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

☒

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

For Quarterly period ended September 30, 2020

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)

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

The Nasdaq Stock Market, LLC

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: ☒         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: ☒        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

☒

Smaller reporting company

☒

Emerging growth company

☐

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):

Yes: ☐       No: ☒

The number of shares of the registrant's common stock, $.01 par value, outstanding on November 4, 2020 was 4,656,862.

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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			10
			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			81
Item 4:			Controls and Procedures			82
PART II.			OTHER INFORMATION
Item 1:			Legal Proceedings			83
Item 1A:			Risk Factors			83
Item 2:			Unregistered Sales of Equity Securities and Use of Proceeds			84
Item 3:			Defaults Upon Senior Securities			84
Item 4:			Mine Safety Disclosures			84
Item 5:			Other Information			84
Item 6:			Exhibits			85
SIGNATURES						86
EXHIBIT INDEX

2

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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
CARES Act			Coronavirus Aid, Relief, and Economic Security Act
CDARS			Certificate of Deposit Account Registry Service
CDO			Collateralized Debt Obligation
CECL			Current expected credit loss
CFS			CFS Group, Inc.
Corporation			Chemung Financial Corporation
COVID-19			Coronavirus disease 2019
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
IRT			Incident Response Team
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

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PCI			Purchased credit impaired
PPP			Paycheck Protection Program
PPPLF			Paycheck Protection Program Liquidity Facility
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.

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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.

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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.

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CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)						September 30, 2020						December 31, 2019
ASSETS
Cash and due from financial institutions						$	35,327					$	25,203
Interest-earning deposits in other financial institutions						114,575						96,701
Total cash and cash equivalents						149,902						121,904
Equity investments, at estimated fair value						2,291						2,174
Securities available for sale, at estimated fair value						396,300						284,090
Securities held to maturity, estimated fair value of $3,093 at September 30, 2020   and $3,139 at December 31, 2019						3,047						3,115
FHLBNY and FRBNY Stock, at cost						3,150						3,099
Loans, net of deferred loan fees						1,538,493						1,309,219
Allowance for loan losses						(24,590)						(23,478)
Loans, net						1,513,903						1,285,741
Loans held for sale						2,059						1,185
Premises and equipment, net						20,891						22,417
Operating lease right-of-use assets						7,474						8,001
Goodwill						21,824						21,824
Other intangible assets, net						371						742
Bank-owned life insurance						3,045						3,111
Accrued interest receivable and other assets						40,757						30,424
Total assets						$	2,165,014					$	1,787,827
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing						$	619,412					$	468,238
Interest-bearing						1,304,777						1,103,900
Total deposits						1,924,189						1,572,138
FHLBNY overnight advances						245						—
Long term finance lease obligation						3,910						4,085
Operating lease liabilities						7,584						8,084
Dividends payable						1,229						1,263
Accrued interest payable and other liabilities						30,852						19,630
Total liabilities						1,968,009						1,605,200
Shareholders' equity:
Common stock, $0.01 par value per share, 10,000,000 shares authorized;   5,310,076 issued at September 30, 2020 and December 31, 2019						53						53
Additional paid-in capital						46,892						46,382
Retained earnings						163,987						153,701
Treasury stock, at cost; 589,694 shares at September 30, 2020 and 452,641   shares at December 31, 2019						(15,569)						(11,710)
Accumulated other comprehensive income (loss)						1,642						(5,799)
Total shareholders' equity						197,005						182,627
Total liabilities and shareholders' equity						$	2,165,014					$	1,787,827

See accompanying notes to unaudited consolidated financial statements.

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CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

						Three Months Ended   September 30,												Nine Months Ended   September 30,
(in thousands, except per share data)						2020						2019						2020						2019
Interest and dividend income:
Loans, including fees						$	14,876					$	14,664					$	43,770					$	43,723
Taxable securities						1,474						1,349						4,358						3,825
Tax exempt securities						263						293						799						872
Interest-earning deposits						101						502						643						1,735
Total interest and dividend income						16,714						16,808						49,570						50,155
Interest expense:
Deposits						809						1,629						2,922						4,634
Borrowed funds						36						37						126						111
Total interest expense						845						1,666						3,048						4,745
Net interest income						15,869						15,142						46,522						45,410
Provision for loan losses						679						4,441						3,989						5,684
Net interest income after provision for loan losses						15,190						10,701						42,533						39,726
Non-interest income:
WMG fee income						2,416						2,315						6,968						7,115
Service charges on deposit accounts						740						1,141						2,294						3,330
Interchange revenue from debit card transactions						1,082						1,058						2,989						3,113
Net gains on security transactions						—						—						—						19
Changes in fair value of equity investments						57						(10)						(33)						106
Net gains on sales of loans held for sale						553						69						916						146
Net gains (losses) on sales of other real estate owned						6						(1)						(71)						(87)
Income from bank-owned life insurance						14						17						147						48
Other						471						367						1,940						1,177
Total non-interest income						5,339						4,956						15,150						14,967
Non-interest expenses:
Salaries and wages						6,088						5,874						17,678						17,375
Pension and other employee benefits						1,245						1,470						4,095						4,488
Other components of net periodic pension and postretirement benefits						(254)						(141)						(762)						(423)
Net occupancy						1,454						1,424						4,406						4,469
Furniture and equipment						538						717						1,573						1,840
Data processing						1,777						1,818						5,630						5,418
Professional services						453						395						1,313						1,218
Amortization of intangible assets						120						151						371						465
Marketing and advertising						140						231						546						644
Other real estate owned						53						9						87						80
FDIC insurance						247						(10)						726						476
Loan expense						301						171						798						557
Other						1,200						1,416						3,878						4,238
Total non-interest expenses						13,362						13,525						40,339						40,845
Income before income tax expense						7,167						2,132						17,344						13,848
Income tax expense						1,456						176						3,315						2,443
Net income						$	5,711					$	1,956					$	14,029					$	11,405
Weighted average shares outstanding						4,773						4,871						4,836						4,866
Basic and diluted earnings per share						$	1.19					$	0.40					$	2.90					$	2.34

See accompanying notes to unaudited consolidated financial statements.

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CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

						Three Months Ended   September 30,												Nine Months Ended   September 30,
(in thousands)						2020						2019						2020						2019
Net income						$	5,711					$	1,956					$	14,029					$	11,405
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale						(692)						3,573						9,919						10,885
Reclassification adjustment for gains realized in net income						—						—						—						(19)
Net unrealized gains (losses)						(692)						3,573						9,919						10,866
Tax effect						(176)						911						2,530						2,771
Net of tax amount						(516)						2,662						7,389						8,095
Change in funded status of defined benefit pension plan and other benefit plans:
Reclassification adjustment for amortization of prior service costs						(55)						(55)						(165)						(165)
Reclassification adjustment for amortization of net actuarial loss						77						72						231						218
Total before tax effect						22						17						66						53
Tax effect						6						4						14						13
Net of tax amount						16						13						52						40
Total other comprehensive income (loss)						(500)						2,675						7,441						8,135
Comprehensive income						$	5,211					$	4,631					$	21,470					$	19,540

See accompanying notes to unaudited consolidated financial statements.

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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 Income (Loss)						Total
Balance at June 30, 2019			$	53					$	46,284					$	150,063					$	(12,062)					$	(5,951)					$	178,387
Net income			—						—						1,956						—						—						1,956
Other comprehensive income			—						—						—						—						2,675						2,675
Restricted stock awards			—						97						—						—						—						97
Restricted stock units for directors' deferred compensation plan			—						10						—						—						—						10
Cash dividends declared ($0.26 per share)			—						—						(1,260)						—						—						(1,260)
Sale of 2,485 shares of treasury stock (a)			—						73						—						106						—						179
Balances at September 30, 2019			$	53					$	46,464					$	150,759					$	(11,956)					$	(3,276)					$	182,044
Balances at Balance at June 30, 2020			$	53					$	46,758					$	159,505					$	(13,869)					$	2,142					$	194,589
Net income			—						—						5,711						—						—						5,711
Other comprehensive income			—						—						—						—						(500)						(500)
Restricted stock awards			—						125						—						—						—						125
Restricted stock units for directors' deferred compensation plan			—						5						—						—						—						5
Cash dividends declared ($0.26 per share)			—						—						(1,229)						—						—						(1,229)
Repurchase of 64,185 shares of common stock			—						—						—						(1,816)						—						(1,816)
Sale of 18,202 shares of treasury stock (a)			—						4						—						116						—						120
Balances at September 30, 2020			$	53					$	46,892					$	163,987					$	(15,569)					$	1,642					$	197,005

(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.

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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 Income (Loss)						Total
Balances at January 1, 2019, as reported			$	53					$	45,820					$	143,129					$	(12,562)					$	(11,411)					$	165,029
Net income			—						—						11,405						—						—						11,405
Other comprehensive income			—						—						—						—						8,135						8,135
Restricted stock awards			—						296						—						—						—						296
Restricted stock units for directors' deferred compensation plan			—						31						—						—						—						31
Distribution of 439 shares of treasury stock grants for employee restricted stock awards			—						—						—						11						—						11
Cash dividends declared ($0.78 per share)			—						—						(3,775)						—						—						(3,775)
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 for deferred directors' compensation			—						(52)						—						65						—						13
Repurchase of 272 shares of common stock			—						—						—						(13)						—						(13)
Sale of 10,250 shares of treasury stock (a)			—						191						—						264						—						455
Balances at September 30, 2019			$	53					$	46,464					$	150,759					$	(11,956)					$	(3,276)					$	182,044
Balances at January 1, 2020			$	53					$	46,382					$	153,701					$	(11,710)					$	(5,799)					$	182,627
Net income			—						—						14,029						—						—						14,029
Other comprehensive income			—						—						—						—						7,441						7,441
Restricted stock awards			—						431						—						—						—						431
Restricted stock units for directors' deferred compensation plan			—						25						—						—						—						25
Distribution of 255 shares of treasury stock grants for employee restricted stock awards			—						(7)						—						7						—						—
Cash dividends declared ($0.78 per share)			—						—						(3,743)						—						—						(3,743)
Distribution of 7,923 shares of treasury stock for directors' compensation			—						144						—						206						—						350
Distribution of 2,274 shares of treasury stock for employee compensation			—						41						—						59						—						100
Distribution of 6,426 shares of treasury stock for deferred directors’ compensation			—						(180)						—						168						—						(12)
Repurchase of 186,206 shares of common stock			—						—						—						(5,137)						—						(5,137)
Sale of 32,387 shares of treasury stock (a)			—						51						—						843						—						894
Forfeiture of 112 shares of restricted stock awards			—						5						—						(5)						—						—
Balances at September 30, 2020			$	53					$	46,892					$	163,987					$	(15,569)					$	1,642					$	197,005

(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.

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CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)			Nine Months Ended   September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:			2020						2019
Net income			$	14,029					$	11,405
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of right-of-use assets			527						541
Amortization of intangible assets			371						465
Provision for loan losses			3,989						5,684
Loss on disposal of fixed assets			7						35
Depreciation and amortization of fixed assets			2,215						2,375
Amortization of premiums on securities, net			1,003						784
Gain on sales of loans held for sale, net			(916)						(146)
Proceeds from sales of loans held for sale			17,216						7,293
Loans originated and held for sale			(17,174)						(7,958)
Net losses on sale of other real estate owned			71						87
Write-downs on other real estate owned			38						53
Net change in fair value of equity investments			33						(106)
Proceeds from sales of trading assets			24						22
Purchase of equity investments			(174)						(72)
Increase in other assets and accrued interest receivable			(10,264)						(2,233)
(Decrease) increase in accrued interest payable			(38)						94
Expense related to restricted stock units for directors' deferred compensation plan			25						31
Expense related to employee stock compensation			102						100
Expense related to employee restricted stock awards			431						296
Payments on operating leases			(500)						(467)
Increase in other liabilities			9,119						3,592
Income from bank owned life insurance			(147)						(48)
Net cash provided by operating activities			19,987						21,808
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			39,508						37,152
Proceeds from maturities and principal collected on securities held to maturity			1,349						2,498
Purchases of securities available for sale			(142,797)						(67,522)
Purchases of securities held to maturity			(1,286)						(1,043)
Purchase of FHLBNY and FRBNY stock			(51)						(6)
Redemption of FHLBNY and FRBNY stock			—						53
Purchases of premises and equipment			(696)						(392)
Proceeds from sale of other real estate owned			253						376
Proceeds from bank owned life insurance			213						—
Net (increase) decrease in loans			(232,582)						4,411
Net cash used in investing activities			(336,089)						(9,273)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts			307,723						(12,330)
Increase in time deposits			44,327						19,599
Proceeds from FHLB overnight advances			245						—
Payments made on capital lease			(175)						(164)
Purchase of treasury stock			(5,137)						—
Sale of treasury stock			894						455
Cash dividends paid			(3,777)						(3,769)
Net cash provided by financing activities			344,100						3,791
Net increase in cash and cash equivalents			27,998						16,326
Cash and cash equivalents, beginning of period			121,904						129,972
Cash and cash equivalents, end of period			$	149,902					$	146,298

See accompanying notes to unaudited consolidated financial statements.

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CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(UNAUDITED)

(in thousands)			Nine Months Ended   September 30,
Supplemental disclosure of cash flow information:			2020						2019
Cash paid for:
Interest			$	3,086					$	4,651
Income taxes			3,785						3,225
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned			431						152
Dividends declared, not yet paid			1,229						1,260
Repurchase of common stock in lieu of employee payroll taxes			54						(13)
Distribution of treasury stock for directors' compensation			350						357
Distribution of treasury stock for deferred directors' compensation			(12)						13
Forfeiture of shares of restricted stock awards			(5)						—

See accompanying notes to unaudited consolidated financial statements.

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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 2019 Annual Report on Form 10-K for the year ended December 31, 2019. 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

Amounts in the prior year financial statements are reclassified whenever necessary to conform to the current year's presentation.

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 November 2019, the FASB adopted 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 is eligible for the proposed delay and has elected to defer implementation until January 1, 2023. 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. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provides banking organizations which previously adopted for fiscal years beginning after December 15, 2019, temporary relief from complying with CECL. 

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Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under ASC 310-40, Receivables: Troubled Debt Restructurings by Creditors, in certain situations. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. All loan modifications made by the Corporation in response to the COVID-19 pandemic have been in accordance with Section 4013 of the CARES Act.

Adoption of New Accounting Standards

On January 1, 2020, the Corporation adopted 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 adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements.

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.

Risks and Uncertainties - COVID-19

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 pandemic, millions of people have filed claims for unemployment, and stock markets have remained volatile and in particular bank stocks have significantly declined in value. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

The Corporation's consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses established. Management evaluated the potential impact of the COVID-19 pandemic as it related to the loan portfolio and as part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. Certain allowance qualitative factors were increased based on an assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.

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Management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio. While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, Management has designated certain industries as most impacted by COVID-19. As of September 30, 2020, these "highly impacted" industries total $248.4 million, or 27.4% of the Bank's commercial loan portfolio. For a discussion of the effect of COVID-19 on our business, see pages 46-47 of this Form 10-Q.

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 4,773 and 4,871 weighted average shares outstanding for the three month periods ended September 30, 2020 and 2019, respectively. Earnings per share were computed by dividing net income by 4,836 and 4,866 weighted average shares outstanding for the nine month periods ended September 30, 2020 and 2019, respectively. There were no common stock equivalents during the three and nine month periods ended September 30, 2020 or 2019.

NOTE 3        SECURITIES

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

						September 30, 2020
						Amortized Cost						Unrealized Gains						Unrealized Losses						Estimated Fair Value
Mortgage-backed securities, residential						$	317,087					$	9,385					$	204					$	326,268
Obligations of states and political subdivisions						40,694						2,566						—						43,260
Corporate bonds and notes						7,000						64						—						7,064
SBA loan pools						19,766						47						105						19,708
Total						$	384,547					$	12,062					$	309					$	396,300

						December 31, 2019
						Amortized Cost						Unrealized Gains						Unrealized Losses						Estimated Fair Value
Mortgage-backed securities, residential						$	225,029					$	1,471					$	1,266					$	225,234
Obligations of states and political subdivisions						41,265						1,580						—						42,845
Corporate bonds and notes						250						—						—						250
SBA loan pools						15,712						95						46						15,761
Total						$	282,256					$	3,146					$	1,312					$	284,090

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

						September 30, 2020
						Amortized Cost						Unrecognized Gains						Unrecognized Losses						Estimated Fair Value
Obligations of states and political subdivisions						$	409					$	—					$	—					$	409
Time deposits with other financial institutions						2,638						46						—						2,684
Total						$	3,047					$	46					$	—					$	3,093

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						December 31, 2019
						Amortized Cost						Unrecognized Gains						Unrecognized Losses						Estimated Fair Value
Obligations of states and political subdivisions						$	1,045					$	—					$	—					$	1,045
Time deposits with other financial institutions						2,070						24						—						2,094
Total						$	3,115					$	24					$	—					$	3,139

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

						September 30, 2020
						Available for Sale												Held to Maturity
						Amortized Cost						Fair Value						Amortized Cost						Fair Value
Within one year						$	—					$	—					$	609					$	613
After one, but within five years						27,232						28,769						2,438						2,480
After five, but within ten years						19,703						20,755						—						—
After ten years						759						800						—						—
						47,694						50,324						3,047						3,093
Mortgage-backed securities, residential						317,087						326,268						—						—
SBA loan pools						19,766						19,708						—						—
Total						$	384,547					$	396,300					$	3,047					$	3,093

There were no proceeds from sales and calls of securities resulting in gains or losses for the three months ended September 30, 2020 and 2019.

The proceeds from sales and calls of securities resulting in gains or losses for the nine months ended September 30, 2020 and 2019 are listed below (in thousands):

						2020						2019
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 September 30, 2020 and December 31, 2019 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):

			Less than 12 months												12 months or longer												Total
September 30, 2020			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
Mortgage-backed securities, residential			$	77,898					$	202					$	1,056					$	2					$	78,954					$	204
SBA loan pools			8,657						56						3,665						49						12,322						105
Total temporarily impaired securities			$	86,555					$	258					$	4,721					$	51					$	91,276					$	309

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			Less than 12 months												12 months or longer												Total
December 31, 2019			Fair Value						Unrealized Losses						Fair Value						Unrealized Losses						Fair Value						Unrealized Losses
Mortgage-backed securities, residential			$	71,506					$	791					$	54,343					$	475					$	125,849					$	1,266
SBA loan pools			3,014						9						1,405						37						4,419						46
Total temporarily impaired securities			$	74,520					$	800					$	55,748					$	512					$	130,268					$	1,312

Other-Than-Temporary Impairment

As of September 30, 2020, the Corporation’s unrealized and unrecognized losses were not material.

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):

						September 30, 2020						December 31, 2019
Commercial and agricultural:
Commercial and industrial						$	403,911					$	230,018
Agricultural						682						274
Commercial mortgages:
Construction						54,332						43,962
Commercial mortgages, other						636,179						604,832
Residential mortgages						227,372						188,338
Consumer loans:
Home equity lines and loans						81,556						91,784
Indirect consumer loans						121,406						134,973
Direct consumer loans						13,055						15,038
Total loans, net of deferred loan fees						1,538,493						1,309,219
Interest receivable on loans						5,035						3,684
Total recorded investment in loans						$	1,543,528					$	1,312,903

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. As of September 30, 2020, the Corporation had outstanding loan balances of $189.8 million for PPP loans which were included in commercial and industrial loans in the table above. These loans require no allowance for loan losses as of September 30, 2020 since they are government guaranteed loans.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, 2020 and 2019 (in thousands):

			Three Months Ended September 30, 2020
Allowance for loan losses			Commercial and Agricultural						Commercial Mortgages						Residential Mortgages						Consumer Loans						Total
Beginning balance			$	8,327					$	10,549					$	1,891					$	3,363					$	24,130
Charge-offs			(68)						—						(42)						(216)						(326)
Recoveries			18						2						—						87						107
Net recoveries (charge-offs)			(50)						2						(42)						(129)						(219)
Provision			180						361						232						(94)						679
Ending balance			$	8,457					$	10,912					$	2,081					$	3,140					$	24,590

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			Three Months Ended September 30, 2019
Allowance for loan losses			Commercial and Agricultural						Commercial Mortgages						Residential Mortgages						Consumer Loans						Total
Beginning balance			$	5,476					$	9,545					$	1,229					$	3,406					$	19,656
Charge-offs			—						—						(19)						(283)						(302)
Recoveries			29						—						—						99						128
Net recoveries (charge-offs)			29						—						(19)						(184)						(174)
Provision			4,651						(285)						(26)						101						4,441
Ending balance			$	10,156					$	9,260					$	1,184					$	3,323					$	23,923

The following tables present the activity in the allowance for loan losses by portfolio segment for the nine month periods ended September 30, 2020 and 2019 (in thousands):

			Nine Months Ended September 30, 2020
Allowance for loan losses			Commercial and Agricultural						Commercial Mortgages						Residential Mortgages						Consumer Loans						Total
Beginning balance:			$	10,227					$	8,869					$	1,252					$	3,130					$	23,478
Charge-offs:			(134)						(2,143)						(56)						(915)						(3,248)
Recoveries:			27						2						49						293						371
Net recoveries (charge-offs)			(107)						(2,141)						(7)						(622)						(2,877)
Provision			(1,663)						4,184						836						632						3,989
Ending balance			$	8,457					$	10,912					$	2,081					$	3,140					$	24,590

			Nine Months Ended September 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)						—						(60)						(1,040)						(1,155)
Recoveries:			44						2						45						359						450
Net recoveries (charge-offs)			(11)						2						(15)						(681)						(705)
Provision			4,784						1,074						(27)						(147)						5,684
Ending balance			$	10,156					$	9,260					$	1,184					$	3,323					$	23,923

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2020 and December 31, 2019 (in thousands):

			September 30, 2020
Allowance for loan losses:			Commercial and Agricultural						Commercial Mortgages						Residential Mortgages						Consumer Loans						Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment			$	5,530					$	184					$	—					$	52					$	5,766
Collectively evaluated for impairment			2,927						10,728						2,081						3,088						18,824
Total ending allowance balance			$	8,457					$	10,912					$	2,081					$	3,140					$	24,590

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			December 31, 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			$	6,000					$	2,097					$	—					$	—					$	8,097
Collectively evaluated for impairment			4,227						6,772						1,252						3,130						15,381
Total ending allowance balance			$	10,227					$	8,869					$	1,252					$	3,130					$	23,478

			September 30, 2020
Loans:			Commercial and Agricultural						Commercial Mortgages						Residential Mortgages						Consumer Loans						Total
Loans individually evaluated for impairment			$	7,515					$	6,750					$	1,277					$	812					$	16,354
Loans collectively evaluated for  impairment			398,498						686,185						226,707						215,784						1,527,174
Total ending loans balance			$	406,013					$	692,935					$	227,984					$	216,596					$	1,543,528

			December 31, 2019
Loans:			Commercial and Agricultural						Commercial Mortgages						Residential Mortgages						Consumer Loans						Total
Loans individually evaluated for impairment			$	6,147					$	8,844					$	525					$	149					$	15,665
Loans collectively evaluated for  impairment			224,775						641,726						188,349						242,388						1,297,238
Loans acquired with deteriorated credit quality			—						—						—						—						—
Total ending loans balance			$	230,922					$	650,570					$	188,874					$	242,537					$	1,312,903

The following table presents loans individually evaluated for impairment recognized by class of loans as of September 30, 2020 and December 31, 2019 (in thousands):

			September 30, 2020																		December 31, 2019
With no related allowance recorded:			Unpaid Principal Balance						Recorded Investment						Allowance for Loan Losses Allocated						Unpaid Principal Balance						Recorded Investment						Allowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial			$	1,391					$	1,391					$	—					$	133					$	133					$	—
Commercial mortgages:
Construction			204						204						—						247						247						—
Commercial mortgages, other			6,339						4,287						—						3,501						3,503						—
Residential mortgages			1,297						1,277						—						554						525						—
Consumer loans:
Home equity lines and loans			657						642						—						171						149						—
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial			6,118						6,124						5,530						6,013						6,014						6,000
Commercial mortgages:
Commercial mortgages, other			2,347						2,259						184						5,093						5,094						2,097
Consumer loans:
Home equity lines and loans			170						170						52						—						—						—
Total			$	18,523					$	16,354					$	5,766					$	15,712					$	15,665					$	8,097

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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 nine month periods ended September 30, 2020 and 2019 (in thousands):

						Three Months Ended   September 30, 2020												Three Months Ended   September 30, 2019												Nine Months Ended   September 30, 2020												Nine Months Ended   September 30, 2019
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						$	1,239					$	2					$	228					$	—					$	679					$	2					$	277					$	1
Commercial mortgages:
Construction						213						2						270						2						226						6						285						7
Commercial mortgages, other						4,515						—						3,372						3						3,938						—						3,630						9
Residential mortgages						1,224						7						396						36						873						17						396						40
Consumer loans:
Home equity lines & loans						650						2						156						3						399						5						134						4
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial						5,804						2						3,983						—						5,867						4						2,508						—
Commercial mortgages:
Commercial mortgages, other						2,229						8						10,240						—						3,645						16						6,881						—
Consumer loans:
Home equity lines and loans						175						—						—						—						88						—						—						—
Total						$	16,049					$	23					$	18,645					$	44					$	15,715					$	50					$	14,111					$	61

(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 September 30, 2020 and December 31, 2019 (in thousands):

						Non-accrual												Loans Past Due 90 Days or More and Still Accruing
						September 30, 2020						December 31, 2019						September 30, 2020						December 31, 2019
Commercial and agricultural:
Commercial and industrial						$	6,272					$	6,147					$	—					$	7
Commercial mortgages:
Construction						63						80						—						—
Commercial mortgages, other						6,027						8,407						—						—
Residential mortgages						1,742						2,155						—						—
Consumer loans:
Home equity lines and loans						1,017						641						—						—
Indirect consumer loans						604						571						—						—
Direct consumer loans						1						7						—						—
Total						$	15,726					$	18,008					$	—					$	7

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The following tables present the aging of the recorded investment in loans as of September 30, 2020 and December 31, 2019 (in thousands):

			September 30, 2020
			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			$	2,433					$	1					$	3,982					$	6,416											$	398,913					$	405,329
Agricultural			—						—						—						—												684						684
Commercial mortgages:
Construction			—						—						—						—												54,523						54,523
Commercial mortgages, other			11,077						262						1,878						13,217												625,195						638,412
Residential mortgages			631						9						434						1,074												226,910						227,984
Consumer loans:
Credit cards			—						—						—						—												—						—
Home equity lines and loans			169						30						147						346												81,424						81,770
Indirect consumer loans			753						190						213						1,156												120,564						121,720
Direct consumer loans			18						187						1						206												12,900						13,106
Total			$	15,081					$	679					$	6,655					$	22,415											$	1,521,113					$	1,543,528

			December 31, 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			$	1,285					$	49					$	4,398					$	5,732											$	224,916					$	230,648
Agricultural			—						—						—						—												274						274
Commercial mortgages:
Construction			—						—						—						—												44,082						44,082
Commercial mortgages, other			440						277						2,165						2,883												603,605						606,488
Residential mortgages			1,016						803						956						2,775												186,099						188,874
Consumer loans:
Credit cards			—						—						—						—												—						—
Home equity lines and loans			353						151						149						653												91,412						92,065
Indirect consumer loans			1,546						377						355						2,278												133,088						135,366
Direct consumer loans			32						11						6						49												15,057						15,106
Total			$	4,672					$	1,668					$	8,029					$	14,370											$	1,298,533					$	1,312,903

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. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 related modifications and therefore will not be treated as TDRs. As of September 30, 2020, in conformance with Section 4013 of the CARES Act, the Corporation modified a total of 1,125 commercial and consumer loans represented by a total loan balance of $233.6 million. As of

22

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September 30, 2020, 74 loans totaling $45.9 million remained in modified status, of which 44 loans totaling $32.8 million had been modified more than once.

As of September 30, 2020 and December 31, 2019, the Corporation has a recorded investment in TDRs of $10.8 million and $9.0 million, respectively. There were specific reserves of $0.6 million and $2.3 million allocated for TDRs at September 30, 2020 and December 31, 2019, respectively. As of September 30, 2020, TDRs totaling $2.8 million were accruing interest under the modified terms and $8.0 million were on non-accrual status. As of December 31, 2019, TDRs totaling $0.9 million were accruing interest under the modified terms and $8.1 million were on non-accrual status. The Corporation has committed $37 thousand and $17 thousand to customers with outstanding loans that are classified as TDRs as of September 30, 2020 and December 31, 2019, respectively.

During the three months ended September 30, 2020 and 2019, the terms of certain loans were modified as TDRs. In addition to the modifications noted above, during the nine months ended September 30, 2020 modifications included two commercial and industrial loans where deferral of payments were granted and both loans were risk rated Substandard while one loan was in non-accrual status prior to the modification. The modifications of four commercial mortgage loans included the deferral of payments with three of the loans risk rated Substandard and in non-accrual status, three of the borrowers were over one year past due in real estate taxes and two of loans were over 30 days past due in payments. The modifications of three residential mortgages included the deferral of payments while all three were in non-accrual status prior to the modifications, two were risk rated Substandard and one was over thirty days past due in payments. The modifications of three home equity lines and loans included the deferral of payments while all three loans were risk rated Substandard and in non-accrual status prior to the modifications. In addition to the modification noted above, the modification of the terms of one home equity loan during the nine months ended September 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 following tables present loans by class modified as TDRs that occurred during the three month period ended September 30, 2020 and September 30, 2019 (dollars in thousands):

September 30, 2020						Number of Loans						Pre-Modification Outstanding Recorded Investment						Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial						2						$	1,138					$	1,138
Agricultural
Commercial mortgages:
Commercial mortgages, other						—						—						—
Residential mortgages						1						320						320
Consumer loans:
Home equity lines and loans						—						—						—
Total						3						$	1,458					$	1,458

The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the three month period ended September 30, 2020.

September 30, 2019						Number of Loans						Pre-Modification Outstanding Recorded Investment						Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages, other						1						$	4,223					$	4,223
Total						1						$	4,223					$	4,223

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The TDR described above did not increase the allowance for loan losses and resulted in no charge-offs during the three month period ended September 30, 2019.

The following tables present loans by class modified as TDRs that occurred during the nine month period ended September 30, 2020 and September 30, 2019 (dollars in thousands):

September 30, 2020						Number of Loans						Pre-Modification Outstanding Recorded Investment						Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial						4						$	2,068					$	2,068
Commercial mortgages:
Commercial mortgages, other						4						1,297						1,297
Residential mortgages						4						997						997
Consumer loans:
Home equity lines and loans						3						738						738
Total						15						$	5,100					$	5,100

The TDRs described above increased the allowance for loan losses by $142 thousand and resulted in no charge-offs during the nine months ended September 30, 2020.

September 30, 2019						Number of Loans						Pre-Modification Outstanding Recorded Investment						Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages, other						1						$	4,223					$	4,223
Consumer loans:
Home equity lines and loans						1						137						137
Total						2						$	4,360					$	4,360

The TDRs described above increased the allowance for loan losses by $1.7 million and resulted in no charge-offs during the nine month period ended September 30, 2019.

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 nine month periods ended September 30, 2020 and 2019.

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):

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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 September 30, 2020 and December 31, 2019, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):

			September 30, 2020
			Not Rated						Pass						Special Mention						Substandard						Doubtful												Total
Commercial and agricultural:
Commercial and industrial			$	—					$	392,378					$	2,779					$	4,966					$	5,206											$	405,329
Agricultural			—						684						—						—						—												684
Commercial mortgages:
Construction			—						51,126						610						2,787						—												54,523
Commercial mortgages			—						610,687						6,732						18,755						2,238												638,412
Residential mortgages			226,242						—						—						1,742						—												227,984
Consumer loans:
Credit cards			—						—						—						—						—												—
Home equity lines and loans			80,753						—						—						1,017						—												81,770
Indirect consumer loans			121,116						—						—						604						—												121,720
Direct consumer loans			13,105						—						—						1						—												13,106
Total			$	441,216					$	1,054,875					$	10,121					$	29,872					$	7,444											$	1,543,528

			December 31, 2019
			Not Rated						Pass						Special Mention						Substandard						Doubtful												Total
Commercial and agricultural:
Commercial and industrial			$	—					$	208,552					$	5,915					$	10,361					$	5,820											$	230,648
Agricultural			—						274						—						—						—												274
Commercial mortgages:
Construction			—						40,304						168						3,610						—												44,082
Commercial mortgages			—						577,266						12,451						12,356						4,415												606,488
Residential mortgages			186,719						—						—						2,155						—												188,874
Consumer loans:
Credit cards			—						—						—						—						—												—
Home equity lines and loans			91,424						—						—						641						—												92,065
Indirect consumer loans			134,795						—						—						571						—												135,366
Direct consumer loans			15,099						—						—						7						—												15,106
Total			$	428,037					$	826,396					$	18,534					$	29,701					$	10,235											$	1,312,903

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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 September 30, 2020 and December 31, 2019 (in thousands):

			September 30, 2020
															Consumer Loans
			Residential Mortgages												Home Equity Lines and Loans						Indirect Consumer Loans						Other Direct Consumer Loans
Performing			$	226,242											$	80,753					$	121,117					$	13,104
Non-Performing			1,742												1,017						604						1
			$	227,984											$	81,770					$	121,721					$	13,105

			December 31, 2019
															Consumer Loans
			Residential Mortgages												Home Equity Lines and Loans						Indirect Consumer Loans						Other Direct Consumer Loans
Performing			$	186,719											$	91,424					$	134,795					$	15,099
Non-Performing			2,155												641						571						7
			$	188,874											$	92,065					$	135,366					$	15,106

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).

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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).

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

									Fair Value Measurement at September 30, 2020 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)
Mortgage-backed securities, residential			$	326,268					$	—					$	326,268					$	—
Obligations of states and political subdivisions			43,260						—						43,260						—
Corporate bonds and notes			7,064						—						7,064						—
SBA loan pools			19,708						—						19,708						—
Total available for sale securities			$	396,300					$	—					$	396,300					$	—
Equity investments, at fair value			$	2,291					$	1,629					$	—					$	662
Derivative assets			16,886						—						16,886						—
Financial Liabilities:
Derivative liabilities			$	17,097					$	—					$	16,886					$	211

There were no transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2020.

									Fair Value Measurement at December 31, 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)
Mortgage-backed securities, residential			$	225,234					$	—					$	225,234					$	—
Obligations of states and political subdivisions			42,845						—						42,845						—
Corporate bonds and notes			250						—						250						—
SBA loan pools			15,761						—						15,761						—
Total available for sale securities			$	284,090					$	—					$	284,090					$	—
Equity investments, at fair value			$	1,442					$	1,442					$	—					$	—
Derivative assets			6,466						—						6,466						—
Financial Liabilities:
Derivative liabilities			$	6,831					$	—					$	6,466					$	365

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

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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 September 30, 2020 and 2019 (in thousands):

																		Assets (Liabilities)
												Derivative Liabilities
																		September 30, 2020						September 30, 2019
Balance of recurring Level 3 assets at July 1																		$	(211)					$	(365)
Derivative instruments entered into																		—						(7)
Total gains or losses for the period:
Included in earnings - other non-interest income																		—						(54)
Included in other comprehensive income																		—						—
Transfers out of Level 3																		—						—
Balance of recurring Level 3 assets at September 30																		$	(211)					$	(426)

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 nine month periods ended September 30, 2020 and September 30, 2019 (in thousands):

																		Assets (Liabilities)
												Derivative Liabilities
																		September 30, 2020						September 30, 2019
Balance of recurring Level 3 assets at January 1																		$	(365)					$	(140)
Derivative instruments entered into																		(15)						(42)
Total gains or losses for the period:
Included in earnings - other non-interest income																		169						(244)
Included in other comprehensive income																		—						—
Transfers out of Level 3																		—						—
Balance of recurring Level 3 assets at September 30																		$	(211)					$	(426)

The following table presents information related to Level 3 recurring fair value measurements at September 30, 2020 and December 31, 2019 (in thousands):

Description

Fair Value at September 30, 2020

Valuation Technique

Unobservable Inputs

Range [Weighted Average] at September 30, 2020

Derivative liabilities

$

211

Historical trend

Credit default rate

0.59% - 6.59% [1.18%]

Description

Fair Value at December 31, 2019

Valuation Technique

Unobservable Inputs

Range [Weighted Average] at December 31, 2019

Derivative liabilities

$

365

Historical trend

Credit default rate

7.30% - 7.30% [7.30%]

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

									Fair Value Measurement at September 30, 2020 Using
Financial Assets:			Fair Value						Quoted Prices in Active Markets for Identical Assets (Level 1)						Significant Other Observable Inputs (Level 2)						Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial mortgages:
Commercial mortgages			$	512					$	—					$	—					$	512
Total impaired loans			$	512					$	—					$	—					$	512
Other real estate owned:
Commercial mortgages:
Commercial mortgages			$	416					$	—					$	—					$	416
Residential mortgages			126						—						—						126
Consumer loans:
Home equity lines and loans			44						—						—						44
Total other real estate owned, net			$	586					$	—					$	—					$	586

									Fair Value Measurement at December 31, 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)
Impaired Loans:
Commercial mortgages:
Commercial mortgages			$	1,554					$	—					$	—					$	1,554
Total impaired loans			$	1,554					$	—					$	—					$	1,554
Other real estate owned:
Commercial mortgages:
Commercial mortgages			$	111					$	—					$	—					$	111
Residential mortgages			284						—						—						284
Consumer loans:
Home equity lines and loans			122						—						—						122
Total other real estate owned, net			$	517					$	—					$	—					$	517

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The following tables present information related to Level 3 non-recurring fair value measurement at September 30, 2020 and December 31, 2019 (in thousands):

Description

Fair Value at September 30, 2020

Valuation Technique

Unobservable Inputs

Range [Weighted Average] at September 30, 2020

Impaired loans:

Commercial mortgages:

Commercial mortgages

$

512

Sales comparison

Discount to appraised value

13.30% - 13.30% [13.30%]

$

512

OREO:

Commercial mortgages:

Commercial mortgages

$

416

Sales comparison

Discount to appraised value

42.28% - 42.28% [42.28%]

Residential mortgages

126

Sales comparison

Discount to appraised value

20.80% - 20.80% [20.80%]

Consumer loans:

Home equity lines and loans

44

Sales comparison

Discount to appraised value

20.80% - 20.80% [20.80%]

$

586

Description

Fair Value at December 31, 2019

Valuation Technique

Unobservable Inputs

Range [Weighted Average] at December 31, 2019

Impaired loans:

Commercial mortgages:

Commercial mortgages

$

1,554

Sales comparison

Discount to appraised value

10.00% - 10.00% [10.00%]

$

1,554

OREO:

Commercial mortgages:

Commercial mortgages

$

111

Sales comparison

Discount to appraised value

20.80% - 20.80% [20.80%]

Residential mortgages

284

Sales comparison

Discount to appraised value

20.80% - 35.29% [24.09%]

Consumer loans:

Home equity lines and loans

122

Sales comparison

Discount to appraised value

20.80% - 20.80% [20.80%]

$

517

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FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of other financial instruments, at September 30, 2020 and December 31, 2019, are as follows (in thousands):

			September 30, 2020
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			$	35,327					$	35,327					$	—					$	—					$	35,327
Interest-earning deposits in other financial institutions			114,575						114,575						—						—						114,575
Equity investments			2,291						1,629						—						662						2,291
Securities held to maturity			3,047						—						2,684						409						3,093
FHLBNY and FRBNY stock			3,150						—						—						—						N/A
Loans, net and loans held for sale			1,515,962						—						—						1,522,274						1,522,274
Accrued interest receivable			6,230						1						1,194						5,035						6,230
Derivative Assets			16,886						—						16,886						—						16,886
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts			$	1,718,686					$	1,718,686					$	—					$	—					$	1,718,686
Time deposits			205,503						—						208,491						—						208,491
Accrued interest payable			260						10						250						—						260
Derivative Liabilities			17,097						—						16,886						211						17,097

(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.

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			December 31, 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			$	25,203					$	25,203					$	—					$	—					$	25,203
Interest-earning deposits in other financial institutions			96,701						96,701						—						—						96,701
Equity investments			2,174						2,174						—						—						2,174
Securities available for sale			284,090						—						284,090						—						284,090
Securities held to maturity			3,115						—						2,094						1,045						3,139
FHLBNY and FRBNY stock			3,099						—						—						—						N/A
Loans, net and loans held for sale			1,286,926						—						—						1,285,215						1,285,215
Accrued interest receivable			4,633						63						885						3,685						4,633
Derivative Asset			6,466						—						6,466						—						6,466
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts			$	1,410,962					$	1,410,962					$	—					$	—					$	1,410,962
Time deposits			161,176						—						163,761						—						163,761
Accrued interest payable			299						27						272						—						299
Derivative Liabilities			6,831						—						6,466						365						6,831

(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.

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 September 30, 2020, the weighted average remaining lease term was 10.5 years with a weighted average discount rate of 3.39%.  Rent expense was $0.2 million for the three months ended September 30, 2020. Rent expense was $0.7 million for the nine months ended September 30, 2020. 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 September 30, 2020 and December 31, 2019 consist of the following (in thousands):

						September 30, 2020						December 31, 2019
Operating lease right-of-use asset						$	8,713					$	8,713
Less: accumulated amortization						(1,239)						(712)
Operating lease right-of-use-assets, net						$	7,474					$	8,001

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The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of September 30, 2020 (in thousands):

Year						Amount
2020						$	233
2021						930
2022						869
2023						889
2024						880
2025 and thereafter						5,347
Total minimum lease payments						9,148
Less: amount representing interest						(1,564)
Present value of net minimum lease payments						$	7,584

As of September 30, 2020, 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 September 30, 2020, the weighted average remaining lease term was 12.3 years with a weighted average discount rate of 3.35%. The Corporation has included these leases in premises and equipment as of September 30, 2020 and December 31, 2019 as follows (in thousands):

						September 30, 2020						December 31, 2019
Buildings						$	5,572					$	5,572
Less: accumulated depreciation						(1,791)						(1,541)
Net book value						$	3,781					$	4,031

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 September 30, 2020 (in thousands):

Year						Amount
2020						$	94
2021						388
2022						391
2023						391
2024						391
2025 and thereafter						3,250
Total minimum lease payments						4,905
Less: amount representing interest						(995)
Present value of net minimum lease payments						$	3,910

As of September 30, 2020, 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 July, 2022 from a member of the Corporation's Board of Directors with monthly rent expense totaling $3 thousand per month. Rent paid to this Board of Directors member totaled $13 thousand and $12 thousand for the three month periods ended September 30, 2020 and 2019, respectively. Rent paid to this Board of Directors member totaled $40 thousand for the nine month periods ended September 30, 2020 and 2019.

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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 $7 thousand per month. Rent paid to this Board of Directors member totaled $26 thousand and $24 thousand for the three month periods ended September 30, 2020 and 2019, respectively. Rent paid to this Board of Directors member totaled $76 thousand and $69 thousand for the nine month periods ended September 30, 2020 and 2019, respectively.

NOTE 7        GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill included in the core banking segment during the nine month periods ended September 30, 2020 and 2019 were as follows (in thousands):

						2020						2019
Beginning of year						$	21,824					$	21,824
Acquired goodwill						—						—
Ending balance September 30,						$	21,824					$	21,824

Acquired intangible assets were as follows at September 30, 2020 and December 31, 2019 (in thousands):

						At September 30, 2020												At December 31, 2019
						Balance Acquired						Accumulated Amortization						Balance Acquired						Accumulated Amortization
Core deposit intangibles						$	5,975					$	5,938					$	5,975					$	5,832
Other customer relationship intangibles						5,633						5,299						5,633						5,034
Total						$	11,608					$	11,237					$	11,608					$	10,866

Aggregate amortization expense was $0.1 million and $0.2 million for the three month periods ended September 30, 2020 and 2019, respectively. Aggregate amortization expense was $0.4 million and $0.5 million for the nine month periods ended September 30, 2020 and 2019, respectively.

The remaining estimated aggregate amortization expense at September 30, 2020 is listed below (in thousands):

Year						Estimated Expense
2020						$	113
2021						258
2022						—
2023						—
2024						—
Total						$	371

The amount of goodwill reflected in the Corporation's Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model. The goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred. However, Management did conclude that the current decline in macroeconomic conditions is a triggering event, but other mitigating factors did not warrant an interim quantitative impairment test. We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) forecasted revenues, expenses, and cash flows; (2) current discount rates; (3) our market capitalization; (4) observable market transactions and multiples; (5) changes to the regulatory environment; and (6) the nature and amount of government support that has been and is expected to be provided in the future.

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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 September 30, 2020 and December 31, 2019 (in thousands):

			September 30, 2020												December 31, 2019
			Fixed Rate						Variable Rate						Fixed Rate						Variable Rate
Commitments to make loans			$	31,698					$	31,428					$	15,560					$	25,233
Unused lines of credit			1,191						268,784						1,062						229,137
Standby letters of credit			—						15,652						—						16,272

On February 4, 2020, the Corporation filed a lawsuit against Pioneer Bank, Albany, New York, in the Supreme Court of the State of New York in the County of Albany. As disclosed in the Corporation’s September 12, 2019 Current Report on Form 8-K, the Bank owns a participating interest totaling $4.2 million in an approximately $36.0 million commercial credit facility on which the borrower defaulted due to fraudulent activity. The Bank’s complaint alleges that Pioneer Bank, as lead bank, breached the participation agreement and engaged in fraud and negligent misrepresentation. The Bank seeks to recover $4.2 million and additional damages as a result of purchasing the participation interest. On April 23, 2020 the Corporation received payment of $461,309 from Pioneer Bank related to its obligation under the participation agreements.

In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of September 30, 2020, we believe that we are not a party to any additional pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.

NOTE 9        ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (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 income (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 July 1, 2020, as adjusted						$	9,273					$	(7,131)					$	2,142
Other comprehensive income before reclassification						(516)						—						(516)
Amounts reclassified from accumulated other comprehensive income						—						16						16
Net current period other comprehensive income (loss)						(516)						16						(500)
Balance at September 30, 2020						$	8,757					$	(7,115)					$	1,642

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						Unrealized Gains and Losses on Securities Available for Sale						Defined Benefit and Other Benefit Plans						Total
Balance at July 1, 2019, as adjusted						$	787					$	(6,738)					$	(5,951)
Other comprehensive income before reclassification						2,662						—						2,662
Amounts reclassified from accumulated other comprehensive income						—						13						13
Net current period other comprehensive income						2,662						13						2,675
Balance at September 30, 2019						$	3,449					$	(6,725)					$	(3,276)

						Unrealized Gains and Losses on Securities Available for Sale						Defined Benefit and Other Benefit Plans						Total
Balance at January 1, 2020, as adjusted						$	1,368					$	(7,167)					$	(5,799)
Other comprehensive income before reclassification						7,389						—						7,389
Amounts reclassified from accumulated other comprehensive income						—						52						52
Net current period other comprehensive income						7,389						52						7,441
Balance at September 30, 2020						$	8,757					$	(7,115)					$	1,642

						Unrealized Gains and Losses on Securities Available for Sale						Defined Benefit and Other Benefit Plans						Total
Balance at January 1, 2019, as adjusted						$	(4,646)					$	(6,765)					$	(11,411)
Other comprehensive income before reclassification						8,109						—						8,109
Amounts reclassified from accumulated other comprehensive income						(14)						40						26
Net current period other comprehensive income						8,095						40						8,135
Balance at September 30, 2019						$	3,449					$	(6,725)					$	(3,276)

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

Details about Accumulated Other Comprehensive Income (Loss) Components						Three Months Ended   September 30,												Affected Line Item in the Statement Where Net Income is Presented
						2020						2019
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale						$	—					$	—					Net gains on securities transactions
Tax effect						—						—						Income tax expense
Net of tax						—						—
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)						77						72						Other components of net periodic pension and postretirement benefits
Tax effect						(6)						(4)						Income tax expense
Net of tax						16						13
Total reclassification for the period, net of tax						$	16					$	13

(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						Nine Months Ended   September 30,												Affected Line Item in the Statement Where Net Income is Presented
						2020						2019
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale						$	—					$	(19)					Net gains 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)						(165)						(165)						Other components of net periodic pension and postretirement benefits
Actuarial losses (a)						231						218						Other components of net periodic pension and postretirement benefits
Tax effect						(14)						(13)						Income tax expense
Net of tax						52						40
Total reclassification for the period, net of tax						$	52					$	26

(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 nine months ended September 30, 2020 and 2019 (in thousands). Items outside the scope of ASC 606 are noted as such.

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						Three Months Ended September 30, 2020
Revenue by Operating Segment:						Core Banking						WMG						Holding Company, CFS, and CRM(b)						Total
Non-interest income
Service charges on deposit accounts
Overdraft fees						$	668					$	—					$	—					$	668
Other						72						—						—						72
Interchange revenue from debit card transactions						1,082						—						—						1,082
WMG fee income						—						2,416						—						2,416
CFS fee and commission income						—						—						172						172
Net gains (losses) on sales of OREO						6						—						—						6
Net gains on sales of loans(a)						553						—						—						553
Loan servicing fees(a)						32						—						—						32
Changes in fair value of equity investments(a)						71						—						(14)						57
Income from bank-owned life insurance(a)						14						—						—						14
Other(a)						320						—						(53)						267
Total non-interest income (loss)						$	2,818					$	2,416					$	105					$	5,339

(a) Not within scope of ASC 606.

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

						Three Months Ended September 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						$	959					$	—					$	—					$	959
Other						182						—						—						182
Interchange revenue from debit card transactions						1,058						—						—						1,058
WMG fee income						—						2,315						—						2,315
CFS fee and commission income						—						—						145						145
Net gains (losses) on sales of OREO						(1)						—						—						(1)
Net gains on sales of loans(a)						69						—						—						69
Loan servicing fees(a)						25						—						—						25
Changes in fair value of equity investments(a)						3						—						(13)						(10)
Income from bank-owned life insurance(a)						17						—						—						17
Other(a)						252						—						(55)						197
Total non-interest income						$	2,564					$	2,315					$	77					$	4,956

(a) Not within scope of ASC 606.

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

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						Nine Months Ended September 30, 2020
Revenue by Operating Segment:						Core Banking						WMG						Holding Company, CFS, and CRM(b)						Total
Non-interest income
Service charges on deposit accounts
Overdraft fees						$	1,894					$	—					$	—					$	1,894
Other						400						—						—						400
Interchange revenue from debit card transactions						2,989						—						—						2,989
WMG fee income						—						6,968						—						6,968
CFS fee and commission income						—						—						502						502
Net gains (losses) on sales of OREO						(71)						—						—						(71)
Net gains on sales of loans(a)						916						—						—						916
Loan servicing fees(a)						88						—						—						88
Changes in fair value of equity investments(a)						49						—						(82)						(33)
Income from bank-owned life insurance(a)						147						—						—						147
Other(a)						1,383						—						(33)						1,350
Total non-interest income						$	7,795					$	6,968					$	387					$	15,150

(a) Not within scope of ASC 606.

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

						Nine Months Ended September 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						$	2,703					$	—					$	—					$	2,703
Other						627						—						—						627
Interchange revenue from debit card transactions						3,113						—						—						3,113
WMG fee income						—						7,115						—						7,115
CFS fee and commission income						—						—						502						502
Net gains (losses) on sales of OREO						(87)						—						—						(87)
Net gains on sales of loans(a)						146						—						—						146
Loan servicing fees(a)						76						—						—						76
Net gains on sales of securities(a)						19						—						—						19
Changes in fair value of equity investments(a)						103						—						3						106
Income from bank-owned life insurance(a)						48						—						—						48
Other(a)						796						—						(197)						599
Total non-interest income						$	7,544					$	7,115					$	308					$	14,967

(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

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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.

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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   September 30,												Nine Months Ended   September 30,
						2020						2019						2020						2019
Qualified Pension Plan
Service cost, benefits earned during the period						$	—					$	—					$	—					$	—
Interest cost on projected benefit obligation						322						379						966						1,136
Expected return on plan assets						(610)						(554)						(1,830)						(1,661)
Amortization of unrecognized transition obligation						—						—						—						—
Amortization of unrecognized prior service cost						—						—						—						—
Amortization of unrecognized net loss						49						49						147						147
Net periodic pension benefit						$	(239)					$	(126)					$	(717)					$	(378)
Supplemental Pension Plan
Service cost, benefits earned during the period						$	—					$	—					$	—					$	—
Interest cost on projected benefit obligation						10						13						30						39
Expected return on plan assets						—						—						—						—
Amortization of unrecognized prior service cost						—						—						—						—
Amortization of unrecognized net loss						3						1						9						3
Net periodic supplemental pension cost						$	13					$	14					$	39					$	42
Postretirement Plan, Medical and Life
Service cost, benefits earned during the period						$	—					$	—					$	—					$	—
Interest cost on projected benefit obligation						2						4						6						10
Expected return on plan assets						—						—						—						—
Amortization of unrecognized prior service cost						(55)						(55)						(165)						(165)
Amortization of unrecognized net loss						25						22						75						68
Net periodic postretirement, medical and life benefit						$	(28)					$	(29)					$	(84)					$	(87)

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 2019 Annual Report on Form 10-K, which was filed with the SEC on March 12, 2020. 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).

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						Three months ended September 30, 2020
						Core Banking						WMG						Holding Company, CFS, and CRM						Consolidated Totals
Interest and dividend income						$	16,701					$	—					$	13					$	16,714
Interest expense						845						—						—						845
Net interest income						15,856						—						13						15,869
Provision for loan losses						679						—						—						679
Net interest income after provision for loan losses						15,177						—						13						15,190
Other non-interest income						2,818						2,416						105						5,339
Other non-interest expenses						11,528						1,565						269						13,362
Income (loss) before income tax expense (benefit)						6,467						851						(151)						7,167
Income tax expense (benefit)						1,271						218						(33)						1,456
Segment net income (loss)						$	5,196					$	633					$	(118)					$	5,711

						Three months ended September 30, 2019
						Core Banking						WMG						Holding Company, CFS, and CRM						Consolidated Totals
Interest and dividend income						$	16,787					$	—					$	21					$	16,808
Interest expense						1,666						—						—						1,666
Net interest income						15,121						—						21						15,142
Provision for loan losses						4,441						—						—						4,441
Net interest income after provision for loan losses						10,680						—						21						10,701
Other non-interest income						2,564						2,315						77						4,956
Other non-interest expenses						11,704						1,559						262						13,525
Income (loss) before income tax expense (benefit)						1,540						756						(164)						2,132
Income tax expense (benefit)						17						193						(34)						176
Segment net income (loss)						$	1,523					$	563					$	(130)					$	1,956

						Nine months ended September 30, 2020
						Core Banking						WMG						Holding Company, CFS, and CRM						Consolidated Totals
Interest and dividend income						$	49,527					$	—					$	43					$	49,570
Interest expense						3,048						—						—						3,048
Net interest income						46,479						—						43						46,522
Provision for loan losses						3,989						—						—						3,989
Net interest income after provision for loan losses						42,490						—						43						42,533
Other non-interest income						7,795						6,968						387						15,150
Other non-interest expenses						34,690						4,814						835						40,339
Income (loss) before income tax expense (benefit)						15,595						2,154						(405)						17,344
Income tax expense (benefit)						2,884						552						(121)						3,315
Segment net income (loss)						$	12,711					$	1,602					$	(284)					$	14,029
Segment assets						$	2,156,025					$	3,153					$	5,836					$	2,165,014

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						Nine months ended September 30, 2019
						Core Banking						WMG						Holding Company, CFS, and CRM						Consolidated Totals
Interest and dividend income						$	50,108					$	—					$	47					$	50,155
Interest expense						4,745						—						—						$	4,745
Net interest income						45,363						—						47						45,410
Provision for loan losses						5,684						—						—						5,684
Net interest income after provision for loan losses						39,679						—						47						39,726
Other non-interest income						7,544						7,115						308						14,967
Other non-interest expenses						35,253						4,705						887						40,845
Income (loss) before income tax expense (benefit)						11,970						2,410						(532)						13,848
Income tax expense (benefit)						1,934						615						(106)						2,443
Segment net income (loss)						$	10,036					$	1,795					$	(426)					$	11,405
Segment assets						$	1,784,692					$	3,410					$	5,541					$	1,793,643

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 2020 and 2019, 7,923 and 8,465 shares, respectively, were re-issued from treasury to fund the stock component of directors' compensation for respective prior year. An expense of $67 thousand and $79 thousand related to this compensation was recognized during the three month periods ended September 30, 2020 and 2019, respectively. An expense of $232 thousand and $256 thousand related to this compensation was recognized during the nine month periods ended September 30, 2020 and 2019, 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 September 30, 2020 is presented below:

						Shares						Weighted–Average Grant Date Fair Value
Nonvested at July 1, 2020						29,816						$	43.34
Granted						—						—
Vested						(808)						42.53
Forfeited or cancelled						—						—
Nonvested at September 30, 2020						29,008						$	43.36

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A summary of restricted stock activity for the nine month period ended September 30, 2020 is presented below:

						Shares						Weighted–Average Grant Date Fair Value
Nonvested at January 1, 2020						33,575						$	43.24
Granted						255						39.35
Vested						(4,710)						42.24
Forfeited or cancelled						(112)						44.72
Nonvested at September 30, 2020						29,008						$	43.36

As of September 30, 2020, there was $0.9 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 3.18 years. The total fair value of shares vested was $159 thousand and $32 thousand for the nine month periods ended September 30, 2020 and 2019, 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 nine months ended September 30, 2020 and 2019. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s 2019 Annual Report on Form 10-K, which was filed with the SEC on March 12, 2020, 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, in Part I, Item 1A, Risk Factors, on pages 19–29 of the Corporation’s 2019 Form 10-K, pages 67-68 of the Corporation's March 31, 2020 Form 10-Q, and page 83 of the Corporation's June 30, 2020 Form 10-Q. For a discussion of use of non-GAAP financial measures, see pages 69–72 of the Corporation's 2019 Form 10-K, and pages 77-80 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

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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.

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Corporation could be subject to any of the following additional risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:

•demand for our products and services may decline, making it difficult to grow assets and income;

•if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;

•as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•a material decrease in net income over several quarters could result in a decrease in the rate of our quarterly cash dividend;

•our wealth management revenues may decline with continuing market turmoil;

•our cyber security risks are increased as the result of an increase in the number of employees working remotely;

•we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

•FDIC premiums may increase if the agency experiences additional resolution costs.

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 2019 Annual Report on Form 10-K, March 31, 2020 Quarterly Report on Form 10-Q, June 30, 2020 Quarterly Report on Form 10-Q, and in this Quarterly Report on Form 10-Q.  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.

COVID-19

The Effect of COVID-19 on Our Business

The Corporation continued to exercise COVID-19 precautions throughout its footprint, striving to ensure a healthy and safe work environment for our colleagues, clients and the communities we assist, and continued to provide the high level of customer service that our communities depend on in a manner that is accessible, reliable and efficient. At all times, social distancing, sanitizing and facial coverings were required. As of the date of this filing, 30 of our 32 offices have fully re-opened to normal business hours. The remaining two branches, currently being consolidated, are available by appointment. On or about November 20, 2020, these branches will consolidate into nearby branches. The Corporation is looking forward to assisting clients in the case that a next-phase stimulus package is passed by Congress, and with the SBA loan-forgiveness application process for PPP loans.

Management did not experience any negative effects on our ability to maintain operations and financial reporting systems, and has not identified any impact on business continuity plans. Management does not anticipate additional risk with respect to its ability to maintain internal control over financial reporting and disclosure controls and procedures, nor does it expect any changes in such controls and procedures.

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On June 17, 2020 the New York legislature passed, and Governor Cuomo signed, new legislation which allows certain borrowers to extend the period of forbearance on a primary residence if financial hardship is demonstrated as a result of COVID-19. At its highest point as of May 31, 2020, total loan forbearances represented 15.77% of the Corporation's total loan portfolio. As of September 30, 2020, total loan forbearances decreased to 2.98% of the total loan portfolio. As of September 30, 2020, 46.2% of total loan forbearances related to accommodation and food services, 31.4% related to real estate, rental and leasing, 10.9% to entertainment and recreation, and 11.5% to other industries.

COVID-19 Loan Modifications Outstanding As Of

June 30, 2020

September 30, 2020

# Clients

Total Loan Balance

# Clients

Total Loan Balance

Commercial

172

$167.7 million

31

$43.3 million

Retail and Residential

457

$18.0 million

43

$2.5 million

The above reflects the uncertain economic situation whereby the initial response by customers prompted a quick reaction to the unknown potential impact of COVID-19 on their business. Subsequently, customers may have reassessed their financial position prior to finalization of a modification, either modifying deferral requests or withdrawing the request altogether. In some cases, customers continued to make payments on modified loans. Of these modifications, 100% were considered current prior to the forbearance and primarily reflect deferrals for 90 days.

Paycheck Protection Program Initiative

As part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Congress established the Paycheck Protection Program (“PPP”) under the direction of the United States Small Business Administration (the “SBA”). Included in the legislation, and additional legislation approved by Congress on April 23, 2020 and June 5, 2020, was a total of $659 billion to assist small businesses by providing SBA guaranteed loans to help pay for up to 24 weeks of their payroll, in addition to other expenses such as interest expense on mortgages, rent or utility payments. PPP loans have an interest rate of 1.0%, two-year or five-year loan terms to maturity, and principal and interest payments deferred until the lender receives the applicable forgiven amount or 10 months after the end of the borrower's loan forgiveness covered period. The funds are an effort to encourage retention of employees and up to the entire loan balance and interest may be forgiven, if the borrower meets certain predetermined SBA criteria. Businesses with less than 500 employees are eligible, although certain corporate organizational structures were not included in the legislation. As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans.

The Corporation successfully navigated the processes set forth by the SBA and assisted customers and non-customers through the PPP. As of the date of this filing, the Corporation is preparing to assist the businesses who received PPP loans with the forgiveness application phase of the program. As of this filing, the Corporation has submitted 54 loans, a total of $39.2 million, to the SBA for forgiveness. As of the date of this filing, the Corporation has received $16.4 million related to 29 loans forgiven by the SBA.

Participation in Paycheck Protection Program Liquidity Facility ("PPPLF")

The PPPLF was created by the Board of Governors of the Federal Reserve System on April 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act. Under the facility, the Federal Reserve Banks lend to participating financial institutions on a non-recourse basis, taking PPP loans as collateral. The Bank participated in the PPPLF and received funding for 141 loans totaling $66.4 million. The Corporation fully repaid the funds on May 28, 2020.

Outlook

Management believes that the Corporation's liquidity position is strong. 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, FHLB borrowings, securities sold under agreements to repurchase and other borrowings. At September 30, 2020, the Corporation's cash and cash equivalents balance was $149.9 million. The Corporation also maintains an investment portfolio of securities available for sale, comprised primarily of mortgage-backed securities and municipal bonds. Although this portfolio generates interest income for the Corporation, it also serves as an available source of liquidity and capital if the need should arise. As of September 30, 2020, the Corporation's investment in securities available for sale was $396.3 million, $216.3 million of which was not pledged as collateral.

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Additionally, the Bank's unused borrowing capacity at the Federal Home Loan Bank of New York was $97.1 million as of September 30, 2020. The Corporation did not experience excessive draws on available working capital lines of credit and home equity lines of credit during the first nine months of 2020 due to the COVID-19 pandemic. Nor has the Corporation experienced any significant or unusual activity related to customer reaction to the COVID-19 pandemic that would create stress on the Corporation's liquidity position.

With respect to the Corporation's credit risk and lending activities, management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio. The table below summarizes the Bank's commercial loan portfolio, excluding PPP loans, by NAICS code, as of September 30, 2020. While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, the industries designated by Management to be most impacted by COVID-19 are indicated in bold.

Commercial Loan Portfolio by NAICS Codes
"Highly Impacted" industries in bold (dollars in thousands)												% of Total Loans excluding PPP Loans						% of RBC*
Industry Sectors						Loan Balance excluding PPP Loans
Real Estate, Rental & Leasing
Multifamily						$	194,788					21.52		%				102.33		%
Hospitality						39,410						4.35		%				20.70		%
Nursing Home/Assisted Living						13,140						1.45		%				6.90		%
Medical Office						18,662						2.06		%				9.80		%
Non-Essential Retail						40,152						4.44		%				21.09		%
CRE Other						284,920						31.47		%				149.67		%
Non-Real Estate Secured						33,240						3.67		%				17.46		%
Agricultural, Forestry, Farming and Hunting						1,766						0.20		%				0.93		%
Accommodation and Food Services						43,714						4.83		%				22.96		%
Manufacturing						36,021						3.98		%				18.92		%
Arts, Entertainment and Recreation						34,745						3.84		%				18.25		%
Health Care and Social Assistance						29,059						3.21		%				15.27		%
Construction						23,653						2.61		%				12.43		%
Wholesale Trade						22,919						2.53		%				12.04		%
Retail Trade						25,049						2.77		%				13.16		%
Professional, Scientific, and Technical Services						12,371						1.37		%				6.50		%
Transportation and Warehousing						10,784						1.19		%				5.67		%
Finance and Insurance						10,247						1.13		%				5.38		%
Administration and Support, Waste Management, Remediation						6,048						0.67		%				3.18		%
Educational Services						4,791						0.53		%				2.52		%
Mining						2,687						0.30		%				1.41		%
Other						17,133						1.88		%				9.01		%
Total Loans, excluding Paycheck Protection Program (PPP)						$	905,299					100.00		%
COVID-19 Highly Impacted Industries						$	248,384					27.44		%
* Risk Based Capital

COVID-19 highly impacted industries totaled $248.4 million, or 27.4% of the Bank's commercial loan portfolio excluding PPP loans, as of September 30, 2020. PPP loans totaling $189.8 million are 100% guaranteed by the SBA and represent virtually no risk. The rental and leasing sector encompasses real estate, rental properties plus rental of non-real estate items. In this same sector, $111.4 million of the loan balances related to commercial real estate rentals for hospitality, nursing home/assisted living, non-essential retail and medical offices and are considered "highly impacted." The arts, entertainment and recreation sector included $26.6 million of loan balances related to casinos. PPP loans to the highly impacted industries totaled $59.9 million.

The COVID-19 pandemic is expected to continue to impact the Corporation's financial results, as well as demand for its services and products during the remainder of 2020 and potentially beyond. The short and long-term implications of the COVID-19 pandemic, and related monetary and fiscal stimulus measures, on the Corporation's future revenues, earnings results, allowance for loan losses, capital reserves, and liquidity are uncertain at this time.

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Consolidated Financial Highlights

																																	As of or for the
			As of or for the Three Months Ended																														Nine Months Ended
			Sept. 30,						June 30,						Mar. 31,						Dec. 31,						Sept. 30,						Sept. 30,						Sept. 30,
(in thousands, except per share data)			2020						2020						2020						2019						2019						2020						2019
RESULTS OF OPERATIONS
Interest income			$	16,714					$	16,472					$	16,384					$	16,777					$	16,808					$	49,570					$	50,155
Interest expense			845						881						1,322						1,576						1,666						3,048						4,745
Net interest income			15,869						15,591						15,062						15,201						15,142						46,522						45,410
Provision for loan losses			679						260						3,050						261						4,441						3,989						5,684
Net interest income after provision for loan losses			15,190						15,331						12,012						14,940						10,701						42,533						39,726
Non-interest income			5,339						5,080						4,730						5,106						4,956						15,150						14,967
Non-interest expense			13,362						13,227						13,749						14,851						13,525						40,339						40,845
Income before income tax expense			7,167						7,184						2,993						5,195						2,132						17,344						13,848
Income tax expense			1,456						1,357						502						991						176						3,315						2,443
Net income			$	5,711					$	5,827					$	2,491					$	4,204					$	1,956					$	14,029					$	11,405
Basic and diluted earnings per share			$	1.19					$	1.20					$	0.51					$	0.87					$	0.40					$	2.90					$	2.34
Average basic and diluted shares outstanding			4,773						4,850						4,895						4,879						4,871						4,836						4,866
PERFORMANCE RATIOS - Annualized
Return on average assets			1.08		%				1.15		%				0.55		%				0.93		%				0.44		%				0.95		%				0.87		%
Return on average equity			11.56		%				12.22		%				5.32		%				9.14		%				4.29		%				9.74		%				8.76		%
Return on average tangible equity (a)			13.03		%				13.83		%				6.04		%				10.43		%				4.91		%				11.03		%				10.09		%
Efficiency ratio (unadjusted) (f)			63.00		%				63.99		%				69.47		%				73.13		%				67.30		%				65.41		%				67.65		%
Efficiency ratio (adjusted) (a) (b)			62.19		%				63.16		%				68.50		%				72.08		%				66.21		%				64.54		%				66.56		%
Non-interest expense to average assets			2.54		%				2.62		%				3.06		%				3.28		%				3.05		%				2.72		%				3.12		%
Loans to deposits			79.96		%				82.70		%				82.11		%				83.28		%				82.88		%				79.96		%				82.88		%
YIELDS / RATES - Fully Taxable Equivalent
Yield on loans			3.91		%				4.06		%				4.37		%				4.43		%				4.50		%				4.10		%				4.53		%
Yield on investments			1.61		%				1.58		%				2.20		%				2.29		%				2.36		%				1.78		%				2.39		%
Yield on interest-earning assets			3.37		%				3.45		%				3.86		%				3.92		%				4.03		%				3.54		%				4.05		%
Cost of interest-bearing deposits			0.26		%				0.28		%				0.46		%				0.55		%				0.60		%				0.33		%				0.57		%
Cost of borrowings			3.54		%				0.82		%				3.58		%				3.58		%				3.53		%				1.44		%				3.52		%
Cost of interest-bearing liabilities			0.27		%				0.29		%				0.47		%				0.56		%				0.61		%				0.34		%				0.58		%
Interest rate spread			3.10		%				3.16		%				3.39		%				3.36		%				3.42		%				3.20		%				3.47		%
Net interest margin, fully taxable equivalent (a)			3.20		%				3.26		%				3.55		%				3.56		%				3.63		%				3.33		%				3.67		%
CAPITAL
Total equity to total assets at end of period			9.10		%				9.49		%				10.34		%				10.22		%				10.15		%				9.10		%				10.15		%
Tangible equity to tangible assets at end of period (a)			8.16		%				8.49		%				9.24		%				9.07		%				9.00		%				8.16		%				9.00		%
Book value per share			$	41.51					$	40.51					$	38.83					$	37.35					$	37.35					$	41.51					$	37.35
Tangible book value per share (a)			36.83						35.86						34.25						32.74						32.69						36.83						32.69
Period-end market value per share			28.87						27.30						32.98						42.50						42.00						28.87						42.00
Dividends declared per share			0.26						0.26						0.26						0.26						0.26						0.78						0.78
AVERAGE BALANCES
Loans and loans held for sale (c)			$1,515,762						$	1,456,080					$	1,310,342					$	1,303,349					$	1,295,167					$	1,427,716					$	1,294,093
Earning assets			1,986,043						1,931,107						1,715,562						1,705,766						1,665,793						1,877,966						1,664,188
Total assets			2,094,114						2,032,729						1,807,753						1,798,385						1,760,385						1,978,570						1,752,948
Deposits			1,853,557						1,776,275						1,588,147						1,581,645						1,545,858						1,739,744						1,550,251
Total equity			196,569						191,853						188,427						182,522						180,896						192,299						173,998
Tangible equity (a)			174,302						169,464						165,911						159,889						158,111						169,909						151,052

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ASSET QUALITY
Net charge-offs			$	219					$	2,363					$	294					$	706					$	174					$	2,877					$	705
Non-performing loans (d)			15,726						17,280						17,948						18,008						23,468						15,726						23,468
Non-performing assets (e)			16,311						17,573						18,328						18,525						23,679						16,311						23,679
Allowance for loan losses			24,590						24,130						26,233						23,478						23,923						24,590						23,923
Annualized net charge-offs to average loans			0.06		%				0.65		%				0.09		%				0.21		%				0.05		%				0.27		%				0.07		%
Non-performing loans to total loans			1.02		%				1.15		%				1.36		%				1.38		%				1.80		%				1.02		%				1.80		%
Non-performing assets to total assets			0.75		%				0.86		%				1.00		%				1.04		%				1.32		%				0.75		%				1.32		%
Allowance for loan losses to total loans			1.60		%				1.61		%				1.99		%				1.79		%				1.83		%				1.60		%				1.83		%
Allowance for loan losses to non-performing loans			156.36		%				139.64		%				146.16		%				130.38		%				101.94		%				156.36		%				101.94		%
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) 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 77-80 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.

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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   September 30,
						2020						2019						Change						Percentage Change
Net interest income						$	15,869					$	15,142					$	727					4.8		%
Non-interest income						5,339						4,956						383						7.7		%
Non-interest expense						13,362						13,525						(163)						(1.2)		%
Pre-provision income						7,846						6,573						1,273						19.4		%
Provision for loan losses						679						4,441						(3,762)						(84.7)		%
Income tax expense						1,456						176						1,280						727.3		%
Net income						$	5,711					$	1,956					$	3,755					192.0		%
Basic and diluted earnings per share						$	1.19					$	0.40					$	0.79					197.5		%
Selected financial ratios:
Return on average assets						1.08		%				0.44		%
Return on average equity						11.56		%				4.29		%
Net interest margin, fully taxable equivalent (a)						3.20		%				3.63		%
Efficiency ratio (adjusted) (b)						62.19		%				66.21		%
Non-interest expenses to average assets						2.54		%				3.05		%
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) 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 third quarter of 2020 was $5.7 million, or $1.19 per share, compared to $2.0 million, or $0.40 per share, for the same period in the prior year. Return on average equity for the current quarter was 11.56%, compared to 4.29% for the same period in the prior year. The increase in net income was due primarily to increases in net interest income and non-interest income, decreases in non-interest expense and the provision for loan losses, offset by an increase in income tax expense.

Net interest income

Net interest income increased $0.7 million, or 4.8%, compared to the same period in the prior year. The increase was due primarily to increases in interest income on loans, including fees, interest and dividend income on taxable securities, and a decrease in total interest expense, offset by a decrease in interest income on interest-earning deposits.

Non-interest income

Total non-interest income increased $0.4 million, or 7.7%, compared to the same period in the prior year. The increase can be mostly attributed to increases in net gains on sales of residential mortgage loans sold into the secondary market, WMG fee income, change in fair value of equity investments and other non-interest income, offset by a decrease in service charges on deposit accounts primarily attributable to a decrease in NSF and overdraft fees, as compared to the same period in the prior year.

Non-interest expense

Non-interest expense decreased $0.2 million, or 1.2%, compared to the same period in the prior year. The decrease was due primarily to decreases in pension and other employee benefits, other non-interest expense, and furniture and equipment expenses, offset by increases in FDIC insurance and salaries and wages. For the three months ended September 30, 2020, non-interest expense to average assets was 2.54%, compared to 3.05% for the same period in the prior year.

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Provision for loan losses

The provision for loan losses decreased $3.8 million, compared to the same period in the prior year. The decrease in the provision for loan losses was primarily due to a specific impairment of $4.2 million related to a participating interest in a commercial credit in the third quarter of the prior year. Net charge-offs for the third quarter of 2020 and 2019 were $0.2 million, respectively.

Income tax expense

Income tax expense was $1.5 million in the third quarter of 2020, an increase of $1.3 million when compared to the same period in the prior year. The increase was due primarily to an increase of $5.0 million in income before income tax expense for the third quarter of 2020 as compared to the same period in the prior year. The effective tax rate increased from 8.3% for the third quarter of 2019 to 20.3% for the third quarter of 2020.

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):

						Nine Months Ended   September 30,
						2020						2019						Change						Percentage Change
Net interest income						$	46,522					$	45,410					$	1,112					2.4		%
Non-interest income						15,150						14,967						183						1.2		%
Non-interest expense						40,339						40,845						(506)						(1.2)		%
Pre-provision income						21,333						19,532						1,801						9.2		%
Provision for loan losses						3,989						5,684						(1,695)						(29.8)		%
Income tax expense						3,315						2,443						872						35.7		%
Net income						$	14,029					$	11,405					$	2,624					23.0		%
Basic and diluted earnings per share						$	2.90					$	2.34					$	0.56					23.9		%
Selected financial ratios:
Return on average assets						0.95		%				0.87		%
Return on average equity						9.74		%				8.76		%
Net interest margin, fully taxable equivalent (a)						3.33		%				3.67		%
Efficiency ratio (adjusted) (b)						64.54		%				66.56		%
Non-interest expense to average assets						2.72		%				3.12		%
(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 nine months ended September 30, 2020 was $14.0 million, or $2.90 per share, compared to $11.4 million, or $2.34 per share, for the same period in the prior year.  Return on average equity for the nine months ended September 30, 2020 was 9.74%, compared to 8.76% for the same period in the prior year. The increase in net income from the prior year period was attributable to increases in total net interest income and total non-interest income, decreases in provision for loan losses and non-interest expense, partially offset by an increase in income tax expense.

Net interest income

Net interest income increased $1.1 million, or 2.4%, compared to the same period in the prior year. The increase can be mostly attributed to a decrease in total interest expense on deposits and an increase in interest income on taxable securities. This increase was offset by a decrease in interest income on interest-earning deposits.

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Non-interest income

Non-interest income increased $0.2 million, or 1.2%, compared to the same period in the prior year. The increase was due primarily to increases in net gains on sales of residential mortgage loans sold into the secondary market, other non-interest income, and income from bank owned life insurance, offset by decreases in service charges on deposit accounts, WMG fee income, changes in fair value of equity investments, and interchange revenue from debit card transactions. The increase in other non-interest income was due primarily to receipt of an insurance claim payment in the current period and an increase in interest rate swap fee income when compared to the same period in the prior year.

Non-interest expense

Non-interest expense decreased $0.5 million, or 1.2%, compared to the same period in the prior year. The decrease was due primarily to decreased spending across all categories except salaries and wages, data processing, loan expenses, FDIC insurance, and an increased credit in other components of net periodic pension and postretirement benefits. For the nine months ended September 30, 2020, non-interest expense to average assets was 2.72%, compared to 3.12% for the same period in the prior year.

Provision for loan losses

The provision for loan losses decreased $1.7 million, or 29.8%, compared to the same period in the prior year. The $1.7 million decrease in the provision as compared to the prior year can be mostly attributed to a specific impairment of $4.2 million related to a participation interest in a commercial credit in the prior year. The provision for loan losses included a $4.5 million increase in potential projected loss estimates in response to the COVID-19 pandemic, and an increase in loan volume, offset by recoveries, decreases in specific allocations, and a net decrease in historical loss factors due to a large 2018 loan charge-off which no longer impacts the provision calculation. Net charge-offs increased $2.2 million for the nine months ended September 30, 2020, compared to the same period in the prior year, mostly due to the partial charge-off of a commercial loan.

Income tax expense

Income tax expense increased $0.9 million, or 35.7%, 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 17.6% for the nine months ended September 30, 2019 to 19.1% for the nine months ended September 30, 2020.

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 nine months ended September 30, 2020 and 2019. For a discussion of the Critical Accounting Policies, Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see pages 76-77 of this Form 10-Q and page 69 of the Corporation’s 2019 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   September 30,
			2020						2019						Change						Percentage Change
Interest and dividend income			$	16,714					$	16,808					$	(94)					(0.6)		%
Interest expense			845						1,666						(821)						(49.3)		%
Net interest income			$	15,869					$	15,142					$	727					4.8		%

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.

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Net interest income for the three months ended September 30, 2020 increased $0.7 million, or 4.8%, to $15.9 million compared to the same period in the prior year, due primarily to a $0.8 million decrease in total interest expense, offset by a $0.1 million decrease in total interest and dividend income. Interest expense on deposits decreased $0.8 million in the third quarter of 2020 as compared to the same period in the prior year. The decrease in interest expense on deposits was due primarily to a $0.7 million decrease in interest-bearing checking, savings, and money market expenses which was due to the decreases in average rates paid on these products in response to the Federal Reserve's 50 and 100 basis points drop on overnight rates in March, 2020. As a result, the average rate of interest-bearing liabilities decreased 34 basis points to 0.27% for the third quarter of 2020 compared to the same period in the previous year. The decrease in total interest and dividend income for the current quarter was due primarily to a decrease of $0.4 million in interest income on interest-earning deposits, offset by increases of $0.2 million in interest income on loans, including fees, and $0.1 million in interest income on taxable securities as compared to the same period in the prior year. The decrease in interest income on interest-earning deposits was due primarily to the sharp drop in interest rates on overnight deposits with the average yield on interest-earning deposits declining from 2.22% in the third quarter of 2019 to 0.31% in the third quarter of 2020. The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $67.2 million in the third quarter 2020 as compared to the third quarter 2019 due to increased purchases. The increase in loan income was due primarily to an increase of $0.4 million in interest income on commercial loans primarily attributable to a $210.1 million increase in average balances of commercial loans and the recognition of $1.2 million of PPP loan fees, offset by a decrease in portfolio average yield due to a decrease in interest rates. Interest income on mortgage loans increased $0.3 million primarily due to an increase of $36.3 million in average balances of mortgage loans. These increases were offset by a decrease of $0.5 million in interest income on consumer loans which can be attributed to both decreases in average balances and average portfolio yield on consumer loans.

Fully taxable equivalent net interest margin was 3.20% in the third quarter of 2020, compared to 3.63% for the same period in the prior year. The average yield on interest-earning assets decreased 66 basis points, and the average cost of interest-bearing liabilities decreased 34 basis points in the third quarter of 2020, compared to the same period in the prior year. Average interest-earning assets increased $320.3 million in the current quarter compared to the same period in the prior year.

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

			Nine Months Ended   September 30,
			2020						2019						Change						Percentage Change
Interest and dividend income			$	49,570					$	50,155					$	(585)					(1.2)		%
Interest expense			3,048						4,745						(1,697)						(35.8)		%
Net interest income			$	46,522					$	45,410					$	1,112					2.4		%

Net interest income for the nine months ended September 30, 2020 totaled $46.5 million compared to $45.4 million for the same period in the prior year, an increase of $1.1 million, or 2.4% due primarily to a $1.7 million decrease in total interest expense offset by a $0.6 million decrease in total interest and dividend income.

The decrease in interest expense for the first nine months of 2020 can be mostly attributed to a decrease of $1.7 million in interest-bearing checking, savings and money market expenses, which was due to decreases in average rates paid on these products as a result of the Federal Reserve's 50 and 100 basis points drop on overnight rates in March, 2020. As a result, the average rate of interest-bearing liabilities decreased 24 basis points to 0.34% for the nine months ended September 30, 2020 compared to the same period in the previous year. Total interest and dividend income decreased primarily due to decreases of $1.1 million in interest income on interest-earning deposits, offset by an increase of $0.5 million in interest income on taxable securities. The decrease in interest-earning deposits can mostly be attributed to a decline in interest rates. The decrease in interest income on loans, including fees, can mostly be attributed to a decrease in average interest rates despite an increase in the average balances of loans and early payoff penalties and deferred fee income year to date. The increase in interest income on taxable securities can mostly be attributed to an increase in average balances of $44.3 million for the nine months ended September 30, 2020 as compared to the same period in the prior year, due to increased purchases. Fully taxable equivalent net interest margin was 3.33% for the nine months ended September 30, 2020 compared to 3.67% for the same period in the prior year.

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The average yield on interest-earning assets decreased 51 basis points, and the average cost of interest-bearing liabilities decreased 24 basis points for the nine months ended September 30, 2020, as compared to the same period in the prior year. Average interest-earning assets increased $213.8 million compared to the same period in the prior year. The decrease in interest and dividend income for the first nine months of 2020 can be mostly attributed to average annualized yield decreases of 181 basis points on interest-earning deposits, 27 basis points on consumer loans, 12 basis points on taxable securities, and 55 basis points on commercial loans, offset by a $44.3 million increase in the average balance of taxable securities, $137.1 million increase in the average balance of commercial loans, and a $21.0 million increase in the average balance of mortgage loans, compared to the same period in the prior year.

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 nine months ended September 30, 2020 and 2019. 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.

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AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)			Three Months Ended   September 30, 2020																		Three Months Ended   September 30, 2019
			Average Balance						Interest						Yield/Rate (3)						Average Balance						Interest						Yield/Rate (3)
Interest-earning assets:
Commercial loans			$	1,075,029					$	10,575					3.91		%				$	864,923					$	10,160					4.66		%
Mortgage loans			220,345						2,067						3.73		%				184,090						1,788						3.85		%
Consumer loans			220,388						2,256						4.07		%				246,154						2,752						4.44		%
Taxable securities			301,315						1,476						1.95		%				234,075						1,350						2.29		%
Tax-exempt securities			41,372						325						3.13		%				46,945						357						3.02		%
Interest-earning deposits			127,594						100						0.31		%				89,606						502						2.22		%
Total interest-earning assets			1,986,043						16,799						3.37		%				1,665,793						16,909						4.03		%
Non-earning assets:
Cash and due from banks			25,534																		25,784
Other assets			106,907																		88,841
Allowance for loan losses			(24,370)																		(20,033)
Total assets			$	2,094,114																	$	1,760,385
Interest-bearing liabilities:
Interest-bearing demand deposits			$	253,278					$	55					0.09		%				$	180,852					$	170					0.37		%
Savings and insured money market deposits			791,004						231						0.12		%				724,451						794						0.43		%
Time deposits			188,889						524						1.10		%				178,107						665						1.48		%
Long-term advances, securities sold under agreements to repurchase, and other debt			3,930						35						3.54		%				4,161						37						3.53		%
Total interest-bearing liabilities			1,237,101						845						0.27		%				1,087,571						1,666						0.61		%
Non-interest-bearing liabilities:
Demand deposits			620,386																		462,448
Other liabilities			40,058																		29,470
Total liabilities			1,897,545																		1,579,489
Shareholders' equity			196,569																		180,896
Total liabilities and shareholders’ equity			$	2,094,114																	$	1,760,385
Fully taxable equivalent net interest income									15,954																		15,243
Net interest rate spread (1)															3.10		%																3.42		%
Net interest margin, fully taxable equivalent (2)															3.20		%																3.63		%
Taxable equivalent adjustment									(85)																		(101)
Net interest income									$	15,869																	$	15,142

(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.

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AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)			Nine Months Ended   September 30, 2020																		Nine Months Ended   September 30, 2019
			Average Balance						Interest						Yield/ Rate (3)						Average Balance						Interest						Yield/ Rate (3)
Interest-earning assets:
Commercial loans			$	996,136					$	30,926					4.15		%				$	858,997					$	30,184					4.70		%
Mortgage loans			203,692						5,762						3.78		%				182,657						5,223						3.82		%
Consumer loans			227,888						7,150						4.19		%				252,439						8,425						4.46		%
Taxable securities			270,348						4,361						2.15		%				226,029						3,830						2.27		%
Tax-exempt securities			41,753						983						3.14		%				48,550						1,063						2.93		%
Interest-earning deposits			138,149						643						0.62		%				95,516						1,735						2.43		%
Total interest-earning assets			1,877,966						49,825						3.54		%				1,664,188						50,460						4.05		%
Non-earning assets:
Cash and due from banks			25,111																		25,860
Other assets			100,276																		82,684
Allowance for loan losses			(24,783)																		(19,784)
Total assets			$	1,978,570																	$	1,752,948
Interest-bearing liabilities:
Interest-bearing demand deposits			$	231,085					$	262					0.15		%				$	186,327					$	554					0.40		%
Savings and insured money market deposits			774,706						1,000						0.17		%				738,869						2,378						0.43		%
Time deposits			173,556						1,660						1.28		%				165,088						1,702						1.38		%
Long-term advances, securities sold under agreements to repurchase, and other debt			11,661						126						1.44		%				4,214						111						3.52		%
Total interest-bearing liabilities			1,191,008						3,048						0.34		%				1,094,498						4,745						0.58		%
Non-interest-bearing liabilities:
Demand deposits			560,397																		459,967
Other liabilities			34,866																		24,495
Total liabilities			1,786,271																		1,578,960
Shareholders' equity			192,299																		173,988
Total liabilities and shareholders’ equity			$	1,978,570																	$	1,752,948
Fully taxable equivalent net interest income									46,777																		45,715
Net interest rate spread (1)															3.20		%																3.47		%
Net interest margin, fully taxable equivalent (2)															3.33		%																3.67		%
Taxable equivalent adjustment									(255)																		(305)
Net interest income									$	46,522																	$	45,410

(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.

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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 nine months ended September 30, 2020 and 2019. 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 September 30, 2020 vs. 2019
						Increase/(Decrease)
						Total Change						Due to Volume						Due to Rate
(in thousands)
Interest and dividend income on:
Commercial loans						$	415					$	2,212					$	(1,797)
Mortgage loans						279						337						(58)
Consumer loans						(496)						(276)						(220)
Taxable investment securities						126						348						(222)
Tax-exempt investment securities						(32)						(44)						12
Interest-earning deposits						(402)						152						(554)
Total interest and dividend income, fully taxable equivalent						(110)						2,729						(2,839)
Interest expense on:
Interest-bearing demand deposits						(115)						49						(164)
Savings and insured money market deposits						(563)						64						(627)
Time deposits						(141)						38						(179)
Long-term advances, securities sold under agreements to repurchase and other debt						(2)						(2)						—
Total interest expense						(821)						149						(970)
Net interest income, fully taxable equivalent						$	711					$	2,580					$	(1,869)

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						Nine Months Ended September 30, 2020 vs. 2019
						Increase/(Decrease)
						Total Change						Due to Volume						Due to Rate
(in thousands)
Interest and dividend income on:
Commercial loans						$	742					$	4,521					$	(3,779)
Mortgage loans						539						595						(56)
Consumer loans						(1,275)						(786)						(489)
Taxable investment securities						531						739						(208)
Tax-exempt investment securities						(80)						(154)						74
Interest-earning deposits						(1,092)						563						(1,655)
Total interest and dividend income, fully taxable equivalent						(635)						5,478						(6,113)
Interest expense on:
Interest-bearing demand deposits						(292)						113						(405)
Savings and insured money market deposits						(1,378)						112						(1,490)
Time deposits						(42)						85						(127)
Long-term advances, securities sold under agreements to repurchase and other debt						15						110						(95)
Total interest expense						(1,697)						420						(2,117)
Net interest income, fully taxable equivalent						$	1,062					$	5,058					$	(3,996)

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. Management continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio. As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. Management increased certain allowance qualitative factors based on its assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics during the first half of 2020.

Based on this approach, the Corporation determined that additional provision specifically related to the COVID-19 pandemic was not necessary in the third quarter of 2020. The provision for loan losses for the third quarter of 2020 and 2019 was $0.7 million and $4.4 million, respectively. The decrease in the provision for loan losses was primarily due to a specific impairment of $4.2 million related to a participating interest in a commercial credit in the third quarter of the prior year. Net charge-offs for the third quarter of 2020 and 2019 were $0.2 million, respectively.

The provision for loan losses for the nine months ended September 30, 2020 and 2019 was $4.0 million and $5.7 million, respectively. The decrease in the provision for loan losses for the nine months ended September 30, 2020, compared to the same period in the prior year, can mostly be attributed to a specific impairment of $4.2 million related to a participation interest in a commercial credit in the third quarter of the prior year. The provision for loan losses included a $4.5 million increase in potential projected loss estimates in response to the COVID-19 pandemic, and an increase in loan volume, offset by recoveries, decreases in specific allocations, and a net decrease in historical loss factors due to a large 2018 loan charge-off which no longer impacts the provision calculation. Net charge-offs for the nine months ended September 30, 2020 and 2019 were $2.9 million and $0.7 million, respectively. The increase in net charge offs for the nine month periods ended September 30, 2020 can be mostly attributed to the partial charge-off of a commercial loan in the second quarter of 2020.

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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   September 30,
						2020						2019						Change						Percentage Change
WMG fee income						$	2,416					$	2,315					$	101					4.4		%
Service charges on deposit accounts						740						1,141						(401)						(35.1)		%
Interchange revenue from debit card transactions						1,082						1,058						24						2.3		%
Changes in fair value of equity investments						57						(10)						67						(670.0)		%
Net gains on sales of loans held for sale						553						69						484						701.4		%
Net gains (losses) on sales of other real estate owned						6						(1)						7						N/M
Income from bank owned life insurance						14						17						(3)						(17.6)		%
CFS fee and commission income						172						145						27						18.6		%
Other						299						222						77						34.7		%
Total non-interest income						$	5,339					$	4,956					$	383					7.7		%

Total non-interest income for the third quarter of 2020 increased $0.4 million compared to the same period in the prior year. Increases in net gains on sales of loans held for sale, WMG fee income, other non-interest income and changes in fair value of equity investments were offset partially by a decrease in service charges on deposit accounts.

Change in Net Gains on Sales of Loans Held for Sale

The increase in net gains on sales of loans held for sale was primarily attributable to an increase in residential mortgage loans originated and sold in the secondary market when compared to the same period in the prior year, primarily due to increased home purchases and refinancings due to the low interest rate environment.

Change in WMG Fee Income

The increase in WMG fee income was primarily due to a general increase in the equity markets when compared to the same period in the prior year.

Change in Other Non-Interest Income

The increase in other non-interest income was due primarily to receipt of an insurance claim payment.

Changes in Fair Value of Equity Investments

The increase in changes in fair value of equity investments was primarily due to a general increase in the equity markets when compared to the same period in the prior year.

Change in Service Charges on Deposit Accounts

The decrease in service charges on deposit accounts was primarily due to a decline in non-sufficient fund and overdraft fees when compared to the same period in the prior year.

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

						Nine Months Ended   September 30,
						2020						2019						Change						Percentage Change
WMG fee income						$	6,968					$	7,115					$	(147)					(2.1)		%
Service charges on deposit accounts						2,294						3,330						(1,036)						(31.1)		%
Interchange revenue from debit card transactions						2,989						3,113						(124)						(4.0)		%
Net gains on securities transactions						—						19						(19)						(100.0)
Changes in fair value of equity investments						(33)						106						(139)						(131.1)		%
Net gains on sales of loans held for sale						916						146						770						527.4		%
Net gains (losses) on sales of other real estate owned						(71)						(87)						16						(18.4)		%
Income from bank owned life insurance						147						48						99						206.3		%
CFS fee and commission income						502						502						—						N/A
Other						1,438						675						763						113.0		%
Total non-interest income						$	15,150					$	14,967					$	183					1.2		%

Total non-interest income for the nine months ended September 30, 2020 increased $0.2 million compared to the same period in the prior year. The increase was mostly due to increases in net gains on sales of loans held for sale, and other non-interest income, offset by decreases in service charges on deposit accounts, WMG fee income and changes in fair value of equity investments.

Change in Net Gains on Sales of Loans Held for Sale

The increase in net gains on sales of loans held for sale was primarily attributable to an increase in residential mortgage loans originated and sold in the secondary market when compared to the same period in the prior year, primarily due to increased home purchases and refinancings due to the low interest rate environment.

Change in Other Non-Interest Income

The increase in other non-interest income was due primarily to receipt of an insurance claim payment in the current year and an increase in interest rate swap fee income as compared to the same period in the prior year.

Change in Service Charges on Deposit Accounts

The decrease in service charges on deposit accounts was primarily due to a decline in non-sufficient fund and overdraft fees when compared to the same period in the prior year.

Change in WMG Fee Income

The decrease in WMG fee income was primarily due to fees earned from terminating trusts in the prior year period.

Change in Fair Value of Equity Investments

The decrease in changes in fair value of equity investments was primarily due to a general decrease in the equity markets when compared to the prior year period.

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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   September 30,
						2020						2019						Change						Percentage Change
Compensation expense:
Salaries and wages						$	6,088					$	5,874					$	214					3.6		%
Pension and other employee benefits						1,245						1,470						(225)						(15.3)		%
Other components of net periodic pension and postretirement benefits						(254)						(141)						(113)						N/M
Total compensation expense						7,079						7,203						(124)						(1.7)		%
Non-compensation expense:
Net occupancy						1,454						1,424						30						2.1		%
Furniture and equipment						538						717						(179)						(25.0)		%
Data processing						1,777						1,818						(41)						(2.3)		%
Professional services						453						395						58						14.7		%
Amortization of intangible assets						120						151						(31)						(20.5)		%
Marketing and advertising						140						231						(91)						(39.4)		%
Other real estate owned expenses						53						9						44						488.9		%
FDIC insurance						247						(10)						257						N/M
Loan expenses						301						171						130						76.0		%
Other						1,200						1,416						(216)						(15.3)		%
Total non-compensation expense						6,283						6,322						(39)						(0.6)		%
Total non-interest expense						$	13,362					$	13,525					$	(163)					(1.2)		%

Total non-interest expense for the third quarter of 2020 decreased $0.2 million compared to the same period in the prior year. The decrease was due to decreases in total compensation expense and total non-compensation expense.

Compensation expense

The decrease in compensation expense, compared to the same period in the prior year, can be mostly attributable to a decrease in pension and other employee benefits, offset by an increase in salaries and wages, and a reduced credit in other components of net periodic pension and postretirement benefits. The decrease in pension and other employee benefits was mostly attributable to a decrease in healthcare expenses as compared to the same period in the prior year. The reduced credit in other components of net periodic pension and postretirement benefits was primarily due to a change in assumptions used to prepare annual actuarial expense estimates. The increase in salaries and wages was mostly attributable to an increase in reward and incentive payments.

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 other non-interest expense, furniture and equipment, and marketing and advertising, offset by increases in FDIC insurance and loan expenses.

The decrease in other non-interest expense can mostly be attributed to overall decreases in expenditures due to the COVID-19 pandemic including, corporate travel and client and bank relations, supplies, and statement and notice processing. The decrease in furniture and equipment can mostly be attributed to a decrease in the overall depreciation expense after the closure of two branch locations in 2019. The decrease in marketing and advertising can mostly be attributed to decreased promotional efforts due to the COVID-pandemic. The increase in FDIC insurance was primarily attributable to the receipt of a credit in the third quarter of the prior year related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment. The increase in loan expenses was mostly attributable to increased loan volume compared to the same period in the prior year.

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

						Nine Months Ended   September 30,
						2020						2019						Change						Percentage Change
Compensation expense:
Salaries and wages						$	17,678					$	17,375					$	303					1.7		%
Pension and other employee benefits						4,095						4,488						(393)						(8.8)		%
Other components of net periodic pension and postretirement benefits						(762)						(423)						(339)						N/M
Total compensation expense						21,011						21,440						(429)						(2.0)		%
Non-compensation expense:
Net occupancy						4,406						4,469						(63)						(1.4)		%
Furniture and equipment						1,573						1,840						(267)						(14.5)		%
Data processing						5,630						5,418						212						3.9		%
Professional services						1,313						1,218						95						7.8		%
Amortization of intangible assets						371						465						(94)						(20.2)		%
Marketing and advertising						546						644						(98)						(15.2)		%
Other real estate owned expenses						87						80						7						8.8		%
FDIC insurance						726						476						250						52.5		%
Loan expenses						798						557						241						43.3		%
Other						3,878						4,238						(360)						(8.5)		%
Total non-compensation expense						19,328						19,405						(77)						(0.4)		%
Total non-interest expense						$	40,339					$	40,845					$	(506)					(1.2)		%

Total non-interest expense for the nine months ended September 30, 2020 decreased $0.5 million compared to the same period in the prior year. The decrease was due to decreases in total compensation expense and total non-compensation expense.

Compensation expense

The decrease in compensation expense, compared to the same period in the prior year, can be mostly attributable to a decrease in pension and other employee benefits and a reduced credit in other components of net periodic pension and postretirement benefits, offset by an increase in salaries and wages. The decrease in pension and other employee benefits was mostly attributable to a decrease in healthcare expenses as compared to the same period in the prior year. The reduced credit in other components of net periodic pension and postretirement benefits was due to a change in assumptions used to prepare annual actuarial expense estimates. The increase in salaries and wages was due to an increase in reward and incentive payments.

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 other non-compensation expense and furniture and equipment expenses, offset by increases in FDIC insurance and loan expenses.

The decrease in other non-compensation expense can mostly be attributed to a decrease in bank and client relations and travel expenditures as compared to the same period in the prior year due to the COVID-19 pandemic. The decrease in furniture and equipment expenses can mostly be attributed to a decrease in the overall depreciation expense after the closure of two branch locations in 2019. The increase in FDIC insurance was primarily attributed to the receipt of a credit in the third quarter of the prior year related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment. The increase in loan expenses was primarily attributable to legal fees associated with a legal action taken by the Corporation related to the $4.2 million impairment of a commercial credit disclosed in the Corporation's Current Report on Form 8-K, dated September 12, 2019, and an increase in loan volume.

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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   September 30,
						2020						2019						Change						Percentage Change
Income before income tax expense						$	7,167					$	2,132					$	5,035					236.2		%
Income tax expense						1,456						176						1,280						727.3		%
Effective tax rate						20.3		%				8.3		%

Income tax expense for the current quarter was $1.5 million compared to $0.2 million for the same period in the prior year. The increase in income tax expense was due primarily to an increase of $5.0 million in income before income tax expense. The effective income tax rate increased from 8.3% for the third quarter of 2019 to 20.3% for the third quarter of 2020.

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

						Nine Months Ended   September 30,
						2020						2019						Change						Percentage Change
Income before income tax expense						$	17,344					$	13,848					$	3,496					25.2		%
Income tax expense						3,315						2,443						872						35.7		%
Effective tax rate						19.1		%				17.6		%

Income tax expense for the nine months ended September 30, 2020 and 2019 were $3.3 million and $2.4 million, respectively. The increase in income tax expense was due primarily to an increase of $3.5 million in income before income tax expense. The effective income tax rate increased from 17.6% for the nine months ended September 30, 2019 to 19.1% for the nine months ended September 30, 2020.

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Financial Condition

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

						September 30, 2020						December 31, 2019						Change						Percentage Change
ASSETS
Total cash and cash equivalents						$	149,902					$	121,904					$	27,998					23.0		%
Total investment securities, FHLB, and FRB stock						404,788						292,478						112,310						38.4		%
Loans, net of deferred loan fees						1,538,493						1,309,219						229,274						17.5		%
Allowance for loan losses						(24,590)						(23,478)						(1,112)						4.7		%
Loans, net						1,513,903						1,285,741						228,162						17.7		%
Goodwill and other intangible assets, net						22,195						22,566						(371)						(1.6)		%
Other assets						74,226						65,138						9,088						14.0		%
Total assets						$	2,165,014					$	1,787,827					$	377,187					21.1		%
LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits						$	1,924,189					$	1,572,138					$	352,051					22.4		%
Long-term advances and other debt						4,155						4,085						70						1.7		%
Other liabilities						39,665						28,977						10,688						36.9		%
Total liabilities						1,968,009						1,605,200						362,809						22.6		%
Total shareholders’ equity						197,005						182,627						14,378						7.9		%
Total liabilities and shareholders’ equity						$	2,165,014					$	1,787,827					$	377,187					21.1		%

Cash and Cash Equivalents

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

Investment securities

The increase in investment securities can be mostly attributed to purchases in the amount of $138.4 million and an increase in the fair value of the portfolio of $11.8 million, offset by $38.9 million in maturities, and principal paydowns.

Loans, net

The increase in loans can be attributed to increases of $41.7 million in commercial mortgages, $174.3 million in commercial and agricultural loans, and $39.0 million in residential mortgages, partially offset by decreases of $13.6 million in indirect consumer loans, and $12.2 million in other consumer loans. $189.8 million of the increase in loan balances relates to loans extended as part of the Paycheck Protection Program (PPP).

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 $10.4 million in interest rate swap assets.

Deposits

The increase in deposits can be attributed to increases of $49.3 million in money market accounts, $70.9 million in interest-bearing demand deposit accounts, $36.4 million in savings deposits, $44.3 million in time deposits, and $151.2 million in non-interest-bearing demand deposits.

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Other liabilities

The increase in other liabilities can be mostly attributed to an increase of $10.3 million in interest rate swap liabilities.

Shareholders’ equity

Shareholders’ equity was $197.0 million at September 30, 2020 compared to $182.6 million at December 31, 2019. The increase can be mostly attributed to earnings of $14.0 million, and an increase in accumulated other comprehensive income of $7.4 million, offset by $3.7 million in dividends declared during the nine months ended September 30, 2020. The increase in accumulated other comprehensive income can be mostly attributed to the increase in the fair market value of the securities portfolio. Treasury stock increased $3.9 million, primarily due to the repurchase of the Corporation's common stock. As of September 30, 2020, 184,360 shares have been repurchased at an average cost of $27.57 per share.

Assets under management or administration

The market value of total assets under management or administration in WMG was $1.935 billion at September 30, 2020, including $299.0 million of assets held under management or administration for the Corporation, compared to $1.915 billion at December 31, 2019, including $289.7 million of assets held under management or administration for the Corporation, an increase of $20.0 million, or 1.1%. The increase 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 "Baa". 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
						September 30, 2020																		December 31, 2019
						Amortized Cost						Estimated Fair Value						Percent of Total Estimated Fair Value						Amortized Cost						Estimated Fair Value						Percent of Total Estimated Fair Value
Mortgage-backed securities, residential and collateralized mortgage obligations						$	317,087					$	326,268					82.3		%				$	225,029					$	225,234					79.3		%
Obligations of states and political subdivisions						40,694						43,260						10.9		%				41,265						42,845						15.1		%
Other securities						26,766						26,772						6.8		%				15,962						16,011						5.6		%
Total						$	384,547					$	396,300					100.0		%				$	282,256					$	284,090					100.0		%

The available for sale segment of the securities portfolio totaled $396.3 million at September 30, 2020, an increase of $112.2 million, or 39.5%, from $284.1 million at December 31, 2019. The increase can be mostly attributed to purchases in the amount of $138.4 million and an increase in the fair value of the portfolio of $11.8 million, offset by $38.9 million in maturities, calls and principal paydowns.

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 $3.0 million at September 30, 2020, a decrease of $0.1 million, or 1.5%, from $3.1 million at December 31, 2019, mostly attributed to maturities.

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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, 2019 to September 30, 2020 (in thousands):

LOANS
						September 30, 2020						December 31, 2019						Dollar Change						Percentage Change
Commercial and agricultural						$	404,593					$	230,292					$	174,301					75.7		%
Commercial mortgages						690,511						648,794						41,717						6.4		%
Residential mortgages						227,372						188,338						39,034						20.7		%
Indirect consumer loans						121,406						134,973						(13,567)						(10.1)		%
Other consumer loans						94,611						106,822						(12,211)						(11.4)		%
Total loans, net of deferred loan fees						$	1,538,493					$	1,309,219					$	229,274					17.5		%

Portfolio loans totaled $1.538 billion at September 30, 2020, an increase of $229.3 million, or 17.5%, from $1.309 billion at December 31, 2019.  The increase in loans can be attributed to increases of $174.3 million in commercial and agricultural loans, $41.7 million in commercial mortgages and $39.0 million in residential mortgages, offset by decreases of $13.6 million in indirect consumer loans, and $12.2 million in other consumer loans. $189.8 million of the increase in loan balances relates to loans extended as part of the Paycheck Protection Program (PPP).

Residential mortgage loans totaled $227.4 million at September 30, 2020, an increase of $39.0 million, or 20.7%, from December 31, 2019. During the nine months ended September 30, 2020, $110.1 million of residential mortgages were originated, of which $30.7 million were sold in the secondary market to Freddie Mac and $0.4 million 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. Recent growth in residential mortgages was driven by both home purchases and refinancings due to the low interest rate environment. The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):

LOANS BY DIVISION
			September 30, 2020						December 31, 2019						December 31, 2018						December 31, 2017						December 31, 2016
Chemung Canal Trust Company*			$	678,477					$	576,399					$	603,133					$	630,732					$	636,836
Capital Bank Division			860,016						732,820						708,773						681,092						563,454
Total loans			$	1,538,493					$	1,309,219					$	1,311,906					$	1,311,824					$	1,200,290

* 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 September 30, 2020 and December 31, 2019, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were 41.4% and 45.0% 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 September 30, 2020 and December 31, 2019.

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.

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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
						September 30, 2020						December 31, 2019
Non-accrual loans						$	7,701					$	9,938
Non-accrual troubled debt restructurings						8,025						8,070
Total non-performing loans						15,726						18,008
Other real estate owned						585						517
Total non-performing assets						$	16,311					$	18,525
Ratio of non-performing loans to total loans						1.02		%				1.38		%
Ratio of non-performing assets to total assets						0.75		%				1.04		%
Ratio of allowance for loan losses to non-performing loans						156.36		%				130.38		%
Accruing loans past due 90 days or more (1)						$	—					$	7
Accruing troubled debt restructurings (1)						$	2,825					$	900
(1) These loans are not included in non-performing assets above.

Non-Performing Loans

Non-performing loans totaled $15.7 million at September 30, 2020, or 1.02% of total loans, compared to $18.0 million at December 31, 2019, or 1.38% of total loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $16.3 million, or 0.75% of total assets, at September 30, 2020, compared to $18.5 million, or 1.04% of total assets, at December 31, 2019. The decrease in non-performing loans can mostly be attributed to payments received on commercial loans and a partial charge-off of a large commercial loan, partially offset by additional non-performing commercial and consumer loans. The decrease in non-performing assets can be attributed to the aforementioned change in non-performing loans and sales of other real estate owned.

Accruing Loans Past due 90 Days or More

The recorded investment in accruing loans past due 90 days or more totaled less than $1 thousand at September 30, 2020, a decrease of $7 thousand from December 31, 2019.

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 has 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. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 related modifications and therefore will not be treated as TDRs. As of September 30, 2020, the Corporation had $8.0 million of non-accrual TDRs compared to $8.1 million as of December 31, 2019.  As of September 30, 2020 and December 31, 2019, the Corporation had $2.8 million and $0.9 million respectively, of accruing TDRs.

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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 September 30, 2020 totaled $16.4 million, including TDRs of $10.2 million, compared to $15.7 million, including TDRs of $9.0 million, at December 31, 2019. Included in the recorded investment of impaired loans at September 30, 2020, were loans totaling $8.6 million for which impairment allowances of $5.8 million have been specifically allocated to the allowance for loan losses. As of December 31, 2019, the impaired loan total included $11.1 million of loans for which specific impairment allowances of $8.1 million were allocated to the allowance for loan losses.

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.

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, and more recently the expected impact of COVID-19 on the various portfolios, (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, including the impact of COVID-19.

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. 

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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 $24.6 million at September 30, 2020, compared to $23.5 million at December 31, 2019.  The ratio of allowance for loan losses to total loans was 1.60% at September 30, 2020, compared to 1.79% at December 31, 2019.  Net charge-offs for the nine months ended September 30, 2020 were $2.9 million, including a partial charge-off of a commercial loan in the second quarter of 2020, as compared to net charge-offs for the nine months ended September 30, 2019 of $0.7 million.

The table below summarizes the Corporation’s loan loss experience for the nine months ended September 30, 2020 and 2019 (in thousands, except ratio data):

SUMMARY OF LOAN LOSS EXPERIENCE
			Nine Months Ended   September 30,
			2020						2019
Balance of allowance for loan losses at beginning of period			$	23,478					$	18,944
Charge-offs:
Commercial and agricultural			134						55
Commercial mortgages			2,143						—
Residential mortgages			56						60
Consumer loans			915						1,040
Total charge-offs			3,248						1,155
Recoveries:
Commercial and agricultural			27						44
Commercial mortgages			2						2
Residential mortgages			49						45
Consumer loans			293						359
Total recoveries			371						450
Net charge-offs			2,877						705
Provision for loan losses			3,989						5,684
Balance of allowance for loan losses at end of period			$	24,590					$	23,923
Ratio of net charge-offs to average loans outstanding			0.27		%				0.07		%
Ratio of allowance for loan losses to total loans outstanding			1.60		%				1.83		%

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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, 2019 to September 30, 2020 (in thousands):

DEPOSITS
			September 30, 2020						December 31, 2019						Dollar Change						Percentage Change
Non-interest-bearing demand deposits			$	619,412					$	468,238					$	151,174					32.3		%
Interest-bearing demand deposits			270,949						200,089						70,860						35.4		%
Insured money market accounts			579,574						530,242						49,332						9.3		%
Savings deposits			248,751						212,393						36,358						17.1		%
Time deposits			205,503						161,176						44,327						27.5		%
Total			$	1,924,189					$	1,572,138					$	352,051					22.4		%

Deposits totaled $1.924 billion at September 30, 2020 compared to $1.572 billion at December 31, 2019, an increase of $352.1 million, or 22.4%. The increase was attributable to increases of $44.3 million in time deposits, $70.9 million in interest-bearing demand deposit accounts, $49.3 million in money market accounts, $36.4 million in savings deposits, and $151.2 million in non-interest-bearing demand deposits. The growth in deposits was due primarily to increases of $220.7 million in commercial deposits, $69.7 million in public deposits, and $61.6 million in consumer funds. The increase in deposits was partially due to the collection of stimulus checks and PPP loan disbursements. At September 30, 2020, demand deposit and money market accounts comprised 76.4% of total deposits compared to 76.2% at December 31, 2019.

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

DEPOSITS BY DIVISION
			September 30, 2020						December 31, 2019						December 31, 2018						December 31, 2017						December 31, 2016
Chemung Canal Trust Company*			$	1,587,452					$	1,317,225					$	1,328,658					$	1,264,883					$	1,249,870
Capital Bank Division			336,737						254,913						240,579						202,563						206,473
Total			$	1,924,189					$	1,572,138					$	1,569,237					$	1,467,446					$	1,456,343

*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 September 30, 2020 and December 31, 2019. Deposits obtained through the CDARS and ICS programs were $233.6 million and $180.4 million as of September 30, 2020 and December 31, 2019, respectively. The increase in CDARS and ICS deposits was due to the seasonal inflow 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.

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Borrowings

Borrowings increased $0.1 million from $4.1 million at December 31, 2019 to $4.2 million at September 30, 2020, attributable to normal recurring finance lease payments.

Shareholders’ Equity

Total shareholders' equity increased $14.4 million from $182.6 million at December 31, 2019 to $197.0 million at September 30, 2020, due primarily to an increase in retained earnings and an increase in accumulated other comprehensive income. The increase in retained earnings of $10.3 million was due primarily to earnings of $14.0 million, offset by $3.7 million in dividends declared during the nine months ended September 30, 2020. The increase in accumulated other comprehensive income of $7.4 million can be mostly attributed to the increase in the fair market value of the securities portfolio. Treasury stock increased $3.9 million, primarily due to the Corporation's common stock repurchase program. As of September 30, 2020, 184,360 shares have been repurchased at an average cost of $27.57 per share.

The total shareholders’ equity to total assets ratio was 9.10% at September 30, 2020 compared to 10.22% at December 31, 2019.  The tangible equity to tangible assets ratio was 8.16% at September 30, 2020 compared to 9.07% at December 31, 2019.  Book value per share increased to $41.51 at September 30, 2020 from $37.35 at December 31, 2019.

On March 18, 2020, the Corporation's Board of Directors approved a stock repurchase program which replaced the previously authorized repurchase program. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares starting March 18, 2020. The repurchase program permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. For the three month period ended September 30, 2020, the Corporation repurchased 63,870 shares of common stock at a total cost of $3.2 million under the share repurchase program. The weighted average cost was $28.29 per share repurchased. For the nine month period ended September 30, 2020, the Corporation repurchased a total of 184,360 shares of common stock at a total cost of $5.1 million under the repurchase program at the weighted average cost of $27.57 per share. Remaining buyback authority under the share repurchase program was 65,640 shares at September 30, 2020.

On April 27, 2020, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933. The Corporation's Board of Directors approved the filing with the SEC of a Shelf Registration Statement to register for sale from time to time up to $50 million of the following securities: (i) shares of common stock; (ii) unsecured debt securities, which may consist of notes, debentures or other evidences of indebtedness; (iii) warrants; (iv) purchase contracts; (v) units consisting of any combination of the foregoing; and (vi) subscription rights to purchase shares of common stock or debt securities. The SEC declared the registration statement effective on May 7, 2020.

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 September 30, 2020, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”) simplifies capital calculations by requiring the federal regulators to establish for institutions under $10 billion in assets a community bank leverage ratio at a percentage not less than 8% and not greater than 10% that eligible institutions may choose to elect to replace the general applicable risk-based capital requirements under the Basel III capital rules for such institutions. Such institutions that meet the community bank leverage ratio will automatically be deemed to be well-capitalized under the federal regulator’s prompt corrective action framework, although the regulators retain the flexibility to determine that the institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile. The federal regulators jointly issued a final rule on October 29, 2019, whereby a qualifying community bank organization may elect, but is not required to, use the community bank leverage ratio capital framework, in which case it will be considered well-capitalized so long as its community bank leverage ratio (tier 1 capital to average consolidated assets) is greater than 9%. The new rule took effect on January 1, 2020. Pursuant to the CARES Act, the federal banking regulators in April 2020 issued interim final rules to set the community bank leverage ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the community bank leverage ratio will increase to 8.5% for the calendar year. Community banks will have until Jan. 1, 2022, before the community bank leverage ratio requirement will return to 9%. The Bank has elected not to use the community bank leverage ratio.

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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 $97.1 million and $141.8 million at September 30, 2020 and December 31, 2019, respectively. The Corporation also had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which was available at September 30, 2020. The Corporation had a total of $58.0 million of unsecured lines of credit with five different financial institutions at December 31, 2019, 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)						Nine Months Ended   September 30,
						2020						2019
Net cash provided by operating activities						$	19,987					$	21,808
Net cash used (provided) in investing activities						(336,089)						(9,273)
Net cash provided (used) in financing activities						344,100						3,791
Net increase (decrease) in cash and cash equivalents						$	27,998					$	16,326

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 nine months of 2020 and 2019 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

Cash used in investing activities during the first nine months of 2020 predominantly resulted from purchases of securities available for sale, and a net increase in loans, offset by maturities and principal paydowns on securities available for sale. Cash provided by investing activities during the first nine 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.

Financing activities

Cash provided by financing activities during the first nine months of 2020 predominantly resulted from a net increase in deposits. Cash used in financing activities during the first nine months of 2019 predominantly resulted from a net decrease in deposits.

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Capital Resources

The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the 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 not subject to regulatory capital requirements. 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. Under Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer 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.

Pursuant to the Regulatory Relief Act, the FRB finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020. Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the community bank leverage ratio will increase to 8.5% for the calendar year. Community banks will have until Jan. 1, 2022, before the community bank leverage ratio requirement will return to 9%. The Bank has not elected to use the community bank leverage ratio.

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 September 30, 2020 and December 31, 2019, the Bank met all capital adequacy requirements to which it was subject.

As of September 30, 2020, 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 September 30, 2020 and December 31, 2019 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.

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The Corporation and the Bank’s capital ratios as of September 30, 2020 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 September 30, 2020			Amount						Ratio						Amount						Ratio						Amount						Ratio						Amount						Ratio
Total Capital (to Risk Weighted Assets):
Consolidated			$	190,303					13.96		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	183,963					13.51		%				$	108,959					8.00		%				$	143,009					10.50		%				$	136,199					10.00		%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	173,167					12.70		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	166,845					12.25		%				$	81,719					6.00		%				$	115,769					8.50		%				$	108,959					8.00		%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	173,167					12.70		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	166,845					12.25		%				$	61,289					4.50		%				$	95,339					7.00		%				$	88,529					6.50		%
Tier 1 Capital (to Average Assets):
Consolidated			$	173,167					8.41		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	166,845					8.12		%				$	82,141					4.00		%				N/A						N/A						$	102,676					5.00		%

The Corporation and the Bank’s capital ratios as of December 31, 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 December 31, 2019			Amount						Ratio						Amount						Ratio						Amount						Ratio						Amount						Ratio
Total Capital (to Risk Weighted Assets):
Consolidated			$	182,239					13.98		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	175,062					13.45		%				$	104,136					8.00		%				$	136,679					10.500		%				$	130,170					10.00		%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	165,859					12.73		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	158,702					12.19		%				$	78,102					6.00		%				$	110,645					8.500		%				$	104,136					8.00		%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated			$	165,859					12.73		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	158,702					12.19		%				$	58,577					4.50		%				$	91,119					7.000		%				$	84,611					6.50		%
Tier 1 Capital (to Average Assets):
Consolidated			$	165,859					9.35		%				N/A						N/A						N/A						N/A						N/A						N/A
Bank			$	158,702					8.98		%				$	70,719					4.00		%				N/A						N/A						$	88,399					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 September 30, 2020, the Bank could, without prior approval, declare dividends of approximately $37.4 million.

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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.

Allowance for Loan Losses

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.

Goodwill

Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level, defined as the segment level, at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, the Corporation has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.

The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value.

Goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred. However, Management did conclude that the current decline in macroeconomic conditions is a triggering event, but other mitigating factors did not warrant an interim quantitative impairment test. We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) forecasted revenues, expenses, and cash flows; (2) current discount rates; (3) our market capitalization; (4) observable market transactions and multiples; (5) changes to the regulatory environment; and (6) the nature and amount of government support that has been and is expected to be provided in the future.

Intangible assets identified in acquisitions consist primarily of wealth management advisory contracts. The fair value of intangible assets was estimated using valuation techniques, based on a discounted cash flow analysis. The value attributed to

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other intangible assets was based on the time period over which they are expected to generate economic benefits. Intangible assets are amortized over their estimated lives using a method that approximates the amount of economic benefits that are realized by the Corporation.

For additional information on critical accounting policies and to gain a greater understanding of how the Corporation's financial performance is reported, refer to Note 1 - "Summary of Significant Accounting Policies" in Notes to Unaudited Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for a discussion of recent accounting updates, and the section captioned "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2019.

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 7–12. 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 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.

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																																	As of the
			As of the Three Months Ended																														Nine Months Ended
(in thousands, except ratio data)			Sept. 30,						June 30,						March 31,						Dec. 31,						Sept. 30,						Sept. 30,						Sept. 30,
			2020						2020						2020						2019						2019						2020						2019
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
Net interest income (GAAP)			$	15,869					$	15,591					$	15,062					$	15,201					$	15,142					$	46,522					$	45,410
Fully taxable equivalent adjustment			85						84						86						98						101						255						305
Fully taxable equivalent net interest income (non-GAAP)			$	15,954					$	15,675					$	15,148					$	15,299					$	15,243					$	46,777					$	45,715
Average interest-earning assets (GAAP)			$	1,986,043					$	1,931,107					$	1,715,562					$	1,705,766					$	1,665,793					$	1,877,966					$	1,664,188
Net interest margin - fully taxable equivalent (non-GAAP)			3.20		%				3.26		%				3.55		%				3.56		%				3.63		%				3.33		%				3.67		%

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
			As of the Three Months Ended																														Nine Months Ended
(in thousands, except ratio data)			Sept. 30,						June 30,						March 31,						Dec. 31,						Sept. 30,						Sept. 30,						Sept. 30,
			2020						2020						2020						2019						2019						2020						2019
EFFICIENCY RATIO
Net interest income (GAAP)			$	15,869					$	15,591					$	15,062					$	15,201					$	15,142					$	46,522					$	45,410
Fully taxable equivalent adjustment			85						84						86						98						101						255						305
Fully taxable equivalent net interest income (non-GAAP)			$	15,954					$	15,675					$	15,148					$	15,299					$	15,243					$	46,777					$	45,715
Non-interest income (GAAP)			$	5,339					$	5,080					$	4,730					$	5,106					$	4,956					$	15,150					$	14,967
Less:  net (gains) losses on security transactions			—						—						—						—						—						—						(19)
Adjusted non-interest income (non-GAAP)			$	5,339					$	5,080					$	4,730					$	5,106					$	4,956					$	15,150					$	14,948
Non-interest expense (GAAP)			$	13,362					$	13,227					$	13,749					$	14,851					$	13,525					$	40,339					$	40,845
Less:  amortization of intangible assets			(120)						(119)						(132)						(144)						(151)						(371)						(465)
Adjusted non-interest expense (non-GAAP)			$	13,242					$	13,108					$	13,617					$	14,707					$	13,374					$	39,968					$	40,380
Efficiency ratio (unadjusted)			63.00		%				63.99		%				69.47		%				73.13		%				67.30		%				65.41		%				67.65		%
Efficiency ratio (adjusted)			62.19		%				63.16		%				68.50		%				72.08		%				66.21		%				64.54		%				66.56		%

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 tangible 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.

 

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																																	As of or for the
			As of or for the Three Months Ended																														Nine Months Ended
(in thousands, except per share and ratio data)			Sept. 30,						June 30,						March 31,						Dec. 31,						Sept. 30,						Sept. 30,						Sept. 30,
			2020						2020						2020						2019						2019						2020						2019
TANGIBLE EQUITY AND TANGIBLE ASSETS
(PERIOD END)
Total shareholders' equity (GAAP)			$	197,005					$	194,589					$	190,447					$	182,627					$	182,044					$	197,005					$	182,044
Less: intangible assets			(22,195)						(22,315)						(22,434)						(22,566)						(22,710)						(22,195)						(22,710)
Tangible equity (non-GAAP)			$	174,810					$	172,274					$	168,013					$	160,061					$	159,334					$	174,810					$	159,334
Total assets (GAAP)			$	2,165,014					$	2,050,921					$	1,841,329					$	1,787,827					$	1,793,643					$	2,165,014					$	1,793,643
Less: intangible assets			(22,195)						(22,315)						(22,434)						(22,566)						(22,710)						(22,195)						(22,710)
Tangible assets (non-GAAP)			$	2,142,819					$	2,028,606					$	1,818,895					$	1,765,261					$	1,770,933					$	2,142,819					$	1,770,933
Total equity to total assets at end of period (GAAP)			9.10		%				9.49		%				10.34		%				10.22		%				10.15		%				9.10		%				10.15		%
Book value per share (GAAP)			$	41.51					$	40.51					$	38.83					$	37.35					$	37.35					$	41.51					$	37.35
Tangible equity to tangible assets at end of period (non-GAAP)			8.16		%				8.49		%				9.24		%				9.07		%				9.00		%				8.16		%				9.00		%
Tangible book value per share (non-GAAP)			$	36.83					$	35.86					$	34.25					$	32.74					$	32.69					$	36.83					$	32.69

 

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
			As of or for the Three Months Ended																														Nine Months Ended
			Sept. 30,						June 30,						March 31,						Dec. 31,						Sept. 30,						Sept. 30,						Sept. 30,
(in thousands, except ratio data)			2020						2020						2020						2019						2019						2020						2019
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP)			$	196,569					$	191,853					$	188,427					$	182,522					$	180,896					$	192,299					$	173,988
Less: average intangible assets			(22,267)						(22,389)						(22,516)						(22,633)						(22,785)						(22,390)						(22,936)
Average tangible equity (non-GAAP)			$	174,302					$	169,464					$	165,911					$	159,889					$	158,111					$	169,909					$	151,052
Return on average equity (GAAP)			11.56		%				12.22		%				5.32		%				9.14		%				4.29		%				9.74		%				8.76		%
Return on average tangible equity (non-GAAP)			13.03		%				13.83		%				6.04		%				10.43		%				4.91		%				11.03		%				10.09		%

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.

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																																	As of or for the
			As of or for the Three Months Ended																														Nine Months Ended
(in thousands, except per share and ratio data)			Sept. 30,						June 30,						March 31,						Dec. 31,						Sept. 30,						Sept. 30,						Sept. 30,
			2020						2020						2020						2019						2019						2020						2019
NON-GAAP NET INCOME
Reported net income (GAAP)			$	5,711					$	5,827					$	2,491					$	4,204					$	1,956					$	14,029					$	11,405
Net (gains) losses on security transactions (net of tax)			—						—						—						—						—						—						(14)
Non- GAAP net income			$	5,711					$	5,827					$	2,491					$	4,204					$	1,956					$	14,029					$	11,391
Average basic and diluted shares outstanding			4,773						4,850						4,895						4,879						4,871						4,836						4,866
Reported basic and diluted earnings per share (GAAP)			$	1.19					$	1.20					$	0.51					$	0.87					$	0.40					$	2.90					$	2.34
Reported return on average assets (GAAP)			1.08		%				1.15		%				0.55		%				0.93		%				0.44		%				0.95		%				0.87		%
Reported return on average equity (GAAP)			11.56		%				12.22		%				5.32		%				9.14		%				4.29		%				9.74		%				8.76		%
Non-GAAP basic and diluted earnings per share			$	1.19					$	1.20					$	0.51					$	0.87					$	0.40					$	2.90					$	2.34
Non-GAAP return on average assets			1.08		%				1.15		%				0.55		%				0.93		%				0.44		%				0.95		%				0.87		%
Non-GAAP return on average equity			11.56		%				12.22		%				5.32		%				9.14		%				4.29		%				9.74		%				8.75		%

 

 

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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 and Treasurer, 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 various basis point changes in interest rates, with appropriate floors set for interest-bearing liabilities. At September 30, 2020, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 6.03% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by 11.97%. Both are within the Corporation's policy guidelines.

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 September 30, 2020, 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 9.39%. An immediate 200-basis point increase in interest rates would positively impact the market value by 14.67%. Both are within the Corporation's policy guidelines.

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), Chief Credit and Risk Officer, 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.

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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 September 30, 2020 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 September 30, 2020. 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.

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PART II.    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of September 30, 2020, we believe that we are not a party to any additional pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.

ITEM 1A.    RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC on March 12, 2020. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020 the President of the United States declared the COVID-19 pandemic in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 pandemic, millions of people have filed claims for unemployment, and stock markets have experienced extreme volatility, and in particular bank stocks have significantly declined in value. In response to the COVID-19 pandemic, the Federal Reserve has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. The State of New York and certain federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and has provided relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

•demand for our products and services may decline, making it difficult to grow assets and income;

•if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;

•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;

•our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;

•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.

•as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;

•a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend,

•our wealth management revenues may decline with continuing market turmoil;

•our cyber security risks are increased as the result of an increase in the number of employees working remotely;

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•we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and

•Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

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

    (c)    Issuer Purchases of Equity Securities (1)

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
July 1 - July 31, 2020			27,924						$	26.65					27,924						101,586
August 1 - August 31, 2020			21,408						29.31						21,408						80,178
September 1 - September 30, 2020			14,538						29.96						14,538						65,640
Quarter ended September 30, 2020			63,870						$	28.29					63,870						65,640
(1) On March 18, 2020, the Corporation’s Board of Directors approved a stock repurchase plan which replaced the previously authorized repurchase program. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its outstanding shares. On October 30, 2020 the stock repurchase plan was completed. A total of 250,000 shares were repurchased at an average cost of $29.40 per share.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

ITEM 5.    OTHER INFORMATION

        Not applicable.

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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 September 16, 2020 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K filed with the Commission on September 18, 2020).
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*
101.SCH			XBRL Taxonomy Schema*
101.CAL			XBRL Taxonomy Calculation Linkbase*
101.DEF			XBRL Taxonomy Definition Linkbase*
101.LAB			XBRL Taxonomy Label Linkbase*
101.PRE			XBRL Taxonomy Presentation Linkbase*
*			Filed herewith.

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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: November 5, 2020			By:  /s/ Anders M. Tomson
			Anders M. Tomson President and Chief Executive Officer (Principal Executive Officer)

DATED: November 5, 2020			By:  /s/ Karl F. Krebs
			Karl F. Krebs Chief Financial Officer and Treasurer (Principal Financial Officer)

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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 September 16, 2020 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K filed with the Commission on September 18, 2020).
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*
101.SCH			XBRL Taxonomy Schema*
101.CAL			XBRL Taxonomy Calculation Linkbase*
101.DEF			XBRL Taxonomy Definition Linkbase*
101.LAB			XBRL Taxonomy Label Linkbase*
101.PRE			XBRL Taxonomy Presentation Linkbase*
*			Filed herewith.