Chemung Financial 10Q 2012 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON D.C. 20549 FORM 10-Q
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly period ended March 31, 2012
Or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-13888

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, P.O. Box 1522, Elmira, NY				14902
(Address of principal executive offices)				(Zip Code)

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

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

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

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

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 April 30, 2012 was 4,574,239.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION	PAGE

Item 1:	Financial Statements – Unaudited

	Consolidated Balance Sheet	3
	Consolidated Statements of Income	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Shareholders’ Equity	6
	Consolidated Statements of Cash Flows	7

	Notes to Unaudited Consolidated Financial Statements	8

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	37

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	52

Item 4:	Controls and Procedures	52

PART II.	OTHER INFORMATION	52

Item 1A:	Risk Factors	52

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	52

Item 6:	Exhibits	53

SIGNATURES		54

INDEX TO EXHIBITS

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	MARCH 31, 2012			DECEMBER, 31, 2011
ASSETS
Cash and due from financial institutions	$	27,311,509		$	28,204,699
Interest-bearing deposits in other financial institutions		83,202,900			24,697,154
Total cash and cash equivalents		110,514,409			52,901,853

Trading assets, at fair value		254,243			294,381
Securities available for sale, at estimated fair value		259,449,877			280,869,810
Securities held to maturity, estimated fair value of $8,206,472 at March 31, 2012 and $9,175,956 at December 31, 2011		7,446,817			8,311,921
Federal Home Loan Bank and Federal Reserve Bank Stock, at cost		5,435,800			5,509,350
Loans, net of deferred origination fees and costs, and unearned income		803,033,067			796,915,177
Allowance for loan losses		(10,283,289	)		(9,659,320	)
Loans, net		792,749,778			787,255,857

Loans held for sale		825,850			395,427
Premises and equipment, net		24,976,937			24,762,405
Goodwill		21,824,443			21,983,617
Other intangible assets, net		5,906,400			6,190,540
Bank owned life insurance		2,646,629			2,625,104
Other assets		22,463,763			25,159,322

Total assets	$	1,254,494,946		$	1,216,259,587

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	272,055,263		$	258,835,961
Interest-bearing		766,650,126			739,656,878
Total deposits		1,038,705,389			998,492,839

Securities sold under agreements to repurchase		34,998,443			37,106,842
Federal Home Loan Bank term advances		43,227,341			43,343,918
Accrued interest payable		675,784			800,148
Dividends payable		1,143,923			1,141,081
Other liabilities		6,915,320			9,445,319
Total liabilities		1,125,666,200			1,090,330,147

Shareholders' equity:
Common stock, $.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at March 31, 2012 and December 31, 2011		53,101			53,101
Additional-paid-in capital		45,556,436			45,582,861
Retained earnings		103,099,510			100,628,900
Treasury stock, at cost (734,887 shares at March 31, 2012; 741,003 shares at December 31, 2011)		(18,734,217	)		(18,894,044	)
Accumulated other comprehensive income (loss)		(1,146,084	)		(1,441,378	)

Total shareholders' equity		128,828,746			125,929,440

Total liabilities and shareholders' equity	$	1,254,494,946		$	1,216,259,587


See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Three Months Ended
	March 31,			March 31,
Interest and dividend income:	2012			2011
Loans, including fees	$	11,670,912	$	8,575,343
Taxable securities		1,486,351		1,248,586
Tax exempt securities		340,622		315,423
Interest-bearing deposits		41,782		39,727
Total interest and dividend income		13,539,667		10,179,079


Interest expense:
Deposits		927,983		1,027,365
Borrowed funds		313,039		234,425
Securities sold under agreements to repurchase		282,772		371,099
Total interest expense		1,523,794		1,632,889
Net interest income		12,015,873		8,546,190
Provision for loan losses		477,305		125,000
Net interest income after provision for loan losses		11,538,568		8,421,190


Other operating income:
Wealth management group fee income		1,775,576		1,615,691
Service charges on deposit accounts		991,880		983,078
Net gain on securities transactions		297,169		193,398
Other-than-temporary loss on investment securities:
Total impairment losses		-		-
Loss recognized in other comprehensive income		-		-
Net impairment loss recognized in earnings		-		-
Net gain on sales of loans held for sale		65,340		46,932
Casualty gains		758,857		-

Income from bank owned life insurance		21,525		21,587
Other		986,510		1,486,806
Total other operating income		4,896,857		4,347,492


Other operating expenses:
Salaries and wages		4,492,675		3,923,505
Pension and other employee benefits		1,289,940		1,043,107
Net occupancy expenses		1,294,877		1,174,042
Furniture and equipment expenses		518,366		497,447
Data processing expense		1,077,483		861,813
Amortization of intangible assets		284,140		176,503
Marketing and advertising expense		289,239		212,555
Losses on sales of other real estate owned		6,459		1,671
Other real estate owned expenses		43,479		27,223
FDIC insurance		226,631		252,395
Merger related expenses		4,545		1,036,072
Other		1,394,512		1,237,305
Total other operating expenses		10,922,346		10,443,638

Income before income tax expense		5,513,079		2,325,044
Income tax expense		1,898,546		660,029
Net income	$	3,614,533	$	1,665,015


Weighted average shares outstanding		4,642,012		3,624,434

Basic and diluted earnings per share	$	0.78	$	0.46


See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Three Months Ended March 31,
	2012			2011

Net income	$	3,614,533		$	1,665,015

Other comprehensive income
Unrealized holding gains on securities available for sale		514,361			747,372
Change in unrealized losses on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassification		-			-
Reclassification adjustment gains realized in net income		(297,169	)		(193,398	)
Net unrealized gains		217,192			553,974
Less: Tax effect		115,666			214,310
Net of tax amount		101,526			339,664

Change in funded status of defined benefit pension plan and other benefit plans		314,763			154,699
Less: Tax effect		120,995			59,847
Net of tax amount		193,768			94,852

Total other comprehensive income		295,294			434,516

Comprehensive income	$	3,909,827		$	2,099,531



See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)

	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balances at December 31, 2010	$	43,001	$	22,022,122		$	94,407,620		$	(19,166,655	)	$	102,475		$	97,408,563

Net income		-		-			1,665,015			-			-			1,665,015
Other comprehensive income		-		-			-			-			434,516			434,516


Restricted stock awards		-		6,254			-			-			-			6,254
Restricted stock units for directors' deferred compensation plan		-		24,968			-			-			-			24,968
Cash dividends declared ($.25 per share)		-		-			(891,403	)		-			-			(891,403	)
Distribution of 10,378 shares of treasury stock for directors’ compensation		-		(33,831	)		-			265,262			-			231,431
Distribution of 2,392 shares of treasury stock for employee compensation		-		(6,140	)		-			61,140			-			55,000
Distribution of 286 shares of treasury stock for deferred directors’ compensation		-		(7,363	)		-			7,310						(53	)
Distribution of 2,300 shares of treasury stock for employee restricted stock awards		-		(7,498	)		-			58,788			-			51,290
Balances at March 31, 2011	$	43,001	$	21,998,512		$	95,181,232		$	(18,774,155	)	$	536,991		$	98,985,581

Balances at December 31, 2011	$	53,101	$	45,582,861		$	100,628,900		$	(18,894,044	)	$	(1,441,378	)	$	125,929,440

Net income		-		-			3,614,533			-			-			3,614,533
Other comprehensive income		-		-			-			-			295,294			295,294


Restricted stock awards		-		15,922			-			-			-			15,922
Restricted stock units for directors' deferred compensation plan		-		21,340			-			-			-			21,340
Cash dividends declared ($.25 per share)		-		-			(1,143,923	)		-						(1,143,923	)
Distribution of 10,238 shares of treasury stock for directors' compensation		-		(28,121	)		-			261,069			-			232,948
Distribution of 3,453 shares of treasury stock for employee compensation		-		(8,052	)		-			88,052			-			80,000

Distribution of 1,079 shares of treasury stock for employee restricted stock awards		-		(27,514	)		-			27,514			-			-
Purchase of 8,654 shares of treasury stock		-		-			-			(216,808	)		-			(216,808	)


Balances at March 31, 2012	$	53,101	$	45,556,436		$	103,099,510		$	(18,734,217	)	$	(1,146,084	)	$	128,828,746


See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

	Three Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES:	2012			2011
Net income	$	3,614,533		$	1,665,015
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		284,140			176,503
Provision for loan losses		477,305			125,000
Depreciation and amortization of fixed assets		740,442			704,659
Amortization of premiums on securities, net		415,183			195,308
Gains on sales of loans held for sale, net		(65,340	)		(46,932	)
Proceeds from sales of loans held for sale		2,345,590			2,325,959
Loans originated and held for sale		(2,710,673	)		(1,819,218	)
Net losses on sale of other real estate owned		6,459			1,671
Net gains on trading assets		(13,122	)		(8,793	)
Net gains on securities transactions		(297,169	)		(193,398	)

Proceeds from sales of trading assets		72,646			-
Purchase of trading assets		(19,386	)		(227,287	)
Decrease (increase) in other assets		2,329,896			(414,556	)
Decrease in prepaid FDIC assessment		207,849			234,174
Decrease in accrued interest payable		(124,364	)		(81,239	)
Expense related to restricted stock units for directors' deferred compensation plan		21,340			24,968
Expense related to employee stock compensation		80,000			55,000
Expense related to employee stock awards		15,922			6,254
Decrease in other liabilities		(2,218,951	)		(1,831,697	)
Income from bank owned life insurance		(21,525	)		(21,587	)

Net cash provided by operating activities		5,140,775			869,804
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale		52,579,688			50,170,898
Proceeds from maturities and principal collected on securities available for sale		6,881,564			8,404,592
Proceeds from maturities and principal collected on securities held to maturity		1,090,104			172,790
Purchases of securities available for sale		(37,942,141	)		(69,419,853	)
Purchases of securities held to maturity		(225,000	)		(1,973,274	)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock		(1,550	)		-
Redemption of Federal Home Loan Bank and Federal Reserve Bank stock		75,100			121,900
Purchases of premises and equipment		(954,974	)		(238,718	)
Proceeds from sales of other real estate owned		34,555			36,809
Net (increase) decrease in loans		(5,695,251	)		1,139,806


Net cash provided (used) by investing activities		15,842,095			(11,585,050	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, savings accounts, and insured money market accounts		54,238,429			32,078,587
Net decrease in time deposits and individual retirement accounts		(14,025,878	)		(217,109	)
Net decrease in securities sold under agreements to repurchase		(2,108,399	)		(2,863,867	)
Repayments of Federal Home Loan Bank long term advances		(116,577	)		-
Purchase of treasury stock		(216,808	)		-

Cash dividends paid		(1,141,081	)		(881,203	)
Net cash provided by financing activities		36,629,686			28,116,408
Net increase in cash and cash equivalents		57,612,556			17,401,162
Cash and cash equivalents, beginning of period		52,901,853			60,619,777
Cash and cash equivalents, end of period	$	110,514,409		$	78,020,939
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	1,648,158		$	1,714,128
Income Taxes	$	875		$	309,686
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	116,800		$	-
See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Chemung Financial Corporation (the "Corporation"), through its wholly owned subsidiaries, Chemung

Canal Trust Company (the "Bank") and CFS Group, Inc., a financial services company, provides a wide

range of banking, financing, fiduciary and other financial services to its local market area. The

consolidated financial statements include the accounts of the Corporation and its wholly owned

subsidiaries. All material intercompany accounts and transactions are eliminated in consolidation.

The data in the consolidated balance sheet as of December 31, 2011 was derived from the audited

consolidated financial statements in the Corporation's 2011 Annual Report on Form 10-K, which was

filed with the Securities and Exchange Commission on March 28, 2012. That data, along with the other

interim financial information presented in the consolidated balance sheets, statements of income,

shareholders' equity and comprehensive income, and cash flows should be read in conjunction with the

audited consolidated financial statements, including the notes thereto, contained in the 2011 Annual

Report on Form 10-K. Amounts in prior periods' consolidated interim financial statements are

reclassified whenever necessary to conform to the current period's presentation.

The consolidated financial statements included herein reflect all adjustments which are, in the opinion of

management, of a normal recurring nature and necessary to present fairly the Corporation's financial

position as of March 31, 2012 and December 31, 2011, and results of operations for the three-month

periods ended March 31, 2012 and 2011, and changes in shareholders' equity and cash flows for the

three-month periods ended March 31, 2012 and 2011. Subsequent events were evaluated for any

required recognition or disclosure. The results for the periods presented are not necessarily indicative of

results to be expected for the entire fiscal year or any other interim period.

2. Earnings Per Common Share

Basic earnings per share is net income divided by the weighted average number of common shares

outstanding during the period. Issuable shares, including those related to directors’ restricted stock units

and directors’ stock compensation, are considered outstanding and are included in the computation of

basic earnings per share as they are earned. All outstanding unvested share based payment awards that

contain rights to nonforfeitable dividends are considered participating securities for this calculation.

Restricted stock awards are grants of participating securities. The impact of the participating securities

on earnings per share is not material. Earnings per share information is adjusted to present comparative

results for stock splits and stock dividends that occur. Earnings per share were computed by dividing

net income by 4,642,012 and 3,624,434 weighted average shares outstanding for the three-month

periods ended March 31, 2012 and 2011, respectively. There were no dilutive common stock

equivalents during the three-month periods ended March 31, 2012 or 2011.

3. Adoption of New Accounting Standards

In May, 2011, the FASB issued an amendment to achieve common fair value measurement and

disclosure requirements between U.S. and International accounting principles. Overall, the guidance is

consistent with existing U.S. accounting principles; however, there are some amendments that change a

particular principle or requirement for measuring fair value or for disclosing information about fair value

measurements. The amendments in this guidance are effective for interim and annual reporting periods

beginning after December 15, 2011. The effect of adopting this standard did not have a material effect

on the Corporation’s operating results or financial condition, but the additional disclosures are included

in Note 4.

In June 2011, the FASB amended existing guidance and eliminated the option to present the components

of other comprehensive income as part of the statement of changes in shareholder’s equity. The

amendment requires that comprehensive income be presented in either a single continuous statement or

in two separate consecutive statements. The amendments in this guidance are effective as of the

beginning of a fiscal reporting year, and interim periods within that year, that begins after December 15,

2011. In connection with the adoption of this amendment, the Corporation changed the presentation of

the statement of comprehensive income for the Corporation to two consecutive statements instead of

presenting it as part of the consolidated statements of shareholder’s equity.

4. 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:

Investment 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).

The Corporation's investment in collateralized debt obligations consisting of pooled trust preferred

securities which are issued by financial institutions were historically priced using Level 2 inputs. The

lack of observable inputs and market activity in this class of investments has been significant

and resulted in unreliable external pricing. Broker pricing and bid/ask spreads, when available, have varied

widely. The once active market has become comparatively inactive. As a result, these investments are

now priced using Level 3 inputs.

The Corporation has developed an internal model for pricing these securities. This is the same model

used in determining other-than-temporary impairment (“OTTI”) as further described in Note 8.

Information such as historical and current performance of the underlying collateral, deferral/default

rates, collateral coverage ratios, break in yield calculations, cash flow projections, liquidity and credit

premiums required by a market participant, and financial trend analysis with respect to the individual

issuing financial institutions, are utilized in determining individual security valuations. Discount rates

were utilized along with the cash flow projections in order to calculate an appropriate fair value. These

discount rates were calculated based on industry index rates and adjusted for various credit and liquidity

factors. Due to current market conditions as well as the limited trading activity of these securities, the

market value of the securities is highly sensitive to assumption changes and market volatility.

Trading Assets: The fair values of trading assets 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 losses. 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 the 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, resulting in

a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional

impairment and adjusted accordingly.

Other Real Estate Owned: 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 the 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 other real estate owned (“OREO”) are

performed by certified general appraisers (for commercial properties) or certified residential appraisers

(for 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, appraisals are adjusted based on the age

of the appraisal, the position of the lien, the type of the property and its condition.

Assets and liabilities measured at fair value on a recurring basis are summarized below:

			Fair Value Measurement at March 31, 2012 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	$	136,695,868	$	35,563,500	$	99,132,368	$	-
Mortgage-backed securities, residential		45,957,281		-		45,957,281		-
Obligations of states and political subdivisions		45,542,316		-		45,542,316		-
Collateralized mortgage obligations		6,487,629		-		6,487,629		-
Corporate bonds and notes		13,830,673		-		13,830,673		-
SBA loan pools		1,906,290		-		1,906,290		-
Trust Preferred securities		2,364,804		-		2,018,594		346,210
Corporate stocks		6,665,016		5,975,014		690,002		-
Total available for sale securities	$	259,449,877	$	43,538,514	$	215,565,153	$	346,210

Trading assets	$	254,243	$	254,243	$	-	$	-

			Fair Value Measurement at December 31, 2011 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	$	152,079,770	$	35,950,000	$	116,129,770	$	-
Mortgage-backed securities, residential		50,766,604		-		50,766,604		-
Obligations of states and political subdivisions		46,512,971		-		46,512,971		-
Trust Preferred securities		2,310,066		-		2,015,156		294,910
Corporate bonds and notes		13,684,199		-		13,684,199		-
Collateralized mortgage obligations		7,536,753		-		7,536,753		-
SBA loan pools		1,949,606		-		1,949,606		-
Corporate stocks		6,029,841		5,339,839		690,002		-
Total available for sale securities	$	280,869,810	$	41,289,839	$	239,285,061	$	294,910

Trading assets	$	294,381	$	294,381	$	-	$	-

There were no transfers between Level 1 and Level 2 during the three-month period ending March 31, 2012

or the year ending December, 31, 2011.

The significant unobservable inputs used in the fair value measurement of the Corporation’s

collateralized debt obligations are probabilities of specific-issuer defaults and deferrals and specific-

issuer recovery assumptions. Significant increases in specific-issuer default assumptions or decreases

in specific-issuer recovery assumptions would result in a significantly lower fair value measurement.

Conversely, decreases in specific-issuer default assumptions or increases in specific-issuer recovery

assumptions would result in a higher fair value measurement. The Corporation treats all interest

payment deferrals as defaults and assumes no recoveries on defaults.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis

using significant unobservable inputs (Level 3) for the three-month periods ending March 31, 2012

and 2011:

	Fair Value Measurement three-months ended March 31, 2012 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement three-months ended March 31, 2011 Using Significant Unobservable Inputs (Level 3)
Investment Securities Available for Sale
Beginning balance	$	294,910	$	334,585
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-		-
Impairment charge on investment securities		-		-
Included in other comprehensive income		51,300		14,450
Transfers in and/or out of Level 3		-		-
Ending balance March 31	$	346,210	$	349,035

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

			Fair Value Measurement at March 31, 2012 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial, financial and agricultural:
Commercial and industrial	$	872,053	$	-	$	-	$	872,053
Commercial mortgages:				-		-
Other		1,161,125		-		-		1,161,125
Total Impaired Loans	$	2,033,178	$	-	$	-	$	2,033,178

Other real estate owned:
Commercial, financial and agricultural:
Commercial and industrial	$	218,040	$	-	$	-	$	218,040
Commercial mortgages:
Other		366,760		-		-		366,760
Residential mortgages		358,600		-		-		358,600
Consumer loans:
Home equity lines & loans		36,600		-		-		36,600
Total Other real estate owned, net	$	980,000	$	-	$	-	$	980,000

			Fair Value Measurement at December 31, 2011 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial, financial and agricultural:
Commercial and industrial	$	831,601	$	-	$	-	$	831,601
Commercial mortgages:				-		-
Other		3,321,838		-		-		3,321,838
Total Impaired Loans	$	4,153,439	$	-	$	-	$	4,153,439

Other real estate owned:
Commercial, financial and agricultural:
Commercial and industrial	$	218,040	$	-	$	-	$	218,040
Commercial mortgages:
Other		366,760		-		-		366,760
Residential mortgages		276,355		-		-		276,355
Consumer loans:
Home equity lines & loans		36,600		-		-		36,600
Total Other real estate owned, net	$	897,755	$	-	$	-	$	897,755

Impaired loans, which are measured for impairment using the fair value of the collateral for collateral

dependent loans, had a carrying amount of $3,838,542 with a valuation allowance of $1,805,364 as of

March 31, 2012, resulting in no additional provision for loan losses for the three month period ending

March 31, 2012. Impaired loans had a carrying amount of $6,095,645, with a valuation allowance of

$1,942,206 as of December 31, 2011, resulting in a $958,333 provision for loan losses for the year

ending December 31, 2011.

OREO, which is measured by the lower of carrying or fair value less costs to sell, had a net carrying

amount of $980,000 at March 31, 2012. The net carrying amount reflects the outstanding balance of

$1,091,407 net of a valuation allowance of $111,407 at March 31, 2012 and no write downs resulted for

the three-month period ending March 31, 2012. OREO had a net carrying amount of $897,755 at

December 31, 2011. The net carrying amount reflects the outstanding balance of $1,009,162 net of a

valuation allowance of $111,407 at December 31, 2011, which resulted in write downs of $12,120

for the year ending December 31, 2011.

The carrying amounts and estimated fair values of other financial instruments, at March 31, 2012 and

December 31, 2011, are as follows:

	Fair Value Measurements at March 31, 2012 Using
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	$	27,312	$	27,312	$	-		-	$	27,312
Interest-bearing deposits in other financial institutions		83,203		80,325		2,878		-		83,203
Trading assets		254		254		-		-		254
Securities available for sale		259,450		43,539		215,565		346		259,450
Securities held to maturity		7,447		-		8,206		-		8,206
Federal Home Loan and Federal Reserve Bank stock		5,436		-		-		-		N/A
Net loans		792,750		-		-		813,736		813,736
Loans held for sale		826		-		826		-		826
Accrued interest receivable		4,382		730		1,315		2,330		4,382

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts		775,741		775,741		-		-		775,741
Time deposits		262,965		-		264,977		-		264,977
Securities sold under agreements to repurchase		34,998		-		37,621		-		37,621
Federal Home Loan Bank advances		43,227		-		46,055		-		46,055
Accrued interest payable		676		10		686		-		676
Dividends payable		1,144		1,144		-		-		1,144

	December 31, 2011
Financial assets:	Carrying Amount		Estimated Fair Value (1)
Cash and due from financial institutions	$	28,205	$	28,205
Interest-bearing deposits in other financial institutions		24,697		24,697
Trading assets		294		294
Securities available for sale		280,870		280,870
Securities held to maturity		8,312		9,176
Federal Home Loan and Federal Reserve Bank stock		5,509		N/A
Net loans		787,256		805,760
Loans held for sale		395		395
Accrued interest receivable		3,882		3,882

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts		721,503		721,503
Time deposits		276,990		279,441
Securities sold under agreements to repurchase		37,107		40,019
Federal Home Loan Bank advances		43,344		46,603
Accrued interest payable		800		800
Dividends payable		1,141		1,141

(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.

The methods and assumptions used to estimate fair value are described as follows:

Cash, Due From and Interest-Bearing Deposits in Other Financial Institutions

For those short-term instruments that generally mature in ninety days or less, the carrying value

approximates fair value of which non interest-bearing deposits are classified as Level 1 and interest-

bearing deposits with the FHLB and FRB are classified as Level 1, and time deposits are classified as

Level 2.

FHLB and FRB Stock

It is not practicable to determine the fair value of FHLB and FRB stock due to restrictions on its

transferability.

Loans Receivable

For variable-rate loans that reprice frequently, fair values approximate carrying values. The fair values

for other loans are estimated through discounted cash flow analysis using interest rates currently being

offered for loans with similar terms and credit quality. Loans are classified as Level 3. The methods

utilized to estimate the fair value of loans do not necessarily represent an exit price. Loans held for sale

are classified as Level 2.

Deposits

The fair values disclosed for demand deposits, savings accounts and money market accounts are, by

definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying values) and

classified as Level 1.

The fair value of certificates of deposits is estimated using a discounted cash flow approach that applies

interest rates currently being offered on certificates to a schedule of the weighted-average expected

monthly maturities and classified as Level 2.

Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

These instruments bear both variable and fixed rates of interest. Therefore, the carrying value

approximates fair value for the variable rate instruments and the fair value of fixed rate instruments is

based on discounted cash flows to maturity. These are classified as Level 2.

Federal Home Loan Bank Advances

These instruments bear a stated rate of interest to maturity and, therefore, the fair value is based on

discounted cash flows to maturity and classified as Level 2.

Accrued Interest Receivable and Payable

For these short-term instruments, the carrying value approximates fair value resulting in a classification

of Level 1, Level 2 or Level 3 depending upon the classification of the asset/liability they are associated

with.

5. Goodwill and Intangible Assets

The changes in goodwill included in the core banking segment during the periods ending March 31,

2012 and 2011 were as follows:

	2012			2011
Beginning of year	$	21,983,617		$	9,872,375
Adjustment of Acquired goodwill		(159,174	)		-
March 31,	$	21,824,443		$	9,872,375

Acquired intangible assets were as follows at March 31, 2012 and December 31, 2011:

	At March 31, 2012				At December 31, 2011
	Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization
Core deposit intangibles	$	3,819,798	$	1,373,084	$	3,819,798	$	1,213,118
Other customer relationship intangibles		6,063,423		2,603,737		6,063,423		2,479,563
Total	$	9,883,221	$	3,976,821	$	9,883,221	$	3,692,681

Aggregate amortization expense was $284,140 and $176,503 for the three-month periods ended March 31, 2012 and 2011, respectively.

The remaining estimated aggregate amortization expense at March 31, 2012 is listed below:

Year	Estimated Expense
2012	$	762,580
2013		876,524
2014		777,801
2015		681,176
2016		607,713
2017 and thereafter		2,200,606
Total	$	5,906,400

6. Accumulated Other Comprehensive Income

Accumulated other comprehensive income or 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 accumulated other comprehensive income balance, net of tax:

	Balance at December 31, 2011				Current Period Change		Balance at March 31, 2012
Unrealized gains on securities available for sale		$	7,987,055		$	101,526	$	8,088,581
Unrealized loss on pension plans and other benefit plans			(9,428,433	)		193,768		(9,234,665	)
Total		$	(1,441,378	)	$	295,294	$	(1,146,084	)

7. 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 U.S. 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.

In the normal course of business, there are various outstanding claims and legal proceedings involving

the Corporation or its subsidiaries. On February 14 and April 14, 2011, the Bank received separate

settlement demands from representatives of beneficiaries of certain trusts for which the Bank has acted

as trustee. The settlement demands relate to alleged claims of, among other things, breach of the Bank’s

fiduciary duties as trustee, including the Bank’s alleged failure to adequately diversify the relevant trust

portfolios. The beneficiaries seek aggregate damages of up to approximately $27.0 million. On

September 16, 2011, the beneficiaries objected in the Surrogate’s Court of the State of New York,

County of Chemung (the “Surrogate’s Court”) to accountings with respect to the above-mentioned trusts

provided by the Bank, based on allegations similar to those offered in the settlement demands. The

matter remains pending at the Surrogate Court. Although these matters are inherently unpredictable,

management will defend against these claims vigorously. Management has concluded that it is

reasonably possible, but not probable, that the financial position, results of operations or cash flows of

the Corporation could be materially adversely affected in any particular period by the unfavorable

resolution of these claims, not withstanding any potential recovery under applicable insurance coverage.

An amount of loss or range of loss cannot be reasonably estimated at this time.

8. Securities

Amortized cost and estimated fair value of securities available for sale are as follows:

	March 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	134,096,396	$	2,660,433	$	60,961	$	136,695,868
Mortgage-backed securities, residential		43,370,865		2,586,416		-		45,957,281
Collateralized Mortgage obligations		6,363,526		126,984		2,881		6,487,629
Obligations of states and political subdivisions		43,831,193		1,719,743		8,620		45,542,316
Corporate bonds and notes		13,448,409		432,568		50,304		13,830,673
SBA loan pools		1,871,925		34,365		-		1,906,290
Trust Preferred securities		2,540,204		134,035		309,435		2,364,804
Corporate stocks		788,013		5,878,972		1,969		6,665,016
Total	$	246,310,531	$	13,573,516	$	434,170	$	259,449,877

	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	149,140,715	$	3,022,726	$	83,671	$	152,079,770
Mortgage-backed securities, residential		48,129,271		2,637,334		-		50,766,605
Collateralized mortgage obligations		7,412,470		135,603		11,321		7,536,753
Obligations of states and political subdivisions		44,561,789		1,954,265		3,083		46,512,971
Corporate bonds and notes		13,461,675		418,969		196,446		13,684,198
SBA loan pools		1,915,419		34,187		-		1,949,606
Trust preferred securities		2,538,286		132,516		360,735		2,310,066
Corporate stocks		788,030		5,246,655		4,844		6,029,841
Total	$	267,947,655	$	13,582,255	$	660,100	$	280,869,810

Amortized cost and estimated fair value of securities held to maturity are as follows:

	March 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	7,446,817	$	759,655	$	-	$	8,206,472

Total	$	7,446,817	$	759,655	$	-	$	8,206,472

	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value

Obligations of states and political subdivisions	$	8,311,921	$	864,035	$	-	$	9,175,956

Total	$	8,311,921	$	864,035	$	-	$	9,175,956

The amortized cost and estimated fair value of debt securities are shown 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:

	March 31, 2012
	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Within One Year	$	40,873,174	$	41,400,512	$	2,083,170	$	2,103,820
After One, But Within Five Years		156,409,760		162,127,467		3,586,148		3,953,357
After Five, But Within Ten Years		44,820,918		46,015,553		1,777,499		2,149,295
After Ten Years		3,418,666		3,241,330		-		-
Total	$	245,522,518	$	252,784,861	$	7,446,817	$	8,206,472

Proceeds from sales of securities available for sale that resulted in realized gains were $ 25,679,688 and

$25,170,898 for the three months ended March 31, 2012 and 2011, respectively. Gross gains of

$297,169 and $193,398 were realized on these sales during the first quarter of 2012 and 2011,

respectively. There were no calls of securities available for sale that resulted in gains for the three

months ended March 31, 2012 and 2011. There were no gross losses from calls or sales of securities

during the three months ended March 31, 2012 and March 31, 2011.

The following table summarizes the investment securities available for sale and held to maturity with

unrealized losses at March 31, 2012 and December 31, 2011 by aggregated major security type and

length of time in a continuous unrealized loss position:

	Less than 12 months				12 months or longer				Total
March 31, 2012	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	55,431,000	$	60,961	$	-	$	-	$	55,431,000	$	60,961
Collateralized mortgage obligations		1,256,943		2,881		-		-		1,256,943		2,881
Obligations of states and political subdivisions		1,059,454		8,620		-		-		1,059,454		8,620
Corporate bonds and notes		992,891		36,123		757,235		14,181		1,750,126		50,304
Trust preferred securities		-		-		346,210		309,435		346,210		309,435
Corporate stocks		-		-		1,669		1,969		1,669		1,969
Total temporarily impaired securities	$	58,740,288	$	108,585	$	1,105,114	$	325,585	$	59,845,402	$	434,170

	Less than 12 months				12 months or longer				Total
December 31, 2011	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	27,365,920	$	83,671	$	-	$	-	$	27,365,920	$	83,671
Collateralized mortgage obligations		2,546,461		11,321		-		-		2,546,461		11,321
Obligations of states and political subdivisions		947,203		3,083		-		-		947,203		3,083
Corporate bonds and notes		5,261,074		196,446		-		-		5,261,074		196,446
Trust preferred securities		-		-		294,910		360,735		294,910		360,735
Corporate stocks		1,669		1,969		47,117		2,875		48,786		4,844
Total temporarily impaired securities	$	36,122,327	$	296,490	$	342,027	$	363,610	$	36,464,354	$	660,100

Other-Than-Temporary Impairment

When OTTI occurs, for either debt securities or purchased beneficial interests, the amount of the OTTI

recognized in earnings depends on whether an entity intends to sell the security or more likely than not

will be required to sell the security before recovery of its amortized cost basis, less any current-period

credit loss. If an entity intends to sell or more likely than not will be required to sell the security before

recovery of its amortized cost basis, less any current-period credit loss, the OTTI shall be recognized in

earnings equal to the entire difference between the investment’s amortized cost basis and its fair value at

the balance sheet date. If an entity does not intend to sell the security and it is not more likely than not

that the entity will be required to sell the security before recovery of its amortized cost basis less any

current-period loss, the OTTI shall be separated into the amount representing the credit loss and the

amount related to all other factors. The amount of the total OTTI related to the credit loss is determined

based on the present value of cash flows expected to be collected and is recognized in earnings. The

amount of the total OTTI related to other factors is recognized in other comprehensive income, net of

applicable taxes. The previous amortized cost basis less the OTTI recognized in earnings becomes the

new amortized cost basis of the investment.

As of March 31, 2012, the majority of the Corporation's unrealized losses in the investment securities

portfolio related to two pooled trust preferred securities. The decline in fair value on these securities is

primarily attributable to the financial crisis and resulting credit deterioration and financial condition of

the underlying issuers, all of which are financial institutions. This deterioration may affect the future

receipt of both principal and interest payments on these securities. This fact combined with the current

illiquidity in the market makes it unlikely that the Corporation would be able to recover its investment in

these securities if the securities were sold at this time. One of these securities has been previously

written down through the income statement to an amount considered to be immaterial to the financial

statements. Therefore management is no longer analyzing this security for further impairment.

Our analysis of these investments includes a $629 thousand book value collateralized debt obligation

("CDO") which is a pooled trust preferred security. This security was rated high quality at inception, but

at March 31, 2012 Moody's rated this security as Caa3, which is defined as substantial risk of default.

The Corporation uses the OTTI evaluation model to compare the present value of expected cash flows to

the previous estimate to determine if there are adverse changes in cash flows during each quarter. The

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

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

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

allocation of the payments to the note classes. The current estimate of expected cash flows is based on

the most recent trustee reports and any other relevant market information including announcements of

interest payment deferrals or defaults of underlying trust preferred securities.

Upon completion of the March 31, 2012 analysis, our model indicated no additional other-than-

temporary impairment on the TPREF Funding II security. This security remained classified as available

for sale and represented $300 thousand of the unrealized losses reported at March 31, 2012. Payments

continue to be made as agreed on this security.

When conducting the March 31, 2012 analysis, the present value of expected future cash flows using a

discount rate equal to the yield in effect at the time of purchase was compared to the previous quarters'

analysis. The analysis indicated no further decline in value attributed to credit related factors stemming

from further deterioration in the underlying collateral payment streams. Additionally, to estimate fair

value the present value of the expected future cash flows was calculated using a current estimated

discount rate that a willing market participant might use to value the security based on current market

conditions and interest rates. This comparison indicated an increase in value based on factors other than

credit which resulted in a gain reported in other comprehensive income. Changes in credit quality may

or may not correlate to changes in the overall fair value of the impaired securities as the change in credit

quality is only one component in assessing the overall fair value of the impaired securities. Therefore,

the recognition of additional credit related OTTI could result in a gain reported in other comprehensive

income. Total other-than-temporary impairment recognized in accumulated other comprehensive

income was $188,878 and $228,598 for securities available for sale at March 31, 2012 and March 31,

2011, respectively.

The table below presents a roll forward of the cumulative credit losses recognized in earnings for the

three-month periods ending March 31, 2012 and 2011:

	2012		2011
Beginning balance, January 1,	$	3,506,073	$	3,438,673
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-		-
Additions/Subtractions:
Amounts realized for securities sold during the period		-		-
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		-		-
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security		-		-
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-		-
Ending balance, March 31,	$	3,506,073	$	3,438,673

9. Loans and Allowance for Loan Losses

The composition of the loan portfolio is summarized as follows:

	March 31, 2012		December 31, 2011
Commercial, financial and agricultural	$	138,265,330	$	142,209,279
Commercial mortgages		276,270,702		264,589,013
Residential mortgages		192,548,256		193,599,853
Indirect consumer loans		96,660,998		97,165,447
Consumer loans		99,287,781		99,351,585
	$	803,033,067	$	796,915,177

Loans are charged against the allowance for loan losses when management believes that the

collectability of all or a portion of the principal is unlikely. The allowance is an amount that

management believes will be adequate to absorb probable incurred losses on existing loans.

Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic

basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical

loan loss experience and review of specific problem loans (including evaluations of the underlying

collateral). Historical loss experience is adjusted by management based on their judgment as to the

current impact of qualitative factors including changes in the composition and volume of the loan

portfolio, overall portfolio quality, and current economic conditions that may affect the borrowers'

ability to pay. Management believes that the allowance for loan losses is adequate to absorb probable

incurred losses. While management uses available information to recognize losses on loans, future

additions to the allowance may be necessary based on changes in economic conditions. In addition,

various regulatory agencies, as an integral part of their examination process, periodically review the

Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize

additions to the allowance based on their judgments about information available to them at the time of

their examination.

Management, after considering current information and events regarding a borrower's ability to repay its

obligations, classifies a loan as impaired when it is probable that the Corporation will be unable to

collect all amounts due according to the contractual terms of the loan agreement. If a loan is impaired, a

portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated

future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected

solely from the collateral. Large groups of smaller balance homogeneous loans, such as consumer and

residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not

separately identified for impairment disclosures. Troubled debt restructurings are separately identified

for impairment disclosures and are measured at the present value of estimated future cash flows using

the loan’s effective rate at inception. If a troubled debt restructuring is considered to be a collateral

dependent loan, the loan is reported, net, at the fair value of the collateral. For troubled debt

restructurings that subsequently default, the Corporation determines the amount of reserve in accordance

with the accounting policy for the allowance for loan losses.

The general component of the allowance for loan losses covers non-impaired loans and is based on

historical loss experience adjusted for current factors. Loans not impaired but classified as substandard

and special mention use a historical loss factor on a rolling five year history of net losses. For all other

unclassified loans, the historical loss experience is determined by portfolio class and is based on the

actual loss history experienced by the Corporation over the most recent two years. This actual loss

experience is supplemented with other economic factors based on the risks present for each portfolio

class. These economic factors include consideration of the following: levels of and trends in

delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume

and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in

lending policies, procedures, and practices; experience, ability, and depth of lending management and

other relevant staff; national and local economic trends and conditions; industry conditions; and effects

of changes in credit concentrations. The following portfolio segments have been identified: commercial,

financial and agricultural; commercial mortgages; residential mortgages; and consumer loans.

Risk Characteristics

Commercial, financial and agricultural loans primarily consist of loans to small to mid-sized businesses

in our market area in a diverse range of industries. These loans are of higher risk and typically are made

on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.

Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may

fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic

conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral,

if any.

Commercial mortgage loans generally have larger balances and involve a greater degree of risk than

residential mortgage loans, inferring higher potential losses on an individual customer basis. Loan

repayment is often dependent on the successful operation and management of the properties and/or the

businesses occupying the properties, as well as on the collateral securing the loan. Economic events or

conditions in the real estate market could have an adverse impact on the cash flows generated by

properties securing the Company’s commercial real estate loans and on the value of such properties.

Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment

from his or her employment and other income, but are secured by real property whose value tends to be

more easily ascertainable. Credit risk for these types of loans is generally influenced by general

economic conditions, the characteristics of individual borrowers and the nature of the loan collateral.

The consumer loan segment includes home equity lines of credit and home equity loans, which exhibit

many of the same risk characteristics as residential mortgages. Indirect and other consumer loans may

entail greater credit risk than residential mortgage and home equity loans, particularly in the case of

other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by

depreciable assets, such as automobiles or boats. In such cases, any repossessed collateral for a defaulted

consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In

addition, consumer loan collections are dependent on the borrower’s continuing financial stability, thus

are more likely to be affected by adverse personal circumstances such as job loss, illness or personal

bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and

insolvency laws, may limit the amount which can be recovered on such loans.

The following tables present activity in the allowance for loan losses by portfolio segment for the three-

month periods ending March 31, 2012 and March 31, 2011 and by loans originated by the Corporation

(referred to as “Legacy” loans) and loans acquired in the FOFC merger completed on April 8, 2011

(referred to as “Acquired” loans). The Acquired loan allowance represents any valuation allowances

established after acquisition for decreases in cash flows expected to be collected on loans acquired with

deteriorated credit quality:

Legacy Loans	Three Months Ended March 31, 2012
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	3,143,373		$	2,570,149	$	1,309,649		$	2,192,729		$	443,420		$	9,659,320
Charge Offs:		-			-		(14,340	)		(158,319	)		-			(172,659	)
Recoveries:		172,603			10,235		-			61,983			-			244,821
Net charge offs		172,603			10,235		(14,340	)		(96,336	)		-			72,162
Provision		(179,519	)		373,248		121,943			4,040			(69,712	)		250,000
Ending balance	$	3,136,457		$	2,953,632	$	1,417,252		$	2,100,433		$	373,708		$	9,981,482

Acquired loans	Three Months Ended March 31, 2012
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages			Residential Mortgages		Consumer Loans		Unallocated		Total
Beginning balance:	$	-	$	-		$	-	$	-	$	-	$	-
Reclassification of acquired loan discount		73,228		50,332			-		-		-		123,560
Charge Offs:		-		(49,057	)						-		(49,057	)
Recoveries:		-		-			-		-		-		-
Net charge offs		-		(49,057	)		-		-		-		(49,057	)
Provision		151,708		75,597			-		-		-		227,305
Ending balance	$	224,936	$	76,872		$	-	$	-	$	-	$	301,807

	Three Months Ended March 31, 2011
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages			Residential Mortgages		Consumer Loans			Unallocated			Total
Beginning balance:	$	2,118,299	$	2,575,058		$	1,301,780	$	2,727,022		$	775,972		$	9,498,131
Charge Offs:		-		(3,764	)		-		(206,911	)		-			(210,675	)
Recoveries:		110,589		9,629			14,479		43,797			-			178,494
Net charge offs		110,589		5,865			14,479		(163,114	)		-			(32,181	)
Provision		273,312		76,262			49,955		(139,596	)		(134,933	)		125,000
Ending balance	$	2,572,200	$	2,657,185		$	1,366,214	$	2,424,312		$	641,040		$	9,590,951

The following tables present the balance in the allowance for loan losses and the recorded investment in

loans by portfolio segment based on impairment method as of March 31, 2012 and December 31, 2011.

The recorded investment excludes loans acquired in the FOFC merger except those loans acquired with

deteriorated credit quality:

	March 31, 2012
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,492,310	$	313,054	$	-	$	-	$	-	$	1,805,364
Collectively evaluated for impairment		1,644,147		2,640,578		1,417,252		2,100,433		373,708		8,176,118
Acquired with deteriorated credit quality		224,936		76,871		-		-		-		301,807
Total ending allowance balance	$	3,361,393	$	3,030,503	$	1,417,252	$	2,100,433	$	373,708	$	10,283,289

	December 31, 2011
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,528,651	$	413,555	$	-	$	-	$	-	$	1,942,206
Collectively evaluated for impairment		1,614,722		2,156,594		1,309,649		2,192,729		443,420		7,717,114
Total ending allowance balance	$	3,143,373	$	2,570,149	$	1,309,649	$	2,192,729	$	443,420	$	9,659,320

	March 31, 2012
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,470,586	$	2,190,967	$	142,730	$	59,568	$	4,863,851
Loans collectively evaluated for impairment		112,831,940		190,351,054		175,166,488		190,478,832	$	668,828,314
Acquired with deteriorated credit quality		1,275,293		10,613,740		231,246		-		12,120,279
Total ending loans balance	$	116,577,819	$	203,155,761	$	175,540,464	$	190,538,400	$	685,812,444

	December 31, 2011
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	5,275,043	$	4,603,563	$	179,337	$	-	$	10,057,943
Loans collectively evaluated for impairment		111,532,413		169,658,759		175,405,950		190,904,630		647,501,752
Total ending loans balance	$	116,807,456	$	174,262,322	$	175,585,287	$	190,904,630	$	657,559,695

The following tables present loans individually evaluated for impairment recognized by class of loans as of

March 31, 2012 and December 31, 2011, the average recorded investment and interest income

recognized by class of loans as of the three-month periods ending March 31, 2012 and 2011:

	March 31, 2012						December 31, 2011
	Unpaid Principal Balance		Allowance for Loan Losses Allocated		Recorded Investment		Unpaid Principal Balance			Allowance for Loan Losses Allocated		Recorded Investment
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	105,834	$	-	$	105,947	$	2,914,401	$	-	$	2,914,776
Commercial mortgages:
Construction		10,454		-		10,454		10,454		-		10,454
Other		706,200		-		706,172		862,815		-		860,648
Residential mortgages		142,730		-		142,730		178,925		-		179,337
Consumer loans:
Home equity lines & loans		58,823		-		59,568		-		-		-

With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		2,364,363		1,492,310		2,364,639		2,360,252		1,528,651		2,360,267
Commercial mortgages:
Construction		8,295		8,295		8,295		8,295		8,295		8,295
Other		1,465,884		304,759		1,466,046		3,727,097		405,260		3,724,166
Total	$	4,862,583	$	1,805,364	$	4,863,851	$	10,062,239	$	1,942,206	$	10,057,943

	Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	1,510,362	$	-	$	3,165,465	$	8,426
Commercial mortgages:
Construction		10,454		-		31,460		-
Other		783,410		-		3,434,129		-
Residential mortgages		161,034		-		357,510		2,374
Consumer loans:
Home equity lines & loans		29,784		1,166		-		-
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		2,362,453		-		43, 715		-

Commercial mortgages:
Construction		8,295		-		35,551		-
Other		2,595,105		-		766,573		-
Total	$	7,460,897	$	1,166	$	7,834,403	$	10,800

The following table presents the recorded investment in non accrual and loans past due over 90 days still

on accrual by class of loans as of the periods ending March 31, 2012 and December 31, 2011. This table

includes loans acquired in the FOFC merger, except those loans with evidence of credit deterioration at

the time of the merger.

	March 31, 2012				December 31, 2011
	Non-Accrual		Loans Past Due Over 90 Days Still Accruing		Non-Accrual		Loans Past Due Over 90 Days Still Accruing
Commercial, financial and agricultural:
Commercial & industrial	$	2,823,621	$	7,847	$	5,611,805	$	-
Commercial mortgages
Construction		427,729		6,274,564		18,749		7,295,104
Other		2,412,214		-		4,778,384		-
Residential mortgages		2,588,711		-		2,611,096		-
Consumer loans
Credit cards		-		11,582		-		9,053
Home equity lines & loans		417,776		-		455,418		-
Indirect consumer loans		102,402		-		22,287		-
Other direct consumer loans		10,596		-		113,349		-
Total	$	8,783,049	$	6,293,993	$	13,611,088	$	7,304,157

The following tables present the aging of the recorded investment in loans past due (including non-accrual loans) by class of loans as of

March 31, 2012 and December 31, 2011 and by loans originated by the Corporation (referred to as “Legacy” loans) and loans acquired in the

FOFC merger (referred to as “Acquired” loans):

	March 31, 2012
Legacy Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	83,304	$	211,650	$	167,318	$	462,272	$	-	$	114,534,498	$	114,996,770
Agricultural		-		-		-		-		-		305,755		305,755
Commercial mortgages:
Construction		-		10,454		8,295		18,749		-		17,321,744		17,340,493
Other		-		-		701,830		701,830		-		174,499,698		175,201,528
Residential mortgages		1,323,511		173,740		867,608		2,364,859		-		172,944,360		175,309,219
Consumer loans:
Credit cards		7,789		5,800		11,582		25,171		-		1,756,861		1,782,032
Home equity lines & loans		358,087		17,579		173,659		549,325		-		76,404,286		76,953,611
Indirect consumer loans		335,143		46,448		73,560		455,151		-		96,515,998		96,971,149
Other direct consumer loans		10,998		21,729		435		33,162		-		14,798,446		14,831,608
Total	$	2,118,832	$	487,400	$	2,004,287	$	4,610,519	$	-	$	669,081,646	$	673,692,165

	March 31, 2012
Acquired Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	438,004	$	24,476	$	249,984	$	712,464	$	1,275,293	$	22,654,930	$	24,642,687
Commercial mortgages:
Construction		-		-		6,683,544		6,683,544		1,199,658		2,498,382		10,381,584
Other		-		-		239,996		239,996		9,414,082		63,195,237		72,849,315
Residential mortgages		2,723,725		-		265,851		2,989,576		231,246		14,556,417		17,777,239
Consumer loans:
Home equity lines & loans		-		-		-		-		-		5,915,875		5,915,875
Other direct consumer loans		-		701		-		701		-		122,048		122,749
Total	$	3,161,729	$	25,177	$	7,439,375	$	10,626,281	$	12,120,279	$	108,942,889	$	131,689,449

	December 31, 2011
Legacy Loans:		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial		$	4,571	$	10,940	$	2,920,906	$	2,936,417	$	-	$	113,612,941	$	116,549,358
Agricultural			-		-		-		-		-		258,098		258,098
Commercial mortgages:
Construction			-		-		-		-		-		7,383,731		7,383,731
Other			82,986		-		2,977,010		3,059,996		-		163,818,595		166,878,591
Residential mortgages			1,418,234		293,337		1,221,056		2,932,627		-		172,652,660		175,585,287
Consumer loans:
Credit cards			3,660		8,031		9,053		20,744		-		1,934,471		1,955,215
Home equity lines & loans			368,556		27,717		212,573		608,846		-		76,280,502		76,889,348
Indirect consumer loans			597,180		75,817		85,763		758,760		-		96,781,480		97,540,240
Other direct consumer loans			21,876		10,243		9,644		41,763		-		14,478,064		14,519,827
Total		$	2,497,063	$	426,085	$	7,436,005	$	10,359,153	$	-	$	647,200,542	$	657,559,695

	December 31, 2011
Acquired Loans:		30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial		$	275,121	$	82,677	$	195,687	$	553,485	$	1,499,141	$	25,335,874	$	27,388,500
Commercial mortgages:
Construction			-		418,518		7,295,104		7,713,622		2,022,149		2,715,270		12,451,041
Other			-		-		193,570		193,570		11,063,483		65,836,938		77,093,991
Residential mortgages			405,087		62,017		84,083		551,187		226,937		17,753,898		18,532,022
Consumer loans:
Home equity lines & loans			-		-		-		-		-		6,168,831		6,168,831
Other direct consumer loans			171		-		-		171		-		147,439		147,610
Total		$	680,379	$	563,212	$	7,768,444	$	9,012,035	$	14,811,710	$	117,958,250	$	141,781,995

Troubled Debt Restructurings:

The Corporation has $66 thousand of allocated specific reserves to customers whose loan terms have

been modified in troubled debt restructurings which are included in non-accrual loans as of March 31,

2012. The Corporation had $218 thousand allocated specific reserves to customers whose loan terms

have been modified in troubled debt restructurings which are included in non-accrual loans as of

December 31, 2011. The Corporation has not committed to lend any additional amounts as of March 31,

2012 or December 31, 2011 to customers with outstanding loans that are classified as trouble debt

restructurings.

During the three months ended March 31, 2012, one loan in the amount of $59 thousand was modified

as a troubled debt restructuring by the Corporation. The modification of the terms of this loan included

an extension of the maturity date. Additionally, there were no payment defaults on any loans previously

modified as troubled debt restructurings within twelve months following the modification. A loan is

considered to be in payment default once it is 90 days contractually past due under the modified terms.

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of

borrowers to service their debt such as: current financial information, historical payment experience,

credit documentation, public information, and current economic trends, among other factors. The

Corporation analyzes loans individually by classifying the loans as to credit risk. This analysis

includes new consumer, mortgage and home equity loans and lines with outstanding balances greater than $50

thousand, $250 thousand and $100 thousand, respectively, along with a sample of existing loans and

non-homogeneous loans, such as commercial and commercial real estate loans. The loans meeting these

criteria are reviewed at least annually. The Corporation uses the following definitions for risk rating:

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 as 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.

Loans not meeting the criteria above that are analyzed individually as part of the above described

process are considered to be not rated loans. Based on the analysis’s performed as of March 31, 2012

and December 31, 2011, the risk category of the recorded investment of loans by class of loans is as

follows:

	March 31, 2012
Legacy Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	96,287,427	$	13,885,755	$	2,833,733	$	1,989,855
Agricultural		-		305,755		-		-		-
Commercial mortgages:
Construction		-		16,358,450		205,050		776,993		-
Other		-		159,594,079		10,130,408		5,060,046		416,995
Residential mortgages		172,986,984		-		-		2,322,235		-
Consumer loans:
Credit cards		1,782,032		-		-		-		-
Home equity lines & loans		76,476,267		-		-		477,344		-
Indirect consumer loans		96,886,193		-		-		84,956		-
Other direct consumer loans		14,820,994		-		-		10,614		-
Total	$	362,952,470	$	272,545,711	$	24,221,213	$	11,565,921	$	2,406,850

	March 31, 2012
Acquired Loans:		Not Rated		Pass		Loans Acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial		$	-		22,421,797	$	1,275,293	$	568,085	$	284,941	$	92,571
Commercial mortgages
Construction			-		1,019,952		1,199,658		6,562,664		1,599,310		-
Other			-		60,091,719		9,414,082		476,760		2,673,184		193,570
Residential mortgages			17,401,243		-		231,246		-		144,750		-
Consumer loans
Home equity lines & loans			5,915,875		-		-		-		-		-
Other direct consumer loans			122,749		-		-		-		-		-
Total		$	23,439,867		83,533,468	$	12,120,279	$	7,607,509	$	4,702,185	$	286,141

	December 31, 2011
Legacy Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	93,923,356	$	14,957,683	$	4,139,413	$	3,528,906
Agricultural		-		258,098		-		-		-
Commercial mortgages:
Construction		-		6,391,614		208,360		783,757		-
Other		-		152,435,884		6,503,087		7,423,514		516,106
Residential mortgages		173,120,292		-		-		2,464,995		-
Consumer loans:
Credit cards		1,955,215		-		-		-		-
Home equity lines & loans		76,432,196		-		-		457,152		-
Indirect consumer loans		97,426,891		-		-		113,349		-
Other direct consumer loans		14,497,795		-		-		22,032		-
Total	$	363,432,389	$	253,008,952	$	21,669,130	$	15,404,212	$	4,045,012

	December 31, 2011
Acquired Loans:		Not Rated		Pass		Loans Acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial		$	-	$	25,164,742	$	1,499,141	$	602,006	$	24,635	$	97,976
Commercial mortgages
Construction			-		1,790,731		2,022,149		7,447,661		1,190,500		-
Other			-		62,684,708		11,063,483		475,036		2,677,194		193,570
Residential mortgages			18,158,984		-		226,937		-		146,101		-
Consumer loans
Home equity lines & loans			6,168,831		-		-		-		-		-
Other direct consumer loans			147,610		-		-		-		-		-
Total		$	24,475,425	$	89,640,181	$	14,811,710	$	8,524,703	$	4,038,430	$	291,546

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 the recorded investment in residential and consumer loans based on payment activity as of

March 31, 2012 and December 31, 2011:

	March 31, 2012
			Consumer Loans
Legacy Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	172,986,359	$	1,770,450	$	76,535,835	$	96,868,747	$	14,820,994
Non-Performing		2,322,860		11,582		417,776		102,402		10,614
		175,309,219		1,782,032		76,953,611		96,971,149		14,831,608

Acquired Loans:
Performing	$	17,511,388	$	-	$	5,915,875	$	-	$	122,749
Non-Performing		265,851		-		-		-		-
Total	$	17,777,239	$	-	$	5,915,875	$	-	$	122,749

	December 31, 2011
			Consumer Loans
Legacy Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	173,120,292	$	1,946,162	$	76,432,196	$	97,426,891	$	14,497,878
Non-Performing		2,464,995		9,053		457,152		113,349		21,949
Total	$	175,585,287	$	1,955,215	$	76,889,348	$	97,540,240	$	14,519,827

Acquired Loans:
Performing	$	18,385,921	$	-	$	6,168,831	$	-	$	147,610
Non-Performing		146,101		-		-		-		-
Total	$	18,532,022	$	-	$	6,168,831	$	-	$	147,610

Acquired loans include loans acquired with deteriorated credit quality. The Corporation adjusted its

estimates of future expected losses, cash flows, and renewal assumptions during the current year. The

table below summarizes the changes in total contractually required principal and interest cash payments,

management’s estimate of expected total cash payments and carrying value of the loans from January 1,

2012 to March 31, 2012 (in thousands of dollars):

	Balance at December 31, 2011			Income Accretion		All Other Adjustments			Balance at March 31, 2012
Contractually required principal and interest	$	21,261		$	-	$	(3,481	)	$	17,780
Contractual cash flows not expected to be collected (nonaccretable discount)		(4,662	)		-		440			(4,222	)
Cash flows expected to be collected		16,599			-		(3,041	)		13,558
Interest component of expected cash flows (accretable yield)		(1,844	)		916		(489	)		(1,417	)
Fair value of loans acquired with deteriorating credit quality	$	14,755		$	916	$	(3,530	)	$	12,141

10. Components of Quarterly and Year-to-Date Net Periodic Benefit Costs

	Three Months Ended March 31,
	2012				2011
Qualified Pension
Service cost, benefits earned during the period	$	323,351		$	259,134
Interest cost on projected benefit obligation		406,110			392,956
Expected return on plan assets		(663,493	)		(585,673	)
Amortization of unrecognized transition obligation		-			-
Amortization of unrecognized prior service cost		3,464			7,470
Amortization of unrecognized net loss		330,568			169,113
Net periodic pension expense	$	400,000		$	243,000


Supplemental Pension
Service cost, benefits earned during the period	$	8,692		$	7,656
Interest cost on projected benefit obligation		12,773			13,443
Expected return on plan assets		-			-
Amortization of unrecognized prior service cost		-			-
Amortization of unrecognized net loss		4,980			2,366
Net periodic supplemental pension expense	$	26,445		$	23,465


Postretirement, Medical and Life
Service cost, benefits earned during the period	$	8,750		$	8,250
Interest cost on projected benefit obligation		18,000			18,750
Expected return on plan assets		-			-
Amortization of unrecognized prior service cost		(24,250	)		(24,250	)
Amortization of unrecognized net gain		-			-
Net periodic postretirement, medical and life expense	$	2,500		$	2,750

11. Segment Reporting

The Corporation manages its operations through two primary business segments: core banking and

wealth management group services. 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 wealth management group services segment provides revenues by providing trust and investment

advisory services to clients.

Summarized financial information concerning the Corporation’s reportable segments and the

reconciliation to the Corporation’s consolidated results is 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. Holding

company amounts are the primary differences between segment amounts and consolidated totals, and are

reflected in the Holding Company and Other column below, along with amounts to eliminate

transactions between segments. (dollars in thousands)

	Three Months Ended March 31, 2012
	Core Banking		Wealth Management Group			Holding Company And Other			Consolidated Totals
Net interest income	$	12,012	$	-		$	4		$	12,016
Provision for loan losses		477		-			-			477
Net interest income after provision for loan losses		11,535		-			4			11,539
Other operating income		3,076		1,776			45			4,897
Other operating expenses		8,929		1,810			183			10,922
Income or (loss) before income tax expense		5,682		(34	)		(134	)		5,514
Income tax expense (benefit)		1,982		(13	)		(70	)		1,899
Segment net income (loss)	$	3,700	$	(21	)	$	(64	)	$	3,615

Segment assets	$	1,245,868	$	5,687		$	2,940		$	1,254,495

	Three Months Ended March 31, 2011
	Core Banking		Wealth Management Group			Holding Company And Other		Consolidated Totals
Net interest income	$	8,544	$	-		$	2	$	8,546
Provision for loan losses		125		-			-		125
Net interest income after provision for loan losses		8,419		-			2		8,421
Other operating income		2,088		1,616			644		4,348
Other operating expenses		8,405		1,816			223		10,444
Income or (loss) before income tax expense		2,102		200			423		2,325
Income tax expense (benefit)		591		(78	)		147		660
Segment net income (loss)	$	1,511	$	(122	)	$	276	$	1,665

Segment assets	$	977,553	$	6,098		$	3,115	$	986,766

12. Stock Based Compensation

Board of Director’s Stock Compensation

Members of the Board of Directors receive common shares of the Corporation equal in value to the

amount of 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 President and CEO 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 twelve (12) months

during the prior year.

During January 2012, 10,238 shares were re-issued from treasury to fund the stock component of

directors' compensation. An expense of $54 thousand related to this compensation was recognized

during the first quarter of 2012.

Restricted Stock Plan

Pursuant to the Corporation’s Restricted Stock Plan (the “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. The maximum number of shares as to which stock awards may be granted under the

Plan is 10,000 per year, with these shares vesting over a 5 year period.

A summary of restricted stock activity from December 31, 2011 to March 31, 2012 is presented below:

	Shares		Weighted–Average Grant Date Fair Value
Nonvested at December 31, 2011		12,458		22.33
Granted		1,079		23.18
Vested		-		-
Forfeited or Cancelled		-		-
Nonvested at March 31, 2012		13,537		22.40

As of March 31, 2012, there was $283,012 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

4.37 years.

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

The review that follows focuses on the significant factors affecting the financial condition and results of

operations of the Corporation during the three-month period ended March 31, 2012, with comparisons to

the comparable period in 2011, as applicable. The following discussion and the unaudited consolidated

interim financial statements and related notes included in this report should be read in conjunction with

our 2011 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission

on March 28, 2012. The results for the period ended March 31, 2012 are not necessarily indicative of

results to be expected for the entire fiscal year or any other interim period.

Forward-looking Statements

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

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

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

sections. Statements regarding, among other things, the Corporation's expected financial position and

operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted

demographic and economic trends relating to the Corporation's industry and similar matters are forward-

looking statements. These statements can sometimes be identified by the Corporation's use of forward-

looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation

cannot promise that its expectations in such forward-looking statements will turn out to be correct. The

Corporation's actual results could be materially different from expectations because of various factors,

including changes in economic conditions or interest rates, credit risk, difficulties in managing our growth,

competition, changes in law or the regulatory environment, including as a result of regulations or rules

promulgated pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act, and changes in

general business and economic trends. Information concerning risks facing the Corporation can be found in

our periodic filings with the Securities and Exchange Commission, including in our 2011 Annual Report on

Form 10-K. These filings are available publicly on the SEC's website at http://www.sec.gov, on the

Corporation's website at http://www.chemungcanal.com or upon request from the Corporate Secretary at

(607) 737-3788. Except as otherwise required by law, the Corporation undertakes no obligation to publicly

update or revise its forward-looking statements, whether as a result of new information, future events or

otherwise.

Critical Accounting Policies, Estimates and Risks and Uncertainties

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

particularly difficult, subjective or complex judgments concerning estimates, and where these estimates

can significantly affect the Corporation's financial results under different assumptions and conditions.

The Corporation prepares its financial statements in conformity with accounting principles generally

accepted in the United States of America. As a result, the Corporation is required to make certain

estimates, judgments and assumptions that it believes are reasonable based upon the information

available at that time. These estimates, judgments and assumptions affect the reported amounts of assets

and liabilities at the date of the financial statements and the reported amounts of revenue and expenses

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

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

accounting policy given the uncertainty in evaluating the level of the allowance required to cover

probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments

can have on the Corporation's results of operations. While management's current evaluation of the

allowance for loan losses indicates that the allowance is adequate, under adversely different conditions

or assumptions the allowance would need to be increased. For example, if historical loan loss

experience significantly worsened or if current economic conditions significantly deteriorated,

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

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

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

has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real

estate values in the Corporation’s market area did not increase dramatically in the prior several years,

and, as a result, any declines in real estate values have been modest. While management has concluded

that the current evaluation of collateral values is reasonable under the circumstances, if collateral

evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also

require additional provisions for loan losses.

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

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

market value is other-than-temporary is necessarily a matter of subjective judgment. The timing and

amount of any realized losses reported in the Corporation's financial statements could vary if

management's conclusions were to change as to whether an other-than-temporary impairment exists. The

Corporation assesses whether it intends to sell, or it is more likely than not that it will be required to sell

a security in an unrealized loss position before recovery of its amortized cost basis. If either of these

criteria is met, the entire difference between amortized cost and fair value is recognized through a

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

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

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

recognized in other comprehensive income. For the three-month period ended March 31, 2012, the

Corporation recognized no OTTI charges.

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

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

intangible assets is determined using estimated fair values developed from various sources and other

generally accepted valuation techniques. Estimates are based upon financial, economic, market and

other conditions as they existed as of the date of a particular acquisition. These estimates of fair value

are the results of judgments made by the Corporation based upon estimates that are inherently uncertain

and changes in the assumptions upon which the estimates were based may have a significant impact on

the resulting estimates. In addition to the initial determination of the carrying value, on an ongoing basis

management must assess whether there is any impairment of goodwill and other intangible assets that

would require an adjustment in carrying value and recognition of a loss in the consolidated statement of

income.

Financial Condition

Consolidated assets at March 31, 2012 totaled $1.254 billion, an increase of $38.2 million or 3.1% since

December 31, 2011. The increase was principally due to a $58.5 million increase in interest-bearing

deposits at other financial institutions and a $6.1 million increase in loans, net of deferred fees and costs

and unearned income, offset in part by a $22.3 million decrease in the Corporation’s securities portfolio

and a $2.7 million decrease in other assets.

As noted above, total loans, net of deferred fees and costs and unearned income increased $6.1 million

or 0.8% from December 31, 2011 to March 31, 2012 as a $7.7 million increase in commercial loans

(including commercial mortgages) was offset by decreases in residential mortgages and total consumer

loans totaling $1.1 million and $568 thousand, respectively. The increase in commercial loans reflects a

$8.4 million increase in commercial loans at the Corporation’s Capital Bank offices acquired in April of

last year, while the decrease in total consumer loans was due primarily to a $504 thousand decrease in

indirect consumer installment loans, a $283 thousand decrease in other installment loans and a $183

thousand decrease in home equity balances, offset in part by a $402 thousand increase in revolving

consumer credit. During the first quarter of this year, approximately $2.3 million of newly originated

residential mortgages were sold in the secondary market to Freddie Mac, with an additional $212

thousand originated and sold to the State of New York Mortgage Agency.

The composition of the loan portfolio is summarized as follows:

	March 31, 2012		December 31, 2011
Commercial, financial and agricultural	$	138,265,330	$	142,209,279
Commercial mortgages		276.270,702		264,589,013
Residential mortgages		192,548,256		193,599,853
Indirect Consumer loans		96,660,998		97,165,447
Consumer loans		99,287,781		99,351,585
Total loans, net of deferred origination fees and cost, and unearned income	$	803,033,067	$	796,915,177

The available for sale segment of the securities portfolio totaled $259.4 million at March 31, 2012, a

decrease of approximately $21.4 million or 7.6% from December 31, 2011. At amortized cost, the

available for sale portfolio decreased $21.6 million, with unrealized appreciation related to the available

for sale portfolio increasing $217 thousand. The decrease was principally reflected in a $17.1 million

decrease in federal agency bonds, as during the quarter, approximately $27.2 million of federal agency

bonds were called or matured ($17.5 million of which occurred during the last three days of the quarter),

offset by the purchase of a $10.0 million bond. The decrease in the available for sale portfolio at

amortized cost was additionally impacted by paydowns on mortgage-backed securities and collateralized

mortgage obligations totaling approximately $5.8 million and a $1.6 million decrease in municipal

bonds. These decreases were partially offset by a $2.0 million increase in U.S. treasury bonds, as during

the quarter a $27.5 million purchase was offset by the sale of a $25.5 million bond. The held to maturity

portion of the portfolio, consisting of local municipal obligations, decreased approximately $865

thousand from $8.3 million at December 31, 2011 to $7.4 million at March 31, 2012.

As noted above, interest-bearing deposits at other financial institutions increased $58.5 million since

December 31, 2011. This increase was principally due to the significant increase in deposits as

discussed below, along with the decrease in the securities portfolio, exceeding the growth in the loan

portfolio. With total cash and due from banks totaling $110.5 million at March 31, 2012, the

Corporation continues to maintain a strong liquidity position and the Corporation continues to evaluate

alternative investment of these funds with caution given the low interest rate environment and the

inherent interest rate risk associated with longer term securities portfolio investments.

A $2.7 million decrease in other assets was due principally to a $2.4 million decrease in prepaid income

taxes.

Since December 31, 2011, total deposits have increased $40.2 million or 4.0% to $1.039 billion, with

public fund balances increasing $28.9 million and all other deposits increasing $11.3 million. The

increase in public fund deposits was due principally to increases in insured money market account

(“IMMA”) and NOW account balances totaling $15.4 million and $8.3 million, respectively, as well as a

$2.7 million increase in demand deposits and a $2.0 million increase in savings balances. The increase

in all other period-end deposits reflects an $18.9 million increase in IMMA balances, as well as

increases in demand deposits and NOW accounts totaling $10.5 million and $5.5 million, respectively.

These increases were partially offset by a $14.5 million decrease in total time deposits and a $9.1

million decrease in savings balances. Both the decrease in savings balances and the increase in IMMA

accounts was impacted by an initiative to convert funds from the former Capital Bank tiered savings

accounts into the Capital Bank Privilege IMMA account.

A $2.1 million decrease in securities sold under agreements to repurchase reflects maturities during the

quarter, while a $2.5 million decrease in other liabilities was due in large part to the payment of escrowed

real estate taxes during the quarter, as well as the payment of previously accrued compensation and

benefits.

A $2.9 million increase in shareholders’ equity was primarily due to a $2.5 million increase in retained

earnings as well as a $295 thousand increase in accumulated other comprehensive income.

Asset Quality

Non-Performing Loans

The recorded investment in non-performing loans at March 31, 2012 totaled $15.137 million compared

to $20.915 million at year-end 2011, a decrease of $5.778 million. Not included in the non-performing

loan totals are loans acquired in the FOFC acquisition which the Corporation has identified as purchased

credit impaired (“PCI”) loans totaling $12.120 million at March 31, 2012, which are accounted for under

separate accounting guidance, Accounting Standards Codification (“ASC”) Subtopic 310-30,

“Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as disclosed in

Note 9 of the financial statements. The decrease in non-performing loans was due to decreases in non-

accrual loans and loans 90 days or more past due totaling $4.828 million and $1.010 million,

respectively, partially offset by a $60 thousand increase in accruing troubled debt restructurings

(“TDRs”). The $4.828 million decrease in non-accrual loans was principally due to a $4.745 million

decrease in non-accrual commercial loans, as during the quarter non-accrual commercial loans to one

borrower were reduced $5.132 million from the receipt of funds under United States Department of

Agriculture (“USDA”) guarantees. Other non-accrual commercial loans reported at December 31, 2011

were reduced by $220 thousand during the quarter. These decreases were partially offset by the addition

of four commercial loans totaling $607 thousand to non-accrual status during the quarter. Additionally,

during the quarter, non-accrual residential mortgages, home equity and consumer loans decreased $22

thousand, $38 thousand and $23 thousand, respectively. It is generally the Corporation's policy that a

loan 90 days past due be placed in non-accrual status unless factors exist that would eliminate the need

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

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

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

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

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

Accruing loans 90 days or more past due totaled $6.294 million at March 31, 2012 compared to $7.304

million at year-end 2011, a decrease of $1.010 million. This decrease was principally due to a $1.020

million decrease in construction loans not considered by management to be PCI loans acquired in the

FOFC acquisition totaling $6.275 million at March 31, 2012, which for a variety of reasons are 90 days

or more past their stated maturity dates, however the borrowers continue to make required interest

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

of those credit enhancements, the Corporation has not identified these loans as PCI loans and expects to

incur no losses on these loans.

As noted above, accruing TDRs increased $60 thousand since December 31, 2011 as during the first

quarter, a home equity loan was restructured to extend the term and lower the monthly payments.

Concessions made on commercial loan TDRs generally involve short term deferrals of principal

payments, while residential mortgage and home equity restructurings include interest rate and/or

payment reductions and maturity extensions. Overall, our past experience in working with borrowers in

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

present value of expected future cash flows with any changes recorded through the provision for loan

losses.

At March 31, 2012, OREO totaled $980 thousand compared to $898 thousand at December 31, 2011, an

increase of $82 thousand. During the first quarter of 2012, two properties totaling $117 thousand were

placed in OREO and one property totaling $35 thousand was sold. At March 31, 2012, OREO

properties consisted of six residential properties totaling $443 thousand, three commercial properties

totaling $319 thousand and undeveloped land totaling $218 thousand.

Impaired Loans

Impaired loans, excluding residential real estate loans determined to be troubled debt restructurings, at

March 31, 2012 totaled $4.662 million compared to $9.879 million at December 31, 2011. Not included

in the impaired loan totals are loans acquired in the FOFC acquisition which the Corporation has

identified as PCI loans as these loans are accounted for under ASC Subtopic 310-30 as noted under the

above discussion of non-performing loans. The decrease of $5.217 million resulted principally from the

above-discussed decrease in non-accrual commercial loans. Included in the impaired loan total at March

31, 2012 are loans totaling $3.839 million for which impairment allowances of $1.805 million have been

specifically allocated to the allowance for loan losses. As of December 31, 2011, the impaired loan total

included $6.093 million of loans for which specific impairment allowances of $1.942 thousand were

allocated to the allowance for loan losses. The decrease in both the amount of impaired loans for which

specific allowances were allocated to the allowance for loan losses and the amount allocated were both

primarily driven by the above mentioned receipt of funds under USDA guarantees. The majority of the

Corporation's impaired loans are secured and measured for impairment based on collateral evaluations.

It is the Corporation's policy to obtain updated appraisals on loans secured by real estate at the time a

loan is determined to be impaired. Prior to the receipt of the updated appraisal, an impairment

measurement is performed based upon the most recent appraisal on file to determine the amount of any

specific allocation or charge-off. Upon receipt and review of the updated appraisal, an additional

measurement is performed to determine if any adjustments are necessary to reflect the proper

provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any

changes in credit quality or market conditions would require any additional allocation or recognition of

additional charge-offs. If market conditions warrant, future appraisals are obtained. Real estate values

in the Corporation's market area had not increased dramatically in the prior several years, and, as a

result, declines in real estate values have been modest.

The appraisals are performed by independent third parties and reflect the properties market value "as is".

In determining the amount of any specific allocation or charge-off, the Corporation will make

adjustments to reflect the estimated costs to sell the property. In situations where partial charge-offs

have been recognized, any balance remaining continues to be reflected as non-performing until the loan

has been paid in full. 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.

The following table summarizes the Corporation's recorded investment in non-performing assets:

(dollars in thousands)	March 31, 2012		December 31, 2011
Non-accrual loans	$	8,783	$	13,611
Troubled debt restructurings		60		-
Accruing loans past due 90 days or more		6,294		7,304
Total non-performing loans	$	15,137	$	20,915
Other real estate owned		980		898
Total non-performing assets	$	16,117	$	21,813

In addition to non-performing loans, as of March 31, 2012, the Corporation has identified commercial

relationships totaling $8.1 million as potential problem loans, as compared to $8.2 million at December

31, 2011. Potential problem loans are loans that are currently performing, but known information about

possible credit problems of the related borrowers causes management to have serious doubts as to the

ability of such borrowers to comply with the present loan repayment terms, which may result in the

disclosure of such loans as non-performing at some time in the future. Potential problem loans are

typically loans that are performing but are classified in the Corporation's loan rating system as

"substandard." Management cannot predict the extent to which economic conditions may worsen or

other factors which may impact borrowers and the potential problem loans. Accordingly, there can be

no assurance that other loans will not become 90 days or more past due, be placed on non-accrual status,

be restructured, or require increased allowance coverage and provisions for loan losses.

Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic

basis and takes into consideration such factors as historical loan loss experience, review of specific

problem loans (including evaluation of the underlying collateral), changes in the composition and

volume of the loan portfolio, recent charge-off experience, overall portfolio quality, current economic

conditions that may affect the borrowers' ability to pay and, as of the first quarter of 2012, global and

national fiscal uncertainties, including the potential effects on our borrowers of any adverse resolution of

such uncertainties.

While we have seen improvement in the amount of non-performing and impaired loans as well as net

charge-offs, in light of the factors described above, including continuing uncertainty with respect to

national and global fiscal policy matters, the Corporation’s provision for loan losses on legacy loans

totaled $250 thousand in the first quarter of this year compared to $125 thousand in the corresponding

period last year. Additionally, the Corporation recognized a provision of $227 thousand for impairment

charges related to certain PCI loans.

During the first quarter of this year, the Corporation recorded net recoveries of $23 thousand compared

to net charge-offs of $32 thousand during the first quarter of last year. This improvement was

principally due to a $67 thousand decrease in net consumer loan charge-offs and a $17 thousand increase

in net commercial loan recoveries, partially offset by a $29 thousand increase in net residential mortgage

charge-offs. At March 31, 2012, the Corporation's allowance for loan losses on legacy loans totaled

$9.981 million, resulting in a coverage ratio of allowance to non-performing loans of 65.9%. Included

in the non-performing loan totals are loans totaling $480 thousand for which previous partial charge-offs

have been recognized. Excluding these loans, the coverage ratio of allowance to non-performing loans

was 68.1%. This ratio as well as the ratio of allowance to total loans was impacted by the April 2011

Capital Bank acquisition, as current accounting rules do not allow the acquirer to transfer the acquiree’s

allowance for loan losses to the acquirer’s balance sheet. Rather, the acquiree’s overall loan quality is a

component in determining the fair value of loans acquired, which are carried on the balance sheet at fair

value. Excluding acquired loans reported above as non-performing loans totaling $7.543 million and

loans for which partial charge-offs have been recognized, the allowance to non-performing loan ratio

was 140.3%. Excluding loans acquired in the Capital Bank acquisition, the allowance for loan losses on

legacy loans to total legacy loans was 1.48% and represents an amount that management believes is

adequate to absorb probable incurred loan losses on the Corporation’s legacy loan portfolio.

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

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

losses includes a detailed analysis of historical loss factors for pools of similarly graded loans, as well as

specific collateral reviews of relationships graded special mention, substandard or doubtful with

outstanding balances of $1.0 million or greater. Among the factors considered in allocating portions of

the allowance by loan type are the current levels of past due, non-accrual and impaired loans, as well as

historical loss experience and the evaluation of collateral. In addition, management has formally

documented factors considered in determining the appropriate level of general reserves, including

current economic conditions, forecasted trends in the credit quality cycle, loan growth, entry into new

markets, and industry and peer group trends. These amounts have been included in the allocated portion

of the loan categories to which they relate.

At March 31, 2012, in addition to the qualitative factors allocated within the allowance, the Corporation

maintained $374 thousand of the allowance as unallocated. While some preliminary improvements have

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

and management believes it is prudent to see a longer period of sustained improvement before

completely reflecting this in the allowance. Additionally, management monitors coverage ratios of

nonperforming loans and total loans compared to peers on a regular basis. This analysis also suggests

that it would not be prudent to eliminate the unallocated portion of the allowance at this time.

Activity in the allowance for loan losses was as follows:

	Three Months Ended March 31, 2012
(dollars in thousands)	Legacy Loans			Acquired Loans
Balance at beginning of period	$	9,659		$	-
Reclassification of acquired loan discount		-			124
Charge-offs:
Commercial, financial and agricultural		-			-
Commercial mortgages		-			(49	)
Residential mortgages		(15	)		-
Consumer loans		(158	)		-
Total		(173	)		(49	)
Recoveries:
Commercial, financial and agricultural		173			-
Commercial mortgages		10			-
Residential mortgages		-			-
Consumer loans		62			-
Total		245			-
Net recoveries (charge-offs)		72			(49	)
Provision charged to operations		250			227
Balance at end of period	$	9,981		$	302

	Three Months Ended March 31, 2011
(dollars in thousands)
Balance at beginning of period	$	9,498
Charge-offs:
Commercial, financial and agricultural		-
Commercial mortgages		(4	)
Residential mortgages		-
Consumer loans		(207	)
Total		(211	)
Recoveries:
Commercial, financial and agricultural		111
Commercial mortgages		10
Residential mortgages		14
Consumer loans		44
Total		179
Net recoveries (charge-offs)		(32	)
Provision charged to operations		125
Balance at end of period	$	9,591

Results of Operations

First Quarter of 2012 vs. First Quarter of 2011

Net income for the first quarter of 2012 totaled $3.615 million, an increase of $1.950 million or 117.1%

as compared to first quarter 2011 net income of $1.665 million. Earnings per share were up 69.6% from

$0.46 to $0.78 per share on 1,017,578 additional average shares outstanding primarily resulting from the

acquisition of Fort Orange Financial Corp. (“FOFC”) and its subsidiary bank, Capital Bank & Trust

Company (“Capital Bank”) in April 2011. The significant increase was due in part to a $1.032 million

decrease in direct transaction costs related to the above acquisition, as well as the recognition of a $759

thousand casualty gain from flood insurance reimbursements in excess of the carrying amount of fixed

assets lost in the September 2011 flooding of our Owego and Tioga offices. We also attribute the

increase in net income to the Capital Bank acquisition, particularly due to the increase in net interest

income.

Net interest income compared to the first quarter of 2011 increased $3.470 million or 40.6% to $12.016

million, with the net interest margin increasing 44 basis points to 4.28%. A portion of the increase in

both net interest income and net interest margin compared to the prior year comparable period was the

result of collections on certain purchased credit impaired (“PCI”) loans in excess of expectations totaling

$482 thousand which are recorded as interest income. This had a positive affect on both the yield on

average earning assets and net interest margin of 17 basis points. We attribute the balance of the

increase in net interest income principally to the Capital Bank acquisition which had a significant impact

on a $224.8 million or 24.9% increase in average earning assets, as well as a 25 basis point decrease in

the cost of average interest bearing liabilities. The $224.8 million increase in average earning assets

included a $181.3 million increase in average loans, with Capital Bank loans averaging $189.3 million

during the quarter, and a $60.8 million increase in the average investment portfolio, including average

investments at Capital Bank totaling $38.3 million. These increases were offset in part by a $17.3

million decrease in average interest-bearing deposits at other financial institutions. While average

earning assets increased 24.9%, total interest and dividend income increased 33.0% or $3.361 million

with the yield on average earning assets increasing 26 basis points to 4.83%.

Total average funding liabilities, including non-interest bearing demand deposits, as compared to the first

quarter of last year, increased $223.3 million or 25.5% to $1.099 billion as average deposits and borrowings

increased $207.2 million and $16.1 million, respectively. In total, average non-interest bearing deposits

increased $57.2 million, with Capital Bank non-interest bearing deposits comprising $26.4 million of that

increase. Average interest bearing deposits increased $150.0 million, including $141.9 million in Capital

Bank average interest bearing deposits. The increase in average interest bearing deposits was reflected

principally in a $64.8 million increase in average savings account balances, as well as increases in average

IMMA and NOW accounts totaling $42.0 million and $27.7 million, respectively, and a $15.5 million

increase in average time deposits. The increase in average borrowings was due principally to an increase in

borrowings assumed by the Corporation in the Capital Bank acquisition. While average interest bearing

liabilities increased $166.1 million, or 24.9%, interest expense decreased $109 thousand or 6.7%, as the cost

of average interest bearing liabilities decreased 25 basis points to 0.74%.

The provision for loan loss expense in the first quarter of this year totaled $477 thousand compared to

$125 thousand in the first quarter of last year, an increase of $352 thousand. The first quarter 2012

provision includes $227 thousand of impairment charges related to certain PCI loans. As discussed

under the Asset Quality section of this report, the balance of the increase in the provision for loan losses

reflects in large part management’s concerns about global and national fiscal uncertainties and the affect

that these uncertainties could have on the economy and our borrowers in particular, as well as

management’s evaluation of the adequacy of the allowance for loan losses based upon a number of other

factors, including an analysis of historical loss factors, the evaluation of collateral, recent charge-off

experience, overall credit quality, current economic conditions and loan growth.

Non-interest income during the first quarter of 2012 increased $549 thousand or 12.6% compared to the

first quarter of last year due principally to the above mentioned casualty gain on flood insurance

reimbursements, a $160 thousand increase in Wealth Management Group fee income, a $104 thousand

increase in gains on the sale of securities and a $53 thousand increase in check card interchange fee

income. These increases were offset in part primarily by a $536 thousand decrease in revenue from the

Corporation’s equity investment in Cephas Capital Partners, L.P. due in large part to a gain recognized

during the first quarter of last year on the exercise of stock warrants held in one of their investments.

First quarter 2012 operating expenses were $479 thousand or 4.6% higher than the comparable period

last year. Excluding the aforementioned decrease in direct transaction costs associated with the Capital

Bank acquisition, all other operating expenses increased $1.510 million or 16.1%, with approximately

$1.196 million of this increase related to the operations of the acquired offices. The overall increase,

excluding direct transaction costs, was due in large part to increases in salaries and employee benefits

totaling $569 thousand and $247 thousand, respectively. Other significant increases included a $216

thousand increase in data processing costs, a $121 thousand increase in net occupancy costs, a $112

thousand increase in loan and OREO expenses, a $108 thousand increase in amortization of intangible

assets and a $77 thousand increase in marketing and advertising expenses. The increase in salaries

reflects additional staff related to the Capital Bank offices as well as merit increases over the past year,

while the increase in employee benefits was due principally to increases in pension expense, health

insurance and payroll taxes. Increases in net occupancy costs, amortization of intangible assets and

marketing and advertising expenses all reflect in large part higher costs related to the operations of the

Capital Bank offices. The increase in data processing expense was due principally to higher data

communication line charges, as well as increases in hardware and software maintenance, while the

increase in loan and OREO expense was due in large part to higher collection costs and OREO

expenses.

A $1.239 million increase in income tax expense reflects a $3.188 million increase in pre-tax income,

and an increase in the effective tax rate from 28.4% to 34.4% due principally to a decrease in the relative

percentage of tax exempt income to pre-tax income.

Average Consolidated Balance Sheet and Interest Analysis

For the purpose of the table below, non-accruing loans are included in the daily average loan amounts

outstanding. Daily balances were used for average balance computations. Investment securities are

stated at amortized cost. No tax equivalent adjustments have been made in calculating yields on

obligations of states and political subdivisions. (dollars in thousands)

	Three Months Ended March 31, 2012								Three Months Ended March 31, 2011
Assets	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Earning assets:
Loans	$	796,035		$	11,671		5.90	%	$	614,765		$	8,575		5.66	%
Taxable securities		232,673			1,486		2.57	%		176,700			1,249		2.87	%
Tax-exempt securities		52,161			341		2.63	%		47,330			315		2.70	%
Federal funds sold		-			-		N/A			-			-		N/A	%
Interest-bearing deposits		47,178			42		0.36	%		64,454			40		0.25	%
Total earning assets		1,128,047			13,540		4.83	%		903,249			10,179		4.57	%

Non-earning assets:
Cash and due from banks		23,904								20,760
Premises and equipment, net		24,726								24,031
Other assets		54,894								33,872
Allowance for loan losses		(9,854	)							(9,592	)
AFS valuation allowance		13,736								9,623
Total	$	1,235,453							$	981,943

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits		80,991			21		0.11	%		53,315			12		0.09	%
Savings and insured money market deposits		401,287			236		0.24	%		294,523			174		0.24	%
Time deposits		269,288			671		1.00	%		253,810			841		1.34	%
Federal Home Loan Bank advances and securities sold under agreements to repurchase		80,842			596		2.96	%		64,705			606		3.80	%
Total interest-bearing liabilities		832,408			1,524		0.74	%		666,353			1,633		0.99	%

Non-interest-bearing liabilities:
Demand deposits		266,469								209,233
Other liabilities		8,382								7,266
Total liabilities		1,107,259								882,852
Shareholders' equity		128,194								99,091
Total	$	1,235,453							$	981,943
Net interest income				$	12,016							$	8,546
Net interest rate spread							4.09	%							3.58	%

Net interest margin							4.28	%							3.84	%

The following table demonstrates the impact on net interest income of the changes in the volume of

earning assets and interest-bearing liabilities and changes in rates earned and paid by the Corporation.

For purposes of constructing this table, average investment securities are at average amortized cost and

earning asset averages include non-performing loans. Therefore, the impact of changing levels of non-

performing loans is reflected in the change due to rate, but does not affect changes due to volume. No

tax equivalent adjustments were made.

	Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
	Increase (Decrease) Due to (1)
	Volume			Rate			Net
Interest and dividends earned on:
Loans	$	2,707		$	389		$	3,096
Taxable securities		375			(138	)		237
Tax-exempt securities		34			(8	)		26
Interest-bearing deposits		(12	)		14			2

Total earning assets	$	2,741		$	620		$	3,361

Interest paid on:
Demand deposits	$	7		$	2		$	9
Savings and insured money market deposits		65			(3	)		62
Time deposits		50			(220	)		(170	)
Federal Home Loan Bank advances and securities sold under agreements to repurchase		137		$	(147	)	$	(10	)

Total interest-bearing liabilities	$	365		$	(474	)	$	(109	)

Net interest income	$	2,376		$	1,094		$	3,470

(1)	The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Liquidity and Capital Resources

Liquidity management involves the ability to meet the cash flow requirements of deposit customers,

borrowers, and the operating, investing, and financing activities of the Corporation. The Corporation

uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow

from lending and investing activities, core deposit growth and non-core funding sources, such as time

deposits of $100,000 or more, securities sold under agreements to repurchase and other borrowings.

The Corporation is a member of the Federal Home Loan Bank of New York ("FHLB") which allows it

to access borrowings which enhance management's ability to satisfy future liquidity needs. Based on

available collateral and current advances outstanding, the Corporation was eligible to borrow up to a

total of $76.0 million and $85.5 million at March 31, 2012 and March 31, 2011, respectively.

During the first three months of 2012, cash and cash equivalents increased $57.6 million as compared to

an increase of $17.4 million during the first three months of last year. In addition to cash provided by

operating activities, major sources of cash during the first quarter of 2012 included proceeds from sales,

maturities, calls and principal reductions on securities totaling $60.6 million and a $40.2 million

increase in deposits. Proceeds from the above were used primarily to fund purchases of securities

totaling $38.2 million, a $5.7 million increase in loans, a net decrease in securities sold under

agreements to repurchase totaling $2.1 million, the payment of cash dividends in the amount of $1.1

million and purchases of fixed assets and treasury stock totaling $955 thousand and $217 thousand,

respectively.

In addition to cash provided by operating activities, major sources of cash during the first quarter of

2011 included proceeds from sales, maturities, calls and principal reductions on securities totaling $58.7

million, a $31.9 million increase in deposits and a $1.1 million decrease in loans. Proceeds from the

above were used primarily to fund purchases of securities totaling $71.4 million, a net decrease in

securities sold under agreements to repurchase totaling $2.9 million and the payment of cash dividends

in the amount of $881 thousand.

As of March 31, 2012, the Bank’s leverage ratio was 8.21%. The Tier I and Total Risk Adjusted Capital

ratios were 11.71% and 13.25%, respectively. All of the above ratios are in excess of the requirements

for being considered "well capitalized" by the FDIC, the Federal Reserve and the New York State

Department of Financial Services.

During the first quarter of 2012 the Corporation declared a cash dividend of $0.25 per share, unchanged

from the dividend declared during the first quarter of 2011.

When shares of the Corporation become available in the market, the Corporation may purchase them after

careful consideration of our capital position. On November 16, 2011, the Corporation’s Board of Directors

approved a one year extension of the stock repurchase program that had been initially approved on

November 18, 2009 and extended for one year on November 17, 2010. The extension authorizes the

purchase of up to 90,000 shares of the Corporation’s outstanding common stock, including those shares

purchased during the first two years of the plan. Purchases may be made from time to time on the open

market or in privately negotiated transactions at the discretion of management. Through March 31, 2012, a

total of 51,898 shares had been purchased under this program. During the first quarter of 2012, the

Corporation purchased 8,654 shares at a cost of $217 thousand or an average of $25.05 per share. During

the first quarter of 2012, 14,770 shares were re-issued from treasury to fund the stock component of

directors’ 2011 compensation, an unrestricted stock grant to an executive officer and a restricted stock grant

to an executive officer.

Interest Rate Risk

As intermediaries between borrowers and savers, commercial banks incur both interest rate risk and

liquidity risk. The Corporation's Asset/Liability Committee (ALCO) has the strategic responsibility for

setting the policy guidelines on acceptable exposure to these areas. These guidelines contain specific

measures and limits regarding these risks, which are monitored on a regular basis. The ALCO is made

up of the president & chief executive officer, the chief financial officer, the asset liability management

officer, and other officers representing key functions.

The ALCO is also responsible for supervising the preparation and annual revisions of the financial

segments of the annual budget, which is built upon the committee's economic and interest-rate

assumptions. It is the responsibility of the ALCO to modify prudently the Corporation's asset/liability

policies.

Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates.

It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a

financial institution. For that reason, the ALCO has established tolerance limits based upon a 200-basis

point change in interest rates. At March 31, 2012, it is estimated that an immediate 200-basis point

decrease in interest rates would negatively impact the next 12 months net interest income by 9.69% and

an immediate 200-basis point increase would negatively impact the next 12 months net interest income

by 2.19%. Both are within the Corporation's policy guideline of 15% established by ALCO. Given the

overall low level of current interest rates and the unlikely event of a 200-basis point decline from this

point, management additionally modeled an immediate 100-basis point decline and an immediate 300-

basis point increase in interest rates. When applied, it is estimated these scenarios would result in

negative impacts to net interest income of 4.45% and 3.32%, respectively. Management is comfortable

with the level of exposures at these levels.

A related component of interest rate risk is the expectation that the market value of our capital account

will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact

component: an institution exposed to earnings erosion is also exposed to shrinkage in market value.

At March 31, 2012, it is estimated that an immediate 200-basis point decrease in interest rates would

negatively impact the market value of our capital account by 10.03% and an immediate 200-basis point

increase in interest rates would positively impact the market value by 0.58%. Both are within the

established tolerance limit of 15%. Management also modeled the impact to the market value of our

capital with an immediate 100-basis point decline and an immediate 300-basis point increase in interest

rates, based on the current interest rate environment. When applied, it is estimated these scenarios

would result in negative impacts to the market value of our capital of 7.00% and 0.81%, respectively.

Management is also comfortable with the level of exposures at these levels.

Management does recognize the need for certain hedging strategies during periods of anticipated higher

fluctuations in interest rates and the Board-approved Funds Management Policy provides for limited use

of certain derivatives in asset liability management. These strategies were not employed during the first

three months of 2012.

Adoption of New Accounting Standards