

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

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

For Quarterly period ended September 30, ~~2018~~2019



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

Commission File No. 000-13888



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

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

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

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



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: X NO:____

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
YES: X NO:____

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

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

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

The number of shares of the registrant's common stock, $.01 par value, outstanding on ~~October 30, 2018~~November 5, 2019 was ~~4,806,864.~~4,846,630.

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	67
	Consolidated Statements of Income	78
	Consolidated Statements of Comprehensive Income	89
	Consolidated Statements of Shareholders’ Equity	911
	Consolidated Statements of Cash Flows	1012

	Notes to Unaudited Consolidated Financial Statements	1214

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	4345

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	7576

Item 4:	Controls and Procedures	7677

PART II.	OTHER INFORMATION

Item 1:	Legal Proceedings	7778

Item 1A:	Risk Factors	7778

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	7778

Item 3:	Defaults Upon Senior Securities	7778

Item 4:	Mine Safety Disclosures	7778

Item 5:	Other Information	7778

Item 6:	Exhibits	7879

SIGNATURES		7980

EXHIBIT INDEX

GLOSSARY OF ABBREVIATIONS AND TERMS

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

Abbreviations



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



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

Terms



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



Long term lease obligation	An obligation extending beyond the current year, which is related to a long term ~~capital~~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 ~~noninterest~~non-interest expense, before income tax expense (benefit). The Corporation believes that this financial measure is useful in assessing the ability of a bank to generate income in excess of its provision for credit losses.
Regulatory Relief Act	The Economic Growth, Regulatory Relief and Consumer Protection Act was enacted on May 24, 2018 provides certain limited amendments to the Dodd-Frank Act, as well as certain targeted modifications to other post-financial crisis regulatory requirements. In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements.
RWA	Risk-weighted assets consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On-balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off-balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. Risk-weighted assets also incorporate a measure for market risk related to applicable trading assets-debt and equity instruments. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets.
SBA loan pools	Business loans partially guaranteed by the SBA.
Securities sold under agreements to repurchase	Sale of securities together with an agreement for the seller to buy back the securities at a later date.
Tax Act	The Tax Act was enacted on December 22, 2017 and amended the Internal Revenue Code of 1986. The legislation reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, with some related business deductions and credits being either reduced or eliminated.
TDR	A TDR is deemed to occur when the Corporation modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.



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

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(in thousands, except share and per share data)	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018
ASSETS
Cash and due from financial institutions	$	31,831		$	27,966		$	36,497		$	33,040
Interest-earning deposits in other financial institutions	82,081			2,763			109,801			96,932
Total cash and cash equivalents	113,912			30,729			146,298			129,972

Equity investments, at estimated fair value	1,987			2,337			2,065			1,909
Securities available for sale, at estimated fair value	246,473			293,091			267,529			242,258
Securities held to maturity, estimated fair value of $4,190 at September 30, 2018 and $3,776 at December 31, 2017	4,203			3,781
Securities held to maturity, estimated fair value of $3,443 at September 30, 2019 and $4,858 at December 31, 2018							3,420			4,875
FHLBNY and FRBNY Stock, at cost	3,138			5,784			3,091			3,138

Loans, net of deferred loan fees	1,320,638			1,311,824			1,306,638			1,311,906
Allowance for loan losses	(19,635		)	(21,161		)	(23,923		)	(18,944		)
Loans, net	1,301,003			1,290,663			1,282,715			1,292,962

Loans held for sale	1,715			542			1,313			502
Premises and equipment, net	25,514			26,657			22,962			24,980
Operating lease right-of-use assets							8,051			—
Goodwill	21,824			21,824			21,824			21,824
Other intangible assets, net	1,527			2,085			886			1,351
Bank-owned life insurance	3,032			2,982			3,096			3,048
Accrued interest receivable and other assets	29,536			27,145			30,393			28,524

Total assets	$	1,753,864		$	1,707,620		$	1,793,643		$	1,755,343

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	469,887		$	467,610		$	472,600		$	484,433
Interest-bearing	1,106,110			999,836			1,103,906			1,084,804
Total deposits	1,575,997			1,467,446			1,576,506			1,569,237

FHLBNY overnight advances	—			57,700
Securities sold under agreements to repurchase	—			10,000
FHLBNY term advances	—			2,000
Long term capital lease obligation	4,358			4,517
Long term finance lease obligation							4,140			4,304
Operating lease liabilities							8,125			—
Dividends payable	1,249			1,233			1,260			1,254
Accrued interest payable and other liabilities	15,761			14,911			21,568			15,519
Total liabilities	1,597,365			1,557,807			1,611,599			1,590,314

Shareholders' equity:
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at September 30, 2018 and December 31, 2017	53			53
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at September 30, 2019 and December 31, 2018							53			53
Additional paid-in capital	46,006			45,967			46,464			45,820
Retained earnings	138,654			128,453			150,759			143,129
Treasury stock, at cost; 504,676 shares at September 30, 2018 and 559,094 shares at December 31, 2017	(12,927		)	(14,320		)
Treasury stock, at cost; 465,038 shares at September 30, 2019 and 488,844 shares at December 31, 2018							(11,956		)	(12,562		)
Accumulated other comprehensive loss	(15,287		)	(10,340		)	(3,276		)	(11,411		)
Total shareholders' equity	156,499			149,813			182,044			165,029

Total liabilities and shareholders' equity	$	1,753,864		$	1,707,620		$	1,793,643		$	1,755,343

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share data)	2018			2017			2018			2017			2019			2018			2019			2018
Interest and dividend income:
Loans, including fees	$	14,580		$	13,709		$	42,930		$	39,025		$	14,664		$	14,580		$	43,723		$	42,930
Taxable securities	1,200			1,369			3,753			4,189			1,349			1,200			3,825			3,753
Tax exempt securities	272			322			875			836			293			272			872			875
Interest-earning deposits	84			97			116			445			502			84			1,735			116
Total interest and dividend income	16,136			15,497			47,674			44,495			16,808			16,136			50,155			47,674
Interest expense:
Deposits	858			545			1,967			1,632			1,629			858			4,634			1,967
Securities sold under agreements to repurchase	—			95			137			383			—			—			—			137
Borrowed funds	199			94			574			273			37			199			111			574
Total interest expense	1,057			734			2,678			2,288			1,666			1,057			4,745			2,678
Net interest income	15,079			14,763			44,996			42,207			15,142			15,079			45,410			44,996
Provision for loan losses	300			1,289			3,371			2,750			4,441			300			5,684			3,371
Net interest income after provision for loan losses	14,779			13,474			41,625			39,457			10,701			14,779			39,726			41,625

Non-interest income:
WMG fee income	2,406			2,147			7,095			6,525			2,315			2,406			7,115			7,095
Service charges on deposit accounts	1,231			1,269			3,539			3,678			1,141			1,231			3,330			3,539
Interchange revenue from debit card transactions	982			925			3,013			2,809			1,058			982			3,113			3,013
Net gains (losses) on security transactions	—			—			—			12
Net gains on security transactions													—			—			19			—
Changes in fair value of equity investments	2,141			32			2,165			96			(10		)	2,141			106			2,165
Net gains on sales of loans held for sale	79			71			184			193			69			79			146			184
Net gains on sales of other real estate owned	123			30			119			38
Net gains (losses) on sales of other real estate owned													(1		)	123			(87		)	119
Income from bank-owned life insurance	17			17			50			52			17			17			48			50
Other	402			675			2,016			1,632			367			402			1,177			2,016
Total non-interest income	7,381			5,166			18,181			15,035			4,956			7,381			14,967			18,181

Non-interest expenses:
Salaries and wages	5,691			5,480			16,969			16,177			5,874			5,691			17,375			16,969
Pension and other employee benefits	1,262			1,325			4,438			4,416			1,470			1,262			4,488			4,438
Other components of net periodic pension and postretirement benefits	(408		)	(333		)	(1,224		)	(999		)	(141		)	(408		)	(423		)	(1,224		)
Net occupancy	1,671			1,476			4,922			4,784			1,424			1,671			4,469			4,922
Furniture and equipment	581			657			1,941			2,119			717			581			1,840			1,941
Data processing	1,782			1,667			5,288			4,858			1,818			1,782			5,418			5,288
Professional services	479			452			1,527			1,169			395			479			1,218			1,527
Legal accruals and settlements	—			—			989			850			—			—			—			989
Amortization of intangible assets	182			214			558			653			151			182			465			558
Marketing and advertising	212			213			816			580			231			212			644			816
Other real estate owned	83			4			321			35			9			83			80			321
FDIC insurance	263			312			881			946			(10		)	263			476			881
Loan expense	262			165			615			447			171			262			557			615
Other	1,368			1,644			4,520			4,618			1,416			1,368			4,238			4,520
Total non-interest expenses	13,428			13,276			42,561			40,653			13,525			13,428			40,845			42,561
Income before income tax expense	8,732			5,364			17,245			13,839			2,132			8,732			13,848			17,245
Income tax expense	1,802			1,710			3,349			4,250			176			1,802			2,443			3,349
Net income	$	6,930		$	3,654		$	13,896		$	9,589		$	1,956		$	6,930		$	11,405		$	13,896

Weighted average shares outstanding	4,834			4,802			4,828			4,796			4,871			4,834			4,866			4,828
Basic and diluted earnings per share	$	1.43		$	0.76		$	2.88		$	2.00		$	0.40		$	1.43		$	2.34		$	2.88

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	2018			2017			2018			2017			2019			2018			2019			2018
Net income	$	6,930		$	3,654		$	13,896		$	9,589		$	1,956		$	6,930		$	11,405		$	13,896
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale	(1,583		)	(522		)	(6,422		)	5,498			3,573			(1,583		)	10,885			(6,422		)
Reclassification adjustment for gains realized in net income	—			—			—			(12		)	—			—			(19		)	—
Net unrealized gains (losses)	(1,583		)	(522		)	(6,422		)	5,486			3,573			(1,583		)	10,866			(6,422		)
Tax effect	(404		)	(198		)	(1,637		)	2,069			911			(404		)	2,771			(1,637		)
Net of tax amount	(1,179		)	(324		)	(4,785		)	3,417			2,662			(1,179		)	8,095			(4,785		)

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		)	(55		)	(55		)	(165		)	(165		)
Reclassification adjustment for amortization of net actuarial loss	72			88			218			264			72			72			218			218
Total before tax effect	17			33			53			99			17			17			53			53
Tax effect	4			12			13			37			4			4			13			13
Net of tax amount	13			21			40			62			13			13			40			40

Total other comprehensive income (loss)	(1,166		)	(303		)	(4,745		)	3,479			2,675			(1,166		)	8,135			(4,745		)

Comprehensive income	$	5,764		$	3,351		$	9,151		$	13,068		$	4,631		$	5,764		$	19,540		$	9,151

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)



(in thousands, except share and per share data)	Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balances at June 30, 2018	$	53	$	45,873	$	132,973		$	(12,998	)	$	(14,121	)	$	151,780
Net income	—		—		6,930			—			—			6,930
Other comprehensive loss	—		—		—			—			(1,166		)	(1,166		)
Restricted stock awards	—		69		—			—			—			69
Restricted stock units for directors' deferred compensation plan	—		10		—			—			—			10
Cash dividends declared ($0.26 per share)	—		—		(1,249		)	—			—			(1,249		)
Sale of 2,648 shares of treasury stock (a)	—		54		—			71			—			125
Balances at September 30, 2018	$	53	$	46,006	$	138,654		$	(12,927	)	$	(15,287	)	$	156,499



Balances 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 4,100 shares of treasury stock (a)	—		73		—			106			—			179
Balances at September 30, 2019	$	53	$	46,464	$	150,759		$	(11,956	)	$	(3,276	)	$	182,044

(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.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)


(in thousands, except share and per share data)	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total			Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balances at January 1, 2017	$	53	$	45,603		$	124,111		$	(15,265	)	$	(10,754	)	$	143,748
Net income	—		—			9,589			—			—			9,589
Other comprehensive income	—		—			—			—			3,479			3,479
Restricted stock awards	—		162			—			—			—			162
Restricted stock units for directors' deferred compensation plan	—		72			—			—			—			72
Cash dividends declared ($0.78 per share)	—		—			(3,694		)	—			—			(3,694		)
Distribution of 7,880 shares of treasury stock for directors' compensation	—		68			—			201			—			269
Distribution of 5,861 shares of treasury stock for employee compensation	—		50			—			150			—			200
Distribution of 2,438 shares of treasury stock for deferred directors’ compensation	—		(51		)	—			62			—			11
Sale of 11,688 shares of treasury stock (a)	—		142			—			299			—			441
Forfeiture of 1,139 shares of restricted stock awards	—		43			—			(43		)	—			—
Balances at September 30, 2017	$	53	$	46,089		$	130,006		$	(14,596	)	$	(7,275	)	$	154,277


Balances at December 31, 2017, as reported	$	53	$	45,967		$	128,453		$	(14,320	)	$	(10,340	)	$	149,813
Balances at January 1, 2018, as reported																		$	53	$	45,967		$	128,453		$	(14,320	)	$	(10,340	)	$	149,813
Cumulative effect of accounting change (b)	—		—			40			—			(202		)	(162		)	—		—			40			—			(202		)	(162		)
Balances at January 1, 2018, as adjusted	53		45,967			128,493			(14,320		)	(10,542		)	149,651			53		45,967			128,493			(14,320		)	(10,542		)	149,651
Net income	—		—			13,896			—			—			13,896			—		—			13,896			—			—			13,896
Other comprehensive loss	—		—			—			—			(4,745		)	(4,745		)	—		—			—			—			(4,745		)	(4,745		)
Restricted stock awards	—		301			—			—			—			301			—		301			—			—			—			301
Restricted stock units for directors' deferred compensation plan	—		57			—			—			—			57			—		57			—			—			—			57
Cash dividends declared ($0.78 per share)	—		—			(3,735		)	—			—			(3,735		)	—		—			(3,735		)	—			—			(3,735		)
Distribution of 6,015 shares of treasury stock for directors' compensation	—		147			—			154			—			301			—		147			—			154			—			301
Distribution of 1,784 shares of treasury stock for employee compensation	—		44			—			45			—			89			—		44			—			45			—			89
Distribution of 36,681 shares of treasury stock for deferred directors’ compensation	—		(722		)	—			940			—			218			—		(722		)	—			940			—			218
Sale of 9,938 shares of treasury stock (a)	—		212			—			254			—			466			—		212			—			254			—			466
Balances at September 30, 2018	$	53	$	46,006		$	138,654		$	(12,927	)	$	(15,287	)	$	156,499		$	53	$	46,006		$	138,654		$	(12,927	)	$	(15,287	)	$	156,499



Balances at January 1, 2019																		$	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 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

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

													CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES	CONSOLIDATED STATEMENTS OF CASH FLOWS	(UNAUDITED)
(in thousands)	Nine Months Ended September 30,						Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2018			2017			2019			2018
Net income	$	13,896		$	9,589		$	11,405		$	13,896
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets	558			653			465			558
Provision for loan losses	3,371			2,750			5,684			3,371
Net losses on disposal of fixed assets	10			15			35			10
Depreciation and amortization of fixed assets	2,625			2,820			2,375			2,625
Amortization of right-of-use asset							541			—
Amortization of premiums on securities, net	910			1,098			784			910
Gains on sales of loans held for sale, net	(184		)	(193		)	(146		)	(184		)
Proceeds from sales of loans held for sale	9,476			9,655			7,293			9,476
Loans originated and held for sale	(10,465		)	(10,296		)	(7,958		)	(10,465		)
Changes in fair value on equity investments	(2,165		)	(96		)	(106		)	(2,165		)
Proceeds from sales of equity investments	2,288			20			22			2,288
Net gains on securities transactions	—			(12		)	(19		)	—
Net gains on sales of other real estate owned	(119		)	(38		)
Net losses on sales of other real estate owned							87			(119		)
Write-downs on OREO							53			—
Purchase of equity investments	(84		)	(59		)	(72		)	(84		)
Expense related to restricted stock units for directors' deferred compensation plan	57			72			31			57
Expense related to employee stock compensation	89			200			100			89
Expense related to employee restricted stock awards	301			162			296			301
Income from bank-owned life insurance	(50		)	(52		)	(48		)	(50		)
(Increase) decrease in other assets and accrued interest receivable	(3,510		)	888
(Increase) decrease in other assets and accrued interest payable	28			(26		)
Increase (decrease) in other liabilities	3,073			(565		)
Increase in other assets and accrued interest receivable							(2,233		)	(3,510		)
Payments made on operating leases							(467		)	—
Increase in accrued interest payable							94			28
Increase in other liabilities							3,592			3,073
Net cash provided by operating activities	20,105			16,585			21,808			20,105

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale	1,385			1,620
Proceeds from maturities and principal collected on securities available for sale	37,901			35,262
Proceeds from sales of securities available for sale							15,200			—
Proceeds from maturities, calls, and principal paydowns on securities available for sale							37,152			39,286
Proceeds from maturities and principal collected on securities held to maturity	988			2,807			2,498			988
Purchases of securities available for sale	—			(41,306		)	(67,522		)	—
Purchases of securities held to maturity	(1,410		)	(1,967		)	(1,043		)	(1,410		)
Purchase of FHLBNY and FRBNY stock	(22,003		)	(1,708		)	(6		)	(22,003		)
Redemption of FHLBNY and FRBNY stock	24,649			2,252			53			24,649
Proceeds from sale of equipment	—			16
Purchases of premises and equipment	(1,492		)	(1,294		)	(392		)	(1,492		)
Proceeds from sales of other real estate owned	1,576			383			376			1,576
Net increase in loans	(13,955		)	(90,019		)
Net (increase) decrease in loans							4,411			(13,955		)
Net cash (used in) provided by investing activities	27,639			(93,954		)	(9,273		)	27,639

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts	82,012			98,599
Net increase (decrease) in time deposits	26,539			(17,924		)
Net decrease in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts							(12,330		)	82,012
Net increase in time deposits							19,599			26,539
Net decrease in securities sold under agreements to repurchase	(10,000		)	(17,606		)	—			(10,000		)
Net decrease in FHLBNY overnight advances	(57,700		)	—			—			(57,700		)
Repayments of FHLBNY long term advances	(2,000		)	(84		)	—			(2,000		)
Payments made on capital leases	(159		)	(154		)
Payments made on finance leases							(164		)	(159		)
Sale of treasury stock	466			441			455			466
Cash dividends paid	(3,719		)	(3,687		)	(3,769		)	(3,719		)
Net cash (used in) provided by financing activities	35,439			59,585
Net increase (decrease) in cash and cash equivalents	83,183			(17,784		)
Net cash used in financing activities							3,791			35,439
Net increase in cash and cash equivalents							16,326			83,183
Cash and cash equivalents, beginning of period	30,729			74,162			129,972			30,729
Cash and cash equivalents, end of period	$	113,912		$	56,378		$	146,298		$	113,912
(continued)

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(UNAUDITED)


(in thousands)	Nine Months Ended September 30,				Nine Months Ended September 30,
Supplemental disclosure of cash flow information:	2018		2017		2019			2018
Cash paid (received) for:
Cash paid for:
Interest	$	2,650	$	2,314	$	4,651		$	2,650
Income taxes	$	1,355	$	4,050	$	3,225		$	1,355
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	244	$	187	$	152		$	244
Dividends declared, not yet paid	$	1,249	$	1,232	$	1,260		$	1,249
Repurchase of common stock in lieu of employee payroll taxes					$	(13	)	$	—
Distribution of treasury stock for directors' compensation	$	301	$	269	$	357		$	301
Distribution of treasury stock for deferred directors' compensation	$	218	$	11	$	13		$	218

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 ~~2017~~2018 Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.

Reclassifications

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

Recent Accounting Pronouncements

~~In February 2016, the FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The amendments in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2018, though early adoption is permitted. The Corporation intends to adopt the new lease guidance as of January 1, 2019 and is currently evaluating the impact that adoption of these updates will have on its consolidated financial statements. Currently, the Corporation believes the implementation of this ASU will create a right of use asset of less than $15.0 million for the Corporation's 16 leased facilities and a related capital obligation of the same amount as of January 1, 2019.

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. ~~The~~In October 2019, the FASB voted 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 ~~currently evaluating~~eligible for the ~~impact of~~delay and plans to implement the ~~adoption of this guidance on its consolidated financial statements.~~standard effective January 2023. The Corporation anticipates that the adoption of the CECL model will result in an increase to the Corporation's allowance for loan losses. The Corporation has established a committee to oversee the implementation of CECL and has selected a vendor to assist in the implementation process. In 2018, the committee ~~plans to begin~~began establishing parameters which will be used in the CECL model with the selected vendor. The Corporation ~~further plans to run~~is running its current incurred loss model and a CECL model ~~concurrently for twelve months prior to the adoption of this guidance on January 1, 2020.~~concurrently.

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

~~In March 2017, the FASB issued ASU 2017-08,~~ ~~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 amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. The adoption of the ASU is not expected to have a significant impact on the Corporation's consolidated financial statements.

Adoption of New Accounting Standards

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

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

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

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

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

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

NOTE 2 EARNING PER COMMON SHARE (shares in thousands)

Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Issuable shares, including those related to directors’ restricted stock units and directors’ stock compensation, are considered outstanding and are included in the computation of basic earnings per share. All outstanding unvested share based payment awards that contain rights to non-forfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities and are considered outstanding at grant date. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur. Earnings per share were computed by dividing net income by ~~4,834~~4,871 and ~~4,802~~4,834 weighted average shares outstanding for the three-month periods ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. Earnings per share were computed by dividing net income by 4,866 and 4,828 ~~and 4,796~~weighted average shares outstanding for the ~~nine- month~~nine-month periods ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. There were no common stock equivalents during the three and nine-month periods ended September 30, ~~2018~~2019 or ~~2017.~~2018.

NOTE 3 SECURITIES

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


	September 30, 2018								September 30, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	10,487	$	8	$	42	$	10,453
Mortgage-backed securities, residential	196,977		58		10,258		186,777		$	201,152	$	2,757	$	385	$	203,524
Obligations of states and political subdivisions	46,544		17		1,016		45,545		45,122		2,148		—		47,270
Corporate bonds and notes	249		1		—		250		250		—		—		250
SBA loan pools	3,494		—		46		3,448		16,377		144		36		16,485
Total	$	257,751	$	84	$	11,362	$	246,473	$	262,901	$	5,049	$	421	$	267,529


	December 31, 2017								December 31, 2018
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	15,492	$	20	$	21	$	15,491	$	5,489	$	10	$	27	$	5,472
Mortgage-backed securities, residential	224,939		136		5,166		219,909		189,111		146		6,065		183,192
Obligations of states and political subdivisions	52,928		355		151		53,132		44,390		70		308		44,152
Corporate bonds and notes	249		2		—		251		249		—		2		247
SBA loan pools	4,339		1		32		4,308		9,257		—		62		9,195
Total	$	297,947	$	514	$	5,370	$	293,091	$	248,496	$	226	$	6,464	$	242,258

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


	September 30, 2018								September 30, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	2,123	$	—	$	—	$	2,123	$	1,125	$	—	$	—	$	1,125
Time deposits with other financial institutions	2,080		—		13		2,067		2,295		23		—		2,318
Total	$	4,203	$	—	$	13	$	4,190	$	3,420	$	23	$	—	$	3,443


	December 31, 2017								December 31, 2018
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	1,946	$	—	$	—	$	1,946	$	3,020	$	—	$	—	$	3,020
Time deposits with other financial institutions	1,835		—		5		1,830		1,855		—		17		1,838
Total	$	3,781	$	—	$	5	$	3,776	$	4,875	$	—	$	17	$	4,858

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


	September 30, 2018								September 30, 2019
	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	16,284	$	16,241	$	1,785	$	1,781	$	3,413	$	3,421	$	1,340	$	1,340
After one, but within five years	15,932		15,728		2,185		2,176		7,464		7,722		2,080		2,103
After five, but within ten years	24,580		23,831		233		233		33,446		35,285		—		—
After ten years	484		448		—		—		1,049		1,092		—		—
	57,280		56,248		4,203		4,190		45,372		47,520		3,420		3,443
Mortgage-backed securities, residential	196,977		186,777		—		—		201,152		203,524		—		—
SBA loan pools	3,494		3,448		—		—		16,377		16,485		—		—
Total	$	257,751	$	246,473	$	4,203	$	4,190	$	262,901	$	267,529	$	3,420	$	3,443

~~The~~There were no proceeds from sales ~~and calls~~ of securities resulting in gains or losses for the three months ended September 30, ~~2018~~2019 and ~~2017 are listed below (in thousands):~~

2018 2017
Proceeds $ —
$ 545
Gross gains —
—
Tax expense —
—
2018.

The proceeds from sales ~~and calls~~ of securities resulting in gains or losses for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 are listed below (in thousands):


	2018		2017		2019			2018
Proceeds	$	—	$	1,620	$	15,200		$	—
Gross gains	—		12		79			—
Gross losses					(60		)	—
Tax expense	—		4		5			—

The following tables summarize the investment securities available for sale with unrealized losses at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):


	Less than 12 months				12 months or longer				Total				Less than 12 months				12 months or longer				Total
September 30, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	9,953	$	42	$	—	$	—	$	9,953	$	42
September 30, 2019													Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Mortgage-backed securities, residential	11,248		448		173,420		9,810		184,668		10,258		$	—	$	—	$	67,646	$	385	$	67,646	$	385
Obligations of states and political subdivisions	38,405		746		4,250		270		42,655		1,016
SBA loan pools	214		1		3,234		45		3,448		46		3,353		1		1,525		35		4,878		36
Total temporarily impaired securities	$	59,820	$	1,237	$	180,904	$	10,125	$	240,724	$	11,362	$	3,353	$	1	$	69,171	$	420	$	72,524	$	421


	Less than 12 months				12 months or longer				Total				Less than 12 months				12 months or longer				Total
December 31, 2017	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2018													Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	14,982	$	21	$	—	$	—	$	14,982	$	21	$	—	$	—	$	4,969	$	27	$	4,969	$	27
Mortgage-backed securities, residential	83,562		1,013		131,165		4,153		214,727		5,166		—		—		171,481		6,065		171,481		6,065
Obligations of states and political subdivisions	20,526		133		271		18		20,797		151		10,868		38		21,345		270		32,213		308
Corporate bonds and notes													247		2		—		—		247		2
SBA loan pools	3,937		32		—		—		3,937		32		5,985		17		3,210		45		9,195		62
Total temporarily impaired securities	$	123,007	$	1,199	$	131,436	$	4,171	$	254,443	$	5,370	$	17,100	$	57	$	201,005	$	6,407	$	218,105	$	6,464

Other-Than-Temporary Impairment

As of September 30, ~~2018,~~2019, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage-backed securities. At September 30, ~~2018,~~2019, all of the unrealized losses related to mortgage-backed securities were issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because it is not likely that the Corporation will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at September 30, ~~2018.~~2019.

Equity Investments

Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in the consolidated statement of income. For periods prior to adoption, equity investments were classified as available-for-sale and stated at fair value with unrealized gains and losses reports as a separate component of accumulated other comprehensive income, net of tax.

The Corporation recognized a change in fair value of equity investments of $2.1 million during the three and nine month period ending September 30, 2018, primarily related to the sale of Visa Class B shares during the third quarter of 2018.

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, 2018		December 31, 2017		September 30, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	192,093	$	198,463	$	226,884	$	202,526
Agricultural	287		544		214		328
Commercial mortgages:
Construction	50,353		45,558		48,635		54,476
Commercial mortgages, other	615,221		598,772		602,970		606,694
Residential mortgages	188,636		194,440		184,013		182,724
Consumer loans:
Credit cards	1,393		1,517		—		1,449
Home equity lines and loans	98,239		100,591		92,456		98,145
Indirect consumer loans	157,123		153,060		136,502		149,380
Direct consumer loans	17,293		18,879		14,964		16,184
Total loans, net of deferred origination fees and costs	1,320,638		1,311,824		1,306,638		1,311,906
Interest receivable on loans	3,884		3,758		3,682		3,703
Total recorded investment in loans	$	1,324,522	$	1,315,582	$	1,310,320	$	1,315,609

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

The following tables present the activity in the allowance for loan losses by portfolio segment for the three ~~and nine-month~~month periods ended September 30, ~~2018~~2019 and ~~2017~~2018 (in thousands):


	Three Months Ended September 30, 2018														Three Months Ended September 30, 2019
Allowance for loan losses	Commercial and Agricultural		Commercial Mortgages			Residential Mortgages			Consumer Loans			Total			Commercial and Agricultural		Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance	$	4,969	$	8,740		$	1,445		$	4,491		$	19,645		$	5,476	$	9,545		$	1,229		$	3,406		$	19,656
Charge-offs	—		—			(60		)	(380		)	(440		)	—		—			(19		)	(283		)	(302		)
Recoveries	13		—			—			117			130			29		—			—			99			128
Net recoveries (charge-offs)	13		—			(60		)	(263		)	(310		)	29		—			(19		)	(184		)	(174		)
Provision	285		(91		)	11			95			300			4,651		(285		)	(26		)	101			4,441
Ending balance	$	5,267	$	8,649		$	1,396		$	4,323		$	19,635		$	10,156	$	9,260		$	1,184		$	3,323		$	23,923

Three Months Ended September 30, 2017
Allowance for loan losses Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Beginning balance $ 1,883
$ 7,778
$ 1,517
$ 3,926
$ 15,104
Charge-offs (89 ) (154 ) (133 ) (440 ) (816 )
Recoveries 34
1
—
82
117
Net recoveries (charge-offs) (55 ) (153 ) (133 ) (358 ) (699 )
Provision 99
758
12
420
1,289
Ending balance $ 1,927
$ 8,383
$ 1,396
$ 3,988
$ 15,694

Nine Months Ended September 30, 2018
Allowance for loan losses Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Beginning balance: $ 6,976
$ 8,514
$ 1,316
$ 4,355
$ 21,161
Charge-offs: (3,644 ) (145 ) (225 ) (1,301 ) (5,315 )
Recoveries: 34
2
5
377
418
Net recoveries (charge-offs) (3,610 ) (143 ) (220 ) (924 ) (4,897 )
Provision 1,901
278
300
892
3,371
Ending balance $ 5,267
$ 8,649
$ 1,396
$ 4,323
$ 19,635


	Nine Months Ended September 30, 2017															Three Months Ended September 30, 2018
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total			Commercial and Agricultural		Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	1,589		$	7,270		$	1,523		$	3,871		$	14,253
Charge-offs:	(96		)	(154		)	(193		)	(1,265		)	(1,708		)
Recoveries:	95			4			30			270			399
Beginning balance																$	4,969	$	8,740		$	1,445		$	4,491		$	19,645
Charge-offs																		—			(60		)	(380		)	(440		)
Recoveries																13		—			—			117			130
Net recoveries (charge-offs)	(1		)	(150		)	(163		)	(995		)	(1,309		)	13		—			(60		)	(263		)	(310		)
Provision	339			1,263			36			1,112			2,750			285		(91		)	11			95			300
Ending balance	$	1,927		$	8,383		$	1,396		$	3,988		$	15,694		$	5,267	$	8,649		$	1,396		$	4,323		$	19,635

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



	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



	Nine Months Ended September 30, 2018
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance:	$	6,976		$	8,514		$	1,316		$	4,355		$	21,161
Charge-offs:	(3,644		)	(145		)	(225		)	(1,301		)	(5,315		)
Recoveries:	34			2			5			377			418
Net recoveries (charge-offs)	(3,610		)	(143		)	(220		)	(924		)	(4,897		)
Provision	1,901			278			300			892			3,371
Ending balance	$	5,267		$	8,649		$	1,396		$	4,323		$	19,635

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, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	September 30, 2018										September 30, 2019
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total		Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,713	$	496	$	—	$	—	$	2,209	$	6,141	$	2,519	$	—	$	—	$	8,660
Collectively evaluated for impairment	3,554		8,153		1,396		4,323		17,426		4,015		6,741		1,184		3,323		15,263
Total ending allowance balance	$	5,267	$	8,649	$	1,396	$	4,323	$	19,635	$	10,156	$	9,260	$	1,184	$	3,323	$	23,923


	December 31, 2017										December 31, 2018
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total		Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	5,135	$	802	$	—	$	—	$	5,937	$	1,743	$	446	$	—	$	—	$	2,189
Collectively evaluated for impairment	1,841		7,683		1,316		4,355		15,195		3,640		7,738		1,226		4,151		16,755
Loans acquired with deteriorated credit quality	—		29		—		—		29
Total ending allowance balance	$	6,976	$	8,514	$	1,316	$	4,355	$	21,161	$	5,383	$	8,184	$	1,226	$	4,151	$	18,944


	September 30, 2018										September 30, 2019
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total		Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,181	$	6,572	$	410	$	58	$	9,221	$	6,349	$	13,708	$	407	$	153	$	20,617
Loans collectively evaluated for impairment	190,777		661,003		188,751		274,770		1,315,301		221,376		639,697		184,162		244,468		1,289,703
Total ending loans balance	$	192,958	$	667,575	$	189,161	$	274,828	$	1,324,522	$	227,725	$	653,405	$	184,569	$	244,621	$	1,310,320


	December 31, 2017										December 31, 2018
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total		Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	6,133	$	7,302	$	427	$	64	$	13,926	$	2,128	$	6,146	$	402	$	55	$	8,731
Loans collectively evaluated for impairment	193,443		638,080		194,510		274,831		1,300,864		201,284		656,842		182,823		265,929		1,306,878
Loans acquired with deteriorated credit quality	—		792		—		—		792
Total ending loans balance	$	199,576	$	646,174	$	194,937	$	274,895	$	1,315,582	$	203,412	$	662,988	$	183,225	$	265,984	$	1,315,609

The following table presents loans individually evaluated for impairment recognized by class of loans as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	September 30, 2018						December 31, 2017						September 30, 2019						December 31, 2018
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		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	$	405	$	405	$	—	$	861	$	867	$	—	$	184	$	184	$	—	$	345	$	346	$	—
Commercial mortgages:
Construction	322		323		—		364		365		—		262		263		—		307		308		—
Commercial mortgages, other	4,342		4,309		—		4,135		4,138		—		3,305		3,306		—		4,007		3,935		—
Residential mortgages	432		410		—		450		427		—		436		407		—		424		402		—
Consumer loans:
Home equity lines and loans	57		58		—		64		64		—		176		153		—		54		55		—
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	1,773		1,776		1,713		5,231		5,266		5,135		6,164		6,165		6,141		1,780		1,782		1,743
Commercial mortgages:
Commercial mortgages, other	1,939		1,940		496		2,989		2,799		802		10,221		10,139		2,519		1,902		1,903		446
Total	$	9,270	$	9,221	$	2,209	$	14,094	$	13,926	$	5,937	$	20,748	$	20,617	$	8,660	$	8,819	$	8,731	$	2,189

The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans ~~as of~~for the three and nine-month periods ended September 30, ~~2018~~2019 and ~~2017~~2018 (in thousands):


	Three Months Ended September 30, 2018				Three Months Ended September 30, 2017				Nine Months Ended September 30, 2018				Nine Months Ended September 30, 2017				Three Months Ended September 30, 2019				Three Months Ended September 30, 2018				Nine Months Ended September 30, 2019				Nine Months Ended September 30, 2018
With no related allowance recorded:	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		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	$	526	$	1	$	661	$	8	$	673	$	11	$	666	$	24	$	228	$	—	$	526	$	1	$	277	$	1	$	673	$	11
Commercial mortgages:
Construction	330		3		974		3		344		8		946		9		270		2		330		3		285		7		344		8
Commercial mortgages, other	4,339		5		4,946		5		4,257		16		5,973		73		3,372		3		4,339		5		3,630		9		4,257		16
Residential mortgages	413		2		439		2		420		6		416		6		396		36		413		2		396		40		420		6
Consumer loans:
Home equity lines & loans	59		1		68		1		61		2		76		2		156		3		59		1		134		4		61		2
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	1,573		1		291		3		3,359		2		145		4		3,983		—		1,573		1		2,508		—		3,359		2
Commercial mortgages:
Commercial mortgages, other	2,040		1		4,721		4		2,419		4		3,989		10		10,240		—		2,040		1		6,881		—		2,419		4
Consumer loans:
Home equity lines and loans	—		—		—		—		—		—		180		—
Total	$	9,280	$	14	$	12,100	$	26	$	11,533	$	49	$	12,391	$	128	$	18,645	$	44	$	9,280	$	14	$	14,111	$	61	$	11,533	$	49

(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, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	Non-accrual				Loans Past Due 90 Days or More and Still Accruing				Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	September 30, 2018		December 31, 2017		September 30, 2018		December 31, 2017		September 30, 2019		December 31, 2018		September 30, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	2,075	$	5,250	$	—	$	5	$	6,335	$	2,048	$	53	$	10
Commercial mortgages:
Construction	115		135		—		—		87		109		—		—
Commercial mortgages, other	5,849		6,520		—		—		13,250		5,529		—		—
Residential mortgages	2,654		3,160		—		—		2,455		2,655		—		—
Consumer loans:
Credit cards	—		—		14		24		—		—		—		9
Home equity lines and loans	1,289		1,310		—		—		722		1,183		—		—
Indirect consumer loans	616		935		—		—		613		693		—		—
Direct consumer loans	31		14		—		—		6		37		—		—
Total	$	12,629	$	17,324	$	14	$	29	$	23,468	$	12,254	$	53	$	19

The following tables present the aging of the recorded investment in loans as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	September 30, 2018														September 30, 2019
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Acquired with Deteriorated Credit Quality		Loans Not Past Due		Total		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	$	5,894	$	121	$	14	$	6,029	$	—	$	186,641	$	192,670	$	1,782	$	249	$	302	$	2,333	$	225,177	$	227,510
Agricultural	—		—		—		—		—		288		288		—		—		—		—		215		215
Commercial mortgages:
Construction	—		—		—		—		—		50,504		50,504		279		—		—		279		48,490		48,769
Commercial mortgages, other	2,137		25		436		2,598		—		614,473		617,071		2,176		402		1,993		4,571		600,065		604,636
Residential mortgages	1,324		510		946		2,780		—		186,381		189,161		1,906		674		1,258		3,838		180,731		184,569
Consumer loans:
Credit cards	5		4		14		23		—		1,370		1,393
Home equity lines and loans	244		111		816		1,171		—		97,366		98,537		36		15		496		547		92,205		92,752
Indirect consumer loans	1,424		240		305		1,969		—		155,557		157,526		1,356		305		349		2,010		134,830		136,840
Direct consumer loans	59		21		23		103		—		17,269		17,372		63		14		4		81		14,948		15,029
Total	$	11,087	$	1,032	$	2,554	$	14,673	$	—	$	1,309,849	$	1,324,522	$	7,598	$	1,659	$	4,402	$	13,659	$	1,296,661	$	1,310,320


	December 31, 2017														December 31, 2018
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Acquired with Deteriorated Credit Quality		Loans Not Past Due		Total		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	$	1,689	$	999	$	20	$	2,708	$	—	$	196,322	$	199,030	$	284	$	61	$	71	$	416	$	202,667	$	203,083
Agricultural	—		—		—		—		—		546		546		16		—		—		16		313		329
Commercial mortgages:
Construction	—		—		—		—		—		45,688		45,688		—		—		—		—		54,626		54,626
Commercial mortgages, other	2,399		115		748		3,262		792		596,432		600,486		6,273		158		169		6,600		601,762		608,362
Residential mortgages	1,399		939		1,474		3,812		—		191,125		194,937		2,204		516		1,026		3,746		179,479		183,225
Consumer loans:
Credit cards	17		9		24		50		—		1,466		1,516		1		3		9		13		1,437		1,450
Home equity lines and loans	265		31		983		1,279		—		99,599		100,878		279		97		730		1,106		97,360		98,466
Indirect consumer loans	1,822		484		581		2,887		—		150,645		153,532		1,511		319		436		2,266		147,540		149,806
Direct consumer loans	48		28		2		78		—		18,891		18,969		120		53		31		204		16,058		16,262
Total	$	7,639	$	2,605	$	3,832	$	14,076	$	792	$	1,300,714	$	1,315,582	$	10,688	$	1,207	$	2,472	$	14,367	$	1,301,242	$	1,315,609

Troubled Debt Restructurings:

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

As of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the Corporation has a recorded investment in TDRs of ~~$6.6~~$9.3 million and ~~$7.7~~$6.8 million, respectively. There were specific reserves of ~~$0.5~~$2.4 million and ~~$0.7~~$0.9 million allocated for TDRs at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. As of September 30, ~~2018,~~2019, TDRs totaling $0.9 million were accruing interest under the modified terms and ~~$5.7~~$8.4 million were on non-accrual status. As of December 31, ~~2017,~~2018, TDRs totaling ~~$1.7~~$0.8 million were accruing interest under the modified terms and $6.0 million were on non-accrual status. The Corporation had committed no additional amounts as of both September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, to customers with outstanding loans that are classified as TDRs.

~~There~~During the three months ended September 30, 2019, the terms of a loan was modified as a TDR, while there were no loans modified as TDRs during the three ~~month period~~months ended September 30, ~~2018 while the terms of certain loans were modified as TDRs during the three month period ended September 30, 2017.~~2018. The modification of the terms of ~~two~~one commercial ~~and industrial~~real estate term ~~loans~~loan during the three months ended September 30, ~~2017~~2019 included a reduction of the ~~schedule~~scheduled amortized payments for greater than a three month ~~period, the release of collateral related to one of the loans, and the extension of a maturity date.~~

period.

During the nine months ended September 30, ~~2018~~2019 and ~~2017,~~2018, the terms of certain loans were modified as TDRs. 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 modification of the terms of one commercial and industrial term loan during the nine months ended September 30, 2018 included an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. In addition to the modification noted above, the modification of two commercial and industrial term loans and one line of credit during the nine months ended September 30, 2017 included consolidating the loans into one commercial and industrial loan, extending the maturity date by approximately two years, and lowering the monthly payment. An additional piece of equipment was taken as collateral, but was not considered to be of greater value than the concession given. The modification of the terms of one commercial mortgage loan during the nine months ended September 30, 2017 included a reduction of the scheduled amortized payments of the loan for greater than a three month period. The modification of the terms of a residential mortgage loan during the nine months ended September 30, 2017 included an extension of the maturity date by approximately five years and a postponement of the scheduled amortized past due payments to the end of the loan.

The following ~~table presents~~tables present loans by class modified as TDRs that occurred during the three ~~month period~~months ended September 30, ~~2017~~2019 and 2018 (dollars in thousands):

September 30, 2017 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial 2
$ 506
$ 506
Total 2
$ 506
$ 506



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

The ~~TDRs~~TDR described above ~~increased~~did not increase the allowance for loan losses ~~by $0.1 million~~ and resulted in no charge-offs during the three month period ended September 30, ~~2017.~~2019.

The following tables present loans by class modified as TDRs that occurred during the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 (dollars in thousands):

September 30, 2018 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:

Commercial and agricultural:

Commercial and industrial 1
$ 100
$ 100
Total 1
$ 100
$ 100



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


September 30, 2017	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
September 30, 2018						Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial	3	$	677	$	677	1	$	100	$	100
Commercial mortgages:
Commercial mortgages	1	$	166	$	166
Residential mortgages	1	105		105
Total	5	$	948	$	948	1	$	100	$	100

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. The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the nine months ended September 30, 2018. ~~The TDRs described above increased the allowance for loan losses by $0.2 million and resulted in no charge-offs during the nine months ended September 30, 2017.~~

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, ~~2018~~2019 and ~~2017.~~

2018.

Credit Quality Indicators

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

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

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

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

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

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

Commercial loans not meeting the criteria above to be considered criticized or classified are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans performing under terms of the loan notes. Based on the analyses performed as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):


	September 30, 2018														September 30, 2019
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loans acquired with deteriorated credit quality		Total		Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	179,502	$	9,421	$	2,021	$	1,726	$	—	$	192,670	$	—	$	210,620	$	4,250	$	10,997	$	1,643	$	227,510
Agricultural	—		288		—		—		—		—		288		—		215		—		—		—		215
Commercial mortgages:
Construction	—		50,389		—		115		—		—		50,504		—		48,682		—		87		—		48,769
Commercial mortgages	—		592,724		10,793		12,252		1,302		—		617,071		—		572,663		10,976		16,522		4,475		604,636
Residential mortgages	186,507		—		—		2,654		—		—		189,161		182,114		—		—		2,455		—		184,569
Consumer loans:
Credit cards	1,393		—		—		—		—		—		1,393
Home equity lines and loans	97,248		—		—		1,289		—		—		98,537		92,030		—		—		722		—		92,752
Indirect consumer loans	156,910		—		—		616		—		—		157,526		136,227		—		—		613		—		136,840
Direct consumer loans	17,341		—		—		31		—		—		17,372		15,023		—		—		6		—		15,029
Total	$	459,399	$	822,903	$	20,214	$	18,978	$	3,028	$	—	$	1,324,522	$	425,394	$	832,180	$	15,226	$	31,402	$	6,118	$	1,310,320


	December 31, 2017														December 31, 2018
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loans acquired with deteriorated credit quality		Total		Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	186,556	$	4,447	$	6,605	$	1,422	$	—	$	199,030	$	—	$	190,666	$	4,452	$	6,222	$	1,743	$	203,083
Agricultural	—		546		—		—		—		—		546		—		329		—		—		—		329
Commercial mortgages:
Construction	—		45,553		—		135		—		—		45,688		—		54,517		—		109		—		54,626
Commercial mortgages	—		575,321		9,665		13,331		1,377		792		600,486		—		574,221		16,830		15,948		1,363		608,362
Residential mortgages	191,777		—		—		3,160		—		—		194,937		180,570		—		—		2,655		—		183,225
Consumer loans:
Credit cards	1,516		—		—		—		—		—		1,516		1,450		—		—		—		—		1,450
Home equity lines and loans	99,568		—		—		1,310		—		—		100,878		97,283		—		—		1,183		—		98,466
Indirect consumer loans	152,598		—		—		934		—		—		153,532		149,113		—		—		693		—		149,806
Direct consumer loans	18,955		—		—		14		—		—		18,969		16,225		—		—		37		—		16,262
Total	$	464,414	$	807,976	$	14,112	$	25,489	$	2,799	$	792	$	1,315,582	$	444,641	$	819,733	$	21,282	$	26,847	$	3,106	$	1,315,609

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following ~~table presents~~tables present the recorded investment in residential and consumer loans based on payment activity as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	September 30, 2018										September 30, 2019
			Consumer Loans										Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans		Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	186,507	$	1,393	$	97,248	$	156,910	$	17,341	$	182,114	$	—	$	92,030	$	136,227	$	15,023
Non-Performing	2,654		—		1,289		616		31		2,455		—		722		613		6
	$	189,161	$	1,393	$	98,537	$	157,526	$	17,372	$	184,569	$	—	$	92,752	$	136,840	$	15,029


	December 31, 2017										December 31, 2018
			Consumer Loans										Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans		Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	191,777	$	1,516	$	99,568	$	152,598	$	18,955	$	180,570	$	1,450	$	97,283	$	149,113	$	16,225
Non-Performing	3,160		—		1,310		934		14		2,655		—		1,183		693		37
	$	194,937	$	1,516	$	100,878	$	153,532	$	18,969	$	183,225	$	1,450	$	98,466	$	149,806	$	16,262

NOTE 5 FAIR VALUE

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

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

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

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

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

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

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

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

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

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

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

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


			Fair Value Measurement at September 30, 2018 Using								Fair Value Measurement at September 30, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	10,453	$	—	$	10,453	$	—
Mortgage-backed securities, residential	186,777		—		186,777		—		$	203,524	$	—	$	203,524	$	—
Obligations of states and political subdivisions	45,545		—		45,545		—		47,270		—		47,270		—
Corporate bonds and notes	250		—		250		—		250		—		250		—
SBA loan pools	3,448		—		3,448		—		16,485		—		16,485		—
Total available for sale securities	$	246,473	$	—	$	246,473	$	—	$	267,529	$	—	$	267,529	$	—

Equity investments	$	1,153	$	1,153	$	—	$	—
Equity investments, at fair value									$	1,231	$	1,231	$	—	$	—
Derivative assets	2,503		—		2,503		—		7,885		—		7,885		—

Financial Liabilities:
Derivative liabilities	$	2,516	$	—	$	2,503	$	13	$	8,311	$	—	$	7,885	$	426

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



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

Equity investments, at fair value	$	1,075	$	1,075	$	—	$	—
Derivative assets	3,142		—		3,142		—

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

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

Fair Value Measurement at December 31, 2017 Using
Financial Assets: Fair Value
Quoted Prices in Active Markets for Identical Assets
(Level 1)

Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises $ 15,491
$ —
$ 15,491
$ —
Mortgage-backed securities, residential 219,909
—
219,909
—
Obligations of states and political subdivisions 53,132
—
53,132
—
Corporate bonds and notes 251
—
251
—
SBA loan pools 4,308
—
4,308
—
Total available for sale securities $ 293,091
$ —
$ 293,091
$ —

Equity investments $ 1,192
$ 1,192
$ —
$ —
Derivative assets 974
—
974
—

Financial Liabilities:
Derivative liabilities $ 1,049
$ —
$ 974
$ 75

There were no transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2017. During the three months ended September 30, 2017, the Corporation transferred corporate bonds with a fair market value of $242 thousand from Level 3 to Level 2 due to the availability of pricing in secondary markets.

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, ~~2018~~2019 and ~~September 30, 2017~~2018 (in thousands):


	Assets (Liabilities)											Assets (Liabilities)
	Corporate Bonds and Notes					Derivative Liabilities						Corporate Bonds and Notes				Derivative Liabilities
	September 30, 2018		September 30, 2017			September 30, 2018			September 30, 2017			September 30, 2019		September 30, 2018		September 30, 2019			September 30, 2018
Balance of recurring Level 3 assets at July 1	$	—	$	252		$	(18	)	$	(71	)	$	—	$	—	$	(365	)	$	(18	)
Derivative instruments entered into	—		—			—			—			—		—		(7		)	—
Total gains or losses for the period:
Included in earnings - other non-interest income	—		—			5			—			—		—		(54		)	5
Included in other comprehensive income	—		(10		)	—			—			—		—		—			—
Transfers out of Level 3	—		(242		)	—			—			—		—		—			—
Balance of recurring Level 3 assets at September 30	$	—	$	—		$	(13	)	$	(71	)	$	—	$	—	$	(426	)	$	(13	)

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, ~~2018~~2019 and September 30, ~~2017~~2018 (in thousands):


	Assets (Liabilities)											Assets (Liabilities)
	Corporate Bonds and Notes					Derivative Liabilities						Corporate Bonds and Notes				Derivative Liabilities
	September 30, 2018		September 30, 2017			September 30, 2018			September 30, 2017			September 30, 2019		September 30, 2018		September 30, 2019			September 30, 2018
Balance of recurring Level 3 assets at January 1	$	—	$	250		$	(75	)	$	(68	)	$	—	$	—	$	(140	)	$	(75	)
Derivative instruments entered into	—		—			—			(1		)	—		—		(42		)	—
Total gains or losses for the period:
Included in earnings - other non-interest income	—		—			62			(2		)	—		—		(244		)	62
Included in other comprehensive income	—		(8		)	—			—			—		—		—			—
Transfers out of Level 3	—		(242		)	—			—			—		—		—			—
Balance of recurring Level 3 assets at September 30	$	—	$	—		$	(13	)	$	(71	)	$	—	$	—	$	(426	)	$	(13	)

The following table presents information related to Level 3 recurring fair value measurements at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):

Description

Fair Value at
September 30,
2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at September 30, 2018

Fair Value at
September 30,
2019

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at September 30, 2019

Derivative liabilities

Historical trend

Credit default rate

8.04% - 8.04%
[8.04%]

426

Historical trend

Credit default rate

5.65% - 5.65%
[5.65%]

Description

Fair Value at
December 31,
2017

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at December 31, 2017

Fair Value at
December 31,
2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at December 31, 2018

Derivative liabilities

Historical trend

Credit default rate

5.67% - 5.67%
[5.67%]

140

Historical trend

Credit default rate

7.46% - 7.46%
[7.46%]

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


			Fair Value Measurement at September 30, 2018 Using										Fair Value Measurement at September 30, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial and agricultural:
Commercial and industrial	$	12	$	—	$	—	$	12	$	—
Commercial mortgages:
Commercial mortgages											$	7,627	$	—	$	—	$	7,627	$	(1,673	)
Total impaired loans	$	12	$	—	$	—	$	12	$	—	$	7,627	$	—	$	—	$	7,627	$	(1,673	)
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	375	$	—	$	—	$	375	$	—	$	62	$	—	$	—	$	62	$	—
Residential mortgages	204		—		—		204		—		62		—		—		62		—
Consumer loans:
Home equity lines and loans	148		—		—		148		—		86		—		—		86		—
Total other real estate owned, net	$	727	$	—	$	—	$	727	$	—	$	210	$	—	$	—	$	210	$	—


			Fair Value Measurement at December 31, 2017 Using											Fair Value Measurement at December 31, 2018 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)			Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial and agricultural:
Commercial and industrial	$	96	$	—	$	—	$	96	$	(70	)
Commercial mortgages:
Commercial mortgages	411		—		—		411		(105		)	$	1,456	$	—	$	—	$	1,456	$	240
Total impaired loans	$	507	$	—	$	—	$	507	$	(175	)	$	1,456	$	—	$	—	$	1,456	$	240
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	1,483	$	—	$	—	$	1,483	$	(43	)	$	213	$	—	$	—	$	213	$	—
Residential mortgages	382		—		—		382		—			204		—		—		204		—
Consumer loans:
Home equity lines and loans	75		—		—		75		—			157		—		—		157		(14		)
Total other real estate owned, net	$	1,940	$	—	$	—	$	1,940	$	(43	)	$	574	$	—	$	—	$	574	$	(14	)

The following tables present information related to Level 3 non-recurring fair value measurement at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):

Description

Fair Value at September 30, 2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
September 30, 2018

Fair Value at September 30, 2019

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
September 30, 2019

Impaired loans:

Commercial and agricultural:

Commercial and industrial

Sales comparison

Discount to appraised value

0.00% - 0.00%
[0.00%]

Commercial mortgages:

Commercial mortgages

7,627

Sales comparison

Discount to appraised value

10.00% - 15.43%
[10.13%]

7,627

OREO:

Commercial mortgages:

Commercial mortgages

375

Sales comparison

Discount to appraised value

10.00% - 22.00%
[14.56%]

Sales comparison

Discount to appraised value

22.00% - 22.00%
[22.00%]

Residential mortgages

204

Sales comparison

Discount to appraised value

20.80% - 39.78%
[22.94%]

Sales comparison

Discount to appraised value

20.80% -20.80%
[20.80%]

Consumer loans:

Home equity lines and loans

148

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

727

210

Description

Fair Value at December 31, 2017

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
December 31, 2017

Fair Value at December 31, 2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
December 31, 2018

Impaired loans:

Commercial and agricultural:

Commercial and industrial

Sales comparison

Discount to appraised value

0.00% - 36.07%
[33.02%]

1,456

Sales comparison

Discount to appraised value

11.76% - 11.76%
[11.76%]

Commercial mortgages:

Commercial mortgages

411

Sales comparison

Discount to appraised value

10.00% - 89.98%
[51.35%]

507

1,456

OREO:

Commercial mortgages:

Commercial mortgages

1,483

Sales comparison

Discount to appraised value

10.00% - 22.95%
[19.75%]

213

Sales comparison

Discount to appraised value

10.00% - 24.80%
[17.72%]

Residential mortgages

382

Sales comparison

Discount to appraised value

17.28% - 27.97%
[20.77%]

204

Sales comparison

Discount to appraised value

20.80% - 39.78%
[22.94%]

Consumer loans:

Home equity lines and loans

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

157

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

1,940

574

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of other financial instruments, at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, are as follows (in thousands):


	September 30, 2018										September 30, 2019
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)		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	$	31,831	$	31,831	$	—	$	—	$	31,831	$	36,497	$	36,497	$	—	$	—	$	36,497
Interest-earning deposits in other financial institutions	82,081		82,081		—		—		82,081		109,801		109,801		—		—		109,801
Equity investments	1,153		1,153		—		—		1,153		834		834		—		—		834
Securities available for sale	246,473		—		246,473		—		246,473
Securities held to maturity	4,203		—		2,067		2,123		4,190		3,420		—		2,318		1,125		3,443
FHLBNY and FRBNY stock	3,138		—		—		—		N/A		3,091		—		—		—		N/A
Loans, net and loans held for sale	1,302,718		—		—		1,283,057		1,283,057		1,284,028		—		—		1,262,536		1,262,536
Accrued interest receivable	4,768		17		867		3,884		4,768		4,714		89		943		3,682		4,714
Derivative assets	2,503		—		2,503		—		2,503

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,431,096	$	1,431,096	$	—	$	—	$	1,431,096	$	1,406,681	$	1,406,681	$	—	$	—	$	1,406,681
Time deposits	144,901		—		145,401		—		145,401		169,825		—		172,617		—		172,617
Accrued interest payable	176		29		147		—		176		326		30		296		—		326
Derivative liabilities	2,516		—		2,503		13		2,516

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



	December 31, 2018
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	33,040	$	33,040	$	—	$	—	$	33,040
Interest-earning deposits in other financial institutions	96,932		96,932		—		—		96,932
Equity investments	834		834		—		—		834
Securities held to maturity	4,875		—		1,838		3,020		4,858
FHLBNY and FRBNY stock	3,138		—		—		—		N/A
Loans, net and loans held for sale	1,293,464		—		—		1,287,495		1,287,495
Accrued interest receivable	4,480		80		697		3,703		4,480

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

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, 2019, the weighted average remaining lease term was 11.4 years with a weighted average discount rate of 3.39%. Rent expense was $0.2 million for the three months ended September 30, 2019. Rent expense was $0.5 million for the nine months ended September 30, 2019. Certain leases provide for increases in future minimum annual rent payments as defined in the lease agreements. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees.

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

December 31, 2017
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 $ 27,966
$ 27,966
$ —
$ —
$ 27,966
Interest-earning deposits in other financial institutions 2,763
2,763
—
—
2,763
Equity investments 1,192
1,192
—
—
1,192
Securities available for sale 293,091
—
293,091
—
293,091
Securities held to maturity 3,781
—
1,830
1,946
3,776
FHLBNY and FRBNY stock 5,784
—
—
—
N/A
Loans, net 1,291,205
—
—
1,289,584
1,289,584
Loans held for sale 542
—
542
—
542
Accrued interest receivable 4,642
1
867
3,774
4,642
Derivative assets 974
—
974
—
974

Financial liabilities:

Deposits:

Demand, savings, and insured money market accounts $ 1,349,084
$ 1,349,084
$ —
$ —
$ 1,349,084
Time deposits 118,362
—
118,598
—
118,598
Securities sold under agreements to repurchase 10,000
—
10,058
—
10,058
FHLBNY overnight advances 57,700
—
57,700
—
57,700
FHLBNY term advances 2,000
—
2,001
—
2,001
Accrued interest payable 148
24
124
—
148
Derivative liabilities 1,049
—
974
75
1,049



	September 30, 2019			December 31, 2018
Operating lease right-of-use asset	$	8,592		$	—
Less: accumulated amortization	(541		)	—
Operating lease right-of-use-assets, net	$	8,051		$	—

~~(1) Fair~~

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



Year	Amount
2019	$	231
2020	932
2021	899
2022	831
2023	851
2024 and thereafter	6,091
Total minimum lease payments	9,835
Less: amount representing interest	(1,710		)
Present value of net minimum lease payments	$	8,125

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

Finance Leases

The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of September 30, 2019, the weighted average remaining lease term was 13.2 years with a weighted average discount rate of 3.34%. The Corporation has included these leases in premises and equipment as of September 30, 2019 and December 31, 2018 as follows (in thousands):



	September 30, 2019			December 31, 2018
Buildings	$	5,572		$	5,572
Less: accumulated depreciation	(1,458		)	(1,208		)
Net book value	$	4,114		$	4,364

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



Year	Amount
2019	$	92
2020	376
2021	388
2022	391
2023	391
2024 and thereafter	3,639
Total minimum lease payments	5,277
Less: amount representing interest	(1,137		)
Present value of net minimum lease payments	$	4,140

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

Related Party Transactions

The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a ~~specific point in time, based on relevant market information~~lease agreement through July, 2020 from a member of the Corporation's Board of Directors with monthly rent expense totaling $4 thousand per month. Rent paid to this Board of Directors member totaled $12 thousand and ~~information about~~$12 thousand for the ~~financial instrument. These estimates are subjective in nature~~three month periods ended September 30, 2019 and ~~involve uncertainties~~2018, respectively. Rent paid to this Board of Directors member totaled $40 thousand and ~~matters~~$36 thousand for the nine month periods ended September 30, 2019 and 2018, respectively.

The Bank leases its branch located at 2 Rush Street, Schenectady, New York, under a lease agreement through February 2033 from a member of ~~significant judgment~~the Corporation's Board of Directors with monthly rent expense totaling $8 thousand per month. Rent paid to this Board of Directors member totaled $24 thousand and ~~therefore, cannot be determined with precision. Changes in assumptions could significantly affect~~$24 thousand for the ~~estimates.~~three month periods ended September 30, 2019 and 2018, respectively. Rent paid to this Board of Directors member totaled $69 thousand and $60 thousand for the nine month periods ended September 30, 2019 and 2018, respectively.

NOTE 67 GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill included in the core banking segment during the nine month periods ended September 30, ~~2018~~2019 and ~~2017~~2018 were as follows (in thousands):


	2018		2017		2019		2018
Beginning of year	$	21,824	$	21,824	$	21,824	$	21,824
Acquired goodwill	—		—		—		—
Ending balance September 30,	$	21,824	$	21,824	$	21,824	$	21,824

Acquired intangible assets were as follows at September 30, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	At September 30, 2018				At December 31, 2017				At September 30, 2019				At December 31, 2018
	Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization
Core deposit intangibles	$	5,975	$	5,489	$	5,975	$	5,196	$	5,975	$	5,776	$	5,975	$	5,576
Other customer relationship intangibles	5,633		4,592		5,633		4,327		5,633		4,946		5,633		4,681
Total	$	11,608	$	10,081	$	11,608	$	9,523	$	11,608	$	10,722	$	11,608	$	10,257

Aggregate amortization expense was $0.2 million for both of the three month periods ended September 30, ~~2018~~2019 and ~~2017.~~2018. Aggregate amortization expense was ~~$0.6~~$0.5 million and ~~$0.7~~$0.6 million for the nine month periods ended September 30, 2019 and 2018, ~~and 2017,~~ respectively.

The remaining estimated aggregate amortization expense at September 30, ~~2018~~2019 is listed below (in thousands):


Year	Estimated Expense		Estimated Expense
2018	$	176
2019	609		$	144
2020	484		484
2021	258		258
2022	—		—
2023			—
Total	$	1,527	$	886

~~NOTE 7 SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE~~

The Corporation enters into sales of securities under agreements to repurchase and the amounts received under these agreements represent borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the consolidated balance sheets.

The Corporation has no control over the market value of the securities which fluctuate due to market conditions, however, the Corporation is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. The Corporation manages this risk by utilizing highly marketable and easily priced securities, monitoring these securities for significant changes in market valuation routinely, and maintaining an unpledged securities portfolio believed to be sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.

~~There were no securities sold under agreements to repurchase as of September 30, 2018.~~

~~A summary of securities sold under agreements to repurchase as of December 31, 2017 is as follows (in thousands):~~

December 31, 2017
Overnight and Continuous Up to 1 Year 1 - 3 Years 3+ Years Total
Mortgage-backed securities, residential $ —
$ 11,798
$ —
$ —
$ 11,798
Excess collateral held —
(1,798 ) —
—
(1,798 )
Gross amount of recognized liabilities for repurchase agreements $ —
$ 10,000
$ —
$ —
$ 10,000

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, ~~2018~~2019 and December 31, ~~2017~~2018 (in thousands):


	September 30, 2018				December 31, 2017				September 30, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	14,516	$	26,544	$	16,019	$	28,591	$	17,021	$	28,797	$	9,137	$	18,033
Unused lines of credit	1,246		202,355		1,604		200,353		1,431		218,517		848		212,601
Standby letters of credit	—		15,627		—		15,022		—		15,583		—		16,161

On June 15, 2018, the Bank, through mediation, reached a resolution by way of a settlement agreement in the matter of Fane v. Chemung Canal Trust Company (the “Action”). The parties agreed to release each other from any and all liabilities, claims, counterclaims, demands, charges, complaints and causes of action, to dismiss the Action with prejudice, and the Bank agreed to pay Fane $3.3 million in connection with the settlement of the Action. As of ~~March 31,~~January 1, 2018, the Corporation had a legal reserve of $2.3 million for the Action and therefore recognized an additional $1.0 million of legal expense during ~~the second quarter of~~ 2018.

In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of September 30, ~~2018,~~2019, we believe that we are not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.

NOTE 9 ACCUMULATED OTHER COMPREHENSIVE LOSS

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

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

Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total
Balance at July 1, 2018 $ (7,223 ) $ (6,898 ) $ (14,121 )
Other comprehensive income before reclassification (1,179 ) —
(1,179 )
Amounts reclassified from accumulated other comprehensive income —
13
13
Net current period other comprehensive income (loss) (1,179 ) 13
(1,166 )
Balance at September 30, 2018 $ (8,402 ) $ (6,885 ) $ (15,287 )



	Unrealized Gains and Losses on Securities Available for Sale		Defined Benefit and Other Benefit Plans			Total
Balance at July 1, 2019	$	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			Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at July 1, 2017	$	(615	)	$	(6,357	)	$	(6,972	)
Balance at July 1, 2018										$	(7,223	)	$	(6,898	)	$	(14,121	)
Other comprehensive loss before reclassification	(324		)	—			(324		)	(1,179		)	—			(1,179		)
Amounts reclassified from accumulated other comprehensive income	—			21			21			—			13			13
Net current period other comprehensive income (loss)	(324		)	21			(303		)	(1,179		)	13			(1,166		)
Balance at September 30, 2017	$	(939	)	$	(6,336	)	$	(7,275	)
Balance at September 30, 2018										$	(8,402	)	$	(6,885	)	$	(15,287	)

Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total
Balance at January 1, 2018 $ (3,415 ) $ (6,925 ) $ (10,340 )
Cumulative effect of account change (202 ) —
(202 )
Balance at January 1, 2018, as adjusted (3,617 ) (6,925 ) (10,542 )
Other comprehensive income before reclassification (4,785 ) —
(4,785 )
Amounts reclassified from accumulated other comprehensive income —
40
40
Net current period other comprehensive income (loss) (4,785 ) 40
(4,745 )
Balance at September 30, 2018 $ (8,402 ) $ (6,885 ) $ (15,287 )



	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at January 1, 2019	$	(4,646	)	$	(6,765	)	$	(11,411	)
Other comprehensive income before reclassification	8,109			—			8,109
Amounts reclassified from accumulated other comprehensive income	(14		)	40			26
Net current period other comprehensive income (loss)	8,095			40			8,135
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			Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at January 1, 2017	$	(4,356	)	$	(6,398	)	$	(10,754	)
Balance at January 1, 2018										$	(3,415	)	$	(6,925	)	$	(10,340	)
Cumulative effect of account change										(202		)	—			(202		)
Balance at January 1, 2018, as adjusted										(3,617		)	(6,925		)	(10,542		)
Other comprehensive income before reclassification	3,425			—			3,425			(4,785		)	—			(4,785		)
Amounts reclassified from accumulated other comprehensive income	(8		)	62			54			—			40			40
Net current period other comprehensive income	3,417			62			3,479			(4,785		)	40			(4,745		)
Balance at September 30, 2017	$	(939	)	$	(6,336	)	$	(7,275	)
Balance at September 30, 2018										$	(8,402	)	$	(6,885	)	$	(15,287	)

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


Details about Accumulated Other Comprehensive Income Components	Three Months Ended September 30,						Affected Line Item in the Statement Where Net Income is Presented	Three Months Ended September 30,						Affected Line Item in the Statement Where Net Income is Presented
	2018			2017				2019			2018
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale	$	—		$	—		Net gains (losses) on securities transactions	$	—		$	—		Net gains on securities transactions
Tax effect	—			—			Income tax expense	—			—			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	$	(55	)	$	(55	)	Other components of net periodic pension and postretirement benefits
Actuarial losses (a)	72			88			Other components of net periodic pension and postretirement benefits	72			72			Other components of net periodic pension and postretirement benefits
Tax effect	(4		)	(12		)	Income tax expense	(4		)	(4		)	Income tax expense
Net of tax	13			21				13			13
Total reclassification for the period, net of tax	$	13		$	21			$	13		$	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	Nine Months Ended September 30,						Affected Line Item in the Statement Where Net Income is Presented
	2018			2017				2019			2018
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale	$	—		$	(12	)	Net gains (losses) on securities transactions	$	(19	)	$	—		Net gains on securities transactions
Tax effect	—			4			Income tax expense	5			—			Income tax expense
Net of tax	—			(8		)		(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	(165		)	(165		)	Other components of net periodic pension and postretirement benefits
Actuarial losses (a)	218			264			Other components of net periodic pension and postretirement benefits	218			218			Other components of net periodic pension and postretirement benefits
Tax effect	(13		)	(37		)	Income tax expense	(13		)	(13		)	Income tax expense
Net of tax	40			62				40			40
Total reclassification for the period, net of tax	$	40		$	54			$	26		$	40

(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, ~~2018~~2019 and ~~2017~~2018 (in thousands). Items outside the scope of ASC 606 are noted as such.

Three Months Ended September 30, 2018
Revenue by Operating Segment: Core Banking WMG
Holding Company, CFS, and CRM^(c)
Total
Non-interest income
Service charges on deposit accounts
Overdraft fees $ 1,035
$ —
$ —
$ 1,035
Other 196
—
—
196
Interchange revenue from debit card transactions 982
—
—
982
WMG fee income —
2,406
—
2,406
CFS fee and commission income —
—
120
120
Net gains (losses) on sales of OREO 123
—
—
123
Net gains on sales of loans^(a)
79
—
—
79
Loan servicing fees^(a)
22
—
—
22
Changes in fair value of equity investments^(a)
2,140
—
1
2,141
Other^(a)
410
—
(133 ) 277
Total non-interest income (loss) $ 4,987
$ 2,406
$ (12 ) $ 7,381


	Three Months Ended September 30, 2017 (b)									Three Months Ended September 30, 2019
Revenue by Operating Segment:	Core Banking		WMG		Holding Company, CFS, and CRM^(c)			Total		Core Banking			WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	1,142	$	—	$	—		$	1,142	$	959		$	—	$	—		$	959
Other	127		—		—			127		182			—		—			182
Interchange revenue from debit card transactions	925		—		—			925		1,058			—		—			1,058
WMG fee income	—		2,147		—			2,147		—			2,315		—			2,315
CFS fee and commission income	—		—		139			139		—			—		145			145
Net gains (losses) on sales of OREO	30		—		—			30		(1		)	—		—			(1		)
Net gains on sales of loans^(a)	71		—		—			71		69			—		—			69
Loan servicing fees^(a)	21		—		—			21		25			—		—			25
Net gains on sales of securities^(a)	—		—		—			—		—			—		—			—
Changes in fair value of equity investments^(a)	32		—		—			32		3			—		(13		)	(10		)
Other^(a)	641		—		(109		)	532		269			—		(55		)	214
Total non-interest income	$	2,989	$	2,147	$	30		$	5,166
Total non-interest income (loss)										$	2,564		$	2,315	$	77		$	4,956



	Three Months Ended September 30, 2018
Revenue by Operating Segment:	Core Banking		WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	1,035	$	—	$	—		$	1,035
Other	196		—		—			196
Interchange revenue from debit card transactions	982		—		—			982
WMG fee income	—		2,406		—			2,406
CFS fee and commission income	—		—		120			120
Net gains (losses) on sales of OREO	123		—		—			123
Net gains on sales of loans^(a)	79		—		—			79
Loan servicing fees^(a)	22		—		—			22
Net gains on sales of securities^(a)	—		—		—			—
Changes in fair value of equity investments^(a)	2,140		—		1			2,141
Other^(a)	410		—		(133		)	277
Total non-interest income	$	4,987	$	2,406	$	(12	)	$	7,381

(a) Not within scope of ASC 606.

(b) ~~The Corporation elected the modified retrospective approach of adoption; therefore, prior period balances are presented under legacy GAAP and may not be comparable to current year presentation.~~

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

Nine Months Ended September 30, 2018
Revenue by Operating Segment: Core Banking WMG
Holding Company, CFS, and CRM^(c)
Total
Non-interest income
Service charges on deposit accounts
Overdraft fees $ 2,939
$ —
$ —
$ 2,939
Other 600
—
—
600
Interchange revenue from debit card transactions 3,013
—
—
3,013
WMG fee income —
7,095
—
7,095
CFS fee and commission income —
—
365
365
Net gains (losses) on sales of OREO 119
—
—
119
Net gains on sales of loans^(a)
184
—
—
184
Loan servicing fees^(a)
67
—
—
67
Changes in fair value of equity investments^(a)
2,148
—
17
2,165
Other^(a)
1,922
—
(288 ) 1,634
Total non-interest income $ 10,992
$ 7,095
$ 94
$ 18,181


	Nine Months Ended September 30, 2017 (b)									Nine Months Ended September 30, 2019
Revenue by Operating Segment:	Core Banking		WMG		Holding Company, CFS, and CRM^(c)			Total		Core Banking			WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	3,092	$	—	$	—		$	3,092	$	2,703		$	—	$	—		$	2,703
Other	586		—		—			586		627			—		—			627
Interchange revenue from debit card transactions	2,809		—		—			2,809		3,113			—		—			3,113
WMG fee income	—		6,525		—			6,525		—			7,115		—			7,115
CFS fee and commission income	—		—		452			452		—			—		502			502
Net gains on sales of OREO	38		—		—			38
Net gains (losses) on sales of OREO										(87		)	—		—			(87		)
Net gains on sales of loans^(a)	193		—		—			193		146			—		—			146
Loan servicing fees^(a)	62		—		—			62		76			—		—			76
Net gains on sales of securities^(a)	12		—		—			12		19			—		—			19
Change in fair value of equity securities^(a)	96		—		—			96
Changes in fair value of equity investments^(a)										103			—		3			106
Other^(a)	1,340		—		(170		)	1,170		844			—		(197		)	647
Total non-interest income	$	8,228	$	6,525	$	282		$	15,035	$	7,544		$	7,115	$	308		$	14,967



	Nine Months Ended September 30, 2018
Revenue by Operating Segment:	Core Banking		WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	2,939	$	—	$	—		$	2,939
Other	600		—		—			600
Interchange revenue from debit card transactions	3,013		—		—			3,013
WMG fee income	—		7,095		—			7,095
CFS fee and commission income	—		—		365			365
Net gains on sales of OREO	119		—		—			119
Net gains on sales of loans^(a)	184		—		—			184
Loan servicing fees^(a)	67		—		—			67
Net gains on sales of securities^(a)	—		—		—			—
Change in fair value of equity securities^(a)	2,148		—		17			2,165
Other^(a)	1,922		—		(288		)	1,634
Total non-interest income	$	10,992	$	7,095	$	94		$	18,181

(a) Not within scope of ASC 606.

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

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

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

Interchange Income from Debit Card Transactions: The Corporation earns interchange fees from debit cardholder transactions conducted through the ~~Mastercard~~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 ~~trust~~ customers to manage assets for investment, and/or to conduct transactions on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at quarter-end.

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

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

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

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


	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017			2019			2018			2019			2018
Qualified Pension Plan
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	385			403			1,154			1,209			379			385			1,136			1,154
Expected return on plan assets	(826		)	(785		)	(2,478		)	(2,355		)	(554		)	(826		)	(1,661		)	(2,478		)
Amortization of unrecognized transition obligation	—			—			—			—			—			—			—			—
Amortization of unrecognized prior service cost	—			—			—			—			—			—			—			—
Amortization of unrecognized net loss	43			58			130			174			49			43			147			130
Net periodic pension benefit	$	(398	)	$	(324	)	$	(1,194	)	$	(972	)	$	(126	)	$	(398	)	$	(378	)	$	(1,194	)

Supplemental Pension Plan
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	12			12			36			36			13			12			39			36
Expected return on plan assets	—			—			—			—			—			—			—			—
Amortization of unrecognized prior service cost	—			—			—			—			—			—			—			—
Amortization of unrecognized net loss	1			1			5			3			1			1			3			5
Net periodic supplemental pension cost	$	13		$	13		$	41		$	39		$	14		$	13		$	42		$	41

Postretirement Plan, Medical and Life
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	4			3			11			11			4			4			10			11
Expected return on plan assets	—			—			—			—			—			—			—			—
Amortization of unrecognized prior service cost	(55		)	(55		)	(165		)	(165		)	(55		)	(55		)	(165		)	(165		)
Amortization of unrecognized net loss	28			29			83			87			22			28			68			83
Net periodic postretirement, medical and life benefit	$	(23	)	$	(23	)	$	(71	)	$	(67	)	$	(29	)	$	(23	)	$	(87	)	$	(71	)

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 ~~2017~~2018 Annual Report on Form 10-K, which was filed with the SEC on March ~~8, 2018.~~13, 2019. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment. The Holding Company, CFS, and CRM column below includes amounts to eliminate transactions between segments (in thousands).



	Three months ended 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



	Three months ended September 30, 2018
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	16,122	$	—	$	14		$	16,136
Interest expense	1,057		—		—			1,057
Net interest income	15,065		—		14			15,079
Provision for loan losses	300		—		—			300
Net interest income after provision for loan losses	14,765		—		14			14,779
Other non-interest income	4,987		2,406		(12		)	7,381
Other non-interest expenses	11,871		1,307		250			13,428
Income (loss) before income tax expense (benefit)	7,881		1,099		(248		)	8,732
Income tax expense (benefit)	1,555		281		(34		)	1,802
Segment net income (loss)	$	6,326	$	818	$	(214	)	$	6,930

Three months ended September 30, 2017
Core Banking WMG Holding Company, CFS, and CRM Consolidated Totals
Interest and dividend income $ 15,487
$ —
$ 10
$ 15,497
Interest expense 734
—
—
734
Net interest income 14,753
—
10
14,763
Provision for loan losses 1,289
—
—
1,289
Net interest income after provision for loan losses 13,464
—
10
13,474
Other non-interest income 2,989
2,147
30
5,166
Other non-interest expenses 11,651
1,370
255
13,276
Income (loss) before income tax expense (benefit) 4,802
777
(215 ) 5,364
Income tax expense (benefit) 1,457
295
(42 ) 1,710
Segment net income (loss) $ 3,345
$ 482
$ (173 ) $ 3,654


	Nine months ended September 30, 2018									Nine months ended September 30, 2019
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals		Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	47,645	$	—	$	29		$	47,674	$	50,108	$	—	$	47		$	50,155
Interest expense	2,678		—		—			2,678		4,745		—		—			4,745
Net interest income	44,967		—		29			44,996		45,363		—		47			45,410
Provision for loan losses	3,371		—		—			3,371		5,684		—		—			5,684
Net interest income after provision for loan losses	41,596		—		29			41,625		39,679		—		47			39,726
Other non-interest income	10,992		7,095		94			18,181		7,544		7,115		308			14,967
Legal settlements	989		—		—			989
Other non-interest expenses	36,300		4,414		858			41,572		35,253		4,705		887			40,845
Income (loss) before income tax expense (benefit)	15,299		2,681		(735		)	17,245		11,970		2,410		(532		)	13,848
Income tax expense (benefit)	2,791		684		(126		)	3,349		1,934		615		(106		)	2,443
Segment net income (loss)	$	12,508	$	1,997	$	(609	)	$	13,896	$	10,036	$	1,795	$	(426	)	$	11,405

Segment assets	$	1,740,311	$	3,800	$	9,753		$	1,753,864	$	1,784,692	$	3,410	$	5,541		$	1,793,643


	Nine months ended September 30, 2017									Nine months ended September 30, 2018
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals		Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	44,478	$	—	$	17		$	44,495	$	47,645	$	—	$	29		$	47,674
Interest expense	2,288		—		—			2,288		2,678		—		—			2,678
Net interest income	42,190		—		17			42,207		44,967		—		29			44,996
Provision for loan losses	2,750		—		—			2,750		3,371		—		—			3,371
Net interest income after provision for loan losses	39,440		—		17			39,457		41,596		—		29			41,625
Other non-interest income	8,228		6,525		282			15,035		10,992		7,095		94			18,181
Legal accruals and settlements	850		—		—			850		989		—		—			989
Other non-interest expenses	34,795		4,142		866			39,803		36,300		4,414		858			41,572
Income (loss) before income tax expense (benefit)	12,023		2,383		(567		)	13,839		15,299		2,681		(735		)	17,245
Income tax expense (benefit)	3,523		904		(177		)	4,250		2,791		684		(126		)	3,349
Segment net income (loss)	$	8,500	$	1,479	$	(390	)	$	9,589	$	12,508	$	1,997	$	(609	)	$	13,896

Segment assets	$	1,721,571	$	4,112	$	5,999		$	1,731,682	$	1,740,311	$	3,800	$	9,753		$	1,753,864

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 ~~equal in value to the amount of~~based on fees individually earned during the previous year for service as a director. The common shares are distributed to the Corporation's individual board members from treasury shares of the Corporation on or about January 15 following the calendar year of service.

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

During January 2019 and 2018, 8,465 and ~~2017,~~ 6,015 ~~and 7,880~~ shares, respectively, were re-issued from treasury to fund the stock component of directors' compensation. An expense of ~~$86~~$79 thousand and ~~$68~~$86 thousand related to this compensation was recognized during the three month periods ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. An expense of ~~$271~~$256 thousand and ~~$222~~$271 thousand related to this compensation was recognized during the nine month periods ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively. This expense is accrued as shares are earned.

Restricted Stock Plan

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

A summary of restricted stock activity for the three month period ended September 30, ~~2018~~2019 is presented below:


	Shares	Weighted–Average Grant Date Fair Value		Shares	Weighted–Average Grant Date Fair Value
Nonvested at July 1, 2018	23,084	$	37.88
Nonvested at July 1, 2019				29,436	$	41.03
Granted	—	—		—	—
Vested	—	—		—	—
Forfeited or cancelled	—	—		—	—
Nonvested at September 30, 2018	23,084	$	37.88
Nonvested at September 30, 2019				29,436	$	41.03

A summary of restricted stock activity for the nine month period ended September 30, ~~2018~~2019 is presented below:


	Shares		Weighted–Average Grant Date Fair Value		Shares		Weighted–Average Grant Date Fair Value
Nonvested at January 1, 2018	25,522		$	38.01
Nonvested at January 1, 2019					29,694		$	40.81
Granted	—		—		439		45.66
Vested	(2,438	)	39.28		(697	)	34.58
Forfeited or cancelled	—		—		—		—
Nonvested at September 30, 2018	23,084		$	37.88
Nonvested at September 30, 2019					29,436		$	41.03

As of September 30, ~~2018,~~2019, there was ~~$654 thousand~~$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 ~~3.08~~3.05 years. The total fair value of shares vested was ~~$112~~$32 thousand and ~~$16~~$112 thousand for the nine month periods ended September 30, ~~2018~~2019 and ~~2017,~~2018, respectively.

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

Introduction

The following is the MD&A of the Corporation in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s ~~2017~~2018 Annual Report on Form 10-K, which was filed with the SEC on March ~~8, 2018,~~13, 2019, for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 3–5.6.

The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below and in Part I, Item 1A, Risk Factors, on pages ~~17–24~~19–28 of the Corporation’s ~~2017~~2018 Form 10-K. For a discussion of use of non-GAAP financial measures, see pages ~~64–67~~67–70 of the Corporation's ~~2017~~2018 Form 10-K orand pages ~~71-74~~71-75 in this Form 10-Q.

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

Forward-looking Statements

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing the Corporation’s growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s ~~2017~~2018 Annual Report on Form 10-K. These filings are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com or upon request from the Corporate Secretary at (607) 737-3746. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

Consolidated Financial Highlights

As of or for the
As of or for the Three Months Ended Nine Months Ended
Sept. 30 June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
(in thousands, except per share data) 2018 2018 2018 2017 2017 2018 2017
RESULTS OF OPERATIONS
Interest income $ 16,136
$ 15,869
$ 15,669
$ 15,560
$ 15,497
$ 47,674
$ 44,495
Interest expense 1,057
852
769
780
734
2,678
2,288
Net interest income 15,079
15,017
14,900
14,780
14,763
44,996
42,207
Provision for loan losses 300
2,362
709
6,272
1,289
3,371
2,750
Net interest income after provision for loan losses 14,779
12,655
14,191
8,508
13,474
41,625
39,457
Non-interest income 7,381
5,325
5,475
5,456
5,166
18,181
15,035
Non-interest expense 13,428
14,967
14,166
13,111
13,276
42,561
40,653
Income before income tax expense 8,732
3,013
5,500
853
5,364
17,245
13,839
Income tax expense 1,802
486
1,061
3,012
1,710
3,349
4,250
Net income (loss) $ 6,930
$ 2,527
$ 4,439
$ (2,159 ) $ 3,654
$ 13,896
$ 9,589

Basic and diluted earnings per share $ 1.43
$ 0.52
$ 0.92
$ (0.45 ) $ 0.76
$ 2.88
$ 2.00
Average basic and diluted shares outstanding 4,834
4,828
4,822
4,809
4,802
4,828
4,796

PERFORMANCE RATIOS - Annualized
Return on average assets 1.61 % 0.59 % 1.06 % (0.50 )% 0.85 % 1.09 % 0.75 %
Return on average equity 17.81 % 6.70 % 11.96 % (5.53 )% 9.46 % 12.22 % 8.54 %
Return on average tangible equity (a) 21.01 % 7.94 % 14.21 % (6.55 )% 11.24 % 14.47 % 10.21 %
Efficiency ratio (a) (b) 64.72 % 67.47 % 68.21 % 63.43 % 64.83 % 66.80 % 67.72 %
Non-interest expense to average assets 3.13 % 3.52 % 3.37 % 3.01 % 3.09 % 3.34 % 3.18 %
Loans to deposits 83.80 % 90.23 % 86.94 % 89.40 % 83.85 % 83.80 % 83.85 %

YIELDS / RATES - Fully Taxable Equivalent
Yield on loans 4.36 % 4.33 % 4.34 % 4.26 % 4.34 % 4.34 % 4.24 %
Yield on investments 2.18 % 2.21 % 2.22 % 2.15 % 2.16 % 2.20 % 2.05 %
Yield on interest-earning assets 3.96 % 3.94 % 3.94 % 3.82 % 3.86 % 3.95 % 3.72 %
Cost of interest-bearing deposits 0.33 % 0.24 % 0.20 % 0.20 % 0.20 % 0.25 % 0.20 %
Cost of borrowings 2.38 % 2.41 % 2.23 % 2.42 % 2.95 % 2.33 % 2.95 %
Cost of interest-bearing liabilities 0.39 % 0.32 % 0.29 % 0.28 % 0.27 % 0.33 % 0.27 %
Interest rate spread 3.57 % 3.62 % 3.65 % 3.54 % 3.59 % 3.62 % 3.45 %
Net interest margin, fully taxable equivalent 3.71 % 3.73 % 3.75 % 3.63 % 3.68 % 3.73 % 3.53 %

CAPITAL
Total equity to total assets at end of period 8.92 % 8.88 % 8.84 % 8.77 % 8.91 % 8.92 % 8.91 %
Tangible equity to tangible assets at end of period (a) 7.69 % 7.60 % 7.55 % 7.48 % 7.62 % 7.69 % 7.62 %

Book value per share $ 32.35
$ 31.42
$ 31.16
$ 31.10
$ 32.11
$ 32.35
$ 32.11
Tangible book value per share (a) 27.53
26.55
26.24
26.14
27.09
27.53
27.09
Period-end market value per share 42.43
50.11
46.47
48.10
47.10
42.43
47.10
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) $ 1,330,071
$ 1,328,386
$ 1,315,207
$ 1,291,414
$ 1,259,919
$ 1,324,610
$ 1,237,681
Earning assets 1,625,132
1,625,591
1,623,748
1,639,257
1,615,833
1,624,830
1,618,788
Total assets 1,704,721
1,703,722
1,703,047
1,727,616
1,707,111
1,703,834
1,708,360
Deposits 1,501,082
1,495,410
1,488,708
1,516,390
1,512,685
1,495,111
1,513,804
Total equity 154,331
151,216
150,495
154,767
153,244
152,026
150,038
Tangible equity (a) 130,891
127,591
126,665
130,759
129,024
128,396
125,603

ASSET QUALITY
Net charge-offs $ 310
$ 4,107
$ 480
$ 805
$ 699
$ 4,897
$ 1,309



																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 per share data)	2019			2019			2019			2018			2018			2019			2018
RESULTS OF OPERATIONS
Interest income	$	16,808		$	16,682		$	16,665		$	16,879		$	16,136		$	50,155		$	47,674
Interest expense	1,666			1,581			1,498			1,395			1,057			4,745			2,678
Net interest income	15,142			15,101			15,167			15,484			15,079			45,410			44,996
Provision (credit) for loan losses	4,441			150			1,093			(218		)	300			5,684			3,371
Net interest income after provision (credit) for loan losses	10,701			14,951			14,074			15,702			14,779			39,726			41,625
Non-interest income	4,956			5,086			4,925			4,893			7,381			14,967			18,181
Non-interest expense	13,525			13,823			13,497			14,205			13,428			40,845			42,561
Income before income tax expense	2,132			6,214			5,502			6,390			8,732			13,848			17,245
Income tax expense	176			1,233			1,034			660			1,802			2,443			3,349
Net income	$	1,956		$	4,981		$	4,468		$	5,730		$	6,930		$	11,405		$	13,896

Basic and diluted earnings per share	$	0.40		$	1.02		$	0.92		$	1.18		$	1.43		$	2.34		$	2.88
Average basic and diluted shares outstanding	4,871			4,866			4,860			4,843			4,834			4,866			4,828

PERFORMANCE RATIOS - Annualized
Return on average assets	0.44		%	1.15		%	1.03		%	1.29		%	1.61		%	0.87		%	1.09		%
Return on average equity	4.29		%	11.51		%	10.83		%	14.29		%	17.81		%	8.76		%	12.22		%
Return on average tangible equity (a)	4.91		%	13.27		%	12.56		%	16.74		%	21.01		%	10.09		%	14.47		%
Efficiency ratio (unadjusted) (f)	67.30		%	68.47		%	67.18		%	69.71		%	59.79		%	67.65		%	67.37		%
Efficiency ratio (adjusted) (a) (b)	66.21		%	67.44		%	66.04		%	68.49		%	64.72		%	66.56		%	66.80		%
Non-interest expense to average assets	3.05		%	3.18		%	3.12		%	3.21		%	3.13		%	3.12		%	3.34		%
Loans to deposits	82.88		%	83.60		%	82.93		%	83.60		%	83.80		%	82.88		%	83.80		%


																														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 per share data)															2019			2019			2019			2018			2018			2019			2018
YIELDS / RATES - Fully Taxable Equivalent															YIELDS / RATES - Fully Taxable Equivalent
Yield on loans															4.50		%	4.54		%	4.54		%	4.54		%	4.36		%	4.53		%	4.34		%
Yield on investments															2.36		%	2.41		%	2.42		%	2.16		%	2.18		%	2.39		%	2.20		%
Yield on interest-earning assets															4.03		%	4.07		%	4.07		%	4.01		%	3.96		%	4.05		%	3.95		%
Cost of interest-bearing deposits															0.60		%	0.57		%	0.54		%	0.48		%	0.33		%	0.57		%	0.25		%
Cost of borrowings															3.53		%	3.52		%	3.52		%	3.58		%	2.38		%	3.52		%	2.33		%
Cost of interest-bearing liabilities															0.61		%	0.58		%	0.55		%	0.50		%	0.39		%	0.58		%	0.33		%
Interest rate spread															3.42		%	3.49		%	3.52		%	3.51		%	3.57		%	3.47		%	3.62		%
Net interest margin, fully taxable equivalent (a)															3.63		%	3.69		%	3.71		%	3.68		%	3.71		%	3.67		%	3.73		%

CAPITAL															CAPITAL
Total equity to total assets at end of period															10.15		%	10.18		%	9.69		%	9.40		%	8.92		%	10.15		%	8.92		%
Tangible equity to tangible assets at end of period (a)															9.00		%	8.99		%	8.50		%	8.19		%	7.69		%	9.00		%	7.69		%

Book value per share															$	37.35		$	36.64		$	35.27		$	33.99		$	32.35		$	37.35		$	32.35
Tangible book value per share (a)															32.69			31.95			30.54			29.22			27.53			32.69			27.53
Period-end market value per share															42.00			48.34			46.93			41.31			42.43			42.00			42.43
Dividends declared per share															0.26			0.26			0.26			0.26			0.26			0.78			0.78

AVERAGE BALANCES															AVERAGE BALANCES
Loans and loans held for sale (c)															$	1,295,167		$	1,290,923		$	1,296,200		$	1,306,556		$	1,330,071		$	1,294,093		$	1,324,610
Earning assets															1,665,793			1,654,156			1,671,063			1,680,269			1,625,132			1,664,188			1,624,830
Total assets															1,760,385			1,744,599			1,753,788			1,756,765			1,704,721			1,752,948			1,703,834
Deposits															1,545,858			1,539,739			1,565,371			1,576,629			1,501,082			1,550,251			1,495,111
Total equity															180,896			173,534			167,385			159,032			154,331			173,988			152,026
Tangible equity (a)															158,111			150,598			144,293			135,766			130,891			151,052			128,396

ASSET QUALITY															ASSET QUALITY
Net charge-offs															$	174		$	239		$	292		$	472		$	310		$	705		$	4,897
Non-performing loans (d)	12,629		12,790		17,280		17,324		14,028		12,629		14,028		23,468			19,505			15,099			12,254			12,629			23,468			12,629
Non-performing assets (e)	13,356		13,676		19,113		19,264		14,216		13,356		14,216		23,679			19,719			15,304			12,828			13,356			23,679			13,356
Allowance for loan losses	19,635		19,645		21,390		21,161		15,694		19,635		15,694		23,923			19,656			19,745			18,944			19,635			23,923			19,635

Annualized net charge-offs to average loans	0.09	%	1.24	%	0.15	%	0.25	%	0.22	%	0.49	%	0.14	%	0.05		%	0.07		%	0.09		%	0.14		%	0.09		%	0.07		%	0.49		%
Non-performing loans to total loans	0.96	%	0.96	%	1.31	%	1.32	%	1.09	%	0.96	%	1.09	%	1.80		%	1.51		%	1.16		%	0.93		%	0.96		%	1.80		%	0.96		%
Non-performing assets to total assets	0.76	%	0.80	%	1.12	%	1.13	%	0.82	%	0.76	%	0.82	%	1.32		%	1.12		%	0.86		%	0.73		%	0.76		%	1.32		%	0.76		%
Allowance for loan losses to total loans	1.49	%	1.47	%	1.62	%	1.61	%	1.22	%	1.49	%	1.22	%	1.83		%	1.53		%	1.52		%	1.44		%	1.49		%	1.83		%	1.49		%
Allowance for loan losses to non-performing loans	155.48	%	153.60	%	123.78	%	122.15	%	111.88	%	155.48	%	111.88	%	101.94		%	100.77		%	130.77		%	154.59		%	155.48		%	101.94		%	155.48		%

(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.
(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.															(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.															(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 ~~71-74~~71-75 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.

Executive Summary

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

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


	Three Months Ended September 30,												Three Months Ended September 30,
	2018			2017			Change			Percentage Change			2019			2018			Change			Percentage Change
Net interest income	$	15,079		$	14,763		$	316		2.1	%		$	15,142		$	15,079		$	63		0.4	%
Non-interest income	7,381			5,166			2,215			42.9	%		4,956			7,381			(2,425		)	(32.9	)%
Non-interest expense	13,428			13,276			152			1.1	%		13,525			13,428			97			0.7	%
Pre-provision income	9,032			6,653			2,379			35.8	%		6,573			9,032			(2,459		)	(27.2	)%
Provision for loan losses	300			1,289			(989		)	(76.7	)%		4,441			300			4,141			1,380.3	%
Income tax expense	1,802			1,710			92			5.4	%		176			1,802			(1,626		)	(90.2	)%
Net income	$	6,930		$	3,654		$	3,276		89.7	%		$	1,956		$	6,930		$	(4,974	)	(71.8	)%

Basic and diluted earnings per share	$	1.43		$	0.76		$	0.67		88.2	%		$	0.40		$	1.43		$	(1.03	)	(72.0	)%

Selected financial ratios:
Return on average assets	1.61		%	0.85		%							0.44		%	1.61		%
Return on average equity	17.81		%	9.46		%							4.29		%	17.81		%
Net interest margin, fully taxable equivalent(a)	3.71		%	3.68		%							3.63		%	3.71		%
Efficiency ratio	64.72		%	64.83		%
Efficiency ratio (adjusted) (b)													66.21		%	64.72		%
Non-interest expenses to average assets	3.13		%	3.09		%							3.05		%	3.13		%
(a) See the GAAP to Non-GAAP reconciliations.												(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.												(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 ~~2018~~2019 was $2.0 million, or $0.40 per share, compared with $6.9 million, or $1.43 ~~per share, compared with $3.7 million, or $0.76~~ per share, for the same period in the prior year. Return on average equity for the current quarter was ~~17.81%~~4.29%, compared with ~~9.46%~~17.81% for the prior year quarter. The ~~increase~~decrease in net income was ~~driven by increases~~due to an increase in provision for loan losses and a decrease in non-interest income, ~~and net interest income, along with~~offset by a decrease in ~~the provision for loan losses.~~income tax expense.

Net interest income

Net interest income increased ~~$0.3~~by less than $0.1 million, or ~~2.1%~~0.4%, compared with the same period in the prior year. The increase was due primarily to ~~increases in interest income from the commercial and consumer loan portfolios, partially offset by decreases in interest income from taxable and tax-exempt securities and~~ an increase in interest ~~expense on interest-bearing deposits.~~and dividend income, offset by an increase in total interest expense.

Non-interest income

Non-interest income ~~increased $2.2~~decreased $2.4 million, or ~~42.9%~~32.9%, compared with the same period in the prior year. The ~~increase was due primarily~~decrease can be mostly attributed to a ~~$2.1 million increase~~decrease in the change in fair value of equity ~~investments recognized as a result of~~investments. The decrease was due primarily to an increase in the ~~sale~~fair value of Visa Class B shares ~~and an increase~~ in ~~WMG fee income.~~the third quarter of 2018, which were subsequently sold during the third quarter of 2018.

Non-interest expense

Non-interest expense increased ~~$0.2~~$0.1 million, or ~~1.1%~~0.7%, compared with the same period in the prior year. The increase was due primarily to increases in salaries and wages, ~~net occupancy and data processing expenses, partially offset by decreases in~~ pension and other employee benefits, furniture and ~~other non-interest~~equipment expenses, and ~~an increased~~a reduced credit in other components of net periodic pension cost and ~~postretirement benefits.~~post-retirement benefits, offset by decreases in net occupancy expense and FDIC insurance expense. For the three months ended September 30, ~~2018,~~2019, non-interest expense to average assets was ~~3.13%~~3.05%, compared with ~~3.09%~~3.13% for the same period in the prior year.

Provision for loan losses

The provision for loan losses ~~decreased $1.0~~increased $4.1 million, ~~or 76.7%,~~compared to the same period in the prior year. The increase can be mostly attributed to a specific impairment of $4.2 million related to a participating interest in a commercial credit. Net charge-offs for the third quarter of 2019 were $0.2 million, compared with $0.3 million for the third quarter of 2018.

Income tax expense

Income tax expense was $0.2 million in the third quarter of 2019, a decrease of $1.6 million when compared to the same period in the prior year. The decrease was due primarily to a ~~decline~~decrease of $6.6 million in ~~total loans during~~income before income tax expense for the third quarter of ~~2018, compared to the growth of total loans for the same period in the prior year. Net charge-offs decreased $0.4 million, compared with the same period in the prior year.~~

~~Income tax expense~~

~~Income tax expense increased $0.1 million, or 5.4%,~~2019 as compared to the same period in the prior year. The ~~increase was due primarily to a $3.4 million increase in income before income tax expense, partially offset by the decline in the Federal income~~effective tax rate decreased from ~~34%~~20.6% for the third quarter of 2018 to ~~21%, with~~8.3% for the ~~enactment~~third quarter of ~~the Tax Act. Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation’s state income tax.~~2019.

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


	Nine Months Ended September 30,												Nine Months Ended September 30,
	2018			2017			Change			Percentage Change			2019			2018			Change			Percentage Change
Net interest income	$	44,996		$	42,207		$	2,789		6.6	%		$	45,410		$	44,996		$	414		0.9	%
Non-interest income	18,181			15,035			3,146			20.9	%		14,967			18,181			(3,214		)	(17.7	)%
Non-interest expense	42,561			40,653			1,908			4.7	%		40,845			42,561			(1,716		)	(4.0	)%
Pre-provision income	20,616			16,589			4,027			24.3	%		19,532			20,616			(1,084		)	(5.3	)%
Provision for loan losses	3,371			2,750			621			22.6	%		5,684			3,371			2,313			68.6	%
Income tax expense	3,349			4,250			(901		)	(21.2	)%		2,443			3,349			(906		)	(27.1	)%
Net income	$	13,896		$	9,589		$	4,307		44.9	%		$	11,405		$	13,896		$	(2,491	)	(17.9	)%

Basic and diluted earnings per share	$	2.88		$	2.00		$	0.88		44.0	%		$	2.34		$	2.88		$	(0.54	)	(18.8	)%

Selected financial ratios:
Return on average assets	1.09		%	0.75		%							0.87		%	1.09		%
Return on average equity	12.22		%	8.54		%							8.76		%	12.22		%
Net interest margin, fully taxable equivalent(a)	3.73		%	3.53		%							3.67		%	3.73		%
Efficiency ratio	66.80		%	67.72		%
Efficiency ratio (adjusted) (b)													66.56		%	66.80		%
Non-interest expense to average assets	3.34		%	3.18		%							3.12		%	3.34		%
(a) See the GAAP to Non-GAAP reconciliations.												(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.												(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, ~~2018~~2019 was $11.4 million, or $2.34 per share, compared with $13.9 million, or $2.88 ~~per share, compared with $9.6 million, or $2.00~~ per share, for the same period in the prior year. Return on average equity for the nine months ended September 30, ~~2018~~2019 was ~~12.22%~~8.76%, compared with ~~8.54%~~12.22% for the same period in the prior year. The ~~increase~~decrease in net income from the prior year period was driven by ~~increases~~a decrease in ~~net interest income and~~ non-interest income, and ~~a reduction~~an increase in ~~income tax expense, partially~~provision for loan losses, offset by ~~increases~~decreases in non-interest expense and ~~the provision for loan losses.~~income tax expense, and an increase in net interest income.

Net interest income

Net interest income increased ~~$2.8~~$0.4 million, or ~~6.6%~~0.9%, compared with the same period in the prior year. The increase ~~was due primarily~~can be mostly attributed to ~~increases~~an increase in interest income on loans, including fees, an increase in interest income from ~~the commercial~~interest-earning deposits, and ~~consumer loan portfolios, partially offset by decreases~~a decrease in interest ~~income~~expense on ~~taxable securities, tax-exempt securities and interest-earning deposits, along with~~borrowed funds, offset by an increase in interest expense on interest-bearing deposits.

Non-interest income

Non-interest income ~~increased $3.1~~decreased $3.2 million, or ~~20.9%~~17.7%, compared to the same period in the prior year. The ~~increase~~decrease was due primarily to ~~a $2.1 million increase~~decreases in other non-interest income, net gains (losses) on sales of other real estate owned, and change in fair value of equity ~~investments recognized as a result of the sale of Visa Class B shares and increases~~investments. The decrease in ~~WMG fee income, interchange revenue from debit card transactions, and~~ other non-interest income was due to a New York sales tax refund received in March 2018, and additional rental income from OREO property received in the prior year, and a decrease in swap fees, partially offset by an increase in CFS fee and commission income.

Non-interest expense

Non-interest expense ~~increased $1.9~~decreased $1.7 million, or ~~4.7%~~4.0%, compared to the same period in the prior year. The ~~increase~~decrease was due primarily to ~~increases~~decreases in ~~salaries~~legal accruals and ~~wages, data processing~~settlements, net occupancy expenses, ~~professional services,~~furniture and equipment expenses, other non-interest expenses, marketing and advertising expenses, ~~and~~professional services, other real estate owned expenses, and FDIC insurance. These items were partially offset by ~~a decrease in furniture and equipment expenses and~~ an ~~increased credit~~increase in other components of net periodic pension cost (benefits), and ~~postretirement benefits.~~salaries and wages. For the nine months ended September 30, ~~2018,~~2019, non-interest expense to average assets was ~~3.34%~~3.12%, compared with ~~3.18%~~3.34% for the same period in the prior year.

Provision for loan losses

The provision for loan losses increased ~~$0.6~~$2.3 million, or ~~22.6%~~68.6%, compared to the same period in the prior year. The increase was due primarily to an increase in the historical loss factor of the commercial and industrial loan portfolio, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the first nine months of 2018, compared to the same period in the prior year. The increase in the provision for loan losses ~~due~~can be mostly attributed to ~~the historical loss factor was partially~~a third quarter impairment of a participating interest in a commercial credit for $4.2 million, offset by a ~~decline~~decrease in the ~~growth~~loan portfolio of ~~total loans~~$14.0 million between September 30, 2018 and September 30, 2019. Net charge-offs decreased $4.2 million for the nine months ended September 30, ~~2018 when compared to the same period in the prior year. Net charge-offs increased $3.6 million,~~2019, compared with the same period in the prior year, mostly due to the ~~previously mentioned~~ charge-off of multiple large commercial loans to one ~~borrower.~~borrower during the first nine months of 2018.

Income tax expense

Income tax expense decreased $0.9 million, or ~~21.2%~~27.1%, compared to the same period in the prior year. The decrease was due primarily to ~~the decline in the Federal income tax rate from 34% to 21%, with the enactment of the Tax Act. Additionally, the Corporation increased income generated from CCTC Funding Corp.,~~ a ~~real estate investment trust subsidiary of the Bank, reducing the Corporation’s state income tax. These items were partially offset by a $3.4 million increase~~decrease in income before income tax expense. The effective income tax rate decreased from 19.4% for the nine months ended September 30, 2018 to 17.6% for the nine months ended September 30, 2019.

Consolidated Results of Operations

The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018. For a discussion of the Critical Accounting Policies, Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see page 71 of this Form 10-Q and page 6467 of the Corporation’s ~~2017~~2018 Form 10-K.

Net Interest Income

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


	Three Months Ended September 30,								Three Months Ended September 30,
	2018		2017		Change		Percentage Change		2019		2018		Change		Percentage Change
Interest and dividend income	$	16,136	$	15,497	$	639	4.1	%	$	16,808	$	16,136	$	672	4.2	%
Interest expense	1,057		734		323		44.0	%	1,666		1,057		609		57.6	%
Net interest income	$	15,079	$	14,763	$	316	2.1	%	$	15,142	$	15,079	$	63	0.4	%

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

Net interest income for the three months ended September 30, ~~2018 totaled~~2019 increased less than $0.1 million, or 0.4%, to $15.1 million compared ~~with $14.8 million for~~to the same period in the prior year, andue primarily to a $0.7 million increase ~~of $0.3~~in total interest and dividend income, offset by a $0.6 million ~~or 2.1%.~~increase in total interest expense. Interest and fees from loans increased ~~$0.9~~$0.1 million, ~~while~~ interest from ~~investments, including~~taxable securities increased $0.1 million, and interest from interest-earning deposits ~~decreased $0.2~~increased $0.4 million, in the third quarter of ~~2018~~2019 as compared to the same period in the prior year. Interest expense on deposits ~~and borrowed funds~~ increased ~~$0.4~~$0.8 million, while interest expense on ~~securities sold under agreements to repurchase~~borrowed funds decreased ~~$0.1~~$0.2 million in the third quarter of ~~2018~~2019 when compared to the same period in the prior year. Fully taxable equivalent net interest margin was 3.63% in the third quarter of 2019, compared with 3.71% for the ~~three months ended September 30, 2018~~same period in the prior year.

The average yield on interest-earning assets increased 7 basis points, while the average cost of interest-bearing liabilities increased 22 basis points in the third quarter of 2019, compared ~~with 3.68% for~~to the same period in the prior year. Average interest-earning assets increased ~~$9.3~~$40.7 million in the third quarter of 2018, compared to the same period in the prior year due primarily to an increase in the average balance of commercial and consumer loans, partially offset by decreases in the average balance of mortgage loans, taxable and tax-exempt securities, and interest-earning deposits. The average yield on interest-earning assets increased ten basis points, while the average cost of interest-bearing liabilities increased twelve basis points in the third quarter of 2018, compared to the same period in the prior year. The increase in interest and dividend income for the current quarter can be mostly attributed to average annualized yield increases of 12 basis points on commercial loans, 25 basis points on consumer loans, and 23 basis points in taxable securities, along with a ~~$62.0~~$74.1 million increase in the average balance of ~~commercial loans, primarily commercial real estate, along with~~interest-earning deposits, offset by a ~~six basis points increase in the average yield on commercial loans, and a $16.0~~$30.9 million ~~increase~~decrease in the average balance of consumer loans, compared to the same period in the prior year.

The increase in interest expense for the current quarter can be mostly attributed to an increase in ~~the average~~ interest rates on average interest-bearing deposit accounts, including promotional ~~interest~~ rates on time deposits, ~~and~~offset by a ~~$7.8~~$29.1 million ~~increase~~decrease in the average balance of FHLB advances, other debt and securities sold under agreements to repurchase. The increase in the average cost of interest-bearing liabilities can be attributed to increases of twelve basis points in the average cost of interest-bearing demand deposits, seven basis points in the average cost of savings and money market accounts, and 39 basis points in the average cost of time deposits, related to promotional rates, offset by a decrease of 57 basis points in the average cost of FHLB advances and securities sold under agreements to repurchase.repurchase agreements.

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


	Nine Months Ended September 30,								Nine Months Ended September 30,
	2018		2017		Change		Percentage Change		2019		2018		Change		Percentage Change
Interest and dividend income	$	47,674	$	44,495	$	3,179	7.1	%	$	50,155	$	47,674	$	2,481	5.2	%
Interest expense	2,678		2,288		390		17.0	%	4,745		2,678		2,067		77.2	%
Net interest income	$	44,996	$	42,207	$	2,789	6.6	%	$	45,410	$	44,996	$	414	0.9	%

Net interest income for the nine months ended September 30, ~~2018~~2019 totaled ~~$45.0~~$45.4 million compared with ~~$42.2~~$45.0 million for the same period in the prior year, an increase of ~~$2.8~~$0.4 million, or ~~6.6%~~0.9%. Interest and fees from loans increased ~~$3.9~~$0.8 million, ~~while~~and interest from ~~investments, including~~ interest-earning deposits ~~decreased $0.7~~increased $1.6 million for the nine months ended September 30, ~~2018~~2019, as compared to the same period in the prior year. Interest expense on ~~deposits and~~ borrowed funds ~~increased $0.6 million, while~~and interest expense on securities sold under agreements to repurchase decreased ~~$0.2~~$0.5 million and $0.1 million respectively, for the nine months ended September 30, ~~2018 as~~2019, compared to the same period in the prior year. These items were partially offset by an increase in interest expense on deposits of $2.7 million on deposits for the nine month period ended September 30, 2019, compared to the same period in the prior year. Fully taxable equivalent net interest margin was ~~3.73%~~3.67% for the nine months ended September 30, ~~2018~~2019 compared with ~~3.53%~~3.73% for the same period in the prior year. Average interest-earning assets increased ~~$6.0~~$39.4 million for the nine months ended September 30, ~~2018 as~~2019, compared to the same period in the prior year due primarily to an increase in the average balance of commercial and consumer loans and tax-exempt securities, partially offset by decreases in the average balances of mortgage loans, taxable securities, and interest-earning deposits. year.

The average yield on interest-earning assets increased 2310 basis points, while the average cost of interest-bearing liabilitiesincreased ~~six~~25 basis points for the nine months ended September 30, ~~2018~~2019, as compared to the same period in the prior year. The increase in ~~interest and dividend income~~the average yield on interest-earning assets can be mostly attributed to ~~a $73.7 million~~an increase in the average balance of ~~commercial loans, primarily commercial real estate, along with~~interest-earning deposits of $87.7 million, and a 1816 basis points increase in the average yield on commercial loans, and a $19.3 million increase in the average balance of consumer loans, compared to the same period in the prior year. The increase in interest expense for the nine month period ended September 30, 2018 can be attributeddue to an increase in ~~the average interest rate on interest-bearing deposits~~PRIME and ~~an $11.0 million increase in the average balance of FHLB advances and securities sold under agreements to repurchase.~~LIBOR. The increase in the average cost of interest-bearing liabilities can be attributed to a ~~four~~20 basis points increase in the average cost of ~~interest-bearing demand deposits,~~ savings and money market accounts ~~a 17~~due to rising rates, and an 85 basis points increase in the average cost of time deposits ~~related~~due to ~~promotional rates, and~~promotions, offset by a ~~$11.0~~$36.6 million ~~increase~~decrease in the average balance of FHLB advances, ~~and~~ securities sold under ~~agreements~~agreement to repurchase, ~~offset by a 62 basis points decline in the average cost of FHLB advances~~ and ~~securities sold under agreements to repurchase~~other debt due to the maturity of ~~one $4.0 million FHLB term advance (3.90% rate) in October 2017, one $3.0 million FHLB term advance (2.91% rate) in December 2017,~~ one $2.0 million FHLB term advance (3.05% rate) in January 2018, and one $10.0 million repurchase agreement (3.72% rate) in May 2018.

Average Consolidated Balance ~~Sheet~~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, ~~2018~~2019 and ~~2017.~~2018. For the purpose of the tables below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments.

																																	AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)	Three Months Ended September 30, 2018								Three Months Ended September 30, 2017								Three Months Ended September 30, 2019								Three Months Ended September 30, 2018
	Average Balance			Interest			Yield/Rate (3)		Average Balance			Interest			Yield/Rate (3)		Average Balance			Interest			Yield/Rate (3)		Average Balance			Interest			Yield/Rate (3)
Interest-earning assets:
Commercial loans	$	861,513		$	9,868		4.54	%	$	799,505		$	9,037		4.48	%	$	864,923		$	10,160		4.66	%	$	861,513		$	9,868		4.54	%
Mortgage loans	191,493			1,824			3.78	%	199,396			1,963			3.91	%	184,090			1,788			3.85	%	191,493			1,824			3.78	%
Consumer loans	277,065			2,925			4.19	%	261,018			2,782			4.23	%	246,154			2,752			4.44	%	277,065			2,925			4.19	%
Taxable securities	231,340			1,201			2.06	%	271,529			1,371			2.00	%	234,075			1,350			2.29	%	231,340			1,201			2.06	%
Tax-exempt securities	48,226			333			2.74	%	57,127			467			3.24	%	46,945			357			3.02	%	48,226			333			2.74	%
Interest-earning deposits	15,495			84			2.15	%	27,258			97			1.41	%	89,606			502			2.22	%	15,495			84			2.15	%
Total interest-earning assets	1,625,132			16,235			3.96	%	1,615,833			15,717			3.86	%	1,665,793			16,909			4.03	%	1,625,132			16,235			3.96	%

Non-earning assets:
Cash and due from banks	27,686								26,036								25,784								27,686
Premises and equipment, net	25,896								27,774								23,426								25,896
Other assets	55,323								53,944								63,149								55,323
Allowance for loan losses	(19,879		)						(15,179		)						(20,033		)						(19,879		)
AFS valuation allowance	(9,437		)						(1,297		)						2,266								(9,437		)
Total assets	$	1,704,721							$	1,707,111							$	1,760,385							$	1,704,721

Interest-bearing liabilities:
Interest-bearing demand deposits	$	147,340		$	78		0.21	%	$	138,364		$	32		0.09	%	$	180,852		$	170		0.37	%	$	147,340		$	78		0.21	%
Savings and insured money market deposits	745,235			513			0.27	%	801,580			398			0.20	%	724,451			794			0.43	%	745,235			513			0.27	%
Time deposits	144,037			267			0.74	%	130,445			115			0.35	%	178,107			665			1.48	%	144,037			267			0.74	%
FHLBNY advances, securities sold under agreements to repurchase, and other debt	33,227			199			2.38	%	25,405			189			2.95	%	4,161			37			3.53	%	33,227			199			2.38	%
Total interest-bearing liabilities	1,069,839			1,057			0.39	%	1,095,794			734			0.27	%	1,087,571			1,666			0.61	%	1,069,839			1,057			0.39	%

Non-interest-bearing liabilities:
Demand deposits	464,470								442,296								462,448								464,470
Other liabilities	16,081								15,777								29,470								16,081
Total liabilities	1,550,390								1,553,867								1,579,489								1,550,390
Shareholders' equity	154,331								153,244								180,896								154,331
Total liabilities and shareholders’ equity	$	1,704,721							$	1,707,111							$	1,760,385							$	1,704,721
Fully taxable equivalent net interest income				15,178								14,983								15,243								15,178
Net interest rate spread (1)							3.57	%							3.59	%							3.42	%							3.57	%
Net interest margin, fully taxable equivalent (2)							3.71	%							3.68	%							3.63	%							3.71	%
Taxable equivalent adjustment				(99		)						(220		)						(101		)						(99		)
Net interest income				$	15,079							$	14,763							$	15,142							$	15,079

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

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

(3) Annualized.

																																	AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)	Nine Months Ended September 30, 2018								Nine Months Ended September 30, 2017								Nine Months Ended September 30, 2019								Nine Months Ended September 30, 2018
	Average Balance			Interest			Yield/ Rate (3)		Average Balance			Interest			Yield/ Rate (3)		Average Balance			Interest			Yield/ Rate (3)		Average Balance			Interest			Yield/ Rate (3)
Interest-earning assets:
Commercial loans	$	853,832		$	28,962		4.54	%	$	780,120		$	25,425		4.36	%	$	858,997		$	30,184		4.70	%	$	853,832		$	28,962		4.54	%
Mortgage loans	193,539			5,435			3.75	%	199,625			5,716			3.83	%	182,657			5,223			3.82	%	193,539			5,435			3.75	%
Consumer loans	277,239			8,643			4.17	%	257,936			8,082			4.19	%	252,439			8,425			4.46	%	277,239			8,643			4.17	%
Taxable securities	240,650			3,758			2.09	%	273,124			4,194			2.05	%	226,029			3,830			2.27	%	240,650			3,758			2.09	%
Tax-exempt securities	51,769			1,075			2.78	%	51,016			1,214			3.18	%	48,550			1,063			2.93	%	51,769			1,075			2.78	%
Interest-earning deposits	7,801			116			1.99	%	56,967			445			1.04	%	95,516			1,735			2.43	%	7,801			116			1.99	%
Total interest-earning assets	1,624,830			47,989			3.95	%	1,618,788			45,076			3.72	%	1,664,188			50,460			4.05	%	1,624,830			47,989			3.95	%

Non-earning assets:
Cash and due from banks	27,358								25,456								25,860								27,358
Premises and equipment, net	26,240								28,208								26,873								26,240
Other assets	55,029								53,965								57,640								55,029
Allowance for loan losses	(20,779		)						(14,866		)						(19,784		)						(20,779		)
AFS valuation allowance	(8,844		)						(3,191		)						(1,829		)						(8,844		)
Total assets	$	1,703,834							$	1,708,360							$	1,752,948							$	1,703,834

Interest-bearing liabilities:
Interest-bearing demand deposits	$	143,556		$	141		0.13	%	$	144,683		$	98		0.09	%	$	186,327		$	554		0.40	%	$	143,556		$	141		0.13	%
Savings and insured money market deposits	762,993			1,306			0.23	%	802,700			1,168			0.19	%	738,869			2,378			0.43	%	762,993			1,306			0.23	%
Time deposits	130,628			520			0.53	%	136,359			366			0.36	%	165,088			1,702			1.38	%	130,628			520			0.53	%
FHLBNY advances, securities sold under agreements to repurchase, and other debt	40,778			711			2.33	%	29,760			656			2.95	%	4,214			111			3.52	%	40,778			711			2.33	%
Total interest-bearing liabilities	1,077,955			2,678			0.33	%	1,113,502			2,288			0.27	%	1,094,498			4,745			0.58	%	1,077,955			2,678			0.33	%

Non-interest-bearing liabilities:
Demand deposits	457,934								430,062								459,967								457,934
Other liabilities	15,919								14,758								24,495								15,919
Total liabilities	1,551,808								1,558,322								1,578,960								1,551,808
Shareholders' equity	152,026								150,038								173,988								152,026
Total liabilities and shareholders’ equity	$	1,703,834							$	1,708,360							$	1,752,948							$	1,703,834
Fully taxable equivalent net interest income				45,311								42,788								45,715								45,311
Net interest rate spread (1)							3.62	%							3.45	%							3.47	%							3.62	%
Net interest margin, fully taxable equivalent (2)							3.73	%							3.53	%							3.67	%							3.73	%
Taxable equivalent adjustment				(315		)						(581		)						(305		)						(315		)
Net interest income				$	44,996							$	42,207							$	45,410							$	44,996

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

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

(3) Annualized.

Changes Due to Rate and Volume

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The tables below illustrate the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three and nine months ended September 30, ~~2018~~2019 and ~~2017.~~2018. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For ~~purposes~~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, 2018 vs. 2017									Three Months Ended September 30, 2019 vs. 2018
	Increase/(Decrease)									Increase/(Decrease)
	Total Change			Due to Volume			Due to Rate			Total Change			Due to Volume			Due to Rate
(in thousands)
Interest and dividend income on:
Commercial loans	$	831		$	709		$	122		$	292		$	38		$	254
Mortgage loans	(139		)	(76		)	(63		)	(36		)	(70		)	34
Consumer loans	143			169			(26		)	(173		)	(340		)	167
Taxable investment securities	(170		)	(210		)	40			149			14			135
Tax-exempt investment securities	(134		)	(67		)	(67		)	24			(9		)	33
Interest-earning deposits	(13		)	(52		)	39			418			415			3
Total interest and dividend income, fully taxable equivalent	518			473			45			674			48			626

Interest expense on:
Interest-bearing demand deposits	46			2			44			92			22			70
Savings and insured money market deposits	115			(28		)	143			281			(14		)	295
Time deposits	152			13			139			398			76			322
FHLBNY advances, securities sold under agreements to repurchase and other debt	10			51			(41		)	(162		)	(228		)	66
Total interest expense	323			38			285			609			(144		)	753
Net interest income, fully taxable equivalent	$	195		$	435		$	(240	)	$	65		$	192		$	(127	)


	Nine Months Ended September 30, 2018 vs. 2017									Nine Months Ended September 30, 2019 vs. 2018
	Increase/(Decrease)									Increase/(Decrease)
	Total Change			Due to Volume			Due to Rate			Total Change			Due to Volume			Due to Rate
(in thousands)
Interest and dividend income on:
Commercial loans	$	3,537		$	2,462		$	1,075		$	1,222		$	179		$	1,043
Mortgage loans	(281		)	(167		)	(114		)	(212		)	(311		)	99
Consumer loans	561			600			(39		)	(218		)	(799		)	581
Taxable investment securities	(436		)	(515		)	79			72			(239		)	311
Tax-exempt investment securities	(139		)	18			(157		)	(12		)	(69		)	57
Interest-earning deposits	(329		)	(553		)	224			1,619			1,587			32
Total interest and dividend income, fully taxable equivalent	2,913			1,845			1,068			2,471			348			2,123

Interest expense on:
Interest-bearing demand deposits	43			(1		)	44			413			52			361
Savings and insured money market deposits	138			(65		)	203			1,072			(42		)	1,114
Time deposits	154			(15		)	169			1,182			167			1,015
FHLBNY advances, securities sold under agreements to repurchase and other debt	55			211			(156		)	(600		)	(845		)	245
Total interest expense	390			130			260			2,067			(668		)	2,735
Net interest income, fully taxable equivalent	$	2,523		$	1,715		$	808		$	404		$	1,016		$	(612	)

Provision for loan losses

Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. Based on this analysis, the provision for loan losses for the third quarter of 2019 and 2018 ~~and 2017 were $0.3~~was $4.4 million and ~~$1.3~~$0.3 million, respectively. The ~~decrease was due primarily to a decline~~increase in ~~total loans during~~ the ~~third quarter of 2018,~~provision for loan losses for the three months ended September 30, 2019, compared to ~~the growth of total loans for~~ the same period in the prior ~~year. Net charge-offs decreased $0.4~~year, can be mostly attributed to the impairment of a participating interest in a commercial credit for $4.2 million ~~compared with~~due to potentially fraudulent activity during the ~~same period in the prior year.~~third quarter of 2019.

The provision for loan losses for the nine months ended September 30, 2019 and 2018 ~~and 2017 were $3.4~~was $5.7 million and ~~$2.8~~$3.4 million, respectively. The increase in the provision for loan losses for the nine months ended September 30, ~~2018,~~2019, compared to the same period in the prior year, can be mostly attributed to the impairment of a participating interest in a commercial credit for $4.2 million due to a potentially fraudulent activity in the third quarter of 2019, offset by a decrease in the total loan portfolio of $14.0 million between September 30, 2018 and September 30, 2019. Additionally, during 2018 there was an increase in the historical loss factor of the commercial and industrial loan portfolio, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the nine months ended September 30, 2018 when compared to the same period in the prior year. The increase in the provision for loan losses due to the historical loss factor was partially offset by a decline in the growthsecond quarter of total loans for the nine months ended September 30, 2018 when compared to the same period in the prior year. Net charge-offs increased $3.6 million, compared with the same period in the prior year, mostly due to the previously mentioned charge-off of multiple loans to one borrower.2018.

Net charge-offs for the three months ended September 30, 2019 and 2018 ~~and 2017~~ were ~~$0.3~~$0.2 million and ~~$0.7~~$0.3 million, respectively. Net charge-offs for the nine months ended September 30, 2019 and 2018 were $0.7 million and ~~2017 were~~ $4.9 million, ~~and $1.3 million,~~ respectively. ~~As previously discussed, the increase~~The decrease in net charge offs for the nine ~~months~~month period ended September 30, ~~2018~~2019 can be attributed to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018.

Non-interest income

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


	Three Months Ended September 30,									Three Months Ended September 30,
	2018		2017		Change			Percentage Change		2019			2018		Change			Percentage Change
WMG fee income	$	2,406	$	2,147	$	259		12.1	%	$	2,315		$	2,406	$	(91	)	(3.8	)%
Service charges on deposit accounts	1,231		1,269		(38		)	(3.0	)%	1,141			1,231		(90		)	(7.3	)%
Interchange revenue from debit card transactions	982		925		57			6.2	%	1,058			982		76			7.7	%
Net gains on securities transactions	—		—		—			N/A
Changes in fair value of equity investments	2,141		32		2,109			6,590.6	%	(10		)	2,141		(2,151		)	(100.5	)%
Net gains on sales of loans held for sale	79		71		8			11.3	%	69			79		(10		)	(12.7	)%
Net gains (losses) on sales of other real estate owned	123		30		93			310.0	%	(1		)	123		(124		)	(100.8	)%
Income from bank owned life insurance	17		17		—			N/A		17			17		—			N/A
CFS fee and commission income	120		139		(19		)	(13.7	)%	145			120		25			20.8	%
Other	282		536		(254		)	(47.4	)%	222			282		(60		)	(21.3	)%
Total non-interest income	$	7,381	$	5,166	$	2,215		42.9	%	$	4,956		$	7,381	$	(2,425	)	(32.9	)%

Total non-interest income for the third quarter of ~~2018 increased $2.2~~2019 decreased $2.4 million compared with the same period in the prior year. The ~~increase was~~decrease can be mostly ~~due~~attributed to a decrease of $2.2 million in the changes in fair value of equity ~~investments and WMG fee income, partially offset by a decrease in other non-interest income.~~investments.

Changes in ~~fair value~~Fair Value of ~~equity investments~~Equity Investments

The ~~changes~~decrease was due primarily to an increase in the fair value ~~of equity investments increased primarily as a result of the sale~~ of Visa Class B shares in the third quarter of 2018, which were then subsequently sold during the third quarter of 2018.

~~WMG fee income~~

The increase in WMG fee income, compared to the same period in the prior year, can be mostly attributed to an increase in assets under management or administration. The market value of total assets under management or administration in WMG was $1.923 billion at September 30, 2018, including $264.6 million of assets under management or administration for the Corporation, compared to $1.890 billion at September 30, 2017, including $345.0 million of assets under management or administration for the Corporation, an increase of $32.5 million, or 1.7%.

~~Other~~

~~The decrease in other non-interest income, compared to the same period in the prior year, can be mostly attributed to a decrease in swap fee income.~~

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


	Nine Months Ended September 30,									Nine Months Ended September 30,
	2018		2017		Change			Percentage Change		2019			2018		Change			Percentage Change
WMG fee income	$	7,095	$	6,525	$	570		8.7	%	$	7,115		$	7,095	$	20		0.3	%
Service charges on deposit accounts	3,539		3,678		(139		)	(3.8	)%	3,330			3,539		(209		)	(5.9	)%
Interchange revenue from debit card transactions	3,013		2,809		204			7.3	%	3,113			3,013		100			3.3	%
Net gains on securities transactions	—		12		(12		)	(100.0	)%	19			—		19			N/A
Changes in fair value of equity investments	2,165		96		2,069			2,155.2	%	106			2,165		(2,059		)	(95.1	)%
Net gains on sales of loans held for sale	184		193		(9		)	(4.7	)%	146			184		(38		)	(20.7	)%
Net gains (losses) on sales of other real estate owned	119		38		81			213.2	%	(87		)	119		(206		)	N/M
Income from bank owned life insurance	50		52		(2		)	(3.8	)%	48			50		(2		)	(4.0	)%
CFS fee and commission income	365		452		(87		)	(19.2	)%	502			365		137			37.5	%
Other	1,651		1,180		471			39.9	%	675			1,651		(976		)	(59.1	)%
Total non-interest income	$	18,181	$	15,035	$	3,146		20.9	%	$	14,967		$	18,181	$	(3,214	)	(17.7	)%

Total non-interest income for the nine months ended September 30, ~~2018 increased $3.1~~2019 decreased $3.2 million compared with the same period in the prior year. The ~~increase~~decrease was mostly due to decreases in changes in fair value of equity investments, ~~WMG fee income, interchange revenue from debit card transactions, and~~ other non-interest income, and net gains (losses) on sales of other real estate owned, partially offset by ~~a decrease~~an increase in ~~service charges on deposit accounts.~~CFS fee and commission income.

Changes in fair value of equity investments

The decrease in changes in fair value of equity investments ~~increased~~was due primarily ~~as a result of~~to an increase in the ~~sale~~fair value of Visa Class B shares of $2.1 million in the third quarter of 2018, which were then subsequently sold during the third quarter of 2018.

~~WMG fee income~~

The increase in WMG fee income for the nine months ended September 30, 2018, compared to the same period in the prior year, can be mostly attributed to an increase in assets under management or administration. The market value of total assets under management or administration in WMG was $1.923 billion at September 30, 2018, including $264.6 million of assets under management or administration for the Corporation, compared to $1.890 billion at September 30, 2017, including $345.0 million of assets under management or administration for the Corporation, an increase of $32.5 million, or 1.7%.

~~Service charges on deposit accounts~~

~~The decrease in service charges on deposit accounts, compared to the same period in the prior year, can be mostly attributed to a decline in overdraft fees and other service charges.~~

Other

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

Net gains (losses) on sales of other real estate owned

The decrease in net gains (losses) on sales of other real estate owned ~~rental income.~~was due to net losses on the sale of ten properties in the nine months ended September 30, 2019 versus net gains on the sale of seven properties in the nine months ended September 30, 2018.

CFS fee and commission income

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

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,											Three Months Ended September 30,
	2018			2017			Change			Percentage Change		2019			2018			Change			Percentage Change
Compensation expense:
Salaries and wages	$	5,691		$	5,480		$	211		3.9	%	$	5,874		$	5,691		$	183		3.2	%
Pension and other employee benefits	1,262			1,325			(63		)	(4.8	)%	1,470			1,262			208			16.5	%
Other components of net periodic pension and postretirement benefits												(141		)	(408		)	267			N/M
Total compensation expense	6,953			6,805			148			2.2	%	7,203			6,545			658			10.1	%

Non-compensation expense:
Other components of net periodic pension and postretirement benefits	(408		)	(333		)	(75		)	22.5	%
Net occupancy	1,671			1,476			195			13.2	%	1,424			1,671			(247		)	(14.8	)%
Furniture and equipment	581			657			(76		)	(11.6	)%	717			581			136			23.4	%
Data processing	1,782			1,667			115			6.9	%	1,818			1,782			36			2.0	%
Professional services	479			452			27			6.0	%	395			479			(84		)	(17.5	)%
Amortization of intangible assets	182			214			(32		)	(15.0	)%	151			182			(31		)	(17.0	)%
Marketing and advertising	212			213			(1		)	(0.5	)%	231			212			19			9.0	%
Other real estate owned expenses	83			4			79			1,975.0	%	9			83			(74		)	(89.2	)%
FDIC insurance	263			312			(49		)	(15.7	)%	(10		)	263			(273		)	(103.8	)%
Loan expenses	262			165			97			58.8	%	171			262			(91		)	(34.7	)%
Other	1,368			1,644			(276		)	(16.8	)%	1,416			1,368			48			3.5	%
Total non-compensation expense	6,475			6,471			4			0.1	%	6,322			6,883			(561		)	(8.2	)%
Total non-interest expense	$	13,428		$	13,276		$	152		1.1	%	$	13,525		$	13,428		$	97		0.7	%

Total non-interest expense for the third quarter of ~~2018~~2019 increased ~~$0.2~~$0.1 million compared with the same period in the prior year. The increase was due to ~~increases~~an increase in ~~both~~total compensation expense, ~~and~~offset by a decrease in total non-compensation expense.

Compensation expense

The increase in compensation expense, compared to the same period in the prior year, can be mostly ~~attributable to an increase in salaries and wages. The increase in salaries and wages can~~ be attributed to annual merit increases and ana reduced credit in other components of net periodic pension and postretirement benefits. The increase in ~~the number of employees associated with two~~ ~~denovo~~ ~~branches opened in 2018, compared~~pension and other employee benefits was due primarily to ~~the same period in the prior year. The Bank opened one~~ ~~denovo~~ ~~branch in Schenectady, New York in January 2018 and one~~ ~~denovo~~ ~~branch in Wilton, New York in May 2018.~~increased health care costs.

Non-compensation expense

The ~~slight increase~~decrease in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to ~~increases~~decreases in net occupancy expense and ~~data processing, offset by decreases in other components of net periodic pension and postretirement benefits and other non-interest expenses.~~FDIC insurance expense. The ~~increases~~decrease in net occupancy ~~and data processing expenses can also be attributed~~expense was mostly attributable to the ~~opening~~closing of the ~~two new~~ ~~denovo~~ Oakdale Mall and Painted Post branches ~~along with the timing of various projects.~~in 2019. The ~~increased credit~~decrease in ~~other components of net periodic pension and postretirement benefits can be attributed~~FDIC insurance expense was primarily due to the ~~decline in pension costs in the current quarter, when compared~~receipt of a $0.2 million credit related to the ~~same period in the prior year.~~Deposit Insurance Fund's (DIF) minimum reserve ratio assessment.

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


	Nine Months Ended September 30,											Nine Months Ended September 30,
	2018			2017			Change			Percentage Change		2019			2018			Change			Percentage Change
Compensation expense:
Salaries and wages	$	16,969		$	16,177		$	792		4.9	%	$	17,375		$	16,969		$	406		2.4	%
Pension and other employee benefits	4,438			4,416			22			0.5	%	4,488			4,438			50			1.1	%
Other components of net periodic pension and postretirement benefits												(423		)	(1,224		)	801			N/M
Total compensation expense	21,407			20,593			814			4.0	%	21,440			20,183			1,257			6.2	%

Non-compensation expense:
Other components of net periodic pension and postretirement benefits	(1,224		)	(999		)	(225		)	N/M
Net occupancy	4,922			4,784			138			2.9	%	4,469			4,922			(453		)	(9.2	)%
Furniture and equipment	1,941			2,119			(178		)	(8.4	)%	1,840			1,941			(101		)	(5.2	)%
Data processing	5,288			4,858			430			8.9	%	5,418			5,288			130			2.5	%
Professional services	1,527			1,169			358			30.6	%	1,218			1,527			(309		)	(20.2	)%
Legal accruals and settlements	989			850			139			16.4	%	—			989			(989		)	(100.0	)%
Amortization of intangible assets	558			653			(95		)	(14.5	)%	465			558			(93		)	(16.7	)%
Marketing and advertising	816			580			236			40.7	%	644			816			(172		)	(21.1	)%
Other real estate owned expenses	321			35			286			817.1	%	80			321			(241		)	(75.1	)%
FDIC insurance	881			946			(65		)	(6.9	)%	476			881			(405		)	(46.0	)%
Loan expenses	615			447			168			37.6	%	557			615			(58		)	(9.4	)%
Other	4,520			4,618			(98		)	(2.1	)%	4,238			4,520			(282		)	(6.2	)%
Total non-compensation expense	21,154			20,060			1,094			5.5	%	19,405			22,378			(2,973		)	(13.3	)%
Total non-interest expense	$	42,561		$	40,653		$	1,908		4.7	%	$	40,845		$	42,561		$	(1,716	)	(4.0	)%

Total non-interest expense for the nine months ended September 30, ~~2018 increased $1.9~~2019 decreased $1.7 million compared with the same period in the prior year. The ~~increase~~decrease was due to ~~increases~~a decrease in ~~compensation~~total non-compensation expense, ~~and non-compensation~~offset by an increase in total compensation expense.

Compensation expense

The increase in compensation expense, compared to the same period in the prior year, can be mostly attributable to an increase in salaries and ~~wages.~~wages and a reduced credit in other components of net periodic pension benefits. The increase in salaries and wages can be attributed to annual merit ~~increases and an increase~~increases. The decrease in the ~~number~~benefit in other components of ~~employees associated with two~~ ~~denovo~~ ~~branches opened~~net periodic pension and post-retirement benefits was due to a change in ~~2018, compared~~assumptions used to ~~the same period in the prior year. The Bank opened one~~ ~~denovo~~ ~~branch in Schenectady, New York in January 2018 and one~~ ~~denovo~~ ~~branch in Wilton, New York in May 2018.~~prepare annual actuarial expense estimates.

Non-compensation expense

The ~~increase~~decrease in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to ~~increases~~decreases in ~~data processing, professional services,~~ legal accruals and settlements, net occupancy expenses, furniture and equipment expenses, other non-interest expenses, marketing and advertising expenses, ~~and~~professional services, other real estate owned, ~~expenses, partially offset by a~~and FDIC insurance. The decrease ~~in furniture and equipment expense, and an increased credit in other components of net periodic pension benefits. The increase in data processing can be attributed to the opening of two new~~ ~~denovo~~ branches, along with the timing of various projects. The increase in professional services can be attributed to consulting costs associated with the New York State sales tax refund received during the first quarter of 2018 and advisory services related to the implementation of CECL. The increase in legal accruals and settlements can be attributed to the settlement agreement in the matter of Fane vs. Chemung Canal Trust Company ~~(the "Action")~~ during the second quarter of 2018. ~~As noted~~The decrease in net occupancy and furniture and equipment expenses was mostly attributable to runoff in depreciation expense related to mechanical equipment, the Current Report on Form 8-K filed on June 15, 2018, the two parties agreed to release each other from any and all liabilities, claims, counterclaims, demands, charges, complaints and causes of action, to dismiss the Action with prejudice, and the Bank agreed to pay Fane $3.3 million in connection with the settlementclosing of the ~~Action.~~Oakdale Mall and Painted Post branches, as well as a reduction in non-capitalizable fixed asset purchases as compared to the prior year period due to the opening of two new branches in 2018. The ~~increase~~decrease in marketing and advertising expenses ~~can be attributed~~was due to promotional expenses associated with the ~~promotion~~opening of ~~the~~ two new ~~denovo~~branches ~~and~~during 2018. The decrease in professional services was due to consulting fees incurred in the ~~timing of campaigns and sponsored events.~~prior year associated with the NYS sales tax refund received in March 2018. The ~~increase~~decrease in ~~other real estate owned~~OREO expenses can be attributed to ~~additional~~fewer OREO properties retained in the first nine months of 2019 as compared to the ~~prior year period.~~first nine months of 2018. The decrease in FDIC insurance expense was primarily due to the receipt of a $0.2 million credit related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment.

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,										Three Months Ended September 30,
	2018			2017			Change		Percentage Change		2019			2018			Change			Percentage Change
Income before income tax expense	$	8,732		$	5,364		$	3,368	62.8	%	$	2,132		$	8,732		$	(6,600	)	(75.6	)%
Income tax expense	1,802			1,710			92		5.4	%	176			1,802			(1,626		)	(90.2	)%
Effective tax rate	20.6		%	31.9		%					8.3		%	20.6		%

Income tax expense for the current quarter was ~~$1.8~~$0.2 million compared ~~with $1.7~~to $1.8 million for the same period in the prior ~~year, an increase~~year. The decrease in income tax expense was due primarily to a decrease of ~~$0.1~~$6.6 million ~~or 5.4%. The Corporation recognized a $3.4 million increase~~ in income before income tax ~~expense for the current quarter, when compared to the same period in the prior year. Although~~expense. The effective income ~~tax expense increased in the current quarter when compared to the same period in the prior year, the effective~~ tax rate decreased from ~~31.9%~~20.6% for the third quarter of 2018 to ~~20.6%. The decrease was due primarily to~~8.3% for the ~~decline in the Federal income tax rate from 34% to 21%, with the enactment~~third quarter of the Tax Cuts and Jobs Act of 2017. Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation's state income tax.2019.

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


	Nine Months Ended September 30,											Nine Months Ended September 30,
	2018			2017			Change			Percentage Change		2019			2018			Change			Percentage Change
Income before income tax expense	$	17,245		$	13,839		$	3,406		24.6	%	$	13,848		$	17,245		$	(3,397	)	(19.7	)%
Income tax expense	3,349			4,250			(901		)	(21.2	)%	2,443			3,349			(906		)	(27.1	)%
Effective tax rate	19.4		%	30.7		%						17.6		%	19.4		%

Income tax expense for the nine months ended ~~September 30,~~2019 and 2018 ~~was~~were $2.4 million and $3.3 million, ~~compared with $4.3 million for the same period~~respectively. The decrease in ~~the prior year,~~income tax expense was due primarily to a decrease of ~~$0.9 million, or 21.2%. The Corporation recognized a~~ $3.4 million ~~increase~~ in income before income tax ~~expense for the nine months ended September 30, 2018, when compared to the same period in the prior year.~~expense. The effective income tax rate decreased tofrom 19.4% for the nine months ended September 30, 2018 ~~from 30.7%~~to 17.6% for the same period in the prior year. The decrease was due primarily to the decline in the Federal income tax rate from 34% to 21%, with the enactment of the Tax Cuts and Jobs Act of 2017. Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation's state income tax.

nine months ended September 30, 2019.

Financial Condition

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


	September 30, 2018			December 31, 2017			Change			Percentage Change		September 30, 2019			December 31, 2018			Change			Percentage Change
ASSETS
Total cash and cash equivalents	$	113,912		$	30,729		$	83,183		270.7	%	$	146,298		$	129,972		$	16,326		12.6	%
Total investment securities	253,814			302,656			(48,842		)	(16.1	)%
Total investment securities, FHLB, and FRB stock												276,105			252,180			23,925			9.5	%

Loans, net of deferred loan fees	1,320,638			1,311,824			8,814			0.7	%	1,306,638			1,311,906			(5,268		)	(0.4	)%
Allowance for loan losses	(19,635		)	(21,161		)	1,526			(7.2	)%	(23,923		)	(18,944		)	(4,979		)	26.3	%
Loans, net	1,301,003			1,290,663			10,340			0.8	%	1,282,715			1,292,962			(10,247		)	(0.8	)%

Goodwill and other intangible assets, net	23,351			23,909			(558		)	(2.3	)%	22,710			23,175			(465		)	(2.0	)%
Other assets	61,784			59,663			2,121			3.6	%	65,815			57,054			8,761			15.4	%
Total assets	$	1,753,864		$	1,707,620		$	46,244		2.7	%	$	1,793,643		$	1,755,343		$	38,300		2.2	%

LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits	$	1,575,997		$	1,467,446		$	108,551		7.4	%	$	1,576,506		$	1,569,237		$	7,269		0.5	%
FHLBNY advances and other debt	4,358			74,217			(69,859		)	(94.1	)%	4,140			4,304			(164		)	(3.8	)%
Other liabilities	17,010			16,144			866			5.4	%	30,953			16,773			14,180			84.5	%
Total liabilities	1,597,365			1,557,807			39,558			2.5	%	1,611,599			1,590,314			21,285			1.3	%

Total shareholders’ equity	156,499			149,813			6,686			4.5	%	182,044			165,029			17,015			10.3	%
Total liabilities and shareholders’ equity	$	1,753,864		$	1,707,620		$	46,244		2.7	%	$	1,793,643		$	1,755,343		$	38,300		2.2	%

Cash and Cash Equivalents

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

Investment securities

The ~~decrease~~increase in investment securities can be mostly attributed to ~~pay-downs,~~purchases in the amount of $67.6 million, offset by $15.2 million in sales of mortgage-backed and municipal securities, along with maturities and ~~an increase in unrealized losses.~~paydowns.

Loans, net

The ~~increase~~decrease in total loans, net, can be mostly attributed to ~~increases~~decreases of ~~$21.2~~$9.6 million in commercial mortgages, ~~and $4.1~~$12.9 million in indirect consumer loans, and $8.4 million in other consumer loans, partially offset by ~~decreases~~an increase of ~~$6.6~~$24.2 million in commercial and agriculture loans ~~$5.8~~and $1.3 million in residential ~~mortgages, and $4.1 million in other consumer loans.~~mortgages.

Goodwill and other intangible assets, net

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

Other assets

The increase in other assets can be mostly attributed to ~~the fair market value adjustment to interest rate swaps~~an increase of ~~$1.5~~$8.6 million ~~at September 30, 2018 and increases~~ in operating ~~prepaid~~lease right-of-use assets ~~and~~related to the ~~net deferred tax asset~~adoption of ASU No. 2016-02 Leases as ~~compared to December 31, 2017.~~of January 1, 2019.

Deposits

The increase in deposits can be attributed to increases of ~~$2.3 million in non-interest bearing demand deposits, $62.1~~$28.6 million in interest-bearing demand deposits ~~$18.7~~and $19.6 million in time deposits, offset by decreases of $27.8 million in money market accounts, and ~~$26.5~~$11.8 million in ~~time deposits, offset by a decrease of $1.0 million in savings accounts. Also, in the current quarter, the Corporation converted its off balance sheet sweep agreement accounts into interest-bearing~~non-interest-bearing demand ~~deposits which resulted in the onboarding of approximately $30.0 million in~~ deposits. The ~~increase~~decrease in ~~time deposits~~non-interest-bearing demand deposit can be mostly attributed to ~~a rate promotion during~~an outflow of personal deposits and the ~~second and third quarters~~decrease in money market accounts can be mostly attributed to an outflow of ~~2018.~~municipal deposits.

~~FHLBNY advances and~~Other liabilities

The increase in other ~~debt~~

~~The decrease in FHLBNY advances and other debt~~liabilities can be mostly attributed to an increase in ~~deposits~~operating lease liabilities related to the January 1, 2019 adoption of ASU No. 2016-02 Leases, and ~~decline~~an increase in ~~securities.~~interest rate swap liabilities.

Shareholders’ equity

Shareholders’ equity was ~~$156.5~~$182.0 million at September 30, ~~2018~~2019 compared with ~~$149.8~~$165.0 million at December 31, ~~2017.~~2018. The increase ~~was primarily due~~in retained earnings of $7.6 million can be mostly attributed to earnings of ~~$13.9~~$11.4 million, ~~and a reduction of $1.4~~offset by $3.8 million in ~~treasury stock, offset by an increase of $4.9 million in accumulated other comprehensive loss and $3.7 million in~~ dividendsdeclared during the nine months ended September 30, ~~2018.~~ 2019. The decrease in accumulated other comprehensive loss of $8.1 million can be mostly attributed to the increase in the fair market value of the securities portfolio. Also, treasury stock decreased $0.6 million, due to the issuance of shares to the Corporation's employee benefit stock plans and directors' stock plans.

Assets under management or administration

The market value of total assets under management or administration in WMG was ~~$1.923~~$1.863 billion at September 30, ~~2018,~~2019, including ~~$264.6~~$301.3 million of assets held under management or administration for the Corporation, compared with ~~$1.952~~$1.768 billion at December 31, ~~2017,~~2018, including ~~$346.8~~$283.0 million of assets held under management or administration for the Corporation, ~~a decrease~~an increase of ~~$28.5~~$94.4 million, or ~~1.5%~~5.3%. The ~~decline~~growth in total assets under management or administration can be mostly attributed to ~~a decrease~~an increase in the ~~Corporation's pledged securities portfolio for municipal deposits and the decrease in the mutual fund sweep agreement accounts (previously described under~~ ~~Deposits), which were held by WMG.~~market value of total assets.

Securities

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

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

																									SECURITIES AVAILABLE FOR SALE
	September 30, 2018						December 31, 2017						September 30, 2019						December 31, 2018
	Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value		Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value		Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value		Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value
Obligations of U.S. Government sponsored enterprises	$	10,487	$	10,453	4.2	%	$	15,492	$	15,491	5.3	%	$	—	$	—	—	%	$	5,489	$	5,472	2.3	%
Mortgage-backed securities, residential and collateralized mortgage obligations	196,977		186,777		75.8	%	224,939		219,909		75.0	%	201,152		203,524		76.1	%	189,111		183,192		75.6	%
Obligations of states and political subdivisions	46,544		45,545		18.5	%	52,928		53,132		18.1	%	45,122		47,270		17.7	%	44,390		44,152		18.2	%
Other securities	3,743		3,698		1.5	%	4,588		4,559		1.6	%	16,627		16,735		6.2	%	9,506		9,442		3.9	%
Total	$	257,751	$	246,473	100.0	%	$	297,947	$	293,091	100.0	%	$	262,901	$	267,529	100.0	%	$	248,496	$	242,258	100.0	%

The available for sale segment of the securities portfolio totaled ~~$246.5~~$267.5 million at September 30, ~~2018, a decrease~~2019, an increase of ~~$46.6~~$25.3 million, or ~~15.9%~~10.4%, from ~~$293.1~~$242.3 million at December 31, ~~2017.~~2018. The ~~decrease~~increase can be mostly attributed to ~~pay-downs,~~purchases in the amount of $67.5 million, offset by $15.2 million in sales of mortgage-backed and municipal securities, and $37.2 million in proceeds from maturities, calls, and ~~an increase in unrealized losses.~~principal paydowns on securities available for sale.

The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled ~~$4.2~~$3.4 million at September 30, ~~2018, an increase~~2019, a decrease of ~~$0.4~~$1.4 million, or ~~11.0%~~29.1%, from ~~$3.8~~$4.9 million at December 31, ~~2017.~~2018, mostly attributed to maturities.

Loans

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

The table below presents the Corporation’s loan composition by segment at the dates indicated, and the dollar and percent change from December 31, ~~2017~~2018 to September 30, ~~2018~~2019 (in thousands):

																			LOANS
	September 30, 2018		December 31, 2017		Dollar Change			Percentage Change		September 30, 2019		December 31, 2018		Dollar Change			Percentage Change
Commercial and agricultural	$	192,380	$	199,007	$	(6,627	)	(3.3	)%	$	227,098	$	202,854	$	24,244		12.0	%
Commercial mortgages	665,574		644,330		21,244			3.3	%	651,605		661,170		(9,565		)	(1.4	)%
Residential mortgages	188,636		194,440		(5,804		)	(3.0	)%	184,013		182,724		1,289			0.7	%
Indirect consumer loans	157,123		153,060		4,063			2.7	%	136,502		149,380		(12,878		)	(8.6	)%
Other consumer loans	116,925		120,987		(4,062		)	(3.4	)%	107,420		115,778		(8,358		)	(7.2	)%
Total loans, net of deferred loan fees	$	1,320,638	$	1,311,824	$	8,814		0.7	%	$	1,306,638	$	1,311,906	$	(5,268	)	(0.4	)%

Portfolio loans totaled ~~$1.321~~$1.307 billion at September 30, ~~2018, an increase~~2019, a decrease of ~~$8.8~~$5.3 million, or ~~0.7%~~0.4%, from $1.312 billion at December 31, ~~2017.~~2018. The ~~increase~~decrease in loans can be attributed to ~~increases~~decreases of ~~$21.2~~$9.6 million in commercial mortgages, ~~and $4.1~~$12.9 million in indirect consumer loans, and $8.4 million in other consumer loans, partially offset by ~~decreases~~increases of ~~$6.6~~$24.2 million in commercial and agricultural loans, ~~$5.8~~and $1.3 million in residential ~~mortgages, and $4.1 million in other consumer loans. The growth in commercial mortgages was due primarily to an increase in the Capital Bank division in the Albany, New York region.~~mortgages. The decline in commercial mortgages, indirect consumer loans, and ~~agricultural~~other consumer loans can be mostly ~~attributable~~attributed to the ~~charge-off of multiple large commercial loans to one borrower for $3.6 million~~portfolio runoff rate exceeding production during the ~~second quarter of 2018.~~nine months ended September 30, 2019.

Residential mortgage loans totaled ~~$188.6~~$184.0 million at September 30, ~~2018, a decrease~~2019, an increase of ~~$5.8~~$1.3 million, or ~~3.0%~~0.7%, from December 31, ~~2017.~~2018. During the nine months ended September 30, ~~2018, $9.1~~2019, $29.7 million of ~~newly~~residential mortgages were originated, ~~residential mortgages~~of which $6.6 million were sold in the secondary market to Freddie Mac and ~~$0.2~~$0.5 million ~~of residential mortgages~~ were sold to the State of New York Mortgage Agency.

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

																					LOANS BY DIVISION
	September 30, 2018		December 31, 2017		December 31, 2016		December 31, 2015		December 31, 2014		September 30, 2019		December 31, 2018		December 31, 2017		December 31, 2016		December 31, 2015
Chemung Canal Trust Company*	$	610,548	$	630,732	$	636,836	$	683,137	$	724,099	$	585,783	$	603,133	$	630,732	$	636,836	$	683,137
Capital Bank Division	710,090		681,092		563,454		485,496		397,475		720,855		708,773		681,092		563,454		485,496
Total loans	$	1,320,638	$	1,311,824	$	1,200,290	$	1,168,633	$	1,121,574	$	1,306,638	$	1,311,906	$	1,311,824	$	1,200,290	$	1,168,633

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

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were ~~46.1%~~44.5% and ~~48.1%~~47.2% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of September 30, ~~2018~~2019 and December 31, ~~2017.~~

2018.

Non-Performing Assets

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

Past due status on all loans is based on the contractual terms of the loan. It is generally the Corporation's policy that a loan 90 days past due be placed in non-accrual status unless factors exist that would eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower. At the time loans are placed in non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its original principal and interest. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal balance has been recovered.

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

													NON-PERFORMING ASSETS
	September 30, 2018			December 31, 2017			September 30, 2019			December 31, 2018
Non-accrual loans	$	6,945		$	11,389		$	15,061		$	6,305
Non-accrual troubled debt restructurings	5,684			5,935			8,407			5,949
Total non-performing loans	12,629			17,324			23,468			12,254
Other real estate owned	727			1,940			211			574
Total non-performing assets	$	13,356		$	19,264		$	23,679		$	12,828

Ratio of non-performing loans to total loans	0.96		%	1.32		%	1.80		%	0.93		%
Ratio of non-performing assets to total assets	0.76		%	1.13		%	1.32		%	0.73		%
Ratio of allowance for loan losses to non-performing loans	155.48		%	122.15		%	101.94		%	154.59		%


Accruing loans past due 90 days or more (1)	$	14		$	29		$	53		$	19
Accruing troubled debt restructurings (1)	942			1,728			887			816
(1) These loans are not included in non-performing assets above.

Non-Performing Loans

Non-performing loans totaled ~~$12.6~~$23.5 million at September 30, ~~2018,~~2019, or ~~0.96%~~1.80% of total loans, compared with ~~$17.3~~$12.3 million at December 31, ~~2017,~~2018, or ~~1.32%~~0.93% of total loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was ~~$13.4~~$23.7 million, or ~~0.76%~~1.32% of total assets, at September 30, ~~2018,~~2019, compared with ~~$19.3~~$12.8 million, or ~~1.13%~~0.73% of total assets, at December 31, ~~2017.~~2018. The ~~decline~~increase in non-performing ~~assets~~loans can be mostly attributed to two commercial mortgage relationships and one commercial and agricultural participation loan, offset by paydowns within the ~~charge-off of multiple large~~ commercial ~~loans to one borrower for $3.6 million and the sale of one other real estate owned property during the second quarter of 2018.~~

Not included in non-performing loan totals are $0.8 million of acquired loans that the Corporation has identified as PCI loans as of December 31, 2017. The PCI loans are accounted for under separate accounting guidance, Accounting Standards Codification (“ASC”) Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as disclosed in Note 4 of the financial statements. There were no PCI loans as of September 30, 2018.portfolio.

Accruing Loans Past due 90 Days or More

The recorded investment in accruing loans past due 90 days or more totaled ~~$14~~$53 thousand at September 30, ~~2018, a decrease~~2019, an increase of ~~$15~~$34 thousand from December 31, ~~2017.~~

2018.

Troubled Debt Restructurings

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation modified the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest. As of September 30, ~~2018,~~2019, the Corporation had ~~$5.7~~$8.4 million of non-accrual TDRs compared with ~~$5.9~~$6.0 million as of December 31, ~~2017.~~2018. As of September 30, 2019 and December 31, 2018, the Corporation had $0.9 million and $0.8 million respectively, of accruing ~~TDRs compared with $1.7 million as of December 31, 2017.~~TDRs.

Impaired Loans

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Impaired loans at September 30, ~~2018~~2019 totaled ~~$9.3~~$20.6 million, including TDRs of ~~$6.6~~$9.3 million, compared to ~~$14.1~~$8.7 million, including TDRs of ~~$7.7~~$6.8 million, at December 31, 2017. Not included in the impaired loan totals for December 31, 2017, were acquired loans which the Corporation has identified as PCI loans, as these loans are accounted for under ASC Subtopic 310-30 as noted under the above discussion of non-performing loans.2018. The ~~decrease~~increase in impaired loans was due primarily to the impairment of a ~~decrease in impaired~~ commercial ~~and industrial loans, mostly due to the charge-off of multiple large commercial loans~~mortgage to one borrower for ~~$3.6~~$3.4 million during the first quarter of 2019, a commercial mortgage to one borrower for $5.0 million during the second quarter of ~~2018.~~2019, and a commercial and industrial participation credit for $4.2 million during the third quarter of 2019. Included in the recorded investment of impaired loans at September 30, ~~2018,~~2019, were loans totaling ~~$3.7~~$16.3 million for which impairment allowances of ~~$2.2~~$8.7 million have been specifically allocated to the allowance for loan losses. As of December 31, ~~2017,~~2018, the impaired loan total included ~~$8.1~~$3.7 million of loans for which specific impairment allowances of ~~$5.9~~$2.2 million were allocated to the allowance for loan losses. The ~~decrease~~increase in impaired loans with specific impairment allowances can be mostly attributed to the ~~charge-off~~impairment of ~~multiple large~~a commercial ~~loans~~mortgage to one borrower for ~~$3.6~~$3.4 million during the first quarter of 2019, a commercial mortgage to one borrower for $5.0 million during the second quarter of ~~2018.~~2019, and a commercial and industrial participation credit for $4.2 million during the third quarter of 2019.

The majority of the Corporation's impaired loans are secured and measured for impairment based on collateral evaluations. It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. In determining the amount of any specific allocation or charge-off, the Corporation will make adjustments to reflect the estimated costs to sell the property. Upon receipt and review of the updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs. Real estate values in the Corporation's market area have been holding steady. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.

Allowance for Loan Losses

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

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are established based on management’s analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, delinquent or unpaid property taxes, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five-year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy.

The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The allowance for loan losses was ~~$19.6~~$23.9 million at September 30, ~~2018, down from $21.2~~2019, compared with $18.9 million at December 31, ~~2017.~~2018. The ratio of allowance for loan losses to total loans was ~~1.49%~~1.83% at September 30, ~~2018, down from 1.61%~~2019, compared with 1.44% at December 31, ~~2017.~~2018. Net charge-offs for the nine months ended September 30, 2019 and 2018 were $0.7 million and ~~2017 were~~ $4.9 million, ~~and $1.3~~respectively. Net charge-offs decreased $4.2 million, ~~respectively. The increase~~compared with the same period in ~~net charge-offs can be~~the prior year, mostly ~~attributed~~due to the charge-off of multiple large commercial loans to one borrower for $3.6 million ~~during the second quarter of~~in 2018.

The table below summarizes the Corporation’s loan loss experience for the nine months ended September 30, ~~2018~~2019 and ~~2017~~2018 (in thousands, except ratio data):

													SUMMARY OF LOAN LOSS EXPERIENCE
	Nine Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2019			2018
Balance of allowance for loan losses at beginning of period	$	21,161		$	14,253		$	18,944		$	21,161

Charge-offs:
Commercial and agricultural	3,644			96			55			3,644
Commercial mortgages	145			154			—			145
Residential mortgages	225			193			60			225
Consumer loans	1,301			1,265			1,040			1,301
Total charge-offs	5,315			1,708			1,155			5,315

Recoveries:
Commercial and agricultural	34			95			44			34
Commercial mortgages	2			4			2			2
Residential mortgages	5			30			45			5
Consumer loans	377			270			359			377
Total recoveries	418			399			450			418

Net charge-offs	4,897			1,309			705			4,897
Provision for loan losses	3,371			2,750			5,684			3,371
Balance of allowance for loan losses at end of period	$	19,635		$	15,694		$	23,923		$	19,635

Ratio of net charge-offs to average loans outstanding	0.09		%	0.22		%	0.05		%	0.09		%
Ratio of allowance for loan losses to total loans outstanding	1.49		%	1.22		%	1.83		%	1.49		%

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, ~~2017~~2018 to September 30, ~~2018~~2019 (in thousands):

																			DEPOSITS
	September 30, 2018		December 31, 2017		Dollar Change			Percentage Change		September 30, 2019		December 31, 2018		Dollar Change			Percentage Change
Non-interest-bearing demand deposits	$	469,887	$	467,610	$	2,277		0.5	%	$	472,600	$	484,433	$	(11,833	)	(2.4	)%
Interest-bearing demand deposits	211,099		149,026		62,073			41.7	%	208,222		179,603		28,619			15.9	%
Insured money market accounts	532,489		513,782		18,707			3.6	%	510,194		537,948		(27,754		)	(5.2	)%
Savings deposits	217,621		218,666		(1,045		)	(0.5	)%	215,665		217,027		(1,362		)	(0.6	)%
Time deposits	144,901		118,362		26,539			22.4	%	169,825		150,226		19,599			13.0	%
Total	$	1,575,997	$	1,467,446	$	108,551		7.4	%	$	1,576,506	$	1,569,237	$	7,269		0.5	%

Deposits totaled ~~$1.576~~$1.577 billion at September 30, ~~2018~~2019 compared with ~~$1.467~~$1.569 billion at December 31, ~~2017, an~~2018, a increase of ~~$108.6~~$7.3 million, or ~~7.4%~~0.5%. The increase was attributable to increases of ~~$2.3~~$19.6 million in ~~non-interest bearing demand~~time deposits, ~~$62.1~~due to a rate promotion, and $28.6 million in interest-bearing demand ~~deposits, $18.7~~deposit accounts, offset by decreases of $27.8 million in money market accounts and ~~$26.5~~$11.8 million in ~~time deposits, offset by a decrease of $1.0 million in savings~~non-interest-bearing demand deposits. The ~~increase~~decrease in ~~interest-bearing demand deposits was attributable~~money market accounts can be mostly attributed to ~~the seasonal inflow from existing~~an outflow of municipal clients, and in the current quarter, the Corporation converted its off balance sheet sweep agreement accounts into interest-bearing demand deposits which resulted in the onboarding of approximately $30.0 million in deposits. The ~~increase~~decrease in ~~time~~non-interest-bearing demand deposits can be mostly attributed to ~~a rate promotion during the second and third quarters~~an outflow of ~~2018.~~personal deposits. At September 30, ~~2018,~~2019, demand deposit and money market accounts comprised ~~77.0%~~75.5% of total deposits ~~which was the same when~~ compared with 76.6% at December 31, ~~2017.~~2018.

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

																					DEPOSITS BY DIVISION
	September 30, 2018		December 31, 2017		December 31, 2016		December 31, 2015		December 31, 2014		September 30, 2019		December 31, 2018		December 31, 2017		December 31, 2016		December 31, 2015
Chemung Canal Trust Company*	$	1,362,005	$	1,264,883	$	1,249,870	$	1,219,282	$	1,119,377	$	1,344,087	$	1,328,658	$	1,264,883	$	1,249,870	$	1,219,282
Capital Bank Division	213,992		202,563		206,473		181,013		160,637		232,419		240,579		202,563		206,473		181,013
Total	$	1,575,997	$	1,467,446	$	1,456,343	$	1,400,295	$	1,280,014	$	1,576,506	$	1,569,237	$	1,467,446	$	1,456,343	$	1,400,295

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

In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits. The recently enacted Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations. This will apply to the Corporation's participation in the CDARS and ICS programs. Brokered deposits include funds obtained through brokers. There were no deposits obtained through brokers as of September 30, ~~2018~~2019 and December 31, ~~2017.~~2018. Deposits obtained through the CDARS and ICS programs were ~~$206.3~~$186.2 million and ~~$187.7~~$193.6 million as of September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The ~~increase~~decrease in CDARS and ICS deposits was due to the seasonal ~~inflow~~outflow of ~~current~~ 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 ~~will continue using~~may use brokered deposits as a secondary source of funding to support growth.

Borrowings

Borrowings decreased ~~$69.8~~$0.2 million from ~~$74.2~~$4.3 million at December 31, ~~2017~~2018 to ~~$4.4~~$4.1 million at September 30, ~~2018, mostly attributed~~2019, attributable to a $57.7 million decline in FHLBNY overnight advances and a $10.0 million decrease in securities sold under agreements to repurchase. The decline in the FHLBNY overnight advances was due to the increase in deposits as a source of funds and the decline in repurchase agreements was due to the maturity of one $10.0 million repurchase agreement in May 2018.normal recurring finance lease payments.

Shareholders’ Equity

Total shareholders' equity increased ~~$6.7~~$17.0 million from $165.0 million at December 31, ~~2017~~2018 to $182.0 million at September 30, ~~2018~~2019, due primarily to an increase in retained earnings ~~partially offset by an increase~~and a decrease in accumulated other comprehensive loss. The increase in retained earnings of ~~$10.2~~$7.6 million was due primarily to earnings of ~~$13.9~~$11.4 million, offset by ~~$3.7~~$3.8 million in dividends declared during the nine months ended September 30, ~~2018.~~2019. The ~~increase~~decrease in accumulated other comprehensive loss of ~~$4.9~~$8.1 million can be mostly attributed to the ~~decline~~increase in the fair market value of the securities portfolio. Also, treasury stock decreased ~~$1.4~~$0.6 million, primarily due to the issuance of shares pursuant to the Corporation's employee benefit plans and the directors' stock compensation plans.

The total shareholders’ equity to total assets ratio was ~~8.92%~~10.15% at September 30, ~~2018~~2019 compared with ~~8.77%~~9.40% at December 31, ~~2017.~~2018. The tangible equity to tangible assets ratio was ~~7.69%~~9.00% at September 30, ~~2018~~2019 compared with ~~7.48%~~8.19% at December 31, ~~2017.~~2018. Book value per share increased to ~~$32.35~~$37.35 at September 30, ~~2018~~2019 from ~~$31.10~~$33.99 at December 31, ~~2017.~~2018.

The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. As of September 30, ~~2018,~~2019, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.

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

Off-balance Sheet Arrangements

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

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, securities sold under agreements to repurchase and other borrowings.

The Corporation is a member of the FHLBNY which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. Based on available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of ~~$116.3~~$154.2 million and ~~$73.5~~$112.6 million at September 30, ~~2018~~2019 and December 31, ~~2017,~~2018, respectively. The Corporation also had a total of $58.0 million of unsecured lines of credit with five different financial institutions, all of which was available at September 30, 2019. The Corporation had a total of $28.0 million of unsecured lines of credit with four different financial institutions at ~~September 30, 2018, as compared to a total of $38.0 million of unsecured lines of credit with five different institutions at~~ December 31, ~~2017. The Corporation closed a $10.0 million unsecured line~~2018, all of ~~credit with one institution during the third quarter of 2018.~~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,					Nine Months Ended September 30,
	2018		2017			2019			2018
Net cash provided by operating activities	$	20,105	$	16,585		$	21,808		$	20,105
Net cash (used in) provided by investing activities	27,639		(93,954		)	(9,273		)	27,639
Net cash provided by financing activities	35,439		59,585
Net increase (decrease) in cash and cash equivalents	$	83,183	$	(17,784	)
Net provided by financing activities						3,791			35,439
Net increase in cash and cash equivalents						$	16,326		$	83,183

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 ~~2018~~2019 and ~~2017~~2018 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

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

Financing activities

Cash ~~used in investing~~provided by financing activities during the first nine months of ~~2017~~2019 predominantly resulted from a net increase in ~~loans and purchases of securities, offset by sales, calls, maturities, and principal collected in securities available for sale.~~

~~Financing activities~~

deposits. Cash provided by financing activities during the first nine months of 2018 predominantly resulted from a net increase in deposits, offset by the maturity of one $10.0 million repurchase agreement and the repayment of FHLBNY overnight and long term advances. Cash provided by financing activities during the first nine months of 2017 predominantly resulted from a net increase in deposits, offset by the maturity of one $10.0 million repurchase agreement and the discontinuation of the Corporation's customer repurchase agreement product during 2017.

Capital Resources

The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the recently enacted Regulatory Relief Act, the FRB amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant non-banking activities, (ii) do not conduct significant off-balance sheet activities, and ~~(3)~~(iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, are no longer subject to regulatory capital requirements, effective August 30, 2018. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The final rules implementing Basel III rules became effective for the ~~Corporation~~Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under Basel III rules, the ~~Corporation~~Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer for 2019 is ~~being phased in from 0.0% for 2015 to~~ 2.50% ~~by 2019. The capital conservation buffer for 2018 is 1.875%~~. Organizations that fail to maintain the minimum capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan and other benefit plans are not included in computing regulatory capital.

As a result of the Regulatory Relief Act, the federal banking agencies ~~are required to develop~~adopted a “Community Bank Leverage Ratio” (the ratio of a bank’s ~~tangible equity~~Tier 1 capital to average total consolidated assets) for financial institutions with assets of less than $10 billion. The federal banking agencies have approved a Community Bank Leverage Ratio of 9.0%. A “qualifying community bank” that exceeds this ratio will be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under ~~Prompt~~prompt corrective action statutes. The federal banking agencies may consider a financial institution’s risk profile when evaluating whether it qualifies as a community bank for purposes of the capital ratio requirement. The federal banking agencies must set the minimum capital for the new Community Bank Leverage Ratio at not less than 8% and not more than 10%. A qualifying financial institution can elect to be subject to this new definition. The rule will take effect on January 1, 2020.

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, ~~2018~~2019 and December 31, ~~2017,~~2018, the Bank met all capital adequacy requirements to which it was subject.

As of September 30, ~~2018,~~2019, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank's capital category.

The regulatory capital ratios as of September 30, ~~2018~~2019 and December 31, ~~2017~~2018 were calculated under Basel III rules.

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



	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of September 30, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk Weighted Assets):
Consolidated	$	179,011	13.72	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	170,576	13.09	%	$	104,251	8.00	%	$	128,685	9.875	%	$	130,314	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	162,609	12.46	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	154,192	11.83	%	$	78,188	6.00	%	$	102,622	7.875	%	$	104,251	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	162,609	12.46	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	154,192	11.83	%	$	58,641	4.50	%	$	83,075	6.375	%	$	84,704	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	162,609	9.37	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	154,192	8.92	%	$	69,178	4.00	%	N/A		N/A		$	86,472	5.00	%

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

Actual Minimum Capital Adequacy Minimum Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions
As of September 30, 2018 Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets):
Bank $ 156,776
12.12 % $ 103,481
8.00 % $ 127,735
9.875 % $ 129,352
10.00 %
Tier 1 Capital (to Risk Weighted Assets):

Bank $ 140,564
10.87 % $ 77,611
6.00 % $ 101,864
7.875 % $ 103,481
8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):

Bank $ 140,564
10.87 % $ 58,208
4.50 % $ 82,462
6.375 % $ 84,078
6.50 %
Tier 1 Capital (to Average Assets):

Bank $ 140,564
8.36 % $ 67,239
4.00 % N/A
N/A
$ 84,049
5.00 %

~~The Corporation’s and the Bank’s actual and required regulatory capital ratios as of December 31, 2017 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				Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2017	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
As of December 31, 2018																	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk Weighted Assets):
Consolidated	$	153,020	11.82	%	$	103,527	8.00	%	$	119,703	9.250	%	N/A		N/A		$	169,416	13.14	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	146,129	11.31	%	$	103,390	8.00	%	$	119,545	9.250	%	$	129,238	10.00	%	$	162,536	12.62	%	$	103,039	8.00	%	$	127,189	9.875	%	$	128,799	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	136,660	10.56	%	$	77,645	6.00	%	$	93,821	7.250	%	N/A		N/A		$	153,263	11.89	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	129,881	10.05	%	$	77,543	6.00	%	$	93,697	7.250	%	$	103,390	8.00	%	$	146,401	11.37	%	$	77,280	6.00	%	$	101,429	7.875	%	$	103,039	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	136,660	10.56	%	$	58,234	4.50	%	$	74,410	5.750	%	N/A		N/A		$	153,263	11.89	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	129,881	10.05	%	$	58,157	4.50	%	$	74,312	5.750	%	$	84,004	6.50	%	$	146,401	11.37	%	$	57,960	4.50	%	$	82,110	6.375	%	$	83,720	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	136,660	8.02	%	$	68,200	4.00	%	N/A		N/A		N/A		N/A		$	153,263	8.79	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	129,881	7.63	%	$	68,045	4.00	%	N/A		N/A		$	85,057	5.00	%	$	146,401	8.41	%	$	69,598	4.00	%	N/A		N/A		$	86,998	5.00	%

Dividend Restrictions

The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At September 30, ~~2018,~~2019, the Bank could, without prior approval, declare dividends of approximately ~~$17.9~~$25.7 million.

Adoption of New Accounting Standards

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

Critical Accounting Policies, Estimates and Risks and Uncertainties

Critical accounting policies include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with GAAP. As a result, the Corporation is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available at that time. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates.

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real estate values in the Corporation’s market area did not increase dramatically in the prior several years, and, as a result, any declines in real estate values have been modest. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses.

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, 2018.

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 ~~6–11.~~7–13. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.

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

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

Fully Taxable Equivalent Net Interest Income and Net Interest Margin ~~and Efficiency Ratio~~

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



																As of the
	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,
(in thousands, except ratio data)	2019			2019			2019			2018			2018			2019		2018
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
Net interest income (GAAP)	$	15,142		$	15,101		$	15,167		$	15,484		$	15,079		$	45,410	$	44,996
Fully taxable equivalent adjustment	101			104			100			105			99			305		315
Fully taxable equivalent net interest income (non-GAAP)	$	15,243		$	15,205		$	15,267		$	15,589		$	15,178		$	45,715	$	45,311

Average interest-earning assets (GAAP)	$	1,665,793		$	1,654,156		$	1,671,063		$	1,680,269		$	1,625,132		$	1,664,188	$	1,624,830

Net interest margin - fully taxable equivalent (non-GAAP)	3.63		%	3.69		%	3.71		%	3.68		%	3.71		%	$	—	$	—

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 ~~measures~~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
	As of the Three Months Ended															Nine Months Ended						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,			Sept. 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			Sept. 30,			Sept. 30,
(in thousands, except ratio data)	2018			2018			2018			2017			2017			2018			2017			2019			2019			2019			2018			2018			2019			2018
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT AND EFFICIENCY RATIO
EFFICIENCY RATIO
Net interest income (GAAP)	$	15,079		$	15,017		$	14,900		$	14,780		$	14,763		$	44,996		$	42,207		$	15,142		$	15,101		$	15,167		$	15,484		$	15,079		$	45,410		$	44,996
Fully taxable equivalent adjustment	99			106			110			206			220			315			581			101			104			100			105			99			305			315
Fully taxable equivalent net interest income (non-GAAP)	$	15,178		$	15,123		$	15,010		$	14,986		$	14,983		$	45,311		$	42,788		$	15,243		$	15,205		$	15,267		$	15,589		$	15,178		$	45,715		$	45,311

Non-interest income (GAAP)	$	7,381		$	5,325		$	5,475		$	5,456		$	5,166		$	18,181		$	15,035		$	4,956		$	5,086		$	4,925		$	4,893		$	7,381		$	14,967		$	18,181
Less: changes in fair value of equity investments	(2,093		)	—			—			—			—			(2,093		)	—			—			—			—			—			(2,093		)	—			(2,093		)
Less: net (gains) losses on security transactions	—			—			—			(97		)	—			—			(12		)	—			(19		)	—			—			—			(19		)	—
Adjusted non-interest income (non-GAAP)	$	5,288		$	5,325		$	5,475		$	5,359		$	5,166		$	16,088		$	15,023		$	4,956		$	5,067		$	4,925		$	4,893		$	5,288		$	14,948		$	16,088

Non-interest expense (GAAP)	$	13,428		$	14,967		$	14,166		$	13,111		$	13,276		$	42,561		$	40,653		$	13,525		$	13,823		$	13,497		$	14,205		$	13,428		$	40,845		$	42,561
Less: amortization of intangible assets	(182		)	(182		)	(194		)	(207		)	(214		)	(558		)	(653		)	(151		)	(151		)	(163		)	(176		)	(182		)	(465		)	(558		)
Less: legal reserve	—			(989		)	—			—			—			(989		)	(850		)	—			—			—			—			—			—			(989		)
Adjusted non-interest expense (non-GAAP)	$	13,246		$	13,796		$	13,972		$	12,904		$	13,062		$	41,014		$	39,150		$	13,374		$	13,672		$	13,334		$	14,029		$	13,246		$	40,380		$	41,014

Average interest-earning assets (GAAP)	$	1,625,132		$	1,625,591		$	1,623,748		$	1,639,257		$	1,615,833		$	1,624,830		$	1,618,788

Net interest margin - fully taxable equivalent (non-GAAP)	3.71		%	3.73		%	3.75		%	3.63		%	3.68		%	3.73		%	3.53		%
Efficiency ratio (non-GAAP)	64.72		%	67.47		%	68.21		%	63.43		%	64.83		%	66.80		%	67.72		%
Efficiency ratio (unadjusted)																						67.30		%	68.47		%	67.18		%	69.71		%	59.79		%	67.65		%	67.37		%
Efficiency ratio (adjusted)																						66.21		%	67.44		%	66.04		%	68.49		%	64.72		%	66.56		%	66.80		%

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.


																As of or for the																					As of or for the
	As of or for the Three Months Ended															Nine Months Ended						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,			Sept. 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			Sept. 30,			Sept. 30,
(in thousands, except per share and ratio data)	2018			2018			2018			2017			2017			2018			2017			2019			2019			2019			2018			2018			2019			2018
TANGIBLE EQUITY AND TANGIBLE ASSETS
(PERIOD END)
Total shareholders' equity (GAAP)	$	156,499		$	151,780		$	150,262		$	149,813		$	154,277		$	156,499		$	154,277		$	182,044		$	178,387		$	171,534		$	165,029		$	156,499		$	182,044		$	156,499
Less: intangible assets	(23,351		)	(23,533		)	(23,715		)	(23,909		)	(24,116		)	(23,351		)	(24,116		)	(22,710		)	(22,861		)	(23,012		)	(23,175		)	(23,351		)	(22,710		)	(23,351		)
Tangible equity (non-GAAP)	$	133,148		$	128,247		$	126,547		$	125,904		$	130,161		$	133,148		$	130,161		$	159,334		$	155,526		$	148,522		$	141,854		$	133,148		$	159,334		$	133,148

Total assets (GAAP)	$	1,753,864		$	1,710,166		$	1,699,954		$	1,707,620		$	1,731,682		$	1,753,864		$	1,731,682		$	1,793,643		$	1,752,997		$	1,769,572		$	1,755,343		$	1,753,864		$	1,793,643		$	1,753,864
Less: intangible assets	(23,351		)	(23,533		)	(23,715		)	(23,909		)	(24,116		)	(23,351		)	(24,116		)	(22,710		)	(22,861		)	(23,012		)	(23,175		)	(23,351		)	(22,710		)	(23,351		)
Tangible assets (non-GAAP)	$	1,730,513		$	1,686,633		$	1,676,239		$	1,683,711		$	1,707,566		$	1,730,513		$	1,707,566		$	1,770,933		$	1,730,136		$	1,746,560		$	1,732,168		$	1,730,513		$	1,770,933		$	1,730,513

Total equity to total assets at end of period (GAAP)	8.92		%	8.88		%	8.84		%	8.77		%	8.91		%	8.92		%	8.91		%	10.15		%	10.18		%	9.69		%	9.40		%	8.92		%	10.15		%	8.92		%
Book value per share (GAAP)	$	32.35		$	31.42		$	31.16		$	31.10		$	32.11		$	32.35		$	32.11		$	37.35		$	36.64		$	35.27		$	33.99		$	32.35		$	37.35		$	32.35

Tangible equity to tangible assets at end of period (non-GAAP)	7.69		%	7.60		%	7.55		%	7.48		%	7.62		%	7.69		%	7.62		%	9.00		%	8.99		%	8.50		%	8.19		%	7.69		%	9.00		%	7.69		%
Tangible book value per share (non-GAAP)	$	27.53		$	26.55		$	26.24		$	26.14		$	27.09		$	27.53		$	27.09		$	32.69		$	31.95		$	30.54		$	29.22		$	27.53		$	32.69		$	27.53

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
	As of or for the Three Months Ended																Nine Months Ended						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,			Sept. 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			Sept. 30,			Sept. 30,
(in thousands, except ratio data)	2018			2018			2018			2017			2017				2018			2017			2019			2019			2019			2018			2018			2019			2018
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP)	$	154,331		$	151,216		$	150,495		$	154,767		$	153,244			$	152,026		$	150,038		$	180,896		$	173,534		$	167,385		$	159,032		$	154,331		$	173,988		$	152,026
Less: average intangible assets	(23,440		)	(23,625		)	(23,830		)	(24,008		)	(24,220		)		(23,630		)	(24,435		)	(22,785		)	(22,936		)	(23,092		)	(23,266		)	(23,440		)	(22,936		)	(23,630		)
Average tangible equity (non-GAAP)	$	130,891		$	127,591		$	126,665		$	130,759		$	129,024			$	128,396		$	125,603		$	158,111		$	150,598		$	144,293		$	135,766		$	130,891		$	151,052		$	128,396

Return on average equity (GAAP)	17.81		%	6.70		%	11.96		%	(5.53		)%	9.46		%		12.22		%	8.54		%	4.29		%	11.51		%	10.83		%	14.29		%	17.81		%	8.76		%	12.22		%
Return on average tangible equity (non-GAAP)	21.01		%	7.94		%	14.21		%	(6.55		)%	11.24		%		14.47		%	10.21		%	4.91		%	13.27		%	12.56		%	16.74		%	21.01		%	10.09		%	14.47		%

Adjustments for Certain Items of Income or Expense

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


																As of or for the																					As of or for the
	As of or for the Three Months Ended															Nine Months Ended						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,			Sept. 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			Sept. 30,			Sept. 30,
(in thousands, except per share and ratio data)	2018			2018			2018			2017			2017			2018			2017			2019			2019			2019			2018			2018			2019			2018
NON-GAAP NET INCOME
Reported net income (GAAP)	$	6,930		$	2,527		$	4,439		$	(2,159	)	$	3,654		$	13,896		$	9,589		$	1,956		$	4,981		$	4,468		$	5,730		$	6,930		$	11,405		$	13,896
Net changes in fair value of investments (net of tax)	(1,559		)	—			—			—			—			(1,559		)	—			—			—			—			—			(1,559		)	—			(1,559		)
Net (gains) losses on security transactions (net of tax)	—			—			—			(60		)	—			—			(8		)	—			(14		)	—			—			—			(14		)	—
Legal reserve (net of tax)	—			737			—			—			—			737			528			—			—			—			—			—			—			737
Revaluation of net deferred tax asset	—			—			—			2,927			—			—			—			—			—			—			(445		)	—			—			—
Non- GAAP net income	$	5,371		$	3,264		$	4,439		$	708		$	3,654		$	13,074		$	10,109		$	1,956		$	4,967		$	4,468		$	5,285		$	5,371		$	11,391		$	13,074

Average basic and diluted shares outstanding	4,834			4,828			4,822			4,809			4,802			4,828			4,796			4,871			4,866			4,860			4,843			4,834			4,866			4,828

Reported basic and diluted earnings per share (GAAP)	$	1.43		$	0.52		$	0.92		$	(0.45	)	$	0.76		$	2.88		$	2.00		$	0.40		$	1.02		$	0.92		$	1.18		$	1.43		$	2.34		$	2.88
Reported return on average assets (GAAP)	1.61		%	0.59		%	1.06		%	(0.50		)%	0.85		%	1.09		%	0.75		%	0.44		%	1.15		%	1.03		%	1.29		%	1.61		%	0.87		%	1.09		%
Reported return on average equity (GAAP)	17.81		%	6.70		%	11.96		%	(5.53		)%	9.46		%	12.22		%	8.54		%	4.29		%	11.51		%	10.83		%	14.29		%	17.81		%	8.76		%	12.22		%

Non-GAAP basic and diluted earnings per share	$	1.11		$	0.68		$	0.92		$	0.15		$	0.76		$	2.71		$	2.10		$	0.40		$	1.02		$	0.92		$	1.09		$	1.11		$	2.34		$	2.10
Non-GAAP return on average assets	1.25		%	0.77		%	1.06		%	0.16		%	0.85		%	1.03		%	0.79		%	0.44		%	1.14		%	1.03		%	1.19		%	1.25		%	0.87		%	1.03		%
Non-GAAP return on average equity	13.81		%	8.66		%	11.96		%	1.81		%	9.46		%	11.50		%	9.01		%	4.29		%	11.48		%	10.83		%	13.18		%	13.81		%	8.75		%	11.50		%

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 a 200-basis point change in interest rates, with appropriate floors set for interest-bearing liabilities. At September 30, ~~2018,~~2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the next 12 months net interest income by ~~12.99%~~13.13% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by ~~6.83%~~9.41%. Both are within the Corporation's policy guideline of 15%. Given the overall low level of current interest rates and the unlikely event of a 200-basis point decline at this time, management additionally modeled an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates. When applied, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the next 12 months net interest income by ~~5.81%~~5.73% and an immediate 300-basis point increase would positively impact the next 12 months net interest income by ~~10.17%~~14.00%.

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, ~~2018,~~2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by ~~13.83% and an~~17.30%, above the Corporation's policy guidelines of 15%. An immediate 200-basis point increase in interest rates would positively impact the market value by ~~7.12%. Both are~~10.97%, which is within the Corporation’s policy guideline of 15%. Management also modeled the impact to the market value of the Corporation’s capital with an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates, based on the current interest rate environment. When applied, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by ~~5.87%~~7.39% and an immediate 300-basis point increase in interest rates would positively impact the market value by ~~10.06%~~15.59%.

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

Credit Risk

The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.

The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the President and Chief Executive Officer, Chief Financial Officer and Treasurer (non-voting member), Chief Risk Officer (non-voting member), Chief Credit Officer (non-voting member), Business Client Division Manager, Retail Client Division Manager, Retail Loan Manager, Senior Commercial Real Estate Lender, and Commercial Loan Managers, implements the Board-approved loan policy.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Corporation's management, with the participation of its Chief Executive Officer, who is the Corporation's principal executive officer, and its Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of September 30, ~~2018~~2019 pursuant to Rule 13a-15 of the Exchange Act, as amended. Based upon that evaluation, the principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures are effective as of September 30, ~~2018.~~2019. In addition, there have been no changes in the Corporation’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~For information related~~In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of September 30, 2019, we believe that we are not a party to ~~this item, please see Note 8 to the Corporation’s~~any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial ~~statements included herein.~~results or liquidity.

ITEM 1A. RISK FACTORS

There have been no material changes in the risk factors set forth in the Corporation's Annual Report on Form 10-K for the year ended December 31, ~~2017,~~2018, filed with the Securities and Exchange Commission on March ~~8, 2018.~~13, 2019.

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



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
7/1/~~18-7/~~19-7/31/1819	—	$	—	—	121,906
8/1/~~18-8/~~19-8/31/1819	—	—		—	121,906
9/1/~~18-9/~~19-9/30/1819	—	—		—	121,906
Quarter ended 9/30/1819	—	$	—	—	121,906
(1) On December 19, 2012, the Corporation’s Board of Directors approved a stock repurchase plan authorizing the purchase of up to 125,000 shares of the Corporation's outstanding common stock. Purchases may be made from time to time on the open market or in private negotiated transactions and will be at the discretion of management. For the three months ended September 30, ~~2018,~~2019, no shares had been purchased under this plan. Since inception of the plan, a total of 3,094 shares have been purchased under the plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

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



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

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

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

3.4	Amended and Restated Bylaws of Chemung Financial Corporation, as amended to May ~~16, 2018~~15, 2019 (as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on May ~~17, 2018)~~16, 2019).

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

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

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

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

101.INS	Instance Document*

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.

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: ~~October 31, 2018~~November 6, 2019	By: /s/ Anders M. Tomson
	Anders M. Tomson President and Chief Executive Officer (Principal Executive Officer)



DATED: ~~October 31, 2018~~November 6, 2019	By: /s/ Karl F. Krebs
	Karl F. Krebs Chief Financial Officer and Treasurer (Principal Financial Officer)

EXHIBIT INDEX

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



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

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

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

3.4	Amended and Restated Bylaws of Chemung Financial Corporation, as amended to May ~~16, 2018~~15, 2019 (as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on May ~~17, 2018)~~16, 2019).

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

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

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

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

101.INS	Instance Document*

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.



	Three Months Ended September 30, 2017
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total
Beginning balance	$	1,883		$	7,778		$	1,517		$	3,926		$	15,104
Charge-offs	(89		)	(154		)	(133		)	(440		)	(816		)
Recoveries	34			1			—			82			117
Net recoveries (charge-offs)	(55		)	(153		)	(133		)	(358		)	(699		)
Provision	99			758			12			420			1,289
Ending balance	$	1,927		$	8,383		$	1,396		$	3,988		$	15,694



	December 31, 2017
	Overnight and Continuous		Up to 1 Year			1 - 3 Years		3+ Years		Total
Mortgage-backed securities, residential	$	—	$	11,798		$	—	$	—	$	11,798
Excess collateral held	—		(1,798		)	—		—		(1,798		)
Gross amount of recognized liabilities for repurchase agreements	$	—	$	10,000		$	—	$	—	$	10,000