CHEMUNG FINANCIAL CORP - FORM 10-Q

Attached files

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EX-31.1 - CERTIFICATION OF PRESIDENT & CHIEF EXECUTIVE OFFICER 9-30-11 10Q - CHEMUNG FINANCIAL CORP	exh31_120110930bentley.htm
EX-32.1 - CERTIFICATION OF PRESIDENT & CHIEF EXECUTIVE OFFICER 9-30-11 10Q - CHEMUNG FINANCIAL CORP	exh32_120110930bentley.htm
EX-10.15 - SETTLEMENT AGREEMENT-PETER CUREAU 07-05-2011 - CHEMUNG FINANCIAL CORP	exh10_15agreementcureau.htm
EX-32.2 - CERTIFICATION OF TREASURER & CHIEF FINANCIAL OFFICER 9-30-11 10Q - CHEMUNG FINANCIAL CORP	exh32_220110930battersby.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL & ACCOUNTING OFFICER 9-30-11 10Q - CHEMUNG FINANCIAL CORP	exh31_220110930battersby.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly period ended September 30, 2011
Or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-13888

CHEMUNG FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

New York				16-1237038
(State or other jurisdiction of incorporation or organization)				I.R.S. Employer Identification No.

One Chemung Canal Plaza, P.O. Box 1522, Elmira, NY				14902
(Address of principal executive offices)				(Zip Code)

(607) 737-3711 or (800) 836-3711
(Registrant's telephone number, including area code)

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: X NO:____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer		[ ]	Non-accelerated filer		[ ]
Accelerated filer		[ ]	Smaller reporting company		[X]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
YES: ____ NO: X

The number of shares of the registrant's common stock, $.01 par value, outstanding on October 31, 2011 was 4,569,710.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION	PAGE

Item 1:	Financial Statements - Unaudited

	Consolidated Balance Sheet	3
	Consolidated Statements of Income	4
	Consolidated Statements of Shareholders’ Equity and Comprehensive Income	5
	Consolidated Statements of Cash Flows	6

	Notes to Unaudited Consolidated Financial Statements	8

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4:	Controls and Procedures	52

PART II.	OTHER INFORMATION	53

Item 1A:	Risk Factors	53

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 6:	Exhibits	53

SIGNATURES		54

INDEX TO EXHIBITS

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	SEPTEMBER 30, 2011			DECEMBER, 31, 2010
ASSETS
Cash and due from financial institutions	$	30,748,786		$	16,540,095
Interest-bearing deposits in other financial institutions		87,723,958			44,079,682
Total cash and cash equivalents		118,472,744			60,619,777

Securities available for sale, at estimated fair value		279,078,596			223,544,961
Securities held to maturity, estimated fair value of $8,483,553 at September 30, 2011 and $8,297,392 at December 31, 2010		7,585,671			7,715,123
Federal Home Loan Bank and Federal Reserve Bank Stock, at cost		5,672,450			3,328,900

Loans, net of deferred origination fees and costs, and unearned income		788,458,576			613,684,369
Allowance for loan losses		(9,676,923	)		(9,498,131	)
Loans, net		778,781,653			604,186,238

Loans held for sale		74,412			486,997
Premises and equipment, net		24,250,065			24,192,593
Goodwill		22,157,213			9,872,375
Other intangible assets, net		6,478,541			4,655,900
Bank owned life insurance		2,602,647			2,536,715
Other assets		20,768,574			17,187,706

Total assets	$	1,265,922,566		$	958,327,285

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	261,945,489		$	197,322,036
Interest-bearing		780,260,416			589,036,816
Total deposits		1,042,205,905			786,358,852

Securities sold under agreements to repurchase		41,453,658			44,774,615
Federal Home Loan Bank term advances		43,936,174			20,000,000
Accrued interest payable		822,970			784,351
Dividends payable		1,142,015			881,203
Other liabilities		7,674,121			8,119,701
Total liabilities		1,137,234,843			860,918,722

Shareholders' equity:
Common stock, $.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at September 30, 2011 and 4,300,134 issued at December 31, 2010		53,101			43,001
Additional-paid-in capital		45,709,779			22,022,122
Retained earnings		98,808,285			94,407,620
Treasury stock, at cost (742,518 shares at September 30, 2011; 749,880 shares at December 31, 2010)		(18,948,660	)		(19,166,655	)
Accumulated other comprehensive income		3,065,218			102,475

Total shareholders' equity		128,687,723			97,408,563

Total liabilities and shareholders' equity	$	1,265,922,566		$	958,327,285
See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Nine Months Ended						Three Months Ended
	September 30,			September 30,			September 30,				September 30,
INTEREST AND DIVIDEND INCOME	2011			2010			2011				2010
Loans, including fees	$	31,456,406		$	26,412,468		$	11,673,215		$	8,742,046
Taxable securities		4,347,409			4,968,287			1,504,393			1,555,301
Tax exempt securities		1,035,068			888,938			350,557			300,917
Interest-bearing deposits		166,955			123,984			65,139			41,709
Total interest and dividend income		37,005,838			32,393,677			13,593,304			10,639,973

INTEREST EXPENSE
Deposits		3,325,900			4,452,535			1,138,130			1,335,770
Borrowed funds		783,022			711,231			285,084			239,634
Securities sold under agreements to repurchase		1,056,095			1,257,428			326,542			383,095
Total interest expense		5,165,017			6,421,194			1,749,756			1,958,499
Net interest income		31,840,821			25,972,483			11,843,548			8,681,474
Provision for loan losses		833,333			1,125,000			583,333			375,000
Net interest income after provision for loan losses		31,007,488			24,847,483			11,260,215			8,306,474

Other operating income:
Wealth management group fee income		5,131,119			6,256,974			1,746,958			2,183,765
Service charges on deposit accounts		3,180,733			3,428,277			1,130,824			1,106,415
Net gain on securities transactions		1,108,091			451,094			428,882			-
Other-than-temporary loss on investment securities:
Total impairment losses		(67,400	)		(393,005	)		(67,400	)		(56,380	)
Loss recognized in other comprehensive income		-			-			-			-
Net impairment loss recognized in earnings		(67,400	)		(393,005	)		(67,400	)		(56,380	)
Net gain on sales of loans held for sale		132,902			166,247			53,571			32,681
Credit card merchant earnings		162,215			148,107			57,153			48,937
Gains on sales of other real estate owned		89,404			33,550			442			-
Income from bank owned life insurance		65,932			65,213			22,321			22,075
Other		3,617,016			2,750,745			955,712			909,951
Total other operating income		13,420,012			12,907,202			4,328,463			4,247,444

Other operating expenses:
Salaries and wages		12,534,214			11,362,716			4,272,612			3,768,761
Pension and other employee benefits		3,296,814			2,828,493			1,172,044			809,940
Net occupancy expenses		3,663,005			3,272,432			1,230,490			1,065,930
Furniture and equipment expenses		1,549,048			1,441,030			486,518			465,262
Data processing expense		2,881,150			2,457,347			976,050			822,341
Amortization of intangible assets		753,192			550,531			288,001			180,363
Losses on sales of other real estate owned		1,671			17,983			-			(7,575	)
Other real estate owned expenses		86,040			305,147			37,549			112,307
FDIC insurance		737,281			912,652			294,897			287,298
Merger related expenses		2,243,919			-			20,500			-
Other		5,515,652			4,395,221			1,838,726			1,378,395
Total other operating expenses		33,261,986			27,543,552			10,617,387			8,883,022

Income before income tax expense		11,165,514			10,211,133			4,971,291			3,670,896
Income tax expense		3,589,455			3,157,001			1,680,351			1,119,960
Net income	$	7,576,059		$	7,054,132		$	3,290,940		$	2,550,936

Weighted average shares outstanding		4,297,777			3,604,502			4,637,392			3,602,277

Basic and diluted earnings per share	$	1.76		$	1.96		$	0.71		$	0.71
See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY AND COMPREHENSIVE INCOME

(UNAUDITED)

	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balances at December 31, 2009	$	43,001	$	22,806,829		$	87,826,331		$	(20,024,661	)	$	(565,835	)	$	90,085,665
Comprehensive Income:
Net income		-		-			7,054,132			-			-			7,054,132
Change in unrealized gains(losses) on securities AFS, net		-		-			-			-			2,633,416			2,633,416
Change in funded status of Employers' Accounting for Defined Benefit Pension and Other Benefit Plans, net		-		-			-			-			231,937			231,937
Total comprehensive income (loss)		-		-			-			-			-			9,919,485
Restricted stock units for directors' deferred compensation plan		-		83,311			-			-			-			83,311
Cash dividends declared ($.75 per share)		-		-			(2,639,382	)		-			-			(2,639,382	)
Distribution of 10,082 shares of treasury stock for directors’ compensation		-		(44,677	)		-			258,906			-			214,229
Distribution of 2,750 shares of treasury stock for employee compensation		-		(15,537	)		-			70,537			-			55,000
Purchase of 20,260 shares of treasury stock		-		-			-			(425,566	)		-			(425,566	)
Balances at September 30, 2010	$	43,001	$	22,829,926		$	92,241,081		$	(20,120,784	)	$	2,299,518		$	97,292,742
Balances at December 31, 2010	$	43,001	$	22,022,122		$	94,407,620		$	(19,166,655	)	$	102,475		$	97,408,563
Comprehensive Income:
Net income		-		-			7,576,059			-			-			7,576,059
Change in unrealized gains (losses) on securities AFS, net				-			-			-			2,678,187			2,678,187
Change in funded status of Employers' Accounting for Defined Benefit Pension and Other Benefit Plans, net		-		-			-			-			284,556			284,556
Total comprehensive income (loss)		-		-			-			-			-			10,538,802
Restricted stock awards		-		21,226			-			-			-			21,226
Restricted stock units for directors' deferred compensation plan		-		61,129			-			-			-			61,129
Cash dividends declared ($.75 per share)		-		-			(3,175,394	)		-			-			(3,175,394	)
Distribution of 10,378 shares of treasury stock for directors' compensation		-		(33,831	)		-			265,262			-			231,431
Distribution of 2,392 shares of treasury stock for employee compensation		-		(6,140	)		-			61,140			-			55,000
Distribution of 286 shares of treasury stock for director’s deferred compensation		-		(7,364	)		-			7,310			-			(54	)
Distribution of 4,387 shares of treasury stock for employee restricted stock warrants		-		(60,800	)		-			112,090			-			51,290
Purchase of 13,981 shares of treasury stock		-		-			-			(327,413	)		-			(327,413	)
Sale of 3,900 shares of treasury stock		-		(10,101	)		-			99,606			-			89,505
Issuance of 1,009,942 shares related to FOFC Merger		10,100		23,723,538			-			-			-			23,733,638
Balances at September 30, 2011	$	53,101	$	45,709,779		$	98,808,285		$	(18,948,660	)	$	3,065,218		$	128,687,723
See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Nine Months Ended
	September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2011			2010
Net income	$	7,576,059		$	7,054,132
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		753,192			550,531
Provision for loan losses		833,333			1,125,000
Depreciation and amortization of fixed assets		2,129,738			2,057,825
Amortization of premiums on securities, net		960,973			489,661
Gains on sales of loans held for sale, net		(132,902	)		(166,247	)
Proceeds from sales of loans held for sale		5,523,214			5,686,897
Loans originated and held for sale		(4,977,727	)		(5,906,757	)
Net gain on sale of other real estate owned		(87,733	)		(15,568	)
Net gains on securities transactions		(1,108,091	)		(451,094	)
Net impairment loss recognized on investment securities		67,400			393,005
Decrease in other assets		2,752,047			671,468
(Increase) decrease in prepaid FDIC assessment		(49,464	)		819,241
Decrease in accrued interest payable		(265,000	)		(235,220	)
Expense related to restricted stock units for directors' deferred compensation plan		61,129			83,311
Expense related to employee stock compensation		55,000			55,000
Expense related to employee stock awards		21,226			-
Decrease in other liabilities		(2,243,010	)		(2,987,293	)
Income from bank owned life insurance		(65,932	)		(65,213	)
Proceeds from sales of student loans		-			137,509
Net cash provided by operating activities		11,803,452			9,296,188

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale		67,741,210			50,440,459
Proceeds from maturities and principal collected on securities available for sale		23,608,123			49,260,195
Proceeds from maturities and principal collected on securities held to maturity		3,448,732			9,561,278
Purchases of securities available for sale		(95,911,022	)		(110,793,064	)
Purchases of securities held to maturity		(3,319,281	)		(5,429,297	)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock		(1,002,500	)		(58,200	)
Redemption of Federal Home Loan Bank and Federal Reserve Bank stock		237,250			-
Purchases of premises and equipment		(1,307,723	)		(1,230,458	)
Cash paid Fort Orange Financial Corp. acquisition		(8,137,816	)		-
Cash received Fort Orange Financial Corp. acquisition		33,284,995			-
Proceeds from sale of other real estate owned		356,207			236,102
Net (increase) decrease in loans		(10,967,168	)		3,210,362
Net cash provided (used) by investing activities		8,031,007			(4,802,623	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, savings accounts, and insured money market accounts		70,452,474			17,197,567
Net decrease in time deposits and individual retirement accounts		(15,073,756	)		(14,749,680	)
Net decrease in securities sold under agreements to repurchase		(13,889,730	)		(10,497,579	)
Net decrease in Federal Home Loan Bank long term advances		(317,990	)		-
Purchase of treasury stock		(327,413	)		(425,566	)
Sale of treasury stock		89,505			-
Cash dividends paid		(2,914,582	)		(2,641,239	)
Net cash provided (used) by financing activities		38,018,508			(11,116,497	)
Net increase (decrease) in cash and cash equivalents		57,852,967			(6,622,932	)
Cash and cash equivalents, beginning of period		60,619,777			79,738,396
Cash and cash equivalents, end of period	$	118,472,744		$	73,115,464
See accompanying notes to unaudited consolidated financial statements.

(Cash Flow continued)


Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	5,126,397	$	6,656,414
Income Taxes	$	3,340,847	$	4,575,675
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	308,976	$	554,246

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Chemung Financial Corporation (the "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 to its local market area. The

consolidated financial statements include the accounts of the Corporation and its wholly owned

subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.

The data in the consolidated balance sheet as of December 31, 2010 was derived from the audited

consolidated financial statements in the Corporation's 2010 Annual Report on Form 10-K, which was

filed with the Securities and Exchange Commission on March 16, 2011. That data, along with the other

interim financial information presented in the consolidated balance sheets, statements of income,

shareholders' equity and comprehensive income, and cash flows should be read in conjunction with the

audited consolidated financial statements, including the notes thereto, contained in the 2010 Annual

Report on Form 10-K. Amounts in prior periods' consolidated interim financial statements are

reclassified whenever necessary to conform to the current period's presentation.

The consolidated financial statements included herein reflect all adjustments which are, in the opinion of

management, of a normal recurring nature and necessary to present fairly the Corporation's financial

position as of September 30, 2011 and December 31, 2010, and results of operations for the three and

nine-month periods ended September 30, 2011 and 2010, and changes in shareholders' equity and cash

flows for the nine-month periods ended September 30, 2011 and 2010. Subsequent events were

evaluated for any required recognition or disclosure. The results for the periods presented are not

necessarily indicative of results to be expected for the entire fiscal year or any other interim period.

2. Earnings Per Common Share

Basic earnings per share is net income divided by the weighted average number of common shares

outstanding during the period. 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. All outstanding unvested share based payment awards that

contain rights to nonforfeitable dividends are considered participating securities for this calculation.

Restricted stock awards are grants of participating securities. The impact of the participating securities

on earnings per share is not material. Earnings per share information is adjusted to present comparative

results for stock splits and stock dividends that occur. Earnings per share were computed by dividing

net income by 4,297,777 and 3,604,502 weighted average shares outstanding for the nine-month periods

ended September 30, 2011 and 2010, and 4,637,392 and 3,602,277 weighted average shares outstanding

for the three-month periods ended September 30, 2011 and 2010, respectively. There were no dilutive

common stock equivalents during the three and nine-month periods ended September 30, 2011 or 2010.

3. Fair Value

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 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

lack of observable inputs and market activity in this class of investments 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 determining other-than-temporary impairment (“OTTI”) as further described in Note 8.

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 third party 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.

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:

			Fair Value Measurement at September 30, 2011 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	142,948,508	$	36,088,000	$	106,860,508	$	-
Mortgage-backed securities, residential		57,220,655		-		57,220,655		-
Obligations of states and political subdivisions		46,636,291		-		46,636,291		-
Trust Preferred securities		2,280,848		-		1,985,938		294,910
Corporate bonds and notes		13,792,147		-		13,792,147		-
CMO’s		8,468,507		-		8,468,507		-
SBA Pool’s		2,305,718		-		2,305,718		-
Corporate stocks		5,425,922		4,741,501		684,421		-
Total available for sale securities	$	279,078,596	$	40,829,501	$	237,954,185	$	294,910

			Fair Value Measurement at December 31, 2010 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	102,131,517	$	40,581,250	$	61,550,267	$	-
Mortgage-backed securities, residential		62,761,633		-		62,761,633		-
Obligations of states and political subdivisions		38,765,092		-		38,765,092		-
Trust Preferred securities		2,344,094		-		2,009,509		334,585
Corporate bonds and notes		11,694,190		-		11,694,190		-
Corporate stocks		5,848,435		5,209,069		639,366		-
Total available for sale securities	$	223,544,961	$	45,790,319	$	177,420,057	$	334,585

The table below presents a reconciliation of all assets measured at fair value on a recurring basis

using significant unobservable inputs (Level 3) for the nine-month periods ending September 30,

2011 and 2010:

	Fair Value Measurement nine-months ended September 30, 2011 Using Significant Unobservable Inputs (Level 3)			Fair Value Measurement nine-months ended September 30, 2010 Using Significant Unobservable Inputs (Level 3)
Investment Securities Available for Sale
Beginning balance	$	334,585		$	511,480
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-			-
Impairment charge on investment securities		(67,400	)		(393,005	)
Included in other comprehensive income		27,725			172,340
Transfers in and/or out of Level 3		-			-
Ending balance September 30	$	294,910		$	290,815

Assets and liabilities measured at fair value on a non-recurring basis are summarized below:

			Fair Value Measurement at September 30, 2011 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial, financial and agricultural:
Commercial and industrial	$	701,710	$	-	$	-	$	701,710
Commercial mortgages:		407,551		-		-		407,551
Other		392,257		-		-		392,257
Total Impaired Loans	$	1,501,578	$	-	$	-	$	1,501,578

Other real estate owned, net	$	661,475	$	-	$	-	$	661,475

			Fair Value Measurement at December 31, 2010 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial mortgages:
Construction	$	72,211	$	-	$	-	$	72,211
Other		580,329		-		-		580,329
Total Impaired Loans	$	652,540	$	-	$	-	$	652,540

Other real estate owned, net	$	740,620	$	-	$	-	$	740,620

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral

dependent loans, had a carrying amount of $3,088,321 with a valuation allowance of $1,586,743 as of

September 30, 2011, resulting in a $833,333 provision for loan losses for the nine-month period ending

September 30, 2011. Impaired loans had a carrying amount of $892,298, with a valuation allowance of

$239,758 as of December 31, 2010, resulting in no additional provision for loan losses for the year

ending December 31, 2010.

OREO, which is measured by the lower of carrying or fair value less costs to sell, had a net carrying

amount of $661,475 at September 30, 2011. The net carrying amount reflects the outstanding balance of

$784,162 net of a valuation allowance of $122,687 at September 30, 2011 which resulted in write downs

of $12,120 for the nine-month period ending September 30, 2011. OREO had a net carrying amount of

$740,620 at December 31, 2010. The net carrying amount reflected an outstanding balance of $909,947,

net of a valuation allowance of $169,327 at December 31, 2010 which resulted in write downs of

$169,327 for the year ending December 31, 2010.

The carrying amounts and estimated fair values of other financial instruments, at September 30, 2011 and December 31, 2010, are as follows:

(dollars in thousands)	September 30, 2011				December 31, 2010
Financial assets:	Carrying Amount		Estimated Fair Value (1)		Carrying Amount		Estimated Fair Value (1)
Cash and due from financial institutions	$	30,749	$	30,749	$	16,540	$	16,540
Interest-bearing deposits in other financial institutions		87,724		87,724		44,080		44,080
Securities available for sale		279,079		279,079		223,545		223,545
Securities held to maturity		7,586		8,484		7,715		8,297
Federal Home Loan and Federal Reserve Bank stock		5,672		N/A		3,329		N/A
Net loans		778,782		798,889		604,186		618,859
Loans held for sale		74,412		74,412		487		487
Accrued interest receivable		4,001		4,001		2,713		2,713
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts		736,711		736,711		532,555		532,555
Time deposits		305,495		307,978		253,804		256,281
Securities sold under agreements to repurchase		41,454		43,975		44,775		46,667
Federal Home Loan Bank advances		43,936		47,452		20,000		21,609
Accrued interest payable		823		823		784		784
Dividends payable		1,142		1,142		881		881

(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 judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.

The methods and assumptions used to estimate fair value are described as follows:

Carrying amount is the estimated fair value for cash and due from financial institutions, interest bearing

deposits, accrued interest receivable and payable, demand deposits, short-term debt, and variable rate

loans or deposits that reprice frequently and fully. The methods for determining the fair values for

securities were described previously. For fixed rate loans or deposits and for variable rate loans or

deposits with infrequent repricing or repricing limits, fair value is based on discounted cash flows using

current market rates applied to the estimated life and credit risk. Fair value of debt is based on current

rates for similar financing. It was not practicable to determine the fair value of FHLB stock due to

restrictions placed on its transferability. The fair value of off-balance-sheet items is not considered

material.

4. Goodwill and Intangible Assets

The changes in goodwill included in the core banking segment during the periods ending September 30,

2011 and 2010 were as follows:

	2011		2010
Beginning of year	$	9,872,375	$	9,872,375
Acquired goodwill		12,284,838		-
September 30,	$	22,157,213	$	9,872,375

Acquired intangible assets were as follows at September 30, 2011 and December 31, 2010:

	At September 30, 2011				At December 31, 2010
	Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization
Core deposit intangibles	$	3,819,798	$	1,050,211	$	1,174,272	$	674,141
Other customer relationship intangibles		6,063,423		2,354,469		6,133,116		1,977,347
Total	$	9,883,221	$	3,404,680	$	7,307,388	$	2,651,488

Aggregate amortization expense was $753,192 and $550,531 for the-nine month periods ended

September 30, 2011 and 2010, respectively.

The remaining estimated aggregate amortization expense at September 30, 2011 is listed below:

Year	Estimated Expense
2011	$	288,001
2012		1,046,720
2013		876,524
2014		777,801
2015		681,176
2016 and thereafter		2,808,319
Total	$	6,478,541

5. Business Combinations

Acquisition of Fort Orange Financial Corp.

On April 8, 2011, the Corporation completed its merger with Fort Orange Financial Corp. (“FOFC”), the

holding company of Capital Bank & Trust Company (“Capital Bank”) based in Albany, New York, with

FOFC being merged with and into the Corporation, and the Corporation being the surviving entity.

Immediately following the merger, Capital Bank was merged with and into the Bank.

As of the date of the merger, Capital Bank’s unaudited balance sheet included approximately $254

million in assets, a loan portfolio approximating $171 million and deposits of $199 million. With the

completion of the acquisition, the Corporation became a $1.2 billion financial institution with 28 offices

located in eight New York counties, as well as Bradford County in Pennsylvania. The Capital Bank

branch locations are in Albany, Clifton Park, Latham and Slingerlands.

Under the terms of an Agreement and Plan of Merger (the “Agreement”) entered into on October 14,

2010, the Corporation purchased all of the outstanding shares of FOFC common stock in a stock and

cash transaction valued at $31.9 million, based upon the Corporation’s closing stock price on April 8,

2011 of $23.50. For each share of FOFC common stock outstanding immediately prior to the merger,

each FOFC shareholder had the right to elect to receive: (i) all cash in the amount of $7.50 per share

(“Cash Consideration”), (ii) all stock at an exchange ratio of 0.3571 of a share of the Corporation’s

common stock for each share of FOFC common stock (“Stock Consideration”) or (iii) a mix of Cash

Consideration for 25% of their shares and Stock Consideration for 75% of their shares. The total

consideration to be paid by the Corporation was subject to the requirement that 25% of the FOFC

common stock be acquired for the Cash Consideration and 75% be acquired for the Stock Consideration.

As a result of the merger, the Corporation issued approximately 1.01 million additional shares of its

common stock.

The table below illustrates the reconciliation of shares outstanding and the calculation of the

consideration effectively transferred.

Reconciliation of Shares Outstanding
FOFC shares outstanding at April 8, 2011	3,771,425
Percentage of stock consideration	75	%
FOFC shares exchanged for stock	2,828,569
Exchange Ratio	0.3571
Chemung Financial shares issued to FOFC shareholders (excludes fractional shares)	1,009,942

Chemung Financial shares outstanding April 8, 2011	3,565,610
Total Chemung Financial Shares at April 8, 2011 following the consummation of the transaction	4,575,552

Ownership % held by FOFC shareholders	22	%
Ownership % held by legacy Chemung Financial shareholders	78	%

Purchase Price Consideration (dollar amounts in thousands, except per share data)
FOFC shares outstanding at April 8, 2011		3,771,425
Percentage of stock consideration		75	%
FOFC shares exchanged for stock		2,828,569
Exchange Ratio		0.3571
Chemung Financial shares issued to FOFC shareholders (excludes fractional shares)		1,009,942
Purchase price per Chemung Financial common share	$	23.50
Total stock consideration paid	$	23,734
Total cash consideration paid		6,939
Cash paid for fractional shares		3
Cash paid for the settlement of FOFC stock options		545
Cash paid for severance payments		650
Total consideration paid	$	31,871

As a result of the FOFC merger, we recognized assets acquired and liabilities assumed at their acquisition date fair value as presented below: (in thousands).

Total Purchase Price				$	31,871

Net assets acquired:
Cash and due from banks	$	33,285
Securities available for sale		46,525
Federal Home Loan Bank Stock		1,578
Loans		164,153
Accrued Interest Receivable		864
Premises and equipment		879
Core deposit intangible		2,646
Deferred tax asset		2,466
Other assets		3,530
Deposits		(200,468	)
Borrowings		(34,823	)
Accrued Interest Payable		(304	)
Other liabilities		(745	)

Net assets acquired				$	19,586

Goodwill resulting from the FOFC merger				$	12,285

The goodwill generated by the FOFC merger consists of, among other things, synergies and increased

economies of scale, including the ability to offer more diverse and profitable products, greater diversity

in the branch system which may lead to lower cost deposits, and an increased legal lending limit. We

expect that no goodwill recognized as a result of the FOFC merger will be deductible for income tax

purposes. Purchase accounting adjustments are subject to refinement as management finalizes their fair

value measurements, including their analysis of identifiable intangible assets. Since the branches

acquired were merged into the Bank, there is no segment impact of the FOFC merger.

The fair value of the financial assets acquired included loans receivable with an unpaid principal balance

of $170.7 million. U.S. generally accepted accounting principles (“U.S. GAAP”) prohibits carrying

over an allowance for loan losses for loans purchased in the merger. The table below illustrates the fair

value adjustments made to the unpaid principal balance in order to present a fair value of the loans

acquired (in thousands).

Gross loans-unpaid principal balance at April 8, 2011	$	170,682
Fair value adjustment on pools of homogeneous loans		(1,619	)
Credit fair value adjustment on loans with deteriorating credit quality		(4,820	)
Fair value of purchased loans at April 8, 2011	$	164,243

The fair value adjustment on pools of homogeneous loans represents adjustments a prospective acquirer

would make to the unpaid principal balance to account for differences between the contractual yield on

the portfolio and market interest rates, for credit, and for liquidity. The market rate adjustment

represents the movement in market interest rates, irrespective of credit adjustments, compared to the

stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans

represents the changes in credit quality of the underlying borrowers from the loan inception to the

merger date. The credit adjustment on loans with deteriorating credit quality is derived in accordance

with Accounting Standard Codification 310-30, “Loans and Debt Securities Acquired with Deteriorated

Credit Quality” and represents the portion of the loan balance that has been deemed uncollectible

based on our expectations of future cash flows for each respective loan.

The information below presents the recorded fair value on April 8, 2011 of the Corporation’s purchased

impaired loans with the accretable and non-accretable related adjustments from the perspective of total

contractual cash flows (in thousands).

Contractually required principal and interest at acquisition	$	25,718
Contractual cash flows not expected to be collected (nonaccretable discount)		(5,849	)
Expected cash flows at acquisition		19,869
Interest component of expected cash flows (accretable yield)		(1,861	)
Fair value of loans acquired with deteriorating credit quality	$	18,008

The results of operations of the merged entity have been reflected in Chemung Financial Corporation’s

consolidated statements of income beginning as of the acquisition date. Pro forma condensed

consolidated income statements for the three and nine months ended September 30, 2011 and 2010 as if

the merger occurred at the beginning of each period presented are as follows (in thousands):

	Nine Months Ended September 30,
Financial assets:	2011		2010
Interest and dividend income	$	40,414	$	42,529
Interest expense		6,025		9,660
Net interest income		34,389		32,869
Provision for loan losses		1,808		2,375
Net interest income after provision for loan losses		32,581		30,494
Non-interest income	$	13,472	$	13,349
Non-interest expense		32,777		32,117
Income before income taxes		13,276		11,726
Income tax expense		4,406		3,742
Net income	$	8,870	$	7,984

Weighted average shares outstanding		4,629		4,614
Basic and diluted earnings per share	$	1.92	$	1.73

The consolidated income statement for the Corporation includes $5.654 million of net interest income,

$72 thousand of non-interest income and net income of $2.314 million of the acquiree since

the acquisition date.

6. Comprehensive Income

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 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.

Comprehensive income for the three and nine-month periods ended September 30, 2011 was $3,297,441

and $10,538,802, respectively. Comprehensive income for the three and nine-month periods ended

September 30, 2010 was $3,393,701 and $9,919,485, respectively. The following summarizes the

components of other comprehensive income:

	Nine Months Ended September 30,						Three Months Ended September 30,
Other Comprehensive Income	2011			2010			2011			2010
Unrealized holding gains on securities available for sale	$	5,448,351		$	4,573,717		$	294,210		$	1,400,082
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		27,725			172,340			(9,425	)		(50,760	)
Reclassification adjustment net gains realized in net income		(1,108,091	)		(451,094	)		(428,882	)		-
Net unrealized gains (losses)		4,367,985			4,294,963			(144,097	)		1,349,322
Tax effect		1,689,798			1,661,547			(55,746	)		521,998
Net of tax amount	$	2,678,187		$	2,633,416		$	(88,351	)	$	827,324
Change in funded status of defined benefit pension plan and other benefit plans		464,097			378,277			154,699			25,183
Tax effect		179,541			146,340			59,847			9,742
Net of tax amount		284,556			231,937			94,852			15,441
Total other comprehensive income	$	2,962,743		$	2,865,353		$	6,501		$	842,765

The following is a summary of the accumulated other comprehensive income balance, net of tax:

	Balance at December 31, 2010				Current Period Change		Balance at September 30, 2011
Unrealized gains on securities available for sale		$	5,661,013		$	2,678,187	$	8,339,200
Unrealized loss on pension plans and other benefit plans			(5,558,538	)		284,556		(5,273,982	)
Total		$	102,475		$	2,962,743	$	3,065,218

7. Commitments and Contingencies

The Corporation is 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, overdraft protection and

commitments to fund new loans. In accordance with U.S. GAAP, these financial instruments are not

recorded in the financial statements. 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.

Also in the normal course of business, there are various outstanding claims and legal proceedings

involving the Corporation or its subsidiaries. On February 14 and April 14, 2011, the Bank received

separate settlement demands from representatives of beneficiaries of certain trusts for which the Bank

has acted as trustee. The settlement demands relate to alleged claims of, among other things, breach of

the Bank’s fiduciary duties as trustee, including the Bank’s alleged failure to adequately diversify the

relevant trust portfolios. The beneficiaries seek aggregate damages of up to approximately $27.0 million.

On September 16, 2011, the beneficiaries objected in the Surrogate’s Court of the State of New York,

County of Chemung (the “Surrogate’s Court”) to accountings with respect to the above-mentioned trusts

provided by the Bank, based on allegations similar to those offered in the settlement demands. Although

these matters are inherently unpredictable, management will defend against these claims vigorously.

Management has concluded that it is reasonably possible, but not probable, that the financial position,

results of operations or cash flows of the Corporation could be materially adversely affected in any

particular period by the unfavorable resolution of these claims. An amount of loss or range of loss

cannot be reasonably estimated at this time.

8. Securities

Amortized cost and estimated fair value of securities available for sale are as follows:

	September 30, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	139,497,422	$	3,476,346	$	25,260	$	142,948,508
Mortgage-backed securities, residential		54,007,115		3,214,050		510		57,220,655
Collateralized Mortgage obligations		8,285,864		183,403		760		8,468,507
Obligations of states and political subdivisions		44,622,411		2,017,069		3,189		46,636,291
Corporate bonds and notes		13,475,088		476,400		159,341		13,792,147
SBA loan pools		2,265,412		40,306		-		2,305,718
Trust Preferred securities		2,536,347		105,236		360,735		2,280,848
Corporate stocks		788,129		4,652,367		14,574		5,425,922
Total	$	265,477,788	$	14,165,177	$	564,369	$	279,078,596


	December 31, 2010
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	101,426,799	$	916,547	$	211,829	$	102,131,517
Mortgage-backed securities, residential		60,379,269		2,385,036		2,672		62,761,633
Obligations of states and political subdivisions		38,143,972		672,067		50,947		38,765,092
Corporate bonds and notes		11,019,343		674,847		-		11,694,190
Trust Preferred securities		2,597,993		134,561		388,460		2,344,094
Corporate stocks		744,763		5,112,755		9,082		5,848,435
Total	$	214,312,139	$	9,895,813	$	662,990	$	223,544,961

Amortized cost and estimated fair value of securities held to maturity are as follows:

	September 30, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	7,585,671	$	897,882	$	-	$	8,483,553

Total	$	7,585,671	$	897,882

CHEMUNG FINANCIAL CORP - FORM 10-Q - November 14, 2011

Attached files