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2. Basic Earnings Per Share

4. Comprehensive Income

Forward-looking Statements

Statements included in this report include "forward-looking statements" made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, and are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings and those presently anticipated or projected. Chemung Financial Corporation cautions readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The following important factors, among others, could cause Chemung Financial Corporation's actual financial performance to differ materially from that expressed in any forward-looking statement: (1) credit risk, (2) interest rate risk, (3) competition, (4) changes in the regulatory environment, and (5) changes in general business and economic trends. The foregoing list should not be construed as exhaustive, and the Corporation disclaims any obligation to subsequently revise any forward-looking statements to reflec t events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events.

Consolidated assets at September 30, 2002 totaled $753.2 million, an increase of $28.2 million or 3.9% since the beginning of the year. Earning assets increased $29.6 million or 4.4% from year end 2001 to September 30, 2002. This increase is reflected primarily in federal funds sold (+ $30.2 million), and the loan portfolio (+ $5.6 million), offset somewhat by a decrease in the securities portfolio (- $6.1 million).

The period end federal funds sold balance of $30.2 million includes proceeds from the sale of a $5.0 million U.S. Treasury bond, as well as proceeds from two federal agency bonds totaling $17.5 million which were called during the last few days of the quarter. The proceeds from these transactions are being re-invested in new security purchases during the fourth quarter.

As noted above, total loans increased $5.6 million or 1.3% with $3.5 million of this growth in the commercial portfolio, including commercial mortgages. While the weakness in the economy has impacted commercial loan volume as compared to a year ago, we continue to see a steady volume of new requests. Given the interest rate environment, real estate lending has continued to be active, with our residential mortgage and home equity portfolios having grown $873 thousand and $3.5 million, respectively, since the beginning of the year. The above increases have been somewhat offset primarily by a $2.3 million decrease in installment loans. This decrease is related primarily to a decrease in indirect auto loans outstanding, caused in large part to the competitive pricing environment, including captive auto financing companies offering 0% financing for terms up to 5 years.

The Available for Sale segment of the securities portfolio totaled $234.7 million at September 30, 2002, compared to $239.1 million at the end of 2001, a decrease of $4.4 million. At amortized cost, the available for sale segment of the securities portfolio is down $7.0 million since year end. This decrease is due primarily to the sale of the $5.0 million U.S. Treasury bond and the $17.5 million in agency bonds, which were called during the last few days of the quarter. As noted above, re-investment of these proceeds will occur during the fourth quarter. Since December 31, 2001, major changes in the available for sale portfolio include an increase in mortgage-backed securities ($20.2 million), offset primarily by decreases in federal agency bonds (- $25.9 million) and corporate bonds (- $991 thousand). The pre-tax valuation adjustment for net unrealized gains has increased $2.6 million since the beginning of the year, reflecting the impact that lower intermediate and long-term market rates have had on t he bond portfolio. The Held to Maturity segment of the portfolio, consisting primarily of local municipal obligations, totaled $5.4 million as compared to $7.1 million at the end of 2001, a decrease of $1.7 million.

The $2.0 million increase in premises and equipment is related primarily to continuing renovations to our main office first floor, as well as the purchase of a new mainframe computer system and trust department operating system. These investments are part of an ongoing commitment to provide quality service to both existing and new clients. The asset increases were offset primarily by a $1.4 million decrease in cash and due from banks due to lower period-end branch cash balances.

The year to date asset growth has been supported primarily by a $33.5 million or 6.4% increase in deposits. Period-end public funds deposit balances were up approximately $6.5 million. Despite the low interest rate environment, all other deposits increased $27.0 million, with $16.5 million of this increase the result of higher personal account balances reflected in savings and investment certificates. The balance of the increase is reflected primarily in higher period-end non-personal insured money market account balances. The $7.3 million increase in securities sold under agreements to repurchase is the result of the purchase of a $10.0 million federal agency bond that was leveraged with a $10.0 million term repurchase agreement entered into with the Federal Home Loan Bank of New York. Along with the securities transactions noted above, the increase in deposits also contributed to the $30.2 million increase in federal funds sold, as well as the $12.6 million repayment of Federal Home Loan Bank advances.

The composition of the loan portfolio is summarized as follows:

Net interest income totaled $6.943 million as compared to $7.065 million during the third quarter of 2001, a decrease of $122 thousand or 1.7%. While average earning assets were up $28.8 million or 4.3% as compared to the third quarter of 2001, total interest and dividend income decreased $1.163 million or 9.4% as the yield declined 96 basis points from 7.36% to 6.40%. Of the increase in average earning assets, approximately $7.1 million was in the loan portfolio, primarily related to higher average home equity loans (+ $4.6 million) and mortgages (+ $4.7 million). The securities portfolio has increased $2.7 million on average, with overnight federal funds sold averaging $18.3 million more than during the third quarter of 2001.

Total average funding liabilities have increased $28.3 million or 4.4% when compared to the third quarter of 2001. Average deposits when compared to the third quarter of last year are up $19.1 million despite public fund balances averaging approximately $16.3 million lower than last year. All other deposits are up approximately $35.4 million on average, with $25.8 million of this growth in personal account balances, reflected primarily in higher average demand deposit, savings and investment certificate balances. The balance of the average deposit growth is reflected primarily in higher non-personal insured money market and investment certificate balances. The $11.3 million increase in average securities sold under agreements to repurchase is primarily due to an increase in securities purchases funded by term repurchase agreements with the Federal Home Loan Bank of New York. Due to the decline in interest rates, interest expense totaled $4.288 million as compared to $5.330 million during the third quarter of last year, a decrease of $1.042 million or 19.5%. The total cost of funds, including the effect of non-interest-bearing funding sources (such as demand deposits) decreased 76 basis points from 3.31% to 2.55%. The above yields and costs resulted in a net interest margin during the third quarter of 2002 of 3.95% as compared to 4.20% during the third quarter of 2001.

Other operating income decreased $1.288 million or 41.2%. Included in this decrease is a $1.124 million decrease in net gains/losses on securities transactions. This includes the effect of the above mentioned $1.006 million write-down of the corporate bond, which is reflected in the third quarter 2002 $704 thousand net loss on securities transactions. During the third quarter of 2002, we did sell a $5.0 million U.S. Treasury bond at a gain of $302 thousand. Excluding the $1.124 million decrease in net gains/losses on securities transactions, all other operating income declined $164 thousand or 6.1%. The area having the greatest impact on this decrease was trust and investment services fee income (- $142 thousand). Income from our equity investment in Cephas Capital Partners, L.P. was down $81 thousand, due to an increase in the quarterly loan loss provision by Cephas. The above decreases were somewhat offset primarily by increases in revenue from CFS Group, Inc. (+ $48 thousand) and service charges on deposit accounts (+ $41 thousand).

Operating expenses were $495 thousand or 8.2% higher than the comparable period last year. Of this increase, $327 thousand is due to a prepayment penalty related to a refinance of a term advance from the Federal Home Loan Bank. With interest rates at such low levels, management determined it advantageous to payoff an existing advance carrying a rate of 4.90%, and refinance for a five-year term at a rate of 3.72%. This rate reduction, coupled with a 6 basis point increase in yield on the reinvestment of the proceeds from the sale of the U.S. Treasury bond noted above, will be accretive to future earnings. Excluding this, all other operating expenses increased $168 thousand or 2.8%. Salaries and wages increased $94 thousand, while pension and other employee benefits were down $42 thousand. Pension costs themselves were $118 thousand higher than during the third quarter of last year. While the pension plan continues to be fully funded, the increase does reflect the impact of a declining stock market on the value of plan assets, as well as an increase in compensation. These conditions are expected to result in continued increases in the pension expense category in 2003. Other significant benefit increases were related to health insurance and post-retirement medical benefits (+ $62 thousand). The above benefit increases were offset primarily by a $219 thousand decrease in the accrual for year-end incentive bonuses. Additionally, depreciation expense has increased $80 thousand, resulting from increased investment in property and equipment. In accordance with the provisions of SFAS No. 142, the Corporation did not incur any amortization expense related to goodwill during the third quarter of 2002. During the third quarter of 2001, amortization of goodwill totaled $47 thousand.

The $1.294 million decrease in income tax expense is the result of lower pre-tax earnings, as well as the realization of approximately $58 thousand in New York State Empire Zone real property and tax reduction credits.

Net income for the nine month period ended September 30, 2002 was $4.941 million, a 27.7% decrease as compared to September 30, 2001 results. Earnings per share declined 25.6%, from $1.68 to $1.25 on 102,097 fewer average shares outstanding. As was the case with third quarter results, the year to date results have been impacted by the increase in the provision for loan losses (+ $1.438 million) and the $1.006 million write-down of the investment in a corporate bond. These items have negatively impacted year-to-date net earnings by approximately $1.484 million or $0.38 per share.

Net interest income for the first nine months of this year has increased $281 thousand or 1.4% as compared to the first nine months of 2001. Total interest and dividend income on earning assets was $33.735 million as compared to $37.066 million a year earlier, a decrease of $3.331 million or 9.0%. While on average, total earning assets have increased by $31.2 million or 4.8%, this increase has been offset by a lower interest rate environment, as reflected in a yield decline of 99 basis points from 7.57% to 6.58%. A major factor in the increase in average earning assets was the $16.7 million or 4.1% increase in average loans outstanding. Year to date, average commercial loans have increased $13.1 million or 7.4%, with average mortgages showing a $7.2 million or 7.5% increase. Other significant growth was evidenced by a $4.2 million or 9.3% average increase in the home equity portfolio. The above loan growth was somewhat offset by a $7.8 million decrease in average consumer installment loans, this declin e related primarily to a lower volume of indirect retail auto financing. In addition to loan growth, the securities portfolio and federal funds sold and interest bearing deposits have increased on average $6.1 million and $8.4 million, respectively.

While average funding liabilities increased $28.6 million or 4.6%, interest expense for the nine-month period ended September 30, 2002 was down $3.612 million or 21.5%. This is reflective of the interest rate declines over the past year which have resulted in an 89 basis point decline in the cost of funds from 3.58% to 2.69%. While public fund average balances are down $27.6 million, other personal and non-personal account averages have increased $35.6 million. Much of this growth ($27.1 million) is in personal deposit accounts, primarily reflected in higher average time deposits (+ $9.0 million), savings (+ $11.4 million) and demand deposits (+ $4.3 million). Securities sold under agreements to repurchase have increased $21.8 million on average due primarily to an increase in securities purchases funded by term repurchase agreements entered into with the Federal Home Loan Bank of New York. The net interest margin for the first nine months of 2002 was 4.00% as compared to 4.14% during the first nine mon ths of last year.

Other operating income is approximately $773 thousand or 9.1% lower than during the first nine months of 2001. This decrease includes the impact of the $1.006 million bond write-down discussed previously in this report. Excluding this write-down, all other operating income has increased about $233 thousand or 2.8%. Accelerated stock donations made during the second quarter have resulted in a $122 thousand year-to-date increase in non-taxable gains on stock donations. In addition to the above, we have realized year-to-date increases in revenue generated by CFS Group, Inc. (+ $125 thousand), service charges on deposit accounts (+ $82 thousand), credit card merchant earnings (+ $72 thousand) and checkcard interchange income (+ $65 thousand). These increases were somewhat offset by a $207 thousand decrease in trust and investment services income.

Operating expenses year-to-date have increased $1.565 million or 8.7%. Excluding the prepayment penalty of $327 thousand discussed above, all other operating expenses have increased $1.239 million or 6.9%. The most significant factor impacting this increase is a $723 thousand increase in salaries and wages, and pension and other employee benefits. While salaries and wages have increased $474 thousand, pension and other employee benefits are up $249 thousand. This increase is primarily due to higher pension costs (+ $364 thousand) and health insurance and post-retirement medical benefits costs (+ $85 thousand), offset primarily by a $250 thousand decrease in the accrual for year-end incentive bonuses. Other significant factors in the operating expense increase include credit card and merchant deposit services processing costs (+ $199 thousand) and depreciation expense (+ $224 thousand). In compliance with the provisions of SFAS No. 142, the Corporation has not incurred any amortization expense related to goodwill during the first nine months of this year. During the first nine months of 2001, this expense totaled $142 thousand.

The $1.600 million decrease in income tax expense is reflective of both a lower level of pre-tax earnings, as well as the realization of approximately $58 thousand in New York State Empire Zone real property and tax reduction credits.

Average Consolidated Balance Sheet and Interest Analysis (Dollars in thousands)

For the purpose of these computations, 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.

Average Consolidated Balance Sheet and Interest Analysis (Dollars in

thousands)