CHEMUNG FINANCIAL CORP - Quarter Report: 2019 June (Form 10-Q)



UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q

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

For Quarterly period ended June 30, 2019



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

Commission File No. 000-13888



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

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

One Chemung Canal Plaza, Elmira, NY			14901
(Address of principal executive offices)			(Zip Code)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES: X NO:____

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).
YES: X NO:____

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

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

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

The number of shares of the registrant's common stock, $.01 par value, outstanding on August 7, 2019 was 4,842,971.



Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class	Trading Symbol	Name of exchange on which registered
Common stock, par value $.01 per share	CHMG	Nasdaq Global Select Market

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX



		PAGES
	Glossary of Abbreviations and Terms	3

PART I.	FINANCIAL INFORMATION

Item 1:	Financial Statements – Unaudited

	Consolidated Balance Sheets	7
	Consolidated Statements of Income	8
	Consolidated Statements of Comprehensive Income	9
	Consolidated Statements of Shareholders’ Equity	11
	Consolidated Statements of Cash Flows	12

	Notes to Unaudited Consolidated Financial Statements	14

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	45

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	77

Item 4:	Controls and Procedures	78

PART II.	OTHER INFORMATION

Item 1:	Legal Proceedings	79

Item 1A:	Risk Factors	79

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	79

Item 3:	Defaults Upon Senior Securities	79

Item 4:	Mine Safety Disclosures	79

Item 5:	Other Information	79

Item 6:	Exhibits	80

SIGNATURES		81

EXHIBIT INDEX

GLOSSARY OF ABBREVIATIONS AND TERMS

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

Abbreviations



AFS	Available for sale securities
ALCO	Asset-Liability Committee
AOCI	Accumulated Other Comprehensive Income
ASC	Accounting Standards Codification
ASU	Accounting Standards Update
Bank	Chemung Canal Trust Company
Basel III	The Third Basel Accord of the Basel Committee on Banking Supervision
Board of Directors	Board of Directors of Chemung Financial Corporation
BOLI	Bank Owned Life Insurance
CAM	Common area maintenance charges
CDARS	Certificate of Deposit Account Registry Service
CDO	Collateralized Debt Obligation
CECL	Current expected credit loss
CFS	CFS Group, Inc.
Corporation	Chemung Financial Corporation
CRM	Chemung Risk Management, Inc.
Dodd-Frank Act	The Dodd-Frank Wall Street Reform and Consumer Protection Act
EPS	Earnings per share
Exchange Act	Securities Exchange Act of 1934
FASB	Financial Accounting Standards Board
FDIC	Federal Deposit Insurance Corporation
FHLBNY	Federal Home Loan Bank of New York
FRB	Board of Governors of the Federal Reserve System
FRBNY	Federal Reserve Bank of New York
Freddie Mac	Federal Home Loan Mortgage Corporation
GAAP	U.S. Generally Accepted Accounting Principles
HTM	Held to maturity securities
ICS	Insured Cash Sweep Service
IFRS	International Financial Reporting Standards
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
NAICS	North American Industry Classification System
N/M	Not meaningful
OPEB	Other postemployment benefits
OREO	Other real estate owned
OTTI	Other-than-temporary impairment



PCI	Purchased credit impaired
Regulatory Relief Act	Economic Growth, Regulatory Relief, and Consumer Protection Act
ROA	Return on average assets
ROE	Return on average equity
RWA	Risk-weighted assets
SBA	Small Business Administration
SEC	Securities and Exchange Commission
Securities Act	Securities Act of 1933
Tax Act	Tax Cuts and Jobs Act of 2017
TDRs	Troubled debt restructurings
WMG	Wealth Management Group

Terms



Allowance for loan losses to total loans	Represents period-end allowance for loan losses divided by retained loans.
Assets under administration	Represents assets that are beneficially owned by clients and all investment decisions pertaining to these assets are also made by clients.
Assets under management	Represents assets that are managed on behalf of clients.
Basel III	A comprehensive set of reform measures designed to improve the regulation, supervision, and risk management within the banking sector. The reforms require banks to maintain proper leverage ratios and meet certain capital requirements.
Benefit obligation	Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.
Capital Bank	Division of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany and Saratoga.
CDARS	Product involving a network of financial institutions that exchange certificates of deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Captive insurance company	A company that provides risk-mitigation services for its parent company.
Collateralized debt obligation	A structured financial product that pools together cash flow-generating assets, such as mortgages, bonds, and loans.
Collateralized mortgage obligations	A type of mortgage-backed security with principal repayments organized according to their maturities and into different classes based on risk. The mortgages serve as collateral and are organized into classes based on their risk profile.
Dodd-Frank Act	The Dodd-Frank Act was enacted on July 21, 2010 and significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress.
Fully taxable equivalent basis	Income from tax-exempt loans and investment securities that have been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates; the corresponding income tax impact related to tax-exempt items is recorded within income tax expense.
GAAP	Accounting principles generally accepted in the United States of America.
Holding company	Consists of the operations for Chemung Financial Corporation (parent only).
ICS	Product involving a network of financial institutions that exchange interest-bearing money market deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Loans held for sale	Residential real estate loans originated for sale on the secondary market with maturities from 15-30 years.



Long term lease obligation	An obligation extending beyond the current year, which is related to a long term finance lease that is considered to have the economic characteristics of asset ownership.
Mortgage-backed securities	A type of asset-backed security that is secured by a collection of mortgages.
Municipal clients	A political unit, such as a city, town, or village, incorporated for local self-government.
N/A	Data is not applicable or available for the period presented.
N/M	Not meaningful.
Non-GAAP	A calculation not made according to GAAP.
Obligations of state and political subdivisions	An obligation that is guaranteed by the full faith and credit of a state or political subdivision that has the power to tax.
Obligations of U.S. Government	A federally guaranteed obligation backed by the full power of the U.S. government, including Treasury bills, Treasury notes and Treasury bonds.
Obligations of U.S. Government sponsored enterprise obligations	Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
OREO	Represents real property owned by the Corporation, which is not directly related to its business and is most frequently the result of a foreclosure on real property.
OTTI	Impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security.
PCI loans	Represents loans that were acquired in the Fort Orange Financial Corp. transaction and deemed to be credit-impaired on the acquisition date in accordance with the guidance of FASB.
Political subdivision	A county, city, town, or other municipal corporation, a public authority, or a publicly-owned entity that is an instrumentality of a state or a municipal corporation.
Pre-provision profit/(loss)	Represents total net revenue less non-interest expense, before income tax expense (benefit). The Corporation believes that this financial measure is useful in assessing the ability of a bank to generate income in excess of its provision for credit losses.
Regulatory Relief Act	The Economic Growth, Regulatory Relief and Consumer Protection Act was enacted on May 24, 2018 provides certain limited amendments to the Dodd-Frank Act, as well as certain targeted modifications to other post-financial crisis regulatory requirements. In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements.
RWA	Risk-weighted assets consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On-balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off-balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. Risk-weighted assets also incorporate a measure for market risk related to applicable trading assets-debt and equity instruments. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets.
SBA loan pools	Business loans partially guaranteed by the SBA.
Securities sold under agreements to repurchase	Sale of securities together with an agreement for the seller to buy back the securities at a later date.
Tax Act	The Tax Act was enacted on December 22, 2017 and amended the Internal Revenue Code of 1986. The legislation reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, with some related business deductions and credits being either reduced or eliminated.
TDR	A TDR is deemed to occur when the Corporation modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.



Trust preferred securities	A hybrid security with characteristics of both subordinated debt and preferred stock which allows for early redemption by the issuer, makes fixed or variable payments, and matures at face value.
Unaudited	Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.
WMG	Provides services as executor and trustee under wills and agreements, and guardian, custodian, trustee and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, financial planning, pension, estate planning and employee benefit administration services.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)



(in thousands, except share and per share data)	June 30, 2019			December 31, 2018
ASSETS
Cash and due from financial institutions	$	32,622		$	33,040
Interest-earning deposits in other financial institutions	83,838			96,932
Total cash and cash equivalents	116,460			129,972

Equity investments, at estimated fair value	2,079			1,909
Securities available for sale, at estimated fair value	269,286			242,258
Securities held to maturity, estimated fair value of $4,099 at June 30, 2019 and $4,858 at December 31, 2018	4,090			4,875
FHLBNY and FRBNY Stock, at cost	3,091			3,138

Loans, net of deferred loan fees	1,288,371			1,311,906
Allowance for loan losses	(19,656		)	(18,944		)
Loans, net	1,268,715			1,292,962

Loans held for sale	624			502
Premises and equipment, net	23,605			24,980
Operating lease right-of-use assets	8,220			—
Goodwill	21,824			21,824
Other intangible assets, net	1,037			1,351
Bank-owned life insurance	3,079			3,048
Accrued interest receivable and other assets	30,887			28,524

Total assets	$	1,752,997		$	1,755,343

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	451,985		$	484,433
Interest-bearing	1,089,153			1,084,804
Total deposits	1,541,138			1,569,237

Long term finance lease obligation	4,195			4,304
Operating lease liabilities	8,250			—
Dividends payable	1,259			1,254
Accrued interest payable and other liabilities	19,768			15,519
Total liabilities	1,574,610			1,590,314

Shareholders' equity:
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at June 30, 2019 and December 31, 2018	53			53
Additional paid-in capital	46,284			45,820
Retained earnings	150,063			143,129
Treasury stock, at cost; 469,138 shares at June 30, 2019 and 488,844 shares at December 31, 2018	(12,062		)	(12,562		)
Accumulated other comprehensive loss	(5,951		)	(11,411		)
Total shareholders' equity	178,387			165,029

Total liabilities and shareholders' equity	$	1,752,997		$	1,755,343

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands, except per share data)	2019			2018			2019			2018
Interest and dividend income:
Loans, including fees	$	14,570		$	14,300		$	29,059		$	28,350
Taxable securities	1,281			1,264			2,476			2,553
Tax exempt securities	306			295			579			603
Interest-earning deposits	525			10			1,233			32
Total interest and dividend income	16,682			15,869			33,347			31,538
Interest expense:
Deposits	1,544			608			3,005			1,109
Securities sold under agreements to repurchase	—			44			—			137
Borrowed funds	37			200			74			375
Total interest expense	1,581			852			3,079			1,621
Net interest income	15,101			15,017			30,268			29,917
Provision for loan losses	150			2,362			1,243			3,071
Net interest income after provision for loan losses	14,951			12,655			29,025			26,846

Non-interest income:
WMG fee income	2,524			2,373			4,800			4,689
Service charges on deposit accounts	1,085			1,144			2,189			2,308
Interchange revenue from debit card transactions	1,024			996			2,055			2,031
Net gains on security transactions	19			—			19			—
Changes in fair value of equity investments	27			26			116			24
Net gains on sales of loans held for sale	29			59			77			105
Net losses on sales of other real estate owned	(3		)	(48		)	(86		)	(4		)
Income from bank-owned life insurance	16			17			31			33
Other	365			758			810			1,614
Total non-interest income	5,086			5,325			10,011			10,800

Non-interest expenses:
Salaries and wages	5,780			5,564			11,501			11,278
Pension and other employee benefits	1,473			1,518			3,018			3,176
Other components of net periodic pension and postretirement benefits	(141		)	(408		)	(282		)	(816		)
Net occupancy	1,478			1,643			3,045			3,251
Furniture and equipment	595			702			1,123			1,360
Data processing	1,873			1,764			3,600			3,506
Professional services	418			508			823			1,048
Legal accruals and settlements	—			989			—			989
Amortization of intangible assets	151			182			314			376
Marketing and advertising	145			255			413			604
Other real estate owned	40			100			71			238
FDIC insurance	221			301			486			618
Loan expense	190			184			386			353
Other	1,600			1,665			2,822			3,152
Total non-interest expenses	13,823			14,967			27,320			29,133
Income before income tax expense	6,214			3,013			11,716			8,513
Income tax expense	1,233			486			2,267			1,547
Net income	$	4,981		$	2,527		$	9,449		$	6,966

Weighted average shares outstanding	4,866			4,828			4,863			4,825
Basic and diluted earnings per share	$	1.02		$	0.52		$	1.94		$	1.44

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)



	Three Months Ended June 30,						Six Months Ended June 30,
(in thousands)	2019			2018			2019			2018
Net income	$	4,981		$	2,527		$	9,449		$	6,966
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale	3,882			(400		)	7,312			(4,839		)
Reclassification adjustment for gains realized in net income	(19		)	—			(19		)	—
Net unrealized gains (losses)	3,863			(400		)	7,293			(4,839		)
Tax effect	986			(101		)	1,860			(1,233		)
Net of tax amount	2,877			(299		)	5,433			(3,606		)

Change in funded status of defined benefit pension plan and other benefit plans:
Reclassification adjustment for amortization of prior service costs	(55		)	(55		)	(110		)	(110		)
Reclassification adjustment for amortization of net actuarial loss	73			73			146			146
Total before tax effect	18			18			36			36
Tax effect	4			4			9			9
Net of tax amount	14			14			27			27

Total other comprehensive income (loss)	2,891			(285		)	5,460			(3,579		)

Comprehensive income	$	7,872		$	2,242		$	14,909		$	3,387

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)



(in thousands, except share and per share data)	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balances at March 31, 2018	$	53	$	46,404		$	131,694		$	(14,053	)	$	(13,836	)	$	150,262
Net income	—		—			2,527			—			—			2,527
Other comprehensive loss	—		—			—			—			(285		)	(285		)
Restricted stock awards	—		69			—			—			—			69
Restricted stock units for directors' deferred compensation plan	—		22			—			—			—			22
Cash dividends declared ($0.26 per share)	—		—			(1,248		)	—			—			(1,248		)
Distribution of 36,681 shares of treasury stock for deferred directors’ compensation	—		(722		)	—			940			—			218
Sale of 2,648 shares of treasury stock (a)	—		100			—			115			—			215
Balances at June 30, 2018	$	53	$	45,873		$	132,973		$	(12,998	)	$	(14,121	)	$	151,780



Balances at March 31, 2019	$	53	$	46,174		$	146,340		$	(12,191	)	$	(8,842	)	$	171,534
Net income	—		—			4,981			—			—			4,981
Other comprehensive income	—		—			—			—			2,891			2,891
Restricted stock awards	—		98			—			—			—			98
Restricted stock units for directors' deferred compensation plan	—		10			—			—			—			10
Cash dividends declared ($0.26 per share)	—		—			(1,258		)	—			—			(1,258		)
Distribution of 2,551 shares of treasury stock for deferred directors’ compensation	—		(52		)	—			65			—			13
Sale of 2,485 shares of treasury stock (a)	—		54			—			64			—			118
Balances at June 30, 2019	$	53	$	46,284		$	150,063		$	(12,062	)	$	(5,951	)	$	178,387

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

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)



(in thousands, except share and per share data)	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balances at January 1, 2018, as reported	$	53	$	45,967		$	128,453		$	(14,320	)	$	(10,340	)	$	149,813
Cumulative effect of accounting change (b)	—		—			40			—			(202		)	(162		)
Balances at January 1, 2018, as adjusted	53		45,967			128,493			(14,320		)	(10,542		)	149,651
Net income	—		—			6,966			—			—			6,966
Other comprehensive loss	—		—			—			—			(3,579		)	(3,579		)
Restricted stock awards	—		232			—			—			—			232
Restricted stock units for directors' deferred compensation plan	—		47			—			—			—			47
Cash dividends declared ($0.52 per share)	—		—			(2,486		)	—			—			(2,486		)
Distribution of 6,015 shares of treasury stock for directors' compensation	—		147			—			154			—			301
Distribution of 1,784 shares of treasury stock for employee compensation	—		44			—			45			—			89
Distribution of 36,681 shares of treasury stock for deferred directors’ compensation	—		(722		)	—			940			—			218
Sale of 7,143 shares of treasury stock (a)	—		158			—			183			—			341
Balances at June 30, 2018	$	53	$	45,873		$	132,973		$	(12,998	)	$	(14,121	)	$	151,780



Balances at January 1, 2019	$	53	$	45,820		$	143,129		$	(12,562	)	$	(11,411	)	$	165,029
Net income	—		—			9,449			—			—			9,449
Other comprehensive income	—		—			—			—			5,460			5,460
Restricted stock awards	—		199			—			—			—			199
Restricted stock units for directors' deferred compensation plan	—		21			—			—			—			21
Distribution of 439 shares of treasury stock grants for employee restricted stock awards	—		—			—			11			—			11
Cash dividends declared ($0.52 per share)	—		—			(2,515		)	—			—			(2,515		)
Distribution of 8,465 shares of treasury stock for directors' compensation	—		139			—			218			—			357
Distribution of 2,373 shares of treasury stock for employee compensation	—		39			—			61			—			100
Distribution of 2,551 shares of treasury stock for deferred directors’ compensation	—		(52		)	—			65			—			13
Repurchase of 272 shares of common stock	—		—			—			(13		)	—			(13		)
Sale of 6,150 shares of treasury stock (a)	—		118			—			158			—			276
Balances at June 30, 2019	$	53	$	46,284		$	150,063		$	(12,062	)	$	(5,951	)	$	178,387

(b) Due to implementation of ASC 2016-01. See "Adoption of New Accounting Standards" discussion in Note 1.

See accompanying notes to unaudited consolidated financial statements.



CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)	Six Months Ended June 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2019			2018
Net income	$	9,449		$	6,966
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets	314			376
Provision for loan losses	1,243			3,071
Net losses on disposal of fixed assets	18			10
Depreciation and amortization of fixed assets	1,623			1,816
Amortization of right-of-use asset	322			—
Amortization of premiums on securities, net	518			608
Gains on sales of loans held for sale, net	(77		)	(105		)
Proceeds from sales of loans held for sale	3,938			5,308
Loans originated and held for sale	(3,983		)	(5,345		)
Changes in fair value on equity investments	(116		)	(24		)
Net gains on securities transactions	(19		)	—
Net losses on sales of other real estate owned	86			4
Write-downs on OREO	53			—
Purchase of equity investments	(54		)	(50		)
Expense related to restricted stock units for directors' deferred compensation plan	21			47
Expense related to employee stock compensation	100			89
Expense related to employee restricted stock awards	199			232
Income from bank-owned life insurance	(31		)	(33		)
Increase in other assets and accrued interest receivable	(2,716		)	(4,209		)
Payments made on operating leases	(300		)	—
(Increase) decrease in accrued interest payable	82			(33		)
Increase in other liabilities	2,702			1,825
Net cash provided by operating activities	13,372			10,553

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale	15,200			—
Proceeds from maturities, calls, and principal paydowns on securities available for sale	21,828			22,486
Proceeds from maturities and principal collected on securities held to maturity	1,330			585
Purchases of securities available for sale	(57,262		)	—
Purchases of securities held to maturity	(545		)	(610		)
Purchase of FHLBNY and FRBNY stock	(6		)	(17,123		)
Redemption of FHLBNY and FRBNY stock	53			17,091
Purchases of premises and equipment	(266		)	(1,218		)
Proceeds from sales of other real estate owned	342			1,295
Net (increase) decrease in loans	22,884			(27,451		)
Net cash (used in) provided by investing activities	3,558			(4,945		)

CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts	(55,665		)	(16,269		)
Net increase in time deposits	27,566			27,732
Net decrease in securities sold under agreements to repurchase	—			(10,000		)
Net decrease in FHLBNY overnight advances	—			1,250
Repayments of FHLBNY long term advances	—			(2,000		)
Payments made on finance leases	(109		)	(106		)
Sale of treasury stock	276			341
Cash dividends paid	(2,510		)	(2,470		)
Net cash used in financing activities	(30,442		)	(1,522		)
Net increase (decrease) in cash and cash equivalents	(13,512		)	4,086
Cash and cash equivalents, beginning of period	129,972			30,729
Cash and cash equivalents, end of period	$	116,460		$	34,815

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(UNAUDITED)



(in thousands)	Six Months Ended June 30,
Supplemental disclosure of cash flow information:	2019			2018
Cash paid for:
Interest	$	2,997		$	1,654
Income taxes	$	1,975		$	1,355
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	120		$	244
Dividends declared, not yet paid	$	1,259		$	1,249
Repurchase of common stock in lieu of employee payroll taxes	$	(13	)	$	—
Distribution of treasury stock for directors' compensation	$	357		$	301
Distribution of treasury stock for deferred directors' compensation	$	13		$	218
Securities traded, not yet settled	$	—		$	—

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

Basis of Presentation

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The unaudited consolidated financial statements should be read in conjunction with the Corporation's 2018 Annual Report on Form 10-K for the year ended December 31, 2018. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.

Reclassifications

Some items in the prior year financial statements were reclassified to conform to the current presentation. Reclassifications had no effect on prior year net income or shareholders' equity.

Recent Accounting Pronouncements

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal years beginning after December 15, 2018. In July 2019, the FASB proposed changes to delay the effective date of ASU 2016-13 to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation would be eligible for the proposed delay. The Corporation anticipates that the adoption of the CECL model will result in an increase to the Corporation's allowance for loan losses. The Corporation has established a committee to oversee the implementation of CECL and has selected a vendor to assist in the implementation process. In 2018, the committee began establishing parameters which will be used in the CECL model with the selected vendor. The Corporation is running its current incurred loss model and a CECL model concurrently. The Corporation is currently evaluating the impact of the proposed delay on its implementation plan.

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

Adoption of New Accounting Standards

On January 1, 2018, the Corporation adopted ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and all subsequent amendments to the ASU (collectively, "ASU 606"), which creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Corporation's revenues come from interest income and other sources, including loans, securities, and derivatives that are outside the scope of ASC 606. The Corporation's services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as the Corporation satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposits, interchange income, wealth management fees, and the sale of OREO. The amendments allow for one of two transition methods: full retrospective or modified retrospective. The full retrospective approach requires application to all periods presented. The modified retrospective transition requires application to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect is recognized at the date of initial application on uncompleted contracts. The Corporation adopted the new revenue guidance using the modified retrospective approach. There was no significant change upon adoption of the standard, as the new standard did not materially change the way the Corporation currently records revenue for its WMG and deposit related fees at the Bank; as such, no cumulative effect adjustment was recorded. Refer to Note 10 - Revenue from Contracts with Customers for further discussion on the Corporation's accounting policies for revenue sources within the scope of ASC 606.

On January 1, 2018, the Corporation adopted ASU 2016-01, an amendment to Recognition and Measurement of Financial Assets and Financial Liabilities ("ASC 825"). The objectives of the ASC 825 were (1) require equity investments to be measured at fair value, with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet, (4) require the use of the exit price notion when measuring the fair value of financial instruments, and (5) clarify the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Corporation adopted all provisions of this ASU using the modified retrospective method. The adjustments to opening retained earnings and accumulated other comprehensive loss related to the adoption of ASC 825 are immaterial to the financial statements.

On January 1, 2018, the Corporation adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The objective of the ASU is to reduce the existing diversity in practice relating to eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principal. The adoption of ASU 2016-15 did not result in a change to how the Corporation accounts for its cash flows.

On January 1, 2018, the Corporation adopted ASU 2017-07, Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost ("ASC 715"). The objective of ASC 715 was to improve guidance related to the presentation of defined benefit costs in the income statement. Specifically, ASC 715 required that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, ASC 715 allows only the service cost component to be eligible for capitalization, when applicable. Results for reporting periods beginning after January 1, 2018 are presented under ASC 715, while prior period amounts continue to be reported in accordance with legacy GAAP, with comparable periods presented retrospectively for the presentation of the service cost and net periodic postretirement benefit cost in the income statement. The Corporation elected the practical expedient, which permits employers to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation for applying retrospective presentation requirements.

On January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The Corporation adopted the new lease guidance using the modified retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, allowing entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted. In addition, the Corporation elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Corporation to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities of approximately $8.6 million as of January 1, 2019. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.

On January 1, 2019, the Corporation adopted ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The objective of the ASU is to align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. The amendment requires that the premium be amortized to the earliest call date, but does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements.

NOTE 2 EARNING PER COMMON SHARE (shares in thousands)

Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Issuable shares, including those related to directors’ restricted stock units and directors’ stock compensation, are considered outstanding and are included in the computation of basic earnings per share. All outstanding unvested share based payment awards that contain rights to non-forfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities and are considered outstanding at grant date. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur. Earnings per share were computed by dividing net income by 4,866 and 4,828 weighted average shares outstanding for the three-month periods ended June 30, 2019 and 2018, respectively. Earnings per share were computed by dividing net income by 4,863 and 4,825 weighted average shares outstanding for the six-month periods ended June 30, 2019 and 2018, respectively. There were no common stock equivalents during the three and six-month periods ended June 30, 2019 or 2018.

NOTE 3 SECURITIES

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



	June 30, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	4,999	$	—	$	4	$	4,995
Mortgage-backed securities, residential	200,665		1,101		1,378		200,388
Obligations of states and political subdivisions	45,194		1,227		5		46,416
Corporate bonds and notes	249		1		—		250
SBA loan pools	17,124		148		35		17,237
Total	$	268,231	$	2,477	$	1,422	$	269,286



	December 31, 2018
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	5,489	$	10	$	27	$	5,472
Mortgage-backed securities, residential	189,111		146		6,065		183,192
Obligations of states and political subdivisions	44,390		70		308		44,152
Corporate bonds and notes	249		—		2		247
SBA loan pools	9,257		—		62		9,195
Total	$	248,496	$	226	$	6,464	$	242,258

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



	June 30, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	1,750	$	—	$	—	$	1,750
Time deposits with other financial institutions	2,340		9		—		2,349
Total	$	4,090	$	9	$	—	$	4,099



	December 31, 2018
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	3,020	$	—	$	—	$	3,020
Time deposits with other financial institutions	1,855		—		17		1,838
Total	$	4,875	$	—	$	17	$	4,858

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



	June 30, 2019
	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	8,167	$	8,169	$	1,928	$	1,926
After one, but within five years	6,465		6,609		2,162		2,173
After five, but within ten years	34,706		35,759		—		—
After ten years	1,104		1,124		—		—
	50,442		51,661		4,090		4,099
Mortgage-backed securities, residential	200,665		200,388		—		—
SBA loan pools	17,124		17,237		—		—
Total	$	268,231	$	269,286	$	4,090	$	4,099

The proceeds from sales and calls of securities resulting in gains or losses for the three months ended June 30, 2019 and 2018 are listed below (in thousands):



	2019			2018
Proceeds	$	15,200		$	—
Gross gains	79			—
Gross losses	(60		)	—
Tax expense	5			—

The proceeds from sales and calls of securities resulting in gains or losses for the six months ended June 30, 2019 and 2018 are listed below (in thousands):



	2019			2018
Proceeds	$	15,200		$	—
Gross gains	79			—
Gross losses	(60		)	—
Tax expense	5			—

The following tables summarize the investment securities available for sale with unrealized losses at June 30, 2019 and December 31, 2018 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):



	Less than 12 months				12 months or longer				Total
June 30, 2019	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	—	$	—	$	4,995	$	4	$	4,995	$	4
Mortgage-backed securities, residential	—		—		133,078		1,378		133,078		1,378
Obligations of states and political subdivisions	480		1		323		4		803		5
SBA loan pools	—		—		1,540		35		1,540		35
Total temporarily impaired securities	$	480	$	1	$	139,936	$	1,421	$	140,416	$	1,422



	Less than 12 months				12 months or longer				Total
December 31, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	—	$	—	$	4,969	$	27	$	4,969	$	27
Mortgage-backed securities, residential	—		—		171,481		6,065		171,481		6,065
Obligations of states and political subdivisions	10,868		38		21,345		270		32,213		308
Corporate bonds and notes	247		2		—		—		247		2
SBA loan pools	5,985		17		3,210		45		9,195		62
Total temporarily impaired securities	$	17,100	$	57	$	201,005	$	6,407	$	218,105	$	6,464

Other-Than-Temporary Impairment

As of June 30, 2019, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage-backed securities. At June 30, 2019, all of the unrealized losses related to mortgage-backed securities were issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because it is not likely that the Corporation will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at June 30, 2019.

Equity Investments

Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in the consolidated statement of income.

NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES

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



	June 30, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	206,588	$	202,526
Agricultural	210		328
Commercial mortgages:
Construction	39,606		54,476
Commercial mortgages, other	608,894		606,694
Residential mortgages	183,835		182,724
Consumer loans:
Credit cards	—		1,449
Home equity lines and loans	94,465		98,145
Indirect consumer loans	138,658		149,380
Direct consumer loans	16,115		16,184
Total loans, net of deferred origination fees and costs	1,288,371		1,311,906
Interest receivable on loans	4,052		3,703
Total recorded investment in loans	$	1,292,423	$	1,315,609

The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30, 2019
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance	$	5,429		$	9,474	$	1,215		$	3,627		$	19,745
Charge-offs	(48		)	—		(39		)	(318		)	(405		)
Recoveries	4			1		45			116			166
Net recoveries (charge-offs)	(44		)	1		6			(202		)	(239		)
Provision	91			70		8			(19		)	150
Ending balance	$	5,476		$	9,545	$	1,229		$	3,406		$	19,656



	Three Months Ended June 30, 2018
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance	$	7,003		$	8,640		$	1,407		$	4,340		$	21,390
Charge-offs	(3,624		)	(145		)	(71		)	(463		)	(4,303		)
Recoveries	11			1			—			184			196
Net recoveries (charge-offs)	(3,613		)	(144		)	(71		)	(279		)	(4,107		)
Provision	1,579			244			109			430			2,362
Ending balance	$	4,969		$	8,740		$	1,445		$	4,491		$	19,645

The following tables present the activity in the allowance for loan losses by portfolio segment for the six month periods ended June 30, 2019 and 2018 (in thousands):



	Six Months Ended June 30, 2019
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	5,383		$	8,184	$	1,226		$	4,151		$	18,944
Charge-offs:	(55		)	—		(41		)	(757		)	(853		)
Recoveries:	15			2		45			260			322
Net recoveries (charge-offs)	(40		)	2		4			(497		)	(531		)
Provision	133			1,359		(1		)	(248		)	1,243
Ending balance	$	5,476		$	9,545	$	1,229		$	3,406		$	19,656



	Six Months Ended June 30, 2018
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	6,976		$	8,514		$	1,316		$	4,355		$	21,161
Charge-offs:	(3,644		)	(145		)	(165		)	(921		)	(4,875		)
Recoveries:	21			2			5			260			288
Net recoveries (charge-offs)	(3,623		)	(143		)	(160		)	(661		)	(4,587		)
Provision	1,616			369			289			797			3,071
Ending balance	$	4,969		$	8,740		$	1,445		$	4,491		$	19,645

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,726	$	2,738	$	—	$	—	$	4,464
Collectively evaluated for impairment	3,750		6,807		1,229		3,406		15,192
Total ending allowance balance	$	5,476	$	9,545	$	1,229	$	3,406	$	19,656



	December 31, 2018
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,743	$	446	$	—	$	—	$	2,189
Collectively evaluated for impairment	3,640		7,738		1,226		4,151		16,755
Total ending allowance balance	$	5,383	$	8,184	$	1,226	$	4,151	$	18,944



	June 30, 2019
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,074	$	14,056	$	385	$	160	$	16,675
Loans collectively evaluated for impairment	205,395		636,546		183,962		249,845		1,275,748
Total ending loans balance	$	207,469	$	650,602	$	184,347	$	250,005	$	1,292,423



	December 31, 2018
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,128	$	6,146	$	402	$	55	$	8,731
Loans collectively evaluated for impairment	201,284		656,842		182,823		265,929		1,306,878
Total ending loans balance	$	203,412	$	662,988	$	183,225	$	265,984	$	1,315,609

The following table presents loans individually evaluated for impairment recognized by class of loans as of June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019						December 31, 2018
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial	$	272	$	273	$	—	$	345	$	346	$	—
Commercial mortgages:
Construction	277		278		—		307		308		—
Commercial mortgages, other	3,436		3,438		—		4,007		3,935		—
Residential mortgages	413		385		—		424		402		—
Consumer loans:
Home equity lines and loans	158		160		—		54		55		—
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	1,800		1,801		1,726		1,780		1,782		1,743
Commercial mortgages:
Commercial mortgages, other	10,423		10,340		2,738		1,902		1,903		446
Total	$	16,779	$	16,675	$	4,464	$	8,819	$	8,731	$	2,189

The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans for the three and six-month periods ended June 30, 2019 and 2018 (in thousands):



	Three Months Ended June 30, 2019				Three Months Ended June 30, 2018				Six Months Ended June 30, 2019				Six Months Ended June 30, 2018
With no related allowance recorded:	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)
Commercial and agricultural:
Commercial and industrial	$	289	$	—	$	710	$	7	$	308	$	1	$	762	$	15
Commercial mortgages:
Construction	285		2		345		3		293		5		352		6
Commercial mortgages, other	3,640		3		4,290		5		3,738		6		4,240		10
Residential mortgages	388		2		421		2		393		4		423		4
Consumer loans:
Home equity lines & loans	163		1		61		1		127		1		62		2
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	1,817		—		3,196		—		1,805		—		3,886		—
Commercial mortgages:
Commercial mortgages, other	7,741		—		2,467		1		5,795		—		2,578		3
Total	$	14,323	$	8	$	11,490	$	19	$	12,459	$	17	$	12,303	$	40

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

The following table presents the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of June 30, 2019 and December 31, 2018 (in thousands):



	Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	June 30, 2019		December 31, 2018		June 30, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	2,042	$	2,048	$	57	$	10
Commercial mortgages:
Construction	94		109		—		—
Commercial mortgages, other	13,580		5,529		—		—
Residential mortgages	2,545		2,655		—		—
Consumer loans:
Credit cards	—		—		—		9
Home equity lines and loans	722		1,183		—		—
Indirect consumer loans	526		693		—		—
Direct consumer loans	7		37		—		—
Total	$	19,516	$	12,254	$	57	$	19

The following tables present the aging of the recorded investment in loans as of June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	1,221	$	87	$	128	$	1,436	$	205,822	$	207,258
Agricultural	—		—		—		—		211		211
Commercial mortgages:
Construction	—		—		—		—		39,734		39,734
Commercial mortgages, other	2,593		87		2,126		4,806		606,062		610,868
Residential mortgages	1,894		557		1,039		3,490		180,857		184,347
Consumer loans:
Home equity lines and loans	886		22		251		1,159		93,629		94,788
Indirect consumer loans	1,128		185		201		1,514		137,515		139,029
Direct consumer loans	89		54		—		143		16,045		16,188
Total	$	7,811	$	992	$	3,745	$	12,548	$	1,279,875	$	1,292,423



	December 31, 2018
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	284	$	61	$	71	$	416	$	202,667	$	203,083
Agricultural	16		—		—		16		313		329
Commercial mortgages:
Construction	—		—		—		—		54,626		54,626
Commercial mortgages, other	6,273		158		169		6,600		601,762		608,362
Residential mortgages	2,204		516		1,026		3,746		179,479		183,225
Consumer loans:
Credit cards	1		3		9		13		1,437		1,450
Home equity lines and loans	279		97		730		1,106		97,360		98,466
Indirect consumer loans	1,511		319		436		2,266		147,540		149,806
Direct consumer loans	120		53		31		204		16,058		16,262
Total	$	10,688	$	1,207	$	2,472	$	14,367	$	1,301,242	$	1,315,609

Troubled Debt Restructurings:

A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan.

As of June 30, 2019 and December 31, 2018, the Corporation has a recorded investment in TDRs of $6.3 million and $6.8 million, respectively. There were specific reserves of $0.7 million and $0.9 million allocated for TDRs at June 30, 2019 and December 31, 2018, respectively. As of June 30, 2019, TDRs totaling $0.6 million were accruing interest under the modified terms and $5.7 million were on non-accrual status. As of December 31, 2018, TDRs totaling $0.8 million were accruing interest under the modified terms and $6.0 million were on non-accrual status. The Corporation had committed no additional amounts as of both June 30, 2019 and December 31, 2018, to customers with outstanding loans that are classified as TDRs.

There were no loans modified as TDRs during the three month period ended June 30, 2019 or the three month period ended June 30, 2018.

During the six months ended June 30, 2019 and 2018, the terms of certain loans were modified as TDRs. The modification of the terms of one home equity loan during the six months ended June 30, 2019 included a reduction in the stated interest rate for the remaining life of the loan, an extension of the maturity date for approximately three years and a reduction of the scheduled amortized payment of the loan for greater than a three month period. The modification of the terms of one commercial and industrial term loan during the six months ended June 30, 2018 included an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.

The following tables present loans by class modified as TDRs that occurred during the six months ended June 30, 2019 and 2018 (dollars in thousands):



June 30, 2019	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Consumer loans:
Home equity lines and loans	1	$	137	$	137
Total	1	$	137	$	137



June 30, 2018	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial	1	$	100	$	100
Total	1	$	100	$	100

The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the six month periods ended June 30, 2019 and 2018.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three and six month periods ended June 30, 2019 and 2018.

Credit Quality Indicators

The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower’s ability to service its debt and affirm the risk ratings for the loans at least annually.

For the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment.

The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines):

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Commercial loans not meeting the criteria above to be considered criticized or classified are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans performing under terms of the loan notes. Based on the analyses performed as of June 30, 2019 and December 31, 2018, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):



	June 30, 2019
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	195,789	$	2,641	$	7,085	$	1,743	$	207,258
Agricultural	—		211		—		—		—		211
Commercial mortgages:
Construction	—		39,640		—		94		—		39,734
Commercial mortgages	—		582,259		7,343		16,730		4,536		610,868
Residential mortgages	181,802		—		—		2,545		—		184,347
Consumer loans:
Credit cards	—		—		—		—		—		—
Home equity lines and loans	94,066		—		—		722		—		94,788
Indirect consumer loans	138,503		—		—		526		—		139,029
Direct consumer loans	16,181		—		—		7		—		16,188
Total	$	430,552	$	817,899	$	9,984	$	27,709	$	6,279	$	1,292,423



	December 31, 2018
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	190,666	$	4,452	$	6,222	$	1,743	$	203,083
Agricultural	—		329		—		—		—		329
Commercial mortgages:
Construction	—		54,517		—		109		—		54,626
Commercial mortgages	—		574,221		16,830		15,948		1,363		608,362
Residential mortgages	180,570		—		—		2,655		—		183,225
Consumer loans:
Credit cards	1,450		—		—		—		—		1,450
Home equity lines and loans	97,283		—		—		1,183		—		98,466
Indirect consumer loans	149,113		—		—		693		—		149,806
Direct consumer loans	16,225		—		—		37		—		16,262
Total	$	444,641	$	819,733	$	21,282	$	26,847	$	3,106	$	1,315,609

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	181,802	$	—	$	94,066	$	138,503	$	16,181
Non-Performing	2,545		—		722		526		7
	$	184,347	$	—	$	94,788	$	139,029	$	16,188



	December 31, 2018
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	180,570	$	1,450	$	97,283	$	149,113	$	16,225
Non-Performing	2,655		—		1,183		693		37
	$	183,225	$	1,450	$	98,466	$	149,806	$	16,262

NOTE 5 FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods and significant assumptions to estimate fair value on a recurring basis:

Available for Sale Securities: The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs).

Equity Investments: Securities that are held to fund a deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value included in earnings. The fair values of equity investments are determined by quoted market prices (Level 1 inputs).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part of the allowance for loan loss accounting. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, typically resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

OREO: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition.

Derivatives: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize credit default rate assumptions (Level 3 inputs).

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):



			Fair Value Measurement at June 30, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	4,995	$	—	$	4,995	$	—
Mortgage-backed securities, residential	200,388		—		200,388		—
Obligations of states and political subdivisions	46,416		—		46,416		—
Corporate bonds and notes	250		—		250		—
SBA loan pools	17,237		—		17,237		—
Total available for sale securities	$	269,286	$	—	$	269,286	$	—

Equity investments	$	1,244	$	1,244	$	—	$	—
Derivative assets	6,095		—		6,095		—

Financial Liabilities:
Derivative liabilities	$	6,460	$	—	$	6,095	$	365

There were no transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2019.



			Fair Value Measurement at December 31, 2018 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	5,472	$	—	$	5,472	$	—
Mortgage-backed securities, residential	183,192		—		183,192		—
Obligations of states and political subdivisions	44,152		—		44,152		—
Corporate bonds and notes	247		—		247		—
SBA loan pools	9,195		—		9,195		—
Total available for sale securities	$	242,258	$	—	$	242,258	$	—

Equity investments	$	1,075	$	1,075	$	—	$	—
Derivative assets	3,142		—		3,142		—

Financial Liabilities:
Derivative liabilities	$	3,282	$	—	$	3,142	$	140

There were no transfers between Level 1 and Level 2 during the three and six month periods ended June 30, 2018.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three-month periods ended June 30, 2019 and 2018 (in thousands):



	Assets (Liabilities)
	Corporate Bonds and Notes				Derivative Liabilities
	June 30, 2019		June 30, 2018		June 30, 2019			June 30, 2018
Balance of recurring Level 3 assets at April 1	$	—	$	—	$	(230	)	$	(50	)
Derivative instruments entered into	—		—		(11		)	(1		)
Total gains or losses for the period:
Included in earnings - other non-interest income	—		—		(124		)	33
Included in other comprehensive income	—		—		—			—
Transfers out of Level 3	—		—		—			—
Balance of recurring Level 3 assets at June 30	$	—	$	—	$	(365	)	$	(18	)

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six month periods ended June 30, 2019 and June 30, 2018 (in thousands):



	Assets (Liabilities)
	Corporate Bonds and Notes				Derivative Liabilities
	June 30, 2019		June 30, 2018		June 30, 2019			June 30, 2018
Balance of recurring Level 3 assets at January 1	$	—	$	—	$	(140	)	$	(75	)
Derivative instruments entered into	—		—		(35		)	(1		)
Total gains or losses for the period:
Included in earnings - other non-interest income	—		—		(190		)	58
Included in other comprehensive income	—		—		—			—
Transfers out of Level 3	—		—		—			—
Balance of recurring Level 3 assets at June 30	$	—	$	—	$	(365	)	$	(18	)

The following table presents information related to Level 3 recurring fair value measurements at June 30, 2019 and December 31, 2018 (in thousands):



Description	Fair Value at June 30, 2019		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at June 30, 2019
Derivative liabilities	$	365	Historical trend	Credit default rate	6.53% - 6.53% [6.53%]



Description	Fair Value at December 31, 2018		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2018
Derivative liabilities	$	140	Historical trend	Credit default rate	7.46% - 7.46% [7.46%]

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



			Fair Value Measurement at June 30, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial mortgages:
Commercial mortgages	$	7,611	$	—	$	—	$	7,611	$	(1,891	)
Total impaired loans	$	7,611	$	—	$	—	$	7,611	$	(1,891	)
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	62	$	—	$	—	$	62	$	—
Residential mortgages	55		—		—		55		(2		)
Consumer loans:
Home equity lines and loans	97		—		—		97		(50		)
Total other real estate owned, net	$	214	$	—	$	—	$	214	$	(52	)



			Fair Value Measurement at December 31, 2018 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial mortgages:
Commercial mortgages	$	1,456	$	—	$	—	$	1,456	$	240
Total impaired loans	$	1,456	$	—	$	—	$	1,456	$	240
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	213	$	—	$	—	$	213	$	—
Residential mortgages	204		—		—		204		—
Consumer loans:
Home equity lines and loans	157		—		—		157		(14		)
Total other real estate owned, net	$	574	$	—	$	—	$	574	$	(14	)

The following tables present information related to Level 3 non-recurring fair value measurement at June 30, 2019 and December 31, 2018 (in thousands):



Description	Fair Value at June 30, 2019		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at June 30, 2019
Impaired loans:
Commercial mortgages:
Commercial mortgages	$	7,611	Sales comparison	Discount to appraised value	10.00% - 14.94% [10.43%]
	$	7,611

OREO:
Commercial mortgages:
Commercial mortgages	$	62	Sales comparison	Discount to appraised value	22.00% - 22.00% [22.00%]
Residential mortgages	55		Sales comparison	Discount to appraised value	20.80% -20.80% [20.80%]
Consumer loans:
Home equity lines and loans	97		Sales comparison	Discount to appraised value	20.80% - 88.42% [52.29%]
	$	214



Description	Fair Value at December 31, 2018		Valuation Technique	Unobservable Inputs	Range [Weighted Average] at December 31, 2018
Impaired loans:
Commercial and agricultural:
Commercial and industrial	$	1,456	Sales comparison	Discount to appraised value	11.76% - 11.76% [11.76%]
	$	1,456

OREO:
Commercial mortgages:
Commercial mortgages	$	213	Sales comparison	Discount to appraised value	10.00% - 24.80% [17.72%]
Residential mortgages	204		Sales comparison	Discount to appraised value	20.80% - 39.78% [22.94%]
Consumer loans:
Home equity lines and loans	157		Sales comparison	Discount to appraised value	20.80% - 20.80% [20.80%]
	$	574

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of other financial instruments, at June 30, 2019 and December 31, 2018, are as follows (in thousands):



	June 30, 2019
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	32,622	$	32,622	$	—	$	—	$	32,622
Interest-earning deposits in other financial institutions	83,838		83,838		—		—		83,838
Equity investments	1,244		1,244		—		—		1,244
Securities available for sale	269,286		—		269,286		—		269,286
Securities held to maturity	4,090		—		2,349		1,750		4,099
FHLBNY and FRBNY stock	3,091		—		—		—		N/A
Loans, net and loans held for sale	1,269,339		—		—		1,260,787		1,260,787
Accrued interest receivable	4,940		73		815		4,052		4,940
Derivative assets	6,095		—		6,095		—		6,095

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,363,346	$	1,363,346	$	—	$	—	$	1,363,346
Accrued interest payable	314		37		277		—		314
Derivative liabilities	6,460		—		6,095		365		6,460

(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.



	December 31, 2018
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	33,040	$	33,040	$	—	$	—	$	33,040
Interest-earning deposits in other financial institutions	96,932		96,932		—		—		96,932
Equity investments	1,075		1,075		—		—		1,075
Securities available for sale	242,258		—		242,258		—		242,258
Securities held to maturity	4,875		—		1,838		3,020		4,858
FHLBNY and FRBNY stock	3,138		—		—		—		N/A
Loans, net and loans held for sale	1,293,464		—		—		1,287,495		1,287,495
Accrued interest receivable	4,480		80		697		3,703		4,480
Derivative assets	3,142		—		3,142		—		3,142

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,419,011	$	1,419,011	$	—	$	—	$	1,419,011
Time deposits	150,226		—		150,938		—		150,938
Accrued interest payable	232		26		206		—		232
Derivative liabilities	3,282		—		3,142		140		3,282

NOTE 6 LEASES

Operating Leases

The Corporation leases certain branch properties under long-term, operating lease agreements. The leases expire at various dates through 2033 and generally include renewal options. As of June 30, 2019, the weighted average remaining lease term was 11.7 years with a weighted average discount rate of 3.37%. Rent expense was $0.3 million for the three months ended June 30, 2019. Rent expense was $0.5 million for the six months ended June 30, 2019. Certain leases provide for increases in future minimum annual rent payments as defined in the lease agreements. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees.

Leased branch properties at June 30, 2019 and December 31, 2018 consist of the following (in thousands):



	June 30, 2019			December 31, 2018
Operating lease right-of-use asset	$	8,550		$	—
Less: accumulated amortization	(330		)	—
Operating lease right-of-use-assets, net	$	8,220		$	—

The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of June 30, 2019 (in thousands):



Year	Amount
2019	$	462
2020	932
2021	899
2022	831
2023	851
2024 and thereafter	6,091
Total minimum lease payments	10,066
Less: amount representing interest	(1,816		)
Present value of net minimum lease payments	$	8,250

As of June 30, 2019, the Corporation had no operating leases that were signed, but had not yet commenced.

Finance Leases

The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of June 30, 2019, the weighted average remaining lease term was 13.5 years with a weighted average discount rate of 3.34%. The Corporation has included these leases in premises and equipment as of June 30, 2019 and December 31, 2018 as follows (in thousands):



	June 30, 2019			December 31, 2018
Buildings	$	5,572		$	5,572
Less: accumulated depreciation	(1,374		)	(1,208		)
Net book value	$	4,198		$	4,364

The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value of net minimum lease payments as of June 30, 2019 (in thousands):



Year	Amount
2019	$	184
2020	376
2021	388
2022	391
2023	391
2024 and thereafter	3,639
Total minimum lease payments	5,369
Less: amount representing interest	(1,174		)
Present value of net minimum lease payments	$	4,195

As of June 30, 2019, the Corporation had no finance leases that were signed, but had not yet commenced.

Related Party Transactions

The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through August 2019 from a member of the Corporation's Board of Directors with monthly rent expense totaling $4 thousand per month. Rent paid to this Board of Directors member totaled $16 thousand and $12 thousand for the three month periods ended June 30, 2019 and 2018, respectively. Rent paid to this Board of Directors member totaled $28 thousand and $24 thousand for the six month periods ended June 30, 2019 and 2018, respectively.

The Bank leases its branch located at 2 Rush Street, Schenectady, New York, under a lease agreement through February 2033 from a member of the Corporation's Board of Directors with monthly rent expense totaling $8 thousand per month. Rent paid to this Board of Directors member totaled $21 thousand and $24 thousand for the three month periods ended June 30, 2019 and 2018, respectively. Rent paid to this Board of Directors member totaled $45 thousand and $36 thousand for the six month periods ended June 30, 2019 and 2018, respectively.

NOTE 7 GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill included in the core banking segment during the six month periods ended June 30, 2019 and 2018 were as follows (in thousands):



	2019		2018
Beginning of year	$	21,824	$	21,824
Acquired goodwill	—		—
Ending balance June 30,	$	21,824	$	21,824

Acquired intangible assets were as follows at June 30, 2019 and December 31, 2018 (in thousands):



	At June 30, 2019				At December 31, 2018
	Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization
Core deposit intangibles	$	5,975	$	5,713	$	5,975	$	5,576
Other customer relationship intangibles	5,633		4,858		5,633		4,681
Total	$	11,608	$	10,571	$	11,608	$	10,257

Aggregate amortization expense was $0.2 million for both of the three month periods ended June 30, 2019 and 2018. Aggregate amortization expense was $0.3 million and $0.4 million for the six month periods ended June 30, 2019 and 2018, respectively.

The remaining estimated aggregate amortization expense at June 30, 2019 is listed below (in thousands):



Year	Estimated Expense
2019	$	295
2020	484
2021	258
2022	—
2023	—
Total	$	1,037

NOTE 8 COMMITMENTS AND CONTINGENCIES

The Corporation is a party to certain financial instruments with off-balance sheet risk such as commitments under standby letters of credit, unused portions of lines of credit, overdraft protection and commitments to fund new loans. In accordance with GAAP, these financial instruments are not recorded in the financial statements. The Corporation's policy is to record such instruments when funded. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are generally used by the Corporation to manage clients' requests for funding and other client needs.

The following table lists the contractual amounts of financial instruments with off-balance sheet risk at June 30, 2019 and December 31, 2018 (in thousands):



	June 30, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	16,122	$	17,267	$	9,137	$	18,033
Unused lines of credit	743		207,417		848		212,601
Standby letters of credit	—		14,859		—		16,161

On June 15, 2018, the Bank, through mediation, reached a resolution by way of a settlement agreement in the matter of Fane v. Chemung Canal Trust Company (the “Action”). The parties agreed to release each other from any and all liabilities, claims, counterclaims, demands, charges, complaints and causes of action, to dismiss the Action with prejudice, and the Bank agreed to pay Fane $3.3 million in connection with the settlement of the Action. As of March 31, 2018, the Corporation had a legal reserve of $2.3 million for the Action and therefore recognized an additional $1.0 million of legal expense during the second quarter of 2018.

In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of June 30, 2019, we believe that we are not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.

NOTE 9 ACCUMULATED OTHER COMPREHENSIVE LOSS

Accumulated other comprehensive loss represents the net unrealized holding gains or losses on securities available for sale and the funded status of the Corporation's defined benefit pension plan and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect.

The following is a summary of the changes in accumulated other comprehensive loss by component, net of tax, for the periods indicated (in thousands):



	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at April 1, 2019	$	(2,090	)	$	(6,752	)	$	(8,842	)
Other comprehensive income before reclassification	2,891			—			2,891
Amounts reclassified from accumulated other comprehensive income	(14		)	14			—
Net current period other comprehensive income	2,877			14			2,891
Balance at June 30, 2019	$	787		$	(6,738	)	$	(5,951	)



	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at April 1, 2018	$	(6,924	)	$	(6,912	)	$	(13,836	)
Other comprehensive loss before reclassification	(299		)	—			(299		)
Amounts reclassified from accumulated other comprehensive income	—			14			14
Net current period other comprehensive income (loss)	(299		)	14			(285		)
Balance at June 30, 2018	$	(7,223	)	$	(6,898	)	$	(14,121	)



	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at January 1, 2019	$	(4,646	)	$	(6,765	)	$	(11,411	)
Other comprehensive income before reclassification	5,447			—			5,447
Amounts reclassified from accumulated other comprehensive income	(14		)	27			13
Net current period other comprehensive income (loss)	5,433			27			5,460
Balance at June 30, 2019	$	787		$	(6,738	)	$	(5,951	)



	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at January 1, 2018	$	(3,415	)	$	(6,925	)	$	(10,340	)
Cumulative effect of account change	(202		)	—			(202		)
Balance at January 1, 2018, as adjusted	(3,617		)	(6,925		)	(10,542		)
Other comprehensive income before reclassification	(3,606		)	—			(3,606		)
Amounts reclassified from accumulated other comprehensive income	—			27			27
Net current period other comprehensive income	(3,606		)	27			(3,579		)
Balance at June 30, 2018	$	(7,223	)	$	(6,898	)	$	(14,121	)

The following is the reclassification out of accumulated other comprehensive income for the periods indicated (in thousands):



Details about Accumulated Other Comprehensive Income Components	Three Months Ended June 30,						Affected Line Item in the Statement Where Net Income is Presented
	2019			2018
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale	$	(19	)	$	—		Net gains (losses) on securities transactions
Tax effect	5			—			Income tax expense
Net of tax	(14		)	—
Amortization of defined pension plan and other benefit plan items:
Prior service costs (a)	$	(55	)	$	(55	)	Other components of net periodic pension and postretirement benefits
Actuarial losses (a)	73			73			Other components of net periodic pension and postretirement benefits
Tax effect	(4		)	(4		)	Income tax expense
Net of tax	14			14
Total reclassification for the period, net of tax	$	—		$	14

(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).



Details about Accumulated Other Comprehensive Income Components	Six Months Ended June 30,						Affected Line Item in the Statement Where Net Income is Presented
	2019			2018
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale	$	(19	)	$	—		Net gains (losses) on securities transactions
Tax effect	5			—			Income tax expense
Net of tax	(14		)	—
Amortization of defined pension plan and other benefit plan items:
Prior service costs (a)	(110		)	(110		)	Other components of net periodic pension and postretirement benefits
Actuarial losses (a)	146			146			Other components of net periodic pension and postretirement benefits
Tax effect	(9		)	(9		)	Income tax expense
Net of tax	27			27
Total reclassification for the period, net of tax	$	13		$	27

(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).

NOTE 10 REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following tables present the Corporation's non-interest income by revenue stream and reportable segment for the three and six months ended June 30, 2019 and 2018 (in thousands). Items outside the scope of ASC 606 are noted as such.



	Three Months Ended June 30, 2019
Revenue by Operating Segment:	Core Banking			WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	856		$	—	$	—		$	856
Other	229			—		—			229
Interchange revenue from debit card transactions	1,024			—		—			1,024
WMG fee income	—			2,524		—			2,524
CFS fee and commission income	—			—		189			189
Net gains (losses) on sales of OREO	(3		)	—		—			(3		)
Net gains on sales of loans^(a)	29			—		—			29
Loan servicing fees^(a)	16			—		—			16
Net gains on sales of securities^(a)	19			—		—			19
Changes in fair value of equity investments^(a)	27			—		—			27
Other^(a)	318			—		(142		)	176
Total non-interest income (loss)	$	2,515		$	2,524	$	47		$	5,086



	Three Months Ended June 30, 2018
Revenue by Operating Segment:	Core Banking			WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	939		$	—	$	—		$	939
Other	205			—		—			205
Interchange revenue from debit card transactions	996			—		—			996
WMG fee income	—			2,373		—			2,373
CFS fee and commission income	—			—		135			135
Net gains (losses) on sales of OREO	(48		)	—		—			(48		)
Net gains on sales of loans^(a)	59			—		—			59
Loan servicing fees^(a)	23			—		—			23
Changes in fair value of equity investments^(a)	18			—		8			26
Other^(a)	630			—		(13		)	617
Total non-interest income	$	2,822		$	2,373	$	130		$	5,325

(a) Not within scope of ASC 606.

(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.



	Six Months Ended June 30, 2019
Revenue by Operating Segment:	Core Banking			WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	1,744		$	—	$	—		$	1,744
Other	445			—		—			445
Interchange revenue from debit card transactions	2,055			—		—			2,055
WMG fee income	—			4,800		—			4,800
CFS fee and commission income	—			—		357			357
Net gains (losses) on sales of OREO	(86		)	—		—			(86		)
Net gains on sales of loans^(a)	77			—		—			77
Loan servicing fees^(a)	51			—		—			51
Net gains on sales of securities^(a)	19			—		—			19
Changes in fair value of equity investments^(a)	100			—		16			116
Other^(a)	575			—		(142		)	433
Total non-interest income	$	4,980		$	4,800	$	231		$	10,011



	Six Months Ended June 30, 2018
Revenue by Operating Segment:	Core Banking			WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	1,904		$	—	$	—		$	1,904
Other	404			—		—			404
Interchange revenue from debit card transactions	2,031			—		—			2,031
WMG fee income	—			4,689		—			4,689
CFS fee and commission income	—			—		245			245
Net gains on sales of OREO	(4		)	—		—			(4		)
Net gains on sales of loans^(a)	105			—		—			105
Loan servicing fees^(a)	45			—		—			45
Net gains on sales of securities^(a)	—			—		—			—
Change in fair value of equity securities^(a)	8			—		16			24
Other^(a)	1,512			—		(155		)	1,357
Total non-interest income	$	6,005		$	4,689	$	106		$	10,800

(a) Not within scope of ASC 606.

(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.

A description of the Corporation's revenue streams accounted for under ASC 606 follows:

Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which included services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are recognized at the time the maintenance occurs. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange Income from Debit Card Transactions: The Corporation earns interchange fees from debit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to cardholder.

WMG Fee Income (Gross): The Corporation earns wealth management fees from its contracts with customers to manage assets for investment, and/or to conduct transactions on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at quarter-end.

CFS Fee and Commission Income (Net): The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The Corporation (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers. Investment brokerage fees are presented net of related costs. The Corporation also earns fees from tax services provided to its customers.

Net Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

NOTE 11 COMPONENTS OF QUARTERLY AND YEAR TO DATE NET PERIODIC BENEFIT COSTS

The components of net periodic expense for the Corporation’s pension and other benefit plans for the periods indicated are as follows (in thousands):



	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
Qualified Pension Plan
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	378			384			757			769
Expected return on plan assets	(553		)	(826		)	(1,107		)	(1,652		)
Amortization of unrecognized transition obligation	—			—			—			—
Amortization of unrecognized prior service cost	—			—			—			—
Amortization of unrecognized net loss	49			44			98			87
Net periodic pension benefit	$	(126	)	$	(398	)	$	(252	)	$	(796	)

Supplemental Pension Plan
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	13			12			26			24
Expected return on plan assets	—			—			—			—
Amortization of unrecognized prior service cost	—			—			—			—
Amortization of unrecognized net loss	1			2			2			4
Net periodic supplemental pension cost	$	14		$	14		$	28		$	28

Postretirement Plan, Medical and Life
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	3			4			6			7
Expected return on plan assets	—			—			—			—
Amortization of unrecognized prior service cost	(55		)	(55		)	(110		)	(110		)
Amortization of unrecognized net loss	23			27			46			55
Net periodic postretirement, medical and life benefit	$	(29	)	$	(24	)	$	(58	)	$	(48	)

NOTE 12 SEGMENT REPORTING

The Corporation manages its operations through two primary business segments: core banking and WMG. The core banking segment provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential mortgage loans, primarily in the Corporation’s local markets, and to invest in securities. The WMG services segment provides revenues by providing trust and investment advisory services to clients.

Accounting policies for the segments are the same as those described in Note 1 of the Corporation’s 2018 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2019. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment. The Holding Company, CFS, and CRM column below includes amounts to eliminate transactions between segments (in thousands).



	Three months ended June 30, 2019
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	16,669	$	—	$	13		$	16,682
Interest expense	1,581		—		—			1,581
Net interest income	15,088		—		13			15,101
Provision for loan losses	150		—		—			150
Net interest income after provision for loan losses	14,938		—		13			14,951
Other non-interest income	2,515		2,524		47			5,086
Other non-interest expenses	11,924		1,571		328			13,823
Income (loss) before income tax expense (benefit)	5,529		953		(268		)	6,214
Income tax expense (benefit)	1,028		243		(38		)	1,233
Segment net income (loss)	$	4,501	$	710	$	(230	)	$	4,981



	Three months ended June 30, 2018
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	15,861	$	—	$	8		$	15,869
Interest expense	852		—		—			852
Net interest income	15,009		—		8			15,017
Provision for loan losses	2,362		—		—			2,362
Net interest income after provision for loan losses	12,647		—		8			12,655
Other non-interest income	2,822		2,373		130			5,325
Legal accruals and settlements	989		—		—			989
Other non-interest expenses	12,014		1,629		335			13,978
Income (loss) before income tax expense (benefit)	2,466		744		(197		)	3,013
Income tax expense (benefit)	342		190		(46		)	486
Segment net income (loss)	$	2,124	$	554	$	(151	)	$	2,527



	Six months ended June 30, 2019
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	33,321	$	—	$	26		$	33,347
Interest expense	3,079		—		—			3,079
Net interest income	30,242		—		26			30,268
Provision for loan losses	1,243		—		—			1,243
Net interest income after provision for loan losses	28,999		—		26			29,025
Other non-interest income	4,980		4,800		231			10,011
Other non-interest expenses	23,549		3,146		625			27,320
Income (loss) before income tax expense (benefit)	10,430		1,654		(368		)	11,716
Income tax expense (benefit)	1,917		422		(72		)	2,267
Segment net income (loss)	$	8,513	$	1,232	$	(296	)	$	9,449

Segment assets	$	1,742,927	$	3,574	$	6,496		$	1,752,997



	Six months ended June 30, 2018
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	31,523	$	—	$	15		$	31,538
Interest expense	1,621		—		—			1,621
Net interest income	29,902		—		15			29,917
Provision for loan losses	3,071		—		—			3,071
Net interest income after provision for loan losses	26,831		—		15			26,846
Other non-interest income	6,005		4,689		106			10,800
Legal accruals and settlements	989		—		—			989
Other non-interest expenses	24,429		3,107		608			28,144
Income (loss) before income tax expense (benefit)	7,418		1,582		(487		)	8,513
Income tax expense (benefit)	1,236		403		(92		)	1,547
Segment net income (loss)	$	6,182	$	1,179	$	(395	)	$	6,966

Segment assets	$	1,694,891	$	3,844	$	11,431		$	1,710,166

NOTE 13 STOCK COMPENSATION

Board of Directors' Stock Compensation

Pursuant to the Corporation's Directors' Compensation Plan, members of the Board of Directors receive common shares of the Corporation based on fees individually earned during the previous year for service as a director. The common shares are distributed to the Corporation's individual board members from treasury shares of the Corporation on or about January 15 following the calendar year of service.

Additionally, the Chief Executive Officer of the Corporation, who does not receive cash compensation as a member of the Board of Directors, is awarded common shares equal in value to the average of those awarded to board members not employed by the Corporation who have served for 12 months during the prior year.

During January 2019 and 2018, 8,465 and 6,015 shares, respectively, were re-issued from treasury to fund the stock component of directors' compensation. An expense of $84 thousand and $100 thousand related to this compensation was recognized during the three month periods ended June 30, 2019 and 2018, respectively. An expense of $177 thousand and $184 thousand related to this compensation was recognized during the six month periods ended June 30, 2019 and 2018, respectively. This expense is accrued as shares are earned.

Restricted Stock Plan

Pursuant to the Corporation’s Restricted Stock Plan, the Corporation may make discretionary grants of restricted stock to officers other than the Corporation's Chief Executive Officer. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.

A summary of restricted stock activity for the three month period ended June 30, 2019 is presented below:



	Shares	Weighted–Average Grant Date Fair Value
Nonvested at April 1, 2019	29,436	$	41.03
Granted	—	—
Vested	—	—
Forfeited or cancelled	—	—
Nonvested at June 30, 2019	29,436	$	41.03

A summary of restricted stock activity for the six month period ended June 30, 2019 is presented below:



	Shares		Weighted–Average Grant Date Fair Value
Nonvested at January 1, 2019	29,694		$	40.81
Granted	439		45.66
Vested	(697	)	34.58
Forfeited or cancelled	—		—
Nonvested at June 30, 2019	29,436		$	41.03

As of June 30, 2019, there was $1.0 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.22 years. The total fair value of shares vested was $32 thousand and $112 thousand for the six month periods ended June 30, 2019 and 2018, respectively.

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

Introduction

The following is the MD&A of the Corporation in this Quarterly Report on Form 10-Q for the three and six months ended June 30, 2019 and 2018. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s 2018 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2019, for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 3–6.

The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below and in Part I, Item 1A, Risk Factors, on pages 19–28 of the Corporation’s 2018 Form 10-K. For a discussion of use of non-GAAP financial measures, see pages 67–70 of the Corporation's 2018 Form 10-K and pages 72-76 in this Form 10-Q.

The Corporation has been a financial holding company since 2000, the Bank was established in 1833, CFS in 2001, and CRM in 2016. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services. The Bank relies substantially on a foundation of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its income primarily from interest and fees on loans, interest income on investment securities, WMG fee income, and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans, and general operating expenses. CRM is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

Forward-looking Statements

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. 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 guarantee 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 the Corporation’s growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s 2018 Annual Report on Form 10-K. These filings are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com or upon request from the Corporate Secretary at (607) 737-3746. 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.

Consolidated Financial Highlights



																As of or for the
	As of or for the Three Months Ended															Six Months Ended
	June 30,			March. 31,			Dec. 31,			Sept. 30,			June 30,			June 30,			June 30,
(in thousands, except per share data)	2019			2019			2018			2018			2018			2019			2018
RESULTS OF OPERATIONS
Interest income	$	16,682		$	16,665		$	16,879		$	16,136		$	15,869		$	33,347		$	31,538
Interest expense	1,581			1,498			1,395			1,057			852			3,079			1,621
Net interest income	15,101			15,167			15,484			15,079			15,017			30,268			29,917
Provision (credit) for loan losses	1,093			1,093			(218		)	300			2,362			1,243			3,071
Net interest income after provision (credit) for loan losses	14,951			14,074			15,702			14,779			12,655			29,025			26,846
Non-interest income	4,925			4,925			4,893			7,381			5,325			10,011			10,800
Non-interest expense	13,497			13,497			14,205			13,428			14,967			27,320			29,133
Income before income tax expense	6,214			5,502			6,390			8,732			3,013			11,716			8,513
Income tax expense	1,233			1,034			660			1,802			486			2,267			1,547
Net income	$	4,981		$	4,468		$	5,730		$	6,930		$	2,527		$	9,449		$	6,966

Basic and diluted earnings per share	$	1.02		$	0.92		$	1.18		$	1.43		$	0.52		$	1.94		$	1.44
Average basic and diluted shares outstanding	4,866			4,860			4,843			4,834			4,828			4,863			4,825

PERFORMANCE RATIOS - Annualized
Return on average assets	1.15		%	1.03		%	1.29		%	1.61		%	0.59		%	1.09		%	0.82		%
Return on average equity	11.51		%	10.83		%	14.29		%	17.81		%	6.70		%	11.18		%	9.31		%
Return on average tangible equity (a)	13.27		%	12.56		%	16.74		%	21.01		%	7.94		%	12.92		%	11.05		%
Efficiency ratio (unadjusted) (f)	68.47		%	67.18		%	69.71		%	59.79		%	73.58		%	67.83		%	71.55		%
Efficiency ratio (adjusted) (a) (b)	67.44		%	66.04		%	68.49		%	64.72		%	67.47		%	66.74		%	67.84		%
Non-interest expense to average assets	3.18		%	3.12		%	3.21		%	3.13		%	3.52		%	3.15		%	3.45		%
Loans to deposits	83.60		%	82.93		%	83.60		%	83.80		%	90.23		%	83.60		%	90.23		%

YIELDS / RATES - Fully Taxable Equivalent
Yield on loans	4.54		%	4.54		%	4.54		%	4.36		%	4.33		%	4.54		%	4.34		%
Yield on investments	2.41		%	2.42		%	2.16		%	2.18		%	2.21		%	2.41		%	2.22		%
Yield on interest-earning assets	4.07		%	4.07		%	4.01		%	3.96		%	3.94		%	4.07		%	3.94		%
Cost of interest-bearing deposits	0.57		%	0.54		%	0.48		%	0.33		%	0.24		%	0.55		%	0.22		%
Cost of borrowings	3.52		%	3.52		%	3.58		%	2.38		%	2.41		%	3.52		%	2.31		%
Cost of interest-bearing liabilities	0.58		%	0.55		%	0.50		%	0.39		%	0.32		%	0.57		%	0.30		%
Interest rate spread	3.49		%	3.52		%	3.51		%	3.57		%	3.62		%	3.50		%	3.64		%
Net interest margin, fully taxable equivalent (a)	3.69		%	3.71		%	3.68		%	3.71		%	3.73		%	3.69		%	3.74		%

CAPITAL
Total equity to total assets at end of period	10.18		%	9.69		%	9.40		%	8.92		%	8.88		%	10.18		%	8.88		%
Tangible equity to tangible assets at end of period (a)	8.99		%	8.50		%	8.19		%	7.69		%	7.60		%	8.99		%	7.60		%

Book value per share	$	36.64		$	35.27		$	33.99		$	32.35		$	31.42		$	36.64		$	31.42
Tangible book value per share (a)	31.95			30.54			29.22			27.53			26.55			31.95			26.55
Period-end market value per share	48.34			46.93			41.31			42.43			50.11			48.34			50.11
Dividends declared per share	0.26			0.26			0.26			0.26			0.26			0.52			0.52

AVERAGE BALANCES
Loans and loans held for sale (c)	$	1,290,923		$	1,296,200		$	1,306,556		$	1,330,071		$	1,328,386		$	1,293,547		$	1,321,834
Earning assets	1,654,156			1,671,063			1,680,269			1,625,132			1,625,591			1,663,372			1,624,676
Total assets	1,744,599			1,753,788			1,756,765			1,704,721			1,703,722			1,749,168			1,703,386
Deposits	1,539,739			1,565,371			1,576,629			1,501,082			1,495,410			1,552,485			1,492,076
Total equity	173,534			167,385			159,032			154,331			151,216			170,476			150,857
Tangible equity (a)	150,598			144,293			135,766			130,891			127,591			147,463			127,130



																As of or for the
	As of or for the Three Months Ended															Six Months Ended
	June 30,			March. 31,			Dec. 31,			Sept. 30,			June 30,			June 30,			June 30,
(in thousands, except per share data)	2019			2019			2018			2018			2018			2019			2018
ASSET QUALITY
Net charge-offs	$	239		$	292		$	472		$	310		$	4,107		$	531		$	4,587
Non-performing loans (d)	19,505			15,099			12,254			12,629			12,790			19,505			12,790
Non-performing assets (e)	19,719			15,304			12,828			13,356			13,676			19,719			13,676
Allowance for loan losses	19,656			19,745			18,944			19,635			19,645			19,656			19,645

Annualized net charge-offs to average loans	0.07		%	0.09		%	0.14		%	0.09		%	1.24		%	0.08		%	0.70		%
Non-performing loans to total loans	1.51		%	1.16		%	0.93		%	0.96		%	0.96		%	1.51		%	0.96		%
Non-performing assets to total assets	1.12		%	0.86		%	0.73		%	0.76		%	0.80		%	1.12		%	0.80		%
Allowance for loan losses to total loans	1.53		%	1.52		%	1.44		%	1.49		%	1.47		%	1.53		%	1.47		%
Allowance for loan losses to non-performing loans	100.77		%	130.77		%	154.59		%	155.48		%	153.60		%	100.77		%	153.60		%

(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.
(c) Loans and loans held for sale do not reflect the allowance for loan losses.
(d) Non-performing loans include non-accrual loans only.
(e) Non-performing assets include non-performing loans plus other real estate owned.
(f) Efficiency ratio (unadjusted) is non-interest expense divided by the total of net interest income plus non-interest income.

In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies. Refer to pages 72-76 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.

Executive Summary

This executive summary of the MD&A includes selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of the trends and uncertainties, as well as the risks and critical accounting estimates affecting the Corporation, this Form 10-Q should be read in its entirety.

The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):



	Three Months Ended June 30,
	2019			2018			Change			Percentage Change
Net interest income	$	15,101		$	15,017		$	84		0.6	%
Non-interest income	5,086			5,325			(239		)	(4.5	)%
Non-interest expense	13,823			14,967			(1,144		)	(7.6	)%
Pre-provision income	6,364			5,375			989			18.4	%
Provision for loan losses	150			2,362			(2,212		)	(93.6	)%
Income tax expense	1,233			486			747			153.7	%
Net income	$	4,981		$	2,527		$	2,454		97.1	%

Basic and diluted earnings per share	$	1.02		$	0.52		$	0.50		96.2	%

Selected financial ratios:
Return on average assets	1.15		%	0.59		%
Return on average equity	11.51		%	6.70		%
Net interest margin, fully taxable equivalent (a)	3.69		%	3.73		%
Efficiency ratio (adjusted) (b)	67.44		%	67.47		%
Non-interest expenses to average assets	3.18		%	3.52		%
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.

Net income for the second quarter of 2019 was $5.0 million, or $1.02 per share, compared with $2.5 million, or $0.52 per share, for the same period in the prior year. Return on average equity for the current quarter was 11.51%, compared with 6.70% for the prior year quarter. The increase in net income was driven by an increase in net interest income, a decrease in provision for loan losses, and a decrease in non-interest expenses, offset by a decrease in non-interest income and an increase in income tax expense.

Net interest income

Net interest income increased $0.1 million, or 0.6%, compared with the same period in the prior year. The increase was due primarily to increases in interest income from the commercial loan portfolios, and interest-earning deposits, and a decrease in interest expense on borrowed funds. These items were partially offset by an increase in interest expense on deposits.

Non-interest income

Non-interest income decreased $0.2 million, or 4.5%, compared with the same period in the prior year. The decrease was due primarily to a decrease in other non-interest income due to a New York sales tax refund received in March 2018, partially offset by an increase in WMG fee income.

Non-interest expense

Non-interest expense decreased $1.1 million, or 7.6%, compared with the same period in the prior year. The decrease was due primarily to decreases in pension and other employee benefits, net occupancy expenses, furniture and equipment expenses, professional services, legal accruals and settlements, marketing and advertising expenses, other real estate owned expenses, FDIC insurance, and other non-interest expenses partially offset by increases in other components of net periodic pension cost (benefits), salaries and wages, and data processing expenses. For the three months ended June 30, 2019, non-interest expense to average assets was 3.18%, compared with 3.52% for the same period in the prior year.

Provision for loan losses

The provision for loan losses decreased $2.2 million, or 93.6%, compared to the same period in the prior year. The decrease was due primarily to an increase in the historical loss factor of the commercial and industrial loan portfolio during the second quarter of 2018 due to the charge-off of multiple large commercial loans to one borrower for $3.6 million. Additionally, there was a decrease in the total loan portfolio of $10.7 million during the second quarter of 2019, as compared to an increase in the total loan portfolio of $14.5 million during the second quarter of 2018. Net charge-offs decreased $3.9 million in the second quarter of 2019, compared with the same period in the prior year, mostly due to the previously mentioned charge-off of multiple loans to one borrower.

Income tax expense

Income tax expense was $1.2 million in the second quarter of 2019, an increase of $0.7 million when compared to the same period in the prior year. The increase was due primarily to an increase in income before income tax expense. The effective tax rate increased from 16.1% for the second quarter of 2018 to 19.8% for the second quarter of 2019.

The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):



	Six Months Ended June 30,
	2019			2018			Change			Percentage Change
Net interest income	$	30,268		$	29,917		$	351		1.2	%
Non-interest income	10,011			10,800			(789		)	(7.3	)%
Non-interest expense	27,320			29,133			(1,813		)	(6.2	)%
Pre-provision income	12,959			11,584			1,375			11.9	%
Provision for loan losses	1,243			3,071			(1,828		)	(59.5	)%
Income tax expense	2,267			1,547			720			46.5	%
Net income	$	9,449		$	6,966		$	2,483		35.6	%

Basic and diluted earnings per share	$	1.94		$	1.44		$	0.50		34.7	%

Selected financial ratios:
Return on average assets	1.09		%	0.82		%
Return on average equity	11.18		%	9.31		%
Net interest margin, fully taxable equivalent (a)	3.69		%	3.74		%
Efficiency ratio (adjusted) (b)	66.74		%	67.84		%
Non-interest expense to average assets	3.15		%	3.45		%
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.

Net income for the six months ended June 30, 2019 was $9.4 million, or $1.94 per share, compared with $7.0 million, or $1.44 per share, for the same period in the prior year. Return on average equity for the six months ended June 30, 2019 was 11.18%, compared with 9.31% for the same period in the prior year. The increase in net income from the prior year period was driven by an increase in net interest income, a decrease in provision for loan losses, and a decrease in non-interest expenses, offset by a decrease in non-interest income and an increase in income tax expense.

Net interest income

Net interest income increased $0.4 million, or 1.2%, compared with the same period in the prior year. The increase was due primarily to increases in interest income from the commercial loan portfolios and interest-earning deposits and a decrease in interest expense on borrowed funds. These items were partially offset by an increase in interest expense on deposits.

Non-interest income

Non-interest income decreased $0.8 million, or 7.3%, compared to the same period in the prior year. The decrease was due primarily to a decrease in other non-interest income due to a New York sales tax refund received in March 2018, a decrease in service charges on deposit accounts, and increases in net losses on sales of other real estate owned. These items were partially offset by increases in WMG fee income, CFS fee and commission income, and changes in fair value of equity investments.

Non-interest expense

Non-interest expense decreased $1.8 million, or 6.2%, compared to the same period in the prior year. The decrease was due primarily to decreases in pension and other employee benefits, net occupancy expenses, furniture and equipment expenses, professional services, legal accruals and settlements, marketing and advertising expenses, other real estate owned expenses, FDIC insurance, and other non-interest expenses partially offset by an increase in other components of net periodic pension cost (benefits), salaries and wages, and data processing expenses. For the six months ended June 30, 2019, non-interest expense to average assets was 3.15%, compared with 3.45% for the same period in the prior year.

Provision for loan losses

The provision for loan losses decreased $1.8 million, or 59.5%, compared to the same period in the prior year. The decrease was due primarily to an increase in the historical loss factor of the commercial and industrial loan portfolio during the first six months of 2018, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million. Additionally, there was a decrease in the total loan portfolio of $23.5 million during the six months ended June 30, 2019, as compared to an increase in the total loan portfolio of $22.6 million during the six months ended June 30, 2018. Net charge-offs decreased $4.1 million for the six months ended June 30, 2019, compared with the same period in the prior year, mostly due to the previously mentioned charge-off of multiple loans to one borrower.

Income tax expense

Income tax expense increased $0.7 million, or 46.5%, compared to the same period in the prior year. The increase was due primarily to an increase in income before income tax expense. The effective income tax rate increased from 16.1% for the second quarter of 2018 to 19.8% for the second quarter of 2019.

Consolidated Results of Operations

The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the three and six months ended June 30, 2019 and 2018. For a discussion of the Critical Accounting Policies, Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see page 72 of this Form 10-Q and page 67 of the Corporation’s 2018 Form 10-K.

Net Interest Income

The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):



	Three Months Ended June 30,
	2019		2018		Change		Percentage Change
Interest and dividend income	$	16,682	$	15,869	$	813	5.1	%
Interest expense	1,581		852		729		85.6	%
Net interest income	$	15,101	$	15,017	$	84	0.6	%

Net interest income, which is the difference between the interest income earned on interest-earning assets such as loans and securities, and the interest expense paid on interest-bearing liabilities such as deposits and borrowings, is the largest contributor to the Corporation’s earnings.

Net interest income for the three months ended June 30, 2019 totaled $15.1 million compared with $15.0 million for the same period in the prior year, an increase of $0.1 million, or 0.6%, due primarily to a $0.8 million increase in total interest and dividend income, offset by a $0.7 million increase in total interest expense. Interest and fees from loans increased $0.3 million, and interest from interest-earning deposits increased $0.5 million, in the second quarter of 2019 as compared to the same period in the prior year. Interest expense on deposits increased $0.9 million, while interest expense on borrowed funds decreased $0.2 million in the second quarter of 2019 when compared to the same period in the prior year. Fully taxable equivalent net interest margin was 3.69% in the second quarter of 2019, compared with 3.73% for the same period in the prior year. The average yield on interest-earning assets increased 13 basis points, while the average cost of interest-bearing liabilities increased 26 basis points in the second quarter of 2019, compared to the same period in the prior year. Average interest-earning assets increased $28.6 million in the second quarter of 2019, compared to the same period in the prior year. The increase in interest and dividend income for the current quarter can be mostly attributed to average yield increases of 19 basis points on commercial loans, 34 basis points in consumer loans, 12 basis points in taxable securities and 155 basis points in interest-earning deposits, due to rising interest rates, along with a $77.9 million increase in the average balance of interest-earning deposits, compared to the same period in the prior year. The increase in interest expense for the current quarter can be mostly attributed to an increase in interest rates on interest-bearing deposit accounts, including promotional rates on time deposits, offset by a $36.3 million decrease in the average balance of FHLB advances, securities sold under agreements to repurchase, and other debt.

The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):



	Six Months Ended June 30,
	2019		2018		Change		Percentage Change
Interest and dividend income	$	33,347	$	31,538	$	1,809	5.7	%
Interest expense	3,079		1,621		1,458		89.9	%
Net interest income	$	30,268	$	29,917	$	351	1.2	%

Net interest income for the six months ended June 30, 2019 totaled $30.3 million compared with $29.9 million for the same period in the prior year, an increase of $0.4 million, or 1.2%. Interest and fees from loans increased $0.7 million, and interest-earning deposits increased $1.2 million, while interest from investments decreased $0.1 million for the six months ended June 30, 2019, as compared to the same period in the prior year. Interest expense on deposits increased $1.9 million for the six month period ended June 30, 2019, as compared to the same period in the prior year. Interest expense on borrowed funds and interest expense on securities sold under agreements to repurchase decreased $0.1 million and $0.3 million, respectively, for the six months ended June 30, 2019 as compared to the same period in the prior year. Fully taxable equivalent net interest margin was 3.69% for the six months ended June 30, 2019 compared with 3.74% for the same period in the prior year. Average interest-earning assets increased $38.7 million for the six months ended June 30, 2019, compared to the same period in the prior year. The average yield on interest-earning assets increased 13 basis points, while the average cost of interest-bearing liabilities increased 27 basis points for the six months ended June 30, 2019, as compared to the same period in the prior year. The increase in the average yield on interest-earning assets can be mostly attributed to a 19 basis points increase in the average yield on commercial loans, due to an increase in PRIME and LIBOR. The increase in the average cost of interest-bearing liabilities can be attributed to a 91 basis points increase in the average cost of time deposits, a 32 basis points increase in the average cost of interest-bearing demand deposits, and a 22 basis points increase in the average cost of savings and money market accounts, offset by a 121 basis points decline in the average cost of FHLB advances, securities sold under agreement to repurchase, and other debt due to the maturity of one $2.0 million FHLB term advance (3.05% rate) in January 2018, and one $10.0 million repurchase agreement (3.72% rate) in May 2018.

Average Consolidated Balance Sheets and Interest Analysis

The following tables present certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the three and six months ended June 30, 2019 and 2018. For the purpose of the tables 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. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments.



AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)	Three Months Ended June 30, 2019								Three Months Ended June 30, 2018
	Average Balance			Interest			Yield/Rate (3)		Average Balance			Interest			Yield/Rate (3)
Interest-earning assets:
Commercial loans	$	857,748		$	10,098		4.72	%	$	855,121		$	9,663		4.53	%
Mortgage loans	182,134			1,713			3.77	%	194,244			1,800			3.72	%
Consumer loans	251,041			2,795			4.47	%	279,021			2,873			4.13	%
Taxable securities	230,085			1,282			2.23	%	240,800			1,266			2.11	%
Tax-exempt securities	51,413			373			2.91	%	52,527			363			2.77	%
Interest-earning deposits	81,735			525			2.58	%	3,878			10			1.03	%
Total interest-earning assets	1,654,156			16,786			4.07	%	1,625,591			15,975			3.94	%

Non-earning assets:
Cash and due from banks	25,450								27,130
Premises and equipment, net	32,185								26,287
Other assets	54,987								56,002
Allowance for loan losses	(20,058		)						(21,218		)
AFS valuation allowance	(2,121		)						(10,070		)
Total assets	$	1,744,599							$	1,703,722

Interest-bearing liabilities:
Interest-bearing demand deposits	$	182,480		$	179		0.39	%	$	131,863		$	28		0.09	%
Savings and insured money market deposits	738,188			790			0.43	%	774,020			419			0.22	%
Time deposits	163,619			575			1.41	%	130,432			161			0.50	%
FHLBNY advances, securities sold under agreements to repurchase, and other debt	4,214			37			3.52	%	40,557			244			2.41	%
Total interest-bearing liabilities	1,088,501			1,581			0.58	%	1,076,872			852			0.32	%

Non-interest-bearing liabilities:
Demand deposits	455,452								459,095
Other liabilities	27,112								16,539
Total liabilities	1,571,065								1,552,506
Shareholders' equity	173,534								151,216
Total liabilities and shareholders’ equity	$	1,744,599							$	1,703,722
Fully taxable equivalent net interest income				15,205								15,123
Net interest rate spread (1)							3.49	%							3.62	%
Net interest margin, fully taxable equivalent (2)							3.69	%							3.73	%
Taxable equivalent adjustment				(104		)						(106		)
Net interest income				$	15,101							$	15,017

(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.

(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.

(3) Annualized.



AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)	Six Months Ended June 30, 2019								Six Months Ended June 30, 2018
	Average Balance			Interest			Yield/ Rate (3)		Average Balance			Interest			Yield/ Rate (3)
Interest-earning assets:
Commercial loans	$	855,985		$	20,025		4.72	%	$	849,927		$	19,096		4.53	%
Mortgage loans	181,928			3,434			3.81	%	194,579			3,610			3.74	%
Consumer loans	255,634			5,673			4.48	%	277,328			5,717			4.16	%
Taxable securities	221,939			2,480			2.25	%	245,382			2,557			2.10	%
Tax-exempt securities	49,366			706			2.88	%	53,570			742			2.79	%
Interest-earning deposits	98,520			1,233			2.52	%	3,890			32			1.66	%
Total interest-earning assets	1,663,372			33,551			4.07	%	1,624,676			31,754			3.94	%

Non-earning assets:
Cash and due from banks	25,898								27,191
Premises and equipment, net	28,625								26,415
Other assets	54,841								54,882
Allowance for loan losses	(19,658		)						(21,236		)
AFS valuation allowance	(3,910		)						(8,542		)
Total assets	$	1,749,168							$	1,703,386

Interest-bearing liabilities:
Interest-bearing demand deposits	$	189,111		$	384		0.41	%	$	141,632		$	63		0.09	%
Savings and insured money market deposits	746,197			1,584			0.43	%	772,019			793			0.21	%
Time deposits	158,470			1,037			1.32	%	123,813			253			0.41	%
FHLBNY advances, securities sold under agreements to repurchase, and other debt	4,241			74			3.52	%	44,616			512			2.31	%
Total interest-bearing liabilities	1,098,019			3,079			0.57	%	1,082,080			1,621			0.30	%

Non-interest-bearing liabilities:
Demand deposits	458,707								454,612
Other liabilities	21,966								15,837
Total liabilities	1,578,692								1,552,529
Shareholders' equity	170,476								150,857
Total liabilities and shareholders’ equity	$	1,749,168							$	1,703,386
Fully taxable equivalent net interest income				30,472								30,133
Net interest rate spread (1)							3.50	%							3.64	%
Net interest margin, fully taxable equivalent (2)							3.69	%							3.74	%
Taxable equivalent adjustment				(204		)						(216		)
Net interest income				$	30,268							$	29,917

(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.

(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.

(3) Annualized.

Changes Due to Rate and Volume

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The tables below illustrate the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three and six months ended June 30, 2019 and 2018. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purpose of these tables, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.



RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
	Three Months Ended June 30, 2019 vs. 2018
	Increase/(Decrease)
	Total Change			Due to Volume			Due to Rate
(in thousands)	Total Change			Due to Volume			Due to Rate
Interest and dividend income on:
Commercial loans	$	435		$	30		$	405
Mortgage loans	(87		)	(111		)	24
Consumer loans	(78		)	(303		)	225
Taxable investment securities	16			(56		)	72
Tax-exempt investment securities	10			(8		)	18
Interest-earning deposits	515			479			36
Total interest and dividend income, fully taxable equivalent	811			31			780

Interest expense on:
Interest-bearing demand deposits	151			15			136
Savings and insured money market deposits	371			(21		)	392
Time deposits	414			50			364
FHLBNY advances, securities sold under agreements to repurchase and other debt	(207		)	(285		)	78
Total interest expense	729			(241		)	970
Net interest income, fully taxable equivalent	$	82		$	272		$	(190	)



	Six Months Ended June 30, 2019 vs. 2018
	Increase/(Decrease)
	Total Change			Due to Volume			Due to Rate
(in thousands)	Total Change			Due to Volume			Due to Rate
Interest and dividend income on:
Commercial loans	$	929		$	135		$	794
Mortgage loans	(176		)	(242		)	66
Consumer loans	(44		)	(466		)	422
Taxable investment securities	(77		)	(253		)	176
Tax-exempt investment securities	(36		)	(59		)	23
Interest-earning deposits	1,201			1,175			26
Total interest and dividend income, fully taxable equivalent	1,797			290			1,507

Interest expense on:
Interest-bearing demand deposits	321			27			294
Savings and insured money market deposits	791			(28		)	819
Time deposits	784			87			697
FHLBNY advances, securities sold under agreements to repurchase and other debt	(438		)	(616		)	178
Total interest expense	1,458			(530		)	1,988
Net interest income, fully taxable equivalent	$	339		$	820		$	(481	)

Provision for loan losses

Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. Based on this analysis, the provision for loan losses for the second quarter of 2019 and 2018 was $0.2 million and $2.4 million, respectively. The decrease in the provision for loan losses for the three months ended June 30, 2019, compared to the same period in the prior year, can be mostly attributed an increase in the historical loss factor of the commercial and industrial loan portfolio during the second quarter of 2018 due to the charge-off of multiple large commercial loans to one borrower for $3.6 million. Additionally, there was a decrease in the total loan portfolio of $10.7 million during the second quarter of 2019, as compared to an increase in the total loan portfolio of $14.5 million during the second quarter of 2018.

The provision for loan losses for the six months ended June 30, 2019 and 2018 was $1.2 million and $3.1 million, respectively. The decrease in the provision for loan losses for the six months ended June 30, 2019, compared to the same period in the prior year, can be mostly attributed to an increase in the historical loss factor of the commercial and industrial loan portfolio, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018. Additionally, there was a decrease in the total loan portfolio of $23.5 million during the six months ended June 30, 2019, as compared to an increase in the total loan portfolio of $22.6 million during the six months ended June 30, 2018.

Net charge-offs for the three months ended June 30, 2019 and 2018 were $0.2 million and $4.1 million, respectively. Net charge-offs for the six months ended June 30, 2019 and 2018 were $0.5 million and $4.6 million, respectively. As previously discussed, the decrease in net charge offs for the three and six month periods ended June 30, 2019 can be attributed to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018.

Non-interest income

The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):



	Three Months Ended June 30,
	2019			2018			Change			Percentage Change
WMG fee income	$	2,524		$	2,373		$	151		6.4	%
Service charges on deposit accounts	1,085			1,144			(59		)	(5.2	)%
Interchange revenue from debit card transactions	1,024			996			28			2.8	%
Net gains on securities transactions	19			—			19			N/A
Changes in fair value of equity investments	27			26			1			3.8	%
Net gains on sales of loans held for sale	29			59			(30		)	(50.8	)%
Net losses on sales of other real estate owned	(3		)	(48		)	45			(93.8	)%
Income from bank owned life insurance	16			17			(1		)	(5.9	)%
CFS fee and commission income	189			135			54			40.0	%
Other	176			623			(447		)	(71.7	)%
Total non-interest income	$	5,086		$	5,325		$	(239	)	(4.5	)%

Total non-interest income for the second quarter of 2019 decreased $0.2 million compared with the same period in the prior year. The decrease was primarily due to decreases in other non-interest income, partially offset by an increase in WMG fee income.

Other non-interest income

The decrease in other non-interest income was due to the $0.4 million New York State sales tax refund received in March 2018.

WMG Fee Income

The increase in WMG fee income can mostly be attributed to an increase in the fees from terminating trusts.

The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):



	Six Months Ended June 30,
	2019			2018			Change			Percentage Change
WMG fee income	$	4,800		$	4,689		$	111		2.4	%
Service charges on deposit accounts	2,189			2,308			(119		)	(5.2	)%
Interchange revenue from debit card transactions	2,055			2,031			24			1.2	%
Net gains on securities transactions	19			—			19			N/A
Changes in fair value of equity investments	116			24			92			383.3	%
Net gains on sales of loans held for sale	77			105			(28		)	(26.7	)%
Net losses on sales of other real estate owned	(86		)	(4		)	(82		)	N/M
Income from bank owned life insurance	31			33			(2		)	(6.1	)%
CFS fee and commission income	357			246			111			45.1	%
Other	453			1,368			(915		)	(66.9	)%
Total non-interest income	$	10,011		$	10,800		$	(789	)	(7.3	)%

Total non-interest income for the six months ended June 30, 2019 decreased $0.8 million compared with the same period in the prior year. The decrease was mostly due to a decrease in service charges on deposit accounts, and decreases in other non-interest income, offset by increases in WMG fee income, and CFS fee and commission income.

WMG fee income

The increase in WMG fee income for the six months ended June 30, 2019, compared to the same period in the prior year, can be mostly attributed to an increase in fees from terminating trusts.

Service charges on deposit accounts

The decrease in service charges on deposit accounts, compared to the same period in the prior year, can be mostly attributed to a decline in non-sufficient fund charges.

CFS fee and commission income

The increase in CFS fee and commission income, compared to the same period in the prior year, can be mostly attributed to an increase in annuity commissions.

Other

The decrease in other non-interest income, compared to the same period in the prior year, can be mostly attributed to a $0.4 million New York State sales tax refund received during the first quarter of 2018, decreases in swap fee income, and decreases in rental income from OREO.

Non-interest expense

The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):



	Three Months Ended June 30,
	2019			2018			Change			Percentage Change
Compensation expense:
Salaries and wages	$	5,780		$	5,564		$	216		3.9	%
Pension and other employee benefits	1,473			1,518			(45		)	(3.0	)%
Other components of net periodic pension and postretirement benefits	(141		)	(408		)	267			N/M
Total compensation expense	7,112			6,674			438			6.6	%

Non-compensation expense:
Net occupancy	1,478			1,643			(165		)	(10.0	)%
Furniture and equipment	595			702			(107		)	(15.2	)%
Data processing	1,873			1,764			109			6.2	%
Professional services	418			508			(90		)	(17.7	)%
Legal accruals and settlements	—			989			(989		)	(100.0	)%
Amortization of intangible assets	151			182			(31		)	(17.0	)%
Marketing and advertising	145			255			(110		)	(43.1	)%
Other real estate owned expenses	40			100			(60		)	(60.0	)%
FDIC insurance	221			301			(80		)	(26.6	)%
Loan expenses	190			184			6			3.3	%
Other	1,600			1,665			(65		)	(3.9	)%
Total non-compensation expense	6,711			8,293			(1,582		)	(19.1	)%
Total non-interest expense	$	13,823		$	14,967		$	(1,144	)	(7.6	)%

Total non-interest expense for the second quarter of 2019 decreased $1.1 million compared with the same period in the prior year. The decrease was due to decreases in non-compensation expense, offset by an increase in compensation expense.

Compensation expense

The increase in compensation expense, compared to the same period in the prior year, can mostly be attributed to annual merit increases and a reduced credit in other components of net periodic pension and postretirement benefits. The decrease in pension and other employee benefits was due primarily to reduced health care costs.

Non-compensation expense

The decrease in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to decreases in legal accruals and settlements, net occupancy expense, marketing and advertising expense, furniture and equipment expense, professional services expense, and FDIC Insurance expense, offset by an increase in data processing expense. The decrease in legal accruals and settlements can be attributed to the settlement agreement in the matter of Fane vs. Chemung Canal Trust Company during the second quarter of 2018. The decrease in net occupancy and furniture and equipment expenses was mostly attributable to runoff in depreciation expense related to mechanical equipment, the closing of the Oakdale Mall and Painted Post branches, as well as a reduction in non-capitalizable fixed asset purchases as compared to the prior year due to the opening of two new branches in 2018. The decrease in marketing and advertising expenses was due to the opening of two new branches during 2018. The increase in data processing expenses can be attributed to the timing of various planned projects.

The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):



	Six Months Ended June 30,
	2019			2018			Change			Percentage Change
Compensation expense:
Salaries and wages	$	11,501		$	11,278		$	223		2.0	%
Pension and other employee benefits	3,018			3,176			(158		)	(5.0	)%
Other components of net periodic pension and postretirement benefits	(282		)	(816		)	534			N/M
Total compensation expense	14,237			13,638			599			4.4	%

Non-compensation expense:
Net occupancy	3,045			3,251			(206		)	(6.3	)%
Furniture and equipment	1,123			1,360			(237		)	(17.4	)%
Data processing	3,600			3,506			94			2.7	%
Professional services	823			1,048			(225		)	(21.5	)%
Legal accruals and settlements	—			989			(989		)	(100.0	)%
Amortization of intangible assets	314			376			(62		)	(16.5	)%
Marketing and advertising	413			604			(191		)	(31.6	)%
Other real estate owned expenses	71			238			(167		)	(70.2	)%
FDIC insurance	486			618			(132		)	(21.4	)%
Loan expenses	386			353			33			9.3	%
Other	2,822			3,152			(330		)	(10.5	)%
Total non-compensation expense	13,083			15,495			(2,412		)	(15.6	)%
Total non-interest expense	$	27,320		$	29,133		$	(1,813	)	(6.2	)%

Total non-interest expense for the six months ended June 30, 2019 decreased $1.8 million compared with the same period in the prior year. The decrease was due to decreases in non-compensation expense offset by an increase in compensation expense.

Compensation expense

The increase in compensation expense, compared to the same period in the prior year, can be mostly attributable to an increase in salaries and wages, partially offset by a reduced credit in other components of net periodic pension benefits. The increase in salaries and wages can be attributed to annual merit increases. The decrease in pension and other employee benefits was due primarily to reduced health care costs.

Non-compensation expense

The decrease in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to decreases in legal accruals and settlements, professional services, furniture and equipment expense, net occupancy expense, marketing and advertising expenses, FDIC insurance and other real estate owned expenses, partially offset by an increase in data processing expense. The decrease in legal accruals and settlements can be attributed to the settlement agreement in the matter of Fane vs. Chemung Canal Trust Company during the second quarter of 2018. The decrease in professional services was due primarily to consulting costs associated with the New York State sales tax refund received during the first quarter of 2018. The decrease in net occupancy and furniture and equipment expenses was mostly attributable to runoff in depreciation expense related to mechanical equipment, the closing of the Oakdale Mall and Painted Post branches, as well as a reduction in non-capitalizable fixed asset purchases as compared to the prior year period due to the opening of two new branches in 2018. The decrease in marketing and advertising expenses was due to the opening of two new branches during 2018. The decrease in OREO expenses can be attributed to fewer OREO properties retained in the first half of 2019 as compared to the first half of 2018. The decrease in the benefit in other components of net periodic pension cost (benefits) was due to a change in assumptions used to prepare annual actuarial expense estimates. The increase in data processing expense was related to the timing of various planned projects.

Income tax expense

The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):



	Three Months Ended June 30,
	2019			2018			Change		Percentage Change
Income before income tax expense	$	6,214		$	3,013		$	3,201	106.2	%
Income tax expense	1,233			486			747		153.7	%
Effective tax rate	19.8		%	16.1		%

Income tax expense for the current quarter was $1.2 million compared to $0.5 million for the same period in the prior year. The increase in income tax expense was due primarily to an increase of $3.2 million in income before income tax expense. The effective income tax rate increased from 16.1% for the second quarter of 2018 to 19.8% for the second quarter of 2019.

The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):



	Six Months Ended June 30,
	2019			2018			Change		Percentage Change
Income before income tax expense	$	11,716		$	8,513		$	3,203	37.6	%
Income tax expense	2,267			1,547			720		46.5	%
Effective tax rate	19.3		%	18.2		%

Income tax expense for the six months ended 2019 and 2018 were $2.3 million and $1.5 million, respectively. The increase in income tax expense was due primarily to an increase of $3.2 million in income before income tax expense. The effective income tax rate increased from 18.2% for the six months ended June 30, 2018 to 19.3% for the six months ended June 30, 2019.

Financial Condition

The following table presents selected financial information at the dates indicated, and the dollar and percent change (in thousands):



	June 30, 2019			December 31, 2018			Change			Percentage Change
ASSETS
Total cash and cash equivalents	$	116,460		$	129,972		$	(13,512	)	(10.4	)%
Total investment securities, FHLB, and FRB stock	278,546			252,180			26,366			10.5	%

Loans, net of deferred loan fees	1,288,371			1,311,906			(23,535		)	(1.8	)%
Allowance for loan losses	(19,656		)	(18,944		)	(712		)	3.8	%
Loans, net	1,268,715			1,292,962			(24,247		)	(1.9	)%

Goodwill and other intangible assets, net	22,861			23,175			(314		)	(1.4	)%
Other assets	66,415			57,054			9,361			16.4	%
Total assets	$	1,752,997		$	1,755,343		$	(2,346	)	(0.1	)%

LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits	$	1,541,138		$	1,569,237		$	(28,099	)	(1.8	)%
FHLBNY advances and other debt	4,195			4,304			(109		)	(2.5	)%
Other liabilities	29,277			16,773			12,504			74.5	%
Total liabilities	1,574,610			1,590,314			(15,704		)	(1.0	)%

Total shareholders’ equity	178,387			165,029			13,358			8.1	%
Total liabilities and shareholders’ equity	$	1,752,997		$	1,755,343		$	(2,346	)	(0.1	)%

Cash and Cash Equivalents

The decrease in cash and cash equivalents can be attributed to changes in securities, loans, deposits, and borrowings.

Investment securities

The increase in investment securities can be mostly attributed to purchases in the amount of $57.3 million, offset by $15.2 million in sales of mortgage-backed and municipal securities, along with maturities and paydowns.

Loans, net

The decrease in total loans can be attributed to decreases of $12.7 million in commercial mortgages, $10.7 million in indirect consumer loans, and $5.2 million in other consumer loans, partially offset by an increase of $3.9 million in commercial and agriculture loans and $1.1 million in residential mortgages.

Goodwill and other intangible assets, net

The decrease in goodwill and other intangible assets, net can be attributed to the amortization of intangible assets.

Other assets

The increase in other assets can be mostly attributed to an increase of $8.6 million in operating lease right-of-use assets related to the adoption of ASU No. 2016-02 Leases as of January 1, 2019.

Deposits

The decrease in deposits can be attributed to a decrease of $32.4 million in non-interest-bearing demand deposits, and $32.9 million in money market accounts, offset by increases of $27.6 million in time deposits, and $9.2 million in interest-bearing demand deposits. The decreases in non-interest-bearing demand deposit and money market accounts can be mostly attributed to an outflow of commercial deposits. The increase in time deposits can be mostly attributed to a campaign offering promotional rates.

Other liabilities

The increase in other liabilities can be mostly attributed to an increase in operating lease liabilities related to the January 1, 2019 adoption of ASU No. 2016-02 Leases.

Shareholders’ equity

Shareholders’ equity was $178.4 million at June 30, 2019 compared with $165.0 million at December 31, 2018. The increase in retained earnings of $6.9 million was due primarily to earnings of $9.4 million and other comprehensive income of $5.5 million, offset by $2.5 million in dividends declared during the six months ended June 30, 2019. The other comprehensive income of $5.5 million can be mostly attributed to the increase in the fair market value of the securities portfolio.

Assets under management or administration

The market value of total assets under management or administration in WMG was $1.838 billion at June 30, 2019, including $273.5 million of assets held under management or administration for the Corporation, compared with $1.768 billion at December 31, 2018, including $283.0 million of assets held under management or administration for the Corporation, an increase of $69.7 million, or 3.9%. The growth in total assets under management or administration can be mostly attributed to an increase in the market value of total assets.

Securities

The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt securities purchased for the bond portfolio to carry a minimum agency rating of "A". After an independent credit analysis is performed, the policy also allows the Corporation to purchase local municipal obligations that are not rated. The Corporation intends to maintain a reasonable level of securities to provide adequate liquidity and in order to have securities available to pledge to secure public deposits, repurchase agreements and other types of transactions. Fluctuations in the fair value of the Corporation’s securities relate primarily to changes in interest rates.

Marketable securities are classified as Available for Sale, while investments in local municipal obligations are generally classified as Held to Maturity. The composition of the available for sale segment of the securities portfolio is summarized in the table as follows (in thousands):



SECURITIES AVAILABLE FOR SALE
	June 30, 2019						December 31, 2018
	Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value		Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value
Obligations of U.S. Government sponsored enterprises	$	4,999	$	4,995	1.9	%	$	5,489	$	5,472	2.3	%
Mortgage-backed securities, residential and collateralized mortgage obligations	200,665		200,388		74.4	%	189,111		183,192		75.6	%
Obligations of states and political subdivisions	45,194		46,416		17.2	%	44,390		44,152		18.2	%
Other securities	17,373		17,487		6.5	%	9,506		9,442		3.9	%
Total	$	268,231	$	269,286	100.0	%	$	248,496	$	242,258	100.0	%

The available for sale segment of the securities portfolio totaled $269.3 million at June 30, 2019, an increase of $27.0 million, or 11.2%, from $242.3 million at December 31, 2018. The increase can be mostly attributed to purchases in the amount of $57.3 million, offset by $15.2 million in sales of mortgage-backed and municipal securities, and $21.8 million in proceeds from maturities, calls, and principal paydowns on securities available for sale.

The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled $4.1 million at June 30, 2019, a decrease of $0.8 million, or 15.6%, from $4.9 million at December 31, 2018, mostly attributed to maturities.

Loans

The Corporation has reporting systems to monitor: (i) loan origination and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, troubled debt restructurings, and other real estate owned, (iv) impaired loans, and (v) potential problem loans. Management reviews these systems on a regular basis.

The table below presents the Corporation’s loan composition by segment at the dates indicated, and the dollar and percent change from December 31, 2018 to June 30, 2019 (in thousands):



LOANS
	June 30, 2019		December 31, 2018		Dollar Change			Percentage Change
Commercial and agricultural	$	206,798	$	202,854	$	3,944		1.9	%
Commercial mortgages	648,500		661,170		(12,670		)	(1.9	)%
Residential mortgages	183,835		182,724		1,111			0.6	%
Indirect consumer loans	138,658		149,380		(10,722		)	(7.2	)%
Other consumer loans	110,580		115,778		(5,198		)	(4.5	)%
Total loans, net of deferred loan fees	$	1,288,371	$	1,311,906	$	(23,535	)	(1.8	)%

Portfolio loans totaled $1.288 billion at June 30, 2019, a decrease of $23.5 million, or 1.8%, from $1.312 billion at December 31, 2018. The decrease in loans can be attributed to decreases of $12.7 million in commercial mortgages, $10.7 million in indirect consumer loans, $5.2 million in other consumer loans, partially offset by increases of $1.1 million in residential mortgages, and $3.9 million in commercial and agricultural loans. The decline in commercial mortgages, indirect consumer loans, and other consumer loans can be mostly attributed to the portfolio runoff rate exceeding production during the six months ended June 30, 2019.

Residential mortgage loans totaled $183.8 million at June 30, 2019, an increase of $1.1 million, or 0.6%, from December 31, 2018. During the six months ended June 30, 2019, $1.4 million of newly originated residential mortgages were sold in the secondary market to Freddie Mac and $0.1 million of residential mortgages were sold to the State of New York Mortgage Agency.

The Corporation anticipates that future growth in portfolio loans will continue to be in commercial mortgages and commercial and industrial loans, especially within the Capital Bank division of the Bank. The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):



LOANS BY DIVISION
	June 30, 2019		December 31, 2018		December 31, 2017		December 31, 2016		December 31, 2015
Chemung Canal Trust Company*	$	588,647	$	603,133	$	630,732	$	636,836	$	683,137
Capital Bank Division	699,724		708,773		681,092		563,454		485,496
Total loans	$	1,288,371	$	1,311,906	$	1,311,824	$	1,200,290	$	1,168,633

* All loans, excluding those originated by the Capital Bank division.

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At June 30, 2019 and December 31, 2018, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were 44.4% and 47.2% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of June 30, 2019 and December 31, 2018.

Non-Performing Assets

Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure.

Past due status on all loans is based on the contractual terms of the loan. 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. At the time loans are placed in non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return 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. 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.

The following table summarizes the Corporation's non-performing assets, excluding acquired PCI loans (in thousands):



NON-PERFORMING ASSETS
	June 30, 2019			December 31, 2018
Non-accrual loans	$	13,804		$	6,305
Non-accrual troubled debt restructurings	5,712			5,949
Total non-performing loans	19,516			12,254
Other real estate owned	205			574
Total non-performing assets	$	19,721		$	12,828

Ratio of non-performing loans to total loans	1.51		%	0.93		%
Ratio of non-performing assets to total assets	1.12		%	0.73		%
Ratio of allowance for loan losses to non-performing loans	100.77		%	154.59		%

Accruing loans past due 90 days or more (1)	$	57		$	19
Accruing troubled debt restructurings (1)	776			816
(1) These loans are not included in non-performing assets above.

Non-Performing Loans

Non-performing loans totaled $19.5 million at June 30, 2019, or 1.51% of total loans, compared with $12.3 million at December 31, 2018, or 0.93% of total loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $19.7 million, or 1.12% of total assets, at June 30, 2019, compared with $12.8 million, or 0.73% of total assets, at December 31, 2018. The increase in non-performing loans can be mostly attributed to two commercial mortgage relationships, offset by decreases in the residential mortgage and consumer loan portfolios.

Accruing Loans Past due 90 Days or More

The recorded investment in accruing loans past due 90 days or more totaled $57 thousand at June 30, 2019, an increase of $38 thousand from December 31, 2018.

Troubled Debt Restructurings

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation modified the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest. As of June 30, 2019, the Corporation had $5.7 million of non-accrual TDRs compared with $6.0 million as of December 31, 2018. As of June 30, 2019 and December 31, 2018, the Corporation had $0.6 million and $0.8 million respectively, of accruing TDRs.

Impaired Loans

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Impaired loans at June 30, 2019 totaled $16.7 million, including TDRs of $6.3 million, compared to $8.7 million, including TDRs of $6.8 million, at December 31, 2018. The increase in impaired loans was due primarily to an increase in impaired commercial mortgages, mostly due to the impairment of a commercial mortgage to one borrower for $3.4 million during the first quarter of 2019 and a commercial mortgage to one borrower for $5.0 million during the second quarter of 2019. Included in the recorded investment of impaired loans at June 30, 2019, were loans totaling $12.1 million for which impairment allowances of $4.5 million have been specifically allocated to the allowance for loan losses. As of December 31, 2018, the impaired loan total included $3.7 million of loans for which specific impairment allowances of $2.2 million were allocated to the allowance for loan losses. The increase in impaired loans with specific impairment allowances can be mostly attributed to the impairment of a commercial mortgage to one borrower for $3.4 million during the first quarter of 2019 and a commercial mortgage to one borrower for $5.0 million during the second quarter of 2019.

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, by independent third parties, on loans secured by real estate at the time a loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. 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. 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. Real estate values in the Corporation's market area have been holding steady. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.

Allowance for Loan Losses

The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. The allowance is established based on management’s evaluation of the probable incurred losses inherent in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are established based on management’s analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, delinquent or unpaid property taxes, 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 a 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 non-accrual status, all future payments received are applied to principal and 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.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative 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 qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy.

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. 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 impaired loans. 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.

The allowance for loan losses was $19.7 million at June 30, 2019, compared with $18.9 million at December 31, 2018. The ratio of allowance for loan losses to total loans was 1.53% at June 30, 2019, compared with 1.44% at December 31, 2018. Net charge-offs for the six months ended June 30, 2019 and 2018 were $0.5 million and $4.6 million. Net charge-offs decreased $4.1 million, compared with the same period in the prior year, mostly due to the charge-off of multiple large commercial loans to one borrower for $3.6 million in 2018.

The table below summarizes the Corporation’s loan loss experience for the six months ended June 30, 2019 and 2018 (in thousands, except ratio data):



SUMMARY OF LOAN LOSS EXPERIENCE
	Six Months Ended June 30,
	2019			2018
Balance of allowance for loan losses at beginning of period	$	18,944		$	21,161

Charge-offs:
Commercial and agricultural	55			3,644
Commercial mortgages	—			145
Residential mortgages	41			165
Consumer loans	757			921
Total charge-offs	853			4,875

Recoveries:
Commercial and agricultural	15			21
Commercial mortgages	2			2
Residential mortgages	45			5
Consumer loans	260			260
Total recoveries	322			288

Net charge-offs	531			4,587
Provision for loan losses	1,243			3,071
Balance of allowance for loan losses at end of period	$	19,656		$	19,645

Ratio of net charge-offs to average loans outstanding	0.07		%	1.24		%
Ratio of allowance for loan losses to total loans outstanding	1.53		%	1.47		%

Deposits

The table below summarizes the Corporation’s deposit composition by segment at the dates indicated, and the dollar and percent change from December 31, 2018 to June 30, 2019 (in thousands):



DEPOSITS
	June 30, 2019		December 31, 2018		Dollar Change			Percentage Change
Non-interest-bearing demand deposits	$	451,985	$	484,433	$	(32,448	)	(6.7	)%
Interest-bearing demand deposits	188,843		179,603		9,240			5.1	%
Insured money market accounts	505,084		537,948		(32,864		)	(6.1	)%
Savings deposits	217,434		217,027		407			0.2	%
Time deposits	177,792		150,226		27,566			18.3	%
Total	$	1,541,138	$	1,569,237	$	(28,099	)	(1.8	)%

Deposits totaled $1.541 billion at June 30, 2019 compared with $1.569 billion at December 31, 2018, a decrease of $28.1 million, or 1.8%. The decrease was attributable to decreases of $32.4 million in non-interest-bearing demand deposits and $32.9 million in money market accounts, offset by increases of $27.6 million in time deposits, due to a rate promotion, and $9.2 million in interest-bearing demand deposit accounts. The decreases in non-interest-bearing demand deposit and money market accounts can be mostly attributed to an outflow of commercial deposits. At June 30, 2019, demand deposit and money market accounts comprised 74.4% of total deposits compared with 76.6% at December 31, 2018.

The table below presents the Corporation's deposits balance by bank division (in thousands):



DEPOSITS BY DIVISION
	June 30, 2019		December 31, 2018		December 31, 2017		December 31, 2016		December 31, 2015
Chemung Canal Trust Company*	$	1,326,201	$	1,328,658	$	1,264,883	$	1,249,870	$	1,219,282
Capital Bank Division	214,937		240,579		202,563		206,473		181,013
Total	$	1,541,138	$	1,569,237	$	1,467,446	$	1,456,343	$	1,400,295

*All deposits, excluding those originated by the Capital Bank Division.

In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits. The recently enacted Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations. This will apply to the Corporation's participation in the CDARS and ICS programs. Brokered deposits include funds obtained through brokers. There were no deposits obtained through brokers as of June 30, 2019 and December 31, 2018. Deposits obtained through the CDARS and ICS programs were $189.6 million and $193.6 million as of June 30, 2019 and December 31, 2018, respectively. The decrease in CDARS and ICS deposits was due to the seasonal outflow of municipal client balances.

The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and other low interest-bearing deposit accounts. A checking account is the driver of a banking relationship and consumers consider the bank where they have their checking account as their primary bank. These customers will typically turn to their primary bank first when in need of other financial services. Strategies that have been developed and implemented to generate these deposits include: (i) acquire deposits by entering new markets through branch acquisitions or de novo branching, (ii) an annual checking account marketing campaign, (iii) training branch employees to identify and meet client financial needs with Bank products and services, (iv) link business and consumer loans to the customer's primary checking account at the Bank, (v) aggressively promote direct deposit of client’s payroll checks or benefit checks and (vi) constantly monitor the Corporation’s pricing strategies to ensure competitive products and services.

The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates that it may use brokered deposits as a secondary source of funding to support growth.

Borrowings

Borrowings decreased $0.1 million from $4.3 million at December 31, 2018 to $4.2 million at June 30, 2019, attributable to normal recurring finance lease payments.

Shareholders’ Equity

Total shareholders' equity increased $13.4 million from $165.0 million at December 31, 2018 to $178.4 million at June 30, 2019, due primarily to an increase in retained earnings and a decrease in accumulated other comprehensive loss. The increase in retained earnings of $6.9 million was due primarily to earnings of $9.4 million, offset by $2.5 million in dividends declared during the six months ended June 30, 2019. The decrease in accumulated other comprehensive loss of $5.5 million can be mostly attributed to the increase in the fair market value of the securities portfolio. Also, treasury stock decreased $0.5 million, primarily due to the issuance of shares pursuant to the Corporation's employee benefit plans and the directors' stock compensation plans.

The total shareholders’ equity to total assets ratio was 10.18% at June 30, 2019 compared with 9.40% at December 31, 2018. The tangible equity to tangible assets ratio was 8.99% at June 30, 2019 compared with 8.19% at December 31, 2018. Book value per share increased to $36.64 at June 30, 2019 from $33.99 at December 31, 2018.

The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. As of June 30, 2019, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.

As a result of the recently enacted Regulatory Relief Act, the FRB amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant non-banking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, are no longer subject to regulatory capital requirements, effective on August 30, 2018.

Off-balance Sheet Arrangements

See Note 8 – Commitments and Contingencies in the Notes to Unaudited Consolidated Financial Statements for a discussion of off-balance sheet arrangements.

Liquidity

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 FHLBNY 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 $157.0 million and $112.6 million at June 30, 2019 and December 31, 2018, respectively. The Corporation also had a total of $58.0 million of unsecured lines of credit with five different financial institutions, all of which was available at June 30, 2019. The Corporation had a total of $28.0 million of unsecured lines of credit with four different financial institutions at December 31, 2018, all of which was available.

Consolidated Cash Flows Analysis

The table below summarizes the Corporation's cash flows for the periods indicated (in thousands):



CONSOLIDATED SUMMARY OF CASH FLOWS
(in thousands)	Six Months Ended June 30,
	2019			2018
Net cash provided by operating activities	$	13,372		$	10,553
Net cash (used in) provided by investing activities	3,558			(4,945		)
Net cash used in financing activities	(30,442		)	(1,522		)
Net increase (decrease) in cash and cash equivalents	$	(13,512	)	$	4,086

Operating activities

The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through short-term and long-term borrowings are sufficient to fund the Corporation’s operating liquidity needs.

Cash provided by operating activities in the first six months of 2019 and 2018 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

Cash provided by investing activities during the first six months of 2019 predominantly resulted from a net decrease in loans, maturities and principal paydowns on securities available for sale, and proceeds from sales of securities available for sale, offset by purchases of securities available for sale. Cash used in investing activities during the first six months of 2018 predominantly resulted from a net increase in loans offset by calls, maturities, and principal collected in securities available for sale.

Financing activities

Cash used in financing activities during the first six months of 2019 predominantly resulted from a net decrease in deposits. Cash used in financing activities during the first six months of 2018 predominantly resulted from a net increase in deposits, offset by the maturity of one $10.0 million repurchase agreement and the repayment of FHLBNY overnight and long term advances.

Capital Resources

The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the recently enacted Regulatory Relief Act, the FRB amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant non-banking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, are no longer subject to regulatory capital requirements, effective August 30, 2018. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel III rules became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2019 is 2.50%. Organizations that fail to maintain the minimum capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan and other benefit plans are not included in computing regulatory capital.

As a result of the Regulatory Relief Act, the federal banking agencies are required to develop a “Community Bank Leverage Ratio” (the ratio of a bank’s tangible equity capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital requirement for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A financial institution can elect to be subject to this new definition. The federal banking agencies have proposed a community bank leverage ratio of 9.0%, which remains under consideration. Until a final rule is issued, the Basel III guidelines remain applicable to the Bank.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. Management believes that, as of June 30, 2019 and December 31, 2018, the Bank met all capital adequacy requirements to which it was subject.

As of June 30, 2019, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank's capital category.

The regulatory capital ratios as of June 30, 2019 and December 31, 2018 were calculated under Basel III rules.

The Corporation and the Bank’s capital ratios as of June 30, 2019 were as follows (in thousands, except ratio data):



	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of June 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk Weighted Assets):
Consolidated	$	177,608	13.80	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	169,567	13.19	%	$	102,845	8.00	%	$	126,949	9.875	%	$	128,556	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	161,477	12.55	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	153,453	11.94	%	$	77,133	6.00	%	$	101,238	7.875	%	$	102,845	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	161,477	12.55	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	153,453	11.94	%	$	57,850	4.50	%	$	81,954	6.375	%	$	83,561	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	161,477	9.37	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	153,453	8.94	%	$	68,696	4.00	%	N/A		N/A		$	85,870	5.00	%

The Corporation and the Bank’s capital ratios as of December 31, 2018 were as follows (in thousands, except ratio data):



	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2018	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk Weighted Assets):
Consolidated	$	169,416	13.14	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	162,536	12.62	%	$	103,039	8.00	%	$	127,189	9.875	%	$	128,799	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	153,263	11.89	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	146,401	11.37	%	$	77,280	6.00	%	$	101,429	7.875	%	$	103,039	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	153,263	11.89	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	146,401	11.37	%	$	57,960	4.50	%	$	82,110	6.375	%	$	83,720	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	153,263	8.79	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	146,401	8.41	%	$	69,598	4.00	%	N/A		N/A		$	86,998	5.00	%

Dividend Restrictions

The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At June 30, 2019, the Bank could, without prior approval, declare dividends of approximately $25.2 million.

Adoption of New Accounting Standards

Please refer to Note 1, Summary of Significant Accounting Policies - Recent Accounting Pronouncements for a discussion of new accounting standards.

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 GAAP. 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.

Explanation and Reconciliation of the Corporation’s Use of Non-GAAP Measures

The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on pages 7–13. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.

In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures, because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.

The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Corporation’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's new rules, although we are unable to state with certainty that the SEC would so regard them.

Fully Taxable Equivalent Net Interest Income and Net Interest Margin

Net interest income is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of other institutions or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average interest-earning assets. For purposes of this measure as well, fully taxable equivalent net interest income is generally used by financial institutions, as opposed to actual net interest income, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. The Corporation follows these practices.




	As of the Three Months Ended
(in thousands, except ratio data)	June 30,			March 31,			Dec. 31			Sept. 30,			June 30,
(in thousands, except ratio data)	2019			2019			2018			2018			2018
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
Net interest income (GAAP)	$	15,101		$	15,167		$	15,484		$	15,079		$	15,017
Fully taxable equivalent adjustment	104			100			105			99			106
Fully taxable equivalent net interest income (non-GAAP)	$	15,205		$	15,267		$	15,589		$	15,178		$	15,123

Average interest-earning assets (GAAP)	$	1,654,156		$	1,671,063		$	1,680,269		$	1,625,132		$	1,625,591

Net interest margin - fully taxable equivalent (non-GAAP)	3.69		%	3.71		%	3.68		%	3.71		%	3.73		%

Efficiency Ratio

The unadjusted efficiency ratio is calculated as non-interest expense divided by total revenue (net interest income and non-interest income). The adjusted efficiency ratio is a non-GAAP financial measure which represents the Corporation’s ability to turn resources into revenue and is calculated as non-interest expense divided by total revenue (fully taxable equivalent net interest income and non-interest income), adjusted for one-time occurrences and amortization. This measure is meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s productivity measured by the amount of revenue generated for each dollar spent.




	As of the Three Months Ended
(in thousands, except ratio data)	June 30,			March 31,			Dec. 31			Sept. 30,			June 30,
(in thousands, except ratio data)	2019			2019			2018			2018			2018
EFFICIENCY RATIO
Net interest income (GAAP)	$	15,101		$	15,167		$	15,484		$	15,079		$	15,017
Fully taxable equivalent adjustment	104			100			105			99			106
Fully taxable equivalent net interest income (non-GAAP)	$	15,205		$	15,267		$	15,589		$	15,178		$	15,123

Non-interest income (GAAP)	$	5,086		$	4,925		$	4,893		$	7,381		$	5,325
Less: changes in fair value of equity investments	—			—			—			(2,093		)	—
Less: net (gains) losses on security transactions	(19		)	—			—			—			—
Adjusted non-interest income (non-GAAP)	$	5,067		$	4,925		$	4,893		$	5,288		$	5,325

Non-interest expense (GAAP)	$	13,823		$	13,497		$	14,205		$	13,428		$	14,967
Less: amortization of intangible assets	(151		)	(163		)	(176		)	(182		)	(182		)
Less: legal reserve	—			—			—			—			(989		)
Adjusted non-interest expense (non-GAAP)	$	13,672		$	13,334		$	14,029		$	13,246		$	13,796

Efficiency ratio (unadjusted)	68.47		%	67.18		%	69.71		%	59.79		%	73.58		%
Efficiency ratio (adjusted)	67.44		%	66.04		%	68.49		%	64.72		%	67.47		%

Tangible Equity and Tangible Assets (Period-End)

Tangible equity, tangible assets, and tangible book value per share are each non-GAAP financial measures. Tangible equity represents the Corporation’s stockholders’ equity, less goodwill and intangible assets. Tangible assets represents the Corporation’s total assets, less goodwill and other intangible assets. Tangible book value per share represents the Corporation’s equity divided by common shares at period-end. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.




	As of or for the Three Months Ended
(in thousands, except per share and ratio data)	June 30,			March 31,			Dec. 31			Sept. 30,			June 30,
(in thousands, except per share and ratio data)	2019			2019			2018			2018			2018
TANGIBLE EQUITY AND TANGIBLE ASSETS
(PERIOD END)
Total shareholders' equity (GAAP)	$	178,387		$	171,534		$	165,029		$	156,499		$	151,780
Less: intangible assets	(22,861		)	(23,012		)	(23,175		)	(23,351		)	(23,533		)
Tangible equity (non-GAAP)	$	155,526		$	148,522		$	141,854		$	133,148		$	128,247

Total assets (GAAP)	$	1,752,997		$	1,769,572		$	1,755,343		$	1,753,864		$	1,710,166
Less: intangible assets	(22,861		)	(23,012		)	(23,175		)	(23,351		)	(23,533		)
Tangible assets (non-GAAP)	$	1,730,136		$	1,746,560		$	1,732,168		$	1,730,513		$	1,686,633

Total equity to total assets at end of period (GAAP)	10.18		%	9.69		%	9.40		%	8.92		%	8.88		%
Book value per share (GAAP)	$	36.65		$	35.27		$	33.99		$	32.35		$	31.42

Tangible equity to tangible assets at end of period (non-GAAP)	8.99		%	8.50		%	8.19		%	7.69		%	7.60		%
Tangible book value per share (non-GAAP)	$	31.95		$	30.54		$	29.22		$	27.53		$	26.55

Tangible Equity (Average)

Average tangible equity and return on average tangible equity are each non-GAAP financial measures. Average tangible equity represents the Corporation’s average stockholders’ equity, less average goodwill and intangible assets for the period. Return on average tangible equity measures the Corporation’s earnings as a percentage of average tangible equity. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.




	As of or for the Three Months Ended
	June 30,			March 31,			Dec. 31			Sept. 30,			June 30,
(in thousands, except ratio data)	2019			2019			2018			2018			2018
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP)	$	173,534		$	167,385		$	159,032		$	154,331		$	151,216
Less: average intangible assets	(22,936		)	(23,092		)	(23,266		)	(23,440		)	(23,625		)
Average tangible equity (non-GAAP)	$	150,598		$	144,293		$	135,766		$	130,891		$	127,591

Return on average equity (GAAP)	11.51		%	10.83		%	14.29		%	17.81		%	6.70		%
Return on average tangible equity (non-GAAP)	13.27		%	12.56		%	16.74		%	21.01		%	7.94		%

Adjustments for Certain Items of Income or Expense

In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular period by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the period, including certain nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative impact on the Corporation’s financial results during the particular period in question. In the Corporation’s presentation of any such non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the supplemental financial information and explanations required under Regulation G.




	As of or for the Three Months Ended
(in thousands, except per share and ratio data)	June 30,			March 31,			Dec. 31			Sept. 30,			June 30,
(in thousands, except per share and ratio data)	2019			2019			2018			2018			2018
NON-GAAP NET INCOME
Reported net income (GAAP)	$	4,981		$	4,468		$	5,730		$	6,930		$	2,527
Net changes in fair value of investments (net of tax)	—			—			—			(1,559		)	—
Net (gains) losses on security transactions (net of tax)	(14		)	—			—			—			—
Legal reserve (net of tax)	—			—			—			—			737
Revaluation of net deferred tax asset	—			—			(445		)	—			—
Non- GAAP net income	$	4,967		$	4,468		$	5,285		$	5,371		$	3,264

Average basic and diluted shares outstanding	4,866			4,860			4,843			4,834			4,828

Reported basic and diluted earnings per share (GAAP)	$	1.02		$	0.92		$	1.18		$	1.43		$	0.52
Reported return on average assets (GAAP)	1.15		%	1.03		%	1.29		%	1.61		%	0.59		%
Reported return on average equity (GAAP)	11.51		%	10.83		%	14.29		%	17.81		%	6.70		%

Non-GAAP basic and diluted earnings per share	$	1.02		$	0.92		$	1.09		$	1.11		$	0.68
Non-GAAP return on average assets	1.14		%	1.03		%	1.19		%	1.25		%	0.77		%
Non-GAAP return on average equity	11.48		%	10.83		%	13.18		%	13.81		%	8.66		%

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Management considers interest rate risk to be the most significant market risk for the Corporation. Market risk is the risk of loss from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in the net income of the Corporation as a result of changes in interest rates.

The Corporation’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and credit quality of earning assets.

The Corporation’s objectives in its asset and liability management are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to changes in interest rates. The Corporation's ALCO has the strategic responsibility for setting the policy guidelines on acceptable exposure to interest rate risk. These guidelines contain specific measures and limits regarding the risks, which are monitored on a regular basis. The ALCO is made up of the President and Chief Executive Officer, the Chief Financial Officer, the Asset Liability Management Officer, and other officers representing key functions.

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, with appropriate floors set for interest-bearing liabilities. At June 30, 2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 12.84% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by 7.86%. Both are within the Corporation's policy guideline of 15%. Given the overall low level of current interest rates and the unlikely event of a 200-basis point decline at this time, management additionally modeled an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates. When applied, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 4.82% and an immediate 300-basis point increase would positively impact the next 12 months net interest income by 11.68%.

A related component of interest rate risk is the expectation that the market value of the Corporation’s equity 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 a decline in market value. At June 30, 2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 12.93% and an immediate 200-basis point increase in interest rates would positively impact the market value by 8.50%. Both are within the Corporation’s policy guideline of 15%. Management also modeled the impact to the market value of the Corporation’s 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 that an immediate 100-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 4.53% and an immediate 300-basis point increase in interest rates would positively impact the market value by 12.10%.

Management does recognize the need for certain hedging strategies during periods of anticipated higher fluctuations in interest rates and the Funds Management Policy provides for limited use of certain derivatives in asset liability management.

Credit Risk

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 and Chief Executive Officer, Chief Financial Officer and Treasurer (non-voting member), Chief Risk Officer (non-voting member), Business Client Division Manager, Retail Client Division Manager, Retail Loan Manager, Senior Commercial Real Estate Lender, and Commercial Loan Managers, implements the Board-approved loan policy.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Corporation's management, with the participation of its Chief Executive Officer, who is the Corporation's principal executive officer, and its Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of June 30, 2019 pursuant to Rule 13a-15 of the Exchange Act, as amended. Based upon that evaluation, the principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures are effective as of June 30, 2019. In addition, there have been no changes in the Corporation’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Corporation under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors set forth in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 13, 2019.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds



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
4/1/19-4/30/19	—	$	—	—	121,906
5/1/19-5/31/19	—	—		—	121,906
6/1/19-6/30/19	—	—		—	121,906
Quarter ended 6/30/19	—	$	—	—	121,906
(1) On December 19, 2012, the Corporation’s Board of Directors approved a stock repurchase plan authorizing the purchase of up to 125,000 shares of the Corporation's outstanding common stock. Purchases may be made from time to time on the open market or in private negotiated transactions and will be at the discretion of management. For the three months ended June 30, 2019, no shares had been purchased under this plan. Since inception of the plan, a total of 3,094 shares have been purchased under the plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888.



3.1	Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).

3.2	Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).

3.3	Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006).

3.4	Amended and Restated Bylaws of Chemung Financial Corporation, as amended to May 15, 2019 (as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on May 16, 2019).

31.1	Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*

31.2	Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*

32.1	Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*

32.2	Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*

101.INS	Instance Document*

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*	Filed herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CHEMUNG FINANCIAL CORPORATION



DATED: August 8, 2019	By: /s/ Anders M. Tomson
	Anders M. Tomson President and Chief Executive Officer (Principal Executive Officer)



DATED: August 8, 2019	By: /s/ Karl F. Krebs
	Karl F. Krebs Chief Financial Officer and Treasurer (Principal Financial Officer)

EXHIBIT INDEX

The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888



3.1	Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).

3.2	Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).

3.3	Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006).

3.4	Amended and Restated Bylaws of Chemung Financial Corporation, as amended to May 15, 2019 (as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on May 16, 2019).

31.1	Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*

31.2	Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*

32.1	Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*

32.2	Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*

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101.CAL	XBRL Taxonomy Calculation Linkbase*

101.DEF	XBRL Taxonomy Definition Linkbase*

101.LAB	XBRL Taxonomy Label Linkbase*

101.PRE	XBRL Taxonomy Presentation Linkbase*

*	Filed herewith.