CHEMUNG FINANCIAL CORP - Annual Report: 2011 (Form 10-K)

chemung1231201110k.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

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

For the transition period from _______________ to _____________

Commission File Number 0-13888

CHEMUNG FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

NEW YORK		16-123703-8
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
One Chemung Canal Plaza, P.O. Box 1522, Elmira, New York		14902
(Address of principal executive offices)		(Zip Code)

Registrant's telephone number, including area code: (607) 737-3711

Securities registered pursuant to Section 12(b) of the Act:		None
Securities registered pursuant to Section 12(g) of the Act:

Common Stock, par value $0.01 a share

(Title of class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES o NO x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES o NO x

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 o

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 o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will

not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in

Part III of this Form 10-K or any amendment to this Form 10-K. x

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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2

of the Exchange Act.

Large accelerated filer

Accelerated filer

Non-accelerated filer

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 o NO x

Based upon the closing price of the registrant's Common Stock as of June 30, 2011, the aggregate market value of the voting stock

held by non-affiliates of the registrant was $67,262,296.

As of February 29, 2012 there were 4,579,692 shares of Common Stock, $0.01 par value outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 10, 2012 are incorporated by reference

into Part III, Items 10, 11, 12, 13, and 14 of this Form 10-K.

CHEMUNG FINANCIAL CORPORATION

ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011

Form 10-K Item Number:		Page No.

PART I		1

Item 1. Business		1
Item 1A. Risk Factors		13
Item 1B. Unresolved Staff Comments		17
Item 2. Properties		17
Item 3. Legal Proceedings		17
Item 4. Mine Safety Disclosures		17

PART II		18

Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		18
Item 6. Selected Financial Data		20
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation		22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk		43
Item 8. Financial Statements and Supplementary Data		43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		43
Item 9A. Controls and Procedures		43
Item 9B. Other Information		44

PART III		45

Item 10. Directors, Executive Officers and Corporate Governance		45
Item 11. Executive Compensation		46
Item 12. Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters		46
Item 13. Certain Relationships and Related Transactions, and Director Independence		46
Item 14. Principal Accountant Fees and Services		46

PART IV		46

Item 15. Exhibits and Financial Statement Schedules		47

Index to Consolidated Financial Statements		48

Report of Independent Registered Public Accounting Firm-Crowe Horwath LLP		F-1

SIGNATURES		F-56

Some of the information contained in this report concerning the markets and industry in which we operate is

derived from publicly available information and from industry sources. Although we believe that this publicly

available information and information provided by these industry sources are reliable, we have not independently

verified the accuracy of any of this information.

PART I

ITEM 1. BUSINESS

General Development of Business

Chemung Financial Corporation (the "Corporation") was incorporated on January 2, 1985 under the laws of the State

of New York. The Corporation was organized for the purpose of acquiring Chemung Canal Trust Company (the

"Bank"). The Bank was established in 1833 under the name Chemung Canal Bank, and was subsequently granted a

New York State bank charter in 1895. In 1902, the Bank was reorganized as a New York State trust company under

the name Elmira Trust Company, and its name was changed to Chemung Canal Trust Company in 1903.

The Corporation has been a financial holding company since June 22, 2000. Financial holding company status

provides the Corporation with the flexibility to offer an array of financial services, such as insurance products,

mutual funds, and brokerage services, which provide additional sources of fee based income and allow the

Corporation to better serve its customers. The Corporation established a financial services subsidiary, CFS Group,

Inc., in September 2001 which offers non-banking financial services such as mutual funds, annuities, brokerage

services, insurance and tax preparation services. As such, the Corporation currently operates as a financial holding

company with two subsidiaries, Chemung Canal Trust Company, a full-service community bank with full trust

powers, and CFS Group, Inc.

The Securities and Exchange Commission (the "SEC") maintains a web site at www.sec.gov that contains reports,

proxy and information statements, and other information regarding the Corporation. You may also read and copy

materials we file with the SEC at the SEC's Public Reference Room at 100 F St., NE, Washington, D.C. 20549. You

may obtain information concerning the operation of the Public Reference Room by calling 1-800-SEC-0330. In

addition, we maintain a corporate web site at www.chemungcanal.com. We make available free of charge through

our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any

amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act and filed with the SEC. These

items are available as soon as reasonably practicable after we electronically file or furnish such material with or to the

SEC. These items are also available on our website as Interactive Data Files as required pursuant to Rule 405 of

Regulation S-T (§232.405). The contents of our web site are not a part of this report. These materials are also

available free of charge by written request to: Jane H. Adamy, Senior Vice President and Secretary, Chemung Canal

Trust Company, One Chemung Canal Plaza, Elmira, NY 14901.

Description of Business

Business

The Bank is a New York State chartered commercial bank which engages in full-service commercial and consumer

banking and wealth management business. The Bank's services include accepting time, demand and savings deposits,

including NOW accounts, savings accounts, insured money market accounts, investment certificates, fixed-rate

certificates of deposit and club accounts. The Bank's services also include making secured and unsecured commercial

and consumer loans, financing commercial transactions (either directly or participating with regional industrial

development and community lending corporations), and making commercial, residential and home equity mortgage

loans, revolving credit loans with overdraft checking protection and small business loans. Additional services include

renting safe deposit facilities, the provision of networked automated teller facilities and an internet banking product

featuring bill payment services.

Wealth management services provided by the Bank include 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, pension, estate planning and employee benefit administrative services.

CFS Group, Inc. offers an array of financial services including mutual funds, full and discount brokerage services,

annuity and other insurance products and tax preparation services.

For additional information, including information concerning the results of operations of the Corporation and its

subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II,

Item 7.

There have been no material changes in the manner of doing business by the Corporation or its subsidiaries during the

fiscal year ended December 31, 2011.

Market Area and Competition

Seven of the Bank's 28 full-service offices, including the main office, are located in Chemung County, New York.

The Bank has thirteen full-service offices located in the nearby counties of Broome, Schuyler, Steuben, Tioga and

Tompkins. In April 2011, Chemung Canal Trust Company, as part of the Fort Orange Financial Corp. acquisition by

Chemung Financial Corporation, added five full service branch offices to its footprint in Albany and Saratoga counties

under the name Capital Bank, a division of Chemung Canal Trust Company. The Bank also operates 3 full-service

offices in Bradford County, Pennsylvania and full service Wealth Management Centers located in Chemung and

Broome counties. The Corporation defines its primary market areas as those areas within a 25-mile radius of its New

York offices in Albany, Broome, Chemung, Saratoga, Steuben, Schuyler, Tioga and Tompkins counties, including the

northern tier of Pennsylvania.

Within these market areas, the Bank encounters intense competition in the lending and deposit gathering aspects of

its business from commercial and thrift banking institutions, credit unions and other providers of financial services,

such as brokerage firms, investment companies, insurance companies and Internet banking institutions. The Bank

also competes with non-financial institutions, including retail stores and certain utilities that maintain their own

credit programs, as well as governmental agencies that make available loans to certain borrowers. Unlike the Bank,

many of these competitors are not subject to regulation as extensive as that affecting the Bank and, as a result, they

may have a competitive advantage over the Bank in certain respects. This is particularly true of credit unions

because their pricing structure is not encumbered by income taxes.

Competition for the Bank's Wealth Management Group services comes primarily from brokerage firms and

independent investment advisors. These firms devote much of their considerable resources toward gaining larger

positions in these markets. The market value of the Bank's Wealth Management Group assets under administration

totaled approximately $1.6 billion at year-end 2011. The Wealth Management Group division is responsible for the

largest component of non-interest revenue.

Supervision and Regulation

The Corporation is regulated under the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is

subject to the supervision of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board").

As a bank holding company, the Corporation generally may engage in the activities permissible for a bank holding

company, which includes banking, managing or controlling banks, performing certain servicing activities for

subsidiaries, and engaging in other activities that the Federal Reserve Board has determined to be so closely related

to banking as to be a proper incident thereto. Because the Corporation also has elected financial holding company

status, it may also engage in a broader range of activities that are determined by the Federal Reserve and the

Secretary of the Treasury to be financial in nature or incidental to financial activities or activities that are

determined by the Federal Reserve Board to be complementary to a financial activity and that do not pose

a substantial risk to the safety and soundness of depository institutions or the financial system generally.

The Corporation is also under the jurisdiction of the SEC and is subject to the disclosure and regulatory

requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended,

as administered by the SEC.

The Bank is chartered under the laws of New York State and is supervised by the New York State Department of

Financial Services ("NYSDFS"). The Bank also is a member bank of the Federal Reserve System and, therefore,

the Federal Reserve Board serves as its primary federal regulator.

CFS Group, Inc. is subject to supervision by other regulatory authorities as determined by the activities in which it

is engaged. Insurance activities are supervised by the NYSD, and brokerage activities are subject to supervision

by the SEC and the Financial Industry Regulatory Authority ("FINRA").

The Corporation is subject to capital adequacy guidelines of the Federal Reserve Board. The guidelines apply on a

consolidated basis and require bank holding companies to maintain a minimum ratio of Tier 1 capital to total assets

(or "leverage ratio") of 4%. For the most highly rated bank holding companies, the minimum ratio is 3%. The

Federal Reserve Board capital adequacy guidelines also require bank holding companies to maintain a minimum

ratio of Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying total capital to risk-weighted

assets of 8%. Any bank holding company whose capital does not meet the minimum capital adequacy guidelines is

considered to be undercapitalized, and is required to submit an acceptable plan to the Federal Reserve Board for

achieving capital adequacy. In addition, an undercapitalized company's ability to pay dividends to its shareholders

and expand its lines of business through the acquisition of new banking or non-banking subsidiaries also could be

restricted by the Federal Reserve Board. The Federal Reserve Board may set higher minimum capital requirements

for bank holding companies where circumstances warrant, such as companies anticipating significant growth or

facing unusual risks. As of December 31, 2011, the Corporation's leverage ratio was 8.27%, its ratio of Tier 1

capital to risk-weighted assets was 11.84% and its ratio of qualifying total capital to risk-weighted assets was

13.28%. The Federal Reserve Board has not advised the Corporation that it is subject to any special capital

requirements.

Pursuant to Federal Reserve Board regulations and supervisory policies, bank holding companies also are expected

to serve as a source of financial and managerial strength to their subsidiary depository institutions. Therefore, to

the extent the Bank is in need of capital, the Corporation could be expected to provide additional capital to the

Bank, including, potentially, raising new capital for that purpose.

The Bank is subject to leverage and risk-based capital requirements and minimum capital guidelines of the Federal

Reserve Board that are similar to those applicable to the Corporation. As of December 31, 2011, the Bank was in

compliance with all minimum capital requirements. The Bank's leverage ratio as of that date was 7.92%, its ratio of

Tier 1 capital to risk-weighted assets was 11.36%, and its ratio of qualifying total capital to risk-weighted assets

was 12.80%.

The Bank also is subject to substantial regulatory restrictions relating to its ability to pay dividends to the

Corporation. Under Federal Reserve Board and NYSDFS regulations, the Bank may not pay a dividend without

prior approval of the Federal Reserve and the NYSDFS if the total amount of all dividends declared during such

calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the

calendar year and its retained net income over the preceding two calendar years. As of December 31, 2011,

approximately $4.6 million was available for the payment of dividends by the Bank to the Corporation without

prior approval, after giving effect to the payment of dividends in the fourth quarter of 2011. The Bank's ability to

pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is

currently in compliance with these requirements.

The deposits of the Bank are insured up to regulatory limits by the Federal Deposit Insurance Corporation (the

"FDIC") and are subject to the deposit insurance premium assessments of the Deposit Insurance Fund ("DIF"). The

FDIC currently maintains a risk-based assessment system under which assessment rates vary based on the level of

risk posed by the institution to the DIF. The assessment rate may, therefore, change after any of these

measurements change.

In February 2011, the FDIC adopted a final rule making certain changes to the deposit insurance assessment

system. Among other things, the rule revised the assessment rate schedule effective April 1, 2011, and adopted

additional rate schedules that will go into effect when the DIF reserve ratio reaches various milestones. The rule

changed the deposit insurance assessment system from one that was based on domestic deposits to one that is based

on average consolidated total assets minus average tangible equity. In addition, the rule provides that FDIC

dividend payments will be suspended if the DIF reserve ratio exceeds 1.5 percent but that assessment rates will

decrease when the DIF reserve ratio reaches certain thresholds.

All institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on

bonds issued by the Financing Corporation ("FICO"), an agency of the Federal government established to

recapitalize the predecessor to the Savings Association Insurance Fund. These assessments will continue until the

FICO bonds mature in 2017. The FDIC's FICO assessment authority is separate from its authority to assess risk-

based premiums for deposit insurance. The FICO assessment rate is adjusted quarterly to reflect changes in the

assessment bases of the fund and is not risk-based by institution. The FICO assessment rate for the first quarter of

2012, due December 30, 2011, was .066% of insured deposits.

The Bank is also a member of the Federal Home Bank ("FHLB") of New York, which provides a central credit

facility primarily for member institutions for home mortgage and neighborhood lending. The Bank is subject to the

rules and requirements of the FHLB, including the requirement to acquire and hold shares of capital stock in the

FHLB. The Bank was in compliance with the rules and requirements of the FHLB at December 31, 2011.

The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), enacted on July 21,

2010, 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.

The Dodd-Frank Act directs the federal banking agencies to establish minimum leverage and risk-based capital

requirements for insured depository institutions and bank holding companies with assets greater than $500 million,

among others, that should be no lower than the minimum requirements applicable to banks as of the date of

enactment of the Dodd-Frank Act. On June 14, 2011, the FRB, along with other federal banking supervisors,

issued a final rule implementing the minimum leverage and risk-based capital requirements. The Dodd-Frank Act

also directs the appropriate federal banking supervisors, subject to Council recommendations, to develop capital

requirements for all insured depository institutions, depository institution holding companies and systemically

important non-bank financial companies to address systemically risky activities.

As noted above, the Dodd-Frank Act broadened the base for Federal Deposit Insurance Corporation insurance

assessments. Assessments are now be based on the average consolidated total assets less tangible equity capital of a

financial institution. The Dodd-Frank Act also permanently increases the maximum amount of deposit insurance for

banks, savings institutions and credit unions to $250,000 per depositor per insured institution, retroactive to January

1, 2008, and provided qualifying non-interest bearing transaction accounts with unlimited deposit insurance through

December 31, 2012.

The Dodd-Frank Act requires publicly traded companies to give stockholders a non-binding vote on executive

compensation and so-called "golden parachute" payments. The legislation also authorizes the SEC to promulgate

rules that would allow stockholders to nominate their own candidates using the company’s proxy materials.

Additionally, the Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting

of incentive-based compensation and prohibiting excessive incentive-based compensation paid to executives of

depository institutions and their holding companies with assets in excess of $1.0 billion. In April 2011, the FRB,

along with other federal banking supervisors, issued a joint notice of proposed rulemaking implementing those

requirements.

The Dodd-Frank Act created a new Bureau of Consumer Financial Protection (“CFPB”) with wide-ranging powers

to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of

consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair,

deceptive or abusive" acts and practices. The CFPB has examination and enforcement authority over all banks and

savings institutions with more than $10 billion in assets. The Dodd-Frank Act also weakened the federal

preemption rules that have been applicable to national banks and federal savings associations, and gives state

attorneys general certain powers to enforce federal consumer protection regulations.

It is difficult to predict at this time what specific impact certain provisions of the Dodd-Frank Act and its

implementing rules and regulations, including those yet to be written, will have on the Corporation. The financial

reform legislation and any additional implementing rules that are ultimately issued could have adverse implications

on the financial industry, the competitive environment, and the Corporation’s ability to conduct business. The

Corporation will have to apply resources to ensure compliance with all applicable provisions of the Dodd-Frank Act

and its implementing rules, which may further increase the Corporation’s costs of operations and adversely

impact its earnings.

Basel III Amendments to Capital Adequacy Requirements

In December 2010, the Basel Committee, a group of bank regulatory supervisors from around the world, released

its final framework for strengthening international capital and liquidity regulation, now officially identified by the

Basel Committee as “Basel III.” Basel III, when implemented by the U.S. bank regulatory agencies and fully

phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital,

with a greater emphasis on common equity. The Basel III final capital framework, among other things:

	•		introduces as a new capital measure “Common Equity Tier 1”, or “CET1”, specifies that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital, and expands the scope of the adjustments as compared to existing regulations;
	•		when fully phased in on January 1, 2019, requires banks to maintain:

					as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5 percent, plus a 2.5 percent “capital conservation buffer” (which is added to the 4.5 percent CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk- weighted assets of at least 7 percent);
			•		a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0 percent, plus the capital conservation buffer (which is added to the 6.0 percent Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5 percent upon full implementation);
			•		a minimum ratio of Total (that is, Tier 1 plus Tier 2) capital to risk-weighted assets of at least 8.0 percent, plus the capital conservation buffer (which is added to the 8.0 percent total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5 percent upon full implementation);

•

as a newly adopted international standard, a minimum leverage ratio of 3.0 percent, calculated as the

ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (as the

average for each quarter of the month-end ratios for the quarter); and

•

provides for a “countercyclical capital buffer”, generally to be imposed when national regulators

determine that excess aggregate credit growth becomes associated with a buildup of systemic risk, that

would be a CET1 add-on to the capital conservation buffer in the range of 0 percent to 2.5 percent when

fully implemented (potentially resulting in total buffers of between 2.5 percent and 5 percent).

The capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions

with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the

combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face

constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The implementation of the Basel III final framework will commence January 1, 2013. On that date, banking

institutions will be required to meet the following minimum capital ratios:

	•		3.5 percent CET1 to risk-weighted assets;
	•		4.5 percent Tier 1 capital to risk-weighted assets; and
	•		8.0 percent Total capital to risk-weighted assets.

The Basel III final framework provides for a number of new deductions from and adjustments to CET1. These

include, for example, the requirement that mortgage servicing rights, deferred tax assets and significant investments

in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10

percent of CET1 or all such categories in the aggregate exceed 15 percent of CET1.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased-

in over a five-year period (20 percent per year). The implementation of the capital conservation buffer will begin on

January 1, 2016 at 0.625 percent and be phased in over a four-year period (increasing by that amount on each

subsequent January 1, until it reaches 2.5 percent on January 1, 2019).

The U.S. banking agencies have indicated informally that they expect to propose regulations implementing Basel

III in early 2012.

The Dodd-Frank Act requires the Federal Reserve to adopt regulations imposing a continuing “floor” of the Basel I-

based capital requirements in cases where the Basel II-based capital requirements and any changes in capital

regulations resulting from Basel III otherwise would permit lower requirements. In June 2011, the Federal Reserve

finalized regulations implementing this requirement.

Given that the Basel III rules are subject to implementation and change and the scope and content of capital

regulations that U.S. federal banking agencies may adopt under the Dodd-Frank Act is uncertain, the Corporation

cannot be certain of the impact new capital regulations will have on its capital ratios.

Other Regulatory and Legislative Actions

Transactions between the Bank and either the Corporation or CFS Group, Inc. are governed by sections 23A and

23B of the Federal Reserve Act ("FRA") and the Federal Reserve Board’s implementing Regulation W. Generally,

these provisions are intended to protect insured depository institutions from suffering losses arising from

transactions with non-insured affiliates, by placing quantitative and qualitative limitations on covered transactions

between a bank and any one affiliate as well as all affiliates of the bank in the aggregate, and requiring that such

transactions be on terms that are consistent with safe and sound banking practices. Sections 22(g) and (h) of the

FRA and their implementing Regulation O restrict the amounts and terms of loans to directors, executive officers

and principal shareholders.

Under the privacy and data security provisions of the Financial Modernization Act of 1999, also known as the

Gramm-Leach-Bliley Act ("GLB Act"), and rules promulgated thereunder, all financial institutions, including the

Corporation, the Bank and CFS Group, Inc., are required to establish policies and procedures to restrict the sharing

of nonpublic customer data with nonaffiliated parties at the customer's request and to protect customer data from

unauthorized access. In addition, the Fair Credit Reporting Act ("FCRA"), as amended by the Fair and Accurate

Credit Transactions Act of 2003 ("FACT Act"), includes many provisions affecting the Corporation, Bank, and/or

CFS Group, Inc., including provisions concerning obtaining consumer reports, furnishing information to consumer

reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated

companies, and other provisions. For instance, FCRA requires persons subject to FCRA to notify their customers if

they report negative information about them to a credit bureau or if they are granted credit on terms less favorable

than those generally available. The Federal Reserve Board and the Federal Trade Commission ("FTC") have

extensive rulemaking authority under the FACT Act, and the Corporation and the Bank are subject to the rules that

have been promulgated by the Federal Reserve Board and FTC thereunder, including recent rules regarding

limitations on affiliate marketing and implementation of programs to identify, detect and mitigate the risk of

identity theft through red flags. The Corporation has developed policies and procedures for itself and its

subsidiaries to maintain compliance and believes it is in compliance with all privacy, information sharing and

notification provisions of the GLB Act and FCRA.

The GLB Act and FCRA also impose requirements regarding data security and the safeguarding of customer

information. The Bank is subject to the Interagency Guidelines Establishing Information Security Standards

(Security Guidelines), which implement section 501(b) of the GLB Act and section 216 of the FACT Act. The

Security Guidelines establish standards relating to administrative, technical, and physical safeguards to ensure the

security, confidentiality, integrity and the proper disposal of customer information. The Bank believes it is in

compliance with all such standards.

Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and

Anti-Terrorism Financing Act of 2001, all financial institutions are required in general to identify their customers,

adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain

transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies

concerning their customers and their transactions. Additional information-sharing among financial institutions,

regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy

provisions of the GLB Act for financial institutions that comply with this provision and the authorization of the

Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The

effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any

application submitted by the financial institution under the Bank Merger Act, which applies to the Bank, or the

BHC Act, which applies to the Corporation.

The Bank has a responsibility under the Community Reinvestment Act of 1977 ("CRA") to help meet the credit

needs of its communities, including low- and moderate-income neighborhoods. The CRA does not establish

specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to

develop the types of products and services that it believes are best suited to its particular community, consistent

with the CRA. Regulators assess the Bank’s record of compliance with the CRA. In addition, the Equal Credit

Opportunity Act and the Fair Housing Act prohibit discrimination in lending practices on the basis of

characteristics specified in those statutes. The Bank’s failure to comply with the provisions of the CRA could, at a

minimum, result in regulatory restrictions on its activities and the activities of the Corporation. The Bank’s failure

to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions

against it by its regulators as well as other federal regulatory agencies including the CFPB and the Department of

Justice. The Bank’s latest CRA rating was "Outstanding".

The Sarbanes-Oxley Act of 2002 implemented a broad range of measures to increase corporate responsibility, to

provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and protect

investors by improving the accuracy and reliability of corporate disclosures for companies that have securities

registered under the Exchange Act, including publicly-held financial holding companies such as the Corporation.

Among other things, Sarbanes-Oxley and/or its implementing regulations have established new membership

requirements and additional responsibilities for the Corporation’s audit committee, imposed restrictions on the

relationship between the Corporation and its outside auditors (including restrictions on the types of non-audit

services its auditors may provide to it), imposed additional responsibilities for its external financial statements on

its chief executive officer and chief financial officer, expanded the disclosure requirements for its corporate

insiders, required its management to evaluate its disclosure controls and procedures and its internal control over

financial reporting, and required its auditors to issue a report on its internal control over financial reporting.

Home mortgage lenders, including banks, are required under the Home Mortgage Disclosure Act to make available

to the public information regarding the pricing of home mortgage loans, including the "rate spread" between the

interest rate on loans and certain Treasury securities and other benchmarks. The availability of this information has

led to increased scrutiny of higher-priced loans at all financial institutions to detect illegal discriminatory practices

and to the initiation of a limited number of investigations by federal banking agencies and the U.S. Department of

Justice. The Corporation has no information that it or its affiliates are the subject of any investigation.

In recent years, declining housing values have resulted in deteriorating economic conditions across the U.S.,

resulting in significant writedowns in the values of mortgage-backed securities and derivative securities by

financial institutions, government sponsored entities, and major commercial and investment banks. This has led to

decreased confidence in financial markets among borrowers, lenders, and depositors as well as extreme volatility in

the capital and credit markets and the failure of some entities in the financial sector. The Corporation is fortunate

that the markets it serves have been impacted to a lesser extent than many areas around the country.

Employees

As of December 31, 2011, the Corporation and its subsidiaries employed 349 persons on a full-time equivalent basis.

None of the Corporation's employees are covered by collective bargaining agreements, and the Corporation believes

that its relationship with its employees is good.

Recent Developments

On March 19, 2012, the Corporation received a letter from a law firm on behalf of its client, Automated Transactions,

LLC, which asserts claims against the Corporation for patent infringement based upon the Corporation’s ATM

operations. The letter includes a copy of a proposed complaint seeking injunctive relief and damages for the alleged

infringement and also suggests the possibility of an amicable resolution of these claims. The Corporation is reviewing

the allegations of the proposed complaint and plans to engage counsel to represent it in this matter.

Financial Information about Foreign and Domestic Operations and Export Sales

Neither the Corporation nor its subsidiaries relies on foreign sources of funds or income.

Statistical Disclosure by Bank Holding Companies

The following disclosures present certain summarized statistical data covering the Corporation and its subsidiaries.

See also Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7,

of this report for other required statistical data.

Investment Portfolio

The following table sets forth the carrying amount of available for sale and held to maturity investment securities at

the dates indicated (in thousands of dollars):

	December 31,
		2011		2010		2009
Obligations of U.S. Government and U.S Government sponsored enterprises	$	152,080	$	102,132	$	84,621
Mortgage-backed securities, residential		50,766		62,762		93,945
Collateralized mortgage obligations		7,537		-		-
Obligations of states and political subdivisions		54,825		46,480		44,284
Corporate bonds and notes		13,684		11,694		12,185
SBA loan pools		1,950		-		-
Trust preferred securities		2,310		2,344		2,261
Corporate stocks		6,030		5,848		5,847
Total	$	289,182	$	231,260	$	243,143

Included in the above table are $280,870, $223,545 and $230,984 (in thousands of dollars) of securities available

for sale at December 31, 2011, 2010 and 2009, respectively. Also included in the above table are $8,312, $7,715

and $12,160 (in thousands of dollars) of securities held to maturity at December 31, 2011, 2010 and 2009,

respectively.

The following table sets forth the carrying amounts and maturities of debt securities at December 31, 2011 and the

weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted

for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life

at the projected prepayment speed of each security). Federal tax equivalent adjustments have not been made in

calculating yields on municipal obligations:

	Maturing
	Dollars in thousands
	Within One Year					After One, But Within Five Years
	Amount		Yield			Amount		Yield
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	25,858		1.79	%	$	123,670		1.64	%
Mortgage-backed securities, residential		2,244		3.59	%		44,632		3.85	%
Collateralized mortgage obligations		3,131		2.08	%		4,406		3.33	%
Obligations of states and political subdivisions		10,611		2.42	%		30,977		2.34	%
Corporate bonds and notes		2,084		2.82	%		11,356		4.76	%
SBA loan pools		508		2.52	%		-		-
Trust preferred securities		1,025		8.99	%		-		-
Total	$	45,461		2.25	%	$	215,041		2.39	%

	Maturing
	Dollars in thousands
	After Five, But Within Ten Years					After Ten Years
	Amount		Yield			Amount		Yield
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	2,552		3.24	%	$	-		-	%
Mortgage-backed securities, residential		1,900		3.84	%		1,990		2.23	%
Collateralized mortgage obligations		-		-	%		-		-
Obligations of states and political subdivisions		13,237		3.50	%		-		-
Corporate bonds and notes		244		3.25			-		-
SBA loan pools		1,442		1.85	%		-		-
Trust preferred securities		-		-			1,285		69.10	%
Total	$	19,375		3.37	%	$	3,275		32.52	%

Loan Portfolio

The following table shows the Corporation's loan distribution by segment at the end of each of the last five years,

net of deferred origination fees and costs, and unearned income (in thousands of dollars):

	December 31,
	2011		2010		2009		2008		2007

Commercial, financial and agricultural	$	142,743	$	114,892	$	118,478	$	122,761	$	129,533
Commercial mortgages		264,589		133,070		123,669		92,978		72,318
Residential mortgages		192,723		172,727		162,087		156,150		159,087
Indirect consumer loans		96,197		97,787		92,902		99,723		89,609
Consumer loans		98,242		92,573		96,467		91,137		86,572
Net deferred origination fees and costs, and unearned income		2,421		2,635		2,250		2,436		2,403
Total	$	796,915	$	613,684	$	595,853	$	565,185	$	539,522

The following table shows the maturity of loans (excluding residential mortgages, indirect consumer, and

consumer loans) outstanding as of December 31, 2011. Also provided are the amounts due after one year, classified

according to the sensitivity to changes in interest rates (in thousands of dollars):

	Within One Year		After One But Within Five Years		After Five Years		Total

Commercial, financial and agricultural	$	74,068	$	104,547	$	228,717	$	407,332
Loans maturing after one year with:
Fixed interest rates		N/A		72,172		48,048		120,220
Variable interest rates		N/A		32,375		180,669		213,044
Total	$	N/A	$	104,547	$	228,717	$	333,264

Loan Concentrations

The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within our core

footprint. Significant loan concentrations are considered to exist for a financial institution when there are amounts

loaned to numerous borrowers engaged in similar activities that would cause them to be similarly impacted by

economic or other conditions. At December 31, 2011, 22.5% of the Corporation’s loans consist of commercial real estate

loans to borrowers in the real estate, rental or leasing sector. The major portion of this sector comprises

borrowers that rent, lease or otherwise allow the use of their own assets by others. No other significant

concentrations existed in the Corporation’s portfolio in excess of 10% of total loans as of December 31, 2011.

Allocation of the Allowance for Loan Losses

The allocated portions of the allowance reflect management's estimates of specific known risk elements in the

respective portfolios. Management's methodology followed in evaluating the allowance for loan losses includes a

detailed analysis of historical loss factors for pools of similarly graded loans, as well as specific collateral reviews

of relationships graded special mention, substandard or doubtful with outstanding balances of $1.0 million or

greater. Among the factors considered in allocating portions of the allowance by loan type are the current levels of

past due, non-accrual and impaired loans, as well as historical loss experience and the evaluation of collateral. In

addition, management has formally documented factors considered in determining the appropriate level of

unallocated allowance, including current economic conditions, forecasted trends in the credit quality cycle, loan

growth, entry into new markets, and industry and peer group trends. From 2007 to 2009, these amounts, which had

previously been shown as unallocated, have been included in the allocated portion of the loan categories to which

they relate. At December 31, 2011, in addition to the qualitative factors allocated within the allowance, the

Corporation maintained $443 thousand of the allowance as unallocated. While we have seen some preliminary

improvements in the local economy and while some loans have improved, the recovery is still very fragile and

management believes it is prudent to see a period of sustained improvement before completely reflecting this in the

allowance. Additionally, management monitors coverage ratios of nonperforming loans and total loans compared to

peers on a regular basis. This analysis also suggests that it would not be prudent to eliminate the unallocated

portion of the allowance at this time.

The following table summarizes the Corporation’s allocation of the loan loss allowance for each year in the five-

year period ended December 31, 2011:

		Amount of loan loss allowance (in thousands) and Percent of Loans by Category to Total Loans (%)
Balance at end of period applicable to:	2011	%	2010		%		2009		%		2008		%		2007		%
Commercial, financial and agricultural	3,143	17.8	$	2,118		18.6	$	3,133		19.9	$	3,854		21.7	$	3,955		24.0
Commercial mortgages	2,570	33.2		2,575		21.7		3,073		20.7		3,058		16.4		3,113		13.4
Residential mortgages	1,310	24.3		1,302		28.3		1,125		27.3		753		27.7		479		29.6
Consumer loans	2,193	24.7		2,727		31.4		2,636		32.1		1,441		34.2		906		33.0
	9,216	100.0		8,722		100.0		9,967		100.0		9,106		100.0		8,453		100.0
Unallocated	443	N/A		776		N/A		-		N/A		-		N/A		-		N/A
Total	9,659	100.0	$	9,498		100.0	$	9,967		100.0	$	9,106		100.0	$	8,453		100.0

The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any

category.

Deposits

The average daily amounts of deposits and rates paid on such deposits are summarized for the periods indicated in

the following table (in thousands of dollars):

	Year Ended December 31,
	2011					2010					2009
	Amount		Rate			Amount		Rate			Amount		Rate
Non-interest-bearing demand deposits	$	243,017		-	%	$	196,822		-	%	$	176,305		-	%
Interest-bearing demand deposits		72,953		0.11	%		52,314		0.09	%		47,250		0.17	%
Savings and insured money market deposits		354,746		0.25	%		296,492		0.32	%		245,425		0.58	%
Time deposits		294,467		1.15	%		272,016		1.70	%		283,408		2.44	%
	$	965,183				$	817,644				$	752,388

Scheduled maturities of time deposits at December 31, 2011 are summarized as follows (in thousands of dollars):

2012	$	200,236
2013		48,523
2014		16,684
2015		7,536
2016		3,924
Thereafter		87
	$	276,990

Maturities of time deposits in denominations of $100,000 or more outstanding at December 31, 2011

are summarized as follows (in thousands of dollars):

3 months or less	$	29,672
Over 3 through 6 months		17,718
Over 6 through 12 months		29,307
Over 12 months		28,770
	$	105,467

Return on Equity and Assets

The following table shows consolidated operating and capital ratios of the Corporation for each of the last three

years:

Year Ended December 31,	2011			2010			2009
Return on average assets		0.90	%		1.02	%		0.56	%
Return on average equity		8.77	%		10.64	%		6.13	%
Dividend payout ratio		40.96	%		34.85	%		67.30	%
Average equity to average assets ratio		10.23	%		9.60	%		9.19	%
Year-end equity to year-end assets ratio		10.35	%		10.16	%		9.23	%

Short-Term Borrowings

For each of the three years ended December 31, 2011, 2010 and 2009, respectively, the average outstanding balance

of short-term borrowings did not exceed 30% of shareholders' equity.

Securities Sold Under Agreements to Repurchase and Federal Home Loan Bank ("FHLB") Advances

Information regarding securities sold under agreements to repurchase and FHLB advances is included in notes 8

and 9 to the consolidated financial statements appearing elsewhere in this report.

ITEM 1A. RISK FACTORS

The Corporation’s business is subject to many risks and uncertainties. Although the Corporation seeks ways to

manage these risks and develop programs to control those that management can, the Corporation ultimately cannot

predict the extent to which these risks and uncertainties could affect results. Actual results may differ materially

from management's expectations. The material risks and uncertainties that management believes affect the

Corporation are discussed below. You should consider all of the following risks together with all of the other

information in this Annual Report on Form 10-K.

Economic conditions may adversely affect the Corporation’s financial performance.

As a consequence of the economic slowdown that the United States experienced, business activity across a wide

range of industries continues to face serious difficulties due to reduced consumer spending, the weakened financial

condition of some borrowers and employment levels. A continued weakness or further weakening in business and

economic conditions generally or specifically in the principal markets in which the Corporation does business could

have one or more of the following adverse effects on the Corporation’s business: (i) a decrease in the demand for

loans and other products and services; (ii) a decrease in the value of the Corporation’s loans or other assets secured

by consumer or commercial real estate; (iii) an impairment of certain of the Corporation’s intangible assets, such as

goodwill; and (iv) an increase in the number of borrowers and counterparties who become delinquent, file for

protection under bankruptcy laws or default on their loans or other obligations to the Corporation. Additionally, in

light of economic conditions, the Corporation’s ability to assess the creditworthiness of its customers may be

impaired if the models and approaches that it uses to select, manage and underwrite loans become less predictive of

future behaviors. Further, competition in the Corporation’s industry may intensify as a result of consolidation of

financial services companies in response to current market conditions and the Corporation may face increased

regulatory scrutiny which may increase its costs and limit its ability to pursue business opportunities.

Commercial real estate and business loans increase the Corporation’s exposure to credit risks.

At December 31, 2011, the Corporation’s portfolio of commercial real estate and business loans totaled $406.8

million or 51.0% of total loans. The Corporation’s plans are to continue to emphasize the origination of these types

of loans, which generally expose the Corporation to a greater risk of nonpayment and loss than residential real

estate or consumer loans because repayment of commercial real estate and business loans often depends on the

successful operations and income stream of the borrower’s business. Additionally, such loans typically involve

larger loan balances to single borrowers or groups of related borrowers compared to residential real estate and

consumer loans. Also, some of the Corporation’s borrowers have more than one commercial loan outstanding.

Consequently, an adverse development with respect to one loan or one credit relationship can expose the

Corporation to a significantly greater risk of loss compared to an adverse development with respect to residential

real estate and consumer loans. The Corporation targets its business lending and marketing strategy towards small

to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in

terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these

businesses, the Corporation’s results of operations and financial condition may be adversely affected.

Increases to the allowance for loan losses may cause the Corporation’s earnings to decrease.

The Corporation’s customers may not repay their loans according to the original terms, and the collateral securing

the payment of those loans may be insufficient to pay any remaining loan balance. Hence, we may experience

significant loan losses, which could have a material adverse effect on our operating results. Management makes

various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of

its borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In

determining the amount of the allowance for credit losses, management relies on loan quality reviews, past loss

experience, and an evaluation of economic conditions, among other factors. If these assumptions prove to be

incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the Corporation’s loan

portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net

income.

The Corporation’s emphasis on the origination of commercial loans is one of the more significant factors in

evaluating its allowance for credit losses. As the Corporation continues to increase the amount of these loans,

additional or increased provisions for loan losses may be necessary and as a result could result in a decrease in

earnings.

Bank regulators periodically review the Corporation’s allowance for loan losses and may require the Corporation to

increase its provision for loan losses or loan charge-offs. Any increase in the allowance for loan losses or loan

charge-offs as required by these regulatory authorities could have a material adverse effect on our results of

operations and/or financial condition.

Changes in interest rates could adversely affect the Corporation’s results of operations and financial condition.

The Corporation’s results of operations and financial condition are significantly affected by changes in interest

rates. Our financial results depend substantially on net interest income, which is the difference between the interest

income that we earn on interest-earning assets and the interest expense paid on interest-bearing liabilities. If the

Corporation’s interest-earning assets mature or reprice more quickly than its interest-bearing liabilities in a given

period as a result of decreasing interest rates, net interest income may decrease. Likewise, net interest income may

decrease if interest-bearing liabilities mature or reprice more quickly than interest-earning assets in a given period

as a result of increasing interest rates. The Corporation has taken steps to mitigate this risk, such as holding fewer

longer-term residential mortgages, as well as investing excess funds in shorter-term investments.

Changes in interest rates also affect the fair value of the Corporation’s interest-earning assets and, in particular, its

investment securities available for sale. Generally, the fair value of investment securities fluctuates inversely with

changes in interest rates. Decreases in the fair value of investment securities available for sale, therefore, could

have an adverse effect on our shareholders’ equity or earnings if the decrease in fair value is deemed to be

other than temporary.

Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in

interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance

to reduce borrowing costs. Under these circumstances, the Corporation is subject to reinvestment risk to the extent

that it is unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on its

existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more

difficult for borrowers to repay adjustable rate loans.

Strong competition within our industry and market area could limit the Corporation’s growth and profitability.

The Corporation faces substantial competition in all phases of its operations from a variety of different competitors.

Future growth and success will depend on the ability to compete effectively in this highly competitive environment.

The Corporation competes for deposits, loans and other financial services with a variety of banks, thrifts, credit

unions and other financial institutions as well as other entities which provide financial services. Some of the

financial institutions and financial services organizations with which we compete are not subject to the same degree

of regulation as the Corporation. Many competitors have been in business for many years, have established

customer bases, are larger, and have substantially higher lending limits. The financial services industry is also

likely to become more competitive as further technological advances enable more companies to provide financial

services. These technological advances may diminish the importance of depository institutions and other financial

intermediaries in the transfer of funds between parties.

The Corporation’s growth strategy may not prove to be successful and our market value and profitability may

suffer.

As part of the Corporation's strategy for continued growth, we may open additional branches. New branches do not

initially contribute to operating profits due to the impact of overhead expenses and the start-up phase of generating

loans and deposits. To the extent that additional branches are opened, the Corporation may experience the effects of

higher operating expenses relative to operating income from the new operations, which may have an adverse effect on

the Corporation's levels of net income, return on average equity and return on average assets.

In addition, the Corporation may acquire banks and related businesses that it believes provide a strategic fit with its

business, such as the 2011 acquisition of Fort Orange Financial Corp. To the extent that the Corporation grows

through acquisitions, it cannot provide assurance that such strategic decisions will be accretive to earnings.

Compliance with the Dodd-Frank Act may increase the Corporation’s costs of operations and adversely affect

the Corporation’s earnings and financial condition.

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act

(the "Dodd-Frank Act"). The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of

the financial-services industry. Among other things, the Dodd-Frank Act creates a new federal financial consumer

protection agency, tightens capital standards, imposes clearing and margining requirements on many derivatives

activities, and generally increases oversight and regulation of financial institutions and financial activities.

In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative

rulemakings by various federal agencies to implement various parts of the legislation. The Corporation cannot be

certain when final rules affecting it will be issued through such rulemakings, and what the specific content of such

rules will be. The financial reform legislation and any implementing rules that are ultimately issued could have

adverse implications on the financial industry, the competitive environment, and the Corporation’s ability to

conduct business. The Corporation will have to apply resources to ensure that it is in compliance with all applicable

provisions of the Dodd-Frank Act and any implementing rules, which may increase the Corporation’s costs of

operations and adversely impact its earnings.

The Corporation operates in a highly regulated environment and may be adversely affected by changes in laws

and regulations.

Currently, the Corporation and its subsidiaries are subject to extensive regulation, supervision, and examination by

regulatory authorities. For example, the Corporation is regulated by the Federal Reserve and the Bank is regulated

by the Federal Reserve, the Federal Deposit Insurance Corporation (the "FDIC") and the New York State

Department of Financial Services. Such regulators govern the activities in which the Corporation and its

subsidiaries may engage. These regulatory authorities have extensive discretion in connection with their

supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the

classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses. Any change in such

regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material

impact on the Corporation and its operations. The Corporation believes that it is in substantial compliance with

applicable federal, state and local laws, rules and regulations. Because our business is highly regulated, the laws,

rules and applicable regulations are subject to regular modification and change. There can be no assurance that

proposed laws, rules and regulations, or any other law, rule or regulation, will not be adopted in the future, which

could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition

or prospects.

The Corporation is a holding company and depends on its subsidiaries for dividends, distributions and other

payments.

The Corporation is a legal entity separate and distinct from the Bank and other subsidiaries. Its principal source of

cash flow, including cash flow to pay dividends to its shareholders, is dividends from the Bank. There are statutory

and regulatory limitations on the payment of dividends by the Bank to the Corporation, as well as by the

Corporation to its shareholders. Federal Reserve regulations affect the ability of the Bank to pay dividends and

other distributions and to make loans to the Corporation. If the Bank is unable to make dividend payments to the

Corporation and sufficient capital is not otherwise available, we may not be able to make dividend payments to our

common shareholders.

The Corporation holds certain intangible assets that could be classified as impaired in the future. If these assets

are considered to be either partially or fully impaired in the future, our earnings and the book values of these

assets would decrease.

The Corporation is required to test its goodwill and core deposit intangible assets for impairment on a periodic

basis. The impairment testing process considers a variety of factors, including the current market price of its

common stock, the estimated net present value of its assets and liabilities, and information concerning the terminal

valuation of similarly situated insured depository institutions. If an impairment determination is made in a future

reporting period, our earnings and the book value of these intangible assets would be reduced by the amount of the

impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our

common shares or our regulatory capital levels, but such an impairment loss could significantly restrict the Bank

from paying a dividend to the Corporation.

We may not be able to attract and retain skilled people.

Our success depends, in large part, on our ability to attract and retain key people. Competition for the best people in

most activities in which we engage can be intense and we may not be able to hire people or to retain them. The

unexpected loss of services of one or more of our key personnel could have a material adverse impact on the

business because we would lose the employees’ skills, knowledge of the market, and years of industry experience

and may have difficulty promptly finding qualified replacement personnel.

Our controls and procedures may fail or be circumvented, which may result in a material adverse effect on our

business.

Management regularly reviews and updates our internal controls, disclosure controls and procedures, and corporate

governance policies and procedures. Any system of controls, however well designed and operated, is based in part

on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system

are met. Any failure or circumvention of the controls and procedures or failure to comply with regulations related to

controls and procedures could have a material adverse effect on our business, results of operations and financial

condition.

The Corporation continually encounters technological change and the failure to understand and adapt to these

changes could adversely affect our business.

The banking industry is undergoing rapid technological changes with frequent introductions of new technology-

driven products and services. The Corporation's future success will depend, in part, on the ability to address the

needs of customers by using technology to provide products and services that will satisfy customer demands for

convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater

resources to invest in technological improvements. There can be no assurance that the Corporation will be able to

effectively implement new technology-driven products and services or be successful in marketing such products

and services to customers. Failure to successfully keep pace with technological change affecting the financial

services industry could have a material adverse impact on our business and, in turn, our financial condition and

results of operations.

The Corporation is subject to security and operational risks relating to its use of technology.

Despite instituted safeguards, the Corporation cannot be certain that all of its systems are entirely free from

vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a

variety of vendors to meet its data processing and communication needs. If information security is breached or

other technology difficulties or failures occur, information may be lost or misappropriated, services and operations

may be interrupted and the Corporation could be exposed to claims from customers. Any of these results could have

a material adverse effect on the Corporation's business, financial condition, results of operations or liquidity.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

ITEM 2. PROPERTIES

The Corporation and the Bank currently conduct all their business activities from the Bank's main office in Elmira,

NY, 27 full-service branch locations in a nine county area, owned office space adjacent to the Bank's main office in

Elmira, NY and ten off-site automated teller facilities (ATMs), all of which are located on leased property. The main

office is a six-story structure located at One Chemung Canal Plaza, Elmira, New York, in the downtown business

district. The main office consists of approximately 59,342 square feet of space, of which 745 square feet is occupied

by the Corporation's subsidiary CFS Group, with the remaining 58,597 square feet entirely occupied by the Bank. The

combined square footage of the 28 branch banking facilities totals approximately 122,053 square feet. The office

building adjacent to the main office was acquired in 1995 and consists of approximately 33,186 square feet of which

30,766 square feet are occupied by operating departments of the Bank and 2,420 square feet are leased. The leased

automated teller facility spaces total approximately 500 square feet. The Bank operates eleven of its facilities (Bath,

Binghamton, Clifton Park, Community Corners, Latham, Oakdale Mall, Slingerlands, Tioga, Vestal, Washington

Ave, and Wolf Rd Offices) and ten automated teller facilities (Cornell University, Corning Community College,

Elmira College, Elmira/Corning Regional Airport, E-Z Food Mart, Hardinge Inc., Ithaca College, Lansing Market,

Schuyler Hospital, and Quality Beverage) under lease arrangements. The rest of its offices, including the main

office and the adjacent office building, are owned by the Bank. All properties owned or leased by the Bank are

considered to be in good condition.

The Corporation holds no real estate in its own name.

ITEM 3. LEGAL PROCEEDINGS

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.

The matter remains pending at the Surrogate Court. 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, not

withstanding any potential recovery under applicable insurance coverage. An amount of loss or range of loss

cannot be reasonably estimated at this time.

ITEM 4. MINE SAFETY DISCLOSURES

None

PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER

MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Corporation's stock is traded in the over-the-counter market under the symbol CHMG.OB.

Below are the quarterly market price ranges for the Corporation's stock for the past two years, based upon actual

transactions as reported by securities brokerage firms which maintain a market or conduct trades in the Corporation's

stock and other transactions known by the Corporation's management.

Market Prices During Past Two Years (dollars)

	2011		2010
1st Quarter	$	21.77 - $26.75	$	19.65 - $21.40
2nd Quarter	$	22.50 - $26.00	$	19.90 - $21.55
3rd Quarter	$	22.95 - $24.00	$	20.15 - $22.00
4th Quarter	$	22.50 - $23.75	$	20.50 - $24.00

Below are the dividends paid quarterly by the Corporation for each share of the Corporation's common stock over the

last two years:

Dividends Paid Per Share During Past Two Years

	2011		2010
January	$	0.25	$	0.25
April		0.25		0.25
July		0.25		0.25
October		0.25		0.25
	$	1.00	$	1.00

The Bank is also subject to legal limitations on the amount of dividends that can be paid to the Corporation without

prior regulatory approval. Dividends are limited to retained net profits, as defined by regulations, for the current

year and the two preceding years. At December 31, 2011, approximately $4.6 million was available for the

declaration of dividends from the Bank to the Corporation.

As of February 29, 2012 there were 613 registered holders of record of the Corporation's stock.

The table below sets forth the information with respect to purchases made by the Corporation of our common stock

during the quarter ended December 31, 2011:

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs
10/1/11-10/31/11		1,148	$	23.04		1,148		54,140
11/1/11-11/30/11 (1)		2,050	$	23.34		2,050		52,090
12/1/11-12/31/11		5,334	$	23.87		5,334		46,756
Quarter ended 12/31/11		8,532	$	23.63		8,532		46,756

(1) On November 16, 2011, the Corporation’s Board of Directors approved a one year extension of the stock repurchase program that had been initially approved on November 18, 2009 and extended for one year on November 17, 2010.. The extension authorizes purchases of up to 90,000 shares of the Corporation's outstanding common stock, including those shares purchased during the first two years of the plan. Purchases will be made from time to time on the open-market or in private negotiated transactions and will be at the discretion of management.

STOCK PERFORMANCE GRAPH

The following graph compares the yearly change in the cumulative total shareholder return on the Corporation’s

common stock against the cumulative total return of the NASDAQ Stock Market (U.S. Companies), NASDAQ Bank

Stocks Index and SNL $500M - $1B Bank Index for the period of five years commencing December 31, 2006.

Chemung Financial Corporation

[Graphic Reference]

			Period Ending
Index	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
Chemung Financial Corporation		100.00		90.45		66.38		72.26		83.41		87.80
NASDAQ Composite		100.00		110.66		66.42		96.54		114.06		113.16
NASDAQ Bank		100.00		80.09		62.84		52.60		60.04		53.74
SNL Bank $1B-$5B		100.00		72.84		60.42		43.31		49.09		44.77

The cumulative total return includes (1) dividends paid and (2) changes in the share price of the Corporation’s

common stock and assumes that all dividends were reinvested. The above graph assumes that the value of the

investment in Chemung Financial Corporation and each index was $100 on December 31, 2006.

The Total Returns Index for NASDAQ Stock Market (U.S. Companies) and Bank Stocks indices were obtained from

SNL Financial LC, Charlottesville, VA.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data as of and for the years ended December 31, 2007, 2008, 2009,

2010 and 2011. The selected financial data is derived from our audited consolidated financial statements.

The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial

Condition and Results of Operations" and our audited consolidated financial statements and related notes.

SUMMARIZED BALANCE SHEET DATA AT DECEMBER 31, (in thousands)	2011		2010		2009		2008		2007
Total assets	$	1,216,260	$	958,327	$	975,552	$	838,318	$	788,874
Loans, net of deferred fees and costs, and unearned income		796,915		613,684		595,853		565,185		539,522
Investment Securities		289,182		231,260		243,143		199,694		169,801
Federal Home Loan Bank and Federal Reserve Bank stock		5,509		3,329		3,281		3,155		5,902
Deposits		998,493		786,359		801,063		656,909		572,600
Securities sold under agreements to repurchase		37,107		44,775		54,263		63,413		31,212
Federal Home Loan Bank Advances		43,344		20,000		20,000		20,000		82,400
Shareholders' equity		125,929		97,409		90,086		83,007		88,115

SUMMARIZED EARNINGS DATA FOR THE YEARS ENDED DECEMBER 31, (in thousands)	2011			2010			2009			2008			2007
Net interest income	$	43,849		$	34,530		$	33,155		$	30,668		$	25,936
Provision for loan losses		958			1,125			2,450			1,450			1,255
Net interest income after provision for loan losses	$	42,891		$	33,405			30,705			29,218			24,681
Other operating income:
Wealth management group fee income		6,710			10,497			8,089			6,834			6,345
Securities gains, net		1,108			451			785			589			10
Trust Preferred impairment		(67	)		(393	)		(2,242	)		(803	)		-
Net gains on sales of loans held for sale		179			242			259			114			98
Other income		9,534			8,848			8,819			10,404			10,176
Total other operating income		17,464			19,645			15,710			17,138			16,629
Other operating expenses		44,784			37,843			39,321			33,968			30,521
Income before income tax expense		15,571			15,207			7,094			12,388			10,789
Income tax expense		5,033			5,105			1,861			4,034			3,530
Net income	$	10,538		$	10,102		$	5,233		$	8,354		$	7,259

SELECTED PER SHARE DATA ON SHARES OF COMMON STOCK AT OR FOR THE YEARS ENDED DECEMBER 31,	2011		2010		2009		2008		2007		2006		% Change 2010 To 2011			Compounded Annual Growth 5 Years
Net income per share	$	2.40	$	2.80	$	1.45	$	2.32	$	2.02	$	1.81		-14.3	%		5.8	%
Dividends declared		1.00		1.00		1.00		1.00		0.97		0.96		-	%		0.8	%
Tangible book value (1)		21.07		22.90		20.74		18.96		22.50		22.09		-8.0	%		-0.9	%
Market price at 12/31		22.75		22.30		21.25		20.40		27.25		32.90		2.0	%		-7.1	%
Average shares outstanding (in thousands)		4,383		3,607		3,603		3,594		3,595		3,642		21.5	%		3.8	%

(1) Tangible book value is total shareholders' equity minus goodwill and other intangible assets, net.

SELECTED RATIOS AT OR FOR THE YEARS ENDED DECEMBER 31,	2011			2010			2009			2008			2007
Return on average assets		0.90	%		1.02	%		0.56	%		1.00	%		0.95	%
Return on average tier I equity (1)		11.28	%		12.83	%		6.97	%		11.45	%		9.53	%
Dividend yield at year end		4.40	%		4.48	%		4.71	%		4.90	%		3.67	%
Dividend payout		40.96	%		34.85	%		67.30	%		42.07	%		47.02	%
Total capital to risk adjusted assets		13.28	%		14.54	%		13.22	%		13.58	%		15.78	%
Tier I capital to risk adjusted assets		11.84	%		12.92	%		11.61	%		11.97	%		13.84	%
Tier I leverage ratio		8.27	%		8.72	%		7.89	%		8.94	%		10.14	%
Loans to deposits		79.81	%		78.04	%		74.38	%		86.04	%		94.22	%
Allowance for loan losses to total loans		1.21	%		1.55	%		1.67	%		1.61	%		1.57	%
Allowance for loan losses to non- performing loans (2)		46.18	%		84.40	%		72.20	%		200.40	%		236.58	%
Non-performing loans to total loans		2.62	%		1.83	%		2.32	%		0.80	%		0.66	%
Net interest rate spread		3.85	%		3.53	%		3.49	%		3.46	%		2.88	%
Net interest margin		4.07	%		3.81	%		3.89	%		4.05	%		3.71	%
Efficiency ratio (3)		71.18	%		68.35	%		78.40	%		68.11	%		70.03	%

(1) Average Tier I Equity is average shareholders' equity less average goodwill and intangible assets and average accumulated

other comprehensive income/loss.

(2) Non-performing loans are non-accrual loans plus troubled debt restructurings plus accruing loans past due 90 days or more.

(3) Efficiency ratio is operating expenses adjusted for amortization of intangible assets and stock donations divided by net interest

income (before loan losses) plus other operating income adjusted for non-taxable gains on stock donations.

UNAUDITED QUARTERLY DATA	Quarter Ended
	2011
(in thousands except per share data)	Mar. 31		June 30		Sept. 30		Dec. 31
Interest and dividend income	$	10,180	$	13,233	$	13,593	$	13,642
Interest expense		1,633		1,782		1,750		1,634
Net interest income		8,547		11,451		11,843		12,008
Provision for loan losses		125		125		583		125
Net interest income after provision for loan losses		8,422		11,326		11,260		11,883
Total other operating income		4,348		4,744		4,328		4,044
Total other operating expenses		10,444		12,201		10,617		11,522
Income before income tax expense		2,326		3,869		4,971		4,405
Income tax expense		661		1,249		1,680		1,443
Net Income	$	1,665	$	2,620	$	3,291	$	2,962
Basic and diluted earnings per share	$	0.46	$	0.57	$	0.71	$	0.64

UNAUDITED QUARTERLY DATA	Quarter Ended
	2010
	Mar. 31		June 30		Sept. 30		Dec. 31
Interest and dividend income	$	10,868	$	10,885	$	10,640	$	10,353
Interest expense		2,356		2,106		1,959		1,795
Net interest income		8,512		8,779		8,681		8,558
Provision for loan losses		375		375		375		-
Net interest income after provision for loan losses		8,137		8,404		8,306		8,558
Total other operating income		3,995		4,665		4,247		6,737
Total other operating expenses		9,246		9,415		8,882		10,299
Income before income tax expense		2,886		3,654		3,671		4,996
Income tax expense		886		1,151		1,120		1,948
Net Income	$	2,000	$	2,503	$	2,551	$	3,048
Basic and diluted earnings per share	$	0.55	$	0.69	$	0.71	$	0.84

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATION

The purpose of this discussion is to focus on information about the financial condition and results of operations of

Chemung Financial Corporation. Reference should be made to the accompanying consolidated financial statements

(including related notes) and the selected financial data appearing elsewhere in this report for an understanding of

the following discussion and analysis.

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of

1933 and Section 21E of the Securities Exchange Act of 1934. The Corporation intends its forward-looking

statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All

statements regarding the Corporation's expected financial position and operating results, the Corporation's business

strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the

Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be

identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate,"

"expect," or "intend." The Corporation cannot promise that its expectations in such forward-looking statements

will turn out to be correct. The Corporation's actual results could be materially different from expectations because

of various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing

our growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Wall Street

Reform and Consumer Protection Act, and changes in general business and economic trends. Information

concerning these and other factors can be found in our periodic filings with the Securities and Exchange

Commission, including the discussion under the heading “Item 1A. Risk Factors” in this form 10-K. These filings

are available publicly on the SEC's website at http://www.sec.gov, on the Corporation's website at

http://www.chemungcanal.com or upon request from the Corporate Secretary at (607) 737-3788. Except as

otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-

looking statements, whether as a result of new information, future events or otherwise.

Description of Business

Chemung Financial 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 within its local market areas.

Critical Accounting Policies, Estimates and Risks and Uncertainties

Critical accounting policies include the areas where the Corporation has made what it considers to be particularly

difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly affect

the Corporation's financial results under different assumptions and conditions. The Corporation prepares its

financial statements in conformity with accounting principles generally accepted in the United States of America.

As a result, the Corporation is required to make certain estimates, judgments and assumptions that it believes are

reasonable based upon the information available at that time. These estimates, judgments and assumptions affect

the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of

revenue and expenses during the periods presented. Actual results could be different from these estimates.

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting

policy given the uncertainty in evaluating the level of the allowance required to cover probable incurred credit

losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's

results of operations. While management's current evaluation of the allowance for loan losses indicates that the

allowance is adequate, under adversely different conditions or assumptions the allowance would need to be

increased. For example, if historical loan loss experience significantly worsened or if current economic conditions

significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In

addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and

potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a

significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real estate values in the

Corporation’s market area did not increase dramatically in the prior several years, and, as a result, any declines in

real estate values have been modest. While management has concluded that the current evaluation of collateral

values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's

allowance for loan losses policy would also require additional provisions for loan losses.

Management also considers the accounting policy relating to other-than-temporary impairment ("OTTI") of

investment securities to be a critical accounting policy. The determination of whether a decline in market value is

other-than-temporary is necessarily a matter of subjective judgment. The timing and amount of any realized losses

reported in the Corporation's financial statements could vary if management's conclusions were to change as to

whether an other-than-temporary impairment exists. The Corporation assesses whether it intends to sell, or it is

more likely than not that it will be required to sell a security in an unrealized loss position before recovery of its

amortized cost basis. If either of these criteria is met, the entire difference between amortized cost and fair value is

recognized through a charge to earnings. For those securities that do not meet the aforementioned criteria, such as

those that management has determined to be other-than-temporarily impaired, the amount of impairment charged to

earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in

other comprehensive income. Our analysis of these investments includes a review of a $629 thousand book value

collateralized debt obligation ("CDO") which is a pooled trust preferred security. This security was rated high

quality when purchased, but at December 31, 2011 Moody's rated this security as Caa3 which is defined as

substantial risk of default. The Corporation uses an OTTI evaluation model to compare the present value of

expected cash flows to the previous estimate to determine if there are adverse changes in cash flows during the

quarter. The OTTI model considers the structure and term of the CDO and the financial condition of the underlying

issuers. Specifically, the model details interest rates, principal balances of note classes and underlying issuers, the

timing and amount of interest and principal payments of the underlying issuers, and the allocation of the payments

to the note classes. The current estimate of expected cash flows is based on the most recent trustee reports and any

other relevant market information including announcements of interest payment deferrals or defaults of underlying

trust preferred securities. Assumptions used in the model include expected future default rates and prepayments.

We assume no recoveries on defaults and treat all interest payment deferrals as defaults. Additional default

assumptions were made based on credit quality ratios and performance measures of the remaining financial

institutions in the pool, as well as overall default rates based on historical bank debt default rate averages. For the

year ended December 31, 2011, the Corporation recognized $67 thousand in OTTI charges.

Management also considers the accounting policy relating to the valuation of goodwill and other intangible assets

to be a critical accounting policy. The initial carrying value of goodwill and other intangible assets is determined

using estimated fair values developed from various sources and other generally accepted valuation techniques.

Estimates are based upon financial, economic, market and other conditions as they existed as of the date of a

particular acquisition. These estimates of fair value are the results of judgments made by the Corporation based

upon estimates that are inherently uncertain and changes in the assumptions upon which the estimates were based

may have a significant impact on the resulting estimates. In addition to the initial determination of the carrying

value, on an ongoing basis management must assess whether there is any impairment of goodwill and other

intangible assets that would require an adjustment in carrying value and recognition of a loss in the consolidated

statement of income. The Corporation determined that goodwill and other intangible assets were not impaired at

December 31, 2011.

Management of Credit Risk - Loan Portfolio

The Corporation manages credit risk consistent with state and federal laws governing the making of loans through

written policies and procedures; loan review to identify loan problems at the earliest possible time; collection

procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing

education and training to ensure lending expertise. Diversification by loan product is maintained through offering

commercial loans, 1-4 family mortgages, and a full range of consumer loans.

The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors

is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual

and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the President & CEO, the

Chief Financial Officer, the Chief Administrative and Risk Officer, the business client division manager, the retail

client division manager, the commercial loan manager, the consumer loan manager, the mortgage loan manager, the

President and the commercial loan manager of the Capital Bank division and the credit manager, implements the

Board-approved loan policy.

Financial Condition

Consolidated assets at December 31, 2011 totaled $1.216 billion, an increase of $257.9 million or 26.9% since

December 31, 2010. As discussed in greater detail below, this increase was due in large part to the Corporation’s

acquisition of Fort Orange Financial Corp. (“FOFC”) and the concurrent merger of its banking subsidiary, Capital

Bank & Trust Company (“Capital Bank”) into the Bank on April 8, 2011, as well as other organic growth. The

increase was reflected principally in a $183.2 million increase in loans, net of deferred fees and costs and unearned

income, a $57.9 million increase in the securities portfolio, a $13.6 million increase in goodwill and other

intangible assets and an $8.0 million increase in other assets, offset in part by a $7.7 million decrease in cash and

cash equivalents.

As noted above, total loans, net of deferred fees and costs and unearned income increased $183.2 million or 29.9%

from December 31, 2010 to December 31, 2011, principally due to the acquisition of Capital Bank loans totaling

$187.4 million at year-end. The most significant growth was in commercial loans (including commercial

mortgages), which increased $159.0 million, with Capital Bank commercial loans totaling $161.7 million at

December 31, 2011. Residential mortgages increased $20.1 million, including Capital Bank mortgages totaling

$18.5 million at December 31, 2011. Total consumer loans were up $4.1 million, principally due to a $6.0 million

increase in home equity balances, as home equity loans associated with the acquisition totaled $7.0 million at year-

end. This increase was offset primarily by a $1.8 million decrease in indirect consumer installment loans. During

2011, approximately $7.6 million of newly originated residential mortgages were sold in the secondary market to

Freddie Mac, with an additional $528 thousand originated and sold to the State of New York Mortgage Agency.

The available for sale segment of the securities portfolio totaled $280.9 million at December 31, 2011, an increase

of approximately $57.3 million or 25.6% from December 31, 2010. At amortized cost, the available for sale

portfolio increased $53.6 million, including approximately $38.4 million of bonds related to the Capital Bank

acquisition. Unrealized appreciation related to the available for sale portfolio increased $3.7 million since year-end

2010. The increase in the available for sale portfolio at amortized cost is reflected principally in a $52.2 million

increase in federal agency bonds, with $11.2 million of that total in Capital Bank bonds. Municipal bonds were up

$6.4 million, including $5.9 million of municipal bonds at Capital Bank. Increases in collateralized mortgage

obligations and SBA Guaranteed Loan Pools totaling $7.4 million and $1.9 million, respectively, reflect

investments acquired in the acquisition. A $2.4 million increase in corporate bonds includes $3.0 million of

investments acquired from Capital Bank. The above increases were offset in part by a $12.2 million decrease in

mortgage-backed securities and a $4.5 million decrease in US Treasury bonds. The decrease in mortgage-backed

securities reflects paydowns received since year-end 2010, partially offset by mortgage-backed securities acquired

from Capital Bank totaling $9.0 million at December 31, 2011, while the decrease in US Treasuries was due to the

sale of three bonds during the year, offset in part by purchases totaling $30.3 million. The increase in unrealized

appreciation related to the available for sale portfolio was due in large part to the impact of lower mid-to long-term

rates on the various bond portfolios, as well as an increase in unrealized gains in the Corporation’s equity portfolio.

The held to maturity portion of the portfolio, consisting of local municipal obligations, increased approximately

$597 thousand from $7.7 million at December 31, 2010 to $8.3 million at December 31, 2011.

The $12.1 million increase in goodwill as well as the $1.5 million increase in other intangible assets was directly

related to the FOFC acquisition. The $1.5 million increase, net of amortization, in other intangible assets includes

$2.3 million in other intangibles associated with this acquisition, which the Corporation is amortizing on an

accelerated basis over a 10 year period.

An $8.0 million increase in other assets was due principally to a $4.3 million increase in prepaid income taxes

receivable, which includes $688 thousand in income taxes receivable related to the FOFC acquisition, a $1.2

million increase in accrued interest receivable due in large part to the FOFC acquisition and a $962 thousand

increase in the funded balance of the Corporation’s defined benefit pension plan, as well as increases in accounts

receivable and prepaid expenses totaling $491 thousand and $339 thousand, respectively.

As noted above, total cash and cash equivalents decreased $7.7 million since December 31, 2010, as a $19.4 million

decrease in interest bearing deposits in other financial institutions was somewhat offset by an $11.7 million increase

in cash and due from financial institutions. The decrease in interest bearing deposits in other financial institutions

was principally due to the fact that increases in loans and securities exceeded the increase in deposits discussed

below. The increase in cash and due from banks was primarily due to higher year-end levels of cash items in

process of collection and branch cash. With total cash and cash equivalents of $52.9 million at December 31, 2011,

the Corporation continues to maintain a strong liquidity position and we continue to evaluate alternative investment

of these funds with caution given the low interest rate environment and the inherent interest rate risk associated

with longer term securities portfolio investments.

Since December 31, 2010, total deposits have increased $212.1 million or 27.0% to $998.5 million, with $168.6

million of this increase attributed to the FOFC acquisition, and $43.5 million due to organic deposit growth. Non-

interest bearing demand deposits increased $61.5 million, including balances at the Capital Bank offices acquired

totaling $24.0 million, along with increases in public funds and other non-interest bearing demand deposits of $4.1

million and $33.4 million, respectively. A $150.6 million increase in interest bearing balances was due principally

to a $73.6 million increases in savings balances, as well as increases in insured money market accounts (“IMMA”),

NOW accounts and time deposits totaling $28.9 million, $25.0 million and $23.2 million, respectively. The $73.6

million increase in savings balances includes $57.0 million related to the FOFC acquisition as well as increases in

public fund and other balances totaling $2.2 million and $14.4 million, respectively. A $28.9 million increase in

IMMA balances includes $9.4 million of Capital Bank deposits and a $19.8 million increase in public fund

balances, offset by a $333 thousand decrease in all other IMMA balances. The $25.0 million increase in NOW

accounts was principally due to Capital Bank balances totaling $24.4 million, while the $23.2 million increase in

time deposits reflects $53.8 million in Capital Bank time deposits as well as a $3.3 million increase in public funds,

offset by a $33.9 million decrease in all other time deposits.

A $23.3 million increase in long term borrowings was due to the Corporation assuming the term debt of Capital

Bank, while a $7.7 million decrease in securities sold under agreements to repurchase reflects the payoff of

maturing obligations during 2011, somewhat offset by securities sold under agreements to repurchase which were

assumed in the Capital Bank acquisition.

The $28.5 million increase in total shareholders equity was due in large part to the issuance of 1,009,942 shares to

acquire shares of former FOFC shareholders, which resulted in an increase in common stock and additional paid-in-

capital totaling $23.6 million. Other significant factors included a $6.2 million increase in retained earnings offset

in part by a $1.5 million decrease in accumulated other comprehensive income.

BALANCE SHEET COMPARISONS

(in millions) Average Balance Sheet	2011		2010		2009		2008		2007		2006		% Change 2010 to 2011			Compounded Annual Growth 5 Years
Total Assets	$	1,175.0	$	988.6	$	928.8	$	837.5	$	767.0	$	722.0		18.9	%		10.2	%
Earning Assets (1)		1,078.4		905.5		852.4		757.3		698.6		665.9		19.1	%		10.1	%
Loans, net of deferred fees and costs, and unearned income		741.0		590.6		586.7		561.6		520.0		449.7		25.5	%		10.5	%
Investments (2)		337.4		314.9		265.7		195.7		178.6		216.2		7.1	%		9.3	%
Deposits		965.2		817.6		752.4		649.7		592.6		568.3		18.1	%		11.2	%
Wholesale funding (3)		71.3		61.1		70.9		78.8		72.2		54.3		16.7	%		5.6	%
Tier I equity (4)		93.4		78.7		75.1		73.0		76.2		76.6		18.7	%		4.0	%

(1) Average earning assets include securities available for sale and securities held to maturity based on amortized cost, loans

net of deferred origination fees and costs and unearned income, interest-bearing deposits, Federal Home Loan Bank stock,

Federal Reserve Bank stock and federal funds sold.

(2) Average balances for investments include securities available for sale and securities held to maturity, based on amortized

cost, Federal Home Loan Bank stock, Federal Reserve Bank stock, federal funds sold and interest-bearing deposits.

(3) Wholesale funding includes Federal Home Loan Bank advances and securities sold under agreements to repurchase funded

through the Federal Home Loan Bank.

(4) Average shareholders' equity less goodwill, intangible assets and accumulated other comprehensive income/loss.

(in millions) Ending Balance Sheet	2011		2010		2009		2008		2007		2006		% Change 2010 to 2011			Compounded Annual Growth 5 Years
Total Assets	$	1,216.3	$	958.3	$	975.6	$	838.3	$	788.9	$	739.0		26.9	%		10.5	%
Earning Assets(1)		1,116.3		892.4		900.9		770.4		715.5		673.2		25.1	%		10.6	%
Loans, net of deferred fees and costs, and unearned income		796.9		613.7		595.9		565.2		539.5		477.7		29.9	%		10.8	%
Allowance for loan losses		9.7		9.5		10.0		9.1		8.5		8.0		1.7	%		3.89	%
Investments (2)		319.4		278.7		305.0		205.2		176.0		195.5		14.6	%		10.3	%
Deposits		998.5		786.4		801.1		656.9		572.6		585.1		27.0	%		11.3	%
Wholesale funding(3)		71.8		57.5		67.5		77.5		104.9		55.4		24.9	%		5.3	%

(1) Earning assets include securities available for sale, at estimated fair value and securities held to maturity based on

amortized cost, loans net of deferred origination fees and costs and unearned income, interest-bearing deposits, Federal Home

Loan Bank stock, Federal Reserve Bank stock and federal funds sold.

(2) Investments include securities available for sale, at estimated fair value, securities held to maturity, at amortized cost,

Federal Home Loan Bank stock, Federal Reserve Bank stock, federal funds sold and interest-bearing deposits.

(3) Wholesale funding includes Federal Home Loan Bank advances and securities sold under agreements to repurchase funded

through the Federal Home Loan Bank.

Securities

The Board-approved Funds Management Policy includes an investment portfolio policy which requires that, except

for local municipal obligations that are sometimes not rated or carry ratings above "Baa" but below "A" by Moody's

or Standard & Poor’s, debt securities purchased for the bond portfolio must carry a minimum rating of "A".

As of December 31, 2011, approximately $1.9 million of single issue trust preferred securities at amortized cost and

$656 thousand of collateralized debt obligations consisting of pools of trust preferred securities at amortized cost,

had credit ratings below "A". The two single issue trust preferred securities had a rating of "BBB" by Standard &

Poor’s and "Baa2" by Moody’s, while the trust preferred pools had ratings of "Caa3" and “Ca” by Moody's.

Marketable securities are classified as Available for Sale, while local direct investments in municipal obligations

are generally classified as Held to Maturity. The Available for Sale portfolio at December 31, 2011 totaled $280.9

million compared to $223.5 million a year earlier. At year-end 2011, the total net unrealized appreciation in the

securities available for sale portfolio was $12.9 million, compared to $9.2 million a year ago. The components of

this change are set forth below.

	2011							2010
(in thousands) Securities Available for Sale	Amortized Cost		Estimated Fair Value		Unrealized Gains (Losses)			Amortized Cost		Estimated Fair Value		Unrealized Gains (Losses)
Obligations of U.S. Government and U.S Government sponsored enterprises	$	149,141	$	152,080	$	2,939		$	101,427	$	102,132	$	705
Mortgage-backed securities, residential		48,129		50,766		2,637			60,379		62,762		2,383
Collateralized mortgage obligations		7,412		7,537		125			-		-		-
Obligations of states and political subdivisions		44,562		46,513		1,951			38,144		38,765		621
Corporate bonds and notes		13,462		13,684		222			11,019		11,694		675
SBA loan pools		1,916		1,950		34			-		-		-
Trust preferred securities		2,538		2,310		(228	)		2,598		2,344		(254	)
Corporate stocks		788		6,030		5,242			745		5,848		5,103
Totals	$	267,948	$	280,870	$	12,922		$	214,312	$	223,545	$	9,233

Non-marketable equity securities carried by the Corporation at December 31, 2011 include 34,527 shares of Federal

Reserve Bank stock, 36,310 shares of the Federal Home Loan Bank of New York stock and 1,520 shares of the

Federal Home Loan Bank of Pittsburgh stock. They are carried at their cost of $1.726 million, $3.631 million and

$152 thousand, respectively. The fair value of these securities is assumed to approximate their cost. The number of

shares of these investments is regulated by regulatory policies of the respective institutions.

Asset Quality

Non-Performing Loans

The recorded investment in non-performing loans at December 31, 2011 totaled $20.915 million compared to

$11.268 million at year-end 2010, an increase $9.647 million. Not included in the non-performing loan totals are

loans acquired in the FOFC acquisition which the Corporation has identified as purchased credit impaired (“PCI”)

loans totaling $14.812 million at December 31, 2011, which are accounted for under separate accounting guidance,

Accounting Standards Codification (“ASC”) Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired

with Deteriorated Credit Quality” as disclosed in Note 4 of the financial statements. The increase in non-

performing loans was due to increases in non-accrual loans and loans 90 days or more past due totaling $3.013

million and $7.293 million, respectively, partially offset by a $659 thousand decrease in accruing troubled debt

restructurings (“TDRs”). The $3.013 million increase in non-accrual loans was due to a $3.157 million increase in

non-accruing commercial loans that was primarily due to the addition to non-accrual status of three legacy loans

totaling $2.866 million, as well as the addition to non-accrual status of loans acquired in the FOFC acquisition

totaling $523 thousand. These increases were offset in part by principal reductions on other non-accrual

commercial loans. Additionally, non-accrual residential mortgages increased $53 thousand. These increases were

partially offset by decreases in non-accrual home equity and other consumer loans totaling, $90 thousand, $107

thousand, respectively. Included in the non-accrual loan totals are commercial loans to one borrower totaling

$5.470 million which carry guarantees of the United States Department of Agriculture ("USDA") totaling $4.847

million, thereby reducing the Corporation's remaining exposure on these loans to $623 thousand. It is generally the

Corporation's policy that a loan 90 days past due be placed in non-accrual status unless factors exist that would

eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at any time if

payment of principal or interest in full is not expected due to deterioration in the financial condition of the

borrower. Loans remain in non-accrual status until the loans have been brought current and remain current for a

period of six months. In the case of non-accrual loans where a portion of the loan has been charged off, the

remaining balance is kept in non-accrual status until the entire principal balance has been recovered.

Accruing loans 90 days or more past due totaled $7.304 million at December 31, 2011 compared to $11 thousand at

year-end 2010, an increase of $7.293 million. This increase was due to loans not considered by management to be

PCI loans acquired in the FOFC acquisition, including $7.295 million of construction loans that for a variety of

reasons are 90 days or more past their stated maturity dates, however the borrowers continue to make required

interest payments. Additionally, these loans carry third party credit enhancements, and based upon the strength of

those credit enhancements, the Corporation has not identified these loans as PCI loans and expects to incur no

losses on these loans.

As noted above, accruing TDRs decreased $659 thousand since December 31, 2010 as during 2011 a commercial

loan totaling $137 thousand and three residential mortgages totaling $245 thousand at December 31, 2010 were

removed from TDR status in accordance with the Corporation’s policy that TDRs that have continued to be in

compliance with modified terms and conditions for six months and yield a market rate at the time of restructuring

not be reported as TDRs in years subsequent to the year in which the loan was first reported as TDR. Additionally,

$277 thousand of principal reductions were received on a commercial loan TDR. Concessions made on

commercial loan TDRs generally involve short term deferrals of principal payments, while residential mortgage

restructurings include interest rate and/or payment reductions. Overall, our past experience in working with

borrowers in restructuring troubled debt has been favorable. TDRs are evaluated for impairment based upon the

present value of expected future cash flows with any changes recorded through the provision for loan losses.

At December 31, 2011, OREO totaled $898 thousand compared to $741 thousand at December 31, 2010, an

increase of $157 thousand. During 2011, six properties totaling $571 thousand were placed in OREO and four

properties totaling $294 thousand were sold. Additionally, during the third quarter of 2011, the Corporation

recognized a $12 thousand write-down on one property following the receipt of an updated appraisal. The balance

of the decrease was due to the receipt of private mortgage insurance reimbursement on one property. At December

31, 2011, OREO properties consisted of five residential properties totaling $361 thousand, three commercial

properties totaling $319 thousand and undeveloped land totaling $218 thousand.

Impaired Loans

Impaired loans, excluding residential real estate loans determined to be troubled debt restructurings, at December

31, 2011 totaled $9.879 million compared to $7.667 million at December 31, 2010. Not included in the impaired

loan totals are loans acquired in the FOFC acquisition which the Corporation has identified as PCI loans as these

loans are accounted for under ASC Subtopic 310-30 as noted under the above discussion of non-performing loans.

The increase of $2.212 million resulted principally from the above-discussed increase in non-accrual commercial

legacy loans, offset in part by decreases in other non-accrual loans and accruing commercial loan TDR’s. Included

in the impaired loan total are loans totaling $6.093 million for which impairment allowances of $1.942 million have

been specifically allocated to the allowance for loan losses. As of December 31, 2010, the impaired loan total

included $892 thousand of loans for which specific impairment allowances of $240 thousand were allocated to the

allowance for loan losses. The increases in both the amount of impaired loans for which specific allowances were

allocated to the allowance for loan losses and the amount allocated were both primarily due to the above mentioned

addition to non-accrual loans of loans to three borrowers totaling $2.866 million, as well as the addition of a $2.649

million loan for which no specific allowance was allocated as of December 31, 2010. The majority of the

Corporation's impaired loans are secured and measured for impairment based on collateral evaluations. It is the

Corporation's policy to obtain updated appraisals on loans secured by real estate at the time a loan is determined to

be impaired. Prior to the receipt of the updated appraisal, an impairment measurement is performed based upon the

most recent appraisal on file to determine the amount of any specific allocation or charge-off. Upon receipt and

review of the updated appraisal, an additional measurement is performed to determine if any adjustments are

necessary to reflect the proper provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to

determine if any changes in credit quality or market conditions would require any additional allocation or

recognition of additional charge-offs. If market conditions warrant, future appraisals are obtained. Real estate

values in the Corporation's market area had not increased dramatically in the prior several years, and, as a result,

declines in real estate values have been modest.

The appraisals are performed by independent third parties and reflect the properties market value "as is". In

determining the amount of any specific allocation or charge-off, the Corporation will make adjustments to reflect

the estimated costs to sell the property. In situations where partial charge-offs have been recognized, any balance

remaining continues to be reflected as non-performing until the loan has been paid in full. In the case of impaired

loans secured by assets other than real estate (i.e. business assets), a collateral valuation is performed using data

from the client's most recently received financial statements, and applying discount rates based upon the type of

collateral.

Non-Performing Assets

The following table summarizes the Corporation's non-performing assets (in thousands of dollars):

December 31,	2011		2010		2009		2008		2007
Non-accrual loans	$	13,611	$	10,598	$	5,910	$	2,822	$	2,225
Troubled debt restructurings		-		659		7,377		746		830
Accruing loans past due 90 days or more		7,304		11		517		976		518
Total non-performing loans	$	20,915	$	11,268	$	13,804	$	4,544	$	3,573
Other real estate owned		898		741		649		324		-
Total non-performing assets	$	21,813	$	12,009	$	14,453	$	4,868	$	3,573

Information with respect to interest income on non-accrual and troubled debt restructured loans for the years ended

December 31 is as follows (in thousands of dollars):

	2011		2010		2009
Interest income that would have been recorded under original terms	$	1,009	$	957	$	932

Interest income recorded during the period	$	34	$	298	$	596

In addition to non-performing loans, as of December 31, 2011, the Corporation has identified commercial

relationships totaling $8.2 million as potential problem loans, as compared to $7.2 million at December 31, 2010.

This increase of $1.0 million resulted from the addition of four commercial relationships totaling $5.3 million,

including $2.7 million of loans acquired in the FOFC acquisition which were not considered to be PCI loans,

partially offset by downgrades of four relationships to non-accrual status totaling $2.9 million, as well as upgrades

of and principal reductions on other potential problem loans. Potential problem loans are loans that are currently

performing, but known information about possible credit problems of the related borrowers causes management to

have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms, which

may result in the disclosure of such loans as non-performing at some time in the future. Potential problem loans are

typically loans that are performing but are classified in the Corporation's loan rating system as "substandard."

Management cannot predict the extent to which economic conditions may worsen or other factors which may

impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not

become 90 days or more past due, be placed on non-accrual, be restructured, or require increased allowance

coverage and provisions for loan losses.

Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and

takes into consideration such factors as historical loan loss experience, review of specific problem loans (including

evaluation of the underlying collateral), changes in the composition and volume of the loan portfolio, recent charge-

off experience, overall portfolio quality and current economic conditions that may affect the borrowers' ability to

pay.

While impaired loans increased $2.212 million since year-end 2010, this increase, as noted above, was due in large

part to the addition of three commercial relationships totaling approximately $2.866 million which was the main

factor behind a $1.702 million increase in specific allowances allocated against impaired loans. With the exception

of these relationships, overall credit quality has remained stable and we continue to see signs of improvement as

evidenced by improved credit quality of non-impaired loans and significant reductions in net charge-offs with 2011

net charge offs decreasing $797 thousand as compared to 2010. Based upon an analysis of the factors mentioned

above, the Corporation’s provision for loan losses for 2011 totaled $958 thousand compared to $1.125 million the

previous year, a decrease of $167 thousand.

As noted above, net charge-offs for 2011 as compared to 2010 decreased $797 thousand from $1.594 million to

$797 thousand. This improvement was principally due to decreases in net commercial and consumer loan charge-

offs totaling $618 thousand and $119 thousand, respectively, as well as a $61 thousand decrease in net residential

mortgage charge-offs. At December 31, 2011, the Corporation's allowance for loan losses totaled $9.659 million,

resulting in a coverage ratio of allowance to non-performing loans of 46.2%. As noted above, included in non-

performing loans at December 31, 2011 were loans which carried USDA guarantees totaling $4.847 million. Also

included in the non-performing loan totals are other loans with remaining balances totaling $173 thousand on which

the Corporation has previously recognized partial charge-offs in the amount of $228 thousand. Excluding the

USDA guaranteed amount and other loans for which partial charge-offs have already been recognized from the

non-performing total, the coverage ratio of allowance to non-performing loans was 60.8%. This ratio as well as the

ratio of allowance to total loans was impacted by the Capital Bank acquisition, as current accounting rules do not

allow the acquirer to transfer the acquiree’s allowance for loan losses to the acquirer’s balance sheet. Rather, the

acquiree’s overall loan quality is a component in determining the fair value of loans acquired, which are carried on

the balance sheet at fair value. Excluding acquired loans reported above as non-performing loans totaling $7.963

million, as well as the aforementioned USDA guarantee and loans for which partial charge-offs have already been

recognized, the allowance to non-performing loan ratio was 121.8%. Excluding loans acquired in the Capital Bank

acquisition, the allowance for loan losses to total loans was 1.47% and represents an amount that management

believes is adequate to absorb probable incurred loan losses on the Corporation’s legacy loan portfolio.

The allocated portions of the allowance reflect management's estimates of specific known risk elements in the

respective portfolios. Management's methodology followed in evaluating the allowance for loan losses includes a

detailed analysis of historical loss factors for pools of similarly graded loans, as well as specific collateral reviews

of relationships graded special mention, substandard or doubtful with outstanding balances of $1.0 million or

greater. Among the factors considered in allocating portions of the allowance by loan type are the current levels of

past due, non-accrual and impaired loans, as well as historical loss experience and the evaluation of collateral. In

addition, management has formally documented factors considered in determining the appropriate level of general

reserves, including current economic conditions, forecasted trends in the credit quality cycle, loan growth, entry

into new markets, and industry and peer group trends. These amounts have been included in the allocated portion

of the loan categories to which they relate. In 2011, the historical loss experience used to determine the loss

allocations for criticized and classified loans, as well as non-criticized consumer loans all decreased. These

decreases resulted in a reduction to the loss factors applied to estimate general reserves for these portfolio segments

and, as a consequence, a reduction in the general reserve allocations.

At December 31, 2011, in addition to the qualitative factors allocated within the allowance, the Corporation

maintained $443 thousand of the allowance as unallocated. While some preliminary improvements have been seen

in the local economy and while some loans have improved, the recovery is still very fragile and management

believes it is prudent to see a longer period of sustained improvement before completely reflecting this in the

allowance. Additionally, management monitors coverage ratios of nonperforming loans and total loans compared

to peers on a regular basis. This analysis also suggests that it would not be prudent to eliminate the unallocated

portion of the allowance at this time.

SUMMARY OF LOAN LOSS EXPERIENCE

The following summarizes the Corporation's loan loss experience for each year in the five-year period ended

December 31, 2011 (in thousands of dollars, except ratio data):

	Years Ended December 31,
	2011			2010			2009			2008			2007
Allowance for loan losses at beginning of year	$	9,498		$	9,967		$	9,106		$	8,453		$	7,983
Charge-offs:
Commercial, financial and agricultural		705			1,288			389			306			793
Real estate mortgages		67			83			30			15			13
Consumer loans		678			795			1,400			1,018			482
Home equity		48			45			23			33			-
Total		1,498			2,211			1,842			1,372			1,288
Recoveries:
Commercial, financial and agricultural		464			429			83			437			331
Real estate mortgages		45			-			-			-			-
Consumer loans		190			188			170			138			172
Home Equity		2			-			-			-			-
Total		701			617			253			575			503
Net charge-offs		797			1,594			1,589			797			785
Provision charged to operations		958			1,125			2,450			1,450			1,255
Allowance for loan losses at end of year	$	9,659		$	9,498		$	9,967		$	9,106		$	8,453
Ratio of net charge-offs during year to average loans outstanding (1)		.11	%		.27	%		.27	%		.14	%		.15	%

(1) Daily balances were used to compute average outstanding loan balances.

Liquidity and Capital Resources

Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the

operating, investing and financing activities of the Corporation. The Corporation uses a variety of resources to

meet its liquidity needs. These include short term investments, cash flow from lending and investing activities,

core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, securities sold under

agreements to repurchase and other borrowings.

The Corporation is a member of the Federal Home Loan Bank of New York ("FHLB") which allows it to access

borrowings which enhance management's ability to satisfy future liquidity needs. Based on available collateral and

current advances outstanding, the Corporation was eligible to borrow up to a total of $69.8 million and $64.4

million at December 31, 2011 and December 31, 2010, respectively.

During 2011, cash and cash equivalents decreased $7.7 million as compared to a decrease of $19.1 million during

2010. In addition to cash provided by operating activities, other major sources of cash during 2011 included

proceeds from sales, maturities, calls and principal reductions on securities totaling $123.9 million, $25.1 million in

net cash received in the FOFC acquisition and an $11.7 million increase in deposits. These proceeds were used

primarily to fund purchases of securities totaling $132.3 million, a $19.3 million net increase in loans, a decrease in

securities sold under agreements to repurchase totaling $18.2 million, an $8.0 million contribution to the

Corporation’s defined benefit pension plan, the payment of cash dividends in the amount of $4.1 million and

purchases of fixed assets totaling $2.6 million, as well as a $910 thousand decrease in Federal Home Loan Bank

advances, purchases of Federal Home Loan Bank and Federal Reserve Bank stock totaling $602 thousand and

purchases of treasury shares in the amount of $501 thousand.

In addition to cash provided by operating activities, other major sources of cash during 2010 included proceeds

from sales, maturities and principal reductions on securities totaling $154.7 million and proceeds from the sale of

OREO in the amount of $318 thousand. Proceeds from the above were used principally to fund purchases of

securities totaling $141.7 million, a $20.1 million increase in loans, a $14.7 million decrease in deposits, a $9.5

million reduction in securities sold under agreements to repurchase, the payment of cash dividends totaling $3.5

million and purchases of fixed assets and treasury stock totaling $2.1 million and $426 thousand, respectively.

As of December 31, 2011, the Bank’s leverage ratio was 7.92%. The Tier I and Total Risk Adjusted Capital ratios

were 11.36% and 12.80%, respectively. All of the above ratios are in excess of the requirements for being

considered "well capitalized" by the FDIC, the Federal Reserve and the New York State Department of Financial

Services. Cash dividends declared during 2011 totaled $4.316 million or $1.00 per share compared to $3.521

million or $1.00 per share in 2010 and $3.522 million or $1.00 per share in 2009. Dividends declared during 2011

amounted to 41.0% of net income compared to 34.9% and 67.3% of 2010 and 2009 net income, respectively. It is

management's objective to continue generating sufficient capital internally, while continuing to pay adequate

dividends to our shareholders.

When shares of the Corporation become available in the market, we may purchase them after careful consideration

of our capital position. On November 16, 2011, the Corporation’s Board of Directors approved a one year

extension of the stock repurchase program that had been initially approved on November 18, 2009 and extended for

one year on November 17, 2010. The extension authorizes the purchase of up to 90,000 shares of the Corporation’s

outstanding common stock, including those shares purchased during the first two years of the plan. Purchases may

be made from time to time on the open market or in privately negotiated transactions at the discretion of

management. Through December 31, 2011, a total of 43,244 shares had been purchased under this program.

During 2011, the Corporation purchased 22,513 shares at a total cost of $529 thousand, including 1,087 shares of

forfeited restricted stock awards, or an average price of $23.50 per share. Additionally, during 2011, 31,390 shares

were re-issued from treasury to fund the stock component of directors’ 2010 compensation, distributions under the

Corporation’s directors’ deferred stock plan, a stock grant to an executive officer, restricted stock grants to senior

officers and funding for the Corporation’s profit sharing, savings and investment plan. During 2010, the

Corporation purchased 20,260 shares at a total cost of $426 thousand or an average price of $21.01 per share, while

in 2009, 7,778 treasury shares were purchased at a total cost of $156 thousand or an average price of $20.08 per

share.

Off-Balance Sheet Arrangements

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance

with generally accepted accounting principles, are not recorded in the financial statements. The Corporation is also

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 and commitments to fund new loans. 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.

As of December 31, 2011, the Corporation has off-balance sheet arrangements as follows (in thousands of dollars):

			Commitment Maturity by Period
	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Standby letters of credit	$	13,563	$	9,043	$	559	$	3,493	$	468
Unused portions of lines of credit (1)		111,036		111,036		-		-		-
Commitments to fund new loans		27,539		27,539		-		-		-
Total	$	152,138	$	147,618	$	559	$	3,493	$	468

(1) Not included in this total are unused portions of home equity lines of credit, credit card lines and consumer

overdraft protection lines of credit, since no contractual maturity dates exist for these types of loans. Commitments to

outside parties under these lines of credit were $36,043,427, $14,451,546 and $3,429,670, respectively, at December

31, 2011.

Contractual Obligations

As of December 31, 2011, the Corporation is contractually obliged under long-term agreements as follows (in

thousands of dollars):

			Payments Due by Period
	Total		Less than 1 Year		1 to 3 Years		3 to 5 Years		More than 5 Years
Time Deposits (Note 7)	$	276,990	$	200,236	$	65,207	$	11,460	$	87
Federal Home Loan Bank advances (Note 9)		43,344		16,033		7,869		10,000		9,442
Securities sold under agreements to repurchase (Note 8)		37,107		15,107		2,000				20,000
Operating leases		7,064		894		1,692		1,606		2,872
Other		1,653		491		999		103		60
Total (1)	$	366,158	$	232,761	$	77,767	$	23,169	$	32,461

(1) Not included in the above total is the Corporation's obligation regarding the Pension Plan and Other Benefit

Plans. Please refer to Part IV Item 15 Note 11 for information regarding these obligations at December 31, 2011.

Results of Operations 2011 vs. 2010

Net income in 2011 totaled $10.538 million, an increase of $436 thousand or 4.3% over 2010 net income of $

10.102 million. Earnings per share decreased 14.3% from $2.80 to $2.40 per share on 776,302 additional average

shares outstanding. Included in the 2011 numbers are direct acquisition related transaction costs totaling $2.255

million related to the Corporation’s acquisition of FOFC and its banking subsidiary, Capital Bank, on April 8, 2011,

while the 2010 numbers include $3.982 million of revenue resulting from an earlier than anticipated settlement of

an unusually large estate during the fourth quarter of 2010, somewhat offset by direct acquisition transaction costs

totaling $482 thousand. Excluding the impact of these items from both years, net income would have totaled

$11.994 million or $2.74 per share in 2011 and $8.143 million or $2.26 per share in 2010. This improvement is

attributed in large part to the acquisition, as during 2011, excluding direct transaction costs, Capital Bank

contributed an estimated $3.3 million to net income in just under nine months, or earnings per share accretion of

approximately 14.6%.

Net interest income increased $9.319 million or 27.0% from $34.530 million in 2010 to $43.849 million, with the

net interest margin up 26 basis points to 4.07%. We attribute this increase principally to the Capital Bank

acquisition, as a $172.9 million or 19.1% increase in average earning assets and a 34 basis point decrease in the cost

of average interest bearing liabilities was partially offset by a 2 basis point decrease in the yield on average earning

assets. The $172.9 million increase in average earning assets included a $150.4 million increase in average loans,

with Capital Bank loans contributing $126.7 million to this increase, a $19.0 million increase in the average

investment portfolio due to $32.7 million in Capital Bank average investments and a $3.6 million increase in

average interest bearing deposits at other financial institutions. While, on average, earning assets increased 19.1%,

total interest and dividend income increased $7.902 million or 18.5%, with the yield on average earning assets

decreasing 2 basis points to 4.70%.

Total average funding liabilities, including non-interest bearing demand deposits, increased $160.4 million or

18.1% to $1.046 billion as average deposits and borrowings increased $147.5 million and $12.9 million,

respectively. In total, average non-interest bearing deposits increased $46.2 million, with Capital Bank non-interest

bearing deposits comprising $18.3 million of that increase. Average interest bearing deposits increased $101.3

million due to $115.6 million in Capital Bank average interest bearing deposits. The increase in average interest

bearing deposits was reflected principally in a $57.1 million increase in average savings account balances, as well

as increases in average time and NOW deposits totaling $22.5 million and $20.6 million, respectively and a $1.1

million increase in average IMMA balances. The increase in average borrowings was due to borrowings assumed

by the Corporation in the Capital Bank acquisition. While average interest-bearing liabilities increased $114.2

million or 16.6%, interest expense decreased $1.417 million or 17.2%, as the cost of average interest-bearing

liabilities decreased 34 basis points to 0.85%.

As discussed under the Asset Quality section of this report, despite an increase in impaired loans and specific

allocations for impaired loans, the year-to-date provision for loan losses decreased $167 thousand due to overall

credit quality improvement in the remainder of the loan portfolio, as well as lower net charge-offs, and reflects

management’s evaluation of the adequacy of the allowance for loan losses based upon a number of factors,

including an analysis of historical loss factors, the evaluation of collateral, recent charge-off experience, overall

credit quality, current economic conditions and loan growth.

Non-interest income decreased $2.180 million or 11.1% to $17.464 million due principally to a $3.787

million decrease in Wealth Management Group fee income resulting from the aforementioned settlement of an unusually

large estate that generated $3.982 million in revenue during 2010, as well as a $271 thousand decrease in service

charges. These decreases were partially offset primarily by a $657 thousand increase in gains on securities

transactions and a $388 thousand increase in revenue from the Corporation’s equity investment in Cephas Capital

Partners, L.P., due in large part to gains recognized on the exercise of stock warrants held in two of its investments,

as well as $326 thousand decrease in OTTI charges on trust preferred securities pools held in the Corporation’s

investment portfolio and a $299 thousand increase in check card interchange fee income.

Operating expenses increased $6.942 million or 18.3% to $44.784 million in 2011. Excluding the above mentioned

direct acquisition costs totaling $2.255 million and $482 thousand in 2011 and 2010, respectively, all other

operating expenses increased $5.169 million or 13.8%. The major factors affecting this increase include a $1.793

million increase in salaries, a $930 thousand increase in employee benefits, a $681 thousand increase in net

occupancy costs and a $552 thousand increase in data processing costs. The increase in salaries reflects the

increase in staff following the Capital Bank acquisition as well as merit increases throughout the year, while the

increase in employee benefits was due in large part to a $321 thousand increase in health insurance costs, as well as

increases in payroll taxes and the Corporation’s defined benefit pension plan expense totaling $272 thousand and

$198 thousand, respectively, and a $41 thousand increase in the Corporation’s non-discretionary 401-K plan. The

increase in net occupancy costs was due principally to increased costs associated with the new offices acquired in

the Capital Bank acquisition as well as higher maintenance costs at other offices. Higher data processing costs

were impacted by higher data communication line charges, an increase in check card processing fees and higher

Wealth Management Group, internet and web-banking costs. Other factors impacting the increase in operating

expenses include increases in amortization of intangible assets and marketing and advertising costs totaling $310

thousand and $117 thousand, respectively, both of which are related to the Capital Bank acquisition, as well a $258

thousand increase in professional services fees, a $170 thousand increase in furniture and equipment expenses and a

$149 thousand increase in stationery and supplies. The above increases were offset in part by a $244 thousand

decrease OREO expenses and a $230 thousand decrease in FDIC insurance assessments.

While 2011 pre-tax income increased $364 thousand from 2010, income tax expense decreased $72 thousand. The

effective tax rate was 32.3% for the year ended December 31, 2011, as compared to 33.6% for the year ended

December 31, 2010. The decrease in the effective tax rate and income tax expense is primarily related to two items.

For the year ended December 31, 2011, non-deductible acquisition costs decreased by $235 thousand. In addition,

the Internal Revenue Service completed their 2009 examination of the final Canton Bancorp, Inc. tax return. This

resulted in the settlement of an uncertain tax position and the recognition of a $48 thousand tax benefit.

Results of Operations 2010 vs. 2009

Net income in 2010 totaled $10.102 million, an increase of $4.869 million compared to 2009 net income of $5.233

million. Earnings per share increased 93.1% from $1.45 per share to $2.80 per share. This increase, relative to

2009 results, was due in part to direct transaction costs incurred in 2009 totaling $1.448 million related to the

Corporation’s May 2009 acquisition of Canton Bancorp, Inc. ("Canton"), as well as an FDIC insurance special

assessment in the second quarter of 2009 totaling $439 thousand. However, as discussed below, the earnings

increase in 2010 was driven primarily by higher net interest income and non-interest income, as well as a decrease

in the provision for loan loss expense, partially offset by higher operating expenses (excluding the above mentioned

direct transaction costs and FDIC special assessment) and higher income taxes.

Net interest income increased $1.375 million or 4.1% from $33.155 million in 2009 to $34.530 million, while the

net interest margin decreased 8 basis points to 3.81%. The improvement in net interest income resulted from an

increase in average earning assets and a 54 basis point decrease in the average cost of interest-bearing liabilities,

offset in part by a 50 basis point decrease in the average yield on earning assets. A $53.1 million or 6.2% increase

in average earning assets in 2010 was principally due to a $34.8 million increase in average securities, as well as

increases in average fed funds sold and interest-bearing deposits at other financial institutions and average loans

totaling $14.5 million and $3.8 million, respectively. The increase in average loans reflects a $14.0 million

increase in average loans associated with the Canton acquisition, as during 2010 the Corporation benefited from

having these balances for the entire year. While on average, earning assets increased 6.2%, total interest and

dividend income was down $1.744 million or 3.9%, as the average yield on earning assets decreased 50 basis points

to 4.72%.

Total average funding liabilities, including non-interest bearing demand deposits, increased $54.5 million or 6.6%

as a $65.2 million increase in average deposits was partially offset by a $10.7 million decrease in average other

borrowed funds. Approximately $29.9 million of the increase in average deposits was related to the

Canton acquisition. In total, average non-interest bearing demand deposits increased $20.5 million, while average interest

bearing deposits increased $44.7 million. The increase in average interest bearing deposits was reflected primarily

in higher average insured money market and savings deposits of $39.5 million and $11.6 million, respectively.

Additionally, average NOW account balances increased $5.1 million. These increases were partially offset by an

$11.4 million decrease in average time deposits. The decrease in average other borrowings was due to a $10.7

million decrease in average securities sold under agreements to repurchase. While average interest bearing

liabilities increased $34.0 million or 5.2%, interest expense decreased $3.119 million or 27.5%, as the average cost

of interest-bearing liabilities decreased 54 basis points from 1.73% to 1.19%.

The 2010 provision for loan losses of $1.125 million was $1.325 million lower than the 2009 provision. This

decrease was principally due to decreases in non-performing and potential problem loans, as well as a decrease

in specific allocations for impaired loans, and reflects management's evaluation of the adequacy of the allowance for

loan losses based upon a number of factors, including an analysis of historical loss factors, the evaluation of

collateral, recent charge-off experience, overall credit quality, the current economic environment and loan growth.

Non-interest income increased $3.935 million or 25.0% to $19.645 million. This increase was significantly

impacted by a $2.408 million increase in Wealth Management Group fee income and a $1.849 million decrease

in other-than-temporary impairment ("OTTI") charges on two CDO’s consisting of pools of trust preferred securities

issued by other financial institutions. The increase in Wealth Management Group fee income was largely due to an

earlier than anticipated closing of an unusually large estate during the fourth quarter of 2010 which resulted in the

recognition of additional fee income in the fourth quarter totaling $1.882 million. In 2010 and 2009, fee income

related to this estate totaled $3.982 million and $2.100 million, respectively. OTTI charges were down from $2.242

million in 2009 to $393 thousand in 2010, principally due to a reduced level of deterioration in credit quality of the

underlying issuers during the period. During 2010 we continued to receive all contractual payments on these

securities. Excluding the increase in Wealth Management Group fee income and the reduction in OTTI charges,

all other non-interest income was down approximately $322 thousand primarily due to a $711 thousand decrease in

service charges attributed to lower net overdraft fee income, a $334 thousand decrease in gains recognized on the

sale of securities and a $170 thousand reduction in cash management fee income. These decreases were partially

offset by a $415 thousand increase in check card interchange fee income, a $250 thousand increase in revenue from

the Corporation’s equity investment in Cephas Capital Partners, LP, a small business investment company limited

partnership, and a $220 thousand increase in revenue of CFS Group, Inc.

Operating expenses decreased $1.479 million or 3.8% to $37.843 million in 2010. As noted above, this decrease

reflects direct transaction costs incurred in the 2009 Canton acquisition and the 2009 FDIC special assessment

totaling $1.448 million and $439 thousand, respectively. All other operating expenses in 2010 increased $408

thousand or 1.1% due principally to a $541 thousand increase in salaries (excluding 2009 direct transaction costs

of $253 thousand), a $467 thousand increase in professional services fees (excluding 2009 direct transaction costs of

$159 thousand), a $361 thousand increase in data processing costs (excluding 2009 direct transaction costs of

$1.027 million) and increases in marketing and advertising and other real estate owned ("OREO") expenses totaling

$217 thousand and $185 thousand, respectively. The increase in salaries reflects merit increases over the past year

as well as additions to staff associated with the May 2009 Canton acquisition, while the increase in professional

services fees was largely due to legal and investment banking fees related to the Corporation’s acquisition of Fort

Orange Financial Corp. Higher data processing costs reflect increases in check card and Wealth Management Group

processing costs. The increase in marketing and advertising was impacted by increases in print, television

and billboard adverting, while the increase in OREO expense was due in large part to write-downs of four

properties during 2010 following the receipt of updated appraisals. These increases were offset to some extent

primarily by a $1.230 million decrease in pension and other employee benefit costs as pension and health insurance

expenses decreased $1.017 million and $292 thousand, respectively. The reduction in pension cost was principally

due to an increase in plan asset values during 2009 resulting from much improved equity markets during that year,

which also resulted in a decrease in the amortization of net unrecognized losses on plan assets, while the decrease

in health insurance reflects a reduced level of claims under the Corporation’s self-insured health plan. Other factors

include a $202 thousand decrease in amortization of intangible assets and a $100 thousand reduction in stationery

and supplies expense.

The $3.245 million increase in income tax expense was due primarily to an $8.114 million increase in pre-tax

income, while the increase in the effective tax rate from 26.2% to 33.6% reflects a decrease in the relative

percentage of tax-exempt income to pre-tax income.

EARNINGS FOR THE YEARS ENDED DECEMBER 31,

(in thousands)	2011			2010			2009			2008			2007		2006		% Change 2010 to 2011			Compounded Annual Growth 5 Years
Net interest income	$	43,849		$	34,530		$	33,155		$	30,668		$	25,936	$	24,546		27.0	%		12.3	%
Provision for loan losses		958			1,125			2,450			1,450			1,255		125		-14.8	%		50.3	%
Net interest income after provision for loan losses		42,891			33,405			30,705			29,218			24,681		24,421		28.4	%		11.9	%
Other operating income:
Wealth management group fee income		6,710			10,497			8,089			6,834			6,345		4,901		-36.1	%		6.5	%
Securities gains (losses), net		1,108			451			785			589			10		27		145.7	%		110.2	%
Impairment charge on investment securities		(67	)		(393	)		(2,242	)		(803	)		-		-		-83.0	%		N/A
Net gains on sales of loans held for sale		179			242			259			114			98		103		-26.0	%		11.7	%
Other income		9,534			8,848			8,819			10,404			10,176		9,281		7.8	%		0.5	%
Total other operating income		17,464			19,645			15,710			17,138			16,629		14,312		-11.1	%		4.1	%
Other operating expenses		44,784			37,843			39,321			33,968			30,521		29,523		18.3	%		8.7	%
Income before income tax expense		15,571			15,207			7,094			12,388			10,789		9,210		2.4	%		11.1	%
Income tax expense		5,033			5,105			1,861			4,034			3,530		2,621		-1.4	%		13.9	%
Net income	$	10,538		$	10,102		$	5,233		$	8,354		$	7,259	$	6,589		4.3	%		9.8	%

AVERAGE BALANCES AND YIELDS

For the purpose of the table below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average

balance computations. Investment securities are stated at amortized cost. No tax equivalent adjustments have been made in calculating yields on

obligations of states and political subdivisions.

Distribution of Assets, Liabilities and Shareholders' Equity, Interest Rates and Interest Differential Year Ended December 31,

(Dollars in thousands)	2011								2010						2009
Assets	Average Balance			Interest		Yield/ Rate		Average Balance				Interest	Yield/ Rate		Average Balance			Interest		Yield/ Rate
Earning assets:
Loans	$	740,950		$	43,181	5.83	%	$	590,558		$	35,064	5.94	%	$	586,744		$	36,094	6.15	%
Taxable securities		215,481			5,874	2.73	%		206,232			6,328	3.07	%		176,255			7,136	4.05	%
Tax-exempt securities		52,004			1,379	2.65	%		42,274			1,188	2.81	%		37,472			1,132	3.02	%
Federal funds sold		-			-	-			-			-	-			483			1	0.25	%
Interest-bearing deposits		69,983			214	0.31	%		66,412			166	0.25	%		51,462			127	0.25	%
Total earning assets		1,078,418			50,648	4.70	%		905,476			42,746	4.72	%		852,416			44,490	5.22	%
Non-earning assets:
Cash and due from banks		22,706							21,475							21,855
Premises and equipment, net		24,336							24,335							25,202
Other assets		47,300							37,250							32,915
Allowance for loan losses		(9,742	)						(10,130	)						(9,489	)
AFS adjustment to fair value		12,028							10,178							5,875
Total	$	1,175,046						$	988,584						$	928,774
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Now deposits	$	72,953			84	0.11	%	$	52,314			49	0.09	%	$	47,250			79	0.17	%
Savings and insured money market deposits		354,746			891	0.25	%		296,492			960	0.32	%		245,425			1,423	0.58	%
Time deposits		294,467			3,376	1.15	%		272,016			4,616	1.70	%		283,408			6,927	2.44	%
Federal Home Loan Bank advances and securities sold under agreements to repurchase		81,297			2,448	3.01	%		68,442			2,591	3.79	%		79,166			2,906	3.67	%
Total interest-bearing liabilities		803,463			6,799	0.85	%		689,264			8,216	1.19	%		655,249			11,335	1.73	%
Non-interest-bearing liabilities:
Demand deposits		243,017							196,822							176,305
Other liabilities		8,341							7,556							11,820
Total liabilities	$	1,054,821						$	893,642						$	843,374
Shareholders' equity		120,225							94,942							85,400
Total	$	1,175,046						$	988,584						$	928,774
Net interest income				$	43,849						$	34,530						$	33,155
Net interest rate spread						3.85	%						3.53	%						3.49	%
Net interest margin						4.07	%						3.81	%						3.89	%

CHANGES DUE TO VOLUME AND RATE

The following table demonstrates the impact on net interest income of the changes in the volume of earning assets

and interest-bearing liabilities and changes in rates earned and paid by the Corporation. For purposes of

constructing this table, average investment securities are at average amortized cost and earning asset averages

include non-performing loans. Therefore, the impact of changing levels of non-performing loans is reflected in

the change due to rate, but does not affect changes due to volume. No tax equivalent adjustments were made.

	2011 vs. 2010								2010 vs. 2009
	Increase/(Decrease)								Increase/(Decrease)
	Total			Due to		Due to			Total			Due to			Due to
Interest income (in thousands)	Change			Volume		Rate			Change			Volume			Rate

Loans	$	8,117		$	8,776	$	(659	)	$	(1,030	)	$	234		$	(1,264	)
Taxable investment securities		(454	)		275		(729	)		(808	)		1,093			(1,901	)
Tax-exempt investment securities		191			261		(70	)		56			138			(82	)
Federal funds sold		-			-		-			(1	)		(1	)		-
Interest-bearing deposits		48			10		38			39			37			2
Total interest income	$	7,902		$	8,124	$	(222	)	$	(1,744	)	$	2,665		$	(4,409	)

Interest expense (in thousands)
Interest-bearing demand deposits	$	35		$	22	$	13		$	(30	)	$	7		$	(37	)
Savings and insured money market deposits		(69	)		169		(238	)		(463	)		255			(718	)
Time deposits		(1,240	)		355		(1,595	)		(2,311	)		(268	)		(2,043	)
Federal Home Loan Bank advances and securities sold under agreements to repurchase		(143	)		439		(582	)		(315	)		(404	)		89
Total interest expense		(1,417	)		1,218		(2,635	)		(3,119	)		562			(3,681	)
Net interest income	$	9,319		$	6,906	$	2,413		$	1,375		$	2,103		$	(728	)

Interest Rate Risk

As intermediaries between borrowers and savers, commercial banks incur both interest rate risk and liquidity risk.

The Corporation's Asset/Liability Committee (ALCO) has the strategic responsibility for setting the policy

guidelines on acceptable exposure to these areas. These guidelines contain specific measures and limits regarding

these risks, which are monitored on a regular basis. The ALCO is made up of the president & chief executive

officer, the chief financial officer, the asset liability management officer and other officers representing key

functions.

The ALCO is also responsible for supervising the preparation and annual revisions of the financial segments of

the annual budget, which is built upon the committee's economic and interest-rate assumptions. It is the

responsibility of the ALCO to modify prudently the Corporation's asset/liability policies.

Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the

assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution.

For that reason, the ALCO has established tolerance limits based upon a 200-basis point change in interest rates.

At December 31, 2011, it is estimated that an immediate 200-basis point decrease in interest rates would

negatively impact the next 12 months net interest income by 9.86% and an immediate 200-basis point increase

would negatively impact the next 12 months net interest income by 2.76%. Both are within the Corporation's

policy guideline of 15% established by ALCO. Given the overall low level of current interest rates and the

unlikely event of a 200-basis point decline from this point, management additionally modeled an immediate 100-

basis point decline and an immediate 300-basis point increase in interest rates. When applied, it is estimated these

scenarios would result in negative impacts to net interest income of 4.82% and 4.47%, respectively. Management

is comfortable with the level of exposures at these levels.

A related component of interest rate risk is the expectation that the market value of our capital account will

fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact component:

an institution exposed to earnings erosion is also exposed to shrinkage in market value. At December 31, 2011, it

is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value

of our capital account by 10.47% and an immediate 200-basis point increase in interest rates would positively

impact the market value by 0.54%. Both are within the established tolerance limit of 15%. Management also

modeled the impact to the market value of our capital with an immediate 100-basis point decline and an

immediate 300-basis point increase in interest rates, based on the current interest rate environment. When

applied, it is estimated these scenarios would result in negative impacts to the market value of our capital of

7.54% and 1.27% respectively.

Management is also comfortable with the level of exposures at these levels.

Management does recognize the need for certain hedging strategies during periods of anticipated higher

fluctuations in interest rates and the Board-approved Funds Management Policy provides for limited use of certain

derivatives in asset liability management. These strategies were not employed during 2011.

ADOPTION OF NEW ACCOUNTING STANDARDS

In December 2010, the FASB amended existing guidance relating to Disclosure of Supplementary Pro Forma

Information for Business Combinations. This guidance specifies that if a public entity presents comparative

financial statements, the entity (acquirer) should disclose revenue and earnings of the combined entity as though

the business combination(s) that occurred during the current year had occurred as of the beginning of the

comparable prior annual reporting period only. The guidance also expands the supplemental pro forma disclosures

to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly

attributable to the business combination included in the reported pro forma revenue and earnings. We disclosed

pro forma information in the notes to consolidated financial statements of the merger with Fort Orange Financial

Corp. See Note 21 of Notes to Consolidated Financial Statements.

In April 2011, the FASB amended existing guidance for assisting a creditor in determining whether a

restructuring is a troubled debt restructuring. The amendments clarify the guidance for a creditor’s evaluation of

whether it has granted a concession and whether a debtor is experiencing financial difficulties. With regard to

determining whether a concession has been granted, the ASU clarifies that creditors are precluded from using the

effective interest method to determine whether a concession has been granted. In the absence of using the

effective interest method, a creditor must now focus on other considerations such as the value of the underlying

collateral, evaluation of other collateral or guarantees, the debtor’s ability to access other funds at market rates,

interest rate increases and whether the restructuring results in a delay in payment that is insignificant. This

guidance is effective for interim and annual reporting periods beginning after June 15, 2011, and had to be applied

retrospectively to the beginning of the annual period of adoption. For purposes of measuring impairment on

newly identified troubled debt restructurings, the amendments had to be applied prospectively for the first interim

or annual period beginning on or after June 15, 2011. The adoption of this guidance did not have a material effect

on the Corporation’s operating results or financial condition.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components of other

comprehensive income as part of the statement of changes in shareholder’s equity. The amendment requires that

comprehensive income be presented in either a single continuous statement or in two separate consecutive

statements. The amendments in this guidance are effective as of the beginning of a fiscal reporting year, and

interim periods within that year, that begins after December 15, 2011. Early adoption is permitted. The adoption

of this amendment will change the presentation of the components of comprehensive income for the Corporation

as part of the consolidated statement of shareholder’s equity.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Corporation's main market risk exposure is to changing interest rates. A discussion of the Corporation's

exposure to changing interest rates is included under the heading "Interest Rate Risk" in Management's

Discussion and Analysis of Financial Condition and Results of Operations.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The financial statements listed in Item 15 are filed as part of this report and appear on pages F-1 through F-57.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND

FINANCIAL DISCLOSURE

None.

Item 9A. CONTROLS AND PROCEDURES

The Corporation's management, with the participation of our President and Chief Executive Officer, who is the

Corporation's principal executive officer, and our Treasurer and Chief Financial Officer, who is the Corporation's

principal financial officer, has evaluated the effectiveness of the Corporation's disclosure controls and procedures

as of December 31, 2011. Based upon that evaluation, the President and Chief Executive Officer and the

Treasurer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures

are effective as of December 31, 2011.

During the third fiscal quarter of 2011, a deficiency in the design and operation of internal controls at the branch

level was identified that permitted an alleged misappropriation of funds to go undetected. This deficiency did not

have a material affect on the Corporation’s financial condition or results of operations. Management has taken

appropriate steps to remediate the design and operation of these controls.

During the fourth fiscal quarter, there have been no changes in the Corporation's internal control over financial

reporting that have materially affected, or that are reasonably likely to materially affect, the Corporation's internal

control over financial reporting.

Management's Report on Internal Control over Financial Reporting

We, as members of management of the Corporation, are responsible for establishing and maintaining adequate

internal control over financial reporting. The Corporation's internal control over financial reporting is a process

designed to provide reasonable assurance to the Corporation's management and Board of Directors regarding the

reliability of financial reporting and the preparation of the Corporation's financial statements for external purposes

in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting

includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,

accurately and fairly reflect the transactions and dispositions of the assets of the Corporation, (2) provide

reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in

accordance with accounting principles generally accepted in the United States of America, and that receipts and

expenditures of the Corporation are being made only in accordance with authorizations of management and

directors of the Corporation, and (3) provide reasonable assurance regarding prevention or timely detection of

unauthorized acquisition, use, or disposition of the Corporation's assets that could have a material effect on the

financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect

misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that

controls may become inadequate because of changes in conditions, or that the degree of compliance with the

policies and procedures may deteriorate.

As of December 31, 2011 management assessed the effectiveness of the Corporation's internal control over

financial reporting based on the criteria for effective internal control over financial reporting established in the

"Internal Control-Integrated Framework," issued by the Committee of Sponsoring Organizations (COSO) of the

Treadway Commission. Based on the assessment, we assert that the Corporation maintained effective internal

control over financial reporting as of December 31, 2011 based on the specified criteria.

Crowe Horwath LLP, an independent registered public accounting firm, which audited the Corporation's 2011

consolidated financial statements included in this report, has issued an audit report on the effectiveness of the

Corporation's internal controls over financial reporting.

/s/ Ronald M. Bentley		/s/ John R. Battersby
Ronald M. Bentley		John R. Battersby, Jr.
President and Chief Executive Officer		Treasurer and Chief Financial Officer
March 28, 2012		March 28, 2012

Item 9B. OTHER INFORMATION

On November 7, 2011, Chemung Canal Trust Company entered into a Change of Control Agreement with Karen

R. Makowski, an executive vice president of the Bank. The Change of Control Agreement is similar to the

Change in Control Agreements in place with other executive officers of the Company. Under the Change of

Control Agreements, each executive is eligible to receive payments and other benefits, subject to certain

conditions, if his/her employment is terminated without Cause (as defined in the agreements) within the twelve

month period immediately following a change in control or if he/she resigns for any reason within such period.

The Change of Control Agreements provide for payments of two times the highest annual compensation

(including only salary and bonuses) paid to the executive for any of two calendar years immediately preceding the

year in which the executive’s employment is terminated or he/she resigns. Payments will be made in equal

monthly installments for the twenty-four months immediately following the effective date of termination or

resignation.

The foregoing summary is qualified in its entirety by reference to the Change of Control Agreement entered into

with Ms. Makowski, a copy of which is filed with this Annual Report on Form 10-K as Exhibit 10.16.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The names and ages of the executive officers of the Corporation and positions held by each are presented in the

following table. Officers are elected annually by the Board of Directors.

Name	Age	Position (served since)
Ronald M. Bentley	59	President and Chief Executive Officer of the Corporation and the Bank (2007); Chief Operating Officer of the Bank (2006); President, Retail Banking at NBT Bancorp, Inc. (2005); Executive Vice President, Retail Banking and Regional President at NBT Bancorp, Inc. (2003). Mr. Bentley has been with the Company since 2006.
Jane H. Adamy	61	Corporate Secretary of the Corporation and the Bank (2001); Senior Vice President of the Bank (2004); Trust Compliance Officer (2008). Mrs. Adamy has been with the Company since 1972.
John R. Battersby, Jr.	61	Chief Financial Officer and Treasurer of the Corporation (2003); Executive Vice President, Chief Financial Officer and Treasurer of the Bank (2004). Mr. Battersby has been with the Company since 1988.
Richard G. Carr	58	Executive Vice President of the Bank (2011) responsible for Business Client Service; Senior Vice President of the Bank (2004). Mr. Carr has been with the Company since 1997.
Michael J. Crimmins	59	Senior Vice President of the Bank (2006) responsible for Support Services; Vice President of Operations at Community Bank (2006). Mr. Crimmins has been with the Company since 2006.
Louis C. DiFabio	48	Executive Vice President of the Bank (2011) responsible for Retail Client Services; Senior Vice President of the Bank (2005). Mr. DiFabio has been with the Company since 1987.
Karen R. Makowski	55	Executive Vice President, Chief Administrative and Risk Officer (2011); Consultant in regulatory compliance and strategic planning (2009); President & CEO, Panther Community Bank Florida (2006). Mrs. Makowski joined the Company in 2011.
Melinda A. Sartori	54	Executive Vice President of the Bank (2002) responsible for Wealth Management Group. Mrs. Sartori has been with the Company since 1994.
Linda M. Struble	58	Senior Vice President of the Bank (2000) responsible for Human Resources. Ms. Struble has been with the Company since 1984.
Anders M. Tomson	44	President Capital Bank Division of Chemung Canal Trust Company (2011); Senior Vice President and Commercial Real Estate Division Executive at Citizens Bank in Albany (2006-2010). Mr. Tomson joined the Company in 2011.

Additional information responsive to this Item 10 is incorporated herein by reference to the Corporation's

definitive proxy statement for its 2012 Annual meeting of Shareholders.

ITEM 11. EXECUTIVE COMPENSATION

Information responsive to this Item 11 is incorporated herein by reference to the Corporation's definitive proxy

statement for its 2012 Annual Meeting of Shareholders.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND, MANAGEMENT

AND RELATED STOCKHOLDER MATTERS

Information responsive to this Item 12 is incorporated herein by reference to the Corporation's definitive proxy

statement for its 2012 Annual Meeting of Shareholders.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, DIRECTOR

INDEPENDENCE

Information responsive to this Item 13 is incorporated herein by reference to the Corporation's definitive proxy

statement for its 2012 Annual Meeting of Shareholders.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information responsive to this Item 14 is incorporated herein by reference to the Corporation's definitive proxy

statement for its 2012 Annual Meeting of Shareholders.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1)

The following consolidated financial statements of the Corporation appear on pages F-1 through F-

57 of this report and are incorporated in Part II, Item 8:

Report of Independent Registered Public Accounting Firm-Crowe Horwath LLP

Consolidated Financial Statements

Consolidated Balance Sheets as of December 31, 2011 and 2010

Consolidated Statements of Income for the three years ended December 31, 2011

Consolidated Statements of Shareholders' Equity and Comprehensive Income for the three years ended December 31, 2011

Consolidated Statements of Cash Flows for the three years ended December 31, 2011

Notes to Consolidated Financial Statements

(2) All schedules for which provision is made in the applicable accounting regulations of the Securities &

Exchange Commission are not required under the related instructions or are inapplicable and therefore have been

omitted.

(b) The following exhibits are either filed with this Form 10-K or are incorporated herein by reference.

The Corporation's Securities Exchange Act file number is 000-13888.

Exhibit	3.1	Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984. Filed as Exhibit 3.1 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
	3.2	Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988. Filed as Exhibit 3.2 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.
	3.3	Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998. Filed as Exhibit 3.4 of the Registrant’s Form 10-K for the year ended December 31, 2005 and incorporated herein by reference.
	3.4	Amended and Restated Bylaws of the Registrant, as amended to December 15, 2010. Filed as Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2010 and filed with the SEC on March 16, 2011 and incorporated herein by reference.
	4.1	Specimen Stock Certificate. Filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended December 31, 2002 and incorporated by reference herein.
	10.1	Change of Control Agreement dated September 20, 2006 between Chemung Canal Trust Company and Ronald M. Bentley, President & COO. Filed as Exhibit 10.1 to Registrant's Form 10-Q for the quarter ended September 30, 2006 and incorporated by reference herein.*
	10.2	Executive Severance Agreement dated September 20, 2006 between Chemung Canal Trust Company and Ronald M. Bentley, President & COO. Filed as Exhibit 10.2 to Registrant's Form 10-Q for the quarter ended September 30, 2006 and incorporated by reference herein.*
	10.3	Amended and Restated Deferred Directors' Fee Plan. Filed as Exhibit 10.3 of the Registrant’s Form 10-K for the year ended December 31, 2005 and incorporated by reference herein.*
	10.4	Chemung Financial Corporation Restricted Stock Plan dated June 16, 2010. Filed as Exhibit 10.4 of the Registrant's Form 10-Q for the period ended June 30, 2010 and incorporated herein by reference.*
	10.6	Description of Arrangement for Directors' Fees. Filed as Exhibit 10.6 of the Registrant’s Form 10-K for the year ended December 31, 2005 and incorporated by herein by reference.*
	10.8	Change of Control Agreement dated August 23, 2007 Chemung Canal Trust Company and John R. Battersby, Jr., Executive Vice President, Treasurer & CFO. Filed as Exhibit 10.8 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.*
	10.9	Change of Control Agreement dated August 23, 2007 between Chemung Canal Trust Company and Melinda A. Sartori, Executive Vice President. Filed as Exhibit 10.9 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference.*
	10.11	Change of Control Agreement dated January 19, 2011 between Chemung Canal Trust Company and Richard G. Carr, Executive Vice President. Filed as Exhibit 10.11 to Registrant’s Form 10-K filed with the SEC on March 16, 2011 and incorporated herein by reference.*
	10.12	Change of Control Agreement dated January 19, 2011 between Chemung Canal Trust Company and Louis C. DiFabio, Executive Vice President. Filed as Exhibit 10.12 to Registrant’s Form 10-K filed with the SEC on March 16, 2011 and incorporated herein by reference.*
	10.14	Change of Control Agreement dated April 8, 2011 between Chemung Canal Trust Company and Anders M. Tomson, President Capital Bank Division. Filed as Exhibit 10.14 to Registrant’s Form 10-Q filed with the SEC on May 13, 2011 and incorporated herein by reference.*
	10.15	Settlement Agreement and Waiver and Release dated July 5, 2011 between Chemung Financial Corporation, Chemung Canal Trust Company and Peter D. Cureau. Filed as Exhibit 10.15 to the Registrant’s Form 10-Q filed with the SEC on November 14, 2011 and incorporated herein by reference.*
	10.16	Change of Control Agreement dated November 7, 2011 between Chemung Canal Trust Company and Karen R. Makowski, Executive Vice President and Chief Administration and Risk Officer. Filed herewith and incorporated herein by reference.*
	21	Subsidiaries of the Registrant.
	23	Consent of Crowe Horwath LLP, Independent Registered Public Accounting Firm.
	31.1	Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
	31.2	Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
	32.1	Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.
	32.2	Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.
	101.INS	Instance Document
	101.SCH	XBRL Taxonomy Schema
	101.CAL	XBRL Taxonomy Calculation Linkbase
	101.DEF	XBRL Taxonomy Definition Linkbase
	101.LAB	XBRL Taxonomy Label Linkbase
	101.PRE	XBRL Taxonomy Presentation Linkbase
	*	Indicates material compensatory plan or arrangement.

CHEMUNG FINANCIAL CORPORATION

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Pages F-1 to F-57

	Page
Report of Independent Registered Public Accounting Firm-Crowe Horwath LLP	F-1
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2011 and 2010	F-2
Consolidated Statements of Income for the three years ended December 31, 2011	F-3
Consolidated Statements of Shareholders' Equity and Comprehensive Income for the three years ended December 31, 2011	F-4
Consolidated Statements of Cash Flows for the three years ended December 31, 2011	F-6
Notes to Consolidated Financial Statements	F-7

Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders

Chemung Financial Corporation

Elmira, New York

We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation as of December 31, 2011

and 2010, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended

December 31, 2011, 2010 and 2009. We also have audited Chemung Financial Corporation’s internal control over financial

reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the

Committee of Sponsoring Organizations of the Treadway Commission (COSO). Chemung Financial Corporation’s

management is responsible for these financial statements, for maintaining effective internal control over financial reporting,

and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on

Internal Control over Financial Reporting as disclosed in item 9A. Our responsibility is to express an opinion on these

financial statements and an opinion on the corporation’s internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United

States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the

financial statements are free of material misstatement and whether effective internal control over financial reporting was

maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence

supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant

estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control

over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk

that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal controls based

on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the

circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the

reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally

accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures

that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and

dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to

permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and

expenditures of the company are being made only in accordance with authorizations of management and directors of the

company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or

disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,

projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate

because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial

position of Chemung Financial Corporation as of December 31, 2011 and 2010, and the results of its operations and its cash

flows for the years ended December 31, 2011, 2010 and 2009 in conformity with accounting principles generally accepted in

the United States of America. Also, in our opinion, Chemung Financial Corporation maintained, in all material respects,

effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control –

Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

/s/ Crowe Horwath LLP

Livingston, New Jersey

March 28, 2012

F-1

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	DECEMBER 31,			DECEMBER 31,
	2011			2010
ASSETS
Cash and due from financial institution	$	28,204,699		$	16,540,095
Interest-bearing deposits in other financial institutions		24,697,154			44,079,682
Total cash and cash equivalents		52,901,853			60,619,777

Trading assets, at fair value		294,381			-

Securities available for sale, at estimated fair value		280,869,810			223,544,961
Securities held to maturity, estimated fair value of $9,175,956 at December 31, 2011 and $8,297,392 at December 31, 2010		8,311,921			7,715,123
Federal Home Loan Bank and Federal Reserve Bank Stock, at cost		5,509,350			3,328,900

Loans, net of deferred origination fees and costs, and unearned income		796,915,177			613,684,369
Allowance for loan losses		(9,659,320	)		(9,498,131	)
Loans, net		787,255,857			604,186,238

Loans held for sale		395,427			486,997
Premises and equipment, net		24,762,405			24,192,593
Goodwill		21,983,617			9,872,375
Other intangible assets, net		6,190,540			4,655,900
Bank owned life insurance		2,625,104			2,536,715
Other assets		25,159,322			17,187,706

Total assets	$	1,216,259,587		$	958,327,285

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	258,835,961		$	197,322,036
Interest-bearing		739,656,878			589,036,816
Total deposits		998,492,839			786,358,852

Securities sold under agreements to repurchase`		37,106,842			44,774,615
Federal Home Loan Bank term advances		43,343,918			20,000,000
Accrued interest payable		800,148			784,351
Dividends payable		1,141,081			881,203
Other liabilities		9,445,319			8,119,701
Total liabilities		1,090,330,147			860,918,722

Shareholders' equity:
Common stock, $.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at December 31, 2011 and 4,300,134 issued at December 31, 2010		53,101			43,001
Additional-paid-in capital		45,582,861			22,022,122
Retained earnings		100,628,900			94,407,620
Treasury stock, at cost (741,003 shares at December 31, 2011; 749,880 shares at December 31, 2010)		(18,894,044	)		(19,166,655	)
Accumulated other comprehensive (loss) income		(1,441,378	)		102,475

Total shareholders' equity		125,929,440			97,408,563

Total liabilities and shareholders' equity	$	1,216,259,587		$	958,327,285


See accompanying notes to consolidated financial statements.

F-2

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

	YEARS ENDED DECEMBER 31
	2011			2010				2009
INTEREST AND DIVIDEND INCOME
Loans, including fees	$	43,180,698		$	35,064,009		$	36,094,302
Taxable securities		5,874,019			6,327,489			7,136,112
Tax exempt securities		1,378,753			1,188,193			1,131,610
Federal funds sold		-			-			1,232
Interest-bearing deposits		214,529			166,239			126,816
Total interest and dividend income		50,647,999			42,745,930			44,490,072
INTEREST EXPENSE
Deposits		4,350,419			5,624,402			8,428,760
Borrowed funds		1,073,016			950,866			951,060
Securities sold under agreements to repurchase		1,375,361			1,640,543			1,954,915

Total interest expense		6,798,796			8,215,811			11,334,735

Net interest income		43,849,203			34,530,119			33,155,337
Provision for loan losses		958,333			1,125,000			2,450,000
Net interest income after provision for loan losses		42,890,870			33,405,119			30,705,337

Other operating income:
Wealth management group fee income		6,709,685			10,496,637			8,088,654
Service charges on deposit accounts		4,281,808			4,552,430			5,263,215
Net gain on securities transactions		1,108,091			450,666			784,589
Other-than-temporary loss on investment securities:
Total impairment losses		(67,400	)		(393,005	)		(2,242,446	)
Loss recognized in other comprehensive income		-			-			-
Net impairment loss recognized in earnings		(67,400	)		(393,005	)		(2,242,446	)

Net gain on sales of loans held for sale		179,096			241,537			258,572
Credit card merchant earnings		225,527			204,561			178,180
Gains on sales of other real estate owned		93,204			42,545			24,097
Income from bank owned life insurance		88,389			87,489			51,129
Other		4,845,858			3,961,816			3,303,505
Total other operating income		17,464,258			19,644,676			15,709,495
Other operating expenses:
Salaries and wages		17,136,433			15,343,811			15,055,292
Pension and other employee benefits		4,796,994			3,866,744			5,096,509
Net occupancy expenses		5,015,936			4,334,441			4,283,554
Furniture and equipment expenses		2,118,544			1,948,900			1,996,067
Data processing expense		3,915,841			3,364,240			4,078,361
Amortization of intangible assets		1,041,193			730,894			933,305
Losses on sales of other real estate owned		1,671			17,982			29,010
Other real estate owned expenses		104,829			348,939			163,641
FDIC insurance		967,254			1,196,901			1,512,629
Merger related expenses		2,255,169			482,180			-
Other		7,430,359			6,207,651			6,172,966
Total other operating expenses		44,784,223			37,842,683			39,321,334

Income before income tax expense		15,570,905			15,207,112			7,093,498
Income tax expense		5,033,150			5,105,239			1,860,663
Net income	$	10,537,755		$	10,101,873		$	5,232,835

Weighted average shares outstanding		4,382,843			3,606,541			3,603,129

Basic and diluted earnings per share	$	2.40		$	2.80		$	1.45

F-3

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balances at December 31, 2008	$	43,001	$	22,881,937		$	85,868,637		$	(20,547,419	)	$	(5,239,011	)	$	83,007,145
Cumulative effect of change in accounting principle, adoption of other-than-temporary impairment guidance, net		-		-			246,544			-			(246,544	)		-
Comprehensive Income:
Net income		-		-			5,232,835			-			-			5,232,835
Change in unrealized gains (losses) on securities AFS, net		-		-			-			-			1,301,106			1,301,106
Change in funded status of Employers' Accounting for Defined Benefit Pension and Other Benefit Plans, net		-		-			-			-			3,618,614			3,618,614
Total comprehensive income																10,152,555
Restricted stock units for directors' deferred compensation plan		-		104,929			-			-			-			104,929
Cash dividends declared ($1.00 per share)		-		-			(3,521,685	)		-			-			(3,521,685	)
Distribution of 10,867 shares of treasury stock for director's compensation		-		(58,026	)		-			279,716			-			221,690
Distribution of 1,333 shares of treasury stock for directors' deferred compensation		-		(36,617	)		-			34,271			-			(2,346	)
Distribution of 2,381 shares of treasury stock for employee compensation		-		(11,287	)		-			61,287			-			50,000
Sale of 11,800 shares of treasury stock		-		(74,107	)		-			303,627			-			229,520
Purchase of 7,778 shares of treasury stock		-		-			-			(156,143	)		-			(156,143	)
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		-		-			10,101,873			-			-			10,101,873
Change in unrealized gains (losses) on securities AFS, net		-		-			-			-			1,006,282			1,006,282
Change in funded status of Employers' Accounting for Defined Benefit Pension and Other Benefit Plans, net		-		-			-			-			(337,972	)		(337,972	)
Total comprehensive income (loss)																10,770,183
Distribution of 25,443 shares of treasury stock for directors’ deferred compensation plan		-		(661,102	)		-			650,324			-			(10,778	)
Distribution of 5,886 shares of treasury stock granted for employee restricted stock awards		-		(149,303	)		-			150,446			-			1,143
Restricted stock units for directors' deferred compensation plan		-		111,772			-			-			-			111,772
Cash dividends declared ($1.00 per share)		-		-			(3,520,584	)		-			-			(3,520,584	)
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
Sale of 6,000 shares of treasury stock		-		(25,860	)		-			153,360			-			127,500
Purchase of 20,260 shares of treasury stock		-		-			-			(425,567	)		-			(425,567	)
Balances at December 31, 2010	$	43,001	$	22,022,122		$	94,407,620		$	(19,166,655	)	$	102,475		$	97,408,563

F-4

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(continued)	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
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		-		-			10,537,755			-			-			10,537,755
Change in unrealized gains (losses) on securities AFS, net		-		-			-			-			2,326,042			2,326,042
Change in funded status of Employers' Accounting for Defined Benefit Pension and Other Benefit Plans, net		-		-			-			-			(3,869,895	)		(3,869,895	)
Total comprehensive income (loss)																8,993,902
Restricted stock awards		-		28,141			-			-			-			28,141
Distribution of 286 shares of treasury stock for directors’ deferred compensation plan		-		(7,364	)		-			7,310			-			(54	)
Distribution of 8,834 shares of treasury stock granted for employee restricted stock awards, net		-		(226,360	)		-			225,350			-			(1,010	)
Forfeit of 1,087 shares restricted stock awards.		-		27,762			-			(27,762	)		-			-
Restricted stock units for directors' deferred compensation plan		-		80,083			-			-			-			80,083
Cash dividends declared ($1.00 per share)		-		-			(4,316,475	)		-			-			(4,316,475	)
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
Sale of 9,500 shares of treasury stock		-		(25,090	)		-			242,610			-			217,520
Purchase of 21,426 shares of treasury stock		-		-			-			(501,299	)		-			(501,299	)
Issuance of 1,009,942 shares related to FOFC Merger		10,100		23,723,538			-			-			-			23,733,638
Balances at December 31, 2011	$	53,101	$	45,582,861		$	100,628,900		$	(18,894,044	)	$	(1,441,378	)	$	125,929,440

See accompanying notes to consolidated financial statements.

F-5

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Years Ended December 31,
CASH FLOWS FROM OPERATING ACTIVITIES:	2011				2010			2009
Net income	$	10,537,755		$	10,101,873		$	5,232,835
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		1,041,193			730,894			933,305
Deferred income tax expense (benefit)		3,416,135			153,450			(1,949,446	)
Provision for loan losses		958,333			1,125,000			2,450,000
Depreciation and amortization of fixed assets		2,861,644			2,778,065			2,792,807
Amortization of premiums on securities, net		1,394,115			608,257			386,612
Gains on sales of loans held for sale, net		(179,096	)		(241,537	)		(258,572	)
Proceeds from sales of loans held for sale		7,778,633			9,105,462			13,514,127
Loans originated and held for sale		(7,507,967	)		(9,151,419	)		(13,374,645	)
Net (gain) loss on sale of other real estate owned		(91,533	)		(24,563	)		4,913
Net gain on trading assets		(2,506	)		-			-
Net gains on securities transactions		(1,108,091	)		(450,666	)		(784,589	)
Net impairment loss recognized on investment securities		67,400			393,005			2,242,446
Proceeds from sales of trading assets		19,938			-			-
Purchase of trading assets		(311,813	)		-			-
(Increase) decrease in other assets		(9,890,546	)		2,708,278			1,408,261
Decrease (increase) in prepaid FDIC Assessment		164,744			1,074,474			(3,941,521	)
Decrease in accrued interest payable		(287,822	)		(344,853	)		(333,978	)
Expense related to restricted stock units for directors' deferred compensation plan		80,083			111,772			104,929
Expense related to employee stock compensation		55,000			55,000			50,000
Expense related to employee restricted stock awards		28,141			1,143			-
Increase (decrease) in other liabilities		206,721			(933,414	)		(1,689,170	)
Income from bank owned life insurance		(88,389	)		(87,489	)		(51,129	)
Proceeds from sales of student loans		-			137,509			1,942,673
Net cash provided by operating activities		9,142,072			17,850,241			8,679,858
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale		88,741,210			85,440,031			68,234,755
Proceeds from maturities and principal collected on securities available for sale		31,200,076			59,166,409			58,694,145
Proceeds from maturities and principal collected on securities held to maturity		3,965,483			10,057,026			8,266,171
Purchases of securities available for sale		(127,405,986	)		(136,077,171	)		(161,072,813	)
Purchases of securities held to maturity		(4,562,281	)		(5,612,297	)		(11,987,188	)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock		(1,002,500	)		(58,200	)		(443,650	)
Redemption of Federal Home Loan Bank and Federal Reserve Bank stock		400,350			9,900			535,500
Purchases of premises and equipment		(2,551,969	)		(2,084,537	)		(1,819,689	)
Cash paid Fort Orange Financial Corp. acquisition		(8,137,816	)		-			-
Cash received Fort Orange Financial Corp. acquisition		33,284,995			-			-
Net cash received in Bank of Canton acquisition		-			-			2,876,462
Proceeds from sale of other real estate owned		327,087			317,823			421,871
Net (increase) decrease in loans		(19,322,219	)		(20,117,424	)		24,994,960
Net cash used by investing activities		(5,063,570	)		(8,958,440	)		(11,299,476	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, savings accounts, and insured money market accounts		55,243,997			13,959,189			90,109,046
Net decrease in time deposits and individual retirement accounts		(43,578,345	)		(28,663,430	)		(18,809,498	)
Net decrease in securities sold under agreements to repurchase		(18,236,546	)		(9,488,642	)		(9,149,257	)
Net decrease in Federal Home Loan Bank long term advances		(910,246	)		-			-
Purchase of treasury stock		(501,299	)		(425,567	)		(156,143	)
Sale of treasury stock		242,610			127,500			229,520
Cash dividends paid		(4,056,597	)		(3,519,470	)		(3,517,034	)
Net cash (used) provided by financing activities		(11,796,426	)		(28,010,420	)		58,706,634
Net (decrease) increase in cash and cash equivalents		(7,717,924	)		(19,118,619	)		56,087,016
Cash and cash equivalents, beginning of period		60,619,777			79,738,396			23,651,380
Cash and cash equivalents, end of period	$	52,901,853		$	60,619,777		$	79,738,396
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	6,782,999		$	8,560,664		$	11,472,434
Income Taxes	$	5,110,847		$	5,475,675		$	7,399,018
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	533,976		$	554,246		$	427,108

F-6

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2011, 2010 and 2009

(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Chemung Financial Corporation (the "Corporation"), through its wholly owned subsidiaries, Chemung Canal

Trust Company (the "Bank") and CFS Group, Inc., provides a wide range of banking, financing, fiduciary and

other financial services to its clients. The Corporation is subject to the regulations of certain federal and state

agencies and undergoes periodic examinations by those regulatory agencies.

BASIS OF PRESENTATION

The accompanying consolidated financial statements have been prepared in conformity with accounting principles

generally accepted in the United States of America and include the accounts of the Corporation and its

subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.

The preparation of financial statements in conformity with accounting principles generally accepted in the United

States of America 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. The allowance for loan losses, other-than-temporary impairment of investment

securities and goodwill and other intangibles are particularly subject to change.

SECURITIES

Management determines the appropriate classification of securities at the time of purchase. If management has

the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are

classified as held to maturity and carried at amortized cost. Securities to be held for indefinite periods of time or

not intended to be held to maturity are classified as available for sale and carried at fair value. Unrealized holding

gains and losses on securities classified as available for sale are excluded from earnings and are reported as

accumulated other comprehensive income (loss) in shareholders' equity, net of the related tax effects, until

realized. Realized gains and losses are determined using the specific identification method.

Management evaluates securities for other-than-temporary impairment (“OTTI”) on at least a quarterly basis, and

more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized

loss position, management considers the extent and duration of the unrealized loss, and the financial condition and

near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than

not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost

basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized

cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the

aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to

credit loss, which must be recognized in the income statement and 2) other-than-temporary impairment (OTTI)

related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the

difference between the present value of the cash flows expected to be collected and the amortized cost basis. For

equity securities, the entire amount of impairment is recognized through earnings.

In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the

Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date

to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse

change in the remaining expected future cash flows.

F-7

Securities are placed on non-accrual status when management believes there are significant doubts regarding the

ultimate collectability of interest and/or principal. Premiums and discounts are amortized or accreted over the life

of the related security as an adjustment of yield using the interest method. Dividend and interest income is

recognized when earned.

FEDERAL HOME LOAN BANK (FHLB) AND FEDERAL RESERVE BANK (FRB) STOCK

The Bank is a member of both the FHLB and FRB system. FHLB members are required to own a certain amount

of stock based on the level of borrowings and other factors, while FRB members are required to own a certain

amount of stock based on a percentage of the Bank’s capital stock and surplus. FHLB and FRB stock are carried

at cost and classified as non-marketable equities and periodically evaluated for impairment based on ultimate

recovery of par value. Cash dividends are reported as income.

BANK OWNED LIFE INSURANCE

Bank Owned Life Insurance ("BOLI") is recorded at the amount that can be realized under the insurance contracts

at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that

are probable at settlement. Changes in the cash surrender value are recorded in other income.

LOANS HELD FOR SALE

Certain mortgage loans are originated with the intent to sell. Loans held for sale are recorded at the lower of cost

or fair value. Loans held for sale, as well as the commitments to sell the loans that are originated for sale, are

regularly evaluated for changes in fair value. If necessary, a valuation allowance is established with a charge to

income for unrealized losses attributable to a change in market rates.

LOANS

Loans are stated at the amount of unpaid principal balance less unearned discounts and net deferred origination

fees and costs. The Corporation has the ability and intent to hold its loans for the foreseeable future.

Interest on loans is accrued and credited to operations using the interest method. Past due status is based on the

contractual terms of the loan. The accrual of interest is generally discontinued and previously accrued interest is

reversed when loans become 90 days delinquent. Loans may also be placed on non-accrual status if management

believes such classification is otherwise warranted. All payments received on non accrual loans are applied to

principal. Loans are returned to accrual status when they become current as to principal and interest and remain

current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to

receive all of its original principal and interest. Loan origination fees and certain direct loan origination costs are

deferred and amortized over the life of the loan as an adjustment to yield, using the interest method.

LOAN CONCENTRATIONS

The loan portfolio is widely diversified by types of borrowers, industry groups, and market areas within our core

footprint. Significant loan concentrations are considered to exist for a financial institution when there are

amounts loaned to numerous borrowers engaged in similar activities that would cause them to be similarly

impacted by economic or other conditions. At December 31, 2011 and 2010, 22.5% and 10.4%, respectively, of

the Corporation’s loans consisted of commercial real estate loans to borrowers in the real estate, rental or leasing

sector. The major portion of this sector comprises borrowers that rent, lease or otherwise allow the use of their

own assets by others. No other significant concentrations existed in the Corporation’s portfolio in excess of 10%

of total loans as of December 31, 2011 or 2010.

F-8

Purchased Credit Impaired Loans: The Corporation purchased individual loans and groups of loans, some of

which have shown evidence of credit deterioration since origination. These purchased loans are recorded at the

amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are

recognized by an increase in the provision for loan losses.

Such purchased loans are accounted for individually. The Corporation estimates the amount and timing of

expected cash flows for each purchased loan and the expected cash flows in excess of amount paid is recorded as

interest income over the remaining life of the loan (accretable yield). The excess of the loan’s contractual

principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan expected cash flows continue to be estimated. If the present value of expected cash flows

is less than the carrying amount, a loss is recorded. If the present value of expected cash flows is greater than the

carrying amount, it is recognized as part of future interest income.

ALLOWANCE FOR LOAN LOSSES

The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are

charged against the allowance for loan losses when management believes that the collectability of all or a portion

of the principal is unlikely. The allowance is an amount that management believes will be adequate to absorb

probable incurred losses on existing loans. Management's evaluation of the adequacy of the allowance for loan

losses is performed on a periodic basis and takes into consideration such factors as the credit risk grade assigned

to the loan, historical loan loss experience and review of specific problem loans (including evaluations of the

underlying collateral). Historical loss experience is adjusted by management based on their judgment as to the

current impact of qualitative factors including changes in the composition and volume of the loan portfolio,

overall portfolio quality, and current economic conditions that may affect the borrowers' ability to pay.

Management believes that the allowance for loan losses is adequate to absorb probable incurred losses. While

management uses available information to recognize losses on loans, future additions to the allowance may be

necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part

of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may

require the Corporation to recognize additions to the allowance based on their judgments about information

available to them at the time of their examination.

Management, after considering current information and events regarding the borrower's ability to repay their

obligations, classifies a loan as impaired when it is probable that the Corporation will be unable to collect all

amounts due according to the contractual terms of the loan agreement. Factors considered by management in

determining impairment include payment status, collateral value, and the probability of collecting scheduled

principal and interest payments when due. Loans that experience insignificant payment delays and payment

shortfalls generally are not classified as impaired. Management determines the significance of payment delays and

payment shortfalls on case-by-case basis, taking into consideration all of the circumstances surrounding the loan

and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment

record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be

impaired and is placed on nonaccrual status, all future payments received are applied to principal.

If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of

estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected

solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and residential

real estate loans, are collectively evaluated for impairment, and accordingly, they are not separately identified for

impairment disclosures. Troubled debt restructurings are separately identified for impairment disclosures and are

measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a

troubled debt restructuring is considered to be a collateral dependent loan, the loan is reported, net, at the fair

value of the collateral. For troubled debt restructurings that subsequently default, the Corporation determines the

amount of reserve in accordance with the accounting policy for the allowance for loan losses.

F-9

The general component covers non-impaired loans and is based on historical loss experience adjusted for current

factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a

rolling five year history of net losses. For all other unclassified loans, the historical loss experience is determined

by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two

years. This actual loss experience is supplemented with other economic factors based on the risks present for

each portfolio class. These economic factors include consideration of the following: levels of and trends in

delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms

of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies,

procedures, and practices; experience, ability, and depth of lending management and other relevant staff; national

and local economic trends and conditions; industry conditions; and effects of changes in credit concentrations.

The following portfolio segments have been identified: commercial, financial and agricultural; commercial

mortgages; residential mortgages; and consumer loans.

Risk Characteristics

Commercial, financial and agricultural loans primarily consist of loans to small to mid-sized businesses in our

market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of

the borrower’s ability to make repayment from the cash flow of the borrower’s business. Further, the collateral

securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit

risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on

a borrower’s operations or on the value of underlying collateral, if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential

mortgage loans, inferring higher potential losses on an individual customer basis. Loan repayment is often

dependent on the successful operation and management of the properties and/or the businesses occupying the

properties, as well as on the collateral securing the loan. Economic events or conditions in the real estate market

could have an adverse impact on the cash flows generated by properties securing the Company’s commercial real

estate loans and on the value of such properties.

Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from his

or her employment and other income, but are secured by real property whose value tends to be more easily

ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the

characteristics of individual borrowers and the nature of the loan collateral.

The consumer loan segment includes home equity lines of credit and home equity loans, which exhibit many of

the same risk characteristics as residential mortgages. Indirect and other consumer loans may entail greater credit

risk than residential mortgage and home equity loans, particularly in the case of other consumer loans which are

unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles or boats.

In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of

repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the

borrower’s continuing financial stability, thus are more likely to be affected by adverse personal circumstances

such as job loss, illness or personal bankruptcy. Furthermore, the application of various federal and state laws,

including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

PREMISES AND EQUIPMENT

Land is carried at cost, while buildings, equipment, leasehold improvements and furniture are stated at cost less

accumulated depreciation and amortization. Depreciation is charged to current operations under the straight-line

method over the estimated useful lives of the assets, which range from 15 to 50 years for buildings and from 3 to

10 years for equipment and furniture. Amortization of leasehold improvements and leased equipment is

recognized on the straight-line method over the shorter of the lease term or the estimated life of the asset.

F-10

OTHER REAL ESTATE

Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at estimated fair value of the

property less estimated costs to dispose at the time of acquisition. Write downs from the carrying value of the

loan to estimated fair value which are required at the time of foreclosure are charged to the allowance for loan

losses. Subsequent adjustments to the carrying values of such properties resulting from declines in fair value are

charged to operations in the period in which the declines occur.

INCOME TAXES

The Corporation files a consolidated tax return. Deferred tax assets and liabilities are recognized for future tax

consequences attributable to temporary differences between the financial statement carrying amounts of existing

assets and liabilities and their respective tax bases, and for unused tax loss carry forwards. Deferred tax assets

and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which

temporary differences are expected to be recovered or settled, or the tax loss carry forwards are expected to be

utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the

period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the

amount expected to be realized.

A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be

sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the

largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions

not meeting the "more likely than not" test, no tax benefit is recorded.

WEALTH MANAGEMENT GROUP FEE INCOME

Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated

balance sheets, since such assets are not assets of the Corporation. Wealth Management Group income is

recognized on the accrual method as earned based on contractual rates applied to the balances of individual trust

accounts. The unaudited market value of trust assets under administration totaled $1.596 billion at December 31,

2011 and $1.625 billion at December 31, 2010.

PENSION PLAN

Pension costs, based on actuarial computations of benefits for employees, are charged to current operating results.

The Corporation's funding policy is to contribute amounts to the plan sufficient to meet minimum regulatory

funding requirements, plus such additional amounts as the Corporation may determine to be appropriate from

time to time. On April 21, 2010 the Corporation's Board of Directors approved an amendment to the

Corporation’s Defined Benefit Pension Plan. Under the amendment, which became effective on July 1, 2010,

new employees hired on or after the effective date will not be eligible to participate in the plan, however, existing

participants at that time will continue to accrue benefits. The amendment will result in a decrease over time in the

future benefit obligations of the plan and the corresponding net periodic benefit cost associated with the plan.

POSTRETIREMENT BENEFITS

The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to

employees who meet minimum age and service requirements. Postretirement life insurance benefits are also

provided to certain employees who retired prior to July 1981.

F-11

STOCK-BASED COMPENSATION

Compensation cost is recognized for restricted stock awards issued to employees, based on the fair value of these

awards at the date of the grant. The market price of the Corporation’s common stock at the date of the grant is

used for restricted stock awards.

GOODWILL AND INTANGIBLE ASSETS

Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase

price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations

after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus

the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and

liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business

combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least

annually. The Corporation has selected December 31 as the date to perform the annual impairment test.

Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated

residual values. Goodwill is the only intangible asset with an indefinite life on our balance sheet.

The Corporation's intangible assets with definite useful lives resulted from the purchase of the trust business of

Partners Trust Bank in May of 2007, the acquisition of three former M&T Bank branch offices in March 2008, the

acquisition of Cascio Financial Strategies in May of 2008, the acquisition of Canton Bancorp, Inc. in May 2009,

and the acquisition of Fort Orange Financial Corp. in April 2011 with balances of $3.427 million, $357 thousand,

$72 thousand, $49 thousand and $2.285 million, respectively, at December 31, 2011. The trust business

intangible is being amortized to expense over the expected useful life of 15 years. The identifiable core deposit

and customer relationship intangibles related to the M&T branch offices and Canton Bancorp, Inc. acquisitions

are being amortized to expense using a 7.25 and 7 year accelerated method, respectively. The customer

relationship intangible for Cascio Financial is being expensed over a 5 year period. The identifiable core deposit

intangible related to the FOFC acquisition is being amortized using a 10 year sum-of-the-years digits method.

The balances are reviewed for impairment on an ongoing basis or whenever events or changes in business

circumstances warrant a review of the carrying value. If impairment is determined to exist, the related write-

down of the intangible asset's carrying value is charged to operations.

Based on these impairment reviews, the Corporation determined that goodwill and other intangible assets were

not impaired at December 31, 2011.

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.

COMPREHENSIVE INCOME

Comprehensive income consists of net income and other comprehensive income. Other comprehensive income

includes unrealized gains and losses on securities available for sale and changes in the funded status of the

Corporation’s defined benefit pension plan and other benefit plans, net of the related tax effect, which are also

recognized as separate components of equity.

F-12

CASH AND CASH EQUIVALENTS

Cash and cash equivalents include cash and amounts due from banks and interest-bearing deposits with other

financial institutions.

TRADING ASSETS

Securities that are held to fund a deferred compensation plan are recorded at fair value with changes in fair value

included in earnings.

SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

The Corporation enters into sales of securities under agreements to repurchase. The agreements are treated as

financings, and the obligations to repurchase securities sold are reflected as liabilities in the consolidated balance

sheets. The amount of the securities underlying the agreements continues to be carried in the Corporation's

securities portfolio. The Corporation has agreed to repurchase securities identical to those sold. The securities

underlying the agreements are under the Corporation's control.

OTHER FINANCIAL INSTRUMENTS

The Corporation is a party to certain other financial instruments with off-balance sheet risk such as unused

portions of lines of credit and commitments to fund new loans. The Corporation's policy is to record such

instruments when funded.

SEGMENT REPORTING

The Corporation's operations are solely in the financial services industry and primarily include the provision of

traditional banking and wealth management services. The Corporation operates primarily in the New York

counties of Albany, Broome, Chemung, Saratoga, Steuben, Schuyler, Tioga and Tompkins, and the northern tier

of Pennsylvania. The Corporation has identified separate operating segments and internal financial information is

primarily reported and aggregated in two lines of business, banking and wealth management advisory services.

RECLASSIFICATION

Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform with

the current year's presentation.