Chemung Financial Corporation Annual Report 2007 175 years of responsible banking Our Mission & Vision Mission Vision The mission of Chemung Financial Corporation is to The vision of Chemung Financial Corporation is to be remain a strong and independent financial services a top performing community bank remaining true to organization creating value for shareholders, customers, our mission, and to become the company of choice for employees and the communities where the bank does customers, employees and investors. business, while maintaining the highest standards of business ethics. Chemung Canal is a community- Dividend Investment and Stock Purchase Plan oriented, client-focused organization. Registered shareholders of Chemung Financial Corporation, through the Dividend Investment and Stock Purchase Plan, may invest their dividends or make quarterly cash payments to purchase additional stock of the Corporation. Shareholders not enrolled in the plan may receive a descriptive brochure and authorization card for the plan upon written request to the Corporation’s secretary at the following address: Chemung Financial Corporation Attn: Corporate Secretary P.O. Box 1522 Elmira, New York 14902-1522 www.chemungcanal.com Form 10-K Annual Report A copy of the Corporation’s Form 10-K Annual Report is available without charge to shareholders after March 31, The photo on the cover is a reproduction of a painting of the Chemung 2008 upon written request to the Corporation’s secretary. Canal as it passes through the Village of Havana, NY (now Montour Falls.) This painting now hangs in the Montour Falls Memorial Library. A copy is also available on the Securities and Exchange The artist is unknown. The photograph was taken by Frank Borkowski. Commission’s website at www.sec.gov. The canal opened in 1833, the same year as the Bank, and was operational until 1878. During that time the Chemung Canal was one of Annual Meeting the lateral canals in New York State providing access to the Erie Canal The Annual Meeting of Shareholders will be held on through the Cayuga and Seneca canals. It connected the Chemung River Wednesday, May 7, 2008 at 2:00pm at the downtown in Elmira to Seneca Lake in Watkins Glen. Holiday Inn, Elmira – Riverview. Financial Highlights (in thousands, except per share data) Operating Results-Year Ended December 31 2007 2006 % of Change Net Interest Income $ 25,936 $ 24,546 5.66% Provision for loan losses 1,255 125 904.00% Non-interest income: Securities gains, net 10 27 -62.96% Trust & Investment Services Income 6,345 4,901 29.46% Other operating income 10,274 9,384 9.48% Other operating expense 30,520 29,523 3.38% Net income 7,259 6,589 10.17% At Year End: Assets $ 788,874 $ 739,050 6.74% Loans, net of deferred fees and costs, and unearned income 539,522 477,664 12.95% Allowance for loan losses 8,453 7,983 5.89% Deposits 572,600 585,092 -2.14% Shareholders’ equity 88,115 82,298 7.07% Employees (full time equivalent) 280 293 -4.44% Share And Per Share Data: Net income 2.02 1.81 11.60% Book value, at year end 24.49 22.78 7.51% Tangible book value, at year end 22.50 22.09 1.86% Dividends declared 0.97 0.96 1.04% Shares outstanding (average) 3,595 3,642 -1.29% Ratios: Allowance to total loans 1.57% 1.67% Return on average assets 0.95% 0.91% Return on average Tier I Equity 9.53% 8.60% Trust Assets Under Administration (Market Value) as Fiduciary $ 1,319,785 $ 991,082 33.17% as Custodian 579,458 492,317 17.70% $1,899,243 $1,483,399 28.03% Market Prices Of Chemung Financial Corporation Stock During Past Three Years (Dollars) 2007 2006 2005 1st Quarter 30.00 – 33.00 29.50 – 30.90 31.00 – 34.00 2nd Quarter 29.05 – 32.10 29.05 – 31.75 31.50 – 34.00 3rd Quarter 27.55 – 31.00 29.40 – 32.00 30.50 – 32.50 4th Quarter 25.49 – 30.00 31.00 – 33.75 29.65 – 31.50 Dividends Paid Per Common Share By Chemung Financial Corporation During Past Three Years 2007 2006 2005 January 2 0.24 0.24 0.24 April 2 0.24 0.24 0.24 July 2 0.24 0.24 0.24 October 1 0.24 0.24 0.24 0.96 0.96 0.96 As of December 31, 2007 there were 573 registered holders of record of the Corporation’s stock. Chemung Financial Corporation common stock is inactively traded in the over-the-counter market. The quarterly market price ranges for the Corporation’s stock for the past three (3) years are based upon actual transactions as reported by brokerage firms which maintain a market or conduct trades in the Corporation’s stock and other transactions known by the Corporation’s management. To Our Shareholders 2007 was a very good year for Chemung Canal in spite of loans, essentially unchanged from a year earlier but a challenging business climate for banking companies. significantly lower than 2005 levels. Our allowance for Net income climbed to $7.3 million representing a 10.2% loan and lease losses was a healthy 1.57% of loans at increase over 2006. Earnings per share of $2.02 were year end. 11.6% greater than last year. With increased earnings, Another major goal is to grow noninterest income. the dividend was increased $.01 per quarter bringing our Noninterest income comes from a variety of sources and annual dividend to $1.00 per share. Our return on average showed strong improvement in 2007. Total noninterest assets for 2007 was 0.95% and the return on average income for the year was $16.6 million, an increase equity was 8.58%. These two measures were up from 2006 of $2.3 million or 16.2% over 2006. One factor that levels of 0.91% and 8.11%, respectively. Many factors helped to produce higher levels of fee income was combined to deliver this earnings improvement. the growth in our checking account base. Another major contributor was the acquisition of the Partners Financial Results, Growth and Expansion trust business in May. In this transaction, we acquired This past year, we grew our company organically and nearly $350 million in trust assets and over 300 trust through acquisition. It is particularly pleasing to see us relationships. In connection with this acquisition, grow the old fashioned way by getting new clients and we established offices in downtown Binghamton taking great care of our existing clients. All of our and Herkimer. Total trust assets under management loan portfolios experienced impressive growth. On or administration now approximate $2 billion and average, our commercial loan portfolio grew $8 generated in excess of $6 million in annual revenue. million or 4.2% to nearly This past year, we asked our trust clients to rate us in $200 million. Consumer loans averaged a variety of areas and we are pleased to say they gave $171 million, an increase of nearly $27 million us high marks. Our disciplined approach to investing or 18.5%, while average mortgages increased in high quality, large cap companies that consistently approximately $36 million or 31.3% to grow earnings and dividends delivered attractive returns $149 million. Equally impressive, our average for our clients. It is not easy going against the tide, demand deposits grew 4.8% to $146 million, while total but our discipline and philosophy of investing for the average deposits climbed $24 million or 4.3% to nearly long-term has been rewarding for our clients. To meet $593 million. These results were driven by better execution the expanding needs of our clients, we are introducing in seeking out new business, meeting the needs of existing an open architecture platform to give clients access to clients and providing a level of service that distinguishes a broader array of professional money managers. The us from the competition. Our success in penetrating the trust and investment management business is a core Ithaca and Tompkins County markets also contributed competency of Chemung Canal and we continue to look significantly to our growth. We continue to be encouraged for opportunities to expand this line of business. by our success in these new markets which have proven As of this writing, we expect to complete the to be fertile ground for new loans. Our core business acquisition and conversion of three branches of M&T remains the building of loyal, profitable relationships with Bank in March; two in Broome County and one in Tioga borrowers, depositors and investors so it is gratifying County. Specifically, we will be acquiring the Vestal to see these results. Due to our strong deposit and loan office on Rano Blvd., the Johnson City branch in the growth, our net interest margin remained stable despite Oakdale Mall and the Owego branch on Route 17C. intense competition and an interest rate yield curve that In total, we anticipate acquiring approximately $70 is compressing margins for many banks. We also made million in deposits, $15 million in loans and nearly good progress in recent years reducing the level of 8,000 accounts. We are excited about this acquisition nonperforming assets. Strong asset quality is a major goal as it expands our distribution network into a contiguous and we are pleased to report that noncurrent loans have market that lacks a hometown community bank. We returned to more normalized levels. Nonperforming loans believe there are many individuals and businesses in the at December 31, 2007 were $3.6 million or .66% of total Binghamton market seeking a banking alternative and will value our brand of community banking.