2008, and the related consolidated statements of income, shareholders' equity and comprehensive income (loss) and cash flows for the years ended December 31, 2009, 2008 and 2007. We also have audited Chemung Financial Corporation's internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Chemung Financial Corporation's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control Over Financial Reporting as disclosed in item 9A. Our responsibility is to express an opinion on these financial statements and an opinion on the corporation's internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaulating the design and operating effectiveness of internal controls based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
============================================F-1=======================================
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Chemung Financial Corporation as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years ended December 31, 2009, 2008 and 2007 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, Chemung Financial Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
/s/ Crowe Horwath LLP
Livingston, New Jersey
=========================================F-2=========================================
CONSOLIDATED FINANCIAL STATEMENTS
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS
DECEMBER 31,
ASSETS
Cash and due from financial institutions
$ 21,189,192
$ 21,246,599
Interest-bearing deposits in other financial institutions
58,549,204
2,404,781
------------
Total cash and cash equivalents
79,738,396
23,651,380
Securities available for sale, at estimated fair value
230,983,633
191,254,900
Securities held to maturity, estimated fair value of $12,647,314 at December 31, 2009, and $9,214,787 at December 31, 2008
12,159,852
8,438,835
Federal Home Loan Bank and Federal Reserve Bank Stock, at cost
3,280,600
3,154,950
Loans, net of deferred origination fees and costs, and unearned income
595,852,792
565,185,154
(9,967,223)
(9,105,517)
Loans, net
585,885,569
556,079,637
Loans held for sale
199,503
80,413
24,886,121
24,937,808
Goodwill
10,239,527
8,806,796
Other intangible assets, net
5,386,794
6,204,494
Bank owned life insurance
2,449,226
20,709,472
15,708,894
$975,918,693
$838,318,107
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing
$195,613,007
$157,690,737
Interest-bearing
605,450,086
499,218,612
Total deposits
801,063,093
656,909,349
54,263,257
63,412,514
Federal Home Loan Bank term advances
20,000,000
Accrued interest payable
1,129,204
1,266,903
Dividends payable
880,088
875,438
8,497,386
12,846,758
885,833,028
755,310,962
Commitments and contingencies (note 16)
Shareholders' equity:
Common stock, $.01 par value per share, 10,000,000 shares authorized; 4,300,134 shares issued at December 31, 2009 and 2008
43,001
Additional paid-in capital
22,806,829
22,881,937
Retained earnings
87,826,331
85,868,637
Treasury stock, at cost (779,781 shares at December 31, 2009; 798,384 shares at December 31, 2008)
(20,024,661)
(20,547,419)
Accumulated other comprehensive loss
(565,835)
(5,239,011)
Total shareholders' equity
90,085,665
83,007,145
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
==============================================F-3=============================================
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31
Interest and dividend income:
Loans, including fees
$36,094,302
$36,661,536
$36,019,386
7,136,112
7,886,257
6,987,265
Tax exempt securities
1,131,610
804,360
794,630
1,232
67,936
58,350
126,816
18,256
15,703
-----------
Total interest and dividend income
44,490,072
45,438,345
43,875,334
Interest expense:
8,428,760
11,530,057
13,920,124
Borrowed funds
951,060
1,309,169
2,175,744
1,954,915
1,930,819
1,843,131
11,334,735
14,770,045
17,938,999
33,155,337
30,668,300
25,936,335
2,450,000
1,450,000
1,255,000
30,705,337
29,218,300
24,681,335
Trust & investment services income
8,088,654
6,833,755
6,345,041
Service charges on deposit accounts
5,263,215
5,046,976
4,706,049
Net gain on securities transactions
784,589
589,456
9,680
Other-than-temporary loss on investment securities:
Total impairment losses
(2,242,446)
(803,222)
Loss recognized in other comprehensive income
Net impairment loss recognized in earnings
Net gain on sales of loans held for sale
258,572
114,283
97,595
Credit card merchant earnings
178,180
1,483,558
1,636,787
Gain on sale of merchant discount services
466,510
Gains on sales of other real estate
24,097
671,923
Income from bank owned life insurance
51,129
3,303,505
3,406,836
3,161,439
15,709,495
17,138,152
16,628,514
Other operating expenses:
Salaries and wages
15,055,292
13,650,512
12,609,190
Pension and other employee benefits
5,096,509
2,340,527
2,030,036
Net occupancy expenses
4,283,554
4,044,212
3,248,482
Furniture and equipment expenses
1,996,067
1,998,232
1,983,011
Amortization of intangible assets
933,305
1,315,082
633,363
Data processing expense
4,078,361
4,186,764
3,802,642
Losses on sales of other real estate
29,010
15,005
22,858
FDIC insurance
1,512,629
110,470
69,302
6,336,607
6,307,181
6,121,470
39,321,334
33,967,985
30,520,354
7,093,498
12,388,467
10,789,495
1,860,663
4,034,623
3,530,112
$ 5,232,835
$ 8,353,844
$ 7,259,383
===========
Weighted average shares outstanding
3,603,129
3,593,751
3,594,998
$1.45
$2.32
$2.02
=====
===============================================F-4==============================================
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME (LOSS)
Common Stock
Additional paid-in Capital
Retained Earnings
Treasury Stock
Accumulated Other Comprehensive Income (Loss)
Balances at January 1, 2007
$ 43,001
$22,652,405
$77,183,407
$(19,496,106)
$ 1,915,554
$82,298,261
Comprehensive Income:
7,259,383
Change in unrealized gain on securities AFS, net
1,986,127
Change in funded status of Employers' Accounting for DefinedBenefit Pension and Other Benefit Plans, net
477,710
Total comprehensive income
9,723,220
Restricted stock units for directors' deferred compensationplan
84,867
Distribution of 7,334 shares of treasury stock for directors'compensation plan
54,265
187,017
241,282
Distribution of 1,230 shares restricted stock units fordirectors' deferred compensation plan
(27,659)
31,476
3,817
Distribution of 1,000 shares of treasury stock for employeecompensation
3,250
25,750
29,000
Cash dividends declared ($.97 per share)
(3,413,259)
Sale of 13,700 shares of treasury stock
34,113
352,911
387,024
Purchase of 40,325 shares of treasury stock
(1,239,262)
Balances at December 31, 2007
22,801,241
81,029,531
(20,138,214)
4,379,391
88,114,950
8,353,844
(1,312,069)
Change in funded status of Employers' Accounting for
Defined Benefit Pension and Other Benefit Plans, net
(8,306,333)
Total comprehensive (loss) income
(1,264,558)
103,365
Distribution of 8,227 shares of treasury stock fordirectors' compensation
12,180
212,010
224,190
Distribution of 1,273 shares restricted stock units fordirectors' deferred compensation
(30,818)
32,818
2,000
Distribution of 1,321 shares of treasury stock for employeecompensation
958
34,042
35,000
Cash dividends declared ($1.00 per share)
(3,514,738)
Sale of 9,400 shares of treasury stock
(4,989)
242,288
237,299
Purchase of 37,124 shares of treasury stock
(930,363)
Balances at December 31, 2008
Cumulative effect of change in accounting principle, adoptionof other-than-temporary impairment guidance, net
246,544
(246,544)
5,232,835
Change in unrealized gains (losses) on securities AFS, net
772,279
Change in unrealized gains (losses) on securities AFS forwhich a portion of an other-than-temporary impairment hasbeen recognized in earnings, net
528,827
3,618,614
10,152,555
104,929
Distribution of 10,867 shares of treasury stock for directors'compensation
(58,026)
279,716
221,690
Distribution of 1,333 shares restricted stock units fordirectors' deferred compensation
(36,617)
34,271
(2,346)
Distribution of 2,381 shares of treasury stock for employeecompensation
(11,287)
61,287
50,000
(3,521,685)
Sale of 11,800 shares of treasury stock
(74,107)
303,627
229,520
Purchase of 7,778 shares of treasury stock
(156,143)
Balances at December 31, 2009
$22,806,829
$87,826,331
$(20,024,661)
$ (565,835)
$90,085,665
========================================================================F-5=========================================================================
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities:
Adjustments to reconcile net income to netcash provided by operating activities:
Deferred income tax (benefit) expense
(1,949,446)
(185,160)
471,138
Depreciation and amortization of fixed assets
2,792,807
2,725,428
2,618,987
Amortization of premiums on securities, net
386,612
(5,851)
45,370
Accretion of deferred gain on sale of credit cards
(86,188)
Gains on sales of loans held for sale, net
(258,572)
(114,283)
(11,407)
Proceeds from sales of loans held for sale
13,514,127
3,848,275
503,857
Loans originated and held for sale
(13,374,645)
(3,775,005)
(492,450)
Net loss (gain) on sale of other real estate owned
4,913
(649,065)
Net gains on securities transactions
(784,589)
(589,456)
(9,680)
Net impairment loss recognized on investmentsecurities
2,242,446
803,222
Decrease (increase)in other assets
1,408,261
7,194,870
(783,637)
Increase in prepaid FDIC Assessment
(3,941,521)
Decrease in accrued interest payable
(333,978)
(25,539)
(30,854)
Expense related to employee stock compensation
Expense related to restricted stock units fordirectors' deferred compensation plan
(Decrease) increase in other liabilities
(1,689,170)
(7,029,759)
4,916,415
(51,129)
Origination of student loans
(3,407,942)
(5,733,707)
Proceeds from sales of student loans
1,942,673
7,647,892
5,218,044
-------------
Net cash provided by operating activities
8,679,858
18,358,988
15,238,436
Cash flows from investing activities:
Proceeds from sales of securities availablefor sale
10,834,755
Proceeds from maturities, calls and principal collected on securities available for sale
116,094,145
66,544,535
32,791,379
Proceeds from maturities, calls and principal collected on securities held to maturity
8,266,171
1,654,701
4,122,044
Purchases of securities available for sale
(161,072,813)
(94,826,153)
(10,100,000)
Purchases of securities held to maturity
(11,987,188)
(5,613,721)
(1,735,650)
Purchase of Federal Home Loan Bank andFederal Reserve Bank stock
(443,650)
(20,570,400)
(25,179,300)
Redemption of Federal Home Loan Bank andFederal Reserve Bank stock
535,500
23,317,000
22,882,500
Cash paid for purchase of trust business
(5,301,983)
Net cash received in branch acquisition
43,542,640
Net cash received in Bank of Canton acquisition
2,876,462
Cash paid for purchase of Cascio Financial
(250,000)
Proceeds from sale of other real estate owned
421,871
37,515
2,421,026
Purchases of premises and equipment
(1,819,689)
(4,182,718)
(4,116,999)
Net decrease (increase) in loans
24,994,960
(18,693,020)
(62,194,985)
Net cash used by investing activities
(11,299,476)
(9,039,621)
(46,411,968)
=============================================F-6===============================================
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIESConsolidated Statements of Cash Flows (con't)
Cash flows from financing activities:
Net increase (decrease) in demand deposits,NOW accounts, savings accounts, and insuredmoney market accounts
90,109,046
26,602,484
(9,050,100)
Net (decrease) in time deposits and individual retirement accounts
(18,809,498)
(7,236,981)
(3,441,848)
Net (decrease) increase in securities sold under agreements to repurchase
(9,149,257)
32,200,222
(3,811,656)
Proceeds from Federal Home Loan Bank term advances
10,000,000
Proceeds from Federal Home Loan Bank overnight advances
62,400,000
Repayments of Federal Home Loan Bank overnight advances
(62,400,000)
(7,900,000)
Repayment of Federal Home Loan Bank term advances
(10,000,000)
Purchase of treasury stock
Sale of treasury stock
387,025
Cash dividends paid
(3,517,034)
(3,518,983)
(3,382,566)
Net cash provided (usued) by financing activities
58,706,634
(15,046,322)
33,961,593
Net increase (decrease) in cash and cash equivalents
56,087,016
(5,726,955)
2,788,061
Cash and cash equivalents, beginning of year
29,378,335
26,590,274
Cash and cash equivalents, end of year
$79,738,396
$23,651,380
$29,378,335
Supplemental disclosure of cash flow information:
Cash paid during the year for:
$11,472,434
$14,795,584
$17,969,853
Income taxes
$ 7,399,018
$ 3,320,850
$ 30,972
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned
$ 427,108
$ 454,041
$ 27,200
===============================================F-7==============================================
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Chemung Financial Corporation (the "Corporation"), through its wholly owned subsidiaries, Chemung Canal Trust Company (the "Bank") and CFS Group, Inc., provides a wide range of banking, financing, fiduciary and other financial services to its clients. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory agencies.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America and include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. The allowance for loan losses, other-than-temporary impairment of investment securities and goodwill and other intangibles are particularly subject to change.
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 or not intended to be held to maturity are classified as available for sale and carried at fair value. Unrealized holding gains and losses on securities classified as available for sale are excluded from earnings and are reported as accumulated other comprehensive income (loss) in shareholders' equity, net of the related tax effects, until realized. Realized gains and losses are determined using the specific identification method.
Securities are placed on non-accrual status when management believes there are significant doubts regarding the ultimate collectibility of interest and/or principal. 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 is recognized when earned. Management evaluates securities for other-than-temporary impairment ("OTTI") at least on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
FEDERAL HOME LOAN BANK (FHLB) AND FEDERAL RESERVE BANK (FRB) STOCK
The Bank is a member of both the FHLB and FRB system. FHLB members are required to own a certain amount of stock based on the level of borrowings and other factors, while FRB members are required to own a certain amount of stock based on a percentage of the Bank's capital stock and surplus. FHLB and FRB stock are carried at cost and classified as non-marketable equities. Cash dividends are reported as income.
BANK OWNED LIFE INSURANCE
In conjunction with the Corporation's acquisition of Canton Bancorp, Inc. on May 29, 2009, the Corporation acquired Bank Owned Life Insurance ("BOLI") on certain former key employees and directors of the Bank of Canton. BOLI is recorded at the amount that can be realized under the insurance contracts at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the cash surrender value are recorded in other income.
=========================================F-8===========================================
LOANS
Loans are stated at the amount of unpaid principal balance less unearned discounts and net deferred origination fees and costs. The Corporation has the ability and intent to hold its loans for the foreseeable future, except for student loans, which are sold to a third party upon reaching repayment status.
Certain mortgage loans are originated with the intent to sell. Loans held for sale are recorded at the lower of cost or fair value. Loans held for sale, as well as the commitments to sell the loans that are originated for sale, are regularly evaluated for changes in fair value. If necessary, a valuation allowance is established with a charge to income for unrealized losses attributable to a change in market rates.
Interest on loans is accrued and credited to operations using the interest method. The accrual of interest is generally discontinued 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 on non-accrual status if management believes such classification is otherwise warranted. Loans are returned to accrual status when they become current as to principal and interest or when, in the opinion of management, the Corporation expects to receive all of its original principal and interest. Loan origination fees and certain direct loan origination costs are deferred and amortized over the life of the loan as an adjustment to yield, using the interest method.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectibility of all or a portion of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the historical loan loss experience, review of specific problem loans (including evaluations of the underlying collateral), changes in the composition and volume of the loan portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers' ability to pay. Management believes that the allowance for loan losses is adequate to absorb probable incurred losses. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
Management, after considering current information and events regarding the borrower's ability to repay their obligations, classifies a loan as 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, less the estimated costs to sell, if the loan is collateral dependent. Commercial and commercial real estate loans that are in non-accrual or troubled debt restructuring status, as well as accruing loans 90 days or more past due are considered to be impaired loans. Residential mortgage loans and consumer loans are evaluated collectively since they are homogeneous and generally carry smaller balances. In general, interest income on im paired 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, equipment, leasehold improvements and furniture are stated at cost less accumulated depreciation and amortization. Depreciation is charged to current operations under the straight-line method 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 asset.
=========================================F-9===========================================
OTHER REAL ESTATE
Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at estimated fair value of the property less estimated costs to dispose at the time of acquisition. Write downs from the carrying value of the loan to estimated fair value which are required at the time of foreclosure are charged to the allowance for loan losses. 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 tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for unused tax loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled, or the tax loss carryforwards are expected to be utilized. 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. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.
TRUST AND INVESTMENT SERVICES 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 and Investment Services income is recognized on the accrual method as earned based on contractual rates applied to the balances of individual trust accounts. The unaudited market value of trust assets under administration totaled $1.632 billion at December 31, 2009 and $1.578 billion at December 31, 2008.
PENSION PLAN
Pension costs, based on actuarial computations of benefits for employees, are charged to current operating results. The Corporation's funding policy is to contribute amounts to the plan sufficient to meet minimum regulatory funding requirements, plus such additional amounts as the Corporation may determine to be appropriate from time to time.
POSTRETIREMENT BENEFITS
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to employees who meet minimum age and service requirements. Postretirement life insurance benefits are also provided to certain employees who retired prior to July 1981.
GOODWILL AND INTANGIBLE ASSETS
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009 represents the future economic benefits arising from other assets acquired that are not individually identified and separately recognized. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Corporation has selected December 31 as the date to perform the annual impairment test. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Goodwill and other intangible assets carried on the Corporation's consolidated financial statements totaled $15.6 million and $15.0 million, respectively, at December 31, 2009 and 2008.
=========================================F-10==========================================
The Corporation's other intangible assets resulted from the purchase of the trust business of Partners Trust Bank in May of 2007, the acquisition of three former M&T Bank branch offices in March 2008, the acquisition of Cascio Financial Strategies in May of 2008 and the acquisition of Canton Bancorp, Inc. in May 2009, with balances of $4.134 million, $813 thousand, $341 thousand and $99 thousand, respectively, at December 31, 2009. The trust business intangible is being amortized to expense over the expected useful life of 15 years. The identifiable core deposit and customer relationship intangibles related to the M&T branch offices and Canton Bancorp, Inc. acquisitions are being amortized to expense using a 7.25 and 7 year accelerated method, respectively. The customer relationship intangible for Cascio Financial is being expensed over a 5 year period. The balances are reviewed for impairment on an ongoing basis or whenever events or changes in business circumstances warrant a review of the carr ying value. If impairment is determined to exist, the related write-down of the intangible asset's carrying value is charged to operations.
Based on these impairment reviews, the Corporation determined that goodwill and other intangible assets were not impaired at December 31, 2009.
BASIC EARNINGS PER SHARE
Basic earnings per share is computed on the basis of the weighted average number of common shares outstanding. Issuable shares including those related to directors' restricted stock units and directors stock compensation are considered outstanding and are included in the computation of basic earnings per share as they are earned. The Corporation has no other potentially dilutive stock compensation or stock award arrangements. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from banks, interest-bearing deposits with other financial institutions and federal funds sold.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Corporation enters into sales of securities under agreements to repurchase. The 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 continues to be carried in the Corporation's securities portfolio. The Corporation has agreed to repurchase securities identical to those sold. The securities underlying the agreements are under the Corporation's control.
OTHER FINANCIAL INSTRUMENTS
The Corporation is a party to certain other financial instruments with off-balance sheet risk such as unused portions of lines of credit and commitments to fund new loans. The Corporation's policy is to record such instruments when funded.
SEGMENT REPORTING
The Corporation's operations are solely in the financial services industry and primarily include the provision of traditional banking and trust services. The Corporation operates primarily in the New York counties of Chemung, Herkimer, Steuben, Schuyler, Tioga, Tompkins and Broome, and the northern tier of Pennsylvania. The Corporation has identified separate operating segments and internal financial information is primarily reported and aggregated in two lines of business, banking and trust and investment advisory services.
RECLASSIFICATION
Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform with the current year's presentation.
==========================================F-11==========================================
In June 2009, the FASB replaced The Hierarchy of Generally Accepted Accounting Principles, with the FASB Accounting Standards Codification (The Codification) as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The Codification was effective for financial statements issued for periods ending after September 15, 2009.
In April 2009, the FASB issued guidance that emphasizes that the objective of a fair value measurement does not change even when market activity for the asset or liability has decreased significantly. Fair value is the price that would be received for an asset sold or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. When observable transactions or quoted prices are not considered orderly, then little, if any, weight should be assigned to the indication of the asset or liability's fair value. Adjustments to those transactions or prices should be applied to determine the appropriate fair value. The adoption of this guidance on June 30, 2009 did not have a material impact on the results of operations or financial position.
=========================================F-12==========================================
(2) RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Corporation is required to maintain certain reserves of vault cash and/or deposits with the Federal Reserve Bank of New York. The amount of this reserve requirement was $750,000 at both December 31, 2009 and December 31, 2008.
(3) SECURITIES
Amortized cost and estimated fair value of securities available for sale at December 31, 2009 and 2008 are as follows:
Estimated Fair Value
Obligations of U.S. Government and U.S.Government sponsored enterprises
$ 84,669,025
$ 84,620,520
$ 60,190,338
$ 61,543,499
91,893,807
93,944,883
100,791,511
102,932,724
Obligations of states and politicalsubdivisions
31,280,180
32,125,087
16,264,746
16,419,984
11,740,197
12,184,682
2,500,000
1,750,000
2,983,306
2,261,480
4,809,523
3,285,000
825,488
5,846,981
827,089
5,323,693
--------------
$ 223,392,003
$ 230,983,633
$ 185,383,207
$ 191,254,900
=============
==============
Gross unrealized gains and losses on securities available for sale at December 31, 2009 and 2008, were as follows:
Unrealized
Gains
Losses
Obligations of U.S. Government and U.S.Governmentsponsored enterprises
$ 120,332
$ 168,837
$ 1,353,161
2,244,777
193,701
2,302,649
161,436
847,618
2,711
239,458
84,220
519,488
75,003
750,000
721,826
1,524,523
5,043,198
21,705
4,496,604
$ 8,775,413
$ 1,183,783
$ 8,391,872
$ 2,520,179
=========================================F-13==========================================
The amortized cost and estimated fair value by years to contractual maturity (mortgage-backed securities are shown as maturing based on the estimated average life at the projected prepayment speed) as of December 31, 2009, for debt securities available for sale are as follows:
After One, ButWithin Five Years
Amortized
Fair
Cost
Value
$54,096,953
$54,163,485
$ 20,572,853
$20,510,505
5,518,605
5,567,258
86,146,929
88,145,118
3,553,420
3,581,466
16,529,827
17,064,843
704,673
706,822
11,035,524
11,477,860
$63,873,651
$64,019,031
$134,285,133
$137,198,326
After Five, ButWithin Ten Years
$ 9,999,219
$ 9,946,530
228,273
232,507
11,196,933
11,478,778
$21,196,152
$21,425,308
$ 3,211,579
$ 2,493,987
Actual maturities may differ from contractual maturities above because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
Proceeds from sales and calls of securities available for sale that resulted in realized gains were $10,834,755, $1,509,456 and $1,038,750 for the years ended December 31, 2009, 2008 and 2007, respectively. Gross gains of $784,589, $589,456 and $9,680 were realized on these sales and calls during 2009, 2008 and 2007, respectively. There were no gross losses on these transactions for the years ended December 31, 2009, 2008 and 2007. The tax provision related to security gains was $303,526, $228,037 and $3,745 respectively.
Amortized cost and estimated fair value of securities held to maturity at December 31, 2009 and 2008 are as follows:
$ 12,159,852
$ 12,647,314
$ 8,438,835
$ 9,214,787
Securities held to maturity had unrealized gains totaling $491,943 and $775,952 at December 31, 2009 and 2008, respectively. There were unrealized losses totaling $4,481 at December 31, 2009. There were no unrealized losses at December 31, 2008. There were no sales of securities held to maturity in 2009, 2008 or 2007.
==========================================F-14=========================================
The contractual maturity of securities held to maturity is as follows at December 31, 2009:
$ 6,999,791
$ 7,073,795
$ 3,426,581
$ 3,668,516
$ 1,533,480
$ 1,661,885
$ 200,000
$ 243,118
The following table summarizes the investment securities available for sale and held to maturity with unrealized losses at December 31, 2009 and December 31, 2008 by aggregated major security type and length of time in a continous unrealized position:
Less than 12 months
12 months or longer
Fair Value
Obligations of U.S.Governmentand U.S. Governmentsponsored enterprises
$39,979,031
23,475,694
193,702
730,776
7,192
200,222
2,425,000
75,000
2,625,222
60,480
102,420
2,201,000
619,405
721,825
28,287
----------
Total temporarily impaired securities
$64,474,490
$ 493,859
$ 4,626,000
$ 694,405
$69,100,490
$1,188,264
==========
Obligations of U.S.Governmentand US Government sponsoredenterprises
2,178,309
29,993
6,445,524
131,442
8,623,833
161,435
5,018,240
84,221
2,525,000
$11,471,549
$ 2,388,737
$ 6,445,524
$ 131,442
$17,917,073
Other-Than-Temporary-Impairment
In determining OTTI for debt securities, management considers many factors, including: (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) whether the market decline was affected by macroeconomic conditions, and (4) whether the Company has the intent to sell the debt security or more likely than not will be required to sell the debt security before its anticipated recovery. The assessment of whether an other-than-temporary decline exists involves a high degree of subjectivity and judgment and is based on the information available to management at a point in time.
In order to determine OTTI for purchased beneficial interests, the Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
=========================================F-15==========================================
When OTTI occurs, for either debt securities or purchased beneficial interests, the amount of the OTTI recognized in earnings depends on whether an entity intends to sell the security or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss. If an entity intends to sell or it is more likely than not it will be required to sell the security before recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in earnings equal to the entire difference between the investment's amortized cost basis and its fair value at the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis less any current-period loss, the OTTI shall be separated into the amount representing the credit loss and the amount related to all o ther factors. The amount of the total OTTI related to the credit loss is determined based on the present value of cash flows expected to be collected and is recognized in earnings. The amount of the total OTTI related to other factors is recognized in other comprehensive income, net of applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the investment.
As of December 31, 2009, the majority of the Corporation's unrealized losses in the investment securities portfolio related to four trust preferred securities held. Two of these securities are single issue trust preferred securities, both of which continue to be rated Baa1, which is defined as lower medium credit quality by Moody's. The combined market value of these two securities was $1.75 million with unrealized losses of $117 thousand at December 31, 2009. The Corporation continues to monitor these securities and believes there is no OTTI and does not have the intent to sell these securities and it is likely that it will not be required to sell the securities before their anticipated recovery.
The two other trust preferred securities held consist of investments in pooled trust preferred securities. The decline in fair value on these securities is primarily attributable to the financial crisis and resulting credit deterioration and financial condition of the underlying issuers, all of which are financial institutions. This deterioration may affect the future receipt of both principal and interest payments on these securities. This fact combined with the current illiquidity in the market makes it unlikely that the Corporation would be able to recover its investment in these securities if the securities were sold at this time.
Our analysis of these investments includes $1.1 million book value of collateralized debt obligations ("CDO's") consisting of pooled trust preferred securities. These securities were rated high quality at inception, but at December 31, 2009 Moody's rated these securities both as Caa3, which is defined as substantial risk of default. The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to the previous estimate to determine if there are adverse changes in cash flows during the quarter. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any other relevant market inform ation including announcements of interest payment deferrals or defaults of underlying trust preferred securities. Assumptions used in the model include expected future default rates and prepayments. We assume no recoveries on defaults and treat all interest payment deferrals as defaults.
In determining the amount of "currently performing" collateral for the purposes of modeling the expected future cash flows, management analyzed the default and deferral history over the past 18 months in both of the securities held. This review indicated significant increases in the number and amount of defaults and deferrals by the issuers. Additionally, management has noted the correlation between the rising levels of non-performing loans as a percent of tangible equity plus loan loss reserves, by those issuers that have defaulted and/or deferred interest payments. Therefore management has used this ratio as a primary indicator to project the levels of future defaults for modeling purposes. Management expects the trend of higher default and deferral levels to continue over the next 12 to 24 months as it is widely predicted by experts in the industry that the level of bank failures in 2010 will most probably exceed the 140 bank failures reported in 2009, potentially negatively impacting the fu ture cash flows of these securities.
=========================================F-16==========================================
The following table provides detailed information related to the pooled trust preferred securities held as of December 31, 2009:
Description
Actual Deferrals as % of Outstanding Collateral
Actual Defaults as % of Original Collateral
Excess Subordination as % of Performing Collateral
Expected Additional Defaults as % of Performing Collateral
MM Community Funding IX, Ltd. (Class B-2)
18.43%
15.01%
-37.33%
25.47%
TPREF Funding II, Ltd. (Class B)
12.56%
13.51%
-28.91%
16.04%
In the table above, "Excess Subordination as % of Performing Collateral" was calculated by dividing the difference between the total face value of performing collateral less the face value of all outstanding note balances not subordinate to our investment, by the total face value of performing collateral. This ratio measures the extent to which there may be tranches within each pooled trust preferred structure available to absorb credit losses before the Corporation's securities would be impacted. As mentioned earlier, the levels of defaults and deferrals in these pools have increased significantly in recent months, which have resulted in a significant reduction in the amount of performing collateral. As a result, the negative Excess Subordination as a % of Performing Collateral percentages shown above indicate there is no support from subordinate tranches available to absorb losses before the Corporation's securities would be impacted. A negative ratio is not the only factor to consider when determining if an OTTI should be recorded. Other factors affect the timing and amount of cash flows available for payments to investors such as the excess interest paid by the issuers, as issuers typically pay higher rates of interest than are paid out to investors.
Upon completion of the December 31, 2009 analysis, our model indicated other-than-temporary impairment on both of these securities, since both experienced additional defaults or deferrals of underlying issuers during the period. For the year ended December 31, 2009, OTTI losses recognized in earnings totaled $2.242 million. Both of these securities remained classified as available for sale and represented $605 thousand of the unrealized losses reported at December 31, 2009. Both securities continue to accrue interest and payments continue to be made as agreed.
When the analysis of these securities was conducted at December 31, 2009, the present value of expected future cash flows using a discount rate equal to the yield in effect at the time of purchase, was compared to the previous quarters' analysis. This analysis indicated a further decline in value attributed to credit related factors stemming from further deterioration in the underlying collateral payment streams. Therefore the amount of this decline in fair value or OTTI was recorded in earnings. Additionally, the present value of the expected future cash flows was calculated using a current estimated discount rate that a willing market participant might use to value the securities based on current market conditions and interest rates. This comparison indicated an increase in value from the previous quarter based on factors other than credit which resulted in a gain reported in other comprehensive income. This result is consistent with the fact that some improvement has been noted recently in the credit markets related to overall corporate and financial institution credit spreads. Therefore, while the credit quality related to these securities declined during the quarter, the change in value related to other factors actually improved and partially offset the decline in credit quality when assessing the overall fair value of the impaired securities. This explains how changes in credit quality may or may not correlate to changes in the overall fair value of the impaired securities as the change in credit quality is only one component in assessing the overall fair value of the impaired securities. Therefore the recognition of additional credit related OTTI resulted in a gain reported in other comprehensive income.
=========================================F-17=======================================
The table below presents a rollforward of the cumulative credit losses recognized in earnings for the year ended December 31, 2009:
Beginning balance, January 1, 2009
$ 803,222
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized
1,243,246
Additions/Subtractions
Amounts realized for securities sold during the period
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security
Increases to the amount related to the credit loss for which other-than- temporary impairment was previously recognized
999,200
Ending balance, December 31, 2009
$ 3,045,668
Interest and dividend income on securities for the years ended December 31, 2009, 2008 and 2007 was as follows:
Taxable:
Obligations of U.S. Government and U.S. Governmentsponsored enterprises
$ 1,969,773
$ 2,993,428
$ 3,509,949
4,186,550
3,893,983
2,648,457
362,188
169,654
143,533
306,102
365,083
210,796
311,499
464,109
474,530
Exempt from Federal taxation:
$ 8,267,722
$ 8,690,617
$ 7,781,895
The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $142,575,099 at December 31, 2009 and $151,467,956 at December 31, 2008. This includes mortgage-backed securities, residential totaling $52,709,353 and $65,892,652 (fair value of $54,486,045 and $67,664,077), and obligations of U.S. Government sponsored enterprises totaling $11,601,161 and $19,199,068 (fair value of $11,646,404 and $19,542,379), pledged to secure securities sold under agreements to repurchase at December 31, 2009 and 2008, respectively.
There are no securities of a single issuer (other than securities of U.S. Government sponsored enterprises) that exceed 10% of shareholders' equity at December 31, 2009 or 2008.
The Corporation has an equity investment in Cephas Capital Partners, L.P. This small business investment company was established for the purpose of providing financing to small businesses in market areas served by the Corporation, including minority-owned small businesses and those that are anticipated to create jobs for the low to moderate income levels in the targeted areas. As of December 31, 2009 and 2008, these investments totaled $2,428,436 and $2,549,222, respectively, are included in other assets, and are accounted for under the equity method of accounting.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio, net of deferred origination fees and cost, and unearned income is summarized as follows:
$162,446,550
$156,633,166
120,912,941
91,881,682
121,058,808
123,596,986
94,122,278
101,076,153
97,312,215
91,997,167
$595,852,792
$565,185,154
Residential mortgages held for sale as of December 31, 2009 and 2008 were $199,503 and $80,413, respectively.
=========================================F-18==========================================
Residential mortgages totaling $106,596,585 at December 31, 2009, and $111,242,438 December 31, 2008, were pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLB.
The Corporation's market area encompasses the New York State counties of Broome, Chemung, Herkimer, Schuyler, Steuben, Tioga, and Tompkins, as well as Bradford County in the northern tier of Pennsylvania. Substantially all of the Corporation's outstanding loans are with borrowers living or doing business within 25 miles of the Corporation's branches in these counties. The Corporation's concentrations of credit risk by loan type 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 table above. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.
The following table summarizes the Corporation's non-performing loans at December 31, 2009 and 2008:
$ 5,910,051
$ 2,822,115
7,376,972
745,926
Loans 90 days or more past due and still accruing interest
517,359
975,567
$13,804,382
$ 4,543,608
The total amount of interest income that would have been recorded if the above non-accrual and troubled debt restructured loans had been current in accordance with their original terms and had been outstanding throughout the period or since origination, if held for part of the period, in 2009, 2008 and 2007 was $932,318, $255,775 and $234,716, respectively. Interest income was recognized in 2009, 2008 and 2007 on those loans in the amount of $596,301, $84,620, and $58,818, respectively. The Corporation is not committed to advance additional funds to borrowers with non-performing loans.
Transactions in the allowance for loan losses for the years ended December 31, 2009, 2008 and 2007 were as follows:
Balances at January 1
$ 9,105,517
$ 8,452,819
$ 7,983,256
Loans charged-off
(1,840,899)
(1,372,415)
(1,288,267)
Recoveries
252,605
575,113
502,830
Balances at December 31
$ 9,967,223
$ 8.452.819
At December 31, 2009 and 2008, the recorded investment in loans that are considered to be impaired totaled $10,093,199 and $2,690,174, respectively. Included in the 2009 amount are impaired loans of $3,357,906 for which an impairment allowance has been recognized. The related impairment allowance was $844,551. The 2008 amount includes $1,663,761 of impaired loans with a related impairment allowance of $1,276,359. The average recorded investment in impaired loans during 2009, 2008 and 2007 was $9,300,071, $2,551,013 and $2,487,040, respectively. During 2009 interest income recognized on impaired loans during the period the loans were impaired totaled $476,150, $183,280 of which was recognized on a cash-basis. During 2008, interest income recognized on impaired loans during the period the loans were impaired totaled $65,256, $1,640 of which was recognized on a cash-basis. During 2007, interest income recognized on impaired loans during the period the loans were impaired totaled $44,094, none of which w as recognized on a cash-basis.
(5) PREMISES & EQUIPMENT
Premises and equipment at December 31, 2009 and 2008 are as follows:
Land
$ 3,559,558
$ 3,371,408
Buildings
30,060,241
28,991,156
Equipment and furniture
28,356,217
27,397,896
Leasehold improvements
2,914,386
2,388,870
$64,890,402
$62,149,330
Less accumulated depreciation and amortization
40,004,281
37,211,522
$24,886,121
$24,937,808
=========================================F-19==========================================
Operating Leases: The Corporation leases certain branch properties under operating leases. Rent Expense was $662,119, $568,823, and $169,981 for 2009, 2008, and 2007. Rent committments, before considering renewal options that generally are present, were as follows:
Year
Estimated Expense
$ 576,617
556,576
552,660
543,210
541,267
2015 and thereafter
3,127,651
$ 5,897,981
(6) BUSINESS COMBINATIONS
Acquisition of Canton Bancorp, Inc.
On May 29, 2009, Chemung Financial Corporation acquired 100 percent of the outstanding shares of Canton Bancorp, Inc. As a result of the acquisition, Chemung Financial expects to enhance its relationship with the residents of northeastern Pennsylvania through its extensive menu of products and services, combined with its high touch approach to quality customer service. The Corporation also looks at the acquisition as an opportunity to market additional products and services to new customers, including a full menu of Trust and Investment services.
Under the terms of the agreement, each shareholder of Canton Bancorp, Inc. received a cash payout of $272 per share, totaling approximately $7.7 million. The total purchase price resulted in approximately $1.4 million in goodwill and $116 thousand of other identifiable intangible assets. Goodwill will not be amortized but instead evaluated periodically for impairment, consistent with current accounting standards. Other identifiable intangible assets are being amortized using an accelerated method over 7 years. None of the goodwill recognized is expected to be deductible for income tax purposes. Other identifiable intangible assets are deductible for income tax purposes on a straight-line basis over 15 years.
Net assets acquired at May 29, 2009 are shown in the table below (in thousands).
$ 10,528
Securities available for sale
5,525
58,766
1,433
Other identifiable intangible assets
116
4,691
--------
Total assets acquired
$ 81,059
$ 72,854
553
Total liabilities assumed
$ 73,407
Net assets acquired
$ 7,652
========
=========================================
Canton Bancorp, Inc.'s results of operations have been reflected in Chemung Financial Corporation's consolidated statements of income beginning as of the acquisition date. As we merged the acquiree into the business operations of Chemung Canal Trust Company as of the acquisition date, it is not practicable to disclose the amount of revenue and earnings of the acquiree from the acquisition date through December 31, 2009 as the amounts cannot be readily determined. Pro forma condensed consolidated income statements for the years ended December 31, 2009 and 2008 as if the merger occurred at the beginning of each period presented are as follows (in thousands):
December 31, 2009
December 31, 2008
-------------------
$ 46,232
$ 50,218
12,094
17,247
34,138
32,971
1,810
31,638
31,161
Non-interest income
15,851
17,562
Non-interest expense
40,912
36,466
Income before income taxes
6,577
12,257
1,685
3,990
$ 4,892
$ 8,267
Non-interest expense for the year ended December 31, 2009 includes $1.4 million of direct acquisition related expenses incurred by the Corporation.
(7) GOODWILL AND INTANGIBLE ASSETS
Beginning of year
$ 8,806,796
$ 1,516,666
Acquired goodwill
1,432,731
7,290,130
End of year
$ 10,239,527
Acquired intangible assets were as follows at December 31, 2009 and 2008:
At December 31, 2009
At December 31, 2008
Carrying Amount
Accumulated Amortization
Core deposit intangibles
$ 7,140,066
$ 6,422,294
$ 7,024,461
$ 6,013,280
Other customer relationship intangibles
6,133,116
1,464,094
939,803
Carrying amount
$13,273,182
$ 7,886,388
$13,157,577
$ 6,953,083
Aggregate amortization expense was $933,305, $1,315,082 and $633,363 for 2009, 2008 and 2007.
The remaining estimated aggregate amortization expense at December 31, 2009 is listed below:
$ 730,895
680,439
629,983
521,195
429,073
2,395,209
$ 5,386,794
(8) DEPOSITS
A summary of deposits at December 31, 2009 and 2008 is as follows:
48,273,844
39,287,509
Insured money market accounts
144,501,615
96,215,118
Savings deposits
130,207,216
113,067,542
282,467,411
250,648,443
$801,063,093
$656,909,349
Time deposits include certificates of deposit in denominations of $100,000 or more aggregating $88,609,343 and $71,234,389 at December 31, 2009 and 2008, respectively. Interest expense on such certificates was $2,349,396, $2,676,559 and $4,109,885 for 2009, 2008 and 2007, respectively.
Scheduled maturities of time deposits at December 31, 2009, are summarized as follows:
$ 208,697,908
44,415,877
16,164,932
7,163,355
5,947,063
78,276
$ 282,467,411
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
A summary of securities sold under agreements to repurchase as of and for the years ended December 31, 2009, 2008 and 2007 is as follows:
Securities sold under agreements to repurchase:
Balance at December 31
$ 54,263,257
$ 63,412,514
$ 31,212,292
Maximum month-end balance
$ 66,190,640
$ 65,802,532
$ 40,312,166
Average balance during year
$ 59,141,554
$ 53,630,728
$ 36,032,437
Weighted-average rate at December 31
3.33%
4.43%
Average rate paid during year
3.31%
3.60%
5.12%
Information concerning outstanding securities repurchase agreements as of December 31, 2009 is summarized as follows:
Remaining Term to Final Maturity (1)
Repurchase Liability
Accrued Interest Payable
Weighted Average Rate
Estimated Fair Value of Collateral Securities (2)
Within 90 days
$ 6,763,257
0.08%
$ 12,311,663
After 90 days but within one year
44,508
3.27%
11,687,357
After one year but within five years
17,500,000
77,547
3.81%
21,989,488
After five years but within ten years
64,506
4.13%
20,419,010
-----
$ 186,561
$ 66,407,518
=========
=========================================F-22==========================================
(10) FEDERAL HOME LOAN BANK TERM ADVANCES AND OVERNIGHT ADVANCES
The following is a summary of Federal Home Loan Bank advances at December 31, 2009 and 2008:
Weighted-Average Rate
Maturity
Call Date
$ 10,000.000
4.77%
July 27, 2012
4.60%
December 22, 2016
December 22, 2011
------
$ 20,000,000
4.69%
======
July 27, 2009
Residential mortgages totaling $106,596,585 and $111,242,438, at December 31, 2009 and 2008, respectively, were pledged under a blanket collateral agreement for the Corporation's advances with the FHLB. Each advance is payable at its maturity date, with a prepayment penalty for any term advances. Based on this collateral the Corporation is eligible to borrow up to a total of $65,293,578 at year-end 2009.
(11) INCOME TAXES
For the years ended December 31, 2009, 2008 and 2007, income tax expense attributable to income from operations consisted of the following:
Current:
State
$ 343,339
$ 255,429
$ (6,698)
Federal
3,466,770
3,964,354
3,065,672
3,810,109
4,219,783
3 058,974
Deferred (benefit) expense
$ 1,860,663
$ 4,034,623
$ 3,530,112
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income tax expense as follows:
Tax computed at statutory rate
$ 2,411,789
$ 4,212,079
$ 3,668,428
Tax-exempt interest
(515,379)
(415,958)
(423,251)
Dividend exclusion
(35,417)
(45,694)
(43,773)
State taxes, net of Federal impact
(27,711)
309,796
353,888
Nondeductible interest expense
36,807
36,093
45,605
Other items, net
(9,426)
(61,693)
(70,785)
Actual income tax expense
=============================================
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2009 and 2008, are presented below:
Deferred tax assets:
$ 3,855,920
$ 3,522,560
Accrual for employee benefit plans
932,016
979,916
Depreciation
629,248
554,568
Deferred compensation and directors' fees
957,808
879,000
Tax attribute carryforwards
7,752
Purchase accounting adjustment - deposits
312,703
Purchase accounting adjustment - loans
102,101
Purchase accounting adjustment - fixed assets
226,181
Accounting for defined benefit pension and other benefit plans
3,301,035
5,584,197
Trust preferred impairment writedown
1,178,247
310,734
517,625
468,139
Total gross deferred tax assets
$ 12,012,884
$ 12,306,866
Deferred tax liabilities:
Deferred loan fees and costs
$ 870,285
$ 942,316
Prepaid pension
4,342,391
5,057,817
Net unrealized gains on securities available for sale
3,092,455
2,271,523
Accrued trust fees
85,073
170,146
493,462
332,696
Total gross deferred tax liabilities
8,883,666
8,774,498
Net deferred tax asset (liability)
$ 3,129,218
$ 3,532,368
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income within the loss carryback period. A valuation allowance is recognized 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.
The Corporation had no unrecognized tax benefits at December 31, 2009 and does not expect unrecognized tax benefits to significantly increase or decrease in the next twelve months. There were no interest or penalties recorded in the income statement in income tax expense for the year ended December 31, 2009. As of December 31, 2009, there were no amounts accrued for interest or penalties related to uncertain tax positions.
The Corporation's practice is to recognize interest and penalties related to uncertain tax positions in tax expense. The Corporation is no longer subject to examinations by Federal taxing authorities for the years prior to 2006 and by New York State taxing authorities for the years prior to 2007. The Corporation is currently under audit by the Interal Revenue Service for the 2008 tax year. Any potential adjustments from the Federal examination are not expected to have a material effect on the Corporation's tax position.
(12) PENSION PLAN AND OTHER BENEFIT PLANS
The Corporation 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 Corporation uses a December 31 measurement date for its pension plan.
==========================================F-24=========================================
The following table presents (1) changes in the plan's projected benefit obligation and plan assets, and (2) the plan's funded status at December 31, 2009 and 2008:
Change in projected benefit obligation:
Benefit obligation at beginning of year
$25,043,299
$23,254,898
Service cost
876,063
718,579
Interest cost
1,430,585
1,348,752
Actuarial (gain) loss
(75,075)
906,692
Benefits paid
(1,216,369)
(1,185,622)
Benefit obligation at end of year
$26,058,503
Change in plan assets:
Fair value of plan assets at beginning of year
$23,486,098
$34,343,710
Actual return (loss) on plan assets
6,455,651
(9,671,990)
Employer contributions
Fair value of plan assets at end of year
$28,725,380
Funded status
$ 2,666,877
$(1,557,201)
Amount recognized in accumulated other comprehensive income at December 31, 2009 and 2008 consist of the following:
Net actuarial loss
$ 9,299,911
$15,212,473
Prior service cost
125,433
214,102
Unrecognized net initial obligation
Total before tax effects
$ 9,425,344
$15,426,575
The accumulated benefit obligation at December 31, 2009 and 2008 was $22,196,654 and $21,082,291, respectively.
The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2009, 2008 and 2007 were as follows:
Discount rate
6.10%
5.75%
Assumed rate of future compensation increase
5.00%
Components of net periodic benefit cost and other amounts recognized in other comprehensive income in 2009, 2008 and 2007 consist of the following:
Net periodic benefit cost
Service cost, benefits earned during the year
$ 876,063
$ 718,579
$ 646,922
Interest cost on projected benefit obligation
1,309,689
Expected return on plan assets
(1,833,928)
(2,702,622)
(2,502,101)
Amortization of net loss
1,215,764
Recognized prior service cost
88,669
88,672
Recognized actuarial loss
Recognized net initial obligation
798
69,888
Net periodic cost (benefit)
$ 1,777,153
$ (545,821)
$ (386,930)
Other changes in plan assets and benefit obligations recognized in other comprehensive income:
Net actuarial (gain) loss
(4,696,798)
13,281,304
(612,378)
Recognized loss
(1,215,764)
(88,669)
(88,672)
(798)
(69,888)
Total recognized in other comprehensive (loss) income (before tax effect)
$(6,001,231)
$13,191,834
$ (770,938)
Total recognized in net benefit cost and othercomprehensive (loss) income (before tax effect)
$(4,224,078)
$12,646,013
$(1,157,868)
During 2009, the plan's total unrecognized net loss decreased by $5.9 million. The variance between the actual and expected return on plan assets during 2009 decreased the total unrecognized net loss by $4.6 million. Because the total unrecognized net gain or loss exceeds the greater of 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized over the average future working lifetime of the participants. As of January 1, 2009 the average expected future working lifetime of active plan participants was 10.75 years. Actual results for 2010 will depend on the 2010 actuarial valuation of the plan.
=========================================F-25==========================================
Amounts expected to be recognized in net periodic cost during 2010
Loss recognition
$ 597,895
Prior service cost recognition
45,890
Net initial obligation recognition
The principal actuarial assumptions used in determining the net periodic benefit cost for the years ended December 31, 2009, 2008 and 2007 were as follows:
Expected long-term rate of return on assets
8.00%
The Corporation changes important assumptions whenever changing conditions warrant. The discount rate is evaluated at least annually and the expected long-term return on plan assets will typically be revised every three to five years, or as conditions warrant. Other material assumptions include the compensation increase rates, rates of employee terminations, and rates of participant mortality.
The Corporation's overall investment strategy is to achieve a mix of investments for long-term growth and for near-term benefit payments with a wide diversification of asset types. The target allocations for plan assets are shown in the table below. Equity securities primarily include investments in common or preferred shares of both U.S. and international companies. Debt securities include U.S. Treasury and Government bonds as well as U.S. Corporate bonds. Other investments may consist of mutual funds, money market funds and cash & cash equivalents. While no significant changes in the asset allocations are expected during the upcoming year, the Corporation may make changes at any time.
The expected return on plan assets was determined based on a Capital Asset Pricing Model("CAPM") using historical and expected future returns of the various asset classes, reflecting the target allocations described below. Each 1% increase/(decrease) in the expected rate of return assumption would have (decreased)/increased the net periodic benefit cost for 2009 by $229,000.
Asset Category
Target Allocation 2010
Percentage of Plan Assets at December 31,
Weighted-Average Expected Long-Term Rate of Return
Large Cap Domestic Equities
30% - 60%
51%
44%
Mid-Cap Domestic Equities
0% - 20%
5%
3%
10.6%
Small-Cap Domestic Equities
0% - 15%
9%
11%
10.8%
International Equities
0% - 25%
0%
Intermediate Fixed
20% - 50%
30%
35%
4.7%
Income
Cash
7%
4.0%
----
100%
8.35%
====
The Corporation has appointed an Employee Pension and Profit Sharing Committee to manage the general philosophy, objectives and process of the Plan. The Employee Pension and Profit Sharing Committee meets with the Investment Manager periodically to review the Plan's performance and to ensure that the current investment allocation is within the guidelines set forth in the IPS. Only the Employee Pension and Profit Sharing Committee, in consultation with the Investment Manager, can make adjustments to maintain target ranges and for any permanent changes to the IPS. Quarterly, the Board of Directors' Trust and Employee Benefits Committee reviews the performance of the plan with the Investment Manager.
The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument held by the pension plan:
=========================================F-26==========================================
Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. The fair value hierarchy described below requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Discounted cash flows are calculated using spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
The fair value of the plan assets at December 31, 2009, by asset category, are as follows:
Fair Value Measurement at December 31, 2009 Using
----------------------------------------
Plan Assets:
Carrying Value
Quoted Prices in Active Markets for Identical Assets (Level 1)
Significant Other Observable Inputs (Level 2)
Significant Unobservable Inputs (Level 3)
$ 1,407,299
Equity securities:
U.S. companies
17,684,264
International companies
1,025,212
Mutual Funds
2,203,135
Debt securities:
U.S. Treasuries/Government bonds
3,741,944
1,706,226
2,035,718
U.S. Corporate bonds
2,663,526
Total plan assets
$ 28,725,380
$ 24,026,136
$ 4,699,244
The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten for the pension plan:
Calendar Year
Future Expected Benefit Payments
$ 1,200,530
$ 1,269,189
$ 1,374,345
$ 1,438,533
$ 1,523,668
2015-2019
$ 9,368,209
The Corporation does not expect to contribute to the plan during 2010. Funding requirements for subsequent years are uncertain and will significantly depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements.
For tax planning, financial planning, cash flow management or cost reduction purposes the Corporation may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.
The Corporation also sponsors a defined contribution profit sharing, savings and investment plan which covers all eligible employees with a minimum of 1,000 hours of annual service. The Corporation makes discretionary matching and profit sharing contributions to the plan based on the financial results of the Corporation. Expense under the plan totaled $315,731, $288,486, and $255,468 for the years ended December 31, 2009, 2008 and 2007, respectively. The plan's assets at December 31, 2009 and
=========================================F-27==========================================
2008, include 183,707 and 171,200 shares, respectively, of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds.
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to employees who meet minimum age and service requirements. Postretirement life insurance benefits are also provided to certain employees who retired prior to July 1981. This plan was amended effective July 1, 2006. Prior to this amendment, all retirees age 55 or older were eligible for coverage under the Corporation's self-insured health care plan, contributing 40% of the cost of the coverage. Under the amended plan, coverage for Medicare eligible retirees who reside in the Central New York geographic area is provided under a group sponsored plan with Excellus BlueCross BlueShield called Medicare Blue PPO, with the retiree paying 100% of the premium. Excellus BlueCross BlueShield assumes full liability for the payment of health care benefits incurred after July 1, 2006. Current Medicare eligible retirees who reside outside of the Central New York geographic area were eligible for coverage under the Corp oration's self insurance plan thru December 31, 2009, contributing 50% of
The Corporation uses a December 31 measurement date for its postretirement medical benefits plan.
The following table presents (1) changes in the plan's accumulated postretirement benefit obligation and (2) the plan's funded status at December 31, 2009 and 2008:
Changes in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation at beginning of year
$ 1,368,074
$ 1,215,193
27,000
78,000
Participant contributions
57,947
51,870
Actuarial loss
23,848
235,950
(188,765)
(239,939)
Retiree drug subsidy received
Accumulated postretirement benefit obligation at end of year
$ 1,365,104
Employer contribution
130,818
188,069
Plan participants' contributions
$(1,365,104)
$(1,368,074)
Net actuarial gain
$ (27,076)
$ (50,924)
Prior service benefit
(1,016,000)
(1,113,000)
$(1,043,076)
$(1,163,924)
Weighted-average assumption for disclosure as of December 31,:
Health care cost trend: Initial
15.00%
8.50%
9.00%
Health care cost trend: Ultimate
4.50%
Year ultimate reached
2020
2017
2016
The components of net periodic postretirement benefit cost for the years ended December 31, 2009, 2008 and 2007 are as follows:
$ 29,000
$ 27,000
71,000
Recognized prior service benefit
(97,000)
Recognized actuarial gain
(7,000)
Net periodic postretirement cost (benefit)
$ 7,000
$ 8,000
$ (6,000)
Other changes in plan assets and benefit obligationsrecognized in other comprehensive income:
Net actuarial loss (gain)
(112,193)
7,000
97,000
Total recognized in other comprehensive income(before tax effect)
$ 120,848
$ 332,950
$ (8,193)
Total recognized in net benefit cost and othercomprehensive income (before tax effect)
$ 127,848
$ 340,950
$ (14,193)
During 2009, the plan's total unrecognized net gain decreased by $24 thousand. Because the total unrecognized net gain or loss is less than the greater of 10% of the accumulated postretirement benefit obligation or 10% of the plan assets, no amortization is anticipated in 2010. Actual results for 2010 will depend on the 2010 actuarial valuation of the plan.
Amounts expected to be recognized in net periodic cost during 2010:
Gain recognition
$(97,000)
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects:
Effect of a 1% increase in health care trend rate on:
Benefit obligation
$ 24,000
$ 26,000
Total service and interest cost
$ 500
$ 1,000
$ 2,000
Effect of a 1% decrease in health care trend rate on:
$ (8,000)
$ (29,000)
$ (33,000)
$ (500)
$ (2,000)
Weighted-average assumptions for net periodic cost as ofDecember 31,:
Health care cost tread: Ultimate
The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten:
$ 137,000
$ 158,000
$ 153,000
$ 161,000
$ 113,000
$ 638,000
The Corporation's policy is to contribute the amount required to fund postretirement benefits as they become due to retirees. The amount expected to be required in contributions to the plan during 2010 is $137,000.
The Corporation also sponsors an Executive Supplemental Pension Plan for certain current and former executive officers to restore certain pension benefits that may be reduced due to limitations under the Internal Revenue Code. The benefits under this plan are unfunded as of December 31, 2009 and 2008.
The Corporation uses a December 31 measurement date for its Executive Supplemental Pension Plan.
=========================================F-29==========================================
The following table presents Executive Supplemental Pension plan status at December 31, 2009 and 2008:
Change in benefit obligation:
$ 956,076
$ 915,477
26,767
14,094
52,826
53,168
(14,158)
34,614
(74,730)
(61,277)
Projected benefit obligation at end of year
$ 946,781
Changes in plan assets:
Employer contributions prior to measurement date
74,730
61,277
Unfunded status
$ (946,781)
$ (956,076)
$ 139,333
$ 160,726
---------
Accumulated benefit obligation at December 31, 2009 and 2008 was $901,588 and $929,706, respectively.
$ 26,767
$ 14,094
$ 15,981
48,815
1,448
7,235
3,840
49,476
Net periodic postretirement benefit cost
$ 86,828
$ 71,106
$ 115,720
Other changes in plan assets and benefit obligation recognizedin other comprehensive income
$ 34,614
$ 47,547
Recognized actuarial (loss)
(7,235)
(3,840)
(49,476)
(4)
(1,448)
Total recognized in other comprehensive income (before tax effect)
$ (21,393)
$ 30,770
$ (3,377)
Total recognized in net benefit cost and other comprehensiveincome (before tax effect)
$ 65,435
$ 101,876
$ 112,343
During 2009, the plan's total unrecognized net loss decreased by $21 thousand. Because the total unrecognized net gain or loss exceeds the greater of 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized over the average future working lifetime of the participants. As of January 1, 2010 the average expected future working lifetime of active plan participants was 8 years.
$ 5,582
==========================================F-30=========================================
Weighted-average assumptions for net periodic cost as of December 31,:
Salary scale
Future Estimated Benefit Payments
$ 75,000
$ 415,000
The Corporation expects to contribute $75,000 to the plan during 2010. Corporation contributions are equal to the benefit payments to plan participants.
(13) STOCK COMPENSATION
Members of the Board of Directors receive common shares of the Corporation equal in value to the amount of fees individually earned during the previous year for service as a member of the Board of Directors. The common shares are distributed to the Corporation's individual board members from treasury shares of the Corporation on or about January 15 following the calendar year of service.
Additionally, the President and CEO of the Corporation, who does not receive cash compensation as a member of the Board of Directors, is awarded common shares equal in value to the average of those awarded to board members not employed by the Corporation who have served twelve (12) months during the prior year.
An expense of $214 thousand related to this compensation was recognized during the year of 2009. During January 2010, 10,082 shares were re-issued from treasury to fund the stock component of directors' compensation.
Members of the Board of Directors, certain Corporation officers, and their immediate families directly, or through entities in which they are principal owners (more than 10% interest), were customers of, and had loans and other transactions with the Corporation. These loans are summarized as follows for the years ended December 31, 2009 and 2008:
Balance at beginning of year
$ 11,123,624
$ 9,582,355
New loans or additional advances
15,532,539
33,027,189
Repayments
(16,705,360)
(31,485,920)
Balance at end of year
$ 9,950,803
Deposits from principal officers, directors, and their affiliates at year-end 2009 and 2008 were $14,909,626 and $13,178,498, respectively.
(15) 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:
Marketing and advertising
$712,842
$834,608
$962,538
Professional services
768,039
809,306
585,654
Loan administration and OREO expense
612,655
542,256
663,118
(16) COMMITMENTS AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk at year-end were as follows:
Fixed Rate
Variable Rate
Commitments to make loans
$ 6,872,946
$ 7,694,274
$ 6,756,305
$ 443,639
Unused lines of credit
$ 765,032
$132,367,993
$ 1,178,649
$130,595,014
$ 17,172,050
$ 17,534,513
The Corporation has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled $17.172 million at December 31, 2009 and represent the maximum potential future payments the Corporation could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Corporation policies governing loan collateral apply to standby letters of credit at the time of credit extension. The carrying amount and fair value of the Corporation's standby letters of credit at December 31, 2009 was not significant.
The Corporation has employment contracts with certain of its senior officers, which expire at various dates through 2010 and may be extended on a year-to-year basis.
In the normal course of business, there are various outstanding legal proceedings involving the Corporation or its subsidiaries. In the opinion of management, the aggregate amount involved in such proceedings is not material to the financial condition or results of operations of the Corporation.
(17) SHAREHOLDERS' EQUITY
The Bank is subject to legal limitations on the amount of dividends that can be paid to the Corporation without prior regulatory approval. Dividends are limited to retained net profits, as defined by regulations, for the current year and the two preceding years. At December 31, 2009, approximately $2.0 million was available for the declaration of dividends from the Bank to the Corporation.
============================================F-32=========================================
(18) PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company only financial statement information of Chemung Financial Corporation is as follows (investment in subsidiaries is recorded using the equity method of accounting):
BALANCE SHEETS - DECEMBER 31
Assets:
Cash on deposit with subsidiary bank
$ 530,209
$ 121,126
Investment in subsidiary-Chemung Canal Trust Company
86,285,506
79,376,588
Investment in subsidiary-CFS Group, Inc.
532,931
632,389
Dividends receivable from subsidiary bank
282,653
308,570
2,498,012
2,634,599
$ 91,009,399
$ 83,948,710
Liabilities and shareholders' equity:
43,646
66,127
923,734
941,565
STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
Dividends from subsidiary bank
$11,021,685
$ 3,764,738
$ 3,913,259
7,168
13,118
28,092
Gain on security transactions
9,130
138,483
367,545
204,428
Operating expenses
(164,956)
(173,980)
(179,899)
Income before impact of subsidiaries' earnings anddistributions and income taxes
11,011,510
3,971,421
3,965,880
Equity in undistributed (losses) earnings of Chemung Canal Trust Company
(5,753,397)
4,477,636
3,253,187
Equity in undistributed (losses) earnings of CFS Group, Inc.
(99,458)
(79,715)
901
Income before income tax
5,158,655
8,369,342
7,219,968
Income tax (benefit) expense
(74,180)
15,498
(39,415)
STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
Adjustments to reconcile net income to net cashprovided by operating activities:
Equity in undistributed losses (earnings) of Chemung Canal Trust Company
5,753,397
(4,477,636)
(3,253,187)
Equity in undistributed losses (earnings) of CFSGroup, Inc.
99,458
79,715
(901)
Gain on sales of securities transactions
(9,130)
(Increase) decrease in dividend receivable
(4,650)
4,244
(30,693)
Decrease (increase) in other assets
136,587
(69,173)
354,386
Increase in other liabilities
131,816
179,501
32,071
11,495,242
4,208,860
4,474,926
Cash flow from investing activities:
Cash paid for acquisition of Canton Bank Corp.
(7,651,632)
Cash paid for purchase of Cascio Financial Strategies
(500,000)
Proceeds from sales of securities available for sale
112,880
Purchase of securities available for sale
(103,750)
(100,000)
(7,642,502)
==========================================
STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31, (con't.)
Cash flow from financing activities:
Net cash used in financing activities
(3,443,657)
(4,212,047)
(4,234,803)
(Decrease) increase in cash and cash equivalents
409,083
(503,187)
140,123
Cash and cash equivalents at beginning of year
121,126
624,313
484,190
Cash and cash equivalents at end of year
$ 624,313
(19) FAIR VALUES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs).
The Corporation's investment in collateralized debt obligations consisting of pooled Trust Preferred Securities which are issued by financial institutions were historically priced using Level 2 inputs. The decline in the level of observable inputs and market activity in this class of investments beginning in the fourth quarter of 2008 and continuing through to the measurement date has been significant and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, have varied widely. The once active market has become comparatively inactive. As a result, these investments are now priced using Level 3 inputs.
The Corporation has developed an internal model for pricing these securities. This is the same model used in deterimining OTTI as further described in Note 3. Information such as historical and current performance of the underlying collateral, deferral/default rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit premiums required by a market participant, and financial trend analysis with respect to the individual issuing financial institutions, are utilized in determining individual security valuations. Discount rates were utilized along with the cash flow projections in order to calculate an appropriate fair value. These discount rates were calculated based on industry index rates and adjusted for various credit and liquidity factors. Due to current market conditions as well as the limited trading activity of these securities, the market value of the securities is highly sensitive to assumption changes and market volatility.
The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals and collateral evaluations. The appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are typically significant and result in a Level 3 classification of the inputs for determining fair value.
=========================================F-34==========================================
Non-recurring adjustments to certain commercial and residential real estate properties classified as other real estate owned ("OREO") are measured at the lower of carrying amount or fair value, less costs to sell. Fair values are generally based on third party appraisals of the property, resulting in a Level 3 classification. In cases where the carrying amount exceeds the fair value less costs to sell, an impairment loss is recognized.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
Financial Assets:
-----------------
Obligations of U.S. Government and U.S. Government sponsored enterprises
$ 4,999,219
$ 79,621,301
Trust Preferred securities
511,480
5,127,614
719,367
Total available for sale securities
$230,983,633
$ 10,126,833
$220,345,320
$ 511,480
Fair Value Measurement at December 31, 2008 Using
$ 5,512,500
$ 56,030,999
1,400,000
1,885,000
4,610,114
713,579
$191,254,900
$ 10,122,614
$179,247,286
$ 1,885,000
Fair Value Measurement twelve-months ended December 31, 2009 Using Significant Unobservable Inputs (Level 3)
Fair Value Measurement twelve-months ended December 31, 2008 Using Significant Unobservable Inputs (Level 3)
Investment Securities Available for Sale
--------------------
Beginning balance
$1,885,000
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities
6,436
7,793
Impairment charge on investment securities
Included in other comprehensive income
862,490
(144,571)
Transfers in and/or out of Level 3
2,825,000
Ending balance, December 31
========================================F-35===========================================
Assets and liabilities measured at fair value on a non-recurring basis are summarized below:
$ 2,513,355
Other real estate owned, net
648,962
$ 3,162,317
------------------------------------------
$ 387,402
323,521
$ 710,923
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $3,357,906, with a valuation allowance of $844,551 as of December 31, 2009, resulting in no additional provision for loan losses for the year ending December 31, 2009.
Other real estate owned which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $648,962 at December 31, 2009, which is made up of the outstanding balance of $680,418, net of a valuation allowance of $31,456 at December 31, 2009, resulting in write downs of $31,456 for the year-ending December 31, 2009.
Impaired loans, which are measured for impairment using the fair value of the collateral for collateral dependent loans, had a carrying amount of $1,663,761, with a valuation allowance of $1,276,359 as of December 31, 2008, resulting in an additional provision for loan losses of $935,552 for the year ending December 31, 2008.
Other real estate owned which is measured at the lower of carrying or fair value less costs to sell, had a net carrying amount of $323,521 at December 31, 2008, which is made up of the outstanding balance of $492,624, net of a valuation allowance of $169,103 at December 31, 2008, resulting in write downs of $169,103 for the year-ending December 31, 2008.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Short-Term Financial Instruments
For those short-term instruments that generally mature in ninety days or less, the carrying value approximates fair value.
FHLB and FRB Stock
It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions on its transferablity.
=========================================F-36==========================================
Loans Receivable
For variable-rate loans that reprice frequently, fair values approximate carrying values. The fair values for other loans are estimated through discounted cash flow analysis using interest rates currently being offered for loans with similar terms and credit quality.
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 certificates of deposits is estimated using a discounted cash flow approach that applies interest rates currently being offered on certificates to a schedule of the weighted-average expected monthly maturities.
Securities Sold Under Agreements to Repurchase (Repurchase Agreements)
These instruments bear both variable and fixed rates of interest. Therefore, the carrying value approximates fair value for the variable rate instruments and the fair value of fixed rate instruments is based on discounted cash flows to maturity.
These instruments bear a stated rate of interest to maturity and, therefore, the fair value is based on discounted cash flows to maturity.
Commitments to Extend Credit
The fair value of commitments to extend credit is 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, 2009 and 2008.
Accrued Interest Receivable and Payable
For these short-term instruments, the carrying value approximates fair value.
Financial assets:
Estimated Fair Value (1)
$ 21,189
$ 21,247
58,549
2,405
Securities held to maturity
12,160
12,647
8,439
9,215
Federal Home Loan and Federal Reserve Bank stock
Net loans
585,886
595,958
556,080
564,724
80
Accrued interest receivable
3,255
3,385
Financial liabilities:
Demand, savings, and insured money market accounts
518,596
406,261
282,467
285,999
250,648
253,453
55,829
65,009
Federal Home Loan Bank advances
21,672
21,739
1,129
1,267
880
875
(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 judgement and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
=========================================F-37==========================================
(20) REGULATORY CAPITAL REQUIREMENTS
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 classifications 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 (all as defined in the applicable regulations). Management believes that, as of December 31, 2009 and 2008, the Corporation and the Bank met all capital adequacy requirements to which they were subject.
The actual capital amounts and ratios of the Corporation and the Bank are presented in the following table:
Actual
Required To Be Adequately Capitalized
Required To Be WellCapitalized
As of December 31, 2009
Ratio
Total Capital(to Risk Weighted Assets):
Consolidated
$85,422,981
$51,693,266
$64,616,582
10.00%
Bank
$81,939,653
12.73%
$51,490,913
$64,363,641
Tier 1 Capital(to Risk Weighted Assets):
$75,008,494
$25,846,633
4.00%
$38,769,949
$71,589,051
11.12%
$25,745,456
$38,618,184
Tier 1 Capital(to Average Assets):
$28,534,641
3.00%
$47,557,736
7.55%
$28,451,269
$47,418,781
As of December 31, 2008
$83,068,529
$48,950,358
$61,187,948
$79,857,587
13.10%
$48,775,847
$60,969,809
$73,226,725
$24,475,179
$36,712,769
$70,092,775
11.50%
$24,387,924
$36,581,885
$24,563,307
$40,938,846
8.59%
$24,479,589
$40,799,315
(21) COMPREHENSIVE INCOME (LOSS)
Comprehensive income or loss of the Corporation represents net income plus other comprehensive income or loss, which consists of the net change in unrealized holding gains or losses on securities available for sale and the change in the funded status of the Corporation's defined benefit pension plan and other benefit plans, net of the related tax effect. Accumulated other comprehensive income or loss represents the net unrealized holding gains or losses on securities available for sale and the change in the funded status of the Corporation's defined benefit pension plan and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect.
=========================================F-38==========================================
Comprehensive income (loss) for the years ended December 31, 2009, 2008, and 2007 was $10,152,555, $(1,264,558), and $9,723,220, respectively. The following summarizes the components of other comprehensive income (loss) and related tax effects:
Other Comprehensive Income (Loss)
Unrealized holding gains (losses) on securities available for sale
$ 2,044,137
$ (2,933,939)
$ 3,228,315
Change in unrealized gains (losses) on securities available for sale for which a portion of an other-than-temporary- impairment has been recognized in earnings, net of reclassification
Reclassification adjustment net (gains) lossrealized in net income
(9,200)
Net unrealized gains (losses)
2,122,038
(2,139,917)
3,218,635
Tax effect
(820,932)
827,848
(1,232,508)
Net of tax amount
$ 1,301,106
$ (1,312,069)
$ 1,986,127
Change in funded status of defined benefitpension plan and other benefit plans
5,901,776
(13,555,554)
779,122
(2,283,162)
5,249,221
(301,412)
Total other comprehensive income (loss)
$ 4,919,720
$ (9,618,402)
$ 2,463,837
Balance at December 31, 2008
Current Period Change
Balance at December 31, 2009
------------------
Unrealized gains (losses) on securities available for sale
$ 3,600,169
$ 1,054,562
$ 4,654,731
Unrealized loss on pension plans and other benefit plans
(8,839,180)
(5,220,566)
$ (5,239,011)
$4,673,176
(22) SEGMENT REPORTING
=========================================F-39=======================================
Accounting policies for the segments are the same as those described in Note 1. Summarized financial information concerning the Corporation's reportable segments and the reconciliation to the Corporation's consolidated results is shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment. Holding company amounts are the primary differences between segment amounts and consolidated totals, and are reflected in the Holding Company and Other column below, along with amounts to eliminate transactions between segments. (dollars in thousands)
Year ended December 31, 2009
Core Banking
Trust & Investment Advisory Services
Holding Company And Other
Consolidated Totals
$ 33,147
$ 8
$ 33,155
-------
30,697
8
Other operating income
7,221
400
31,470
7,271
580
6,448
818
(172)
1,681
317
(137)
Segment net income
$ 4,767
$ 501
$ (35)
=======
Segment assets
$966,436
$ 6,288
$3,195
$ 975,919
Year ended December 31, 2008
$ 30,652
$ 16
$ 30,668
29,202
9,717
587
26,678
6,763
527
12,241
71
76
4,042
(35)
$ 8,199
$ 44
$ 111
$827,148
$ 7,745
$3,425
$ 838,318
Year ended December 31, 2007
$ 25,902
$ 34
$ 25,936
24,647
9,857
426
16,628
24,319
5,795
406
30,520
10,185
550
54
3,356
213
(39)
$ 6,829
$ 337
$ 93
$778,158
$ 7,819
$2,897
$ 788,874
==========================================F-40======================================
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.
DATED: MARCH 11, 2010
By /s/ Ronald M. Bentley
Ronald M. BentleyPresident and Chief Executive Officer
By /s/ John R. Battersby, Jr.
John R. Battersby, Jr.Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
Signature
Title
Date
/s/ Robert E. Agan
Director
March 11, 2010
/s/ David J. Dalrymple
DirectorChairman of the Board
/s/ Clover M. Drinkwater Clover M. Drinkwater
/s/ William D. Eggers
/s/ Thomas K. Meier
/s/ Ralph H. Meyer
/s/ John F. Potter
/s/ Robert L. Storch
/s/ Charles M. Streeter, Jr.
/s/ Richard W. Swan
/s/ Jan P. Updegraff
/s/ Ronald M. Bentley Ronald M. Bentley
=======================================================================================
EXHIBIT INDEX
Exhibit
3.1
Specimen Stock Certificate. Filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.
Change of Control Agreement dated September 20, 2006 between Chemung Canal Trust Company and Ronald M. Bentley, President & COO. Filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference.
Executive Severance Agreement dated September 20, 2006 between Chemung Canal Trust Company and Ronald M. Bentley, President & COO. Filed as Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended September 30, 2006 and incorporated herein by reference.
Amended and Restated Deferred Directors' Fee Plan. Filed as Exhibit 10.3 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
Change of Control Agreement dated August 23, 2007 Chemung Canal Trust Company and John R. Battersby, Jr., Executive Vice President Treasurer & CFO. Filed as Exhibit 10.8 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
Certification of President Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
Certification of Treasurer and Chief Finance Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. 1350.
END OF DOCUMENT