CHEMUNG FINANCIAL CORP - FORM 10-Q

Attached files

file	filename
EX-32.1 - EXHIBIT 32.1 - CHEMUNG FINANCIAL CORP	chmg10q03312017exh32-1.htm
EX-32.2 - EXHIBIT 32.2 - CHEMUNG FINANCIAL CORP	chmg10q03312017exh32-2.htm
EX-31.2 - EXHIBIT 31.2 - CHEMUNG FINANCIAL CORP	chmg10q03312017exh31-2.htm
EX-31.1 - EXHIBIT 31.1 - CHEMUNG FINANCIAL CORP	chmg10q03312017exh31-1.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 March 31, 2017



Or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 000-13888



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, Elmira, NY			14901
(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, smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer	[ ]	Non-accelerated filer	[ ]
Accelerated filer	[X]	Smaller reporting company	[ ]
		Emerging growth company	[ ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [ ]

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 May 2, 2017 was 4,732,550.

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	7
	Consolidated Statements of Comprehensive Income	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	38

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	61

Item 4:	Controls and Procedures	62

PART II.	OTHER INFORMATION

Item 1:	Legal Proceedings	63

Item 1A:	Risk Factors	63

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	63

Item 3:	Defaults Upon Senior Securities	63

Item 4:	Mine Safety Disclosures	63

Item 5:	Other Information	63

Item 6:	Exhibits	64

SIGNATURES		65

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
Basel III	The Third Basel Accord of the Basel Committee on Banking Supervision
Board of Directors	Board of Directors of Chemung Financial Corporation
CDARS	Certificate of Deposit Account Registry Service
CDO	Collateralized Debt Obligation
CECL	Current expected credit loss
CFS	CFS Group, Inc.
Corporation	Chemung Financial Corporation
CRM	Chemung Risk Management, Inc.
Dodd-Frank Act	The Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS	Earnings per share
Exchange Act	Securities Exchange Act of 1934
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
IFRS	International Financial Reporting Standards
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
NAICS	North American Industry Classification System
N/M	Not meaningful
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
Securities Act	Securities Act of 1933
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 designed to improve the regulation, supervision, and risk management within the banking sector. The reforms require banks to maintain proper leverage ratios and meet certain capital requirements.
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	Product 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.
Captive insurance company	A company that provides risk-mitigation services for its parent company.
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	Product 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 capital 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)	March 31, 2017			December 31, 2016
ASSETS
Cash and due from financial institutions	$	26,275		$	28,205
Interest-bearing deposits in other financial institutions	99,410			45,957
Total cash and cash equivalents	125,685			74,162

Trading assets, at fair value	826			774

Securities available for sale, at estimated fair value	302,581			303,402
Securities held to maturity, estimated fair value of $3,912 at March 31, 2017 and $4,912 at December 31, 2016	3,721			4,705
FHLBNY and FRBNY Stock, at cost	3,597			4,041

Loans, net of deferred loan fees	1,234,251			1,200,290
Allowance for loan losses	(14,960		)	(14,253		)
Loans, net	1,219,291			1,186,037

Loans held for sale	20			412
Premises and equipment, net	28,206			28,923
Goodwill	21,824			21,824
Other intangible assets, net	2,719			2,945
Bank-owned life insurance	2,929			2,912
Accrued interest receivable and other assets	24,701			27,042

Total assets	$	1,736,100		$	1,657,179

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	432,062		$	417,812
Interest-bearing	1,112,189			1,038,531
Total deposits	1,544,251			1,456,343

Securities sold under agreements to repurchase	15,215			27,606
FHLBNY term advances	9,065			9,093
Long term capital lease obligation	4,671			4,722
Dividends payable	1,230			1,225
Accrued interest payable and other liabilities	13,411			14,442
Total liabilities	1,587,843			1,513,431

Shareholders' equity:
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at March 31, 2017 and December 31, 2016	53			53
Additional paid-in capital	45,901			45,603
Retained earnings	125,860			124,111
Treasury stock, at cost; 579,140 shares at March 31, 2017 and 597,843 shares at December 31, 2016	(14,801		)	(15,265		)
Accumulated other comprehensive loss	(8,756		)	(10,754		)
Total shareholders' equity	148,257			143,748

Total liabilities and shareholders' equity	$	1,736,100		$	1,657,179

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)



	Three Months Ended March 31,
(in thousands, except per share data)	2017		2016
Interest and dividend income:
Loans, including fees	$	12,499	$	12,246
Taxable securities	1,422		1,437
Tax exempt securities	238		254
Interest-bearing deposits	155		12
Total interest and dividend income	14,314		13,949
Interest expense:
Deposits	538		507
Securities sold under agreements to repurchase	193		211
Borrowed funds	89		206
Total interest expense	820		924
Net interest income	13,494		13,025
Provision for loan losses	1,040		595
Net interest income after provision for loan losses	12,454		12,430

Non-interest income:
WMG fee income	2,109		2,012
Service charges on deposit accounts	1,184		1,135
Interchange revenue from debit card transactions	920		893
Net gains on securities transactions	—		908
Net gains on sales of loans held for sale	69		61
Net gains (losses) on sales of other real estate owned	17		(5		)
Income from bank-owned life insurance	17		18
Other	531		579
Total non-interest income	4,847		5,601

Non-interest expenses:
Salaries and wages	5,275		5,183
Pension and other employee benefits	1,218		1,675
Net occupancy expenses	1,606		1,906
Furniture and equipment expenses	682		772
Data processing expense	1,604		1,714
Professional services	300		341
Amortization of intangible assets	226		258
Marketing and advertising expenses	249		222
Other real estate owned expenses	19		52
FDIC insurance	325		294
Loan expense	116		112
Other	1,425		1,479
Total non-interest expenses	13,045		14,008
Income before income tax expense	4,256		4,023
Income tax expense	1,277		1,316
Net income	$	2,979	$	2,707

Weighted average shares outstanding	4,790		4,750
Basic and diluted earnings per share	$	0.62	$	0.57

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended March 31,
(in thousands)	2017			2016
Net income	$	2,979		$	2,707
Other comprehensive income
Unrealized holding gains on securities available for sale	3,166			3,109
Reclassification adjustment for gains realized in net income	—			(908		)
Net unrealized gains	3,166			2,201
Tax effect	1,189			830
Net of tax amount	1,977			1,371

Change in funded status of defined benefit pension plan and other benefit plans:
Reclassification adjustment for amortization of prior service costs	(55		)	(22		)
Reclassification adjustment for amortization of net actuarial loss	88			396
Total before tax effect	33			374
Tax effect	12			141
Net of tax amount	21			233

Total other comprehensive income	1,998			1,604

Comprehensive income	$	4,977		$	4,311

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)



(in thousands, except share and per share data)	Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balances at January 1, 2016	$	53	$	45,537	$	118,973		$	(16,379	)	$	(10,942	)	$	137,242
Net income	—		—		2,707			—			—			2,707
Other comprehensive income	—		—		—			—			1,604			1,604
Restricted stock awards	—		48		—			—			—			48
Restricted stock units for directors' deferred compensation plan	—		23		—			—			—			23
Cash dividends declared ($0.26 per share)	—		—		(1,220		)	—			—			(1,220		)
Distribution of 9,532 shares of treasury stock for directors' compensation	—		19		—			243			—			262
Distribution of 7,661 shares of treasury stock for employee compensation	—		15		—			195			—			210
Sale of 6,252 shares of treasury stock (a)	—		10		—			160			—			170
Balances at March 31, 2016	$	53	$	45,652	$	120,460		$	(15,781	)	$	(9,338	)	$	141,046


Balances at January 1, 2017	$	53	$	45,603	$	124,111		$	(15,265	)	$	(10,754	)	$	143,748
Net income	—		—		2,979			—			—			2,979
Other comprehensive income	—		—		—			—			1,998			1,998
Restricted stock awards	—		52		—			—			—			52
Restricted stock units for directors' deferred compensation plan	—		24		—			—			—			24
Cash dividends declared ($0.26 per share)	—		—		(1,230		)	—			—			(1,230		)
Distribution of 7,880 shares of treasury stock for directors' compensation	—		68		—			201			—			269
Distribution of 5,861 shares of treasury stock for employee compensation	—		50		—			150			—			200
Sale of 6,101 shares of treasury stock (a)	—		61		—			156			—			217
Forfeiture of 1,139 shares of restricted stock awards	—		43		—			(43		)	—			—
Balances at March 31, 2017	$	53	$	45,901	$	125,860		$	(14,801	)	$	(8,756	)	$	148,257

(a) All treasury stock sales were completed at arm's length for adequate consideration with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan and the Chemung Canal Trust Company - Finger Lakes Profit Sharing, Savings, and Investment Plan, which are defined contribution plans 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)	Three Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES:	2017			2016
Net income	$	2,979		$	2,707
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets	226			258
Provision for loan losses	1,040			595
Depreciation and amortization of fixed assets	960			1,114
Amortization of premiums on securities, net	357			478
Gains on sales of loans held for sale, net	(69		)	(61		)
Proceeds from sales of loans held for sale	3,634			2,823
Loans originated and held for sale	(3,173		)	(2,279		)
Net gains on trading assets	(32		)	(9		)
Net gains on securities transactions	—			(908		)
Net (gains) losses on sales of other real estate owned	(17		)	5
Purchase of trading assets	(20		)	(24		)
Expense related to restricted stock units for directors' deferred compensation plan	24			23
Expense related to employee stock compensation	200			210
Expense related to employee restricted stock awards	52			48
Income from bank-owned life insurance	(17		)	(18		)
Decrease in other assets and accrued interest receivable	2,290			2,107
Decrease in accrued interest payable	(38		)	(2		)
Decrease in other liabilities	(1,892		)	(1,246		)
Net cash provided by operating activities	6,504			5,821

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale	—			15,422
Proceeds from maturities and principal collected on securities available for sale	9,289			7,545
Proceeds from maturities and principal collected on securities held to maturity	1,164			586
Purchases of securities available for sale	(5,659		)	—
Purchases of securities held to maturity	(180		)	(597		)
Purchase of FHLBNY and FRBNY stock	(6		)	(5,146		)
Redemption of FHLBNY and FRBNY stock	450			5,764
Purchases of premises and equipment	(243		)	(337		)
Proceeds from sales of other real estate owned	101			34
Net increase in loans	(34,327		)	(18,739		)
Net cash (used in) provided by investing activities	(29,411		)	4,532

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts	91,400			36,495
Net decrease in time deposits	(3,492		)	(2,538		)
Net increase (decrease) in securities sold under agreements to repurchase	(12,391		)	372
Repayments of FHLBNY overnight advances, net	—			(13,900		)
Repayments of FHLBNY long term advances	(28		)	(28		)
Payments made on capital lease	(51		)	(36		)
Sale of treasury stock	217			170
Cash dividends paid	(1,225		)	(1,214		)
Net cash provided by financing activities	74,430			19,321
Net increase in cash and cash equivalents	51,523			29,674
Cash and cash equivalents, beginning of period	74,162			26,185
Cash and cash equivalents, end of period	$	125,685		$	55,859
(continued)

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(UNAUDITED)



(in thousands)	Three Months Ended March 31,
Supplemental disclosure of cash flow information:	2017		2016
Cash paid for:
Interest	$	858	$	926
Income taxes	$	—	$	—
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	33	$	151
Dividends declared, not yet paid	$	1,230	$	1,220
Distribution of treasury stock for directors' compensation	$	269	$	262

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.

CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.

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 Exchange Act. 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.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09, an amendment to Revenue from Contracts with Customers (Topic 606). The objective of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards. In August 2015, the FASB issued ASU 2015-14 to defer for one year the effective date of the new revenue standard. The requirements are effective for annual periods and interim periods within fiscal years beginning after December 15, 2017. During 2016, the FASB issued further implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance obligations and licensing, assessing collectability, presenting sales taxes, measuring noncash consideration, and certain transition matters. The Corporation intends to adopt the new revenue guidance as of January 1, 2018 and does not expect a significant change upon adoption of the standard, as the new standard will not materially change the way the Corporation currently records revenue for its WMG and fee income from mortgage servicing fees, financial guarantees, and deposit related fees.

In January 2016, the FASB issued ASU 2016-01, an amendment to Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10). The objectives of the ASU are to (1) require equity investments to be measured at fair value, with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet, (4) require the use of the exit price notion when measuring the fair value of financial instruments, and (5) clarify the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The Corporation intends to adopt the new guidance as of January 1, 2018 and believes the ASU will not have a material impact on its consolidated financial statements, as the Corporation's equity investment portfolio is less than $1.0 million as of March 31, 2017.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, though early adoption is permitted. The Corporation intends to adopt the new lease guidance as of January 1, 2019 and is currently evaluating the impact that adoption of these updates will have on its consolidated financial statements. Currently, the Corporation believes the implementation of this ASU will create a right of use asset of less than $5.0 million for the Corporation's 13 leased facilities and a related capital obligation of the same amount as of January 1, 2019.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The objectives of the ASU are to simplify accounting for a stock payment's tax consequences and amend how excess tax benefits and a business's payments to cover the tax bills for the shares' recipients should be classified. The amendments allow companies to estimate the number of stock awards they expect to vest, and they revise the withholding requirements for classifying stock awards as equity. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2016, though early adoption is permitted. The adoption of ASU 2016-09 did not have a significant impact on the Corporation's consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal year beginning after December 15, 2018. The Corporation is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements. The Corporation anticipates that the adoption of the CECL model will result in an increase to the Corporation's allowance for loan losses. The Corporation has established a committee to oversee the implementation of CECL. This committee is currently assessing the data and system requirements necessary for adoption. The Corporation plans to run its current incurred loss model and a CECL model concurrently for 12 months prior to the adoption of this guidance on January 1, 2020.

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The objective of the ASU is to reduce the existing diversity in practice relating to eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principal. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, though early adoption is permitted. The adoption of the ASU is not expected to have a significant impact on the Corporation's consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of the ASU is to simplify the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. The amendments in this ASU are effective for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of the ASU is not expected to have a significant impact on the Corporation's consolidated financial statements.

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost. The objective of the ASU is to improve guidance related to the presentation of defined benefit costs in the income statement. Specifically, the ASU requires that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, the ASU allows only the service cost component to be eligible for capitalization, when applicable. The amendments in this ASU are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. The adoption of the ASU is not expected to have a significant impact on the Corporation's consolidated financial statements.

In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The objective of the ASU is to align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. The amendment requires that the premium be amortized to the earlies call date, but does not require an accounting change for securities held at a discount, instead, the discount continues to be amortized to maturity. The amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. The adoption of the ASU is not expected to have a significant impact on the Corporation's 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 4,790 and 4,750 weighted average shares outstanding for the three-month periods ended March 31, 2017 and 2016, respectively. There were no common stock equivalents during the three-month periods ended March 31, 2017 or 2016.

NOTE 3 SECURITIES

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



	March 31, 2017
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	17,295	$	145	$	—	$	17,440
Mortgage-backed securities, residential	244,049		319		4,690		239,678
Obligations of states and political subdivisions	44,007		288		140		44,155
Corporate bonds and notes	248		3		—		251
SBA loan pools	550		1		1		550
Corporate stocks	265		242		—		507
Total	$	306,414	$	998	$	4,831	$	302,581



	December 31, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	17,300	$	155	$	—	$	17,455
Mortgage-backed securities, residential	253,156		202		7,492		245,866
Obligations of states and political subdivisions	38,843		209		312		38,740
Corporate bonds and notes	249		1		—		250
SBA loan pools	568		3		1		570
Corporate stocks	285		236		—		521
Total	$	310,401	$	806	$	7,805	$	303,402

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



	March 31, 2017
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	2,741	$	194	$	—	$	2,935
Time deposits with other financial institutions	980		—		3		977
Total	$	3,721	$	194	$	3	$	3,912



	December 31, 2016
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	3,725	$	206	$	—	$	3,931
Time deposits with other financial institutions	980		1		—		981
Total	$	4,705	$	207	$	—	$	4,912

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):



	March 31, 2017
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	8,197	$	8,224	$	866	$	873
After one, but within five years	33,091		33,411		2,583		2,729
After five, but within ten years	17,184		17,168		272		310
After ten years	3,078		3,043		—		—
	61,550		61,846		3,721		3,912
Mortgage-backed securities, residential	244,049		239,678		—		—
SBA loan pools	550		550		—		—
Total	$	306,149	$	302,074	$	3,721	$	3,912

The proceeds from sales and calls of securities resulting in gains or losses for the three months ended March 31, 2017 and 2016 are listed below (in thousands):



	2017		2016
Proceeds	$	—	$	15,422
Gross gains	—		908
Gross losses	—		—
Tax expense	—		343

The following tables summarize the investment securities available for sale with unrealized losses at March 31, 2017 and December 31, 2016 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
March 31, 2017	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities, residential	$	220,708	$	4,690	$	—	$	—	$	220,708	$	4,690
Obligations of states and political subdivisions	12,815		140		—		—		12,815		140
SBA loan pools	—		—		219		1		219		1
Total temporarily impaired securities	$	233,523	$	4,830	$	219	$	1	$	233,742	$	4,831



	Less than 12 months				12 months or longer				Total
December 31, 2016	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities, residential	$	233,843	$	7,492	$	—	$	—	$	233,843	$	7,492
Obligations of states and political subdivisions	25,724		312		—		—		25,724		312
SBA loan pools	—		—		225		1		225		1
Total temporarily impaired securities	$	259,567	$	7,804	$	225	$	1	$	259,792	$	7,805

Other-Than-Temporary Impairment

As of March 31, 2017, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage-backed securities. At March 31, 2017, all of the unrealized losses related to mortgage-backed securities were issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. 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 March 31, 2017.

NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio, net of deferred origination fees and costs, is summarized as follows (in thousands):



	March 31, 2017		December 31, 2016
Commercial and agricultural:
Commercial and industrial	$	177,575	$	176,201
Agricultural	500		360
Commercial mortgages:
Construction	51,706		46,387
Commercial mortgages, other	550,906		522,269
Residential mortgages	198,020		198,493
Consumer loans:
Credit cards	1,409		1,476
Home equity lines and loans	99,032		98,590
Indirect consumer loans	138,273		139,572
Direct consumer loans	16,830		16,942
Total loans, net of deferred origination fees and costs	$	1,234,251	$	1,200,290
Interest receivable on loans	3,136		3,192
Total recorded investment in loans	$	1,237,387	$	1,203,482

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-month periods ended March 31, 2017 and 2016 (in thousands):



	Three Months Ended March 31, 2017
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance	$	1,589		$	7,270	$	1,523		$	3,871		$	14,253
Charge-offs	(5		)	—		(12		)	(427		)	(444		)
Recoveries	24			1		17			69			111
Net recoveries (charge-offs)	19			1		5			(358		)	(333		)
Provision	42			478		(16		)	536			1,040
Ending balance	$	1,650		$	7,749	$	1,512		$	4,049		$	14,960



	Three Months Ended March 31, 2016
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages		Consumer Loans			Total
Beginning balance	$	1,831		$	7,112	$	1,464	$	3,853		$	14,260
Charge-offs	(8		)	—		—		(443		)	(451		)
Recoveries	32			7		—		84			123
Net recoveries (charge-offs)	24			7		—		(359		)	(328		)
Provision	(60		)	413		18		224			595
Ending balance	$	1,795		$	7,532	$	1,482	$	3,718		$	14,527

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 March 31, 2017 and December 31, 2016 (in thousands):



	March 31, 2017
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	845	$	—	$	153	$	998
Collectively evaluated for impairment	1,650		6,845		1,487		3,896		13,878
Loans acquired with deteriorated credit quality	—		59		25		—		84
Total ending allowance balance	$	1,650	$	7,749	$	1,512	$	4,049	$	14,960



	December 31, 2016
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	—	$	735	$	—	$	141	$	876
Collectively evaluated for impairment	1,589		6,476		1,498		3,730		13,293
Loans acquired with deteriorated credit quality	—		59		25		—		84
Total ending allowance balance	$	1,589	$	7,270	$	1,523	$	3,871	$	14,253



	March 31, 2017
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	649	$	11,969	$	390	$	432	$	13,440
Loans collectively evaluated for impairment	177,885		590,922		198,007		255,763		1,222,577
Loans acquired with deteriorated credit quality	—		1,275		95		—		1,370
Total ending loans balance	$	178,534	$	604,166	$	198,492	$	256,195	$	1,237,387



	December 31, 2016
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	693	$	10,382	$	396	$	455	$	11,926
Loans collectively evaluated for impairment	176,334		558,451		198,474		256,879		1,190,138
Loans acquired with deteriorated credit quality	—		1,323		95		—		1,418
Total ending loans balance	$	177,027	$	570,156	$	198,965	$	257,334	$	1,203,482

The following table presents loans individually evaluated for impairment recognized by class of loans as of March 31, 2017 and December 31, 2016 (in thousands):



	March 31, 2017						December 31, 2016
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	$	646	$	649	$	—	$	690	$	693	$	—
Commercial mortgages:
Construction	1,558		1,559		—		277		278		—
Commercial mortgages, other	6,133		6,144		—		8,792		7,857		—
Residential mortgages	389		390		—		395		396		—
Consumer loans:
Home equity lines and loans	72		72		—		93		95		—
With an allowance recorded:
Commercial mortgages:
Commercial mortgages, other	5,206		4,266		845		2,245		2,247		735
Consumer loans:
Home equity lines and loans	360		360		153		360		360		141
Total	$	14,364	$	13,440	$	998	$	12,852	$	11,926	$	876

The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans as of the three-month periods ended March 31, 2017 and 2016 (in thousands):



	Three Months Ended March 31, 2017				Three Months Ended March 31, 2016
With no related allowance recorded:	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)
Commercial and agricultural:
Commercial and industrial	$	671	$	9	$	1,266	$	13
Commercial mortgages:
Construction	919		3		348		4
Commercial mortgages, other	7,000		59		7,395		68
Residential mortgages	393		2		273		—
Consumer loans:
Home equity lines & loans	84		1		107		1
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	—		—		9		—
Commercial mortgages:
Commercial mortgages, other	3,257		1		4,845		1
Consumer loans:
Home equity lines and loans	360		—		364		—
Total	$	12,684	$	75	$	14,607	$	87

(1)Cash basis interest income approximates interest income recognized.

The following tables present the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of March 31, 2017 and December 31, 2016 (in thousands):



	Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	March 31, 2017		December 31, 2016		March 31, 2017		December 31, 2016
Commercial and agricultural:
Commercial and industrial	$	—	$	—	$	9	$	2
Commercial mortgages:
Construction	1,308		19		—		—
Commercial mortgages, other	5,639		5,454		—		—
Residential mortgages	3,524		4,201		—		—
Consumer loans:
Credit cards	—		—		18		11
Home equity lines and loans	1,647		1,670		—		—
Indirect consumer loans	765		654		—		—
Direct consumer loans	31		45		—		—
Total	$	12,914	$	12,043	$	27	$	13

The following tables present the aging of the recorded investment in loans as of March 31, 2017 and December 31, 2016 (in thousands):

March 31, 2017

30 - 59 Days Past Due

60 - 89 Days Past Due

90 Days or More Past Due

Total Past Due

Loans Acquired with Deteriorated Credit Quality

Loans Not Past Due

Total

Commercial and agricultural:

CHEMUNG FINANCIAL CORP - FORM 10-Q - May 3, 2017

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