CHMG

Chemung Financial Corp. 2008 Annual Report Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2008. Chemung Financial Corporation is a financial holding company headquartered in Elmira, New York, operating primarily through its subsidiary, Chemung Canal Trust Company (a full-service community bank), and CFS Group, Inc. (offering non-banking financial services). The company serves a defined market area in the southern tier of New York and the northern tier of Pennsylvania. In January 2009, the company announced a definitive agreement to acquire Canton Bancorp, Inc. for $7.7 million in cash.

Key Financial Metrics

Material Changes vs. Prior Period

• Profitability: Net income increased 15.1% to $8.35 million, driven by an 18.2% increase in net interest income and a 3.1% increase in non-interest income.
• Asset Growth: Total assets grew 6.3% to $838.3 million. This was largely due to the March 2008 acquisition of three branches from Manufacturers and Traders Trust Company (M&T) and a $50 million leveraged purchase of investment securities.
• Deposit Growth: Total deposits increased 14.7% to $656.9 million, with $57.1 million attributed to the M&T branch acquisition.
• Impairment Charge: The company recognized an $803,000 other-than-temporary impairment (OTTI) charge on a collateralized debt obligation consisting of trust preferred securities, reducing non-interest income.
• Asset Quality: Non-performing loans increased to $4.54 million (0.80% of total loans) from $3.57 million in 2007. Net charge-offs were $797,000, or 0.14% of average loans.
• Capitalization: While the company remains "well capitalized," the Tier 1 leverage ratio declined from 10.14% to 8.94% due to asset growth outpacing equity growth.

Outlook, Risks, and Management Commentary

• Acquisition Strategy: Management is pursuing growth through acquisitions, evidenced by the pending $7.7 million purchase of Canton Bancorp, Inc., expected to close in Q2 2009.
• Capital Strategy: The Board decided not to participate in the U.S. Treasury's TARP Capital Purchase Program, citing the company's strong capital position as sufficient to meet strategic initiatives.
• Regulatory Environment: The company faces increased FDIC deposit insurance assessments due to the financial crisis. The base rate assessment for Q1 2009 is significantly higher than in 2008, and an emergency special assessment of 20 basis points is expected in 2009.
• Compliance: In 2008, the Federal Reserve Bank of New York notified the Bank of deficiencies in its Bank Secrecy Act (BSA) and Anti-Money Laundering (AML) compliance program. Management states corrective actions have been taken and the Bank is now in compliance.
• Risks: Primary risks include credit risk due to economic downturns, interest rate risk (though within policy limits), and the potential for further deterioration in the value of trust preferred securities and mortgage-backed securities.

Investor Verification Checklist

• Acquisition Integration: Verify the regulatory approval status and expected accretion of the pending Canton Bancorp acquisition.
• Asset Quality Trends: Monitor the ratio of non-performing loans to total loans and the adequacy of the allowance for loan losses given the weak economic outlook.
• FDIC Assessment Impact: Assess the impact of the increased FDIC base rate assessments and the emergency special assessment on future operating expenses.
• Impairment Exposure: Review the remaining exposure to trust preferred securities and collateralized debt obligations, specifically those rated below investment grade.
• Compliance Status: Confirm that the BSA/AML compliance program remains effective and that no further regulatory penalties are anticipated.