CHEMUNG FINANCIAL CORP - FORM 10-Q

Attached files

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EX-32.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - CHEMUNG FINANCIAL CORP	chmg10q093015exh32-1.htm
EX-31.1 - CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER - CHEMUNG FINANCIAL CORP	chmg10q093015exh31-1.htm
EX-32.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - CHEMUNG FINANCIAL CORP	chmg10q093015exh32-2.htm
EX-31.2 - CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER - CHEMUNG FINANCIAL CORP	chmg10q093015exh31-2.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, 2015



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		[X]	Smaller reporting company	[ ]

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 November 5, 2015 was 4,661,226.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX



		PAGES
	Glossary of Abbreviations and Terms	3

PART I.	FINANCIAL INFORMATION

Item 1:	Financial Statements – Unaudited

	Consolidated Balance Sheets	6
	Consolidated Statements of Income (Loss)	7
	Consolidated Statements of Comprehensive Income (Loss)	8
	Consolidated Statements of Shareholders’ Equity	9
	Consolidated Statements of Cash Flows	10

	Notes to Unaudited Consolidated Financial Statements	12

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	68

Item 4:	Controls and Procedures	70

PART II.	OTHER INFORMATION

Item 1:	Legal Proceedings	71

Item 1A:	Risk Factors	71

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	71

Item 3:	Defaults Upon Senior Securities	71

Item 4:	Mine Safety Disclosures	71

Item 5:	Other Information	71

Item 6:	Exhibits	72

SIGNATURES		73

EXHIBIT INDEX



GLOSSARY OF ABBREVIATIONS AND TERMS

To assist the reader the Corporation has provided the following list of commonly used abbreviations and terms included in the Notes to the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Abbreviations

ALCO	Asset-Liability Committee
ASU	Accounting Standards Update
Bank	Chemung Canal Trust Company
CDARS	Certificate of Deposit Account Registry Service
CDO	Collateralized Debt Obligation
CFS	CFS Group, Inc.
Corporation	Chemung Financial Corporation
Dodd-Frank Act	The Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS	Earnings per share
FASB	Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
FHLBNY	Federal Home Loan Bank of New York
FRB	Board of Governors of the Federal Reserve System
FRBNY	Federal Reserve Bank of New York
Freddie Mac	Federal Home Loan Mortgage Corporation
GAAP	U.S. Generally Accepted Accounting Principles
ICS	Insured Cash Sweep Service
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
NAICS	North American Industry Classification System
OPEB	Other postemployment benefits
OREO	Other real estate owned
OTTI	Other-than-temporary impairment
PCI	Purchased credit impaired
ROA	Return on average assets
ROE	Return on average equity
RWA	Risk-weighted assets
SBA	Small Business Administration
SEC	Securities and Exchange Commission
TDRs	Troubled debt restructurings
WMG	Wealth Management Group



Terms

Allowance for loan losses to total loans	Represents period-end allowance for loan losses divided by retained loans.
Assets under administration	Represents assets that are beneficially owned by clients and all investment decisions pertaining to these assets are also made by clients.
Assets under management	Represents assets that are managed on behalf of clients.
Basel III	A comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector.



Benefit obligation	Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.
Capital Bank	Division of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany and Saratoga.
CDARS	Program involving a network of financial institutions that exchange certificates of deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Collateralized debt obligation	A structured financial product that pools together cash flow-generating assets, such as mortgages, bonds, and loans.
Collateralized mortgage obligations	A type of mortgage-backed security with principal repayments organized according to their maturities and into different classes based on risk. The mortgages serve as collateral and are organized into classes based on their risk profile.
Dodd-Frank Act	The Dodd-Frank Act was enacted on July 21, 2010 and significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress.
Fully taxable equivalent basis	Income from tax-exempt loans and investment securities that have been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates; the corresponding income tax impact related to tax-exempt items is recorded within income tax expense.
GAAP	Accounting principles generally accepted in the United States of America.
Holding company	Consists of the operations for Chemung Financial Corporation (parent only).
ICS	Program involving a network of financial institutions that exchange interest-bearing money market deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Loans held for sale	Residential real estate loans originated for sale on the secondary market with maturities from 15-30 years.
Long term lease obligation	An obligation extending beyond the current year, which is related to a long term lease that is considered to have the economic characteristics of asset ownership.
Mortgage-backed securities	A type of asset-backed security that is secured by a collection of mortgages.
Municipal clients	A political unit, such as a city, town, or village, incorporated for local self-government.
N/A	Data is not applicable or available for the period presented.
N/M	Not meaningful.
Non-GAAP	A calculation not made according to GAAP.
Obligations of state and political subdivisions	An obligation that is guaranteed by the full faith and credit of a state or political subdivision that has the power to tax.
Obligations of U.S. Government	A federally guaranteed obligation backed by the full power of the U.S. government, including Treasury bills, Treasury notes and Treasury bonds.
Obligations of U.S. Government sponsored enterprise obligations	Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
OREO	Represents real property owned by the Corporation, which is not directly related to its business and is most frequently the result of a foreclosure on real property.
OTTI	Impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security.
PCI loans	Represents loans that were acquired in the Fort Orange Financial Corp. transaction and deemed to be credit-impaired on the acquisition date in accordance with the guidance of FASB.



Political subdivision	A county, city, town, or other municipal corporation, a public authority, or a publicly-owned entity that is an instrumentality of a state or a municipal corporation.
Pre-provision profit/(loss)	Represents total net revenue less noninterest expense, before income tax expense (benefit). The Corporation believes that this financial measure is useful in assessing the ability of a bank to generate income in excess of its provision for credit losses.
RWA	Risk-weighted assets consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On-balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off-balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. Risk-weighted assets also incorporate a measure for market risk related to applicable trading assets-debt and equity instruments. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets.
SBA loan pools	Business loans partially guaranteed by the SBA
Securities sold under agreements to repurchase	Sale of securities together with an agreement for the seller to buy back the securities at a later date.
TDR	A TDR is deemed to occur when the Corporation modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.
Trust preferred securities	A hybrid security with characteristics of both subordinated debt and preferred stock which allows for early redemption by the issuer, makes fixed or variable payments, and matures at face value.
Unaudited	Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.
WMG	Provides 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, financial planning, pension, estate planning and employee benefit administration services.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

UNAUDITED



(in thousands, except share and per share data)	September 30, 2015			December 31, 2014
ASSETS
Cash and due from financial institutions	$	30,800		$	28,130
Interest-bearing deposits in other financial institutions	44,449			1,033
Total cash and cash equivalents	75,249			29,163

Trading assets, at fair value	636			549

Securities available for sale, at estimated fair value	335,571			280,507
Securities held to maturity, estimated fair value of $4,897 at September 30, 2015 and $6,197 at December 31, 2014	4,604			5,831
FHLBNY and FRBNY Stock, at cost	4,171			5,535

Loans, net of deferred loan fees	1,141,937			1,121,574
Allowance for loan losses	(14,022		)	(13,686		)
Loans, net	1,127,915			1,107,888

Loans held for sale	316			665
Premises and equipment, net	30,023			32,287
Goodwill	21,824			21,824
Other intangible assets, net	4,201			5,067
Bank owned life insurance	2,820			2,764
Accrued interest receivable and other assets	24,309			32,459

Total assets	$	1,631,639		$	1,524,539

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	392,734		$	366,298
Interest-bearing	1,017,707			913,716
Total deposits	1,410,441			1,280,014

FHLBNY overnight advances	—			30,830
Securities sold under agreements to repurchase	30,358			29,652
FHLBNY term advances	19,230			19,310
Long term capital lease obligation	2,910			2,976
Dividends payable	1,211			1,204
Accrued interest payable and other liabilities	28,774			26,925
Total liabilities	1,492,924			1,390,911

Shareholders' equity:
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at September 30, 2015 and December 31, 2014	53			53
Additional-paid-in-capital	45,545			45,355
Retained earnings	118,057			114,383
Treasury stock, at cost; 652,599 shares at September 30, 2015 and 680,948 shares at December 31, 2014	(16,654		)	(17,378		)
Accumulated other comprehensive loss	(8,286		)	(8,785		)
Total shareholders' equity	138,715			133,628

Total liabilities and shareholders' equity	$	1,631,639		$	1,524,539

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME (LOSS)

(UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2015			2014			2015		2014
Interest and dividend income:
Loans, including fees	$	12,114		$	11,973		$	36,113	$	34,590
Taxable securities	1,237			1,122			3,490		3,889
Tax exempt securities	227			230			685		752
Interest-bearing deposits	17			16			60		59
Total interest and dividend income	13,595			13,341			40,348		39,290
Interest expense
Deposits	500			511			1,478		1,550
Securities sold under agreements to repurchase	213			214			634		634
Borrowed funds	191			190			556		572
Total interest expense	904			915			2,668		2,756
Net interest income	12,691			12,426			37,680		36,534
Provision for loan losses	307			589			956		2,330
Net interest income after provision for loan losses	12,384			11,837			36,724		34,204

Non-interest income:
WMG fee income	2,122			1,943			6,446		5,816
Service charges on deposit accounts	1,275			1,381			3,637		3,962
Net gains (losses) on securities transactions	(11		)	—			291		522
Net gains on sales of loans held for sale	89			84			239		209
Net gains (losses) on sales of other real estate owned	—			4			120		(40		)
Income from bank owned life insurance	19			20			56		59
Other	1,418			1,554			4,635		4,828
Total non-interest income	4,912			4,986			15,424		15,356

Non-interest expense:
Salaries and wages	5,135			5,344			15,423		15,653
Pension and other employee benefits	1,562			1,294			4,848		4,132
Net occupancy expenses	1,701			1,721			5,308		5,174
Furniture and equipment expenses	742			707			2,264		2,052
Data processing expense	1,751			1,488			4,864		4,383
Professional services	200			268			889		911
Legal settlements	—			4,250			—		4,250
Amortization of intangible assets	277			324			866		993
Marketing and advertising expenses	208			255			714		879
Other real estate owned expenses	79			22			387		154
FDIC insurance	277			271			843		814
Loan expense	212			269			527		564
Merger and acquisition related expenses	—			—			—		115
Other	1,490			1,550			4,260		4,611
Total non-interest expenses	13,634			17,763			41,193		44,685
Income (loss) before income tax expense	3,662			(940		)	10,955		4,875
Income tax expense (benefit)	1,211			(621		)	3,651		1,199
Net income (loss)	$	2,451		$	(319	)	$	7,304	$	3,676

Weighted average shares outstanding	4,722			4,684			4,715		4,681
Basic and diluted earnings (loss) per share	$	0.52		$	(0.07	)	$	1.55	$	0.79

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(UNAUDITED)



	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2015			2014			2015			2014
Net income (loss)	$	2,451		$	(319	)	$	7,304		$	3,676
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale	968			(1,380		)	4			635
Reclassification adjustment for (gains) losses realized in net income	11			—			(291		)	(522		)
Net unrealized gains (losses)	979			(1,380		)	(287		)	113
Tax effect	374			(531		)	(116		)	43
Net of tax amount	605			(849		)	(171		)	70

Change in funded status of defined benefit pension plan and other benefit plans:
Net gain (loss) arising during the period	—			—			—			—
Reclassification adjustment for amortization of prior service costs	(22		)	(22		)	(65		)	(66		)
Reclassification adjustment for amortization of net actuarial loss	384			169			1,151			499
Total before tax effect	362			147			1,086			433
Tax effect	139			60			416			170
Net of tax amount	223			87			670			263

Total other comprehensive income (loss)	828			(762		)	499			333

Comprehensive income (loss)	$	3,279		$	(1,081	)	$	7,803		$	4,009

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)



(in thousands, except share data)	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balances at January 1, 2014	$	53	$	45,399		$	111,031		$	(18,060	)	$	155		$	138,578
Net income	—		—			3,676			—			—			3,676
Other comprehensive income	—		—			—			—			333			333
Restricted stock awards	—		112			—			—			—			112
Restricted stock units for directors' deferred compensation plan	—		71			—			—			—			71
Cash dividends declared ($0.78 per share)	—		—			(3,602		)	—			—			(3,602		)
Distribution of 8,385 shares of treasury stock for directors' compensation	—		59			—			214			—			273
Distribution of 990 shares of treasury stock for employee restricted stock awards, net	—		(26		)	—			26			—			—
Distribution of 3,595 shares of treasury stock for employee stock compensation	—		25			—			92			—			117
Distribution of 3,467 shares of treasury stock for deferred directors’ compensation	—		(85		)	—			88			—			3
Balances at September 30, 2014	$	53	$	45,555		$	111,105		$	(17,640	)	$	488		$	139,561


Balances at January 1, 2015	$	53	$	45,355		$	114,383		$	(17,378	)	$	(8,785	)	$	133,628
Net income	—		—			7,304			—			—			7,304
Other comprehensive income	—		—			—			—			499			499
Restricted stock awards	—		156			—			—			—			156
Restricted stock units for directors' deferred compensation plan	—		72			—			—			—			72
Cash dividends declared ($0.78 per share)	—		—			(3,630		)	—			—			(3,630		)
Distribution of 9,673 shares of treasury stock for directors' compensation	—		24			—			247			—			271
Distribution of 3,303 shares of treasury stock for employee stock compensation	—		8			—			85			—			93
Sale of 11,775 shares of treasury stock (a)	—		19			—			300			—			319
Distribution of 3,598 shares of treasury stock for deferred directors’ compensation	—		(89		)	—			92			—			3
Balances at September 30, 2015	$	53	$	45,545		$	118,057		$	(16,654	)	$	(8,286	)	$	138,715

(a) All treasury stock sales were completed at arm's length with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan, which is a defined contribution plan sponsored by the Bank.

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)



(in thousands)	Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2015			2014
Net income	$	7,304		$	3,676
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets	866			993
Provision for loan losses	956			2,330
Gains on disposal of fixed assets	(13		)	(7		)
Depreciation and amortization of fixed assets	3,047			2,765
Amortization of premiums on securities, net	1,442			1,808
Gains on sales of loans held for sale, net	(239		)	(209		)
Proceeds from sales of loans held for sale	11,225			9,447
Loans originated and held for sale	(10,637		)	(9,710		)
Net (gains) losses on trading assets	25			(32		)
Proceeds from sales of trading assets	—			7
Net gains on securities transactions	(291		)	(522		)
Net (gains) losses on sales of other real estate owned	(120		)	40
Purchase of trading assets	(112		)	(92		)
Expense related to restricted stock units for directors' deferred compensation plan	72			71
Expense related to employee stock compensation	93			117
Expense related to restricted stock awards	156			112
Proceeds from bank owned life insurance	—			111
Income from bank owned life insurance	(56		)	(59		)
(Increase) decrease in other assets	7,581			(475		)
Decrease in accrued interest payable	(30		)	(61		)
Increase (decrease) in other liabilities	(11,212		)	2,077
Net cash provided by operating activities	10,057			12,387

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale	58,035			55,610
Proceeds from maturities and principal collected on securities available for sale	29,537			19,437
Proceeds from maturities and principal collected on securities held to maturity	3,022			3,022
Purchases of securities available for sale	(129,923		)	(18,301		)
Purchases of securities held to maturity	(1,795		)	(1,957		)
Purchase of FHLBNY and FRBNY stock	(6,158		)	(1,103		)
Redemption of FHLBNY and FRBNY stock	7,522			1,223
Proceeds from sale of equipment	13			7
Purchases of premises and equipment	(783		)	(2,118		)
Proceeds from sales of other real estate owned	699			284
Net increase in loans	(20,993		)	(123,345		)
Net cash used by investing activities	(60,824		)	(67,241		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts	169,065			77,980
Net decrease in time deposits	(38,638		)	(33,237		)
Net increase (decrease) in securities sold under agreements to repurchase	706			(1,720		)
Repayments of FHLBNY overnight advances, net	(30,830		)	—
Repayments of FHLBNY long term advances	(80		)	(1,157		)
Payments made on capital lease	(66		)	—
Sale of treasury stock	319			—
Cash dividends paid	(3,623		)	(3,595		)
Net cash provided by financing activities	96,853			38,271
Net increase (decrease) in cash and cash equivalents	46,086			(16,583		)
Cash and cash equivalents, beginning of period	29,163			51,609
Cash and cash equivalents, end of period	$	75,249		$	35,026
(continued)

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(UNAUDITED)



(in thousands)	Nine Months Ended September 30,
Supplemental disclosure of cash flow information:	2015		2014
Cash paid for:
Interest	$	2,698	$	2,817
Income taxes	$	5,662	$	1,846
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	10	$	3,074
Dividends declared, not yet paid	$	1,211	$	1,201
Assets acquired through long term capital lease obligations	$	—	$	3,039
Securities traded, not yet settled	$	14,151	$	—

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The Corporation, through its wholly owned subsidiaries, the Bank and CFS, provides a wide range of banking, financing, fiduciary and other financial services to its clients. The Corporation and the Bank are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Securities Exchange Act of 1934. These financial statements include the accounts of the Corporation and its subsidiaries, and all significant intercompany balances and transactions are eliminated in consolidation. Amounts in the prior periods' consolidated financial statements are reclassified whenever necessary to conform to the current period's presentation.

The preparation of financial statements in conformity with GAAP 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. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included.

Subsequent Events

The Corporation has evaluated events and transactions through the time the unaudited consolidated financial statements were issued. Financial statements are considered issued when they are widely distributed to all shareholders and other financial statement users, or filed with the SEC. In conjunction with applicable accounting standards, all material subsequent events have been either recognized in the unaudited consolidated financial statements or disclosed in the notes to the unaudited consolidated financial statements.

Recent Accounting Pronouncements

There are no recently issued accounting pronouncements that the Corporation feels will have a material impact on its consolidated financial statements.

NOTE 2 EARNING PER COMMON SHARE (shares in thousands)

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. All outstanding unvested share based payment awards that contain rights to non-forfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities and are considered outstanding at grant date. 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 4,722 and 4,684 weighted average shares outstanding for the three month periods ended September 30, 2015 and 2014, respectively. Earnings per share were computed by dividing net income by 4,715 and 4,681 weighted average shares outstanding for the nine month periods ended September 30, 2015 and 2014, respectively. There were no dilutive common stock equivalents during the three and nine month periods ended September 30, 2015 or 2014.

NOTE 3 SECURITIES

Amortized cost and estimated fair value of securities available for sale are as follows (in thousands):



	September 30, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	124,565	$	1,463	$	—	$	126,028
Mortgage-backed securities, residential	162,007		917		344		162,580
Obligations of states and political subdivisions	43,907		683		17		44,573
Corporate bonds and notes	1,247		13		—		1,260
SBA loan pools	663		7		1		669
Corporate stocks	285		176		—		461
Total	$	332,674	$	3,259	$	362	$	335,571



	December 31, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	180,535	$	1,300	$	162	$	181,673
Mortgage-backed securities, residential	60,787		892		19		61,660
Collateralized mortgage obligations	335		3		—		338
Obligations of states and political subdivisions	30,677		802		28		31,451
Corporate bonds and notes	1,502		35		4		1,533
SBA loan pools	1,296		11		3		1,304
Trust preferred securities	1,906		122		—		2,028
Corporate stocks	285		235		—		520
Total	$	277,323	$	3,400	$	216	$	280,507

Amortized cost and estimated fair value of securities held to maturity are as follows (in thousands):



	September 30, 2015
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	4,409	$	293	$	—	$	4,702
Time deposits with other financial institutions	195		—		—		195
Total	$	4,604	$	293	$	—	$	4,897



	December 31, 2014
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	5,175	$	360	$	—	$	5,535
Time deposits with other financial institutions	656		6		—		662
Total	$	5,831	$	366	$	—	$	6,197

The amortized cost and estimated fair value of debt securities are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands):



	September 30, 2015
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	50,363	$	50,779	$	2,464	$	2,505
After one, but within five years	95,370		96,694		1,924		2,143
After five, but within ten years	23,687		24,089		216		249
After ten years	299		299		—		—
	169,719		171,861		4,604		4,897
Mortgage-backed securities, residential	162,007		162,580		—		—
SBA loan pools	663		669		—		—
Total	$	332,389	$	335,110	$	4,604	$	4,897

The proceeds from sales and calls of securities resulting in gains or losses for the three months ended September 30, 2015 and 2014 are listed below (in thousands):



	2015			2014
Proceeds	$	2,936		$	5,845
Gross gains	$	24		$	—
Gross losses	$	(35	)	$	—
Tax benefit	$	(5	)	$	—

The proceeds from sales and calls of securities resulting in gains or losses for the nine months ended September 30, 2015 and 2014 are listed below (in thousands):



	2015			2014
Proceeds	$	58,035		$	55,610
Gross gains	$	326		$	522
Gross losses	$	(35	)	$	—
Tax expense	$	111		$	201

The following tables summarize the investment securities available for sale with unrealized losses at September 30, 2015 and December 31, 2014 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):



	Less than 12 months				12 months or longer				Total
September 30, 2015	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities, residential	$	65,248	$	344	$	—	$	—	$	65,248	$	344
Obligations of states and political subdivisions	4,545		15		921		2		5,466		17
SBA loan pools	—		—		257		1		257		1
Total temporarily impaired securities	$	69,793	$	359	$	1,178	$	3	$	70,971	$	362



	Less than 12 months				12 months or longer				Total
December 31, 2014	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	57,512	$	108	$	4,945	$	54	$	62,457	$	162
Mortgage-backed securities, residential	11,051		19		—		—		11,051		19
Obligations of states and political subdivisions	4,625		22		1,056		6		5,681		28
Corporate bonds and notes	—		—		243		4		243		4
SBA loan pools	276		1		316		2		592		3
Total temporarily impaired securities	$	73,464	$	150	$	6,560	$	66	$	80,024	$	216

Other-Than-Temporary Impairment

As of September 30, 2015, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage backed securities. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because it is not likely that the Corporation will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at September 30, 2015.

During the first quarter of 2014, the Corporation received notice that one CDO consisting of a pool of trust preferred securities was liquidated and recorded $500 thousand in other operating income during the first quarter of 2014. The Corporation does not own any other CDO’s in its investment securities portfolio.

There were no cumulative credit losses recognized in earnings for the three month periods ended September 30, 2015 and 2014. The table below presents a roll forward of the cumulative credit losses recognized in earnings for the nine month periods ended September 30, 2015 and 2014 (in thousands):



	2015		2014
Beginning balance, January 1,	$	—	$	1,939
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized	—		—
Additions/Subtractions:
Amounts realized for securities sold during the period	—		—
Amounts related to securities for which the Corporation intends to sell or that it will be more likely than not that the Corporation 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	—		—
Reductions for previous credit losses realized in securities liquidated during the period	—		(1,939		)
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized	—		—
Ending balance, September 30,	$	—	$	—

NOTE 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 (in thousands):



	September 30, 2015		December 31, 2014
Commercial and agricultural:
Commercial and industrial	$	175,098	$	165,385
Agricultural	1,043		1,021
Commercial mortgages:
Construction	45,579		54,831
Commercial mortgages, other	442,785		397,762
Residential mortgages	197,506		196,809
Consumer loans:
Credit cards	1,423		1,654
Home equity lines and loans	102,085		99,354
Indirect consumer loans	157,059		184,763
Direct consumer loans	19,359		19,995
Total loans, net of deferred loan fees	$	1,141,937	$	1,121,574
Interest receivable on loans	2,694		2,780
Total recorded investment in loans	$	1,144,631	$	1,124,354

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.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three and nine month periods ended September 30, 2015 and 2014 (in thousands):



	Three Months Ended September 30, 2015
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages		Consumer Loans			Total
Beginning balance:	$	1,825		$	6,625		$	1,545	$	4,033		$	14,028
Charge-offs:	(113		)	(1		)	—		(304		)	(418		)
Recoveries:	26			17			—		62			105
Net recoveries (charge-offs)	(87		)	16			—		(242		)	(313		)
Provision	(162		)	326			7		136			307
Ending balance	$	1,576		$	6,967		$	1,552	$	3,927		$	14,022



	Three Months Ended September 30, 2014
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	1,749		$	6,912		$	1,498		$	3,473		$	13,632
Charge-offs:	(60		)	(878		)	(90		)	(415		)	(1,443		)
Recoveries:	138			35			—			200			373
Net recoveries (charge-offs)	78			(843		)	(90		)	(215		)	(1,070		)
Provision	(115		)	256			24			424			589
Ending balance	$	1,712		$	6,325		$	1,432		$	3,682		$	13,151



	Nine Months Ended September 30, 2015
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	1,460		$	6,326		$	1,572		$	4,328		$	13,686
Charge-offs:	(113		)	(29		)	(32		)	(917		)	(1,091		)
Recoveries:	64			101			—			306			471
Net recoveries (charge-offs)	(49		)	72			(32		)	(611		)	(620		)
Provision	165			569			12			210			956
Ending balance	$	1,576		$	6,967		$	1,552		$	3,927		$	14,022



	Nine Months Ended September 30, 2014
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	1,979		$	6,243		$	1,517		$	3,037		$	12,776
Charge-offs:	(415		)	(1,236		)	(97		)	(1,191		)	(2,939		)
Recoveries:	331			118			28			507			984
Net recoveries (charge-offs)	(84		)	(1,118		)	(69		)	(684		)	(1,955		)
Provision	(183		)	1,200			(16		)	1,329			2,330
Ending balance	$	1,712		$	6,325		$	1,432		$	3,682		$	13,151

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30, 2015
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	85	$	1,525	$	—	$	—	$	1,610
Collectively evaluated for impairment	1,491		5,383		1,521		3,927		12,322
Loans acquired with deteriorated credit quality	—		59		31		—		90
Total ending allowance balance	$	1,576	$	6,967	$	1,552	$	3,927	$	14,022



	December 31, 2014
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	89	$	1,145	$	—	$	1	$	1,235
Collectively evaluated for impairment	1,335		5,145		1,550		4,327		12,357
Loans acquired with deteriorated credit quality	36		36		22		—		94
Total ending allowance balance	$	1,460	$	6,326	$	1,572	$	4,328	$	13,686



	September 30, 2015
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	1,088	$	12,796	$	239	$	477	$	14,600
Loans collectively evaluated for impairment	175,461		474,848		197,504		280,104		1,127,917
Loans acquired with deteriorated credit quality	—		1,849		265		—		2,114
Total ending loans balance	$	176,549	$	489,493	$	198,008	$	280,581	$	1,144,631



	December 31, 2014
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	1,452	$	13,712	$	254	$	486	$	15,904
Loans collectively evaluated for impairment	164,748		438,246		196,783		306,042		1,105,819
Loans acquired with deteriorated credit quality	620		1,761		250		—		2,631
Total ending loans balance	$	166,820	$	453,719	$	197,287	$	306,528	$	1,124,354

The following tables present loans individually evaluated for impairment recognized by class of loans as of September 30, 2015 and December 31, 2014, the average recorded investment and interest income recognized by class of loans as of the three and nine month periods ended September 30, 2015 and 2014 (in thousands):



	September 30, 2015							December 31, 2014
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment			Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial	$	1,001	$	1,003		$	—	$	1,359	$	1,364	$	—
Commercial mortgages:
Construction	357		358			—		1,927		1,910		—
Commercial mortgages, other	7,520		7,433			—		7,803		7,708		—
Residential mortgages	238		239		</

CHEMUNG FINANCIAL CORP - FORM 10-Q - November 6, 2015

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