201 6
Annual Report
Financial Highlights
(in thousands, except per share data)
Operating Results – Year Ended December 31:
Net interest income
Provision for loan losses
Other operating income:
Securities gains, net
Wealth Management Group fee income
Other income
Other operating expenses:
Legal accruals and settlements
Other expenses
Income tax expense
Net income
At Year End:
Assets
Loans, net
Allowance for loan losses
Deposits
Shareholders’ equity
Employees (full-time equivalent)
Share and Per Share Data:
Net income
Book value, at year end
Tangible book value, at year end
Dividends declared
Shares outstanding (average)
Ratios:
Allowance for loan losses to total loans
Return on average assets
Return on average equity
Return on average tangible equity
% of
Change
3.33%
55.12%
165.32%
(2.42)%
2.54%
N/A
(0.03)%
(5.45)%
6.30%
2.30%
2.71%
(0.05)%
4.00%
4.74%
(2.39)%
5.50%
3.83%
5.78%
0.91%
2016
$52,329
2,437
987
8,316
11,846
1,200
55,410
4,404
10,027
2015
$50,642
1,571
372
8,522
11,553
55,427
4,658
9,433
$1,657,179
1,200,290
14,253
1,456,343
143,748
368
$1,619,964
1,168,633
14,260
1,400,295
137,242
377
2.11
30.07
24.89
1.04
4,762
1.19%
0.60%
7.02%
8.52%
2.00
28.96
23.53
1.04
4,719
1.22%
0.60%
6.84%
8.45%
Trust Assets Under Administration (market value):
as Fiduciary
as Custodian
$1,340,362
380,787
$1,721,149
$1,392,017
463,543
$1,855,560
(3.71)%
(17.85)%
(7.24)%
Common Stock Market Prices & Dividends Paid During Past Two Years:
December 31, 2016
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
High
Low
Dividends
$36.74
32.19
32.95
28.03
$28.29
27.47
26.20
26.25
$0.26
0.26
0.26
0.26
December 31, 2015
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
High
Low
Dividends
$28.44
28.50
27.68
28.74
$26.31
26.07
26.01
26.93
$0.26
0.26
0.26
0.26
As of February 28, 2017, there were 2,435 holders of record of the Corporation’s stock, which
includes 750 Non-Objecting Beneficial Owners (“NOBO”) shares held in street name.
Letter to Shareholders
April 2017
Dear Fellow Shareholders:
2016 was a successful and significant year for
our Corporation. We delivered solid financial re-
sults which are highlighted in detail below. These
results were achieved while managing significant
leadership transitions at the Bank. Change is
pervasive and ever-present. Because of a solid
foundation and steadfast focus on our core com-
munity banking principles, we were successful in
navigating these transitions without diminished
client service or shareholder value.
A. Tomson
D. Dalrymple
This year, we successfully installed new lead-
ership across our three core business lines: Re-
tail Client Services, Business Client Services and
our Wealth Management Group. In addition, we
instituted a transition plan anticipating the im-
pending retirement of our tenured CEO, Ronald
Bentley. We are pleased that these transitions
were completed thoughtfully and without disrup-
tion. We continued our long tradition of providing excellent client ser-
vice and investing in our communities, a proven formula that provides
strong and sustainable results over the long term. Indeed, 2016 was
another year that validated our community banking value paradigm
of local control, efficient management and specialized execution.
As we know too well, the business climate for community banking
remains challenging. However, we have started to see some move-
ment in long- and short-term interest rates. The prospect for contin-
ued interest rate increases appears likely. Our share price reacted
quickly after the November election with the discussion of lower cor-
porate tax rates and regulatory relief for the financial services sector.
We are hopeful that the current dialogue in Washington will trans-
late into much needed action in these key areas. Regardless of these
events, we remain optimistic and believe that our Corporation is well
positioned for the future.
Financial Results
As stated, the year was one of change but also of positive results.
The combination of organic asset growth and cost-saving measures
contributed to an improvement of 6.3% in net income year over year.
Net income for the year was $10.0 million and earnings per share
(EPS) were $2.11, up from $9.4 million and $2.00, respectively, from
the prior year.
Tangible book value grew to $24.89 at year-end, an increase of
5.8% from a year earlier. In 2016, $4.9 million in dividends were de-
clared, continuing our long history of uninterrupted dividend payments.
Our return on average assets was 0.60% for 2016 and 2015, and re-
turn on average equity was 7.02% for 2016, up from 6.84% for 2015.
Organic asset growth continued to drive increases in interest in-
come. Total interest income increased 3.5% from the prior year to
$56.2 million. This improvement was largely the result of an increase
in average earning assets of $94.0 million. Interest rate compression
has slowed but continues to negatively impact earnings. Our fully tax-
able equivalent net interest margin declined by 9 basis points from
3.46% to 3.37%. In spite of intense competition, we were able to grow
assets while maintaining the strong credit quality of our portfolios. This
is evidenced by the ratio of non-performing assets to total assets of
0.75% at year-end.
One important aspect of our franchise is our Wealth Management
Group. With $1.7 billion in assets under management or adminis-
tration, the level of non-interest income generated by this business
unit is significant, compared to many of our peers. During 2016, our
Wealth Management line of business generated $8.3 million in rev-
enue, amounting to nearly 40% of the Corporation’s total non-interest
income. Our Wealth Management products provide a unique opportu-
nity to create deep client service relationships as a trusted financial
partner for individuals, families, businesses and organizations that
desire a high level of personal attention from a team of experts.
The Corporation remains disciplined in maintaining its operating
costs. Absent the establishment of a $1.2 million legal reserve related
to a reconfiguration of our retail footprint, non-interest expense was
held to 2015 levels. As importantly, the Corporation reduced its effec-
tive tax rate from 33.1% for 2015 to 30.5% for 2016. The decrease in
the effective tax rate can be attributed to the increased utilization of
the Bank’s real estate investment trust and the formation of Chemung
Risk Management, a captive insurance subsidiary of the company.
The Corporation continues to refine our personnel and compensa-
tion models to ensure that we can attract and retain the most quali-
fied banking professionals in support of an increasingly competitive
and complex business climate. To that end, we felt 2016 was the
right time to evaluate certain long-standing retirement and health-
care benefit programs. The Corporation amended its noncontributory
defined benefit pension plan to freeze future retirement benefits and
amended its defined benefit health care plan to not allow new retirees
into the plan. Both changes were effective on December 31, 2016.
These two significant modifications will enhance shareholder value.
We have replaced these programs with competitive benefit packages
that are less costly and more predictable for the Corporation. The new
plans align compensation based on client experience and results, and
diminish those benefits that are earned solely by years of service.
We are proud of the collective efforts of our staff in generating
positive financial results for our company. At the same time, we take
great pride in the significant level of civic engagement provided by our
employees. In every area of our footprint you will find members of our
staff donating their time, talent and treasures to hundreds of organi-
zations. In many instances you’ll find these employees in leadership
positions, helping make the communities we serve great places to
live, work and play.
Important Initiatives
A primary focus of any community bank is gathering low-cost, stable
deposits and investing in low risk assets that support the communities
we serve. At Chemung Canal, this strategy continues across a broad
territory of 12 counties in New York and Pennsylvania. We are pleased
to report the continued success of this effort as our funding base in
our Southern Tier and Finger Lakes regions expands while, at the same
time, the Capital Region continues to be a reliable source of commer-
cial loan growth. Commercial loan balances in the Capital Region grew
to $497.7 million in 2016, which represented an annual growth rate
of 16.8%. This growth was funded largely by increased deposits in the
Southern Tier and Finger Lakes regions. In 2016, commercial and mu-
nicipal deposits grew to $543.6 million, resulting in an annual growth
rate of 15.0%. These trends are a continuation of the strong results
that we’ve experienced in the six years since we entered the Capital
Region market with the acquisition of Capital Bank and Trust.
Our industry continues to see bank consolidation in all sectors.
This disruption has created significant opportunities for us. In many
Letter to Shareholders
of our markets, local businesses and community organizations have
been impacted by the merger of Key Bank and First Niagara. This
disruption has reinforced the stability of our community banking
platform. Indeed, we have benefited from this disruption and were
pleased to welcome several new clients and colleagues to the Bank
who didn’t believe that bigger always meant better.
The digital interface is becoming more and more vital each day.
What was once called an alternate delivery channel is now affirmed
as a primary delivery channel for so many of our clients. To this end,
the Bank has committed to a new three-year strategic technology
plan and remains committed to investing in our digital platform. We
remain focused on insuring that our services, products and people
provide the most current and relevant digital experience in the in-
dustry. It is increasingly imperative that we provide our clients the
essential banking tools they need to thrive in today’s digitized world.
At Chemung Canal, we believe that a digital banking experience is
a personal banking experience. Our model of personal service ex-
tends to all of our clients. This is true whether they visit any of our
33 branch locations or log onto one of our online banking platforms.
In addition to investing in our digital platform, we continue to refine
our branch distribution strategy. This year, we consolidated our oversized
branch on the Ithaca Commons into our three other Ithaca locations. I’m
pleased to report that this consolidation was completed with minimal
client disruption or loss of business. We also announced the relocation
of our existing downtown Auburn branch to a more efficient and cost-
effective facility. The new facility is located next to our existing branch
and will have more client amenities in just 25% of the space contained in
our previous office. As exciting, the Bank announced our intentions to de-
velop a sixth branch within the Capital Region. Under consideration is the
newly developed Mohawk Harbor community in the City of Schenectady.
Consisting of more than 1 million square feet, Mohawk Harbor is the
home of the newly developed Rivers Casino and its 1,100 employees.
When completed, this 60 acre, master planned, riverfront community will
contain newly developed offices, retail stores, restaurants, apartments
and condominiums, multiple hotels and a dynamic waterfront.
We are pleased that several communities we serve have been
awarded significant New York State economic development grants.
As part of the Governor’s “Upstate Revitalization Initiative,” three re-
gions within our footprint were separately awarded a commitment of
$500 million in development grants. In addition, the State awarded
the City of Elmira a $10 million grant to further downtown develop-
ment under its “Downtown Revitalization Initiative.” These grants
will be leveraged with public and private capital, and deployed over a
five-year timeframe. This is a great opportunity for the region and the
Corporation is committed to prudently supporting these initiatives as
we benefit from the economic activity and vitality that these funds
will provide.
In Memoriam
We mourned the passing of four former members of our Board
of Directors during this past year. We are grateful for their many
years of leadership and support, and we extend our condolences
to their families and friends.
Dr. Donald L. Brooks Jr.
William V.M. Iszard
Dr. Thomas K. Meier
William A. Tryon II
Board & Executive Management Developments
One of the great responsibilities of management is to recruit new
members to our Executive Team as the needs of the Corporation
evolve. Toward that end, we are pleased to recognize that Kimberly A.
Hazelton joined the Corporation in 2016 as Executive Vice President
of Retail Client Services. Ms. Hazelton has over 30 years of bank-
ing experience as a senior manager in regional and community bank
institutions. We are pleased that Kim has injected new energy into
our retail division, and is making important and foundational improve-
ments to our franchise.
We are also pleased to welcome a new independent director to
Chemung Financial Corporation. In 2016, we announced the appoint-
ment of Kevin Tully to the Boards of Chemung Financial Corporation
and Chemung Canal Trust Company. Mr. Tully is a licensed Certified
Public Accountant (CPA) and a partner in the firm of Teal, Becker &
Chiaramonte, a regional accounting firm headquartered in Albany, NY.
We thank Kevin for his commitment and look forward to his contribu-
tions to the Corporation.
On a personal note, I am honored and humbled to have been cho-
sen by the Board of Directors to serve as President and CEO, and
a Board member of Chemung Financial Corporation and Chemung
Canal Trust Company. I look forward to working with the Board and my
banking colleagues to continue the long record of financial successes
within our operation.
Final Thoughts
In closing, we are very pleased with our results for 2016. We have
validated that our strong community banking platform can endure
and thrive in spite of intense competition, a challenging regulatory
climate and stubbornly low interest rates. Looking forward, we have
set another aggressive plan of initiatives that is focused on provid-
ing exceptional client service, finding efficiencies in our banking plat-
form, executing on our long-term strategic technology plan, as well as
always prudently managing risk.
2016 was also especially meaningful for the retirement of Ronald
Bentley. The impact that Ron, as President and CEO, has had on this Cor-
poration and with the communities and clients we are privileged to serve
has been tremendous. We are thankful for his contributions and are fo-
cused on maintaining the very high standards he set for the Corporation
every day of his tenure. We certainly wish him well in retirement and ap-
preciate his willingness to continue to serve the Corporation on the Boards
of Chemung Financial Corporation and Chemung Canal Trust Company.
This has been a year of tremendous activity. We are pleased with
the results and are committed to continuing our initiatives to support
the clients and communities we serve. Our success is the direct result
of our hard-working and committed staff, and the guidance and dedi-
cation of our Board of Directors. We are grateful for their assistance
and support.
On behalf of the Board, management and staff, thank you for your
commitment to our company.
Anders M. Tomson
President & CEO
David J. Dalrymple
Chairman of the Board
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016 OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _____________
Commission File Number 0-13888
CHEMUNG FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
NEW YORK
(State or other jurisdiction of incorporation or organization)
One Chemung Canal Plaza, Elmira, New York
(Address of principal executive offices)
16-123703-8
(I.R.S. Employer Identification No.)
14901
(Zip Code)
Registrant's telephone number, including area code: (607) 737-3711
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, Par Value $0.01 Per Share
Name of each exchange on which registered
Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
(Title of Class)
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
YES NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
YES NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES NO
Indicate by check mark whether the registrant has submitted electronically 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).
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
YES 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 definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller Reporting Company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES NO
Based upon the closing price of the registrant's Common Stock as of June 30, 2016, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $106,886,844.
As of March 7, 2017, there were 4,731,487 shares of Common Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 11, 2017 are incorporated by reference into Part
III, Items 10, 11, 12, 13, and 14 of this Form 10-K.
CHEMUNG FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
Form 10-K Item Number:
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Properties
Legal Proceedings
Mine Safety Disclosures
Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Selected Financial Data
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Item 8.
Item 9.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11.
Executive Compensation
Item 12.
Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters
Item 13.
Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
PART IV
Item 15.
Exhibits and Financial Statement Schedules
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm-Crowe Horwath LLP
SIGNATURES
Page No.
1
4
17
22
22
24
24
25
25
28
31
63
64
64
64
65
66
66
66
66
66
66
67
67
69
F-1
F-66
Some of the information contained in this report concerning the markets and industry in which we operate is derived from publicly
available information and from industry sources. Although we believe that this publicly available information and information
provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.
To assist the reader, the Corporation has provided the following list of commonly used abbreviations and terms included in Parts
I through IV.
Abbreviations
ALCO
ASU
Bank
Basel I
Basel III
BHCA
Board of Directors
BOLI
CAPM
CDARS
CDO
CFPB
CFS
Corporation
CRA
CRM
DIF
Dodd-Frank Act
ECOA
EPS
Exchange Act
FACT Act
FASB
FCRA
FDIA
FDIC
FFIEC
FHLBNY
FICO
FINRA
FOFC
FRB
FRBNY
Freddie Mac
FTC
GAAP
GLB Act
ICS
IPS
LIBOR
MD&A
NAICS
Asset-Liability Committee
Accounting Standards Update
Chemung Canal Trust Company
The First Basel Accord of the Basel Committee on Banking Supervision
The Third Basel Accord of the Basel Committee on Banking Supervision
Bank Holding Company Act of 1956
Board of Directors of Chemung Financial Corporation
Bank Owned Life Insurance
Capital Asset Pricing Model
Certificate of Deposit Account Registry Service
Collateralized Debt Obligation
Consumer Financial Protection Bureau
CFS Group, Inc.
Chemung Financial Corporation
Community Reinvestment Act
Chemung Risk Management, Inc.
Deposit Insurance Fund
The Dodd-Frank Wall Street Reform and Consumer Protection Act
Equal Credit Opportunity Act
Earnings per share
Securities Exchange Act of 1934
Fair and Accurate Credit Transactions Act of 2003
Financial Accounting Standards Board
Fair Credit Reporting Act
Federal Deposit Insurance Act
Federal Deposit Insurance Corporation
Federal Financial Institution Examination Council
Federal Home Loan Bank of New York
Financing Corporation
Financial Industry Regulatory Authority
Fort Orange Financial Corporation
Board of Governors of the Federal Reserve System
Federal Reserve Bank of New York
Federal Home Loan Mortgage Corporation
Federal Trade Commission
U.S. Generally Accepted Accounting Principles
Gramm-Leach-Bliley Act
Insured Cash Sweep Service
Investment Policy Statement
London Interbank Offered Rate
Management’s Discussion and Analysis of Financial Condition and Results of
Operations
North American Industry Classification System
1
N/M
NYSDFS
OCC
OPEB
OREO
OTTI
PCI
RESPA
ROA
ROE
RWA
SBA
SEC
Security Guidelines
Securities Act
Sarbanes-Oxley
TDRs
TILA
TRID Rule
USA PATRIOT Act
WMG
Terms
Not meaningful
New York State Department of Financial Services
Office of the Comptroller of the Currency
Other postemployment benefits
Other real estate owned
Other-than-temporary impairment
Purchased credit impaired
Real Estate Settlement Procedures Act
Return on average assets
Return on average equity
Risk-weighted assets
Small Business Administration
Securities and Exchange Commission
Interagency Guidelines Establishing Information Security Standards
Securities Act of 1933
Sarbanes-Oxley Act of 2002
Troubled debt restructurings
Truth in Lending Act
TILA-RESPA Integrated Disclosure Rule
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act of 2001
Wealth Management Group
Accumulated benefit obligation
An approximate measure of the pension plan liability, which is based on the
assumption that the pension plan is to be terminated immediately and does not
consider any future salary increases.
Allowance for loan losses to total loans Represents period-end allowance for loan losses divided by retained loans.
Assets under administration
Represents assets that are beneficially owned by clients and all investment decisions
pertaining to these assets are also made by clients.
Assets under management
Represents assets that are managed on behalf of clients.
Basel I
Basel III
Benefit obligation
Capital Bank
A set of international banking regulations, which set out the minimum capital
requirements of financial institutions with the goal of minimizing credit risk. The
main focus was mainly on credit risk by creating a bank asset classification system.
A comprehensive set of reform measures designed to improve the regulation,
supervision, and risk management within the banking sector. The reforms require
banks to maintain proper leverage ratios and meet certain capital requirements.
Refers to the projected benefit obligation for pension plans and the accumulated
postretirement benefit obligation for OPEB plans.
Division of Chemung Canal Trust Company located in the “Capital Region” of New
York State and includes the counties of Albany and Saratoga.
Captive insurance company
A company that provides risk-mitigation services for its parent company.
CDARS
Collateralized debt obligation
Collateralized mortgage obligations
Product involving a network of financial institutions that exchange certificates of
deposits among members in order to ensure FDIC insurance coverage on customer
deposits above the single institution limit. Using a sophisticated matching system,
funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original
deposit comes back to the originating institution.
A structured financial product that pools together cash flow-generating assets, such
as mortgages, bonds, and loans.
A type of mortgage-backed security with principal repayments organized according
to their maturities and into different classes based on risk. The mortgages serve as
collateral and are organized into classes based on their risk profile.
2
Dodd-Frank Act
Fully taxable equivalent basis
GAAP
Holding company
ICS
Loans held for sale
Long term lease obligation
The Dodd-Frank Act was enacted on July 21, 2010 and significantly changed the
bank regulatory landscape and has impacted and will continue to impact the lending,
deposit, investment, trading and operating activities of financial institutions and their
holding companies. The Dodd-Frank Act requires various federal agencies to adopt a
broad range of new rules and regulations, and to prepare various studies and reports
for Congress.
Income from tax-exempt loans and investment securities that have been increased by
an amount equivalent to the taxes that would have been paid if this income were
taxable at statutory rates; the corresponding income tax impact related to tax-exempt
items is recorded within income tax expense.
Accounting principles generally accepted in the United States of America.
Consists of the operations for Chemung Financial Corporation (parent only).
Product involving a network of financial institutions that exchange interest-bearing
money market deposits among members in order to ensure FDIC insurance coverage
on customer deposits above the single institution limit. Using a sophisticated
matching system, funds are exchanged on a dollar-for-dollar basis, so that the
equivalent of an original deposit comes back to the originating institution.
Residential real estate loans originated for sale on the secondary market with
maturities from 15-30 years.
An obligation extending beyond the current year, which is related to a long term
capital lease that is considered to have the economic characteristics of asset
ownership.
Mortgage-backed securities
A type of asset-backed security that is secured by a collection of mortgages.
Municipal clients
N/A
N/M
Non-GAAP
Obligations of state and political
subdivisions
Obligations of U.S. Government
Obligations of U.S. Government
sponsored enterprise obligations
OREO
OTTI
PCI loans
Political subdivision
Pre-provision profit/(loss)
Projected benefit obligation
A political unit, such as a city, town, or village, incorporated for local self-
government.
Data is not applicable or available for the period presented.
Data is not meaningful in context presented.
A calculation not made according to GAAP.
An obligation that is guaranteed by the full faith and credit of a state or political
subdivision that has the power to tax.
A federally guaranteed obligation backed by the full power of the U.S. government,
including Treasury bills, Treasury notes and Treasury bonds.
Obligations of agencies originally established or chartered by the U.S. government to
serve public purposes as specified by the U.S. Congress; these obligations are not
explicitly guaranteed as to the timely payment of principal and interest by the full
faith and credit of the U.S. government.
Represents real property owned by the Corporation, which is not directly related to
its business and is most frequently the result of a foreclosure on real property.
Impairment charge taken on a security whose fair value has fallen below the carrying
value on the balance sheet and whose value is not expected to recover through the
holding period of the security.
Represents loans that were acquired in the Fort Orange Financial Corp. transaction
and deemed to be credit-impaired on the acquisition date in accordance with the
guidance of FASB.
A county, city, town, or other municipal corporation, a public authority, or a publicly-
owned entity that is an instrumentality of a state or a municipal corporation.
Represents total net revenue less noninterest expense, before income tax expense
(benefit). The Corporation believes that this financial measure is useful in assessing
the ability of a bank to generate income in excess of its provision for credit losses.
An approximate measure of the pension plan liability, which is based on the
assumption that the plan will not terminate in the near future and that employees will
continue to work and receive future salary increases.
3
RWA
Risk-weighted assets, which is used to calculate regulatory capital ratios, consist of
on- and off-balance sheet assets that are assigned to one of several broad risk
categories and weighted by factors representing their risk and potential for default.
On-balance sheet assets are risk-weighted based on the perceived credit risk
associated with the obligor or counterparty, the nature of any collateral, and the
guarantor, if any. Off-balance sheet assets such as lending-related commitments,
guarantees, derivatives and other applicable off-balance sheet positions are risk-
weighted by multiplying the contractual amount by the appropriate credit conversion
factor to determine the on-balance sheet credit equivalent amount, which is then risk-
weighted based on the same factors used for on-balance sheet assets. Risk-weighted
assets also incorporate a measure for market risk related to applicable trading assets-
debt and equity instruments. The resulting risk-weighted values for each of the risk
categories are then aggregated to determine total risk-weighted assets.
SBA loan pools
Business loans partially guaranteed by the SBA.
Securities sold under agreements to
repurchase
Sale of securities together with an agreement for the seller to buy back the securities
at a later date.
A TDR is deemed to occur when the Corporation modifies the original terms of a
loan agreement by granting a concession to a borrower that is experiencing financial
difficulty.
A hybrid security with characteristics of both subordinated debt and preferred stock
which allows for early redemption by the issuer, makes fixed or variable payments,
and matures at face value.
Financial statements and information that have not been subjected to auditing
procedures sufficient to permit an independent certified public accountant to express
an opinion.
Provides services as executor and trustee under wills and agreements, and guardian,
custodian, trustee and agent for pension, profit-sharing and other employee benefit
trusts, as well as various investment, financial planning, pension, estate planning and
employee benefit administration services.
TDR
Trust preferred securities
Unaudited
WMG
PART I
ITEM 1. BUSINESS
General
The Corporation was incorporated on January 2, 1985 under the laws of the State of New York and is headquartered in Elmira,
NY. The Corporation was organized for the purpose of acquiring the Bank. The Bank was established in 1833 under the name
Chemung Canal Bank, and was subsequently granted a New York State bank charter in 1895. In 1902, the Bank was reorganized
as a New York State trust company under the name Elmira Trust Company, and its name was changed to Chemung Canal Trust
Company in 1903.
The Corporation became a financial holding company in June 2000. Financial holding company status provided the Corporation
with the flexibility to offer an array of financial services, such as insurance products, mutual funds, and brokerage services, which
provide additional sources of fee based income and allow the Corporation to better serve its customers. The Corporation established
a financial services subsidiary, CFS, in September 2001 which offers non-banking financial services such as mutual funds, annuities,
brokerage services, insurance and tax preparation services. The Corporation established a captive insurance subsidiary, CRM,
based in the State of Nevada in May 2016, which insures gaps in commercial coverage and uninsured exposures in the Corporation's
current insurance coverages and allows the Corporation to strengthen its overall risk management program.
The Corporation’s Board of Directors has concluded that the expansion of the franchise’s geographic footprint, an increase in the
Bank’s earning assets, and the generation of new sources of non-interest income are important components of its strategic plan.
Towards that end, in recent years it has completed the following transactions:
• On May 3, 2007, the Bank acquired the trust business of Partners Trust Bank, Utica, New York. At the time of the
acquisition, the Bank acquired $351.0 million in trust assets.
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• On March 14, 2008, the Bank acquired three branches from Manufacturers and Traders Trust Company in the New
York counties of Broome and Tioga. At the time of the acquisition, the Bank assumed $64.4 million in deposits and
acquired $12.6 million in loans.
• On May 29, 2009, the Corporation acquired Canton Bancorp, Inc., the holding company of Bank of Canton based in
Canton, Pennsylvania. At the time of the merger, Canton Bancorp, Inc. had $81.1 million in assets, $58.8 million in
loans and $72.9 million in deposits.
• On April 8, 2011, the Corporation acquired FOFC, the holding company of Capital Bank & Trust Company based in
Albany, New York. At the time of the merger, Capital Bank had $254.4 million in assets, $170.7 million in loans and
$199.2 million in deposits.
• On November 23, 2013, the Bank completed the acquisition of six branch offices from Bank of America located in
Cayuga, Cortland, Seneca, and Tompkins counties in New York. As part of the transaction, the Corporation acquired
$177.7 million in deposits and $1.2 million in loans.
As a result of these transactions and organic growth, the Corporation had $1.657 billion in assets, $1.200 billion in loans, $1.456
billion in deposits and $143.7 million in shareholders’ equity at December 31, 2016.
Growth Strategy
The Corporation’s growth strategy is to leverage its expanding branch network in current or new markets to build client relationships
and grow loans and deposits. Consistent with the Corporation’s community banking model, emphasis is placed on acquiring
stable, low-cost deposits, primarily checking account deposits and other low interest-bearing deposits to fund high-quality loans.
Expanding the branch network involves branch purchases or opening de novo branches in contiguous markets and acquiring other
financial institutions in the Northeast. The Corporation evaluates acquisition targets based on the economic viability of the markets
they are in, the degree to which they can be effectively integrated into the Corporation’s current operations and the degree to which
they are accretive to capital and earnings.
Description of Business
The Corporation, through the Bank and CFS, provides a wide range of financial services, including demand, savings and time
deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services, employee
benefit plans, insurance products, mutual funds and brokerage services. The Bank derives its income primarily from interest and
fees on loans, interest on investment securities, WMG fee income, and fees received in connection with deposit and other services.
The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans and
general operating expenses.
CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-
based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries
and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools
resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk
among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada
Division of Insurance.
In order to compete with other financial services companies, the Corporation relies upon personal relationships established with
clients by its officers, employees, and directors. The Corporation has maintained a strong community orientation by supporting
the active participation of officers and employees in local charitable, civic, school, religious, and community development activities.
The Corporation believes that its emphasis on local relationship banking together with a prudent approach to lending are important
factors in its success and growth.
5
Lending Activities
Lending Strategy
The Corporation’s objective is to channel deposits gathered locally into high-quality, market-yielding loans without taking
unacceptable credit and/or interest rate risk. The Corporation seeks to have a diversified loan portfolio consisting of commercial
and agricultural loans, commercial mortgages, residential mortgages, home equity lines of credit and home equity term loans,
consumer and indirect auto loans. The Bank operates with a traditional community bank model where the relationship manager
possesses credit skills and has significant influence over credit decisions. This creates value since clients and prospects know
they are dealing with a decision maker.
Lending Authority
The Board of Directors establishes the lending policies, underwriting standards, and loan approval limits of the Bank. In accordance
with those policies, the Board of Directors has designated certain officers to consider and approve loans within their designated
authority. These officers exercise substantial authority over credit and pricing decisions, subject to loan committee approval for
larger credits. The Bank recognizes that exceptions to the lending policies may occasionally occur and has established procedures
for approving exceptions to these policies.
In underwriting loans, primary emphasis is placed on the borrower’s financial condition, including ability to generate cash flow
to support the debt and other cash expenses. In addition, substantial consideration is given to collateral value and marketability
as well as the borrower’s character, reputation and other relevant factors. Interest rates charged by the Bank vary with degree of
risk, type, size, complexity, repricing frequency, and other relevant factors associated with the loans. Competition from other
financial services companies also impacts interest rates charged on loans.
The Corporation has also implemented reporting systems to monitor loan originations, loan quality, concentration of credit, loan
delinquencies, non-performing loans and potential problem loans.
Lending Segments
The Corporation segments its loan portfolio into the following major lending categories: (i) commercial and agricultural, (ii)
commercial mortgages, (iii) residential mortgages, and (iv) consumer loans.
Commercial and agricultural loans primarily consist of loans to small to mid-sized businesses in the Corporation's 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,
and they, therefore, pose 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 Corporation’s commercial real estate loans and on the value of such properties.
The Corporation offers interest rate swaps to certain larger commercial mortgage borrowers. These swaps allow the Corporation
to originate a mortgage based on short-term LIBOR rates and allow the borrower to swap into a longer term fixed rate. The
Corporation simultaneously sells an offsetting back-to-back swap to an investment grade national bank so that it does not retain
this fixed-rate risk. The swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's
consolidated balance sheets, which typically involves a day one gain.
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.
6
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, recreational vehicles, 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.
Funding Activities
Funding Strategy
The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and
low interest-bearing deposit accounts. A checking account is the driver of a banking relationship and consumers consider the bank
where they have their checking account as their primary bank. These customers will typically turn to their primary bank first
when in need of other financial services. The Corporation also considers brokered deposits to be an element of its deposit strategy
and anticipates that it will continue using brokered deposits as a secondary source of funding to support growth. Borrowings may
be used on a short-term basis for liquidity purposes or on a long-term basis to fund asset growth.
Funding Sources
The Corporation’s primary sources of funds are deposits, principal and interest payments on loans and securities, borrowings and
funds generated from operations of the Bank. The Bank also has access to advances from the FHLBNY, other financial institutions,
and the FRBNY. Contractual loan payments are a relatively stable source of funds, while deposit inflows and outflows and loan
prepayments are significantly influenced by general market interest rates and economic conditions.
The Corporation considers core deposits, consisting of non-interest-bearing and interest-bearing checking accounts, savings
accounts, and insured money market accounts, to be a significant component of its deposits. The Corporation monitors the activity
on these core deposits and, based on historical experience and pricing strategy, believes it will continue to retain a large portion
of such accounts. The Bank is currently not limited with respect to the rates that it may offer on deposit products. The Bank
believes it is competitive in the types of accounts and interest rates it has offered on its deposit products. The Bank regularly
evaluates the internal cost of funds, surveys rates offered by competitors, reviews cash flow requirements for lending and liquidity,
and executes rate changes when necessary as part of its asset/liability management, profitability and growth strategies.
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition.
The Bank’s deposits are obtained predominantly from the areas in which its retail offices are located. The Bank relies primarily
on customer service, long-standing relationships and other banking services, including loans and wealth management services, to
attract and retain these deposits. However, market interest rates and rates offered by competing financial institutions affect the
Bank’s ability to attract and retain deposits. The Bank utilizes a combination of traditional media, such as print, television, and
radio, as well as digital advertising, such as social media and eBlasts, when advertising its deposit products.
Derivative Financial Instruments
The Corporation offers interest rate swaps to commercial loan customers who wish to fix the interest rates on their loans, and the
Corporation matches these swaps with offsetting swaps with national bank counterparties. These swaps are considered free standing
derivatives and are carried at fair value on the consolidated balance sheet in other assets and other liabilities, with gains and losses
recorded through other non-interest income. The swaps are not designated as hedging derivatives. Additionally, the Corporation
participates in risk participation agreements with dealer banks on commercial loans in which it participates. The Corporation
receives an upfront fee for participating in the credit exposure of the interest rate swap associated with the commercial loan in
which it is a participant and the fee received is recognized immediately in other non-interest income. The Corporation is exposed
to its share of the credit loss equal to the fair value of the interest rate swap in the event of nonperformance by the counterparty
of the interest rate swap.
The Corporation has a policy for managing its derivative financial instruments, and the policy and program activity are overseen
by ALCO. Under the policy, derivative financial instruments with counterparties, who are not customers, are limited to a national
financial institution. Cash and/or certain qualified securities are required to serve as collateral when exposures exceed $100
thousand, with a minimum collateral coverage of $150 thousand. The credit worthiness of the counterparty is reviewed internally
by the Bank's credit department.
7
Wealth Management Strategy
With $1.721 billion of assets under management or administration at year-end 2016, including $294.9 million of assets held under
management or administration for the Corporation, WMG is responsible for the largest component of non-interest income. Wealth
management services provided by the Bank include services as executor and trustee under wills and agreements, and guardian,
custodian, trustee, and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, pension,
estate planning, and employee benefit administrative services. The Corporation’s growth strategy also includes the acquisition of
trust businesses to generate new sources of fee income.
The Corporation offers an array of financial services including mutual funds, securities and insurance brokerage, tax preparation
and other services through CFS, its wholly owned subsidiary
For additional information, including information concerning the results of operations of the Corporation and its subsidiaries, see
Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.
Except for the formation of CRM, the Corporation's Nevada-based captive insurance subsidiary, there were no material changes
in the manner of doing business by the Corporation or its subsidiaries during the fiscal year ended December 31, 2016.
Market Area and Competition
The Bank operates 33 branch offices located in 11 counties in New York and Bradford County in Pennsylvania. Bank branch
offices are located in the following New York counties: Chemung, where the Bank is headquartered, Broome, Cayuga, Cortland,
Schuyler, Seneca, Steuben, Tioga and Tompkins. The Bank also operates under the name “Capital Bank, a division of Chemung
Canal Trust Company,” with branch offices located in Albany and Saratoga counties in New York.
Albany and Saratoga counties rely heavily on business related to New York State government activities, the nanotechnology
industry, and colleges located within these counties. Tompkins County is dominated by the presence of Cornell University and
Ithaca College. The world headquarters of Corning Incorporated, the region’s largest employer, is located in Steuben County.
The remaining New York counties have a combination of service, small manufacturing and tourism related businesses, with colleges
located in Broome, Chemung, and Cortland counties.
Within all these market areas, the Bank encounters intense competition in the lending and deposit gathering aspects of its business
from local, regional and national commercial banks and thrift institutions, credit unions and other providers of financial services,
such as brokerage firms, investment companies, insurance companies and internet banking entities. The Bank also competes with
non-financial institutions, including retail stores and certain utilities that maintain their own credit programs, as well as
governmental agencies that make loans to certain borrowers. Many of these competitors are not subject to regulation as extensive
as that affecting the Bank and, as a result, may have a competitive advantage over the Bank in certain respects. This is particularly
true of credit unions because their pricing structure is not encumbered by the payment of income taxes.
Similarly, the competition for the Bank's wealth management services is primarily from local offices of national brokerage firms,
independent investment advisors, national and regional banks as well as internet based brokerage and advisory firms. The Bank
operates full-service wealth management centers in Chemung, Broome and Albany counties in New York.
Employees
As of December 31, 2016, the Corporation and its subsidiaries employed 368 persons on a full-time equivalent basis. None of
the Corporation's employees are covered by collective bargaining agreements. The Corporation provides its employees with a
comprehensive benefit program, some of which is contributory. The Corporation believes that its relationship with its employees
is good.
8
Available Information
The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information
regarding the Corporation. You may also read and copy materials we file with the SEC at the SEC's Public Reference Room at
100 F St., NE, Washington, D.C. 20549. You may obtain information concerning the operation of the Public Reference Room by
calling 1-800-SEC-0330. In addition, the Corporation maintains a corporate web site at www.chemungcanal.com. The Corporation
makes available free of charge through Bank's web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and any amendments to those reports filed with the SEC pursuant to Section 13(a) or 15(d) of the Exchange
Act. These items are available as soon as reasonably practicable after we electronically file or furnish such material with the SEC.
These items are also available on the Bank's web site as Interactive Data Files as required pursuant to Rule 405 of Regulation S-
T (§232.405). The contents of the Bank's web site are not a part of this report. These materials are also available free of charge
by written request to: Kathleen S. McKillip, Corporate Secretary, Chemung Financial Corporation, One Chemung Canal Plaza,
Elmira, NY 14901.
Supervision and Regulation
The Corporation and the Bank are subject to comprehensive regulation, supervision and examination by regulatory authorities.
Numerous statutes and regulations apply to the Corporation’s and, to a greater extent, the Bank’s operations, including required
reserves, investments, loans, deposits, issuances of securities, payments of dividends and establishment of branches. Set forth
below is a brief description of some of these laws and regulations. The description does not purport to be complete, and is qualified
in its entirety by reference to the text of the applicable laws and regulations.
The Corporation
Bank Holding Company Act
The Corporation is a bank holding company registered with, and subject to regulation and examination by, the FRB pursuant to
the BHCA, as amended. The FRB regulates and requires the filing of reports describing the activities of bank holding companies,
and conducts periodic examinations to test compliance with applicable regulatory requirements. The FRB has enforcement authority
over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist
or removal orders, and to require a bank holding company to divest subsidiaries.
The Corporation generally may engage in the activities permissible for a bank holding company, which includes banking, managing
or controlling banks, performing certain servicing activities for subsidiaries, and engaging in other activities that the FRB has
determined to be so closely related to banking as to be a proper incident thereto, as set forth in the FRB's Regulation Y. As the
Corporation has elected financial holding company status, it may also engage in a broader range of activities that are determined
by the FRB and the Secretary of the Treasury to be financial in nature or incidental to financial activities or, with the prior approval
of the FRB, activities that are determined by the FRB to be complementary to a financial activity and that do not pose a substantial
risk to the safety and soundness of depository institutions or the financial system generally.
The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any bank, or increasing such ownership or control of any bank, without the prior approval of the FRB.
Interstate Banking and Branching
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act ("Riegle-Neal"), subject to certain concentration limits
and other requirements, adequately capitalized bank holding companies, such as the Corporation, are permitted to acquire banks
and bank holding companies located in any state. Any bank that is a subsidiary of a bank holding company is permitted to receive
deposits, renew time deposits, close loans, service loans, and receive loan payments as an agent for any other bank subsidiary of
that bank holding company. Subject to certain conditions, bank are permitted to acquire branch offices outside of their home states
by merging with out-of-state banks, purchasing branches in other states, and establishing de novo branch offices in other states.
In April 2008, banking regulators in the states of New Jersey, New York, and Pennsylvania entered into a Memorandum of
Understanding (the "Interstate MOU") to clarify their respective roles, as home and host state regulators, regarding interstate
branching activity on a regional basis pursuant to the Riegle-Neal Amendments Act of 1997. The Interstate MOU established the
regulatory responsibilities of the respective state banking regulators regarding bank regulatory examinations and is intended to
reduce the regulatory burden on state-chartered banks branching within the region by elimination duplicative host state compliance
exams.
9
Under the Interstate MOU, the activities of branches the Corporation established in Pennsylvania would be governed by New
York state law to the same extent that the Federal law governs the activities of the branch of an out-of-state national bank in such
host states. Issues regarding whether a particular host state law is preempted are to be determined in the first instance by the
NYSDFS. In the event that the NYSDFS and the applicable host state regulator disagree regarding whether a particular host state
law is pre-empted, the NYSDFS and the applicable host state regulator would use their reasonable best efforts to consider all
points of view to resolve the disagreement.
New York Law
The Corporation is organized under New York law and is subject to the New York Business Corporation Law, which governs the
rights and obligations of directors and shareholders and other corporate matters.
The Corporation is also a bank holding company as defined in the New York Banking Law by virtue of its ownership and control
of the Bank. Generally, this means that the NYSDFS must approve the Corporation’s acquisition of control of other banking
institutions and similar transactions.
Federal Securities Law
The Corporation is subject to the information, reporting, proxy solicitation, insider trading, and other rules contained in the
Exchange Act, the disclosure requirements of the Securities Act and the regulations of the SEC thereunder. In addition, the
Corporation must comply with the corporate governance and listing standards of the Nasdaq Stock Market to maintain the listing
of its common stock on the exchange. These standards include rules relating to a listed company's board of directors, audit
committees and independent director oversight of executive compensation, the director nomination process, a code of conduct
and shareholder meetings.
The SEC has adopted certain proxy disclosure rules regarding executive compensation and corporate governance, with which the
Corporation must comply. They include: (i) disclosure of total compensation of key officers of the Corporation, including disclosure
of restricted and unrestricted stock awards compensation; (ii) disclosure regarding any potential conflict of interest of any
compensation consultants of the Corporation; (iii) disclosure regarding compensation committee independence and experience,
qualifications, skills and diversity of its directors and any director nominees; (iv) “say-on-pay” disclosure; and (v) information
relating to the leadership structure of the Corporation’s Board of Directors and the Board of Directors' role in the risk management
process. Additionally, these rules require the Corporation to report the voting results of annual meetings in a much more timely
manner on Form 8-K, rather than on a quarterly or annual report.
Sarbanes-Oxley
The Corporation is also subject to Sarbanes-Oxley. Sarbanes-Oxley established laws affecting public companies’ corporate
governance, accounting obligations, and corporate reporting by: (i) creating a federal accounting oversight body; (ii) revamping
auditor independence rules; (iii) enacting new corporate responsibility and governance measures; (iv) enhancing disclosures by
public companies, their directors, and their executive officers; (v) strengthening the powers and resources of the SEC; and (vi)
imposing new criminal and civil penalties for securities fraud and related wrongful conduct.
The SEC has adopted regulations under Sarbanes-Oxley, including: (i) executive compensation disclosure rules; (ii) standards of
independence for directors who serve on the Corporation’s audit committee; (iii) disclosure requirements as to whether at least
one member of the Corporation’s audit committee qualifies as a “financial expert” as defined in SEC regulations; (iv) whether the
Corporation has adopted a code of ethics applicable to its chief executive officer, chief financial officer, or those persons performing
similar functions; (v) and disclosure requirements regarding the operations of Board of Directors' nominating committees and the
means, if any, by which security holders may communicate with directors.
Support of Subsidiary Banks
The Dodd-Frank Act, discussed in the section of this document entitled “Additional Important Legislation and Regulation,” codifies
the FRB’s long-standing policy of requiring bank holding companies to act as a source of financial and managerial strength to
their subsidiary banks. Accordingly, the Corporation is expected to commit resources to support its banking subsidiaries, including
at times when it may not be advantageous for the Corporation to do so.
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The Bank
General
The Bank is a commercial bank chartered under the laws of New York State and is supervised by the NYSDFS. The Bank also
is a member bank of the FRB and, therefore, the FRB serves as its primary federal regulator. The FDIC insures the Bank’s deposit
accounts up to applicable limits. The Bank must file reports with the FFIEC, the FRB and the FDIC concerning its activities and
financial condition and must obtain regulatory approval before commencing certain activities or engaging in transactions such as
mergers and other business combinations or the establishment, closing, purchase or sale of branch offices. This regulatory structure
gives the regulatory authorities extensive discretion in the enforcement of laws and regulations and the supervision of the Bank.
Loans to One Borrower
The Bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Up to an additional 10% of unimpaired capital and surplus can be lent if the additional amount is fully secured
by readily marketable collateral. At December 31, 2016, the Bank’s legal lending limit on loans to one borrower was $22.4 million
for loans not fully secured by readily marketable collateral and $24.6 million for loans secured by readily marketable collateral.
The Bank’s internal limit on loans is set at $15.0 million. At December 31, 2016, the Bank did not have any loans or agreements
to extend credit to a single or related group of borrowers in excess of its legal lending limit.
Branching
Subject to the approval of the NYSDFS, New York-chartered commercial banks may establish branch offices anywhere within
New York State, except in communities having populations of less than 50,000 inhabitants in which another New York-chartered
commercial bank or a national bank has its principal office. Additionally, under the Dodd-Frank Act, state-chartered banks may
generally branch into other states to the same extent as commercial banks chartered under the laws of that state may branch.
Payment of Dividends
The Bank is subject to substantial regulatory restrictions affecting its ability to pay dividends to the Corporation. Under FRB and
NYSDFS regulations, the Bank may not pay a dividend without prior approval of the FRB and the NYSDFS if the total amount
of all dividends declared during such calendar year, including the proposed dividend, exceeds the sum of its retained net income
to date during the calendar year and its retained net income over the preceding two calendar years. As of December 31, 2016,
approximately $15.2 million was available for the payment of dividends by the Bank to the Corporation without prior approval.
The Bank's ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The
Bank is currently in compliance with these requirements.
Federal Reserve System
FRB member banks must maintain, with a Federal Reserve bank, reserves against their transaction accounts (primarily checking,
NOW, and Super NOW accounts) and non-personal time accounts. As of December 31, 2016, the Bank was in compliance with
applicable reserve requirements. In all years preceding 2008, these reserves were maintained as vault cash or noninterest-bearing
accounts, thereby reducing the Bank’s earnings potential. In the fourth quarter of 2008, the FRB announced that they would begin
to pay interest on member banks’ required reserve balances, as well as excess reserve balances.
Standards for Safety and Soundness
The FRB has adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating
to capital adequacy, asset quality, management, earnings performance, liquidity and sensitivity to market risk. In evaluating these
safety and soundness standards, the FRB considers internal controls and information systems, internal audit systems, loan
documentation, credit underwriting, exposure to changes in interest rates, asset growth, compensation, fees, and benefits. In
general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the
guidelines. The FRB may order an institution that has been given notice that it is not satisfying these safety and soundness standards
to submit a compliance plan, and if an institution fails to do so, the FRB must issue an order directing action to correct the deficiency
and may issue an order directing other action. If an institution fails to comply with such an order, the FRB may seek to enforce
such order in judicial proceedings and to impose civil money penalties.
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Real Estate Lending Standards
The FRB has adopted guidelines that generally require each FRB state member bank to establish and maintain written internal
real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the bank and
the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying FRB guidelines,
which include loan-to-value ratios for the different types of real estate loans.
Transactions with Related Parties
The Federal Reserve Act governs transactions between the Bank and its affiliates, specifically the Corporation, CFS, and CRM.
In general, an affiliate of the Bank is any company that controls, is controlled by, or is under common control with the Bank.
Generally, the Federal Reserve Act limits the extent to which the Bank or its subsidiaries may engage in “covered transactions”
with any one affiliate to 10% of the Bank’s capital stock and surplus, and contains an aggregate limit of 20% of capital stock and
surplus for covered transactions with all affiliates. Covered transactions include loans, asset purchases, the issuance of guarantees,
and similar transactions. Section 22(h) of the Federal Reserve Act and its implementing Regulation O restricts loans to directors,
executive officers, and principal stockholders ("Insiders"). Loans to Insiders (and their related entities) may not exceed, together
with all other outstanding loans to such persons and affiliated entities, the Bank's total capital and surplus. Loans to Insiders above
specified amounts must receive the prior approval of the Bank's Board of Directors. The loans must be made on terms that are
substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable
transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable
features, except that such Insiders may receive preferential loans made under a benefit or compensation program that is widely
available to the Bank's employees and does not give preference to the Insider over the employees. The loans are also subject to
maximum dollar limits and must generally be approved by the Board of Directors.
Deposit Insurance
The FDIC insures the deposits of the Bank up to regulatory limits and the deposits are subject to the deposit insurance premium
assessments of the DIF. The FDIC currently maintains a risk-based assessment system under which assessment rates vary based
on the level of risk posed by the institution to the DIF. Therefore, the assessment rate may change if any of these measurements
change.
The FDIC has adopted a final rule making certain changes to the deposit insurance assessment system. Among other things, the
rule revised the assessment rate schedule effective April 1, 2011, and adopted additional rate schedules that will go into effect
when the DIF reserve ratio reaches various milestones. The rule changed the deposit insurance assessment system from one that
was based on domestic deposits to one that is based on average consolidated total assets minus average tangible equity. In addition,
the rule provides that FDIC dividend payments will be suspended if the DIF reserve ratio exceeds 1.5 percent but that assessment
rates will decrease when the DIF reserve ratio reaches certain thresholds.
All institutions with deposits insured by the FDIC are required to pay assessments to fund interest payments on bonds issued by
FICO, an agency of the federal government established to recapitalize the former Savings Association Insurance Fund. These
assessments will continue until the FICO bonds mature in 2017 through 2019. The FDIC's FICO assessment authority is separate
from its authority to assess risk-based premiums for deposit insurance. The FICO assessment rate is adjusted quarterly to reflect
changes in the assessment bases of the fund and is not risk-based by institution. The FICO assessment rate for the third quarter
of 2016, due December 31, 2016, was 0.14 basis points, or an annual rate of 0.56 basis points, of the Bank's assessment base, or
average total assets less average tangible equity and allowable deductions.
Regulatory Capital Requirements
On October 11, 2013, the FRB approved a final rule that amends the regulatory capital rules for state member banks effective
January 1, 2015. The FRB approved the new capital rules in coordination with substantially identical final rules approved by the
FDIC and the Office of the Comptroller of the Currency for other types of banking organizations. The revisions make the capital
rules consistent with agreements that were reached by Basel III and certain provisions of the Dodd-Frank Act. In general, the new
capital rules revise regulatory capital definitions and minimum ratios; redefine Tier 1 Capital as two components (common equity
Tier 1 capital and additional Tier 1 capital); create a new “common equity Tier 1 risk-based capital ratio”; implement a capital
conservation buffer; revise prompt corrective action thresholds; and change risk weights for certain assets and off-balance sheet
exposures.
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The new capital rules implement a revised definition of regulatory capital, a new common equity Tier 1 minimum capital requirement
of 4.5%, and a higher minimum Tier 1 capital requirement of 6.0% (which is an increase from 4.0%). Under the new rules, the
total capital ratio remains at 8.0%, and the minimum leverage ratio (Tier 1 capital to total assets) for all banking organizations,
regardless of supervisory rating, is 4.0%. Additionally, under the new capital rules, in order to avoid limitations on capital
distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization
must hold a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital
requirements. The buffer is measured relative to risk-weighted assets. The final rules also enhance risk sensitivity and address
weaknesses identified by the regulators over recent years with the measure of risk-weighted assets, including through new measures
of creditworthiness to replace references to credit ratings, consistent with the requirements of the Dodd-Frank Act. Effective
January 1, 2016, the additional capital conservation buffer of 0.625% will be added to the minimum requirements for capital
adequacy purposes, subject to a multi-year phase-in period, and will be fully phased-in on January 1, 2019 at 2.5%.
The new capital requirements also include changes in the risk-weights of assets to better reflect credit risk and other risk exposures.
These include a 150% risk weight (up from 100%) for certain high volatility commercial real estate acquisition, development and
construction loans and the unsecured portion of non-residential mortgage loans that are 90 days past due or otherwise on non-
accrual status; a 20% (up from 0%) credit conversion factor for the unused portion of a commitment with an original maturity of
one year or less that is not unconditionally cancellable; a 250% risk weight (up from 100%) for mortgage servicing rights and
deferred tax assets that are not deducted from capital; and increased risk weights (from 0% to up to 600%) for equity exposures.
The new minimum capital requirements became effective for all banking organizations (except for the largest internationally active
banking organizations) on January 1, 2015, whereas the capital conservation buffer and the deductions from common equity Tier
1 capital phase in over time, beginning on January 1, 2016.
The Corporation is subject to FRB capital requirements applicable to bank holding companies, which are similar to those applicable
to the Bank.
In assessing a state member bank’s capital adequacy, the FRB takes into consideration not only these numeric factors but also
qualitative factors, and has the authority to establish higher capital requirements for individual banks where necessary. Prompt
corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, and critically
undercapitalized, although these terms are not used to represent overall financial condition. The Bank, in accordance with its
internal prudential standards, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and
that are consistent with its risk profile. As of December 31, 2016, the Bank exceeded all regulatory capital ratios necessary to be
considered well capitalized.
Prompt Corrective Action
The FDIA requires the federal banking agencies to resolve the problems of insured banks at the least possible loss to the DIF. The
FRB has adopted prompt corrective action regulations to carry out this statutory mandate. The FRB’s regulations authorize, and
in some situations, require, the FRB to take certain supervisory actions against undercapitalized state member banks, including
the imposition of restrictions on asset growth and other forms of expansion. The prompt corrective action regulations place state
member banks in one of the following five categories based on the bank’s capital:
• well capitalized
•
•
•
•
adequately capitalized
undercapitalized
significantly undercapitalized
critically undercapitalized
The capital rules described above under “Regulatory Capital Requirements” maintained the existing general structure of the current
prompt corrective action framework and increased some of the thresholds for the prompt corrective action capital categories. For
example, an adequately capitalized bank is required to maintain a Tier 1 risk-based capital ratio of 6.0% (increased from the current
level of 4.0%). The rule also introduced the common equity Tier 1 capital ratio as a new prompt corrective action capital category
threshold.
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As an institution’s capital decreases within the three undercapitalized categories listed above, the severity of the action that is
authorized or required to be taken by the FRB for state member banks under the prompt corrective action regulations increases.
All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person
if, following such distribution, the bank would be undercapitalized. The FRB is required to monitor closely the condition of an
undercapitalized institution and to restrict the growth of its assets.
An undercapitalized state member bank is required to file a capital restoration plan with the FRB within 45 days (or other timeframe
prescribed by the FRB) of the date the bank receives notice that it is within any of the three undercapitalized categories, and the
plan must be guaranteed by its parent holding company, subject to a cap on the guarantee that is the lesser of: (i) an amount equal
to 5.0% of the bank’s total assets at the time it was notified that it became undercapitalized; and (ii) the amount that is necessary
to restore the bank’s capital ratios to the levels required to be classified as “adequately classified,” as those ratios and levels are
defined as of the time the bank failed to comply with the plan. If the bank fails to submit an acceptable plan, it is treated as if it
were “significantly undercapitalized.” Banks that are significantly or critically undercapitalized are subject to a wider range of
regulatory requirements and restrictions.
Federal Home Loan Bank
The Bank is also a member of the FHLBNY, which provides a central credit facility primarily for member institutions for home
mortgage and neighborhood lending. The Bank is subject to the rules and requirements of the FHLBNY, including the requirement
to acquire and hold shares of capital stock in the FHLBNY. The Bank was in compliance with the rules and requirements of the
FHLBNY at December 31, 2016.
Community Reinvestment Act
Under the federal CRA, the Bank, consistent with its safe and sound operation, must help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The FRB periodically assesses the Bank's compliance with CRA
requirements. The Bank received a “satisfactory” rating for CRA on its last performance evaluation conducted by the FRB as of
May 19, 2014.
Fair Lending and Consumer Protection Laws
The Bank must also comply with the federal Equal Credit Opportunity Act and the New York Executive Law, which prohibit
creditors from discrimination in their lending practices on bases specified in these statutes. In addition, the Bank is subject to a
number of federal statutes and regulations implementing them, which are designed to protect the general public, borrowers,
depositors, and other customers of depository institutions. These include the Bank Secrecy Act, the Truth in Lending Act, the
Home Ownership and Equity Protection Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Fair Housing Act,
the Real Estate Settlement Procedures Act, the Electronic Funds Transfers Act, the FCRA, the Right to Financial Privacy Act, the
Expedited Funds Availability Act, the Flood Disaster Protection Act, the Fair Debt Collection Practices Act, Helping Families
Save Their Homes Act, and the Consumer Protection for Depository Institutions Sales of Insurance regulation. The FRB and, in
some instances, other regulators, including the U.S. Department of Justice, the FTC, the CFPB and state Attorneys General, may
take enforcement action against institutions that fail to comply with these laws.
Prohibitions against Tying Arrangements
Subject to some exceptions, regulations under the BHCA and the Federal Reserve Act prohibit banks from extending credit to or
offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the
customer obtain some additional service from the bank or its affiliates or not obtain services of a competitor of the bank.
Privacy Regulations
Regulations under the Federal Reserve Act generally require the Bank to disclose its privacy policy. The policy must identify
with whom the Bank shares its customers’ “nonpublic personal information,” at the time of establishing the customer relationship
and annually thereafter. In addition, the Bank must provide its customers with the ability to “opt out” of having their personal
information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties
for marketing purposes. The Bank’s privacy policy complies with Federal Reserve Act regulations.
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The USA PATRIOT Act
The Bank is subject to the USA PATRIOT Act, which gives the federal government powers to address terrorist threats through
enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. The USA PATRIOT Act imposes affirmative obligations on financial institutions, including the Bank,
to establish anti-money laundering programs which require: (i) the establishment of internal policies, procedures, and controls;
(ii) the designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an
independent audit function to test the anti-money laundering program. The FRB must consider the Bank’s effectiveness in combating
money laundering when ruling on merger and other applications.
CFS
CFS is subject to supervision by other regulatory authorities as determined by the activities in which it is engaged. Insurance
activities are supervised by the NYSDFS, and brokerage activities are subject to supervision by the SEC and FINRA.
CRM
CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
Additional Important Legislation and Regulation
The Dodd-Frank Act
The Dodd-Frank Act, enacted on July 21, 2010, significantly changed the bank regulatory landscape and has impacted and will
continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding
companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to
prepare various studies and reports for Congress. We have summarized below significant rules adopted by the federal agencies
pursuant to the Dodd-Frank Act.
Consumer Financial Protection Bureau Rules
The Dodd-Frank Act created the CFPB, with wide-ranging powers to supervise and enforce consumer protection laws. The CFPB
has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions,
including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB has examination and enforcement
authority over all banks and savings institutions with more than $10 billion in assets. The Dodd-Frank Act also weakened the
federal preemption rules that had been applicable to national banks and federal savings associations, especially with respect to the
applicability of state consumer protection laws, and gives state attorneys general certain powers to enforce federal consumer
protection regulations.
The CFPB has issued several new rules pursuant to the Dodd-Frank Act concerning the regulation of mortgage markets in the
U.S. The rules amend several existing regulations, including Regulation Z, which implements the Truth in Lending Act, Regulation
X, which implements the Real Estate Settlement Procedures Act and Regulation B, which implements the Equal Credit Opportunity
Act. The CFPB has also issued amendments to Regulation P, which governs information privacy and Regulation E, which
implements the Electronic Funds Transfers Act. The CFPB may from time to time issue additional amendments or new rules that
will affect the Corporation's business practices.
In December 2013, the FRB and the SEC released final rules to implement certain provisions of the Dodd-Frank Act, commonly
known as the “Volcker Rule.” The Volcker Rule, among other things, prohibits banking entities from engaging in proprietary
trading and from sponsoring, having an ownership interest in or having certain relationships with a hedge fund or private equity
fund, subject to certain exemptions. At December 31, 2016, the Corporation was not engaged in any activities and it did not have
any ownership interests in any funds that are not permitted under the Volcker Rule.
In 2013, the CFPB issued a final rule amending Regulation Z (which implements TILA) and Regulation X (which implements
RESPA). In 2015, the CFPB issued a final rule, effective October 3, 2015, specifying mandatory new procedures for the making
of these disclosures. The purpose of the new rule, known as the TRID Rule, is to integrate certain disclosures for closed-end credit
extended against real property, the appraisal notice required under the ECOA, and the servicing notice required under RESPA in
two new forms: a Loan Estimate that must be provided to a consumer within a specified time after receiving his or her application,
and a Closing Disclosure that must be provided at least three days before the loan is closed. The TRID Rule general applies to
all lenders, including the Bank, that extended credit to consumers 25 or more times in the preceding or current year.
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Securities and Exchange Commission Rules
As discussed above under “Federal Securities Law,” pursuant to the Dodd-Frank Act, the SEC issued regulations that provide the
shareholders of public companies with an advisory vote on: i) executive compensation ("say-on-pay"); ii) the desired frequency
of say-on-pay; and iii) compensation arrangements and understandings in connection with merger transactions, known as "golden
parachute" arrangements. Additionally, the SEC has issued regulations effective January 1, 2017 requiring companies subject to
the reporting rules of the SEC to disclose to shareholders the ratio of compensation of the chief executive officer to the median
compensation of employees. The SEC has also adopted corporate governance regulations that provide to shareholders of companies
subject to the SEC’s proxy rules: i) the opportunity to nominate directors at a shareholder meeting and to have their nominees
included in the company proxy materials sent to all shareholders; and ii) the ability to use the shareholder proposal process to
establish procedures for the inclusion of shareholder director nominations in company proxy materials.
Banking Agency Rules
As discussed above under “Regulatory Capital Requirements,” pursuant to the Dodd-Frank Act, the FRB and the other federal
banking agencies have established minimum leverage and risk-based capital requirements for insured depository institutions and
bank holding companies.
The Dodd-Frank Act directs the federal banking regulators to promulgate rules requiring the reporting of incentive-based
compensation and prohibiting excessive incentive-based compensation paid to executives of depository institutions and their
holding companies with total assets in excess of $1.0 billion that encourages excessive risk-taking that could lead to a material
financial loss. In April 2011, the FRB, along with other federal banking supervisors, issued a joint notice of proposed rulemaking
implementing those requirements.
Many other provisions of the Dodd-Frank Act still require extensive rulemaking, guidance and interpretation by regulatory agencies.
Accordingly, in many respects, the ultimate impact of the legislation and its effects on the Corporation and the Bank remain
uncertain. The Corporation continues to closely monitor and evaluate regulatory developments. Such developments could adversely
affect its financial condition and results of operations through significant increases in its regulatory compliance costs.
Gramm-Leach-Bliley Act
Under the privacy and data security provisions of the Financial Modernization Act of 1999, also known as the GLB Act, and rules
promulgated thereunder, all financial institutions, including the Corporation, the Bank and CFS are required to establish policies
and procedures to restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer's request and to protect
customer data from unauthorized access. In addition, the FCRA, as amended by the FACT Act, includes many provisions affecting
the Corporation, Bank, and/or CFS including provisions concerning obtaining consumer reports, furnishing information to
consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated
companies, and other provisions. For instance, the FCRA requires persons subject to the FCRA to notify their customers if they
report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally
available. The FRB and the FTC have extensive rulemaking authority under the FACT Act, and the Corporation and the Bank are
subject to the rules that have been promulgated by the FRB and FTC thereunder, including recent rules regarding limitations on
affiliate marketing and implementation of programs to identify, detect and mitigate the risk of identity theft through red flags. The
Corporation has developed policies and procedures for itself and its subsidiaries to maintain compliance and believes it is in
compliance with all privacy, information sharing and notification provisions of the GLB Act and the FCRA.
The GLB Act and the FCRA also impose requirements regarding data security and the safeguarding of customer information. The
Bank is subject to the Security Guidelines, which implement section 501(b) of the GLB Act and section 216 of the FACT Act.
The Security Guidelines establish standards relating to administrative, technical, and physical safeguards to ensure the security,
confidentiality, integrity and the proper disposal of customer information. The Bank believes it is in compliance with all such
standards.
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ITEM 1A. RISK FACTORS
The Corporation’s business is subject to many risks and uncertainties. Although the Corporation seeks ways to manage these risks
and develop programs to control those that management can control, the Corporation ultimately cannot predict the extent to which
these risks and uncertainties could affect the Corporation's results. Actual results may differ materially from management's
expectations. The following discussion sets forth what the Corporation currently believes could be the most significant factors
of which it is currently aware that could affect the Corporation's business, results of operations or financial condition. You should
consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Economic conditions may adversely affect the Corporation’s financial performance.
The Corporation's businesses and results of operation are affected by the financial markets and general economic conditions in
the United States, and particularly to adverse conditions in New York and Pennsylvania. Key economic factors affecting the
Corporation include the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and
under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets
and currencies, liquidity of the financial markets, the availability and the cost of capital and credit, investor sentiment, confidence
in the financial markets, and the sustainability of economic growth. The deterioration of any of these conditions could adversely
affect the Corporation's consumer and commercial businesses, its securities and derivatives portfolios, its level of charge-offs and
provision for credit losses, the carrying value of the Corporation's deferred tax assets, its capital levels, its capital levels and
liquidity, and the Corporations results of operations.
A decline or prolonged weakness in business and economic conditions generally or specifically in the principal markets in which
the Corporation does business could have one or more of the following adverse effects on the Corporation’s business: (i) a decrease
in the demand for loans and other products and services; (ii) a decrease in the value of the Corporation’s loans or other assets
secured by consumer or commercial real estate; (iii) an impairment of certain of the Corporation’s intangible assets, such as
goodwill; and (iv) an increase in the number of borrowers and counter-parties who become delinquent, file for protection under
bankruptcy laws or default on their loans or other obligations to the Corporation. Additionally, in light of economic conditions,
the Corporation’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches that it uses
to select, manage and underwrite loans become less predictive of future behaviors. Further, competition in the Corporation’s
industry may intensify as a result of consolidation of financial services companies in response to market conditions and the
Corporation may face increased regulatory scrutiny, which may increase its costs and limit its ability to pursue business
opportunities.
Commercial real estate and business loans increase the Corporation’s exposure to credit risks.
At December 31, 2016, the Corporation’s portfolio of commercial real estate and business loans totaled $745.2 million or 62.1%
of total loans. The Corporation plans to continue to emphasize the origination of these types of loans, which generally expose the
Corporation to a greater risk of nonpayment and loss than residential real estate or consumer loans because repayment of commercial
real estate and business loans often depends on the successful operations and income stream of the borrower’s business.
Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to
residential real estate and consumer loans. Also, some of the Corporation’s borrowers have more than one commercial loan
outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Corporation
to a significantly greater risk of loss compared to an adverse development with respect to residential real estate and consumer
loans. The Corporation targets its business lending and marketing strategy towards small to medium-sized businesses. These
small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger
entities. If general economic conditions negatively impact these businesses, the Corporation’s results of operations and financial
condition may be adversely affected.
The allowance for loan losses may prove to be insufficient to absorb losses in the loan portfolio.
The Corporation’s customers may not repay their loans according to the original terms, and the collateral securing the payment
of those loans may be insufficient to pay any remaining loan balance. Hence, the Corporation may experience significant loan
losses, which could have a material adverse effect on the Corporation's operating results. Management makes various assumptions
and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the
real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan
losses, management relies on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other
factors. If these assumptions prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in
the Corporation’s loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially
decrease net income.
17
The Corporation’s emphasis on the origination of commercial loans is one of the more significant factors in evaluating its allowance
for loan losses. As the Corporation continues to increase the amount of these loans, additional or increased provisions for loan
losses may be necessary, which could result in a decrease in earnings.
Bank regulators periodically review the Corporation’s allowance for loan losses and may require the Corporation to increase its
provision for loan losses or loan charge-offs. Any increase in the allowance for loan losses or loan charge-offs as required by these
regulatory authorities could have a material adverse effect on the Corporation's results of operations and/or financial condition.
Changes in interest rates could adversely affect the Corporation’s results of operations and financial condition.
The Corporation’s results of operations and financial condition are significantly affected by changes in interest rates. The
Corporation's financial results depend substantially on net interest income, which is the difference between the interest income
that it earns on interest-earning assets and the interest expense paid on interest-bearing liabilities. If the Corporation’s interest-
earning assets mature or reprice more quickly than its interest-bearing liabilities in a given period as a result of decreasing interest
rates, net interest income may decrease. Likewise, net interest income may decrease if interest-bearing liabilities mature or reprice
more quickly than interest-earning assets in a given period as a result of increasing interest rates. The Corporation has taken steps
to mitigate this risk, such as holding fewer longer-term residential mortgages, as well as investing excess funds in shorter-term
investments.
Changes in interest rates also affect the fair value of the Corporation’s interest-earning assets and, in particular, its investment
securities available for sale. Generally, the fair value of investment securities fluctuates inversely with changes in interest rates.
Decreases in the fair value of investment securities available for sale, therefore, could have an adverse effect on its shareholders’
equity or earnings if the decrease in fair value is deemed to be other than temporary.
Changes in interest rates may also affect the average life of loans and mortgage-related securities. Decreases in interest rates can
result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under
these circumstances, the Corporation is subject to reinvestment risk to the extent that it is unable to reinvest the cash received from
such prepayments at rates that are comparable to the rates on its existing loans and securities. Additionally, increases in interest
rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.
Municipal deposits are generally more sensitive to interest rates and may require competitive rates at placement and subsequent
rollover dates, which may make it more difficult for the Bank to attract and retain public and municipal deposits. Additionally,
when municipal deposits exceed FDIC coverage, any amounts not insured under the FDIC must be properly secured through a
pledge of eligible securities. The requirement that the Bank collateralize municipal deposits above FDIC insurance may have an
adverse effect on the Corporation's liquidity.
Strong competition within the Corporation's industry and market area could limit its growth and profitability.
The Corporation faces substantial competition in all phases of its operations from a variety of different competitors. Future growth
and success will depend on the ability to compete effectively in this highly competitive environment. The Corporation competes
for deposits, loans and other financial services with a variety of banks, thrifts, credit unions and other financial institutions as well
as other entities, which provide financial services. Some of the financial institutions and financial services organizations with
which the Corporation competes with are not subject to the same degree of regulation as the Corporation. Many competitors have
been in business for many years, have established customer bases, are larger, and have substantially higher lending limits. The
financial services industry is also likely to become more competitive as further technological advances enable more companies
to provide financial services. These technological advances may diminish the importance of depository institutions and other
financial intermediaries in the transfer of funds between parties.
The Corporation’s growth strategy may not prove to be successful and its market value and profitability may suffer.
As part of the Corporation's strategy for continued growth, it may open additional branches. New branches do not initially contribute
to operating profits due to the impact of overhead expenses and the start-up phase of generating loans and deposits. To the extent
that additional branches are opened, the Corporation may experience the effects of higher operating expenses relative to operating
income from the new operations, which may have an adverse effect on the Corporation's levels of net income, return on average
equity and return on average assets.
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In addition, the Corporation may acquire banks and related businesses that it believes provide a strategic fit with its business, such
as the 2011 acquisition of FOFC and the 2013 acquisition of six branches from Bank of America. To the extent that the Corporation
grows through acquisitions, it cannot provide assurance that such strategic decisions will be accretive to earnings.
Compliance with the Dodd-Frank Act may increase the Corporation’s costs of operations and adversely affect the Corporation’s
earnings and financial condition.
The Dodd-Frank Act represents a significant overhaul of many aspects of the regulation of the financial-services industry. Among
other things, the Dodd-Frank Act created the CFPB, tightened capital standards, imposed clearing and margining requirements on
many derivatives activities, and generally increases oversight and regulation of financial institutions and financial activities.
In addition to the self-implementing provisions of the statute, the Dodd-Frank Act calls for many administrative rulemakings by
various federal agencies to implement various parts of the legislation. While regulators have adopted a number of new rules
required by the Dodd-Frank Act, others have not been proposed or if proposed, not been adopted in final form. The Corporation
cannot be certain when final rules affecting it will be issued through such rulemakings, and what the specific content of such rules
will be. The financial reform legislation and any implementing rules that are ultimately issued could have adverse implications
on the financial industry, the competitive environment, and the Corporation’s ability to conduct business. The Corporation will
have to apply resources to ensure that it is in compliance with all applicable provisions of the Dodd-Frank Act and any implementing
rules, which may increase the Corporation’s costs of operations and adversely impact its earnings.
The Corporation operates in a highly regulated environment and may be adversely affected by changes in laws and regulations.
Currently, the Corporation and its subsidiaries are subject to extensive regulation, supervision, and examination by regulatory
authorities. For example, the FRB regulates the Corporation, the FRB, the FDIC and the NYSDFS regulate the Bank, and CRM
is regulated by the Nevada Division of Insurance. Such regulators govern the activities in which the Corporation and its subsidiaries
may engage. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities,
including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a
bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations,
or legislation, could have a material impact on the Corporation and its operations. The Corporation believes that it is in substantial
compliance with applicable federal, state and local laws, rules and regulations. As the Corporation's business is highly regulated,
the laws, rules and applicable regulations are subject to regular modification and change. There can be no assurance that proposed
laws, rules and regulations, or any other law, rule or regulation, will not be adopted in the future, which could make compliance
more difficult or expensive or otherwise adversely affect the Corporation's business, financial condition or prospects.
The capital requirement changes from Basel III discussed in Item 1 - “Business-Supervision and Regulation,” could have a material
adverse impact on the Corporation. Even though the Bank exceeds current and proposed minimum regulatory capital levels, adverse
changes to residential mortgage risk weights, new requirements for common equity capital, inclusion of accumulated other
comprehensive income in regulatory capital, the phase out of trust preferred securities, along with the adoption of new capital
conservation buffers would reduce the Bank's current capital position and over time could cause the Bank to fail to meet minimum
regulatory requirements. These capital positions are subject to volatility due to changes in interest rates and credit spreads. Although
there is a phase-in period in the proposed rules, other factors such as the low interest rate environment, slow economic recovery,
and further constraints on profitability by regulators could impact the Bank's ability to meet the new regulatory minimums once
the phase-in periods have ended.
Changes in tax rates could adversely affect the Corporation's results of operations and financial condition.
The Corporation is subject to the income tax laws of the United States, its states, and municipalities. The income tax laws of the
jurisdictions in which the Corporation operates are complex and subject to different interpretations by the taxpayer and the relevant
government taxing authorities. In establishing a provision for income tax expense, the Corporation must make judgments and
interpretations about the application of these inherently complex tax laws to its business activities, as well as the timing of when
certain items may affect taxable income.
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The provision for income taxes is composed of current and deferred taxes. Deferred taxes arise from differences between assets
and liabilities measured for financial reporting versus income tax return purposes. Deferred tax assets are recognized if, in the
Corporation's judgment, their realizability is determined to be more likely than not. The Corporation performs regular reviews to
ascertain the realizability of its deferred tax assets. These reviews include the Corporation's estimates and assumptions regarding
future taxable income, which are incorporates various tax planning strategies. Changes in the Federal corporate tax rates,
particularly rate reductions, can create a negative effect on the Corporation's reported earnings depending on the Corporation's
then deferred tax position.
The Corporation is a holding company and depends on its subsidiaries for dividends, distributions and other payments.
The Corporation is a legal entity separate and distinct from the Bank and other subsidiaries. Its principal source of cash flow,
including cash flow to pay dividends to its shareholders, is dividends from the Bank. There are statutory and regulatory limitations
on the payment of dividends by the Bank to the Corporation, as well as by the Corporation to its shareholders. FRB regulations
affect the ability of the Bank to pay dividends and other distributions and to make loans to the Corporation. If the Bank is unable
to make dividend payments to the Corporation and sufficient capital is not otherwise available, it may not be able to make dividend
payments to the Corporation's common shareholders.
The Corporation holds certain intangible assets that could be classified as impaired in the future. If these assets are considered
to be either partially or fully impaired in the future, its earnings and the book values of these assets would decrease.
The Corporation is required to test its goodwill and core deposit intangible assets for impairment on a periodic basis. The impairment
testing process considers a variety of factors, including the current market price of its common stock, the estimated net present
value of its assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository
institutions. If an impairment determination is made in a future reporting period, its earnings and the book value of these intangible
assets would be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on
the tangible book value of the Corporation's common shares or its regulatory capital levels, but such an impairment loss could
significantly restrict the Bank from paying a dividend to the Corporation.
Financial counterparties expose the Corporation to risks.
The Corporation has increased its use of derivative financial instruments, primarily interest rate swaps, which exposes it to
financial and contractual risks with counterparty banks. The Corporation maintains correspondent bank relationships, manages
certain loan participations, engages in securities transactions, and engages in other activities with financial counterparties that
are customary to its industry. Financial risks are inherent in these counterparty relationships.
The Corporation may not be able to attract and retain skilled people.
The Corporation's success depends, in large part, on its ability to attract and retain key people. Competition for the best people in
most activities in which the Corporation engages can be intense and it may not be able to hire people or to retain them. A key
component of employee retention is providing a fair compensation base combined with the opportunity for additional compensation
for above average performance. In this regard, the Corporation uses a stock-based compensation program that aligns the interest
of the Corporation's executives and senior managers with the interests of the Corporation, and its shareholders.
The Corporation's compensation practices are designed to be competitive and comparable to those of its peers, however, the
unexpected loss of services of one or more of the Corporation's key personnel could have a material adverse impact on the business
because it would lose the employees’ skills, knowledge of the market, and years of industry experience and may have difficulty
promptly finding qualified replacement personnel.
The Corporation's controls and procedures may fail or be circumvented, which may result in a material adverse effect on its
business.
Management regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance
policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and
can provide only reasonable, not absolute, assurances that the objectives of the system are met.
20
The Corporation continually encounters technological change and the failure to understand and adapt to these changes could
adversely affect its business.
The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products
and services. Technology has lowered barriers to entry and made it possible for "non-banks" to offer traditional bank products
and services using innovative technological platforms such as Fintech and Blockchain. These "digital banks" may be able to
achieve economies of scale and offer better pricing for banking products and services than the Corporation can. The Corporation's
future success will depend, in part, on the ability to address the needs of customers by using technology to provide products and
services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many
competitors have substantially greater resources to invest in technological improvements. There can be no assurance that the
Corporation will be able to effectively implement new technology-driven products and services or be successful in marketing such
products and services to customers. Failure to successfully keep pace with technological change affecting the financial services
industry could have a material adverse impact on the Corporation's business and, in turn, its financial condition and results of
operations.
The Corporation is subject to security and operational risks relating to its use of technology.
Despite instituted safeguards, the Corporation cannot be certain that all of its systems are entirely free from vulnerability to attack
or other technological difficulties or failures, such as cyber-attacks. The Corporation relies on the services of a variety of vendors
to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures
occur, information may be lost or misappropriated, services and operations may be interrupted and the Corporation could be
exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation's business, financial
condition, results of operations or liquidity.
Provisions of the Corporation's certificate of incorporation, bylaws, as well as New York law and certain banking laws, could
delay or prevent a takeover of the Corporation by a third party.
Provisions of the Corporation’s certificate of incorporation and bylaws, New York law, and state and federal banking laws, including
regulatory approval requirements, could delay, defer or prevent a third party from acquiring the Corporation, despite the possible
benefit to the Corporation’s shareholders, or otherwise adversely affect the market price of the Corporation’s common stock. These
provisions include: a two-thirds affirmative vote of all outstanding shares of Corporation stock for certain business combinations;
a supermajority shareholder vote of 75% of outstanding stock for business combinations involving 10% shareholders; the election
of directors to staggered terms of three years; and advance notice requirements for nominations for election to the Corporation’s
Board of Directors and for proposing matters that shareholders may act on at a shareholder meeting. In addition, the Corporation
is subject to New York law, which among other things prohibits the Corporation from engaging in a business combination with
any interested stockholder for a period of five years from the date the person became an interested stockholder unless certain
conditions are met. These provisions may discourage potential takeover attempts, discouraging bids for the Corporation’s common
stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of the
Corporation’s common stock. These provisions could also discourage proxy contests and make it more difficult for shareholders
to elect directors other than candidates nominated by the Board of Directors.
The risks presented by acquisitions could adversely affect the Corporation's financial condition and results of operations.
The business strategy of the Corporation has included and may continue to include growth through acquisition from time to time.
Any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks may include, among
other things: its ability to realize anticipated cost savings, the difficulty of integrating operations and personnel, the loss of key
employees, the potential disruption of its or the acquired company’s ongoing business in such a way that could result in decreased
revenues, the inability of its management to maximize its financial and strategic position, the inability to maintain uniform standards,
controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as
a result of changes in ownership and management.
Severe weather and other natural disasters can affect the Corporation’s business.
The Corporation's main office and its branch offices can be affected by natural disasters such as severe storms and flooding. These
kinds of events could interrupt the Corporation's operations, particularly its ability to deliver deposit and other retail banking
services to its customers and as a result, the Corporation's business could suffer serious harm. While the Corporation maintains
adequate insurance against property and casualty losses arising from most natural disasters, and it has successfully overcome the
challenges caused by past flooding in Central New York, there can be no assurance that it will be as successful if and when disasters
occur.
21
The Corporation's accounting policies and estimates are critical to how the Corporation reports its financial condition and
results of operations, and any changes to such accounting policies and estimates could materially affect how the Corporation
reports its financial condition and results of operations.
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain
the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is
obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability or reducing a
liability. The Corporation has established detailed policies and control procedures that are intended to ensure that these critical
accounting estimates and judgments are well controlled and applied consistently. In addition, these policies and procedures are
intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty
surrounding its judgments and the estimates pertaining to these matters, actual outcomes may be materially different from amounts
previously estimated. For example, because of the inherent uncertainty of estimates, management cannot provide any assurance
that the Bank will not significantly increase its allowance for loan losses if actual losses are more than the amount reserved. Any
increase in its allowance for loan losses or loan charge-offs could have a material adverse effect on the Corporation's financial
condition and results of operations. In addition, the Corporation cannot guarantee that it will not be required to adjust accounting
policies or restate prior financial statements.
Further, from time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation
of the Corporation's financial statements. The ongoing economic recession has resulted in increased scrutiny of accounting standards
by legislators and the Corporation's regulators, particularly as they relate to fair value accounting principles. In addition, ongoing
efforts to achieve convergence between GAAP and International Financial Reporting Standards may result in changes to GAAP.
These changes can be hard to predict and can materially impact how it records and reports its financial condition and results of
operations. In some cases, the Corporation could be required to apply a new or revised standard retroactively, resulting in its
restating prior period financial statements or otherwise adversely affecting its financial condition or results of operations.
Specifically, in June of 2016, FASB issued a new accounting standard, ASU 2016-13, Financial Instruments - Credit Losses (Topic
326) that will substantially change the accounting for credit losses under GAAP. Under GAAP's current standards, credit losses
are not reflected in the Corporation's financial statements until it is probable that the credit losses has been incurred. This
methodology has the effect of delaying the recognition of credit losses on loans. Under the new credit loss standard, the allowance
for credit losses will be an estimate of the "expected" credit losses on loans. The new credit loss standard may have a negative
impact on the reporting of results of operations and financial condition of the Corporation. The amendments in this ASU are
effective for public companies for fiscal years beginning after December 15, 2019, though entities may adopt the amendments
earlier for fiscal years beginning after December 15, 2018.
There may be claims and litigation pertaining to fiduciary responsibility.
From time to time as part of the Corporation’s normal course of business, customers make claims and take legal action against
the Corporation based on its actions or inactions related to the fiduciary responsibilities of the Wealth Management Group segment.
If such claims and legal actions are not resolved in a manner favorable to the Corporation, they may result in financial liability
and/or adversely affect the market perception of the Corporation and its products and services. This may also impact customer
demand for the Corporation’s products and services. Any financial liability or reputation damage could have a material adverse
effect on the Corporation’s business, which, in turn, could have a material adverse effect on its financial condition and results of
operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
All properties owned or leased by the Bank are considered to be in good condition. For additional information about the
Corporation’s facilities, including rental expenses, see "Note 5 Premises and Equipment" in Notes to Consolidated Financial
Statements in Part IV, Item 15. Exhibits and Financial Statement Schedules of this report. The Corporation holds no real estate
in its own name.
22
Corporate Headquarters
Executive and Administrative Offices
One Chemung Canal Plaza, Elmira, NY 14901
New York
Albany County
*132 State St., Albany, NY 12207
*65 Wolf Rd., Albany, NY 12205
*581 Loudon Rd., Latham, NY 12110
*1365 New Scotland Rd., Slingerlands, NY 12159
Saratoga County
*25 Park Ave., Clifton Park, NY 12065
Schuyler County
318 N. Franklin St., Watkins Glen, NY 14891
303 W. Main St., Montour Falls, NY 14865
Broome County
*127 Court St., Binghamton, NY 13901
*601-635 Harry L. Dr., Johnson City, NY 13790 (Oakdale Mall) 54 Fall St., Seneca Falls, NY 13148
*100 Rano Blvd., Vestal, NY 13850
Seneca County
Cayuga County
*120 Genesee St., Auburn, NY 13021
185 Grant Ave., Auburn, NY 13021
Chemung County
One Chemung Canal Plaza, Elmira, NY 14901
628 W. Church St., Elmira, NY 14905
437 Maple St., Big Flats, NY 14814
951 Pennsylvania Ave., Elmira, NY 14904
100 W. McCann's Blvd., Elmira Heights, NY 14903
29 Arnot Rd., Horseheads, NY 14845
602 S. Main St., Horseheads, NY 14845
Cortland County
*1094 State Rte. 222, Cortland, NY 13045
Steuben County
*410 West Morris St., Bath, NY 14810
149 West Market St., Corning, NY 14830
243 North Hamilton St., Painted Post, NY 14870
Tioga County
203 Main St., Owego, NY 13827
*1054 State Route 17C, Owego, NY 13827
405 Chemung St., Waverly, NY 14892
Tompkins County
806 W. Buffalo St., Ithaca, NY 14850
304 Elmira Rd., Ithaca, NY 14850
*909 Hanshaw Rd., Ithaca, NY 14850
Pennsylvania
Bradford County
5 West Main St., Canton, PA 17724
304 Main St., Towanda, PA 18848
159 Canton St., Troy, PA 16947
CFS Group
*136 State St., Albany, NY 12207
One Chemung Canal Plaza, Elmira, NY 14901
628 W. Church St., Elmira, NY 14905
* Leased facilities and/or property
23
Times Union Center
Elmira-Corning Regional Airport
Corning Community College
Elmira College
E-Z Food Mart
Hardinge Inc. (employees only)
Quality Beverage
Collegetown Bagels
Ithaca College
Lansing Market
Schuyler Hospital
ITEM 3. LEGAL PROCEEDINGS
Leased Off-Site ATM Locations
Albany, NY
Big Flats, NY
Corning, NY
Elmira, NY
Elmira, NY
Elmira, NY
Elmira, NY
Ithaca, NY
Ithaca, NY
Lansing, NY
Montour Falls, NY
In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its
subsidiaries. Except for the legal matter discussed in Footnote 15, the Corporation believes that it is not a party to any pending
legal, arbitration, or regulatory proceedings that could have a material adverse impact on its financial results or liquidity.
ITEM 4. MINE SAFETY DISCLOSURES
None.
24
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation's stock is traded on the Nasdaq Global Market under the symbol "CHMG."
The table below shows the price ranges for the Corporation’s common stock during each of the indicated quarters. The information
is based upon the high and low closing sale prices reported by the Nasdaq Global Market.
December 31, 2016
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
December 31, 2015
4th Quarter
3rd Quarter
2nd Quarter
1st Quarter
Common Stock Market Prices and Dividends Paid
During the Past Two Years
High
Low
$
$
$
$
36.74
32.19
32.95
28.03
High
28.44
28.50
27.68
28.74
Dividends
0.26
$
0.26
0.26
0.26
28.29
27.47
26.20
26.25
Low
26.31
26.07
26.01
26.93
Dividends
0.26
$
0.26
0.26
0.26
Under New York law, the Corporation may pay dividends on its common stock either: (i) out of surplus, so that the Corporation’s
net assets remaining after such payment equal the amount of its stated capital, or (ii) if there is no surplus, out of its net profits for
the fiscal year in which the dividend is declared and/or the preceding fiscal year. The payment of dividends on the Corporation's
common stock is dependent, in large part, upon receipt of dividends from the Bank, which is subject to certain restrictions which
may limit its ability to pay us dividends. See Item 1, “Business – Supervision and Regulation-The Bank-Payment of Dividends”
for an explanation of legal limitations on the Bank’s ability to pay dividends.
As of February 28, 2017, there were 2,435 holders of record of the Corporation's stock, which includes 750 Non-Objecting
Beneficial Owners held in street name.
25
The table below sets forth the information with respect to purchases made by the Corporation of our common stock during the
quarter ended December 31, 2016:
Period
10/1/16-10/31/16
11/1/16-11/30/16
12/1/16-12/31/16
Quarter ended 12/31/16
Total
number of
shares
purchased
as part of
publicly
announced
plans or
programs
—
—
—
—
Maximum
number of
shares that
may yet be
purchased
under the
plans or
programs
121,906
121,906
121,906
121,906
Total
number of
shares
purchased
Average
price paid
per share
—
—
35.38
35.38
— $
— $
$
612
$
612
On December 19, 2012, the Corporation’s Board of Directors approved a stock repurchase plan authorizing the purchase of up
to 125,000 shares of the Corporation's outstanding common stock. Purchases may be made from time to time on the open market
or in private negotiated transactions and will be at the discretion of management. For the year ending December 31, 2016, no
shares had been purchased under this plan. Since inception of the plan, a total of 3,094 shares have been purchased under the
plan.
Included above are 612 shares purchased in December 2016, at an average cost of $35.38, from employees who participate in
the Corporation's restricted stock plan to cover related employee payroll taxes associated with those participants' vesting in shares
granted under the plan.
26
STOCK PERFORMANCE GRAPH
The following graph compares the yearly change in the cumulative total shareholder return on the Corporation’s common stock
against the cumulative total return of the NASDAQ Stock Market (U.S. Companies), NASDAQ Bank Stocks Index, SNL U.S.
Bank NASDAQ, and SNL $1B - $5B Bank Index for the period of five years commencing December 31, 2011.
Index
Chemung Financial Corporation
NASDAQ Composite
NASDAQ Bank
SNL U.S. Bank NASDAQ
SNL Bank $1B-$5B
12/31/2011
100.00
100.00
100.00
100.00
100.00
12/31/2012
137.02
117.45
118.69
119.19
123.31
12/31/2013
161.72
164.57
168.21
171.31
179.31
12/31/2014
135.78
188.84
176.48
177.42
187.48
12/31/2015
140.24
201.98
192.08
191.53
209.86
12/31/2016
191.87
219.89
265.02
265.56
301.92
Period Ending
The cumulative total return includes (1) dividends paid and (2) changes in the share price of the Corporation’s common stock and
assumes that all dividends were reinvested. The above graph assumes that the value of the investment in Chemung Financial
Corporation and each index was $100 on December 31, 2011.
The Total Returns Index for NASDAQ Stock Market (U.S. Companies) and Bank Stocks indices were obtained from S&P Global
Market Intelligence, New York, NY.
27
ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial data as of and for the years ended December 31, 2016, 2015, 2014, 2013 and 2012.
The selected financial data is derived from our audited consolidated financial statements. The selected financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our
audited consolidated financial statements and related notes.
(in thousands)
Total assets
Loans, net of deferred fees
Investment securities
FHLBNY and FRBNY stock
Deposits
Securities sold under agreements to repurchase
FHLBNY advances
Long term capital lease obligation
Shareholders' equity
SUMMARIZED BALANCE SHEET DATA AT DECEMBER 31,
2014
$ 1,524,539
1,121,574
286,338
5,535
1,280,014
29,652
50,140
2,976
133,628
2013
$ 1,476,143
995,866
352,511
4,482
1,266,256
32,701
25,243
—
138,578
2015
$ 1,619,964
1,168,633
349,386
4,797
1,400,295
28,453
33,103
2,873
137,242
2012
$ 1,248,160
893,517
245,434
4,710
1,047,497
32,711
27,225
—
131,115
2016
$ 1,657,179
1,200,290
308,107
4,041
1,456,343
27,606
9,093
4,722
143,748
(in thousands)
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
$
Wealth management group fee income
Service charges on deposit accounts
Interchange revenue from debit card transactions
Securities gains, net
Other income
Total non-interest income
Legal accruals and settlements
Merger and acquisition related expenses
Other operating expenses
Total non-interest expense
Income before income tax expense
Income tax expense
Net income
$
SUMMARIZED EARNINGS DATA FOR THE YEARS ENDED
DECEMBER 31,
2016
2015
2014
2013
2012
52,329
2,437
49,892
8,316
5,089
4,027
987
2,730
21,149
1,200
—
55,410
56,610
14,431
4,404
10,027
$
$
50,642
1,571
49,071
8,522
4,886
3,307
372
3,360
20,447
—
—
55,427
55,427
14,091
4,658
9,433
$
$
49,568
3,981
45,587
7,747
5,281
3,360
6,869
3,499
26,756
4,250
115
56,112
60,477
11,866
3,709
8,157
$
$
46,631
2,755
43,876
7,344
4,706
2,562
16
3,449
18,077
—
1,387
48,013
49,400
12,553
3,822
8,731
$
$
46,842
828
46,014
6,827
4,241
2,385
301
3,434
17,188
—
30
46,765
46,795
16,407
5,385
11,022
28
SELECTED PER SHARE DATA ON SHARES OF COMMON STOCK AT OR
FOR THE YEARS ENDED DECEMBER 31,
Earnings per share (1)
Dividends declared
Tangible book value (2)
Book Value
Market price at 12/31
2016
2015
2014
2013
2012
2011
$ 2.11
$ 2.00
$ 1.74
$ 1.87
$ 2.38
$ 2.40
1.04
24.89
30.07
36.35
1.04
23.53
28.96
27.50
1.04
22.71
28.44
27.66
1.04
23.63
29.67
34.17
1.00
22.40
28.20
29.89
1.00
21.07
27.14
22.75
Common shares outstanding at
period end (in thousands) (3)
Weighted average shares outstanding
(in thousands)
4,781
4,739
4,699
4,671
4,649
4,641
4,762
4,719
4,683
4,660
4,641
4,383
%
Change
2015
To
2016
Compounded
Annual
Growth 5
Years
5.5%
—%
5.8%
3.8%
32.2%
0.9%
0.9%
(2.1)%
0.7 %
2.8 %
1.7 %
8.1 %
0.5 %
1.4 %
(1) Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. There
is no difference between basic and diluted earnings per share.
(2) Tangible book value is total shareholders’ equity less goodwill and other intangible assets divided by common shares
outstanding.
(3) All issuable shares including those related to directors’ restricted stock units and directors’ stock compensation.
SELECTED RATIOS AT OR FOR THE YEARS
ENDED DECEMBER 31,
2013
2014
2015
2012
2016
Return on average assets
Return on average equity
Dividend yield at year end
Dividend payout
Total capital to risk adjusted assets
Tier I capital to risk adjusted assets
Tier I leverage ratio
Average equity to average assets
Year-end equity to year-end assets ratio
Loans to deposits
Allowance for loan losses to total loans
Allowance for loan losses to non-performing loans
Non-performing assets to total assets
Net interest rate spread
Net interest margin
Efficiency ratio (1)
0.67%
6.50%
3.08%
41.04%
12.10%
10.57%
8.08%
10.28%
9.39%
78.65%
1.28%
0.60%
6.84%
3.78%
51.34%
12.26%
11.01%
7.83%
8.74%
8.47%
83.46%
1.22%
0.54%
5.74%
3.76%
58.80%
11.84%
10.59%
7.78%
9.43%
8.77%
87.62%
1.22%
0.60%
7.02%
2.86%
48.76%
12.14%
10.94%
7.81%
8.57%
8.67%
82.42%
1.19%
0.88%
8.41%
4.20%
51.84%
13.10%
11.68%
8.74%
10.46%
10.50%
85.30%
1.17%
118.35% 116.58% 175.96% 150.11% 172.96%
0.53%
3.96%
4.14%
70.92%
0.85%
3.36%
3.46%
76.18%
0.75%
3.26%
3.37%
74.43%
0.71%
3.48%
3.59%
78.75%
0.61%
3.78%
3.91%
72.52%
(1) Efficiency ratio is non-interest expense less merger and acquisition related expenses less amortization of intangible assets less
legal settlement divided by the total of fully taxable equivalent net interest income plus non-interest income less net gain on
securities transactions less gain from bargain purchase less gain on liquidation of trust preferred securities.
29
The following tables summarize the Corporation’s unaudited net income and basic earnings per share at each quarter end for the
years 2016 and 2015:
(in thousands, except per share data)
UNAUDITED QUARTERLY DATA
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total other operating income
Total other operating expenses
Income before income tax expense
Income tax expense
Net income (1)
Basic and diluted earnings per share
2016
Quarter Ended
Mar. 31
June 30
Sept. 30
Dec. 31
$
$
$
13,949
924
13,025
595
12,430
5,601
14,008
4,023
1,316
2,707
0.57
$
$
$
13,925
957
12,968
388
12,580
5,216
15,570
2,226
605
1,621
0.34
$
$
$
14,025
985
13,040
1,050
11,990
5,435
13,471
3,954
1,209
2,745
0.58
$
$
$
14,269
973
13,296
404
12,892
4,897
13,561
4,228
1,274
2,954
0.62
(1) The quarter ended June 30, 2016 included a $1.2 million legal reserve. Please refer to Footnote 15 for further discussion.
(in thousands, except per share data)
UNAUDITED QUARTERLY DATA
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Total other operating income
Total other operating expenses
Income (loss) before income tax expense (benefit)
Income tax expense (benefit)
Net income (loss)
Basic and diluted earnings (loss) per share
2015
Quarter Ended
Mar. 31
June 30
Sept. 30
Dec. 31
$
$
$
13,234
892
12,342
390
11,952
5,186
13,736
3,402
1,126
2,276
0.48
$
$
$
13,519
872
12,647
259
12,388
5,326
13,823
3,891
1,314
2,577
0.55
$
$
$
13,595
904
12,691
307
12,384
4,912
13,634
3,662
1,211
2,451
0.52
$
$
$
13,896
934
12,962
615
12,347
5,023
14,234
3,136
1,007
2,129
0.45
30
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
The following is the MD&A of the Corporation in this Form 10-K for the years ended December 31, 2016 and 2015. The purpose
of this discussion is to focus on information about the financial condition and results of operations of the Corporation. Reference
should be made to the accompanying audited consolidated financial statements and footnotes for an understanding of the following
discussion and analysis. See the list of commonly used abbreviations and terms on pages 1-4.
The MD&A included in this Form 10-K contains statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management
and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements.
For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially
from those risks and uncertainties, see Forward-looking Statements below.
The Corporation has been a financial holding company since 2000, and the Bank was established in 1833, CFS in 2001, and CRM
in 2016. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and
time deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services,
employee benefit plans, insurance products, mutual funds and brokerage services. The Bank relies substantially on a foundation
of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its
income primarily from interest and fees on loans, interest on investment securities, WMG fee income and fees received in connection
with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and
employee benefit plans and general operating expenses.
CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-
based captive insurance company that insures against certain risks unique to the operations of the Corporation and its subsidiaries
and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools
resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk
among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada
Division of Insurance.
Forward-looking Statements
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the
Exchange Act, and the Private Securities Litigation Reform Act of 1995. The Corporation intends its forward-looking statements
to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the
Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial
plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking
statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will,"
"anticipate," "estimate," "expect," or "intend." The Corporation cannot promise that its expectations in such forward-looking
statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of
various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing the Corporation’s
growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business
and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the
SEC, including the discussion under the heading “Item 1A. Risk Factors” of this Form 10-K. The Corporation's quarterly filings
are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com
or by written request to: Kathleen S. McKillip, Corporate Secretary, Chemung Financial Corporation, One Chemung Canal Plaza,
Elmira, NY 14901. 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.
31
Consolidated Financial Highlights
(in thousands, except per share data)
RESULTS OF OPERATIONS
Interest income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Non-interest income
Non-interest expense
Income before income tax expense
Income tax expense
Net income
Basic and diluted earnings per share
Average basic and diluted shares outstanding
PERFORMANCE RATIOS
Return on average assets
Return on average equity
Return on average tangible equity (a)
Efficiency ratio (b)
Non-interest expense to average assets (c)
Loans to deposits
YIELDS / RATES - Fully Taxable Equivalent
Yield on loans
Yield on investments
Yield on interest-earning assets
Cost of interest-bearing deposits
Cost of borrowings
Cost of interest-bearing liabilities
Interest rate spread
Net interest margin, fully taxable equivalent
CAPITAL
Total equity to total assets at end of period
Tangible equity to tangible assets at end of period (a)
Book value per share
Tangible book value per share
Period-end market value per share
Dividends declared per share
December 31,
2016
As of or for the Years Ended
December 31,
2015
December 31,
2014
$
$
$
$
$
$
$
56,168
3,839
52,329
2,437
49,892
21,149
56,610
14,431
4,404
10,027
2.11
4,762
$
$
$
54,244
3,602
50,642
1,571
49,071
20,447
55,427
14,091
4,658
9,433
2.00
4,719
0.60%
7.02%
8.52%
74.43%
3.32%
82.42%
4.18%
1.83%
3.61%
0.21%
3.01%
0.35%
3.26%
3.37%
8.67%
7.29%
0.60%
6.84%
8.45%
76.18%
3.51%
83.46%
4.24%
1.91%
3.71%
0.20%
2.85%
0.35%
3.36%
3.46%
8.47%
6.99%
$
30.07
24.89
36.35
1.04
$
28.96
23.53
27.50
1.04
53,213
3,645
49,568
3,981
45,587
26,756
60,477
11,866
3,709
8,157
1.74
4,683
0.54%
5.74%
7.12%
78.75%
3.73%
87.62%
4.43%
1.98%
3.85%
0.22%
2.83%
0.37%
3.48%
3.59%
8.77%
7.13%
28.44
22.71
27.66
1.04
32
AVERAGE BALANCES
Loans (d)
Earning assets
Total assets
Deposits
Total equity
Tangible equity (a)
ASSET QUALITY
Net charge-offs (recoveries)
Non-performing loans (e)
Non-performing assets (f)
Allowance for loan losses
Annualized net charge-offs to average loans
Non-performing loans to total loans
Non-performing assets to total assets
Allowance for loan losses to total loans
$
1,194,589
$
1,141,992
$
1,066,379
1,571,513
1,667,184
1,450,520
142,906
117,656
1,477,529
1,577,831
1,367,717
137,891
111,583
1,399,285
1,506,324
1,297,443
142,046
114,492
$
2,444
$
997
$
12,043
12,431
14,253
0.20%
1.00%
0.75%
1.19%
12,232
13,762
14,260
0.09%
1.05%
0.85%
1.22%
3,071
7,778
10,843
13,686
0.29%
0.69%
0.71%
1.22%
Allowance for loan losses to non-performing loans
118.35%
116.58%
175.96%
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio is non-interest expense less merger and acquisition expenses less amortization of intangible assets less legal settlement
divided by the total of fully taxable equivalent net interest income plus non-interest income less net gains on securities transactions less gain
from bargain purchase less gain on liquidation of trust preferred securities.
(c) For the non-interest expense to average assets ratio, non-interest expense does not include legal accrual and legal settlement expense.
See footnote 15 for further discussion.
(d) Loans include loans held for sale. Loans do not reflect the allowance for loan losses.
(e) Non-performing loans include non-accrual loans only.
(f) Non-performing assets include non-performing loans plus other real estate owned.
Executive Summary
This executive summary of the MD&A includes selected information and may not contain all of the information that is important
to readers of this Form 10-K. For a complete description of the trends and uncertainties, as well as the risks and critical accounting
estimates affecting the Corporation, this Form 10-K should be read in its entirety.
The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands,
except per share and ratio data):
33
Years Ended
December 31,
2016
2015
Change
Percentage
Change
Net interest income
Non-interest income
Non-interest expense
Pre-provision income
Provision for loan losses
Income tax expense
Net income
Basic and diluted earnings per share
Selected financial ratios
Return on average assets
Return on average equity
Net interest margin, fully taxable equivalent
Efficiency ratio
Non-interest expense to average assets
$
$
$
52,329
21,149
56,610
16,868
2,437
4,404
10,027
2.11
$
$
$
0.60%
7.02%
3.37%
74.43%
3.32%
50,642
20,447
55,427
15,662
1,571
4,658
9,433
2.00
$
$
$
0.60%
6.84%
3.46%
76.18%
3.51%
1,687
702
1,183
1,206
866
(254)
594
0.11
3.3 %
3.4 %
2.1 %
7.7 %
55.1 %
(5.5)%
6.3 %
5.5 %
Net income for the year ended December 31, 2016 was $10.0 million, or $2.11 per share, compared with net income of $9.4
million, or $2.00 per share, for the prior year. Return on equity for the year was 7.02%, compared with 6.84% for the prior year.
The increase in net income from the prior year was driven by increases in net interest income and non-interest income and a
reduction in income tax expense, partially offset by a increases in non-interest expense and the provision for loan losses.
Net interest income
Net interest income increased $1.7 million, or 3.3%, compared with the prior year. The increase was due primarily to an increase
of $94.0 million in average interest-earning assets, offset by a nine basis point decline in net interest margin.
Non-interest income
Non-interest income increased $0.7 million, or 3.4%, compared to the prior year. The increase was due primarily to increases in
service charges on deposit accounts, interchange revenue from debit card transactions, and net gains on security transactions,
offset by decreases in WMG fee income and other non-interest income.
Non-interest expense
Non-interest expense increased $1.2 million, or 2.1%, compared to the prior year. The increase was due primarily to the
establishment of a $1.2 million legal reserve associated with the Fane v. Chemung Canal Trust Company case, along with increases
in pension and other employee benefits and professional services, offset by decreases in salaries and wages, net occupancy expenses,
amortization of intangible assets, and other real estate owned expenses. Please refer to Footnote 15 for further discussion of the
Fane v. Chemung Canal case. For the years ended December 31, 2016 and 2015, non-interest expense to average assets was 3.32%
and 3.51%, respectively.
Provision for loan losses
The provision for loan losses increased $0.9 million, or 55.1%, compared to the prior year. The increase was the result of an
increase in net charge-offs and growth in the commercial loan portfolio, compared to the prior year. Net charge-offs were $2.4
million, compared with $1.0 million for the prior year.
34
The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands,
except per share and ratio data):
Years Ended
December 31,
2015
2014
Change
Percentage
Change
Net interest income
Non-interest income
Non-interest expense
Pre-provision income
Provision for loan losses
Income tax expense
Net income
Basic and diluted earnings per share
Selected financial ratios
Return on average assets
Return on average equity
Net interest margin, fully taxable equivalent
Efficiency ratio
Non-interest expense to average assets
$
$
$
50,642
20,447
55,427
15,662
1,571
4,658
9,433
2.00
$
$
$
0.60%
6.84%
3.46%
76.18%
3.51%
49,568
26,756
60,477
15,847
3,981
3,709
8,157
1.74
$
$
$
0.54%
5.74%
3.59%
78.75%
3.73%
1,074
(6,309)
(5,050)
(185)
(2,410)
949
1,276
2.2 %
(23.6)%
(8.4)%
(1.2)%
(60.5)%
25.6 %
15.6 %
0.26
14.9 %
Net income for the year ended December 31, 2015 was $9.4 million, or $2.00 per share, compared with $8.2 million, or $1.74 per
share, for the same period in the prior year. Return on equity for the year ended December 31, 2015 was 6.84%, compared with
5.74% for the same period in the prior year. The increase in net income from the prior year was driven by a reduction in non-
interest expense, mostly due to the $4.3 million WMG legal settlement in 2014, and higher net interest income and a reduction in
the provision for loan losses, partially offset by a reduction in non-interest income, mostly due to the gain on the sale of securities,
and an increase in income tax expense.
Net interest income
Net interest income increased $1.1 million, or 2.2%, compared with the same period in the prior year. The increase was due
primarily to an increase of $78.2 million in average interest-earning assets, offset by a 13 basis point decline in net interest margin.
Non-interest income
Non-interest income decreased $6.3 million, or 23.6%, compared to the same period in the prior year. The decrease was due
primarily to decreases in net gains on securities transactions, service charges on deposit accounts and other non-interest income,
offset by an increase in WMG fee income.
Non-interest expense
Non-interest expense decreased $5.1 million, or 8.4%, compared to the same period in the prior year. The decrease was due
primarily to the $4.3 million legal settlement that occurred in 2014, relating to WMG, and a decline in professional services,
amortization of intangibles, marketing and advertising, and other non-interest expense. These items were offset by increases in
pension and other employee benefits, data processing expense and other real estate owned expenses. For the years ended
December 31, 2015 and 2014, non-interest expense to average assets was 3.51% and 3.73%, respectively.
Provision for loan losses
The provision for loan losses decreased $2.4 million, or 60.5%, compared to the same period in the prior year. The decrease was
the result of lower specific allocations for PCI loans and lower net charge-offs during the year. Net charge-offs were $1.0 million,
compared with $3.1 million for the same period in the prior year.
35
Consolidated Results of Operations
The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations
on a reported basis for the years ended December 31, 2016 and 2015. For a discussion of the Critical Accounting Policies, Estimates
and Risks and Uncertainties that affect the Consolidated Results of Operations, see page 60.
Net Interest Income
The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
Interest and dividend income
Interest expense
Net interest income
Years Ended December 31,
2016
2015
Change
$
$
56,168
3,839
52,329
$
$
54,244
3,602
50,642
$
$
1,924
237
1,687
Percentage
Change
3.5%
6.6%
3.3%
Net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and
securities and the interest expense accrued on interest-bearing liabilities, such as deposits and borrowings, is the largest contributor
to the Corporation’s earnings.
Net interest income for the year ended December 31, 2016 totaled $52.3 million, an increase of $1.7 million, or 3.3%, compared
with $50.6 million for the same period in the prior year. Fully taxable equivalent net interest margin was 3.37% for the year ended
December 31, 2016 compared with 3.46% for the same period in the prior year. The increase in net interest income was due
primarily to interest income from the loan portfolio, as the year-to-date average commercial loan balance increased $77.6 million
when compared to the prior year. The decline in interest margin was a result of the commercial loan portfolio repricing to current
market rates. The yield on average interest-earning assets decreased 10 basis points, while the cost of interest-bearing deposits
remained flat. The decline in the yield of interest-earning assets can be mostly attributed to declines of 23 basis points in the yield
of commercial loans and 17 basis points in the yield of mortgage loans, due to new production at lower competitive rates, offset
by a 33 basis point increase in consumer loans, due to the indirect loan portfolio and increasing the portfolio toward higher yielding
used car loans. Average interest-earning assets increased $94.0 million compared to the prior year, primarily in commercial loans.
The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
Interest and dividend income
Interest expense
Net interest income
Years Ended December 31,
2015
2014
Change
$
$
54,244
3,602
50,642
$
$
53,213
3,645
49,568
$
$
1,031
(43)
1,074
Percentage
Change
1.9 %
(1.2)%
2.2 %
Net interest income for the year ended December 31, 2015 totaled $50.6 million, an increase of $1.1 million, or 2.2%, compared
with $49.6 million for the same period in the prior year. Fully taxable equivalent net interest margin was 3.46% for the year ended
December 31, 2015 compared with 3.59% for the same period in the prior year. The increase in net interest income was due
primarily to interest income from the commercial loan portfolio, as the year-to-date average commercial loan balance increased
$88.6 million when compared to the prior year. The decline in interest margin was a result of the commercial loan portfolio
repricing to current market rates. The yield on average interest-earning assets and cost of average interest-bearing liabilities
decreased 14 and two basis points, respectively. Average interest-earning assets increased $78.2 million compared to the prior
year, primarily in commercial loans.
36
Average Consolidated Balance Sheet and Interest Analysis
The following tables present certain information related to the Corporation’s average consolidated balance sheets and its
consolidated statements of income for the years ended December 31, 2016, 2015 and 2014. It also reflects the average yield on
interest-earning assets and average cost of interest-bearing liabilities for the years ended December 31, 2016, 2015 and 2014. 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. Tax equivalent adjustments have
been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on
equity investments.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)
Interest-earning assets:
Commercial loans
Mortgage loans
Consumer loans
Taxable securities
Tax-exempt securities
Interest-bearing deposits
Average
Balance
2016
Interest
Year Ended December 31,
2015
2014
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
Average
Balance
Interest
Yield/
Rate
$ 734,628
$ 31,682
4.31% $ 657,038
$ 29,824
4.54% $ 568,448
$ 28,181
197,132
262,829
274,401
45,127
57,396
7,689
10,512
5,245
1,364
307
3.90%
4.00%
1.91%
3.02%
0.53%
198,332
8,063
286,622
10,516
262,181
43,081
30,275
4,963
1,356
76
4.07%
3.67%
1.89%
3.15%
0.25%
195,266
8,134
302,665
10,947
267,117
39,890
25,899
5,122
1,415
64
4.96%
4.17%
3.62%
1.92%
3.55%
0.25%
3.85%
Total interest-earning assets
1,571,513
56,799
3.61% 1,477,529
54,798
3.71% 1,399,285
53,863
Non-earning assets:
Cash and due from banks
Premises and equipment, net
Other assets
Allowance for loan losses
AFS valuation allowance
26,708
29,525
51,590
(14,771)
2,619
26,959
30,953
53,153
(14,103)
3,340
26,653
30,447
52,014
(13,082)
11,007
Total assets
$1,667,184
$1,577,831
$1,506,324
Interest-bearing liabilities:
Interest-bearing demand deposits
Savings and insured money market deposits
Time deposits
FHLBNY advances, securities sold
under agreements to repurchase, and other debt
Total interest-bearing liabilities
Non-interest-bearing liabilities:
Demand deposits
Other liabilities
Total liabilities
Shareholders' equity
$ 135,874
752,489
156,737
55,472
1,100,572
405,420
18,286
1,524,278
142,906
Total liabilities and shareholders’ equity
$1,667,184
136
1,457
577
1,669
3,839
0.10% $ 129,442
113
0.09% $ 126,593
0.19%
0.37%
671,829
182,177
3.01%
56,202
0.35% 1,039,650
1,214
676
1,599
3,602
0.18%
0.37%
2.85%
0.35%
585,616
223,841
56,625
992,675
101
988
954
1,602
3,645
0.08%
0.17%
0.43%
2.83%
0.37%
384,268
16,022
1,439,940
137,891
$1,577,831
361,393
10,210
1,364,278
142,046
$1,506,324
Fully taxable equivalent net interest income
52,960
51,196
50,218
Net interest rate spread (1)
Net interest margin, fully taxable equivalent
(2)
Taxable equivalent adjustment
Net interest income
3.26%
3.37%
3.36%
3.46%
3.48%
3.59%
(631)
$ 52,329
(554)
$ 50,642
(650)
$ 49,568
(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing
liabilities.
(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
37
Changes Due to Rate and Volume
Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The table belows illustrates the extent
to which changes in interest rates and in the volume of average interest-earning assets and interest-bearing liabilities have affected
the Corporation’s interest income and interest expense during the periods indicated. Information is provided in each category with
respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to
changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purposes of this table, changes that
are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes
in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not
possible to precisely allocate changes between volume and rates. In addition, average earning assets include non-accrual loans
and taxable equivalent adjustments were made.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(in thousands)
Interest income
Commercial, agricultural and
commercial mortgage loans
Mortgage loans
Consumer loans
Taxable investment securities
Tax-exempt investment securities
Interest-bearing deposits
Total interest income
Interest expense
Interest-bearing demand deposits
Savings and insured money
market deposits
Time deposits
FHLBNY advances, securities sold
under agreements to repurchase and
other debt
Total interest expense
2016 vs. 2015
Increase/(Decrease)
Due to
Volume
Total
Change
Due to
Rate
Total
Change
2015 vs. 2014
Increase/(Decrease)
Due to
Volume
Due to
Rate
$
$
1,858
(374)
(4)
282
8
231
2,001
$
3,421
(47)
(913)
230
64
103
2,858
(1,563) $
(327)
909
52
(56)
128
(857)
$
1,643
(71)
(431)
(159)
(59)
12
935
$
4,158
126
(582)
(86)
108
12
3,736
(2,515)
(197)
151
(73)
(167)
—
(2,801)
23
243
(99)
70
237
7
167
(99)
(21)
54
16
76
—
91
183
12
226
(278)
(3)
(43)
2
161
(159)
(13)
(9)
10
65
(119)
10
(34)
Net interest income
$
1,764
$
2,804
$
(1,040) $
978
$
3,745
$
(2,767)
Provision for loan losses
Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors
including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan
portfolio, current economic conditions and loan growth. Based on this analysis, the provision for loan losses for the years ended
December 31, 2016, 2015 and 2014 were $2.4 million, $1.6 million and $4.0 million, respectively. Net charge-offs for the years
ended December 31, 2016, 2015 and 2014 were $2.4 million, $1.0 million and $3.1 million, respectively.
38
Non-interest income
The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
Years Ended December 31,
2016
2015
Change
Percentage
Change
WMG fee income
Service charges on deposit accounts
Interchange revenue from debit card transactions
Net gains on securities transactions
Net gains on sales of loans held for sale
Net gains (losses) on sales of other real estate owned
Income from bank owned life insurance
CFS fee and commission income
Other
Total non-interest income
$
$
8,316
5,089
4,027
987
326
21
73
544
1,766
21,149
$
$
8,522
4,886
3,307
372
294
84
75
906
2,001
20,447
$
$
(206)
203
720
615
32
(63)
(2)
(362)
(235)
702
(2.4)%
4.2 %
21.8 %
165.3 %
10.9 %
(75.0)%
(2.7)%
(40.0)%
(11.7)%
3.4 %
Total non-interest income for the year ended December 31, 2016 increased $0.7 million compared to the same period in the prior
year. The increase was primarily due to increases in services charges on deposit accounts, interchange revenue from debit card
transactions, and net gains on securities transactions, offset by decreases in WMG fee income, CFS fee and commission income,
and other non-interest income.
WMG fee income
WMG fee income decreased compared to the same period in the prior year due to a decline in assets under management or
administration from the loss of one large non-profit customer during 2016.
Service charges on deposit accounts
Service charges on deposit accounts increased compared to the same period in the prior year due to an increase in overdraft fees.
Net gains (losses) on securities transactions
Net gains (losses) on securities transactions increased compared to the same period in the prior year due to the sale of $14.5 million
in U.S. Treasuries and $25.0 million in obligations of U.S. Government sponsored enterprises.
CFS fee and commission income
CFS fee and commission income decreased compared to the same period in the prior year due to a decrease in commissions from
insurance annuity products.
Other
Other non-interest income decreased due to rental income from OREO properties, which were sold in 2016.
39
The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
Years Ended December 31,
2015
2014
Change
Percentage
Change
WMG fee income
Service charges on deposit accounts
Interchange from debit card transactions
Net gains on securities transactions
Net gains on sales of loans held for sale
Net gains (losses) on sales of other real estate owned
Income from bank owned life insurance
CFS fee and commission income
Other
Total non-interest income
$
$
8,522
4,886
3,307
372
294
84
75
906
2,001
20,447
$
$
7,747
5,281
3,360
6,869
301
(64)
78
830
2,354
26,756
$
$
775
(395)
(53)
(6,497)
(7)
148
(3)
76
(353)
(6,309)
10.0 %
(7.5)%
(1.6)%
(94.6)%
(2.3)%
N/M
(3.8)%
9.2 %
(15.0)%
(23.6)%
Total non-interest income for year ended December 31, 2015 decreased $6.3 million compared with the same period in the prior
year. The decrease was primarily due to decreases in service charges on deposit accounts, net gains on securities transactions, and
other non-interest income, offset by an increase in WMG fee income and net gains on sales of other real estate owned.
WMG fee income
WMG fee income increased compared to the same period in the prior year due to an increase in fee levels, as fees were adjusted
to reflect current market fee levels, offset by a decline in total assets under management or administration.
Service charges on deposit accounts
Service charges on deposit accounts decreased compared to the same period in the prior year due to a decline in overdraft fees.
Net gains (losses) on securities transactions
Net gains (losses) on securities transactions decreased compared to the same period in the prior year due to the $6.4 million gain
on the sale of equity securities during the prior year.
CFS fee and commission income
CFS fee and commission income increased compared to the same period in the prior year due to an increase in commissions from
insurance annuity products.
Other
Other non-interest income decreased due to a decline in gains on stock donations to charitable organizations and other non-interest
income, offset by additional rental income in 2015 from properties included within OREO.
40
Non-interest expense
The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
Compensation expense:
Salaries and wages
Pension and other employee benefits
Total compensation expense
Non-compensation expense:
Net occupancy
Furniture and equipment
Data processing
Professional services
Legal accruals and settlements
Amortization of intangible assets
Marketing and advertising
Other real estate owned expense
FDIC insurance
Loan expense
Other
Total non-compensation expense
Total non-interest expense
Years Ended December 31,
2016
2015
Change
Percentage
Change
$
$
$
20,954
6,132
27,086
$
21,223
5,908
27,131
6,837
2,967
6,593
2,175
1,200
986
877
180
1,193
669
5,847
29,524
56,610
$
7,006
2,979
6,586
1,293
—
1,136
899
812
1,075
693
5,817
28,296
55,427
$
(269)
224
(45)
(169)
(12)
7
882
1,200
(150)
(22)
(632)
118
(24)
30
1,228
1,183
(1.3)%
3.8 %
(0.2)%
(2.4)%
(0.4)%
0.1 %
68.2 %
N/M
(13.2)%
(2.4)%
(77.8)%
11.0 %
(3.5)%
0.5 %
4.3 %
2.1 %
Total non-interest expense for the year ended December 31, 2016 increased $1.2 million compared with the prior year. The increase
was primarily due to an increase in non-compensation expense related to the establishment of a $1.2 million legal reserve in the
current year.
Compensation expense
Compensation expense decreased compared to the same period in the prior year due to a decrease in salaries and wages, offset by
an increase in pension and other employee benefits. The decrease in salaries and wages was primarily due to a reduction in full-
time equivalent employees. The $0.2 million increase in pension and other employee benefits was primarily due to an increase in
health insurance costs, offset by a $0.3 million curtailment gain related to the amendment of the defined benefit health care plan
during the fourth quarter of the current year.
Non-compensation expense
Non-compensation expense increased compared to the same period in the prior year primarily due increases in professional services
and legal accruals and settlements, offset by decreases in net occupancy expenses, amortization of intangible assets, and other real
estate owned expenses. The increase in professional services can be mostly attributed to expenses incurred related to the feasibility
and implementation of CRM, consulting costs associated with the conversion of the Corporation's debit cards to MasterCard, and
legal costs associated with the appeal of the Fane v. Chemung Canal Trust Company decision. The increase in legal accruals and
settlements can be attributed to the establishment of a $1.2 million legal reserve associated with the Fane v. Chemung Canal Trust
Company case. Please refer to Footnote 15 for further discussion of the Fane v. Chemung Canal case. The decrease in net
occupancy expenses can be attributed to the closure of the branch office at 202 East State Street in Ithaca, NY during the second
quarter of 2016. The decrease in other real estate owned expenses can be attributed to the sale of properties in 2016.
41
The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
Compensation expense:
Salaries and wages
Pension and other employee benefits
Total compensation expense
Non-compensation expense:
Net occupancy
Furniture and equipment
Data processing
Professional services
Legal settlements
Amortization of intangible assets
Marketing and advertising
Other real estate owned expense
FDIC insurance
Loan expense
Merger and acquisition expenses
Other
Total non-compensation expense
Total non-interest expense
Years Ended December 31,
2015
2014
Change
Percentage
Change
$
$
$
21,223
5,908
27,131
$
21,315
5,733
27,048
7,006
2,979
6,586
1,293
—
1,136
899
812
1,075
693
—
5,817
28,296
55,427
$
7,098
2,972
6,393
1,597
4,250
1,310
1,079
247
1,116
811
115
6,441
33,429
60,477
$
(92)
175
83
(92)
7
193
(304)
(4,250)
(174)
(180)
565
(41)
(118)
(115)
(624)
(5,133)
(5,050)
(0.4)%
3.1 %
0.3 %
(1.3)%
0.2 %
3.0 %
(19.0)%
(100.0)%
(13.3)%
(16.7)%
228.7 %
(3.7)%
(14.5)%
(100.0)%
(9.7)%
(15.4)%
(8.4)%
Total non-interest expense for the year ended December 31, 2015 decreased $5.1 million compared with the same period in the
prior year. The decrease was primarily due to a decrease in non-compensation expense related to the $4.3 million legal settlement
in the the prior year.
Compensation expense
Compensation expense increased compared to the same period in the prior year due to an increase in pension and other employee
benefits, offset by a decrease in salaries and wages. The $0.2 million increase in pension and other employee benefits was due to
the adoption of updated mortality tables in 2015, which reflected improved life expectancies of employees and a reduced discount
rate for determining pension costs. The decrease in salaries and wages was due to a reduction in full-time equivalent employees.
Non-compensation expense
Non-compensation expense decreased compared to the same period in the prior year primarily due to the legal settlement that
occurred in 2014, related to the Bank's WMG, offset by increases in data processing expense and OREO expenses. The increase
in data processing expense was primarily due to check card expense and data communication lines expense, while the increase in
OREO expenses was due to two properties being carried in OREO for the entire year, along with a fair market value adjustment
to one property.
42
Income tax expense
The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent
change (in thousands):
Income before income tax expense
Income tax expense
Effective tax rate
Years Ended December 31,
2016
2015
Change
Percentage
Change
$
$
14,431
4,404
30.5%
$
$
14,091
4,658
33.1%
$
$
340
(254)
2.4 %
(5.5)%
The decrease in the effective tax rate can be attributed to the formation of CRM in 2016 and increasing the utilization of the the
Bank's real estate investment trust during the current year.
The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent
change (in thousands):
Income before income tax expense
Income tax expense
Effective tax rate
Years Ended December 31,
2015
2014
Change
$
$
14,091
4,658
33.1%
$
$
11,866
3,709
31.3%
$
$
2,225
949
Percentage
Change
18.8%
25.6%
The increase in the effective tax rate can be attributed to higher pre-tax income and changes in the mix of income and expense
subject to U.S. federal, state, and local income taxes.
43
Financial Condition
The following table presents selected financial information for the periods indicated, and the dollar and percent change (in
thousands):
December 31,
2016
December 31,
2015
Change
Percentage
Change
Assets
Total cash and cash equivalents
$
74,162
$
26,185
$
Total investment securities, FHLB, and FRB stock
312,148
354,183
Loans, net of deferred loan fees
Allowance for loan losses
Loans, net
Goodwill and other intangible assets, net
Other assets
Total assets
Liabilities and Shareholders’ Equity
Total deposits
FHLBNY advances and other debt
Other liabilities
Total liabilities
$
$
1,200,290
(14,253)
1,186,037
1,168,633
(14,260)
1,154,373
24,769
60,063
25,755
59,468
1,657,179
$
1,619,964
$
37,215
1,456,343
$
1,400,295
$
41,421
15,667
64,429
17,998
1,513,431
1,482,722
Total shareholders’ equity
143,748
137,242
Total liabilities and shareholders’ equity
$
1,657,179
$
1,619,964
$
Cash and cash equivalents
47,977
(42,035)
31,657
7
31,664
(986)
595
56,048
(23,008)
(2,331)
30,709
6,506
37,215
183.2 %
(11.9)%
2.7 %
— %
2.7 %
(3.8)%
1.0 %
2.3 %
4.0 %
(35.7)%
(13.0)%
2.1 %
4.7 %
2.3 %
The increase in cash and cash equivalents can be attributed to maturities, pay-downs, and the sale of available for sale securities
and an increase in deposits, offset by an increase in total loans and the pay down of FHLB overnight advances.
Investment securities
The decrease in investment securities can be mostly attributed to the sale of $14.5 million in U.S. treasuries in the first quarter
and $25.0 million obligations of U.S. Government sponsored enterprises in the third and fourth quarters, along with $89.8 million
in calls and maturities of U.S. Government sponsored enterprises and pay-downs on mortgage-backed securities, and an unrealized
loss of $7.2 million for year-to-date 2016, offset by additional purchases of $1.8 million in obligations of states and political
subdivisions and $94.7 million in mortgaged-backed securities.
Loans, net
The increase in total loans can be attributed to increases of $62.2 million in commercial mortgages and $2.7 million in residential
mortgages, offset by decreases in commercial and agriculture of $16.7 million, indirect consumer of $11.8 million, and other
consumer of $4.8 million. The increase in the commercial loan portfolio is primarily from the Capital Bank Division, while the
decline in the indirect loan portfolio can be attributed to the run off of promotional interest rates.
Goodwill and other intangible assets, net
The decrease in goodwill and other intangible assets, net can be attributed to amortization of other intangible assets. There were
no impairments of goodwill or other intangible assets during the years ended December 31, 2016 and 2015.
44
Other assets
The increase in other assets can be mostly attributed to the amendment of the noncontributory defined benefit pension plan and
defined benefit health care plan, which resulted in a pension asset of $1.8 million, compared to a pension liability of $3.8 million
in the prior year, offset by the sale of one OREO property in 2016 for $1.5 million.
Deposits
The increase in deposits can be attributed to increases of $51.3 million in money market accounts, $15.6 million in non-interest-
bearing demand deposits, $6.2 million in interest-bearing demand deposits, and $4.9 million in savings deposits. These items were
offset by a $22.0 million decrease in time deposits. The changes in money market accounts and demand deposits can be attributed
to the net inflow of deposits from municipal clients, as well as new municipal client relationships.
FHLBNY advances and other debt
FHLBNY overnight advances were paid off with the increase in deposits received from municipal clients and FHLBNY term
advances were reduced by normal scheduled payments. Offsetting the reduction in advances was an additional capital lease
obligation related to the relocation of the Clifton Park, NY branch to a new location.
Other liabilities
The decrease in other liabilities can be mostly attributed to the amendment of the noncontributory defined benefit pension plan
and defined benefit health care plan, which resulted in a pension asset of $1.8 million, compared to a pension liability of $3.8
million in the prior year, offset by the establishment of a $1.2 million legal reserve associated with the Fane v. Chemung Canal
Trust Company case. Please refer to Footnote 15 for further discussion of the Fane v. Chemung Canal case.
Shareholders’ equity
The increase in shareholders’ equity was primarily due to earnings of $10.0 million, a reduction of $1.1 million in treasury stock,
and a decrease of $0.2 million in accumulated other comprehensive loss, offset by $4.9 million in dividends declared.
Assets under management or administration
The market value of total assets under management or administration in our WMG was $1.721 billion, including $294.9 million
of assets held under management or administration for the Corporation, at December 31, 2016 compared with $1.856 billion,
including $304.1 million of assets held under management or administration for the Corporation, at December 31, 2015, a decrease
of $134.5 million, or 7.3%. The decrease in market value can be mostly attributed to the loss of one large non-profit customer
during the first quarter of 2016.
45
Balance Sheet Comparisons
The table below contains selected average balance sheet information for each year in the six-year period ended December 31,
2016 (in millions):
SELECTED AVERAGE BALANCE SHEET INFORMATION
Average Balance Sheet
Total Assets
Earning Assets (1)
Loans (2)
Investments (3)
Deposits
2016
$1,667.2
1,571.5
1,194.6
376.9
1,450.5
2015
$1,577.8
1,477.5
1,142.0
335.5
1,367.7
2014
$1,506.3
1,399.3
1,066.4
332.9
1,297.4
2013
$1,306.4
1,209.7
942.9
266.8
1,092.8
2012
$1,253.7
1,150.4
844.2
306.2
1,045.0
2011
$1,175.0
1,078.4
741.0
337.4
967.1
Borrowings (4)
Shareholders’ Equity
55.5
142.9
56.2
137.9
56.7
142.0
69.5
134.3
70.7
131.1
81.3
120.2
% Change
2015 to
2016
Compounded
Annual
Growth 5
Years
5.7 %
6.4 %
4.6 %
12.3 %
6.1 %
(1.2)%
3.6 %
7.2 %
7.8 %
10.0 %
2.2 %
8.4 %
(7.4)%
3.5 %
(1) Average earning assets include securities available for sale and securities held to maturity based on amortized cost, loans and
loans held for sale net of deferred loan fees, interest-bearing deposits, FHLBNY stock, FRBNY stock and federal funds sold.
(2) Average loans and loans held for sale, net of deferred loan fees.
(3) Average balances for investments include securities available for sale and securities held to maturity, based on amortized cost,
FHLBNY stock, FRBNY stock, federal funds sold and interest-bearing deposits.
(4) Average borrowings include FHLBNY advances, securities sold under agreements to repurchase and capitalized lease
obligations.
The table below contains selected period-end balance sheet information for each year in the six-year period ended December 31,
2016 (in millions):
SELECTED PERIOD-END BALANCE SHEET INFORMATION
Ending Balance Sheet
Total Assets
Earning Assets (1)
Loans (2)
Allowance for loan losses
Investments (3)
Deposits
Borrowings (4)
Shareholders’ Equity
2016
$1,657.2
1,558.8
1,200.7
14.3
358.1
1,456.3
41.4
143.7
2015
$1,620.0
1,525.2
1,169.7
14.3
355.5
1,400.3
64.4
137.2
2014
$1,524.5
1,415.1
1,122.2
13.7
292.9
1,280.0
82.8
133.6
2013
$1,476.1
1,373.6
996.6
12.8
377.0
1,266.3
57.9
138.6
2012
$1,248.2
1,155.7
894.6
10.4
261.2
1,047.5
59.9
131.1
2011
$1,216.3
1,116.3
797.3
9.7
319.4
1,001.1
80.5
125.9
% Change
2015 to
2016
Compounded
Annual
Growth 5
Years
2.3 %
2.2 %
2.7 %
— %
0.7 %
4.0 %
(35.7)%
4.7 %
6.4 %
6.9 %
8.5 %
8.1 %
2.3 %
7.8 %
(12.5)%
2.7 %
(1) Earning assets include securities available for sale, at estimated fair value and securities held to maturity based on amortized
cost, loans and loans held for sale net of deferred loan fees, interest-bearing deposits, FHLBNY stock, FRBNY stock and federal
funds sold.
(2) Loans and loans held for sale, net of deferred loan fees.
(3) Investments include securities available for sale, at estimated fair value, securities held to maturity, at amortized cost, FHLBNY
stock, FRBNY stock, federal funds sold and interest-bearing deposits.
(4) Borrowings include FHLBNY advances, securities sold under agreements to repurchase and capitalized lease obligations.
46
Cash and Cash Equivalents
Total cash and cash equivalents increased $48.0 million since December 31, 2015, due to increases of $3.3 million in cash and
due from financial institutions and $44.7 million in interest-bearing deposits in other financial institutions.
Securities
The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt securities purchased for
the bond portfolio to carry a minimum agency rating of "A". After an independent credit analysis is performed, the policy also
allows the Corporation to purchase local municipal obligations that are not rated. The Corporation intends to maintain a reasonable
level of securities to provide adequate liquidity and in order to have securities available to pledge to secure public deposits,
repurchase agreements and other types of transactions. Fluctuations in the fair value of the Corporation’s securities relate primarily
to changes in interest rates.
Marketable securities are classified as Available for Sale, while investments in local municipal obligations are generally classified
as Held to Maturity. The composition of the available for sale segment of the securities portfolio is summarized in the table as
follows (in thousands):
SECURITIES AVAILABLE FOR SALE
December 31, 2016
December 31, 2015
Amortized
Cost
Unrealized
Gains
(Losses)
Estimated
Fair
Value
Percent of
Total
Estimated
Fair Value
Amortized
Cost
Unrealized
Gains
(Losses)
Estimated
Fair
Value
Percent of
Total
Estimated
Fair
Value
— $
— $
—
—% $
14,507
$
277
$
14,784
4.3%
17,300
155
17,455
5.8%
84,923
459
85,382
24.8%
253,156
(7,290)
245,866
81.0%
199,680
(1,314)
198,366
57.5%
Obligations of
U.S. Government
$
Obligations of
U.S. Government
sponsored
enterprises
Mortgage-backed
securities,
residential and
collateralized
mortgage
obligations
Obligations of
states and
political
subdivisions
Other securities
38,843
1,102
(103)
239
38,740
1,341
12.8%
0.4%
43,695
1,675
Totals
$ 310,401
$
(6,999) $ 303,402
100.0% $ 344,480
$
731
187
340
44,426
1,862
12.9%
0.5%
$ 344,820
100.0%
The available for sale segment of the securities portfolio totaled $303.4 million at December 31, 2016, a decrease of $41.4 million,
or 12.0%, from $344.8 million at December 31, 2015. The decrease resulted primarily from the sale of $14.5 million in U.S.
treasuries in the first quarter and $25.0 million obligations of U.S. Government sponsored enterprises in the third and fourth
quarters, along with $89.8 million in calls and maturities of U.S. Government sponsored enterprises and pay-downs on mortgage-
backed securities, and an unrealized loss of $7.2 million for year-to-date 2016, offset by additional purchases of $1.8 million in
obligations of states and political subdivisions and $94.7 million in mortgaged-backed securities.
The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market
areas. These securities totaled $4.7 million at December 31, 2016, an increase of $0.1 million from December 31, 2015, due
primarily to additional purchases, offset by maturities and principal collected.
47
Non-marketable equity securities at December 31, 2016 include shares of FRBNY stock and FHLBNY stock, carried at their cost
of $1.7 million and $2.3 million, respectively. The fair value of these securities is assumed to approximate their cost. The
investment in these stocks is regulated by regulatory policies of the respective institutions.
The table below sets forth the carrying amounts and maturities of available for sale and held to maturity debt securities at
December 31, 2016 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost
and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life
at the projected prepayment speed of each security) (in thousands):
MATURIES AND YIELDS OF AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES
Within One Year
After One, But
Within Five Years
After Five, But
Within Ten Years
After Ten Years
Amount
Yield
Amount
Yield
Amount
Yield
Amount
Yield
Obligations of U.S.
Government and U.S.
Government sponsored
enterprises
Mortgage-backed securities,
residential
Obligations of states and
political subdivisions
Time deposits with other
institutions
Corporate bonds and notes
SBA loan pools
Total
$
1,822
3.08% $ 15,633
1.74% $
—
N/A $
—
N/A
273
3.32% 164,933
1.83%
75,858
2.26%
4,802
2.59%
7,961
2.12%
22,409
2.09%
11,735
2.12%
360
2.21%
245
—
—
0.80%
N/A
N/A
735
250
570
1.05%
3.25%
2.10%
—
—
—
N/A
N/A
N/A
—
—
—
N/A
N/A
N/A
$ 10,301
2.29% $ 204,530
1.85% $ 87,593
2.24% $
5,162
2.56%
Management evaluates securities for OTTI on a quarterly basis, and more frequently when economic or market conditions warrant
such an evaluation. For the years ended December 31, 2016 and 2015, the Corporation had no OTTI charges. For the year ended
December 31, 2013, the Corporation had less than $0.1 million in OTTI charges. During the fourth quarter of 2013, the Corporation
sold one CDO consisting of a pool of trust preferred securities that had an amortized cost of $0.6 million. The CDO was sold for
$0.6 million, resulting in a slight loss. In addition to the CDO that was sold in the fourth quarter of 2013, the remaining CDO
was liquidated and the Corporation recorded $0.5 million in other income during the first quarter of 2014. The Corporation does
not own any other CDOs in its investment securities portfolio. For more detailed information on OTTI, see Footnote 3, “Securities”
in the Notes to Consolidated Financial Statements.
Loans
The Corporation has reporting systems to monitor: (i) loan originations and concentrations, (ii) delinquent loans, (iii) non-
performing assets, including non-performing loans, troubled debt restructurings, other real estate owned, (iv) impaired loans, and
(v) potential problem loans. Management reviews these systems on a regular basis.
48
The table below presents the Corporation’s loan composition by segment and percentage of total loans at the end of each of the
last five years (in thousands):
LOANS
December 31,
2016
%
2015
%
2014
%
2013
%
2012
%
Commercial
and agricultural $ 176,561
14.7
$ 193,233
16.5
$ 166,406
14.8
$ 145,363
14.6
$ 133,851
15.0
Commercial
mortgages
Residential
mortgages
Indirect
consumer loans
Consumer
loans
568,656
47.4
506,478
43.3
452,593
40.4
373,147
37.5
320,198
35.9
198,493
16.6
195,778
16.8
196,809
17.5
195,997
19.7
200,475
22.4
139,572
11.6
151,327
13.0
184,763
16.5
164,846
16.5
130,573
14.6
117,008
9.7
121,817
10.4
121,003
10.8
116,513
11.7
108,420
12.1
Total
$1,200,290
100.0
$1,168,633
100.0
$1,121,574
100.0
$ 995,866
100.0
$ 893,517
100.0
Portfolio loans totaled $1.200 billion at December 31, 2016, an increase of $31.7 million, or 2.7%, from $1.169 billion at
December 31, 2015. The increase in portfolio loans was due to strong growth of $45.5 million, or 6.5%, in commercial loans,
offset by a decrease of $11.8 million, or 7.8%, in indirect consumer loans. The growth in commercial loans was due primarily to
an increase in commercial mortgages in the Capital Bank division in the Albany, New York region. The decline in indirect consumer
loans was a result of the Corporation's decision to focus the portfolio toward higher yielding indirect used car loans.
Residential mortgage loans totaled $198.5 million at December 31, 2016, an increase of $2.7 million, or 1.4%, from December 31,
2015. In addition, during 2016, $13.9 million of residential mortgages were sold in the secondary market to Freddie Mac, with
an additional $1.3 million of residential mortgages sold to the State of New York Mortgage Agency.
The Corporation anticipates that future growth in portfolio loans will continue to be in commercial mortgages and commercial
and industrial loans, especially within the Capital Bank division of the Bank. The table below presents the Corporation’s outstanding
loan balance by bank division (in thousands):
LOANS BY DIVISION
December 31,
2016
December 31,
2015
December 31,
2014
December 31,
2013
December 31,
2012
Chemung Canal Trust Company*
Capital Bank Division
Total loans
$
$
636,836
563,454
1,200,290
$
$
683,137
485,496
1,168,633
$
$
724,099
397,475
1,121,574
$
$
687,256
308,610
995,866
$
$
645,808
247,709
893,517
*All loans, excluding those originated by the Capital Bank Division.
Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar
activities which would cause them to be similarly impacted by changes in economic or other conditions. The Corporation’s
concentration policy limits consider the volume of commercial loans to any one specific industry, sponsor, and by collateral type
and location. In addition, the Corporation’s policy limits the volume of non-owner occupied commercial mortgages to four times
total risk based capital. At December 31, 2016 and 2015, total non-owner occupied commercial real estate loans divided by total
risk based capital was 351.1% and 334.7% respectively.
The Corporation also monitors specific NAICS industry classifications of commercial loans to identify concentrations greater
than 10.0% of total loans. At December 31, 2016 and 2015, commercial loans to borrowers involved in the real estate, and real
estate rental and leasing businesses were 43.9% and 40.6% of total loans, respectively. No other concentration of loans existed
in the commercial loan portfolio in excess of 10.0% of total loans as of December 31, 2016 and 2015.
49
The table below shows the maturity of only commercial and agricultural loans and commercial mortgages outstanding as of
December 31, 2016. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest
rates (in thousands):
Commercial and agricultural and commercial mortgages
Loans maturing with:
Fixed interest rates
Variable interest rates
Total
$
$
$
Non-Performing Assets
LOAN AMOUNTS CONTRACTUALLY DUE
AFTER DECEMBER 31, 2016
Within
One Year
68,823
After One
But Within
Five Years
246,650
$
After Five
Years
429,744
$
49,441
19,382
68,823
$
$
78,156
168,494
246,650
$
$
347,010
82,734
429,744
Total
745,217
474,607
270,610
745,217
$
$
$
Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings and other real estate owned that has
been acquired in partial or full satisfaction of loan obligations or upon foreclosure.
Past due status on all loans is based on the contractual terms of the loan. It is generally the Corporation's policy that a loan 90
days past due be placed in non-accrual status unless factors exist that would eliminate the need to place a loan in this status. A
loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration
in the financial condition of the borrower. At the time loans are placed in non-accrual status, the accrual of interest is discontinued
and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are
considered for return to accrual status when they become current as to principal and interest and remain current for a period of six
consecutive months or when, in the opinion of management, the Corporation expects to receive all of its contractual principal and
interest. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-
accrual status until the entire principal balance has been recovered.
The following table summarizes the Corporation's non-performing assets, excluding purchased credit impaired loans (in thousands):
NON-PERFORMING ASSETS
December 31,
Non-accrual loans
Non-accrual troubled debt restructurings
Total non-performing loans
Other real estate owned
Total non-performing assets
Ratio of non-performing loans to total loans
Ratio of non-performing assets to total assets
Ratio of allowance for loan losses to non-performing
loans
Accruing loans past due 90 days or more (1)
Accruing troubled debt restructurings (1)
2016
7,649
4,394
12,043
388
12,431
2015
7,821
4,411
12,232
1,530
13,762
$
$
2014
6,798
980
7,778
3,065
10,843
$
$
2013
2012
$
$
7,456
1,061
8,517
538
9,055
$
$
5,667
365
6,032
565
6,597
1.00%
0.75%
1.05%
0.85%
0.69%
0.71%
0.86%
0.61%
0.68%
0.53%
118.35%
116.58%
175.96%
150.01%
172.96%
13
5,839
$
$
18
7,609
$
$
1,454
8,705
$
$
1,473
6,831
$
$
4,484
5,364
$
$
$
$
(1) These loans are not included in nonperforming assets above.
50
The table below shows interest income on non-accrual and troubled debt restructured loans for the indicated years ended December
31 (in thousands):
INTEREST INCOME ON NON-ACCRUAL AND TROUBLED DEBT RESTRUCTURED LOANS
Interest income that would have been recorded under original terms
Interest income recorded during the period
2016
2015
2014
$
$
657
312
$
$
578
424
$
$
463
367
Non-Performing Loans
Non-performing loans totaled $12.0 million at December 31, 2016, or 1.00% of total loans, compared with $12.2 million at
December 31, 2015, or 1.05% of total loans. The decrease in non-performing loans at December 31, 2016 was primarily due to a
$1.8 million decrease in non-accruing commercial mortgages, offset by increases of $1.0 million in non-accruing consumer loans
and $0.6 million in non-accruing residential mortgages. Non-performing assets, which are comprised of non-performing loans
and other real estate owned, was $12.4 million, or 0.75% of total assets, at December 31, 2016, compared with $13.8 million, or
0.85% of total assets, at December 31, 2015.
The recorded investment in accruing loans past due 90 days or more totaled less than $0.1 million at December 31, 2016, consistent
with the prior year.
Not included in non-performing loan totals are $1.4 million and $2.1 million of acquired loans which the Corporation has identified
as PCI loans at December 31, 2016 and 2015, respectively. The PCI loans are accounted for under separate accounting guidance,
Accounting Standards Codification (“ASC”) Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with
Deteriorated Credit Quality” as disclosed in Note 4 of the financial statements.
Troubled Debt Restructurings
The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential
for loss. In that regard, the Corporation modified the terms of select loans to maximize their collectability. The modified loans are
considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or
interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued
interest. As of December 31, 2016, the Corporation had $4.4 million of non-accrual TDRs compared with $4.4 million as of
December 31, 2015. As of December 31, 2016, the Corporation had $5.8 million of accruing TDRs compared with $7.6 million
as of December 31, 2015.
Impaired Loans
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable
to collect both the principal and interest due under the contractual terms of the loan agreement. Impaired loans at December 31,
2016 totaled $12.9 million, including TDRs of $10.2 million, compared to $15.0 million at December 31, 2015, including TDRs
of $12.0 million. Not included in the impaired loan totals are acquired loans which the Corporation has identified as PCI loans,
as these loans are accounted for under ASC Subtopic 310-30 as noted under the above discussion of non-performing loans. The
decrease in impaired loans was primarily in the commercial loan segment of the loan portfolio. Included in the recorded investment
of impaired loans at December 31, 2016, are loans totaling $2.6 million for which impairment allowances of $0.9 million have
been specifically allocated to the allowance for loan losses. As of December 31, 2015, the impaired loan total included $5.2 million
of loans for which specific impairment allowances of $1.6 million were allocated to the allowance for loan losses. The decrease
in the amount of impaired loans for which specific allowances were allocated to the allowance for loan losses was due primarily
to a decrease in impaired commercial loans.
51
The majority of the Corporation's impaired loans are secured and measured for impairment based on collateral evaluations. It is
the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a
loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to
determine the amount of any specific allocation or charge-off. In determining the amount of any specific allocation or charge-off,
the Corporation will make adjustments to reflect the estimated costs to sell the property. Upon receipt and review of the updated
appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning
or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions
would require any additional allocation or recognition of additional charge-offs. Real estate values in the Corporation's market
area have been holding steady. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral
per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s
knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and
non-real estate collateral.
Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. The
allowance is established based on management’s evaluation of the probable inherent losses in our portfolio in accordance with
GAAP, and is comprised of both specific valuation allowances and general valuation allowances.
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable
to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are
established based on management’s analyses of individually impaired loans. Factors considered by management in determining
impairment include payment status, evaluations of the underlying collateral, expected cash flows, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a
case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. If a loan is determined to be impaired and is placed on non-accrual status, all future payments received
are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Loans
not impaired but classified as substandard and special mention use a historical loss factor on a rolling five year history of net
losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual
loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other
qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following:
(1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national
and local economic and business conditions and developments, including the condition of various market segments, (3) loan
profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and
severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6)
the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related
issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect
of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition
and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact
of the global economy.
The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against
the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely.
Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into
consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific
impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may
be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their
examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation
to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The allowance for loan losses was $14.3 million at December 31, 2016, compared to $14.3 million at December 31, 2015. The
ratio of allowance for loan losses to total loans was 1.19% at December 31, 2016 and 1.22% at December 31, 2015, respectively.
Net charge-offs for the years ended December 31, 2016 and 2015 were $2.4 million and $1.0 million, respectively.
52
The table below summarizes the Corporation’s allocation of the allowance for loan losses and percent of loans by category to total
loans for each year in the five-year period ended December 31, 2016 (in thousands):
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Balance at end of period
applicable to:
Commercial and
agricultural
Commercial mortgages
Residential mortgages
Consumer loans
2016
%
2015
%
2014
%
2013
%
2012
%
$ 1,589
7,270
1,523
3,871
14.7
47.4
16.6
21.3
$ 1,831
7,112
1,464
3,853
16.5
43.3
16.8
23.4
$ 1,460
6,326
1,572
4,328
14.8
40.4
17.5
27.3
$ 1,979
6,243
1,517
3,037
14.6
37.5
19.7
28.2
$ 1,708
4,428
1,565
2,706
15.0
35.9
22.4
26.7
14,253
100.0
14,260
100.0
13,686
100.0
12,776
100.0
10,407
100.0
Unallocated
Total
—
—
—
—
26
$14,253
$14,260
$13,686
$12,776
$10,433
The table below summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 2016
(in thousands, except ratio data):
SUMMARY OF LOAN LOSS EXPERIENCE
Allowance for loan losses at beginning of year
Reclassification of acquired loan discount
Charge-offs:
$
2016
14,260
—
$
Years Ended December 31,
2014
12,776
—
2015
13,686
—
$
$
2013
10,433
—
Commercial and agricultural
Commercial mortgages
Residential mortgages
Consumer loans
Total
Recoveries:
Commercial and agricultural
Commercial mortgages
Residential mortgages
Consumer loans
Total
Net charge-offs
Provision charged to operations
Allowance for loan losses at end of year
$
217
911
65
1,637
2,830
92
10
—
284
386
2,444
2,437
14,253
186
104
47
1,294
1,631
96
131
—
407
634
997
1,571
14,260
$
444
2,229
97
1,508
4,278
385
156
32
634
1,207
3,071
3,981
13,686
186
44
124
1,139
1,493
537
98
65
381
1,081
412
2,755
12,776
$
$
$
2012
9,659
124
181
335
83
674
1,273
802
55
—
238
1,095
178
828
10,433
$
Ratio of net charge-offs during year to average
loans outstanding
Ratio of allowance for loan losses to total loans
outstanding
0.20%
0.09%
0.29%
0.04%
0.02%
1.19%
1.22%
1.22%
1.28%
1.17%
Net charge-offs for December 31, 2016 were $2.4 million compared with $1.0 million for December 31, 2015. The ratio of net
charge-offs to average loans outstanding was 0.20% for 2016 compared to 0.09% for 2015. The increase in net charge-offs can
be attributed to the write-off of specifically reserved commercial loans during the current year.
53
Other Real Estate Owned
At December 31, 2016, OREO totaled $0.4 million compared to $1.5 million at December 31, 2015. The decrease in other real
estate owned was due primarily to the sale of one commercial property for $1.5 million.
Other Assets
The $0.6 million increase in other assets was due primarily to the amendment of the noncontributory defined benefit pension plan
and defined benefit health care plan, which resulted in a pension asset of $1.8 million, compared to a pension liability of $3.8
million in the prior year, offset by the sale of one OREO property in 2016 for $1.5 million.
Deposits
The table below summarizes the Corporation’s deposit composition by segment for the periods indicated, and the dollar and percent
change from December 31, 2015 to December 31, 2016 (in thousands):
Non-interest-bearing demand deposits
Interest-bearing demand deposits
Insured money market accounts
Savings deposits
Time deposits
Total
DEPOSITS
December 31,
2016
December 31,
2015
Dollar
Change
Percentage
Change
$
$
417,812
136,826
548,963
208,636
144,106
1,456,343
$
$
402,236
130,573
497,658
203,749
166,079
1,400,295
$
$
15,576
6,253
51,305
4,887
(21,973)
56,048
3.9 %
4.8 %
10.3 %
2.4 %
(13.2)%
4.0 %
Deposits totaled $1.456 billion at December 31, 2016, compared with $1.400 billion at December 31, 2015, an increase of $56.0
million, or 4.0%. At December 31, 2016, demand deposit and money market accounts comprised 75.8% of total deposits compared
with 73.6% at December 31, 2015. Sorted by public, commercial, consumer and broker sources, the growth in deposits was due
primarily to increases of $38.7 million in brokered, $5.0 million in commercial deposits, and $25.5 million in consumer, offset
by a decrease of $13.2 million in public deposit accounts.
The table below presents the Corporation's deposits balance by bank division (in thousands):
DEPOSITS BY DIVISION
Chemung Canal Trust Company*
Capital Bank Division
Total loans
$
December 31,
2016
1,249,870
206,473
1,456,343
$
$
December 31,
2015
1,219,282
181,013
1,400,295
$
$
December 31,
2014
1,119,377
160,637
1,280,014
$
December 31,
2013
1,097,920
168,336
1,266,256
$
December 31,
2012
$
$
888,181
159,316
1,047,497
*All deposits, excluding those originated by the Capital Bank Division.
Brokered deposits include funds obtained through brokers, and the Bank’s participation in CDARS and ICS programs. The CDARS
and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance
coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on
a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. The Corporation
had no deposits obtained through brokers as of December 31, 2016 and 2015. Deposits obtained through the CDARS and ICS
programs were $203.7 million and $165.0 million as of December 31, 2016 and 2015, respectively. The increase in CDARS and
ICS deposits was due to the Corporation offering the programs to local municipalities.
54
The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and
other low interest-bearing deposit accounts. A checking account is the driver of a banking relationship and consumers consider
the bank where they have their checking account as their primary bank. These customers will typically turn to their primary bank
first when in need of other financial services. Strategies that have been developed and implemented to generate these deposits
include: (i) acquire deposits by entering new markets through de novo branching, (ii) an annual checking account marketing
campaign, (iii) training branch employees to identify and meet client financial needs with Bank products and services, (iv) link
business and consumer loans to a primary checking account at the Bank, (v) aggressively promote direct deposit of client’s payroll
checks or benefit checks and (vi) constantly monitor the Corporation’s pricing strategies to ensure competitive products and
services.
The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates that it will continue using
brokered deposits as a secondary source of funding to support growth.
Information regarding deposits is included in Note 7 to the consolidated financial statements appearing elsewhere in this report.
Borrowings
FHLBNY advances decreased $24.0 million to $9.1 million at December 31, 2016 from $33.1 million at December 31, 2015.
FHLBNY overnight advances decreased $13.9 million million during 2016 while FHLBNY term advances decreased $10.1 million.
For each of the three years ended December 31, 2016, 2015 and 2014, respectively, the average outstanding balance of borrowings
that mature in one year or less did not exceed 30% of shareholders' equity.
Information regarding securities sold under agreements to repurchase and FHLBNY advances is included in Foonotes 8 and 9 to
the consolidated financial statements appearing elsewhere in this report.
Derivatives
The Corporation offers interest rate swap agreements to qualified commercial loan customers. These agreements allow the
Corporation’s customers to effectively fix the interest rate on a variable rate loan by entering into a separate agreement. Simultaneous
with the execution of such an agreement with a customer, the Corporation enters into a matching interest rate swap agreement
with an unrelated third party provider, which allows the Corporation to continue to receive the variable rate under the loan agreement
with the customer. The agreement with the third party is not designated as a hedge contract, therefore changes in fair value are
recorded through other non-interest income. Assets and liabilities associated with the agreements are recorded in other assets and
other liabilities on the balance sheet. Gains and losses are recorded as other non-interest income. The Corporation is exposed to
credit loss equal to the fair value of the interest rate swaps, not the notional amount of the derivatives, in the event of nonperformance
by the counterparty to the interest rate swap agreements. Additionally, the swap agreements are free-standing derivatives and are
recorded at fair value in the Corporation's consolidated balance sheets, which typically involves a day one gain. Since the terms
of the two interest rate swap agreements are identical, the income statement impact to the Corporation is limited to the day one
gain and an allowance for credit loss exposure, in the event of nonperformance. The Corporation recognized $0.1 million in swap
fee income for the years ended in December 31, 2016 and 2015.
The Corporation also participates in the credit exposure of certain interest rate swaps in which it participates in the related
commercial loan. The Corporation receives an upfront fee for participating in the credit exposure of the interest rate swap and
recognizes the fee to other non-interest income immediately. The Corporation is exposed to its share of the credit loss equal to
the fair value of the derivatives in the event of nonperformance by the counter-party of the interest rate swap. The Corporation
determines the fair value of the credit loss exposure using historical losses of the loan category associated with the credit exposure.
Information regarding derivatives is included in Note 10 to the consolidated financial statements appearing elsewhere in this report.
Shareholders’ Equity
Total shareholders’ equity was $143.7 million at December 31, 2016, compared with $137.2 million at December 31, 2015, a
increase of $6.5 million, or 4.7%. The increase was due primarily to earnings of $10.0 million, a reduction of $1.1 million in
treasury stock, and a decrease of $0.2 million in accumulated other comprehensive income, offset $4.9 million in dividends
declared. The total shareholders’ equity to total assets ratio was 8.67% at December 31, 2016 compared with 8.47% at December 31,
2015. Tangible equity to tangible assets ratio increased to 7.29% at December 31, 2016, from 6.99% at December 31, 2015.
55
The Corporation and the Bank are subject to capital adequacy guidelines of the Federal Reserve which establish a framework for
the classification of financial holding companies and financial institutions into five categories: well-capitalized, adequately
capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2016, both the
Corporation’s and the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory
capital guidelines. A comparison of the Corporation’s and the Bank’s actual capital ratios to the ratios required to be adequately
or well-capitalized at December 31, 2016 and 2015, is included in Footnote 18 to the consolidated financial statements appearing
elsewhere in this report. For more information regarding current capital regulations see Part I-“Business-Supervision and
Regulation-Regulatory Capital Requirements.”
Cash dividends declared during 2016 totaled $4.9 million or $1.04 per share, and cash dividends declared during both 2015 and
2014 totaled $4.8 million, or $1.04 per share. Dividends declared during 2016 amounted to 48.76% of net income compared to
51.34%, and 58.80% of net income for 2015 and 2014, respectively. Management seeks to continue generating sufficient capital
internally, while continuing to pay dividends to the Corporation’s shareholders.
When shares of the Corporation become available in the market, the Corporation may purchase them after careful consideration
of the Corporation’s liquidity and capital positions. Purchases may be made from time to time on the open market or in privately
negotiated transactions at the discretion of management. On December 19, 2012, the Board of Directors approved a new stock
repurchase plan under which the Corporation may repurchase up to 125,000 shares. No shares were purchased under the new
plan in 2016 and 2015. The Corporation has purchased 3,094 shares at a total cost of $93 thousand under the new plan since its
inception.
Off-balance Sheet Arrangements
In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with GAAP
are not recorded in the financial statements. The Corporation is also a party to certain financial instruments with off balance sheet
risk such as commitments under standby letters of credit, unused portions of lines of credit, commitments to fund new loans,
interest rate swaps, and risk participation agreements. The Corporation's policy is to record such instruments when funded. These
transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are generally used
by the Corporation to manage clients' requests for funding and other client needs.
The table below shows the Corporation’s off-balance sheet arrangements as of December 31, 2016 (in thousands):
COMMITMENT MATURITY BY PERIOD
Total
2017
2018 - 2019
2020 - 2021
2022 and
thereafter
Standby letters of credit
Unused portions of lines of credit (1)
Commitments to fund new loans
Total
$
$
14,241
143,576
71,435
229,252
$
$
12,609
143,576
71,435
227,620
$
$
293
—
—
293
$
$
1,339
—
—
1,339
$
$
—
—
—
—
(1) Not included in this total are unused portions of home equity lines of credit, credit card lines and consumer overdraft protection
lines of credit, since no contractual maturity dates exist for these types of loans. Commitments to outside parties under these lines
of credit were $46.3 million, $12.5 million and $6.3 million, respectively, at December 31, 2016.
56
Contractual Obligations
The table below shows the Corporation’s contractual obligations under long-term agreements as of December 31, 2016 (in
thousands). Note references are to the Notes of the Consolidated Financial Statements:
CONTRACTUAL OBLIGATIONS
Payments Due by Period
Total
2017
2018 - 2019
2020 - 2021
144,106
9,000
$
$
97,706
7,000
$
35,840
2,000
$
8,565
—
27,606
7,641
6,287
4,274
198,914
$
17,606
1,193
367
1,525
125,397
$
10,000
2,028
734
2,393
52,995
$
—
1,022
764
356
10,707
$
2022 and
thereafter
1,995
—
—
3,398
4,422
—
9,815
Time Deposits (Note 7)
FHLBNY advances (Note 9)
Securities sold under agreements to
repurchase (Note 8)
Operating leases (Note 5)
Capital leases (Note 5)
Data processing services and other
Total (1)
$
$
(1) Not included in the above total is the Corporation's obligation regarding the Pension Plan and Other Benefit Plans. Please
refer to Part IV Item 15 Note 12 for information regarding these obligations at December 31, 2016.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating,
investing and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These
include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources,
such as time deposits of $100,000 or more, securities sold under agreements to repurchase and oth+er borrowings.
The Corporation is a member of the FHLBNY which allows it to access borrowings which enhance management's ability to satisfy
future liquidity needs. Based on available collateral and current advances outstanding, the Corporation was eligible to borrow up
to a total of $131.6 million and $106.2 million at December 31, 2016 and 2015, respectively. The Corporation also had a total of
$28.0 million of unsecured lines of credit with four different financial institutions, all of which was available at December 31,
2016 and 2015.
Consolidated Cash Flows Analysis
The table below summarizes the Corporation's cash flows for the periods indicated (in thousands):
CONSOLIDATED SUMMARY OF CASH FLOWS
(in thousands)
Net cash provided by operating activities
Net cash used by investing activities
Net cash provided by financing activities
Net decrease in cash and cash equivalents
Operating activities
Years Ended December 31,
2016
2015
$
$
22,141
(729)
26,565
47,977
$
$
14,123
(114,648)
97,547
(2,978)
The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through short- and
long-term borrowings are sufficient to fund the Corporation’s operating liquidity needs.
Cash provided by operating activities in years ended 2016 and 2015 predominantly resulted from net income after non-cash
operating adjustments.
57
Investing activities
Cash used in investing activities during the years ended 2016 and 2015 predominantly resulted from purchases of securities
available for sale and a net increase in loans, offset by sales, calls, maturities, and principal collected on securities available for
sale.
Financing activities
Cash provided by financing activities during the years ended 2016 and 2015 predominantly resulted from an increase in deposits.
The increase in deposits reflected the seasonable inflow of funds from municipal clients into demand and money market accounts.
Cash inflows in 2016 were offset by a reduction of FHLBNY overnight advances and repayment of FHLB advances.
Capital Resources
The Corporation and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital
adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The
final rules implementing Basel III rules became effective for the Corporation on January 1, 2015 with full compliance with all of
the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under Basel III rules, the
Corporation must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital
conservation buffer is being phased in from 0.0% for 2015 to 2.50% by 2019. The capital conservation buffer for 2016 is 0.625%.
The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan
and other benefit plans are not included in computing regulatory capital. Management believes as of December 31, 2016, the
Corporation and the Bank meet all capital adequacy requirements to which they are subject.
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital restoration plans are required. Management believes that,
as of December 31, 2016 and 2015, the Corporation and the Bank met all capital adequacy requirements to which they were
subject.
As of December 31, 2016, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table below. There have been no conditions or events since that notification that management believes have changed the Bank's
or the Corporation's capital category.
The regulatory capital ratios as of December 31, 2016 and 2015 were calculated under Basel III rules. There is no threshold for
well-capitalized status for bank holding companies.
58
The Corporation’s and the Bank’s actual and required regulatory capital ratios were as follows (in thousands, except ratio data):
Actual
Minimal Capital
Adequacy
Amount
Ratio
Amount
Ratio
Minimal Capital
Adequacy with
Capital Buffer
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
As of December 31, 2016
Total Capital (to Risk Weighted
Assets):
Consolidated
Bank
$145,269
$140,020
12.14% $ 95,748
11.71% $ 95,640
8.00% $103,229
8.00% $103,112
N/A
8.625%
8.625% $119,550
N/A
10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated
Bank
$130,911
$125,736
10.94% $ 71,811
10.52% $ 71,730
6.00% $ 79,292
6.00% $ 79,202
N/A
6.625%
6.625% $ 95,640
N/A
8.00%
Common Equity Tier 1 Capital (to
Risk Weighted Assets):
Consolidated
Bank
$130,911
$125,736
10.94% $ 53,858
10.52% $ 53,798
4.50% $ 61,339
4.50% $ 61,270
N/A
5.125%
5.125% $ 77,708
Tier 1 Capital (to Average Assets):
Consolidated
Bank
$130,911
$125,736
7.81% $ 67,031
7.52% $ 66,919
4.00%
4.00%
N/A
N/A
N/A
N/A
N/A $ 83,649
N/A
6.50%
N/A
5.00%
As of December 31, 2015
Total Capital (to Risk Weighted Assets):
Actual
Minimum Capital
Adequacy
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Consolidated
Bank
$ 139,049
$ 135,058
12.26% $
11.93% $
90,704
90,548
N/A
8.00%
8.00% $ 113,185
N/A
10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated
Bank
$ 124,787
$ 120,881
11.01% $
10.68% $
68,028
67,911
6.00%
6.00% $
N/A
90,548
N/A
8.00%
Common Equity Tier 1 Capital (to Risk
Weighted Assets):
Consolidated
Bank
Tier 1 Capital (to Average Assets):
Consolidated
Bank
Dividend Restrictions
$ 124,787
$ 120,881
11.01% $
10.68% $
51,021
50,933
4.50%
4.50% $
N/A
73,571
$ 124,787
$ 120,881
7.83% $
7.59% $
63,772
63,701
4.00%
4.00% $
N/A
79,626
N/A
6.50%
N/A
5.00%
The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations
limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount
of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net
income of the preceding two years, subject to the capital requirements in the table above. At December 31, 2016, the Bank could,
without prior approval, declare dividends of approximately $15.2 million.
Adoption of New Accounting Standards
For a discussion of the impact of recently issued accounting standards, please see Note 1 to the Corporation's consolidated financial
statements which begins on page F-9.
59
Critical Accounting Policies, Estimates and Risks and Uncertainties
Critical accounting policies include the areas where the Corporation has made what it considers to be particularly difficult, subjective
or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results
under different assumptions and conditions. The Corporation prepares its financial statements in conformity with GAAP. As a
result, the Corporation is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon
the information available at that time. These estimates, judgments and assumptions affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented.
Actual results could be different from these estimates.
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the
uncertainty in evaluating the level of the allowance required to cover probable incurred credit losses inherent in the loan portfolio,
and the material effect that such judgments can have on the Corporation's results of operations. While management's current
evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or
assumptions the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or
if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the
allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and
potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a significant impact
on the overall analysis of the adequacy of the allowance for loan losses. Real estate values in the Corporation’s market area did
not increase dramatically in the prior several years, and, as a result, any declines in real estate values have been modest. While
management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral
evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions
for loan losses.
Explanation and Reconciliation of the Corporation’s Use of Non-GAAP Measures
The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on
pages F-2 through F-8. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked
consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial
statements.
In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures,
because it believes these non-GAAP financial measures provide information to investors about the underlying operational
performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its
competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP
financial measures used by other companies.
The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered
companies that contain “non-GAAP financial measures.” Under Regulation G, companies making public disclosures containing
non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information,
including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement
of the Corporation’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has
exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based
on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The
following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted
by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's new rules, although we are
unable to state with certainty that the SEC would so regard them.
60
Fully Taxable Equivalent Net Interest Income, Net Interest Margin, and Efficiency Ratio
Net interest income is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's
net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result
of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the
actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net
interest income to that of other institutions or in analyzing any institution’s net interest income trend line over time, to correct any
analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their
portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion
of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second
financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average
interest-earning assets. For purposes of this measure as well, fully taxable equivalent net interest income is generally used by
financial institutions, as opposed to actual net interest income, again to provide a better basis of comparison from institution to
institution and to better demonstrate a single institution’s performance over time. The Corporation follows these practices.
The efficiency ratio is a non-GAAP financial measures which represents the Corporation’s ability to turn resources into revenue
and is calculated as non-interest expense divided by total revenue (fully taxable equivalent net interest income and non-interest
income), adjusted for one-time occurrences and amortization. This measure is meaningful to the Corporation, as well as investors
and analysts, in assessing the Corporation’s productivity measured by the amount of revenue generated for each dollar spent.
(in thousands, except ratio data)
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
AND EFFICIENCY RATIO
December 31,
2016
As of or for the Years Ended
December 31,
2015
December 31,
2014
Net interest income (GAAP)
Fully taxable equivalent adjustment
Fully taxable equivalent net interest income (non-GAAP)
Non-interest income (GAAP)
Less: net (gains) losses on security transactions
Less: recoveries from other-than-temporary impairments
Adjusted non-interest income (non-GAAP)
Non-interest expense (GAAP)
Less: merger and acquisition expenses
Less: amortization of intangible assets
Less: legal accruals and settlements
Adjusted non-interest expense (non-GAAP)
Average interest-earning assets (GAAP)
$
$
$
$
$
$
$
52,329
631
52,960
21,149
(987)
—
20,162
56,610
—
(986)
(1,200)
54,424
1,571,513
$
$
$
$
$
$
$
50,642
554
51,196
20,447
(372)
—
20,075
55,427
—
(1,136)
—
54,291
1,477,529
$
$
$
$
$
$
$
49,568
650
50,218
26,756
(6,869)
(515)
19,372
60,477
(115)
(1,310)
(4,250)
54,802
1,399,285
Net interest margin - fully taxable equivalent (non-GAAP)
Efficiency ratio (non-GAAP)
3.37%
74.43%
3.46%
76.18%
3.59%
78.75%
Tangible Equity and Tangible Assets (Period-End)
Tangible equity, tangible assets, and tangible book value per share are each non-GAAP financial measures. Tangible equity
represents the Corporation’s stockholders’ equity, less goodwill and intangible assets. Tangible assets represents the Corporation’s
total assets, less goodwill and other intangible assets. Tangible book value per share represents the Corporation’s equity divided
by common shares at period-end. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing
the Corporation’s use of equity.
61
(in thousands, except per share and ratio data)
TANGIBLE EQUITY AND TANGIBLE ASSETS
(PERIOD END)
Total shareholders' equity (GAAP)
Less: intangible assets
Tangible equity (non-GAAP)
Total assets (GAAP)
Less: intangible assets
Tangible assets (non-GAAP)
Total equity to total assets at end of period (GAAP)
Book value per share (GAAP)
Tangible equity to tangible assets at end of period (non-GAAP)
Tangible book value per share (non-GAAP)
Tangible Equity (Average)
December 31,
2016
As of or for the Years Ended
December 31,
2015
December 31,
2014
$
$
$
$
$
$
143,748
(24,769)
118,979
1,657,179
(24,769)
1,632,410
8.67%
30.07
7.29%
24.89
$
$
$
$
$
$
137,242
(25,755)
111,487
1,619,926
(25,755)
1,594,171
8.47%
28.96
6.99%
23.53
$
$
$
$
$
$
133,628
(26,891)
106,737
1,524,539
(26,891)
1,497,648
8.77%
28.44
7.13%
22.71
Average tangible equity and return on average tangible equity are each non-GAAP financial measures. Average tangible equity
represents the Corporation’s average stockholders’ equity, less average goodwill and intangible assets for the period. Return on
average tangible equity measures the Corporation’s earnings as a percentage of average tangible equity. These measures are
meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.
(in thousands, except ratio data)
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP)
Less: average intangible assets
Average tangible equity (non-GAAP)
December 31,
2016
As of or for the Years Ended
December 31,
2015
December 31,
2014
$
$
142,906
(25,250)
117,656
$
$
137,891
(26,308)
111,583
$
$
142,046
(27,554)
114,492
Return on average equity (GAAP)
Return on average tangible equity (non-GAAP)
7.02%
8.52%
6.84%
8.45%
5.74%
7.12%
Adjustments for Certain Items of Income or Expense
In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide
comparative disclosures that adjust these GAAP financial measures for a particular period by removing from the calculation thereof
the impact of certain transactions or other material items of income or expense occurring during the period, including certain
nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of
its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative
impact on the Corporation’s financial results during the particular period in question. In the Corporation’s presentation of any such
non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the
supplemental financial information and explanations required under Regulation G.
62
(in thousands, except per share and ratio data)
CORE NET INCOME
Reported net income (loss) (GAAP)
Net (gains) losses on security transactions (net of tax)
Legal accruals and settlements (net of tax)
Merger and acquisition related expenses (net of tax)
Core net income (non-GAAP)
Average basic and diluted shares outstanding
Reported basic and diluted earnings (loss) per share (GAAP)
Reported return on average assets (GAAP)
Reported return on average equity (GAAP)
Core basic and diluted earnings per share (non-GAAP)
Core return on average assets (non-GAAP)
Core return on average equity (non-GAAP)
December 31,
2016
As of or for the Years Ended
December 31,
2015
December 31,
2014
$
$
$
$
$
$
$
$
10,027
(614)
747
—
10,160
4,762
2.11
0.60%
7.02%
2.13
0.61%
7.11%
$
$
$
$
9,433
(230)
—
—
9,203
4,719
2.00
0.60%
6.84%
1.95
0.58%
6.67%
8,157
(4,229)
2,617
71
6,616
4,683
1.74
0.54%
5.74%
1.41
0.44%
4.66%
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Management considers interest rate risk to be the most significant market risk for the Corporation. Market risk is the risk of loss
from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in the net income of the
Corporation as a result of changes in interest rates.
The Corporation’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the
relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and
liabilities, and credit quality of earning assets.
The Corporation’s objectives in its asset and liability management are to maintain a strong, stable net interest margin, to utilize
its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to
changes in interest rates. The Corporation's ALCO has the strategic responsibility for setting the policy guidelines on acceptable
exposure to interest rate risk. These guidelines contain specific measures and limits regarding the risks, which are monitored on
a regular basis. The ALCO is made up of the Chief Executive Officer, the Chief Financial Officer, the Asset Liability Management
Officer, and other officers representing key functions.
Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of
interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. For that reason, the ALCO has
established tolerance limits based upon a 200-basis point change in interest rates, with appropriate floors set for interest-bearing
liabilities. At December 31, 2016, it is estimated that an immediate 200-basis point decrease in interest rates would negatively
impact the next 12 months net interest income by 11.42% and an immediate 200-basis point increase would negatively impact the
next 12 months net interest income by 9.20%. Both are within the Corporation's policy guideline of 15%. Given the overall low
level of current interest rates and the unlikely event of a 200-basis point decline 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 5.36% and 13.90%, respectively.
63
A related component of interest rate risk is the expectation that the market value of the Corporation’s capital account will fluctuate
with changes in interest rates. This component is a direct corollary to the earnings-impact component: an institution exposed to
earnings erosion is also exposed to shrinkage in market value. At December 31, 2016, it is estimated that an immediate 200-basis
point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 9.24% and an
immediate 200-basis point increase in interest rates would negatively impact the market value by 6.05%. Both are within the
Corporation’s policy guideline of 15%. Management also modeled the impact to the market value of the Corporation’s capital
with an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates, based on the current interest
rate environment. When applied, it is estimated these scenarios would result in negative impacts to the market value of the
Corporation’s capital of 3.62% and 9.01%, respectively.
Management does recognize the need for certain hedging strategies during periods of anticipated higher fluctuations in interest
rates and the Funds Management Policy provides for limited use of certain derivatives in asset liability management.
Credit Risk
The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies
and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a
loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise.
Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of
consumer loans.
The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated
to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee
lending limits. The Senior Loan Committee, consisting of the President and Chief Executive Officer, Chief Financial Officer and
Treasurer (non-voting member), Chief Risk Officer (non-voting member), Business Client Division Manager, Retail Client
Division Manager, Retail Loan Manager, Senior Commercial Real Estate Lender, and Commercial Loan Managers, implements
the Board-approved loan policy.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Part IV, Item 15 are filed as part of this report and appear on pages F-1 through F-65.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Corporation's management, with the participation of our Chief Executive Officer, who is the Corporation's principal executive
officer, and our Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, evaluated the effectiveness
of the Corporation's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the
Exchange Act) as of December 31, 2016. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer
and Treasurer have concluded that the Corporation's disclosure controls and procedures are effective as of December 31, 2016.
64
(b) Management's Report on Internal Control over Financial Reporting
We, as members of management of the Corporation, are responsible for establishing and maintaining adequate internal control
over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Corporation's internal control
over financial reporting is a process designed to provide reasonable assurance to the Corporation's management and Board of
Directors regarding the reliability of financial reporting and the preparation of the Corporation's financial statements for external
purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes
those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the Corporation, (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the
United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with
authorizations of management and directors of the Corporation, and (3) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the Corporation's assets that could have a material effect on
the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As of December 31, 2016 management assessed the effectiveness of the Corporation's internal control over financial reporting
based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). The objective of this assessment was to determine whether the
Corporation's internal control over financial reporting was effective as of December 31, 2016. Based on the assessment, we assert
that the Corporation maintained effective internal control over financial reporting as of December 31, 2016 based on the specified
criteria.
Crowe Horwath LLP, an independent registered public accounting firm, which audited the Corporation's 2016 consolidated financial
statements included in the Annual Report, has issued an audit report on the effectiveness of the Corporation's internal control over
financial reporting.
(c) Changes in Internal Control over Financial Reporting
During the fourth quarter, there have been no changes in the Corporation’s internal control over financial reporting that have
materially affected, or that are reasonably likely to material affect, the Corporation’s internal control over financial reporting.
/s/ Anders M. Tomson
Anders M. Tomson
President and Chief Executive Officer
March 8, 2017
Item 9B. OTHER INFORMATION
None.
/s/ Karl F. Krebs
Karl F. Krebs
Chief Financial Officer and Treasurer
March 8, 2017
65
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information responsive to this Item 10 is incorporated herein by reference to the Corporation's definitive proxy statement for its
2017 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2016 fiscal year
end.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item 11 is incorporated herein by reference to the Corporation's definitive proxy statement for its
2017 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2016 fiscal year
end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND
RELATED STOCKHOLDER MATTERS
Information responsive to this Item 12 is incorporated herein by reference to the Corporation's definitive proxy statement for its
2017 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2016 fiscal year
end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information responsive to this Item 13 is incorporated herein by reference to the Corporation's definitive proxy statement for its
2017 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2016 fiscal year
end.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information responsive to this Item 14 is incorporated herein by reference to the Corporation's definitive proxy statement for its
2017 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2016 fiscal year
end.
66
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
PART IV
(a) (1) The following consolidated financial statements of the Corporation appear on pages F-1 through F-65 of this report
and are incorporated in Part II, Item 8:
Report of Independent Registered Public Accounting Firm-Crowe Horwath LLP
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the three years ended December 31, 2016
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2016
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2016
Consolidated Statements of Cash Flows for the three years ended December 31, 2016
Notes to Consolidated Financial Statements
(2) Financial statement schedules have been omitted because they are not applicable or the required information is shown in
the Consolidated Financial Statements or the Notes thereto under Item 8, "Financial Statements and Supplementary Data".
(b) The following exhibits are either filed with this Form 10-K or are incorporated herein by reference.
The Corporation's Securities Exchange Act file number is 000-13888.
Exhibit
3.1
3.2
3.3
3.4
4.1
10.1
10.2
The following exhibits are either filed with this Form 10-K or are incorporated herein by
reference. The Corporation’s Securities Exchange Act file number is 000-13888.
Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as
incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December
31, 2007 filed with the Commission on March 13, 2008).
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation,
dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for
the year ended December 31, 2007 filed with the Commission on March 13, 2008).
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation,
dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the
year ended December 31, 2005 and filed with the Commission on March 15, 2006).
Amended and Restated Bylaws of Chemung Financial Corporation, as amended to June 17, 2015
(as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission
on June 18, 2015).
Specimen Stock Certificate (filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended
December 31, 2002 and incorporated herein by reference).
Change of Control Agreement dated September 20, 2006 between Chemung Canal Trust Company
and Ronald M. Bentley, President & COO (filed as Exhibit 10.1 to Registrant's Form 10-Q for the
quarter ended September 30, 2006 and incorporated herein by reference). Mr. Bentley retired as of
December 31, 2016.
Executive Severance Agreement dated September 20, 2006 between Chemung Canal Trust
Company and Ronald M. Bentley, President & COO (filed as Exhibit 10.2 to Registrant's Form
10-Q for the quarter ended September 30, 2006 and incorporated herein by reference). Mr.
Bentley retired as of December 31, 2016.
67
10.3
10.4
10.5
10.6
10.7
10.8
10.9
21.0
23.0
31.1
31.2
32.1
32.2
Chemung Financial Corporation 2014 Omnibus Plan and Component Plans (Chemung Financial
Corporation Restricted Stock Plan, Chemung Financial Corporation Incentive Compensation Plan,
Chemung Financial Corporation Directors’ Compensation Plan and Chemung Financial
Corporation/Chemung Canal Trust Company Directors’ Deferred Fee Plan). (Filed as Exhibits
10.1, 10.2, 10.3, 10.4 and 10.5 to Registrant’s Form S-8 filed with the SEC on January 27, 2015
and incorporated herein by reference).
Change of Control Agreement dated September 1, 2015 between Chemung Canal Trust Company
and Thomas W. Wirth, Executive Vice President. (Filed as Exhibit 10.1 to Registrant’s Form 8-K
filed with the SEC on September 3, 2015 and incorporated herein by reference).
Change of Control Agreement dated January 19, 2011 between Chemung Canal Trust Company
and Louis C. DiFabio, Executive Vice President. (Filed as Exhibit 10.12 to Registrant’s Form 10-
K filed with the SEC on March 16, 2011 and incorporated herein by reference).
Change of Control Agreement dated August 28, 2015 between Chemung Canal Trust Company
and Anders M. Tomson, President and Chief Operating Officer. (Filed as Exhibit 10.1 to
Registrant’s Form 8-K filed with the SEC on September 1, 2015 and incorporated herein by
reference).
Change of Control Agreement dated November 7, 2011 between Chemung Canal Trust Company
and Karen R. Makowski, Executive Vice President and Chief Administration and Risk Officer
(filed as Exhibit 10.16 to Registrant’s Form 10-K on March 28, 2012 and incorporated herein by
reference).
Change of Control Agreement dated October 16, 2013 between Chemung Canal Trust Company
and Karl F. Krebs, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.1 to
Registrant’s Form 8-K filed with the SEC on October 17, 2013 and incorporated herein by
reference).
Change of Control Agreement dated August 17, 2016 between Chemung Canal Trust Company
and Kimberly A. Hazelton, Executive Vice President (filed as Exhibit 10.1 to Registrant’s Form 8-
K filed with the SEC on August 17, 2016 and incorporated herein by reference).
Subsidiaries of the Registrant.*
Consent of Crowe Horwath LLP, Independent Registered Public Accounting Firm.*
Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.*
Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.*
Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14
(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
101.INS
Instance Document
101.SCH
XBRL Taxonomy Schema*
101.CAL
XBRL Taxonomy Calculation Linkbase*
101.DEF
101.LAB
101.PRE
XBRL Taxonomy Definition Linkbase*
XBRL Taxonomy Label Linkbase*
XBRL Taxonomy Presentation Linkbase*
*
Filed herewith.
68
CHEMUNG FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages F-1 to F-65
Report of Independent Registered Public Accounting Firm-Crowe Horwath LLP
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2016 and 2015
Consolidated Statements of Income for the three years ended December 31, 2016
Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 2016
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2016
Consolidated Statements of Cash Flows for the three years ended December 31, 2016
Notes to Consolidated Financial Statements
Page
F-1
F-2
F-3
F-4
F-5
F-7
F-9
69
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
Chemung Financial Corporation
Elmira, New York
We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation as of December 31, 2016 and
2015, and the related consolidated statements of income, comprehensive income (loss), shareholders' equity and cash flows for
each of the years in the three-year period ended December 31, 2016. We also have audited Chemung Financial Corporation’s
internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013 Internal Control –
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Chemung
Financial Corporation’s management is responsible for these financial statements, for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the
accompanying Management’s Report on Internal Control over Financial Reporting as disclosed in Item 9A. Our responsibility is
to express an opinion on these financial statements and an opinion on Chemung Financial Corporation’s internal control over
financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements
are free of material misstatement and whether effective internal control over financial reporting was maintained in all material
respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing
such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for
our opinions.
A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of Chemung Financial Corporation as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each
of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, Chemung Financial Corporation maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2016 based on criteria established in the 2013 Internal Control –
Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission.
/s/ Crowe Horwath LLP
Livingston, New Jersey
March 8, 2017
F-1
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
Cash and due from financial institutions
Interest-bearing deposits in other financial institutions
Total cash and cash equivalents
Trading assets, at fair value
Securities available for sale, at estimated fair value
Securities held to maturity, estimated fair value of $4,912 at
December 31, 2016 and $4,822 at December 31, 2015
FHLBNY and FRBNY Stock, at cost
Loans, net of deferred loan fees
Allowance for loan losses
Loans, net
Loans held for sale
Premises and equipment, net
Goodwill
Other intangible assets, net
Bank owned life insurance
Accrued interest and other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing
Interest-bearing
Total deposits
FHLBNY overnight advances
Securities sold under agreements to repurchase
FHLBNY term advances
Long term capital lease obligation
Dividends payable
Accrued interest payable and other liabilities
Total liabilities
Shareholders' equity:
Common stock, $.01 par value per share, 10,000,000 shares authorized;
5,310,076 issued at December 31, 2016 and December 31, 2015
Additional-paid-in capital
Retained earnings
Treasury stock, at cost (597,843 shares at December 31, 2016; 641,721
shares at December 31, 2015)
Accumulated other comprehensive loss
Total shareholders' equity
DECEMBER 31
2015
2016
$
$
28,205
45,957
74,162
24,886
1,299
26,185
774
701
303,402
344,820
4,705
4,041
4,566
4,797
1,200,290
(14,253)
1,186,037
1,168,633
(14,260)
1,154,373
412
28,923
21,824
2,945
2,912
27,042
1,076
29,397
21,824
3,931
2,839
25,455
$ 1,657,179
$ 1,619,964
$
417,812
1,038,531
1,456,343
$
402,236
998,059
1,400,295
—
27,606
9,093
4,722
1,225
14,442
1,513,431
13,900
28,453
19,203
2,873
1,214
16,784
1,482,722
53
45,603
124,111
(15,265)
(10,754)
53
45,537
118,973
(16,379)
(10,942)
143,748
137,242
Total liabilities and shareholders' equity
$ 1,657,179
$ 1,619,964
See accompanying notes to consolidated financial statements.
F-2
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
Interest and Dividend Income:
Loans, including fees
Taxable securities
Tax exempt securities
Interest-bearing deposits
Total interest and dividend income
Interest Expense:
Deposits
Securities sold under agreements to repurchase
Borrowed funds
Total interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income:
Wealth management group fee income
Service charges on deposit accounts
Interchange revenue from debit card transactions
Net gains on securities transactions
Net gain on sales of loans held for sale
Net gains (losses) on sales of other real estate owned
Income from bank owned life insurance
Other
Total other operating income
Other operating expenses:
Salaries and wages
Pension and other employee benefits
Net occupancy expenses
Furniture and equipment expenses
Data processing expense
Professional services
Legal accruals and settlements
Amortization of intangible assets
Marketing and advertising expense
Other real estate owned expenses
FDIC insurance
Loan expense
Merger and acquisition related expenses
Other
Total other operating expenses
Income before income tax expense
Income tax expense
Net income
Weighted average shares outstanding
Basic and diluted earnings per share
See accompanying notes to consolidated financial statements.
F-3
YEARS ENDED DECEMBER 31
2014
2015
2016
49,677
5,239
945
307
56,168
2,170
849
820
3,839
52,329
2,437
49,892
8,316
5,089
4,027
987
326
21
73
2,310
21,149
20,954
6,132
6,837
2,967
6,593
2,175
1,200
986
877
180
1,193
669
—
5,847
56,610
14,431
4,404
10,027
4,762
2.11
$
$
$
48,271
4,958
939
76
54,244
2,003
848
751
3,602
50,642
1,571
49,071
8,522
4,886
3,307
372
294
84
75
2,907
20,447
21,223
5,908
7,006
2,979
6,586
1,293
—
1,136
899
812
1,075
693
—
5,817
55,427
14,091
4,658
9,433
4,719
2.00
$
$
$
47,139
5,043
967
64
53,213
2,043
848
754
3,645
49,568
3,981
45,587
7,747
5,281
3,360
6,869
301
(64)
78
3,184
26,756
21,315
5,733
7,098
2,972
6,393
1,597
4,250
1,310
1,079
247
1,116
811
115
6,441
60,477
11,866
3,709
8,157
4,683
1.74
$
$
$
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Net income
Other comprehensive income (loss):
Unrealized holding (losses) gains on securities available for sale
Reclassification adjustment gains realized in net income
Net unrealized losses
Tax effect
Net of tax amount
Change in funded status of defined benefit pension plan and other
benefit plans:
Net gain (loss) arising during the period
Reclassification adjustment for amortization of prior service costs
Prior service credit
Reclassification adjustment for amortization of net actuarial loss
Total before tax effect
Tax effect
Net of tax amount
YEARS ENDED DECEMBER 31
2014
2015
2016
$
10,027
$
9,433
$
8,157
(6,352)
(987)
(7,339)
2,773
(4,566)
5,369
(427)
1,101
1,595
7,638
(2,884)
4,754
(2,472)
(372)
(2,844)
1,094
(1,750)
(2,052)
(90)
—
1,484
(658)
251
(407)
236
(6,869)
(6,633)
2,550
(4,083)
(8,481)
(90)
—
681
(7,890)
3,033
(4,857)
Total other comprehensive income (loss)
188
(2,157)
(8,940)
Comprehensive income (loss)
$
10,215
$
7,276
$
(783)
See accompanying notes to consolidated financial statements.
F-4
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common
Stock
Additional
Paid-in Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Total
Balances at January 1, 2014
Net income
Other comprehensive loss
Restricted stock awards
Distribution of 3,467 shares of treasury stock for directors'
deferred compensation plan
Distribution of 11,279 shares of treasury stock granted for
employee restricted stock awards, net
Restricted stock units for directors' deferred compensation plan
Cash dividends declared ($1.04 per share)
Distribution of 8,385 shares of treasury stock for directors'
compensation
Distribution of 3,595 shares of treasury stock for employee
compensation
Balances at December 31, 2014
Net income
Other comprehensive loss
Restricted stock awards
Distribution of 3,598 shares of treasury stock granted for
directors’ deferred compensation plan
Distribution of 7,628 shares of treasury stock granted for
employee restricted stock awards, net
Restricted stock units for directors' deferred compensation plan
Cash dividends declared ($1.04 per share)
Distribution of 9,673 shares of treasury stock for directors'
compensation
Distribution of 3,303 shares of treasury stock for employee
compensation
Sale of 16,209 shares of treasury stock
Repurchase of 1,184 shares of common stock
Balances at December 31, 2015
(continued)
$
$
$
53
—
—
—
—
—
—
—
—
—
53
—
—
—
—
—
—
—
—
—
—
—
53
$
45,399
$
111,031
$
(18,060) $
155
$
138,578
—
—
151
(85)
(288)
94
—
59
25
8,157
—
—
—
—
—
(4,805)
—
—
—
—
—
88
288
—
—
214
92
—
(8,940)
—
—
—
—
—
—
—
8,157
(8,940)
151
3
—
94
(4,805)
273
117
$
45,355
$
114,383
$
(17,378) $
(8,785) $
133,628
—
—
314
(89)
(195)
95
—
24
8
25
—
9,433
—
—
—
—
—
(4,843)
—
—
—
—
—
—
—
92
195
—
—
247
85
413
(33)
—
(2,157)
—
—
—
—
—
—
—
—
—
9,433
(2,157)
314
3
—
95
(4,843)
271
93
438
(33)
$
45,537
$
118,973
$
(16,379) $
(10,942) $
137,242
F-5
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common
Stock
Additional
Paid-in Capital
Retained
Earnings
Treasury
Stock
Accumulated
Other
Comprehensive
Income (Loss)
Balances at December 31, 2015
Net income
Other comprehensive income
Restricted stock awards
Distribution of 3,740 shares of treasury stock granted for
directors’ deferred compensation plan
Distribution of 8,249 shares of treasury stock granted for
employee restricted stock awards, net
Restricted stock units for directors' deferred compensation plan
Cash dividends declared ($1.04 per share)
Distribution of 9,532 shares of treasury stock for directors'
compensation
Distribution of 7,661 shares of treasury stock for employee
compensation
Sale of 15,308 shares of treasury stock
Repurchase of 612 shares of common stock
Balances at December 31, 2016
$
$
53
—
—
—
—
—
—
—
—
—
—
—
53
$
45,537
$
118,973
$
(16,379) $
(10,942) $
—
—
192
(92)
(212)
97
—
19
15
47
—
10,027
—
—
—
—
—
(4,889)
—
—
—
—
—
—
—
95
212
—
—
243
195
391
(22)
188
—
—
—
—
—
—
—
—
$
45,603
$
124,111
$
(15,265) $
(10,754) $
143,748
Total
137,242
10,027
188
192
3
—
97
(4,889)
262
210
438
(22)
See accompanying notes to consolidated financial statements.
F-6
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets
Deferred income tax (benefit) expense
Provision for loan losses
(Gain) loss on disposal of fixed assets
Depreciation and amortization of fixed assets
Amortization of premiums on securities, net
Gains on sales of loans held for sale, net
Proceeds from sales of loans held for sale
Loans originated and held for sale
Net (gains) losses on sale of other real estate owned
Writedowns on OREO
Net (gains) losses on trading assets
Net gains on securities transactions
Proceeds from sales of trading assets
Purchase of trading assets
(Increase) decrease in other assets
Increase (decrease) in accrued interest payable
Expense related to restricted stock units for directors' deferred compensation plan
Expense related to employee stock compensation
Expense related to employee restricted stock awards
Increase (decrease) in other liabilities
Proceeds from bank owned life insurance
Income from bank owned life insurance
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale
Proceeds from maturities and principal collected on securities available for sale
Proceeds from maturities and principal collected on securities held to maturity
Purchases of securities available for sale
Purchases of securities held to maturity
Purchase of FHLBNY and FRBNY stock
Redemption of FHLBNY and FRBNY stock
Proceeds from sales of fixed assets
Purchases of premises and equipment
Proceeds from sale of other real estate owned
Net increase in loans
Net cash used by investing activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing demand accounts, savings
accounts, and insured money market accounts
Net decrease in time deposits
Net decrease in securities sold under agreements to repurchase
Net change in FHLBNY overnight advances
Repayments of FHLBNY long term advances
Payments made on capital lease
Sale of treasury stock
Cash dividends paid
Net cash provided by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
(Continued)
F-7
Years Ended December 31,
2015
2014
2016
$
10,027
$
9,433
$
8,157
986
(2,564)
2,437
—
4,205
1,771
(326)
15,498
(14,508)
(21)
7
(76)
(987)
99
(96)
(165)
1
97
210
192
5,427
—
(73)
22,141
51,128
78,160
2,868
(95,993)
(3,007)
(5,458)
6,214
—
(1,696)
1,568
(34,513)
(729)
78,021
(21,973)
(847)
(13,900)
(10,110)
(186)
438
(4,878)
26,565
47,977
26,185
74,162
$
1,136
774
1,571
(18)
4,044
1,903
(294)
13,669
(13,786)
(84)
390
2
(372)
16
(170)
4,931
(28)
95
93
314
(9,421)
—
(75)
14,123
73,823
48,601
3,290
(191,112)
(2,025)
(8,552)
9,290
18
(1,154)
1,329
(48,156)
(114,648)
166,045
(45,764)
(1,199)
(16,930)
(107)
(103)
438
(4,833)
97,547
(2,978)
29,163
26,185
$
1,310
(2,263)
3,981
14
3,861
2,398
(301)
14,062
(13,731)
64
141
(50)
(6,869)
7
(140)
(7,579)
(99)
94
117
151
15,086
110
(78)
18,443
62,738
24,222
3,201
(23,613)
(2,537)
(3,907)
2,854
—
(2,586)
342
(131,852)
(71,138)
46,407
(32,649)
(3,049)
30,830
(5,933)
(561)
—
(4,796)
30,249
(22,446)
51,609
29,163
$
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
2015
2014
2016
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest
Income Taxes
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned
Dividends declared, not yet paid
Assets acquired through long term capital lease obligation
Repurchase of common stock in lieu of employee payroll taxes
Distribution of treasury stock for directors' deferred compensation plan
Distribution of treasury stock for directors' compensation
$
$
$
$
$
$
$
$
3,838
4,360
$
$
3,630
7,047
$
$
3,744
3,346
412
1,225
2,035
$
$
$
(22) $
$
3
$
262
100
1,214
$
$
— $
(33) $
$
3
$
271
3,074
1,204
3,537
—
3
273
See accompanying notes to consolidated financial statements.
F-8
CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2016, 2015 and 2014
(1)
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Corporation, through its wholly owned subsidiaries, the Bank and CFS Group, Inc., provides a wide range of banking, financing,
fiduciary and other financial services to its clients. The Corporation is subject to the regulations of certain federal and state agencies
and undergoes periodic examinations by those regulatory agencies.
CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-
based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries
and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools
resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk
among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada
Division of Insurance.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in conformity with GAAP and include the accounts of
the Corporation and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based
on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures
provided, and actual results could differ.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from banks and demand interest-bearing deposits with other financial
institutions.
Time deposits with other financial institutions are classified as held-to-maturity securities and are not included in cash and cash
equivalents.
TRADING ASSETS
Securities that are held to fund a non-qualified deferred compensation plan are recorded at fair value with changes in fair value
and interest and dividend income included in earnings.
SECURITIES
Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the
Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and
carried at amortized cost. Securities to be held for indefinite periods of time or not intended to be held to maturity are classified
as available for sale and carried at fair value. Unrealized holding gains and losses on securities classified as available for sale are
excluded from earnings and are reported as accumulated other comprehensive income (loss) in shareholders' equity, net of the
related tax effects, until realized. Realized gains and losses are determined using the specific identification method.
F-9
Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions
warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the
unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends
to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its
amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized
cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria,
the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in
the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss
is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For
equity securities, the entire amount of impairment is recognized through earnings.
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Corporation
compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected
remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future
cash flows.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment of yield using the
interest method. Dividend and interest income is recognized when collected.
FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK STOCK
The Bank is a member of both the FHLBNY and the FRBNY. FHLBNY members are required to own a certain amount of stock
based on the level of borrowings and other factors, while FRBNY members are required to own a certain amount of stock based
on a percentage of the Bank’s capital stock and surplus. FHLBNY and FRBNY stock are carried at cost and classified as non-
marketable equities and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported
as income.
LOANS
Loans are stated at the amount of unpaid principal balance net of deferred loan fees. Additionally, recorded investment in loans
includes interest receivable on loans. The Corporation has the ability and intent to hold its loans for the foreseeable future. The
Corporation’s loan portfolio is comprised of the following segments: (i) commercial and agricultural, (ii) commercial mortgages,
(iii) residential mortgages, and (iv) consumer loans.
Commercial and agricultural loans primarily consist of loans to small to mid-sized businesses in the Corporation’s market area in
a diverse range of industries. These loans are typically made on the basis of the borrower’s ability to make repayment from the
cash flow of the borrower’s business. Commercial mortgage loans are generally non-owner occupied commercial properties or
owner occupied commercial real estate with larger balances. Repayment of these loans is often dependent upon the successful
operation and management of the properties and the businesses occupying the properties, as well as on the collateral securing the
loan. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from their
employment and other income, but are secured by real property. Consumer loans include home equity lines of credit and home
equity loans, which exhibit many of the same characteristics as residential mortgages. Indirect and other consumer loans are
typically secured by depreciable assets, such as automobiles or boats, and are dependent on the borrower’s continuing financial
stability.
Interest on loans is accrued and credited to operations using the interest method. Past due status is based on the contractual terms
of the loan. The accrual of interest is generally discontinued and previously accrued interest is reversed when loans become 90
days delinquent. Loans may also be placed on non-accrual status if management believes such classification is otherwise warranted.
All payments received on non-accrual loans are applied to principal. Loans are returned to accrual status when they become
current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management,
the Corporation expects to receive all of its original principal and interest. Loan origination fees and certain direct loan origination
costs are deferred and amortized over the life of the loan as an adjustment to yield, using the interest method.
F-10
Purchased Credit Impaired Loans:
Loans acquired that show evidence of credit deterioration since origination are considered purchased credit impaired loans These
loans are recorded at the fair value of the amount paid, such that there is no carryover of the seller’s allowance for loan losses.
Such purchased loans are accounted for individually. The Corporation estimates the amount and timing of expected cash flows
for each purchased loan and the expected cash flows in excess of amount paid is recorded as interest income over the remaining
life of the loan (accretable yield). The excess of the loan’s contractual principal and interest over expected cash flows is not
recorded (nonaccretable difference).
After acquisition, losses are recognized by an increase in the allowance for loan losses. Over the life of the loan expected cash
flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a reserve is established.
If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.
These 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 Corporation did not acquire any purchase credit impaired loans during the years ended December 31, 2016 and 2015.
TROUBLED DEBT RESTRUCTURINGS
A TDR is a formally renegotiated loan in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties,
grants a concession to the borrower that would not have been granted to the borrower otherwise. Not all loans that are restructured
as a TDR are classified as non-accrual before the restructuring occurs. Restructured loans can convert from non-accrual to accrual
status when said loans have demonstrated performance, generally evidenced by six months of payment performance in accordance
with the restructured terms and when, in the opinion of management, the Corporation expects to receive all of its contractual
principal and interest due under the restructured terms.
TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are
measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a TDR is considered
to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default,
the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for
loan losses on loans individually identified as impaired. The Company incorporates recent historical experience related to TDRs,
including the performance of TDRs that subsequently default, into the calculation of the allowance by loan portfolio segment.
ALLOWANCE FOR LOAN LOSSES
The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans. The
allowance is established based on management’s evaluation of the probable incurred losses in our portfolio in accordance with
GAAP, and is comprised of both specific valuation allowances and general valuation allowances.
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable
to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are
established based on management’s analyses of individually impaired loans. Factors considered by management in determining
impairment include payment status, evaluations of the underlying collateral, expected cash flows, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on
a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length
of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. If a loan is determined to be impaired and is placed on nonaccrual status, all future payments received
are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated
future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
F-11
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Loans
not impaired but classified as substandard and special mention use a historical loss factor on a rolling five year history of net
losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual
loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with
other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the
following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies,
(2) national and local economic and business conditions and developments, including the condition of various market segments,
(3) loan profiles and volume of the portfolio, (4)the experience, ability, and depth of lending management and staff, (5) the volume
and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications
(6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related
issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect
of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition
and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact
of the global economy.
The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against
the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely.
Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into
consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific
impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance
may be necessary based on changes in economic conditions.
LOANS HELD FOR SALE
Certain mortgage loans are originated with the intent to sell. The Corporation typically retains the right to service the mortgages
upon sale. Loans held for sale are recorded at the lower of cost or fair value in the aggregate and are regularly evaluated for
changes in fair value. Commitments to sell the loans that are originated for sale are recorded at fair value. If necessary, a valuation
allowance is established with a charge to income for unrealized losses attributable to a change in market rates.
CAPITAL LEASES
Capital leases are recorded at the lesser of the present value of future cash outlays using a discounted cash flow, or fair value at
the beginning of the lease term. Initially, the capital lease is recorded as a building asset, which is depreciated over the shorter of
the term of the lease or the estimated life of the asset, and a corresponding long term lease obligation, which amortizes as payments
are made toward the lease. Interest expense is also incurred using the discount rate determined at the beginning of the lease term.
PREMISES AND EQUIPMENT
Land is carried at cost, while buildings, equipment, leasehold improvements and furniture are stated at cost less accumulated
depreciation and amortization. Depreciation is charged to current operations under the straight-line method over the estimated
useful lives of the assets, which range from 15 to 50 years for buildings and from 3 to 10 years for equipment and furniture.
Amortization of leasehold improvements and leased equipment is recognized on the straight-line method over the shorter of the
lease term or the estimated life of the asset. Leases of branch offices, which have been capitalized, are included within buildings
and depreciated on the straight-line method over the shorter of the lease term or the estimated life of the asset.
BANK OWNED LIFE INSURANCE
BOLI is recorded at the amount that can be realized under the insurance contracts at the balance sheet date, which is the cash
surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the cash surrender
value are recorded in other income.
OTHER REAL ESTATE
Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at estimated fair value of the property less
estimated costs to dispose at the time of acquisition to establish a new carrying value. Write downs from the carrying value of
the loan to estimated fair value which are required at the time of foreclosure are charged to the allowance for loan losses. Subsequent
adjustments to the carrying values of such properties resulting from declines in fair value are charged to operations in the period
in which the declines occur.
F-12
INCOME TAXES
The Corporation files a consolidated tax return. Deferred tax assets and liabilities are recognized for future tax consequences
attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their
respective tax bases, and for unused tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax
rates to apply to taxable income in the years in which temporary differences are expected to be recovered or settled, or the tax loss
carry forwards are expected to be utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the
amount expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax
examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is
greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax
benefit is recorded.
WEALTH MANAGEMENT GROUP FEE INCOME
Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets,
since such assets are not assets of the Corporation. Wealth Management Group income is recognized on the accrual method as
earned based on contractual rates applied to the balances of individual trust accounts. The unaudited market value of trust assets
under administration total $1.721 billion, including $299.0 million of assets held under management or administration for the
Corporation, at December 31, 2016 and $1.856 billion, including $304.1 million of assets held under management or administration
for the Corporation, at December 31, 2015.
POSTRETIREMENT BENEFITS
Pension Plan:
The Chemung Canal Trust Company Pension Plan is a non-contributory defined benefit pension plan. The Pension Plan is a
“qualified plan” under the IRS Code and therefore must be funded. Contributions are deposited to the Plan and held in trust. The
Plan assets may only be used to pay retirement benefits and eligible plan expenses. The plan was amended such that new employees
hired on or after July 1, 2010 would not be eligible to participate in the plan, however, existing participants at that time would
continue to accrue benefits.
Under the Plan, pension benefits are based upon final average annual compensation where the annual compensation is total base
earnings paid plus 401(k) salary deferrals. Bonuses, overtime, commissions and dividends are excluded. The normal retirement
benefit equals 1.2% of final average compensation (highest consecutive five years of annual compensation in the prior ten years)
times years of service (up to a maximum of 25 years), plus 1% of average monthly compensation for each additional year of
service (up to a maximum of 10 years), plus 0.65% of average monthly compensation in excess of covered compensation for each
year of credited service up to 35 years. Covered compensation is the average of the social security taxable wage bases in effect
for the 35 year period prior to normal social security retirement age. Compensation for purposes of determining benefits under
the Plan is reviewed annually.
On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future
retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-based and service-based component of
the formula used to determine retirement benefits in the pension plan were frozen so that participants will no longer earn further
retirement benefits. The effects of this freeze are reflected in the pension plan disclosures as of December 31, 2016. See Note
12.
Defined Contribution Profit Sharing, Savings and Investment Plan:
The Corporation also sponsors a 401(K) defined contribution profit sharing, savings and investment plan which covers all eligible
employees with a minimum of 1000 hours of annual service. The Corporation makes non-discretionary contributions and
discretionary matching and profit sharing contributions to the plan based on the financial results of the Corporation. The plan's
assets consist of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government
securities, corporate bonds and notes, and mutual funds. The plan’s expense is the amount of non-discretionary contributions and
discretionary matching and profit sharing contributions, and is charged to other operating expenses in the consolidated statements
of income.
F-13
Due to the freezing of the pension plan, the Corporation amended its defined contribution profit sharing, savings, and investment
plan (“401(k)”) for all active participants to supersede the current contribution formula used by the Corporation. Beginning on
January 1, 2017 the Corporation will begin contributing a non-discretionary 3% of gross annual wages (as defined by the 401(k)
plan) for each participant, regardless of the participant’s deferral, in addition to a 50% match up to 6% of gross annual wages. All
new contributions made on or after January 1, 2017 will vest immediately.
Defined Benefit Health Care Plan:
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to employees who meet
minimum age and service requirements. This plan was amended effective July 1, 2006. Prior to this amendment, all retirees age
55 or older were eligible for coverage under the Corporation's self-insured health care plan, contributing 40% of the cost of the
coverage. Under the amended plan, coverage for Medicare eligible retirees who reside in the Central New York geographic area
is provided under a group sponsored plan with Excellus BlueCross BlueShield called Medicare Blue PPO, with the retiree paying
100% of the premium. Excellus BlueCross BlueShield assumes full liability for the payment of health care benefits incurred after
July 1, 2006. Current Medicare eligible retirees who reside outside of the Central New York geographic area were eligible for
coverage under the Corporation's self insurance plan thru December 31, 2009, contributing 50% of the cost of coverage. Effective
January 1, 2010, these out of area retirees were eligible for coverage under a Medicare Supplement Plan C administered by Excellus
BlueCross BlueShield, contributing 50% of the premium. Current retirees between the ages of 55 and 65, will continue to be
eligible for coverage under the Corporation's self insured plan, contributing 50% of the cost of the coverage. Employees who
retired after July 1, 2006, and become Medicare eligible will only have access to the Medicare Blue PPO plan. Additionally,
effective July 1, 2006, dental benefits were eliminated for all retirees. The cost of the plan is based on actuarial computations of
current and future benefits for employees, and is charged to other operating expenses in the consolidated statements of income.
On October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan,
effective January 1, 2017. The effects of this freeze are reflected in the pension plan disclosures as of December 31, 2016. See
Note 12.
Executive Supplemental Pension Plan:
U.S. laws place limitations on compensation amounts that may be included under the Pension Plan. The Executive Supplemental
Pension Plan is provided to executives in order to produce total retirement benefits, as a percentage of compensation that is
comparable to employees whose compensation is not restricted by the annual compensation limit. Pension amounts, which exceed
the applicable Internal Revenue Service code limitations, will be paid under the Executive Supplemental Pension Plan.
The Executive Supplemental Pension Plan is a “non-qualified plan” under the Internal Revenue Service Code. Contributions to
the Plan are not held in trust; therefore, they may be subject to the claims of creditors in the event of bankruptcy or insolvency.
When payments come due under the Plan, cash is distributed from general assets. The cost of the plan is based on actuarial
computations of current and future benefits for executives, and is charged to other operating expense in the consolidated statements
of income.
Defined Contribution Supplemental Executive Retirement Plan:
The Defined Contribution Supplemental Executive Retirement Plan is provided to certain executives to motivate and retain key
management employees by providing a nonqualified retirement benefit that is payable at retirement, disability, death and certain
other events. The Defined Contribution Supplemental Executive Retirement Plan will deliver a retirement benefit comparable to
that received by other executive officers participating in the bank’s Defined Benefit Plan.
The Supplemental Executive Retirement Plan is intended to be an unfunded plan maintained primarily for the purpose of providing
deferred compensation benefits for a select group of management or highly compensated employees under Sections 201(2), 301
(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. The plan’s expense is the Corporation’s annual
contribution plus interest credits.
F-14
STOCK-BASED COMPENSATION
Restricted Stock Plan:
The Restricted Stock Plan is designed to align the interests of the Corporation’s executives and senior managers with the interests
of the Corporation and its shareholders, to ensure the Corporation’s compensation practices are competitive and comparable with
those of its peers, and to promote the retention of select management-level employees. Under the terms of the Plan, the Corporation
may make discretionary grants of restricted shares of the Corporation’s common stock to or for the benefit of employees selected
to participate in the Plan. Each officer of the Corporation, other than the Corporation’s chief executive officer, is eligible to
participate in the Plan. Awards are based on the performance, responsibility and contributions of the employee and are targeted
at an average of the peer group. The maximum number of shares of the Corporation’s common stock that may be awarded as
restricted shares to Plan participants may not exceed 15,000 per calendar year. Twenty percent of the restricted stock awarded to
a participant vests each year commencing with the first anniversary date of the award and is 100 percent vested on the fifth
anniversary date. Except in the case of the participant’s death, disability, or in the event of a change in control, the participant’s
unvested shares of unrestricted stock will be forfeited if the participant leaves the employment of the Corporation or the Bank,
with or without cause, or if the participant retires prior to attainment of age 65. The plan’s expense is recognized as compensation
expense ratably over the vesting period for the fair value of the award, measured at the grant date. See Note 13 for more information
regarding this Plan.
Deferred Directors Fee Plan:
A Deferred Directors Fee Plan for non-employee directors provides that directors may elect to defer receipt of all or any part of
their fees. Deferrals are either credited with interest compounded quarterly at the Applicable Federal Rate for short-term debt
instruments or converted to units, which appreciate or depreciate, as would an actual share of the Corporation’s common stock
purchased on the deferral date. Cash deferrals will be paid into an interest bearing account and paid in cash. Units will be paid
in shares of common stock. All directors’ fees are charged to other operating expense in the consolidated statements of income.
Directors’ Compensation Plan:
The purpose of the Directors’ Compensation Plan is to enable the Corporation to attract and retain persons of exceptional ability
to serve as directors and stockholders in enhancing the value of the common stock of the Corporation. The Plan was originally
established to provide for the cash payment of an annual retainer and fees to non-employee directors serving on the Board of
Directors of the Corporation and the Bank. The Plan was subsequently amended to provide: (i) payment of additional compensation
to each non-employee director in shares of the Corporation’s common stock in an amount equal to the total cash compensation
earned by each non-employee director during the year for service on the Board of Directors of each of the Corporation and the
Bank, and for each year of service thereafter, to be distributed from treasury shares in January of the following calendar year; and
(ii) payment to the President and CEO of the Corporation and the Bank for his service on the Boards of Directors of the Corporation
and the Bank in an amount equal in value to the average cash compensation awarded to non-employee directors who have served
twelve (12) months of the previous year. The maximum number of shares of Corporation’s common stock that may be granted
under the Plan may not exceed 20,000 per year. The Plan provides that the value of a share of common stock granted under the
Plan shall be determined as the average of the closing prices of a share of common stock as quoted on the applicable established
securities market for each of the prior 30 trading days ending on December 31st of the calendar year. The cost of all cash and stock
compensation is charged to other operating expenses in the consolidated statements of income.
Incentive Compensation Plan:
The purpose of the Incentive Compensation Plan is to attract and retain highly qualified officers and key employees, and to motivate
such persons to serve the Corporation and the Bank and to expend maximum effort to improve the business results and earnings
of the Corporation by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations
and future success of the Corporation. To this end, the Incentive Compensation Plan provides for the discretionary grant of cash
and/or unrestricted stock, i.e., common stock of the Corporation that is free of any restrictions, such as restrictions on transferability,
to select officers and key employees as designated by the Board of Directors in its sole discretion. The maximum number of shares
that can be awarded as unrestricted stock under the Incentive Compensation Plan to any individual is 10,000 per calendar year;
and the maximum amount that may be earned in cash as an Incentive Award in any calendar year by any individual is $300,000.
The right of any eligible employee to receive a grant of an incentive award, whether in the form of cash or unrestricted stock, is
subject to performance standards that are specified by either the Compensation Committee or the Board of Directors. The cost
of all cash and unrestricted stock compensation is charged to other operating expenses in the consolidated statements of income.
F-15
Non-qualified Deferred Compensation Plan:
The Deferred Compensation Plan allows a select group of management and employees to defer all or a portion of their annual
compensation to a future date. Eligible employees are generally highly compensated employees and are designated by the Board
of Directors from time to time. Investments in the plan are recorded as trading assets and deferred amounts are an unfunded
liability of the Corporation. The plan requires deferral elections be made before the beginning of the calendar year during which
the participant will perform the services to which the compensation relates. Participants in the Plan are required to elect a form
of distribution, either lump sum payment or annual installments not to exceed ten years, and a time of distribution, either a specified
age or a specified date. The terms and conditions for the deferral of compensation are subject to the provisions of 409A of the IRS
Code. The income from investments and cost of the plan are recorded as other operating income and other operating expenses,
respectively, in the consolidated statements of income.
GOODWILL AND INTANGIBLE ASSETS
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair
value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally
determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in
the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible
assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested
for impairment at least annually. The Corporation has selected December 31 as the date to perform the annual impairment test.
Goodwill is the only intangible asset with an indefinite life on our balance sheet. Intangible assets with definite useful lives are
amortized over their estimated useful lives to their estimated residual values. The balances are reviewed for impairment on an
ongoing basis or whenever events or changes in business circumstances warrant a review of the carrying value. If impairment is
determined to exist, the related write-down of the intangible asset's carrying value is charged to operations. Based on these
impairment reviews, the Corporation determined that goodwill and other intangible assets were not impaired at December 31,
2016.
The Corporation's intangible assets with definite useful lives resulted from the purchase of the trust business of Partners Trust
Bank in May of 2007, the acquisition of FOFC in April 2011 and the acquisition of six branches of Bank of America in November
of 2013, with balances of $1.7 million, $0.5 million and $0.7 million, respectively, at December 31, 2016. The intangible assets
related to the acquisition of Canton Bancorp, Inc. in May 2009 were fully amortized at December 31, 2016. The intangible assets
related to the acquisition of three former M&T Bank branch offices in March 2008 were fully amortized at December 31, 2015.
The trust business intangible is being amortized to expense over the expected useful life of 15 years. The identifiable core deposit
and customer relationship intangibles related to the M&T branch offices, and Canton Bancorp, Inc. acquisitions are being amortized
to expense using a 7.25 year accelerated method. The identifiable core deposit related to the branch offices in the Bank of America
acquisition is being amortized to expense using a 7 year accelerated method. The identifiable core deposit intangible related to
the FOFC acquisition is being amortized using a 10 year accelerated method.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Corporation enters into sales of securities under agreements to repurchase. The agreements are treated as financings, and the
obligations to repurchase securities sold are reflected as liabilities in the consolidated balance sheets. The amount of the securities
underlying the agreements continues to be carried in the Corporation's securities portfolio. The Corporation has agreed to
repurchase securities identical to those sold. The securities underlying the agreements are under the Corporation's control.
DERIVATIVES
The Corporation utilizes interest rate swaps with commercial borrowers and third-party counterparties as well as agreements with
lead banks in participation loan relationships wherein the Corporation guarantees a portion of the fair value of an interest rate
swap entered into by the lead bank. These transactions are accounted for as derivatives. The Company’s derivatives are entered
into in connection with its asset and liability management activities and not for trading purposes.
The Company does not have any derivatives that are designated as hedges and therefore all derivatives are considered free standing
and are recorded at fair value as derivative assets or liabilities on the consolidated balance sheets, with changes in fair value
recognized in the consolidated statements of income as non-interest income.
Premiums received when entering into derivative contracts are recognized as part of the fair value of the derivative asset or liability
and are carried at fair value with any gain/loss at inception and any changes in fair value reflected in income.
F-16
The Corporation does not typically require its commercial customers to post cash or securities as collateral on its program of back-
to-back interest rate swap program. The Corporation may need to post collateral, either cash or certain qualified securities, in
proportion to potential increases in unrealized loss positions. The Corporation had pledged collateral of $450 thousand to derivative
counterparties as of December 31, 2016.
OTHER FINANCIAL INSTRUMENTS
The Corporation is a party to certain other financial instruments with off-balance sheet risk such as unused portions of lines of
credit and commitments to fund new loans. The Corporation's policy is to record such instruments when funded.
ADVERTISING COSTS
Costs for advertising products and services or for promoting our corporate image are expensed as incurred.
EARNINGS PER COMMON SHARE
Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period.
Issuable shares including those related to directors’ restricted stock units and directors’ stock compensation are considered
outstanding and are included in the computation of basic earnings per share as they are earned. All outstanding unvested share
based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation.
Restricted stock awards are grants of participating securities. The impact of the participating securities on earnings per share is
not material. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that
occur.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss)
includes unrealized gains and losses on securities available for sale and changes in the funded status of the Corporation’s defined
benefit pension plan and other benefit plans, net of the related tax effect, which are also recognized as separate components of
equity.
SEGMENT REPORTING
The Corporation has identified separate operating segments and internal financial information is primarily reported and aggregated
in two lines of business, banking and wealth management services.
RECLASSIFICATION
Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform to the current year's
presentation.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2014, the FASB issued ASU 2014-09, an amendment to Revenue from Contracts with Customers (Topic 606). The objective
of this amendment is to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP
and IFRS. This update affects any entity that either enters into contracts with customers to transfer goods or services or enters
into contracts for the transfer of nonfinancial assets unless those contracts are in the scope of other standards. In August 2015,
the FASB issued ASU 2015-14 to defer for one year the effective date of the new revenue standard. The requires are effective for
annual periods and interim periods within fiscal years beginning after December 15, 2017. During 2016, the FASB issued further
implementation guidance regarding revenue recognition. This additional guidance included clarification on certain principal
versus agent considerations within the implementation of the guidance as well as clarification related to identifying performance
obligations and licensing, assessing collectibility, presenting sales taxes, measuring noncash consideration, and certain transition
matters. The Corporation intends to adopt the new revenue guidance as of January 1, 2018 and does not expect a significant change
upon adoption of the standard, as the new standard will not materially change the way the Corporation currently records revenue
for its WMG and fee income from mortgage servicing fees, financial guarantees, and deposit related fees.
F-17
In January 2016, the FASB issued ASU 2016-01, an amendment to Recognition and Measurement of Financial Assets and Financial
Liabilities (Subtopic 825-10). The objectives of the ASU are to (1) require equity investments to be measured at fair value, with
changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily
determinable fair values, (3) eliminate the requirement to disclose methods and significant assumptions used to estimate fair value
for financial instruments measured at amortized cost on the balance sheet, (4) require the use of the exit price notion when measuring
the fair value of financial instruments, and (5) clarify the need for a valuation allowance on a deferred tax asset related to available-
for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this ASU are effective for public
business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. The
Corporation will adopt all provisions of this ASU as of January 1, 2018 and believes the ASU will not have a material impact on
its consolidated financial statements, as the Corporation's equity investment portfolio is less than $1.0 million as of December 31,
2016.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable
assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The amendments
in this update are effective for annual periods, and interim periods within those annual periods, beginning after December 15,
2018, though early adoption is permitted. The Corporation intends to adopt the new lease guidance as of January 1, 2019 and is
currently evaluation the impact that adoption of these updates will have on its consolidated financial statements. Currently, the
Corporation believes the implementation of this ASU will create a right of use asset of less than $5.0 million for the Corporation's
13 leased facilities and a related capital obligation of the same amount as of January 1, 2019.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee
Share-Based Payment Accounting. The objectives of the ASU are to simplify accounting for a stock payment's tax consequences
and amend how excess tax benefits and a business's payments to cover the tax bills for the shares' recipients should be classified.
The amendments allow companies to estimate the number of stock awards they expect to vest, and they revise the withholding
requirements for classifying stock awards as equity. The amendments in this ASU are effective for public companies for fiscal
years beginning after December 15, 2016, though early adoption is permitted. The Corporation will adopt the new stock
compensation guidance as of January 1, 2017 and believes that the ASU will not have a material impact on its consolidated financial
statements as employee's are responsible for tax consequences associated with the vesting of their shares.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses
on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information
about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each
reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected
credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates.
The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2019, though entities
may adopt the amendments earlier for fiscal years beginning after December 15, 2018. The Corporation is evaluating the potential
impact on the Corporation's consolidated financial statements and believes that the ASU may materially change the current process
of evaluating the allowance for loan losses.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts
and Cash Payments. The objective of the ASU is to reduce the existing diversity in practice relating to eight specific cash flow
issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments
with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration
payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement
of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity
method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application
of the predominance principal. The amendments in this ASU are effective for public companies for fiscal years beginning after
December 15, 2017 and interim periods within those fiscal years, though early adoption is permitted. The adoption of the ASU is
not expected to have a significant impact on the Corporation's consolidated financial statements.
(2)
RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Corporation was in compliance with the reserve requirement with the Federal Reserve Bank of New York as of December 31,
2016.
The Corporation also maintains a pre-funded settlement account with a financial institution in the amount of $1.4 million for
electronic funds transaction settlement purposes at December 31, 2016 and 2015.
F-18
The Corporation also maintains a collateral restricted account with a financial institution in the amount of$.5 million as of December
31, 2016. The collateral held at the financial institution is related to the Corporation's interest rate swap program and serves as
collateral in the event of default on the interest rate swaps with the counterparties.
(3)
SECURITIES
Amortized cost and estimated fair value of securities available for sale at December 31, 2016 and 2015 are as follows (in thousands):
Obligations of U.S. Government and
U.S. Government sponsored enterprises
Mortgage-backed securities, residential
Obligations of states and political subdivisions
Corporate bonds and notes
SBA loan pools
Corporate stocks
Total
2016
2015
Amortized
Cost
Estimated
Fair Value
Amortized
Cost
Estimated
Fair Value
$
$
17,300
253,156
38,843
249
568
285
310,401
$
$
17,455
245,866
38,740
250
570
521
303,402
$
$
99,430
199,680
43,695
747
643
285
344,480
$
$
100,166
198,366
44,426
752
647
463
344,820
Gross unrealized gains and losses on securities available for sale at December 31, 2016 and 2015, were as follows (in thousands):
Obligations of U.S. Government and
U.S. Government sponsored enterprises
Mortgage-backed securities, residential
Obligations of states and political subdivisions
Corporate bonds and notes
SBA loan pools
Corporate stocks
Total
2016
2015
Unrealized
Gains
Unrealized
Losses
Unrealized
Gains
Unrealized
Losses
$
$
155
202
209
1
3
236
806
$
— $
7,492
312
—
1
—
7,805
$
$
752
427
737
5
5
178
2,104
$
$
16
1,741
6
—
1
—
1,764
The amortized cost and estimated fair value of debt securities available for sale are shown below by contractual maturity. Expected
maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or
prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands):
Within one year
After one, but within five years
After five, but within ten years
After ten years
Mortgage-backed securities, residential
SBA loan pools
Total
December 31, 2016
Fair
Value
Amortized
Cost
$
$
8,236
36,171
11,579
406
253,156
568
310,116
$
$
8,286
36,400
11,398
361
245,866
570
302,881
Actual maturities may differ from contractual maturities above because issuers may have the right to call or prepay obligations
with or without call or prepayment penalties.
F-19
The proceeds from sales and calls of securities resulting in gains or losses are listed below (in thousands):
2016
2015
2014
Proceeds
Gross gains
Gross losses
Tax expense
$
$
$
$
40,413
989
$
$
(2) $
$
373
$
72,718
410
$
(38) $
$
142
36,258
6,869
—
2,641
Amortized cost and estimated fair value of securities held to maturity at December 31, 2016 and 2015 are as follows (in thousands):
Obligations of states and political subdivisions
Time deposits with other financial institutions
2016
2015
Amortized
Cost
$
$
3,725
980
4,705
Estimated
Fair Value
3,931
$
981
4,912
$
Amortized
Cost
$
$
4,566
—
4,566
Estimated
Fair Value
4,822
$
—
4,822
$
Gross unrealized gains and losses on securities held to maturity at December 31, 2016 and 2015, were as follows (in thousands):
Obligations of states and political subdivisions
Time deposits with other financial institutions
Total
2016
2015
Unrealized
Gains
Unrealized
Losses
Unrealized
Gains
Unrealized
Losses
$
$
206
1
207
$
$
— $
—
— $
256
—
256
$
$
—
—
—
There were no sales of securities held to maturity in 2016 or 2015.
The contractual maturity of securities held to maturity is as follows at December 31, 2016 (in thousands):
Within one year
After one, but within five years
After five, but within ten years
After ten years
Total
December 31, 2016
Fair
Value
Amortized
Cost
$
$
1,742
2,626
337
—
4,705
$
$
1,754
2,780
378
—
4,912
The following table summarizes the investment securities available for sale with unrealized losses at December 31, 2016 and
December 31, 2015 by aggregated major security type and length of time in a continuous unrealized position (in thousands):
2016
Mortgage-backed securities,
residential
Obligations of states and political
subdivisions
SBA loan pools
Total temporarily impaired
securities
Less than 12 months
12 months or longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
233,843
$
7,492
$
— $
— $
233,843
$
7,492
25,724
—
312
—
—
225
—
1
25,724
225
312
1
$
259,567
$
7,804
$
225
$
1
$
259,792
$
7,805
F-20
Less than 12 months
12 months or longer
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
15,169
$
16
$
— $
— $
15,169
$
16
177,058
1,741
3,756
—
4
—
—
592
251
$
195,983
$
1,761
$
843
$
—
177,058
1,741
2
1
3
4,348
251
6
1
$
196,826
$
1,764
2015
Obligations of U.S. Government
and U.S. Government sponsored
enterprises
Mortgage-backed securities,
residential
Obligations of states and political
subdivisions
Corporate stocks
Total temporarily impaired
securities
Other-Than-Temporary-Impairment
As of December 31, 2016, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to
mortgage-backed securities. At December 31, 2016, all of the unrealized losses related to mortgage-backed securities were issued
by U.S. government sponsored entities, Fannie Mae and Freddie Mac. Because the decline in fair value is attributable to changes
in interest rates and not credit quality, and because the Corporation does not have the intent to sell these securities and it is not
likely that it will be required to sell these securities before their anticipated recovery, the Corporation does not consider these
securities to be other-than-temporarily impaired at December 31, 2016.
The table below presents a roll forward of the cumulative credit losses recognized in earnings for the periods ended December 31,
2016, 2015 and 2014 (in thousands):
Beginning balance, January 1,
Additions/Subtractions:
2016
2015
2014
$
— $
— $
1,939
Reductions for previous credit losses realized on securities sold during the year
Reductions for previous credit losses realized on securities liquidated during the
year
Increases to the amount related to the credit loss for which other-than-temporary
impairment was previously recognized
Ending balance, December 31,
—
—
—
—
—
(1,939)
—
— $
—
— $
—
—
$
During the first quarter of 2014, the Corporation received notice that one CDO consisting of a pool of trust preferred securities
was liquidated and recorded $515 thousand in other operating income during the first quarter of 2014 to reflect proceeds received
from the liquidation. The Corporation does not own any other CDO’s in its investment securities portfolio.
Pledged Securities
The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $191.0 million
at December 31, 2016 and $196.1 million at December 31, 2015.
The table below shows the securities pledged to secure securities sold under agreements to repurchase at December 31, 2016 and
2015 (in thousands):
Obligations of U.S. Government and U. S.
Government sponsored enterprises
Mortgage-backed securities, residential
Total
2016
2015
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
$
$
1,231
37,769
39,000
$
$
1,276
37,000
38,276
$
$
22,988
20,453
43,441
$
$
23,267
20,589
43,856
F-21
Concentrations
There are no securities of a single issuer (other than securities of U.S. Government sponsored enterprises) that exceed 10% of
shareholders' equity at December 31, 2016 or 2015.
Equity Method Investments
The Corporation has an equity investment in Cephas Capital Partners, L.P. This small business investment company was established
for the purpose of providing financing to small businesses in market areas served by the Corporation, including minority-owned
small businesses and those that are anticipated to create jobs for the low to moderate income levels in the targeted areas. As of
December 31, 2016 and 2015, these investments totaled $0.4 million and $0.5 million, respectively, are included in other assets,
and are accounted for under the equity method of accounting.
(4)
LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio, net of deferred loan fees is summarized as follows (in thousands):
Commercial and agricultural:
Commercial and industrial
Agricultural
Commercial mortgages:
Construction
Commercial mortgages
Residential mortgages
Consumer loans:
Credit cards
Home equity lines and loans
Indirect consumer loans
Direct consumer loans
Total loans, net of deferred loan fees
Interest receivable on loans
Total recorded investment in loans
December 31, 2016 December 31, 2015
$
176,201
$
360
46,387
522,269
198,493
1,476
98,590
139,572
16,942
1,200,290
3,192
$
1,203,482
$
192,197
1,036
41,131
465,347
195,778
1,483
101,726
151,327
18,608
1,168,633
2,870
1,171,503
Residential mortgages held for sale as of December 31, 2016 and 2015 totaling $0.4 million and $1.1 million, respectively, are
not included in the above table.
Residential mortgages totaling $158.0 million at December 31, 2016 and $156.3 million at December 31, 2015 were pledged under
a blanket collateral agreement for the Corporation's line of credit with the FHLBNY.
The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk
with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan
classifications in the table above.
F-22
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31,
2016, 2015 and 2014, respectively (in thousands):
Allowance for loan losses
Beginning balance:
Charge Offs:
Recoveries:
Net (charge offs) recoveries
Provision
Ending balance
Allowance for loan losses
Beginning balance:
Charge Offs:
Recoveries:
Net recoveries (charge offs)
Provision
Ending balance
Allowance for loan losses
Beginning balance:
Charge Offs:
Recoveries:
Net recoveries (charge offs)
Provision
Ending balance
Commercial,
and
Agricultural
$
$
1,831
(217)
92
(125)
(117)
1,589
December 31, 2016
Commercial
Mortgages
7,112
$
(911)
10
(901)
1,059
7,270
$
Residential
Mortgages
1,464
$
(65)
—
(65)
124
1,523
$
$
$
3,853
(1,637)
284
(1,353)
1,371
3,871
Consumer
Loans
Total
December 31, 2015
Commercial,
and
Agricultural
$
$
1,460
(186)
96
(90)
461
1,831
Commercial
Mortgages
6,326
$
(104)
131
27
759
7,112
$
Residential
Mortgages
1,572
$
(47)
—
(47)
(61)
1,464
$
Consumer
Loans
$
$
4,328
(1,294)
407
(887)
412
3,853
December 31, 2014
Commercial,
and
Agricultural
$
$
1,979
(444)
385
(59)
(460)
1,460
Commercial
Mortgages
6,243
$
(2,229)
156
(2,073)
2,156
6,326
$
Residential
Mortgages
1,517
$
(97)
32
(65)
120
1,572
$
Consumer
Loans
$
$
3,037
(1,508)
634
(874)
2,165
4,328
$
$
$
$
$
$
14,260
(2,830)
386
(2,444)
2,437
14,253
Total
13,686
(1,631)
634
(997)
1,571
14,260
Total
12,776
(4,278)
1,207
(3,071)
3,981
13,686
The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment
and based on impairment method as of December 31, 2016 and December 31, 2015 (in thousands):
Allowance for loan losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total ending allowance balance
$
$
December 31, 2016
Commercial
and
Agricultural
Commercial
Mortgages
Residential
Mortgages
Consumer
Loans
Total
— $
1,589
—
1,589
$
735
6,476
59
7,270
$
$
— $
1,498
25
1,523
$
141
3,730
—
3,871
$
$
876
13,293
84
14,253
F-23
Allowance for loan losses
Ending allowance balance attributable to loans:
Individually evaluated for impairment
Collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total ending allowance balance
Loans:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total ending loans balance
Loans:
Loans individually evaluated for impairment
Loans collectively evaluated for impairment
Loans acquired with deteriorated credit quality
Total ending loans balance
December 31, 2015
Commercial
and
Agricultural
Commercial
Mortgages
Residential
Mortgages
Consumer
Loans
Total
8
1,823
—
1,831
$
$
1,481
5,572
59
7,112
$
$
— $
1,424
40
1,464
$
77
3,776
—
3,853
$
$
1,566
12,595
99
14,260
Commercial
and
Agricultural
693
176,334
—
177,027
Commercial
and
Agricultural
December 31, 2016
Commercial
Mortgages
10,382
$
558,451
1,323
570,156
$
Residential
Mortgages
396
$
198,474
95
198,965
$
Consumer
Loans
$
$
455
256,879
—
257,334
Total
$
11,926
1,190,138
1,418
$ 1,203,482
December 31, 2015
Commercial
Mortgages
Residential
Mortgages
Consumer
Loans
Total
1,498
$
12,773
$
235
$
474
$
14,980
192,202
—
493,102
1,825
195,731
273,393
1,154,428
270
—
2,095
193,700
$
507,700
$
196,236
$
273,867
$ 1,171,503
$
$
$
$
$
$
F-24
The following tables present loans individually evaluated for impairment recognized by class of loans as of December 31, 2016
and December 31, 2015, the average recorded investment and interest income recognized by class of loans as of the years ended
December 31, 2016, 2015 and 2014 (in thousands):
December 31, 2016
December 31, 2015
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for Loan
Losses
Allocated
Unpaid
Principal
Balance
Recorded
Investment
Allowance
for Loan
Losses
Allocated
With no related allowance
recorded:
Commercial and agricultural:
Commercial and industrial
Commercial mortgages:
Construction
Commercial mortgages
Residential mortgages
Consumer loans:
Home equity lines and loans
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial
Commercial mortgages:
Commercial mortgages
Consumer loans:
$
690
$
693
$
— $
1,487
$
1,489
$
277
8,792
395
93
—
278
7,857
396
95
—
2,245
2,247
349
7,551
234
350
7,577
235
107
108
9
9
—
—
—
—
—
8
4,913
4,846
1,481
364
15,014
$
366
14,980
$
$
77
1,566
—
—
—
—
—
735
141
876
Home equity lines and loans
Total
360
12,852
$
360
11,926
$
$
December 31, 2016
December 31, 2015
December 31, 2014
Average
Recorded
Investment
Interest
Income
Recognized
(1)
Average
Recorded
Investment
Interest
Income
Recognized
(1)
Average
Recorded
Investment
Interest
Income
Recognized
(1)
With no related allowance
recorded:
Commercial and agricultural:
Commercial and industrial
Commercial mortgages:
Construction
Commercial mortgages
Residential mortgages
Consumer loans:
Home equity lines & loans
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial
Commercial mortgages:
Commercial mortgages
Consumer loans:
$
1,010
$
42
$
1,358
$
64
$
1,463
$
320
6,793
366
102
33
4,749
14
240
5
5
—
6
992
7,728
244
396
146
36
264
4
6
3
2,104
7,492
141
143
502
4,503
49
1,611
Home equity lines and loans
Total
362
13,735
$
$
—
312
$
84
15,451
$
18
444
$
56
13,512
$
(1) Cash basis interest income approximates interest income recognized.
F-25
40
102
259
1
6
—
41
4
453
The following tables present the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class
of loans as of December 31, 2016 and December 31, 2015 (in thousands):
Non-accrual
Loans Past Due 90 Days or More and
Still Accruing
2016
2015
2016
2015
Commercial and agricultural:
Commercial and industrial
$
— $
13
$
2
$
Commercial mortgages:
Construction
Commercial mortgages
Residential mortgages
Consumer loans:
Credit cards
Home equity lines and loans
Indirect consumer loans
Direct consumer loans
19
5,454
4,201
—
1,670
654
45
63
7,203
3,610
—
757
542
43
Total
$
12,043
$
12,232
$
—
—
—
11
—
—
—
13
$
3
—
—
—
15
—
—
—
18
The following tables present the aging of the recorded investment in loans as of December 31, 2016 and December 31, 2015 (in
thousands):
December 31, 2016
30 - 59
Days Past
Due
60 - 89
Days Past
Due
90 Days or
More Past
Due
Total Past
Due
Loans
Acquired
with
Deteriorated
Credit
Quality
Loans Not
Past Due
Total
Commercial and
agricultural:
Commercial and
industrial
Agricultural
Commercial
mortgages:
Construction
Commercial
mortgages
Residential mortgages
Consumer loans:
Credit cards
Home equity lines
and loans
Indirect consumer
loans
Direct consumer loans
$
160
$
—
—
652
2,100
3
227
1,773
54
$
7
—
1,177
4,460
436
9
—
287
7
2
—
—
2,412
2,383
11
1,149
542
22
$
169
$
— $
176,497
$
176,666
—
1,177
7,524
4,919
23
1,376
2,602
83
—
—
1,323
95
—
—
—
—
361
361
45,333
46,510
514,799
193,951
523,646
198,965
1,453
1,476
97,477
98,853
137,391
16,929
139,993
17,012
Total
$
4,969
$
6,383
$
6,521
$
17,873
$
1,418
$ 1,184,191
$ 1,203,482
F-26
December 31, 2015
30 - 59
Days Past
Due
60 - 89
Days Past
Due
90 Days or
More Past
Due
Total Past
Due
Loans
Acquired
with
Deteriorated
Credit
Quality
Loans Not
Past Due
Total
Commercial and
agricultural:
Commercial and
industrial
Agricultural
Commercial
mortgages:
Construction
Commercial
mortgages
Residential mortgages
Consumer loans:
Credit cards
Home equity lines
and loans
Indirect consumer
loans
Direct consumer loans
$
398
$
—
—
4,197
2,983
30
233
1,744
208
$
3
—
—
199
725
4
77
4
—
12
—
—
5,239
1,703
15
239
447
19
$
413
$
— $
192,248
$
192,661
—
—
9,635
5,410
50
549
2,194
227
—
—
1,039
1,039
41,231
41,231
1,825
270
455,009
190,555
466,469
196,236
—
—
—
—
1,433
1,482
101,428
101,977
149,531
18,455
151,726
18,682
Total
$
9,793
$
1,012
$
7,674
$
18,478
$
2,095
$ 1,150,929
$ 1,171,503
Troubled Debt Restructurings:
A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the
modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the
schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest
rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for
consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan
or a permanent reduction of the interest on the loan.
As of December 31, 2016, 2015 and 2014, the Corporation has a recorded investment in TDRs of $10.2 million, $12.0 million,
and $9.7 million, respectively. There were specific reserves of $0.9 million allocated for TDRs at December 31, 2016, and $1.4
million allocated for December 31, 2015, and $0.3 million allocated for December 31, 2014. As of December 31, 2016, TDRs
totaling $5.8 million were accruing interest under the modified terms and $4.4 million were on non-accrual status. As of
December 31, 2015, TDRs totaling $7.6 million were accruing interest under the modified terms and $4.4 million were on non-
accrual status. As of December 31, 2014, TDRs totaling $8.7 million were accruing interest under the modified terms and $1.0
million were on non-accrual status. The Corporation has committed no additional amounts as of December 31, 2016 to customers
with outstanding loans that are classified as TDRs. The Corporation committed additional amounts totaling up to $0.1 million as
of both December 31, 2015 and December 31, 2014 to customers with outstanding loans that are classified as TDRs.
F-27
During the years ended December 31, 2016, 2015 and 2014, the terms of certain loans were modified as TDRs. During the year
ended December 31, 2016, the modification of the terms of a residential mortgage loan included an extension of the maturity date
by thirteen years at a stated interest rate lower than the current market rate for new debt with similar risk and a corresponding
reduction of the scheduled amortization payments of the loan due to the longer term. Also, $8 thousand of closing costs were
capitalized on the restructured loan. Additionally, the modification of the terms of five commercial real estate loans and one
residential home equity loan included consolidating the loans into one commercial real estate loan and extending the maturity date
at a stated interest rate lower than the current market rate for new debt with similar risk. Also the modification of the terms of a
residential mortgage loan included a reduction in the stated interest rate for three years and a corresponding reduction of the
scheduled amortized payments of the loan due to the lower interest rate. Additionally, $4 thousand of interest and past due escrow
payments were capitalized on the restructured loan. The modification of the terms of another commercial real estate loan included
a postponement or reduction of the scheduled amortized payments of the loan for greater than a 3 month period and a partial
release of collateral due to a sale of property after which the bank received part of the proceeds to bring the loan current and reduce
the principal balance with the remainder of the proceeds used to pay delinquent taxes. This results in a reduction in outstanding
principal of $97 thousand at the time of restructuring.
The modification of the terms of such commercial loans performed during the year ended December 31, 2015 included renewing
a line of credit and extending the maturity date at a rate lower than the current market rate, decreases of scheduled amortization
payments for five loans and reductions of interest rates for two loans.
The modification of the terms of such commercial loans performed during the year ended December 31, 2014 included a permanent
reduction of the recorded investment and a change in the schedule of payments for one loan and renewing lines of credit or loans
and extending maturity dates at rates lower than the current market rates for six other loans. The modification of the terms of the
residential mortgage loan included extending the maturity date at an interest rate lower than the current market rate for new debt
with similar risk. The modification of the terms of the home equity line of credit included a change in the schedule of payments
and extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk.
The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended
December 31, 2016, 2015 and 2014 (in thousands):
December 31, 2016
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages
Residential mortgages
Consumer loans:
Home equity lines and loans
Total
Number
of Loans
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
6
2
1
9
$
$
485
295
74
854
$
$
388
307
74
769
The TDRs described above did not increase the allowance for loan losses and resulted in no charge offs during the year ended
December 31, 2016.
December 31, 2015
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial
Commercial mortgages:
Commercial mortgages
Total
Number
of Loans
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
477
$
2,810
3,287
$
477
2,810
3,287
1
5
6
$
$
F-28
The TDRs described above increase the allowance for loan losses by $1.1 million and resulted in no charge offs during the year
ended December 31, 2015.
December 31, 2014
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial
Commercial mortgages:
Commercial mortgages
Residential mortgages
Consumer loans:
Home equity lines and loans
Total
Number
of Loans
Pre-Modification
Outstanding Recorded
Investment
Post-Modification
Outstanding Recorded
Investment
4
4
1
1
10
$
$
1,028
$
2,666
149
366
4,209
$
1,028
2,623
150
366
4,167
The TDRs described above increased the allowance for loan losses by $0.2 million and resulted in less than $0.1 million in charge
offs during the year ended December 31, 2014.
A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no
payment defaults on any loans previously modified as troubled debt restructurings during the year ended December 31, 2016
within twelve months following the modification.
The following table presents loans by class modified as TDRs for which there was a payment default within twelve months
following the modification during the year ended December 31, 2015:
December 31, 2015
Commercial mortgages:
Commercial mortgages
Total
Number
of Loans
Recorded Investment
2
2
$
$
1,877
1,877
The TDRs that subsequently defaulted described above did not increase the allowance for loan losses and resulted in no charge
offs during the year ended December 31, 2015.
There were no payment defaults on any loans previously modified as troubled debt restructurings during the year ended
December 31, 2014 within twelve months following the modification.
Credit Quality Indicators
The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk
ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity,
leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans
in their respective portfolios for any changes in the borrower’s ability to service their debt and affirm the risk ratings for the loans
at least annually.
For the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and
credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment.
Retail loans are not rated until they become 90 days past due.
F-29
The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized
and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans
(which are consistent with regulatory guidelines):
Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If
left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s
credit position 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
pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. Based on the analyses performed as of
December 31, 2016 and December 31, 2015, the risk category of the recorded investment of loans by class of loans is as follows
(in thousands):
December 31, 2016
Loans
acquired with
deteriorated
credit quality
Special
Mention
Not Rated
Pass
Substandard Doubtful
Total
$
— $
—
172,873
361
$
— $
—
$
2,277
—
$
1,516
—
— $ 176,666
361
—
—
—
194,669
1,476
97,183
139,339
45,055
—
259
1,196
—
46,510
496,723
1,323
8,574
15,566
1,460
523,646
—
—
—
—
95
—
—
—
—
—
—
—
4,201
—
1,670
654
—
—
—
—
198,965
1,476
98,853
139,993
16,967
449,634
$
—
715,012
$
$
—
1,418
$
—
11,110
$
45
24,848
$
—
1,460
17,012
$1,203,482
Commercial
and agricultural:
Commercial
and industrial
Agricultural
Commercial
mortgages:
Construction
Commercial
mortgages
Residential
mortgages
Consumer loans
Credit cards
Home equity lines
and loans
Indirect consumer
loans
Direct consumer
loans
Total
F-30
December 31, 2015
Loans
acquired with
deteriorated
credit quality
Special
Mention
Not Rated
Pass
Substandard Doubtful
Total
$
— $
—
186,359
1,039
$
— $
—
$
3,772
—
$
2,521
—
9
—
$ 192,661
1,039
—
—
192,245
1,482
101,219
151,184
40,881
—
287
63
—
41,231
437,549
1,825
8,437
14,454
4,204
466,469
—
—
—
—
270
—
—
—
—
—
—
—
3,721
—
758
542
—
—
—
—
196,236
1,482
101,977
151,726
18,639
464,769
$
—
665,828
$
$
—
2,095
$
—
12,496
$
43
22,102
$
—
4,213
18,682
$1,171,503
Commercial
and agricultural:
Commercial
and industrial
Agricultural
Commercial
mortgages:
Construction
Commercial
mortgages
Residential
mortgages
Consumer loans
Credit cards
Home equity lines
and loans
Indirect consumer
loans
Direct consumer
loans
Total
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. Non-performing loans include non-accrual loans and non-accrual troubled debt restructurings.
The following table presents the recorded investment in residential and consumer loans based on payment activity as of
December 31, 2016 and December 31, 2015 (in thousands):
Performing
Non-Performing
Total
Performing
Non-Performing
Total
December 31, 2016
Consumer Loans
Home
Equity
Lines and
Loans
Indirect
Consumer
Loans
Other
Direct
Consumer
Loans
Credit
Card
1,476
—
1,476
$
$
97,183
1,670
98,853
$
$
139,339
654
139,993
$
$
16,967
45
17,012
December 31, 2015
Consumer Loans
Home
Equity
Lines and
Loans
Indirect
Consumer
Loans
Other
Direct
Consumer
Loans
Credit
Card
1,482
—
1,482
$
$
101,219
758
101,977
$
$
151,184
542
151,726
$
$
18,639
43
18,682
$
$
$
$
Residential
Mortgages
194,764
$
4,201
198,965
$
Residential
Mortgages
192,626
$
3,610
196,236
$
F-31
At the time of the merger with Fort Orange Financial Corp., the Corporation identified certain loans with evidence of deteriorated
credit quality, and the probability that the Corporation would be unable to collect all contractually required payments from the
borrower. These loans are classified as PCI loans. The Corporation adjusted its estimates of future expected losses, cash flows,
and renewal assumptions on the PCI loans during the current year. These adjustments were made for changes in expected cash
flows due to loans refinanced beyond original maturity dates, impairments recognized subsequent to the acquisition, advances
made for taxes or insurance to protect collateral held and payments received in excess of amounts originally expected.
The tables below summarize the changes in total contractually required principal and interest cash payments, management’s
estimate of expected total cash payments and carrying value of the PCI loans from January 1, 2014 to December 31, 2016 (in
thousands):
Balance at
December 31,
2015
Income
Accretion
All Other
Adjustments
Balance at
December 31,
2016
Contractually required principal and interest
$
2,912
$
— $
(972) $
1,940
Contractual cash flows not expected to be collected (non
accretable discount)
Cash flows expected to be collected
Interest component of expected cash flows (accretable
yield)
Recorded investment in loans acquired with deteriorating
credit quality
$
(506)
2,406
(311)
—
—
112
154
(818)
29
(352)
1,588
(170)
2,095
$
112
$
(789) $
1,418
Balance at
December 31,
2014
Income
Accretion
All Other
Adjustments
Balance at
December 31,
2015
Contractually required principal and interest
$
3,621
$
— $
(709) $
2,912
Contractual cash flows not expected to be collected (non
accretable discount)
Cash flows expected to be collected
Interest component of expected cash flows (accretable
yield)
Recorded investment in loans acquired with deteriorating
credit quality
$
(570)
3,051
(420)
—
—
174
64
(645)
(65)
(506)
2,406
(311)
2,631
$
174
$
(710) $
2,095
Contractually required principal and interest
Contractual cash flows not expected to be collected (non
accretable discount)
Cash flows expected to be collected
Interest component of expected cash flows (accretable
yield)
Recorded investment in loans acquired with deteriorating
credit quality
$
Balance at
January 1,
2014
Income
Accretion
All Other
Adjustments
Balance at
December 31,
2014
$
11,230
$
— $
(7,609) $
3,621
(543)
10,687
(991)
—
—
515
(27)
(7,636)
56
(570)
3,051
(420)
9,696
$
515
$
(7,580) $
2,631
For those purchased credit impaired loans disclosed above, the Corporation decreased the allowance for loan losses by $15 thousand
during the year ended December 31, 2016, increased the allowance for loan losses by $5 thousand during the year ended December
31, 2016, and decreased the allowance for loan losses by $1.3 million during the year ended December 31, 2014. For those
purchased credit impaired loans disclosed above, the Corporation did not reverse any allowance for loan losses during the years
ended December 31, 2016 and 2015 and reversed $5 thousand during the year ended December 31, 2014.
F-32
(5)
PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2016 and 2015 are as follows (in thousands):
Land
Buildings
Projects in progress
Equipment and furniture
Leasehold improvements
Less accumulated depreciation and amortization
Net book value
2016
2015
$
$
4,803
40,831
—
37,072
5,445
88,151
59,228
28,923
$
$
4,803
38,660
167
35,734
5,759
85,123
55,726
29,397
Depreciation expense was $4.2 million, $4.0 million and $3.9 million for 2016, 2015, and 2014, respectively.
Operating Leases
The Corporation leases certain branch properties under operating leases. Rent expense was $1.2 million, $1.3 million and $1.5
million for the years ended December 31, 2016, 2015 and 2014, respectively. Rent commitments, before considering renewal
options that generally are present, were as follows (in thousands):
Year
2017
2018
2019
2020
2021
2022 and thereafter
Total
Capital Leases
Estimated
Expense
1,193
1,179
849
555
467
3,398
7,641
$
$
The Corporation leases certain buildings under capital leases. The lease arrangements require monthly payments through 2036.
The Corporation has included these leases in premises and equipment as follows:
Buildings
Accumulated depreciation
Net book value
2016
2015
$
$
5,572
(540)
5,032
$
$
3,537
(232)
3,305
F-33
The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value
of net minimum lease payments as of December 31, 2016 (in thousands):
Year
2017
2018
2019
2020
2021
2022 and thereafter
Total minimum lease payments
Less amount representing interest
Present value of net minimum lease payments
Amount
367
367
367
376
388
4,422
6,287
1,565
4,722
$
$
(6) GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill included in the core banking segment during the years ended December 31, 2016 and 2015 were as
follows (in thousands):
Beginning of year
Acquired goodwill
End of year
2016
2015
21,824
—
21,824
$
$
21,824
—
21,824
$
$
Acquired intangible assets were as follows at December 31, 2016 and 2015 (in thousands):
At December 31, 2016
At December 31, 2015
Balance
Acquired
Accumulated
Amortization
Balance
Acquired
Accumulated
Amortization
Core deposit intangibles
Other customer relationship intangibles
Total
$
$
5,975
5,633
11,608
$
$
4,689
3,974
8,663
$
$
5,975
5,633
11,608
$
$
4,057
3,620
7,677
Aggregate amortization expense was $1.0 million, $1.1 million, and $1.3 million for 2016, 2015 and 2014, respectively.
The remaining estimated aggregate amortization expense at December 31, 2016 is listed below (in thousands):
Year
2017
2018
2019
2020
2021
Total
Estimated
Expense
859
734
609
484
259
2,945
$
$
F-34
(7)
DEPOSITS
A summary of deposits at December 31, 2016 and 2015 is as follows (in thousands):
Non-interest-bearing demand deposits
Interest-bearing demand deposits
Insured money market accounts
Savings deposits
Time deposits
Total
2016
2015
417,812
136,826
548,963
208,636
144,106
1,456,343
$
$
402,236
130,573
497,658
203,749
166,079
1,400,295
$
$
Scheduled maturities of time deposits at December 31, 2016, are summarized as follows (in thousands):
Year
2017
2018
2019
2020
2021
2022
Total
Maturities
97,706
29,253
6,587
6,133
2,432
1,995
144,106
$
$
Time deposits that meet or exceed the FDIC Insurance limit of $250 thousand at December 31, 2016 and 2015 were $14.1 million
and $20.6 million, respectively.
(8)
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Repurchase agreements are secured borrowings. The Corporation pledges investment securities to secure these borrowings. A
summary of securities sold under agreements to repurchase as of and for the years ended December 31, 2016, 2015 and 2014 is
as follows (in thousands):
Balance at December 31
Maximum month-end balance
Average balance during year
Weighted-average interest rate at December 31
Average interest rate paid during year
2016
27,606
30,497
29,120
$
$
$
2015
28,453
32,145
30,236
$
$
$
2014
29,652
31,914
30,667
$
$
$
3.02%
2.92%
2.93%
2.80%
2.82%
2.77%
F-35
The contractual maturity of securities sold under agreements to repurchase by collateral pledged as of December 31, 2016 and
2015 is as follows (in thousands):
Obligations of U.S. Government and
U.S. Government sponsored enterprises
Mortgage-backed securities, residential
Total
Excess collateral held
Gross amount of recognized liabilities for
repurchase agreements
Obligations of U.S. Government and
U.S. Government sponsored enterprises
Mortgage-backed securities, residential
Total
Excess collateral held
Gross amount of recognized liabilities for
repurchase agreements
December 31, 2016
Overnight
and
Continuous
Up to 1
Year
1 - 3 Years
3+ Years
Total
$
— $
13,092
13,092
(5,486)
1,276
9,664
10,940
(940)
$
— $
14,244
14,244
(4,244)
— $
—
—
—
1,276
37,000
38,276
(10,670)
$
7,606
$
10,000
$
10,000
$
— $
27,606
December 31, 2015
Overnight
and
Continuous
Up to 1
Year
1 - 3 Years
3+ Years
Total
$
$
12,163
8,280
20,443
(11,990)
$
1,781
9,174
10,955
(955)
$
9,323
3,135
12,458
(2,458)
— $
—
—
—
23,267
20,589
43,856
(15,403)
$
8,453
$
10,000
$
10,000
$
— $
28,453
The Corporation enters into sales of securities under agreements to repurchase and the amounts received under these agreements
represent borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements
are included in investment securities in the consolidated balance sheets. See Note 3 for additional information regarding securities
pledged as collateral for securities sold under the repurchase agreements.
The Corporation has no control over the market value of the securities which fluctuate due to market conditions, however, the
Corporation is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase
agreement price. The Corporation manages this risk by utilizing highly marketable and easily priced securities, monitoring these
securities for significant changes in market valuation routinely, and maintaining an unpledged securities portfolio believed to be
sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.
(9)
FEDERAL HOME LOAN BANK TERM ADVANCES AND OVERNIGHT ADVANCES
The following is a summary of FHLBNY fixed rate advances at December 31, 2016 and 2015. The carrying amount includes the
advance balance plus purchase accounting adjustments that are amortized over the term of the advance (in thousands):
2016
Amount
Rate
Maturity Date
Call Date
$
$
4,041
3,031
2,021
9,093
3.90% October 19, 2017
2.91% December 4, 2017
3.05% January 2, 2018
3.38%
January 19, 2017
March 3, 2017
April 1, 2017
F-36
Amount
Rate
Maturity Date
Call Date
2015
$
$
13,900
10,000
4,090
3,068
2,045
33,103
0.52% January 4, 2016
4.60% December 22, 2016
3.90% October 19, 2017
2.91% December 4, 2017
3.05% January 2, 2018
2.54%
-
-
January 19, 2015
March 3, 2016
April 1, 2016
Each advance is payable at its maturity date, with a prepayment penalty for term advances. The Corporation has pledged $158.0
million and $156.3 million of first mortgage loans under a blanket lien arrangement at December 31, 2016 and 2015, respectively,
as collateral for theses advances and future borrowings. Based on this collateral and the Corporation’s holdings of FHLBNY
stock, the Corporation is eligible to borrow up to a total of $131.6 million at year-end 2016.
Payments over the next five years are as follows:
Year
2017
2018
2019
2020
2021
Total
(10)
DERIVATIVES
Amount
7,000
2,000
—
—
—
9,000
$
$
As part of the Corporation's product offerings, the Corporation acts as an interest rate swap counterparty for certain commercial
borrowers in the normal course of servicing our customers. The interest rate swap agreements are free-standing derivatives and
are recorded at fair value in the Corporation's consolidated balance sheets. The Corporation manages its exposure to such interest
rate swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest
rate swaps it has with the commercial borrowers. These positions directly offset each other and the Corporation's exposure is the
fair value of the derivatives due to potential changes in credit risk of our commercial borrowers and third parties. The Corporation
also enters into risk participation agreements with dealer banks on commercial loans in which it participates. The Corporation
receives an upfront fee for participating in the credit exposure of the interest rate swap associated with the commercial loan in
which it is a participant and the fee received is recognized immediately in other non-interest income. The Corporation is exposed
to its share of the credit loss equal to the fair value of the interest rate swap in the event of nonperformance by the counterparty
of the interest rate swap. The Corporation determines the fair value of the credit loss exposure using an estimated credit default
rate based on the historical performance of similar assets.
The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is
determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. At December 31,
2016, the Corporation held derivatives not designated as hedging instruments with a total notional amount of $52.2 million.
Derivatives not designated as hedging instruments included back-to-back interest rate swaps of $36.8 million, consisting of $18.4
million of interest rate swaps with commercial borrowers and an additional $18.4 million of offsetting interest rate swaps with
third-party counter-parties on substantially the same terms, and risk participation agreements with dealer banks of $15.4 million.
Free-standing derivatives are not designated as hedges for accounting purposes and are therefore recorded at fair value with changes
in fair value recorded in other non-interest income.
F-37
The following table presents information regarding our derivative financial instruments, at December 31:
2016
Derivatives not designated as hedging
instruments:
Interest rate swap agreements on loans
with commercial loan customers
Interest rate swap agreements with
third-party counter-parties
Risk participation agreements
Total
2015
Derivatives not designated as hedging
instruments:
Interest rate swap agreements on loans
with commercial loan customers
Interest rate swap agreements with
third-party counter-parties
Risk participation agreements
2014
Derivatives not designated as hedging
instruments:
Risk participation agreements
Number of
Instruments
Notional
Amount
Weighted
Average
Maturity
(in years)
Weighted
Average
Interest
Rate
Received
Weighted
Average
Contract
Pay Rate
Fair Value
Other
Assets/
(Other
Liabilities)
5
$
18,378
5
5
15
$
18,378
15,401
52,157
7.9
7.9
23.5
4.05%
3.36% $
(693)
3.36%
4.05%
693
(68)
(68)
$
Number of
Instruments
Notional
Amount
Weighted
Average
Maturity
(in years)
Weighted
Average
Interest
Rate
Received
Weighted
Average
Contract
Pay Rate
Fair Value
Other
Assets/
(Other
Liabilities)
1
1
4
6
$
1,934
1,934
10,528
14,396
$
5.9
5.9
26.2
4.33%
3.02% $
3.02%
4.33%
$
15
(16)
(47)
(48)
Number of
Instruments
Notional
Amount
Weighted
Average
Maturity
(in years)
Weighted
Average
Interest
Rate
Received
Weighted
Average
Contract
Pay Rate
Fair Value
Other
Assets/
(Other
Liabilities)
3
3
$
$
8,335
8,335
31.5
N/A
N/A $
$
(18)
(18)
Off-balance sheet exposure for the risk participation agreements was $1.3 million and $0.9 million for December 31, 2016 and
2015, respectively.
F-38
Amounts included in the Consolidated Statements of Income related to derivatives not designated as hedging were as follows:
Years Ended December 31,
2016
2015
2014
Derivatives not designated as hedging instruments:
Interest rate swap agreements with commercial loan customers:
Unrealized gain (loss) recognized in other non-interest income
$
(708) $
15
$
Interest rate swap agreements with third-party counter-parties:
Unrealized gain (loss) recognized in other non-interest income
709
(16)
Risk participation agreements:
Unrealized gain (loss) recognized in other non-interest income
(21)
(29)
Unrealized gain (loss) recognized in non-interest income
$
(20) $
(30) $
—
—
(18)
(18)
(11) INCOME TAXES
For the years ended December 31, 2016, 2015 and 2014, income tax expense attributable to income from operations consisted of
the following (in thousands):
Current:
State
Federal
Total current
Deferred expense/(benefit)
Income tax expense
2016
2015
2014
$
$
638
6,330
6,968
(2,564)
4,404
$
$
216
3,668
3,884
774
4,658
$
$
606
5,366
5,972
(2,263)
3,709
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before
income tax expense as follows (in thousands):
Tax computed at statutory rate
Tax-exempt income
Dividend exclusion
State taxes, net of Federal impact
Nondeductible interest expense
Other items, net
Income tax expense
2016
2015
2014
4,907
(879)
(5)
165
9
207
4,404
$
$
4,791
(441)
(41)
238
8
103
4,658
$
$
4,034
(456)
(60)
227
8
(44)
3,709
$
$
F-39
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2016 and 2015, are presented below (in thousands):
Deferred tax assets:
Allowance for loan losses
Accrual for employee benefit plans
Depreciation
Deferred compensation and directors' fees
Purchase accounting adjustment – deposits
Purchase accounting adjustment – loans
Purchase accounting adjustment – fixed assets
Gain on deemed sale of securities
Net unrealized losses on securities available for sale
Accounting for defined benefit pension and other benefit plans
Nonaccrued interest
Accrued expense
Other
Total gross deferred tax assets
Deferred tax liabilities:
Deferred loan fees and costs
Prepaid pension
Net unrealized gains on securities available for sale
Discount accretion
Core deposit intangible
Other
Total gross deferred tax liabilities
Net deferred tax asset
2016
2015
$
$
5,405
337
2,119
1,195
21
44
221
798
2,643
4,091
944
854
286
18,958
940
3,956
—
342
1,460
152
6,850
12,108
$
$
5,385
597
1,553
1,136
37
130
221
—
—
6,975
868
—
288
17,190
933
4,609
130
427
1,437
149
7,685
9,505
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable
income within the loss carryback period. A valuation allowance is recognized when it is more likely than not that some portion
of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax assets, the level of historical taxable income and projected future taxable income over the periods in
which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management
determined that no valuation allowance is necessary.
As of December 31, 2016, 2015 and 2014, the Corporation did not have any unrecognized tax benefits.
The Corporation accounts for interest and penalties related to uncertain tax positions as part of its provision for Federal and State
income taxes. As of December 31, 2016, 2015 and 2014, the Corporation did not accrue any interest or penalties related to its
uncertain tax positions.
The Corporation is not currently subject to examinations by Federal taxing authorities for the years prior to 2013 and for New
York State taxing authorities for the years prior to 2013.
(12)
PENSION PLAN AND OTHER BENEFIT PLANS
Pension Plan
The Corporation has a noncontributory defined benefit pension plan covering a majority of employees. The plan's defined benefit
formula generally based payments to retired employees upon their length of service multiplied by a percentage of the average
monthly pay over the last five years of employment.
F-40
New employees hired on or after the July 10, 2010 were not eligible to participate in the plan, however, existing participants at
that time continued to accrue benefits. On October 20, 2016, the Corporation amended its noncontributory defined benefit pension
plan (“pension plan”) to freeze future retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-
based and service-based component of the formula used to determine retirement benefits in the pension plan were frozen so that
participants will no longer earn further retirement benefits.
The Corporation uses a December 31 measurement date for its pension plan.
The following table presents (1) changes in the plan's projected benefit obligation and plan assets, and (2) the plan's funded status
at December 31, 2016 and 2015 (in thousands):
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Curtailments
Benefits paid
Benefit obligation at end of year
Change in plan assets:
Fair value of plan assets at beginning of year
Actual return on plan assets
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Funded status
2016
2015
$
$
$
$
$
43,797
1,047
1,883
913
(6,161)
(1,688)
39,791
2016
39,951
3,297
—
(1,688)
41,560
1,769
$
$
$
$
$
45,544
1,231
1,806
(3,199)
—
(1,585)
43,797
2015
43,336
(1,800)
—
(1,585)
39,951
(3,846)
Amount recognized in accumulated other comprehensive income (loss) at December 31, 2016 and 2015 consist of the following
(in thousands):
Net actuarial loss
Prior service cost
Total before tax effects
2016
2015
$
$
10,788
—
10,788
$
$
17,863
7
17,870
The accumulated benefit obligation at December 31, 2016 and 2015 was $39.8 million and $37.7 million, respectively.
The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2016, 2015 and 2014
were as follows:
Discount rate
Assumed rate of future compensation increase
2016
2015
2014
4.16%
N/A
4.39%
5.00%
4.09%
5.00%
F-41
Components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) in 2016, 2015 and
2014 consist of the following (in thousands):
Net periodic benefit cost
Service cost, benefits earned during the year
Interest cost on projected benefit obligation
Expected return on plan assets
Amortization of net loss
Amortization of prior service cost
Net periodic cost
Other changes in plan assets and benefit obligations recognized in other
comprehensive income (loss):
Net actuarial (gain) loss
Recognized loss
Amortization of prior service cost
Total recognized in other comprehensive income (loss) (before tax effect)
2016
2015
2014
1,047
1,883
(3,019)
1,549
7
1,467
$
$
1,231
1,806
(3,287)
1,414
7
1,171
2016
2015
(5,526) $
(1,549)
(7)
(7,082) $
1,888
(1,414)
(7)
467
$
$
$
$
1,045
1,738
(3,174)
649
7
265
2014
8,195
(649)
(7)
7,539
$
$
$
$
Total recognized in net benefit cost and other comprehensive income (loss)
(before tax effect)
$
(5,615) $
1,638
$
7,804
During 2016 the plan's total unrecognized net loss decreased by $7.1 million. Because the total unrecognized net gain or loss in
the plan exceeds 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized. Due to the plan
freeze effective December 31, 2016, this excess will now be amortized over the average total life expectancy of all participants
which was 28.49 years as of January 1, 2016. Prior to the plan freeze, the excess was amortized over the average future working
lifetime of active participants which was 8.76 year as of January 1, 2016. Actual results for 2017 will depend on the 2017 actuarial
valuation of the plan.
Amounts expected to be recognized in net periodic cost during 2017 (in thousands):
Loss recognition
Prior service cost recognition
$
$
233
—
The principal actuarial assumptions used in determining the net periodic benefit cost for the years ended December 31, 2016, 2015
and 2014 were as follows:
Discount rate
Expected long-term rate of return on assets
Assumed rate of future compensation increase
2016
2015
2014
4.39%
7.75%
5.00%
4.09%
7.75%
5.00%
4.92%
7.75%
5.00%
The Corporation changes important assumptions whenever changing conditions warrant. At December 31, 2016, the Corporation
used Retirement Plan 2014 (RP-2014) and Mortality Improvement Scale 2016 (MP-2016) as a basis for the Plan's valuation. At
December 31, 2015, the Corporation used Retirement Plan 2014 (RP-2014) and Mortality Improvement Scale 2015 (MP-2015)
as a basis for the Plan's valuation. The discount rate is evaluated at least annually and the expected long-term return on plan assets
will typically be revised every three to five years, or as conditions warrant. Other material assumptions include the compensation
increase rates, rates of employee terminations, and rates of participant mortality.
F-42
The Corporation's overall investment strategy is to achieve a mix of investments for long-term growth and for near-term benefit
payments with a wide diversification of asset types. The target allocations for plan assets are shown in the table below. Equity
securities primarily include investments in common or preferred shares of both U.S. and international companies. Debt securities
include U.S. Treasury and Government bonds as well as U.S. Corporate bonds. Other investments may consist of mutual funds,
money market funds and cash & cash equivalents. While no significant changes in the asset allocations are expected during 2017,
the Corporation may make changes at any time.
The expected return on plan assets was determined based on a CAPM using historical and expected future returns of the various
asset classes, reflecting the target allocations described below.
Asset Class
Large cap domestic equities
Mid-cap domestic equities
Small-cap domestic equities
International equities
Intermediate fixed income
Alternative assets
Cash
Total
Target
Allocation
2016
30% - 60%
0% - 20%
0% - 15%
0% - 25%
20% - 50%
0% - 10%
0% - 20%
Percentage of Plan Assets
at December 31,
Expected Long-Term
Rate of Return
2016
2015
57%
5%
2%
7%
26%
—%
3%
100%
58%
4%
3%
6%
23%
2%
4%
100%
10.3%
10.6%
10.8%
10.3%
4.7%
7.5%
2.5%
The investment policy of the plan is to provide for long-term growth of principal and income without undue exposure to risk. The
focus is on long-term capital appreciation and income generation. The Corporation maintains an IPS that guides the investment
allocation in the plan. The IPS describes the target asset allocation positions as shown in the table above.
The Corporation has appointed an Employee Pension and Profit Sharing Committee to manage the general philosophy, objectives
and process of the plan. The Employee Pension and Profit Sharing Committee meets with the Investment Manager periodically
to review the plan's performance and to ensure that the current investment allocation is within the guidelines set forth in the IPS.
Only the Employee Pension and Profit Sharing Committee, in consultation with the Investment Manager, can make adjustments
to maintain target ranges and for any permanent changes to the IPS. Quarterly, the Board of Directors' Trust and Employee Benefits
Committee reviews the performance of the plan with the Investment Manager.
As of December 31, 2016 and 2015, the Corporation's pension plan did not hold any direct investment in the Corporation's common
stock.
The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial
instrument held by the pension plan:
Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in
an orderly transaction between market participants on the measurement date. The fair value hierarchy described below requires
an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where
quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities
where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows
or other market indicators (Level 3).
Discounted cash flows are calculated using spread and optionality. During times when trading is more liquid, broker quotes are
used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual
securities are reviewed and incorporated into the calculations.
F-43
The fair value of the plan assets at December 31, 2016 and 2015, by asset class are as follows (in thousands):
U.S. Treasuries/Government bonds
U.S. Corporate bonds
Total plan assets
2,218
2,519
41,560
$
—
—
36,823
$
$
2,218
2,519
4,737
$
Plan Assets
Cash
Equity securities:
U.S. companies
International companies
Mutual funds
Debt securities:
Plan Assets
Cash
Equity securities:
U.S. companies
International companies
Mutual funds
Debt securities:
Fair Value Measurement at
December 31, 2016 Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Carrying
Value
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
1,324
$
1,324
$
— $
19,972
847
19,972
847
14,680
14,680
—
—
—
Fair Value Measurement at
December 31, 2015 Using
Quoted
Prices in
Active
Markets
for
Identical
Assets
(Level 1)
Carrying
Value
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
1,486
$
1,486
$
— $
23,424
1,277
23,424
1,277
8,548
8,548
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
U.S. Treasuries/Government bonds
U.S. Corporate bonds
Total plan assets
2,468
2,748
39,951
$
—
—
34,735
$
$
2,468
2,748
5,216
$
F-44
The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to
be paid in years six through ten for the pension plan (in thousands):
Calendar Year
2017
2018
2019
2020
2021
2022-2026
Future Expected Benefit
Payments
$
$
$
$
$
$
2,055
2,106
2,150
2,176
2,213
11,292
The Corporation does not expect to contribute to the plan during 2017. Funding requirements for subsequent years are uncertain
and will significantly depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets,
changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements.
For tax planning, financial planning, cash flow management or cost reduction purposes the Corporation may increase, accelerate,
decrease or delay contributions to the plan to the extent permitted by law.
Defined Contribution Profit Sharing, Savings and Investment Plan
The Corporation also sponsors a defined contribution profit sharing, savings and investment plan which covers all eligible
employees with a minimum of 1,000 hours of annual service. The Corporation makes discretionary matching and profit sharing
contributions to the plan for employees hired prior to July 1, 2010 based on the financial results of the Corporation. The Corporation
also contributes to a non-discretionary 401K plan which covers all eligible employees hired after July 1, 2010. Expense related
to both plans totaled $609 thousand, $639 thousand, and $620 thousand for the years ended December 31, 2016, 2015 and 2014,
respectively. The plan's assets at December 31, 2016, 2015 and 2014 include 174,957, 169,398, and 170,714 shares, respectively,
of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities,
corporate bonds and notes, and mutual funds.
Defined Benefit Health Care Plan
On October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan,
effective January 1, 2017. The effects of this freeze are reflected in the defined benefit health care plan disclosures as of December
31, 2016.
The Corporation uses a December 31 measurement date for its defined benefit health care plan.
The following table presents (1) changes in the plan's accumulated postretirement benefit obligation and (2) the plan's funded
status at December 31, 2016 and 2015 (in thousands):
Changes in accumulated postretirement benefit obligation:
Accumulated postretirement benefit obligation - beginning of year
Service cost
Interest cost
Participant contributions
Amendments
Actuarial (gain) loss
Benefits paid
Accumulated postretirement benefit obligation at end of year
2016
2015
$
$
1,664
43
66
87
(1,101)
138
(474)
423
$
$
1,663
46
70
83
—
215
(413)
1,664
F-45
Change in plan assets:
Fair value of plan assets at beginning of year
Employer contribution
Plan participants’ contributions
Benefits paid
Fair value of plan assets at end of year
Funded status
2016
2015
— $
387
87
(474)
— $
—
330
83
(413)
—
(423) $
(1,664)
$
$
$
Amount recognized in accumulated other comprehensive income (loss) at December 31, 2016 and 2015 consist of the following
(in thousands):
Net actuarial loss
Prior service credit
Total before tax effects
2016
2015
$
$
$
636
(1,101)
(465) $
517
(434)
83
Weighted-average assumption for disclosure as of December 31:
Discount rate
Health care cost trend: Initial
Health care cost trend: Ultimate
Year ultimate cost trend reached
2016
2015
2014
4.16%
6.50%
5.00%
2020
4.39%
7.00%
5.00%
2019
4.09%
7.00%
5.00%
2018
The components of net periodic postretirement benefit cost for the years ended December 31, 2016, 2015 and 2014 are as follows
(in thousands):
Net periodic cost (benefit)
Service cost
Interest cost
Amortization of prior service benefit
Recognized actuarial loss
Recognized prior service benefit due to curtailments
Net periodic postretirement cost (benefit)
Other changes in plan assets and benefit obligations
recognized in other comprehensive income (loss):
Net actuarial gain
Recognized actuarial loss
Prior service credit
Amortization of prior service benefit
Total recognized in other comprehensive income (loss)(before tax effect)
Total recognized in net benefit cost and other comprehensive income (loss)
(before tax effect)
2016
2015
2014
$
43
66
(97)
20
(337)
(305) $
46
70
(97)
20
—
39
2016
2015
$
139
(20)
(1,101)
434
(548) $
216
(20)
—
97
293
$
$
$
$
39
72
(97)
3
—
17
2014
177
(3)
—
97
271
(853) $
332
$
288
$
$
$
$
$
During 2016 the plan's total unrecognized net loss increased by $119 thousand. Because the total unrecognized net gain or loss
in the plan exceeds 10% of the accumulated postretirement benefit obligation, the excess will be amortized over the average future
working lifetime of active plan participants. As of January 1, 2016, the average future working lifetime of active participants was
14.3 years. Since the plan was frozen as of December 31, 2016, the amortization period moved to the average future life expectancy
of the remaining retirees, which at January 1, 2016 was 5.0 years. Actual results for 2017 will depend on the 2017 actuarial
valuation of the plan.
F-46
Amounts expected to be recognized in net periodic cost during 2017 (in thousands):
Loss recognition
Prior service cost recognition
$
$
119
(220)
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage
point change in assumed health care cost trend rates would have the following effects (in thousands):
Effect of a 1% increase in health care trend rate on:
Benefit obligation
Total service and interest cost
Effect of a 1% decrease in health care trend rate on:
Benefit obligation
Total service and interest cost
2016
2015
2014
2
$
— $
3
$
— $
2016
2015
2014
(3) $
— $
(3) $
— $
5
—
(6)
—
$
$
$
$
Weighted-average assumptions for net periodic cost as of December 31:
Discount rate
Health care cost trend: Initial
Health care cost tread: Ultimate
Year ultimate reached
2016
2015
2014
4.39%
7.00%
5.00%
2019
4.09%
7.00%
5.00%
2018
4.92%
8.00%
5.00%
2018
The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to
be paid in years six through ten (in thousands):
Calendar Year
2017
2018
2019
2020
2021
2022-2026
Future Estimated Benefit
Payments
$
$
$
$
$
$
115
104
71
49
27
67
The Corporation’s policy is to contribute the amount required to fund postretirement benefits as they become due to retirees. The
amount expected to be required in contributions to the plan during 2017 is $115 thousand.
Executive Supplemental Pension Plan
The Corporation also sponsors an Executive Supplemental Pension Plan for certain former executive officers to restore certain
pension benefits that may be reduced due to limitations under the Internal Revenue Code. The benefits under this plan are unfunded
as of December 31, 2016 and 2015.
The Corporation uses a December 31 measurement date for its Executive Supplemental Pension Plan.
The following table presents Executive Supplemental Pension plan status at December 31, 2016 and 2015 (in thousands):
Change in projected benefit obligation:
Benefit obligation at beginning of year
Service cost
Interest cost
Actuarial (gain) loss
Benefits paid
Projected benefit obligation at end of year
2016
2015
$
$
1,210
43
51
19
(75)
1,248
$
$
1,244
44
49
(52)
(75)
1,210
F-47
Changes in plan assets:
Fair value of plan assets at beginning of year
Employer contributions
Benefits paid
Fair value of plan assets at end of year
Unfunded status
2016
2015
— $
75
(75)
— $
—
75
(75)
—
(1,248) $
(1,210)
$
$
$
Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2016 and 2015 consist of the following
(in thousands):
Net actuarial loss
Prior service cost
Total before tax effects
2016
2015
$
$
165
—
165
$
$
173
—
173
Accumulated benefit obligation at December 31, 2016 and 2015 was $1.2 million.
Weighted-average assumption for disclosure as of December 31:
Discount rate
Assumed rate of future compensation increase
2015
2015
2014
4.16%
N/A
4.39%
5.00%
4.09%
5.00%
The components of net periodic benefit cost for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):
Net periodic benefit cost
Service cost
Interest cost
Recognized actuarial loss
Net periodic postretirement benefit cost
Other changes in plan assets and benefit obligation recognized in
other comprehensive income (loss):
Net actuarial (gain) loss
Recognized actuarial loss
Total recognized in other comprehensive income (loss) (before tax effect)
Total recognized in net benefit cost and other comprehensive income (loss)
(before tax effect)
2016
2015
2014
43
51
26
120
$
$
44
49
50
143
$
$
38
55
29
122
2016
2015
2014
$
18
(26)
(8) $
(52) $
(50)
(102) $
110
(29)
81
112
$
41
$
203
$
$
$
$
$
During 2016, the plan's total unrecognized net loss decreased by $8 thousand. Because the unrecognized net gain or loss exceeds
the greater of 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized. Due to the fact that
the plan no longer has any active participants, this excess will now be amortized over the average total life expectancy of all
participants which was 15.05 as of January 1, 2017. In prior years, the excess was amortized over the average future working
lifetime of active participants which was 4.00 years as of January 1, 2017.
F-48
Amounts expected to be recognized in net periodic cost during 2017 (in thousands):
Loss recognition
Prior service cost recognition
$
$
3
—
Weighted-average assumptions for net periodic cost as of December 31:
Discount rate
Salary scale
2016
2015
2014
4.39%
N/A
4.09%
5.00%
4.92%
5.00%
The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to
be paid in years six through ten for the Supplemental Pension Plan (in thousands):
Calendar Year
2017
2018
2019
2020
2021
2022-2026
Future Estimated Benefit
Payments
$
$
$
$
$
$
74
108
106
104
102
462
The Corporation expects to contribute $75 thousand to the plan during 2017. Corporation contributions are equal to the benefit
payments to plan participants.
Defined Contribution Supplemental Executive Retirement Plan
The Corporation also sponsors a Defined Contribution Supplemental Executive Retirement Plan for certain current executive
officers, which was initiated in 2012. The plan is unfunded as of December 31, 2016 and is intended to provide nonqualified
deferred compensation benefits payable at retirement, disability, death or certain other events. The balance in the plan as of
December 31, 2016 and 2015 was $1,043 thousand and $772 thousand, respectively. A total of $262 thousand, $231 thousand,
and $213 thousand was expensed during the years ended December 31, 2016, 2015, and 2014, respectively. In addition to each
participants account being credited with the annual company contribution, each account will receive a quarterly interest credit that
will equal the average yield on five year U.S. Treasury Notes.
(13)
STOCK 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
of Directors members from treasury shares of the Corporation on or about January 15 following the calendar year of service.
Additionally, the Chief Executive Officer of the Corporation, who does not receive cash compensation as a member of the Board
of Directors, is awarded common shares equal in value to the average of those awarded to Board of Directors members not employed
by the Corporation who have served for 12 months during the prior year.
During January 2017, 2016, and 2015, 7,880, 9,532 and 9,673 shares, respectively, were re-issued from treasury to fund the stock
component of the directors' and the Chief Executive Officer’s compensation. An expense of $269 thousand, $262 thousand and
$271 thousand related to this compensation was recognized during the years ended December 31, 2016, 2015 and 2014, respectively.
This expense is accrued as shares are earned.
F-49
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.
A summary of restricted stock activity as of December 31, 2016, and changes during the year ended is presented below:
Nonvested at December 31, 2015
Granted
Vested
Forfeited or Cancelled
Nonvested at December 31, 2016
Weighted–
Average
Grant Date
Fair Value
28.09
$
32.77
27.45
—
29.90
$
Shares
22,569
8,249
(7,024)
—
23,794
As of December 31, 2016, there was $693 thousand of total unrecognized compensation cost related to nonvested shares granted
under the Plan. The cost is expected to be recognized over a weighted-average period of 3.76 years. The total fair value of shares
vested during the years ended December 31, 2016, 2015 and 2014 were $193 thousand, $314 thousand and $152 thousand,
respectively.
(14)
RELATED PARTY TRANSACTIONS
Members of the Board of Directors, certain Corporation officers, and their immediate families directly, or through entities in which
they are principal owners (more than 10% interest) or board members, were customers of, and had loans and other transactions
with the Corporation. These loans are summarized as follows for the years ended December 31, 2016 and 2015 (in thousands):
Balance at beginning of year
New loans or additional advances
Repayments
Balance at end of year
2016
2015
$
$
36,911
5,742
(7,184)
35,469
$
$
37,802
7,116
(8,007)
36,911
Deposits from principal officers, directors, and their affiliates at year-end 2016 and 2015 were $10.3 million and $11.8 million,
respectively.
The Bank leased its branch located at 7 Southside Drive, Clifton Park, New York under a month to month lease from a member
of the Corporation's Board of Directors with a monthly rent expense totaling $4 thousand. In April 2016, the Bank moved its
Clifton Park branch to 25 Park Avenue, Clifton Park, New York under a lease agreement through March 2036 from the same
member of the Corporation's Board of Directors with monthly lease payments of $11 thousand. In October 2016, the property
was sold to an unrelated third party, from which the Bank continues to lease the property. The Bank also leases from this Board
of Directors member its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through
August 2019 with monthly rent expense totaling $4 thousand per month. Annual rent paid to this Board of Directors member
totaled $169 thousand, $90 thousand and $73 thousand for the years ended December 31, 2016, and 2015 and 2014, respectively.
The Bank utilized legal services from a local law firm in which a member of the Board of Directors is a principal owner. Services
totaled $36 thousand, $88 thousand and $67 thousand for the years ended December 31, 2016, 2015, and 2014, respectively.
F-50
The Bank leases its branch located at 127 Court Street, Binghamton, New York under a lease agreement through June 2030 from
an entity in whom the employer of a Director of the Corporation has a twenty percent interest. The monthly lease payments are
$5 thousand and annual rent paid to the leasing entity totaled $62 thousand for the year ended December 31, 2016. The Bank sold
a $1.9 million loan participation to the same employer of a Director of the Corporation during the year ended December 31, 2016.
There were no similar transactions for the years ended December 31, 2015 and 2014. As of December 31, 2016, the Bank has
outstanding loan participations with the same employer of a Director of the Corporation in the amount of $4.7 million. CFS offers
insurance products to its customers through the same employer of a Director of the Corporation. CFS earned income of $2 thousand
related to these insurance products for the year ended December 31, 2016. There were no similar transactions for the years ended
December 31, 2015 and 2014.
WMG provided trust services to members of the Board of Directors, certain Corporation officers, and their immediate families
directly, or through entities in which they are principal owners or board members. WMG fee income for the trust services provided
totaled $328 thousand, $904 thousand, and $858 thousand for the years ended December 31, 2016, 2015, and 2014, respectively.
(15)
COMMITMENTS AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet
customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established
in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk
to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit
policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk at year-end were as follows (in thousands):
Commitments to make loans
Unused lines of credit
Standby letters of credit
2016
2015
Fixed Rate
$
38,246
$
610
$
$
— $
$
Variable
Rate
33,189
208,124
14,241
Fixed Rate
17,167
$
$
1,265
$
$
$
— $
Variable
Rate
25,251
177,004
14,646
Commitments to make real estate and home equity loans are generally made for periods of sixty days or less. As of December 31,
2016, the fixed rate commitments to make loans have interest rates ranging from 2.75% to 5.25% and maturities ranging from
five years to thirty years. Commitments to fund commercial draw notes are generally made for periods of three months to twenty-
four months. As of December 31, 2016, the fixed rate commitments have interest rates ranging from 4.05% to 4.70%.
Because many commitments and almost all standby letters of credit expire without being funded in whole or in part, the contract
amounts are not estimates of future cash flows. Loan commitments and unused lines of credit have off-balance sheet credit risk
because only origination fees are recognized on the consolidated balance sheet until commitments are fulfilled or expire. The
credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and collateral or other security
is of no value. The Corporation does not anticipate losses as a result of these transactions. These commitments also have off-
balance sheet interest rate risk in that the interest rate at which these commitments were made may not be at market rates on the
date the commitments are fulfilled.
The Corporation has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a
customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with
lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending
loans to customers. Contingent obligations under standby letters of credit totaled $14.2 million at December 31, 2016 and represent
the maximum potential future payments the Corporation could be required to make. Typically, these instruments have terms of
twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each
customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend
credit and on-balance sheet instruments. Corporation policies governing loan collateral apply to standby letters of credit at the
time of credit extension. The carrying amount and fair value of the Corporation's standby letters of credit at December 31, 2016
was not significant.
On March 26, 2015, the New York Surrogate’s Court for Chemung County entered an order approving two stipulations that
discontinued litigation against the WMG of the Bank and approved settlements of the litigations. Under the terms of the settlements,
F-51
the Bank agreed to pay the two parties $12.1 million, in total. Payments for the two settlements, offset by $7.9 million of insurance
proceeds, occurred during the second quarter of 2015. The Bank established a $4.3 million legal reserve in connection with this
case during the third quarter of 2014.
On March 23, 2016, the Bank received a summons and complaint for an action brought in the State of New York Supreme Court
for the County of Tompkins, regarding its lease of 202 East State Street, Ithaca, NY. The owner of the leased premises has alleged
that the Bank has breached its contract and is requesting a judgment declaring that the term of the lease runs through December
31, 2025 or a judgment in his favor in the amount of $4.0 million. On July 25, 2016, the Corporation received Notice of Entry of
the decision and order of the New York Supreme Court for the County of Tompkins, involving claims by the owner of the leased
premises at 202 East State Street, Ithaca, New York against the Bank. The Court granted, in part, partial summary judgment in
favor of the plaintiff - on the issue of liability only- for anticipatory breach and breach of contract. The fraud claims were dismissed,
and summary judgment was denied on the plaintiff’s trespass claims. The Court set the matter down for an inquest on damages
at a later date, with the original claim by the plaintiff seeking $4.0 million in damages. The Corporation has filed an appeal to the
court determination which has been perfected in the Appellate Devision, Third Department of State Supreme Court. The briefing
process has not been completed, although the Record on Appeal and the Corporation's brief have both been filed with the Appellate
Division. The Corporation established a legal reserve of $1.2 million in connection with this case during the second quarter of
2016, which the Corporation has deemed sufficient as of December 31, 2016.
In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its
subsidiaries. Except for the above matter, the Corporation believes that it is not a party to any pending legal, arbitration, or
regulatory proceedings that could have a material adverse impact on its financial results or liquidity.
(16)
PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company only financial statement information of Chemung Financial Corporation is as follows (investment in
subsidiaries is recorded using the equity method of accounting) (in thousands):
BALANCE SHEETS - DECEMBER 31
Assets:
Cash on deposit with subsidiary bank
Investment in subsidiary - Chemung Canal Trust Company
Investment in subsidiary - CFS Group, Inc.
Investment in subsidiary - Chemung Risk Management, Inc.
Dividends receivable from subsidiary bank
Securities available for sale, at estimated fair value
Other assets
Total assets
Liabilities and shareholders' equity:
Dividends payable
Other liabilities
Total liabilities
Shareholders' equity:
Total shareholders' equity
Total liabilities and shareholders' equity
2016
2015
$
$
$
$
2,336
138,469
946
833
1,225
386
825
145,020
1,225
47
1,272
143,748
145,020
$
$
$
$
1,795
133,263
994
—
1,214
337
907
138,510
1,214
54
1,268
137,242
138,510
F-52
STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31
Dividends from subsidiary bank
Interest and dividend income
Operating expenses
Income before impact of subsidiaries' undistributed earnings
Equity in undistributed earnings of Chemung Canal Trust Company
Equity in undistributed earnings of CFS Group, Inc.
Equity in undistributed earnings of Chemung Risk Management, Inc.
Income before income tax
Income tax benefit
Net Income
STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31
Cash flows from operating activities:
Net Income
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of Chemung Canal Trust Company
Equity in undistributed earnings of CFS Group, Inc.
Equity in undistributed earnings of Chemung Risk Management, Inc.
Change in dividend receivable
Change in other assets
Change in other liabilities
Expense related to employee stock compensation
Expense related to restricted stock units for directors' deferred compensation
plan
Expense to employee restricted stock awards
Net cash provided by operating activities
Cash flow from financing activities:
Cash dividends paid
Purchase of treasury stock
Sale of treasury stock
Net cash used in financing activities
Increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
(17)
FAIR VALUES
2016
2015
2014
$
$
4,889
9
526
4,372
4,856
(48)
583
9,763
(264)
10,027
$
$
2,424
9
270
2,163
7,015
86
—
9,264
(169)
9,433
$
$
4,805
10
261
4,554
3,307
129
—
7,990
(167)
8,157
2016
2015
2014
$
10,027
$
9,433
$
8,157
(4,856)
48
(583)
(11)
82
(203)
210
97
192
5,003
(4,878)
(22)
438
(4,462)
541
1,795
2,336
$
(7,015)
(86)
—
(10)
222
(23)
93
95
314
3,023
(4,833)
(33)
438
(4,428)
(1,405)
3,200
1,795
$
(3,307)
(129)
—
(9)
126
110
117
94
151
5,310
(4,796)
—
—
(4,796)
514
2,686
3,200
$
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.
F-53
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). For securities where quoted prices or market prices of similar securities
are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs).
Trading Assets: Securities that are held to fund a deferred compensation plan are recorded at fair value with changes in fair value
included in earnings. 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 loss accounting. For
collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation
approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made
in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available.
Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging
reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the
valuation, and management’s expertise and knowledge of the client and client’s business, typically resulting in a Level 3 fair value
classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
OREO: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less costs to sell when acquired,
establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to
sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a
combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal
process by independent appraisers to adjust for differences between the comparable sales and income data available. Such
adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (commercial
properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and
verified by the Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized,
Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value
in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are generally
completed within the previous 12 month period prior to a property being placed into OREO. On impaired loans, appraisal values
are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition.
Derivatives: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement
date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available.
Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs
will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing
curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments
to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value
measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has
considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined
that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation
adjustments associated with credit risk participations are based on credit default rate assumptions (Level 3 inputs).
F-54
Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Financial Assets:
Fair Value
Fair Value Measurement at December 31, 2016
Using
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
Mortgage-backed securities, residential
Obligations of states and political subdivisions
Corporate bonds and notes
SBA loan pools
Corporate stocks
Total available for sale securities
Trading assets
Derivative assets
Financial Liabilities:
Derivative liabilities
$
17,455
$
— $
17,455
$
245,866
38,740
250
570
521
303,402
774
693
$
$
—
—
—
—
170
170
774
—
$
$
245,866
38,740
—
570
351
302,982
$
— $
693
761
$
— $
693
$
$
$
$
—
—
—
250
—
—
250
—
—
68
Financial Assets:
Fair Value
Fair Value Measurement at December 31, 2015
Using
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
Mortgage-backed securities, residential
Obligations of states and political subdivisions
Corporate bonds and notes
SBA loan pools
Corporate stocks
Total available for sale securities
Trading assets
Derivative assets
Financial Liabilities:
Derivative liabilities
$
100,166
$
14,784
$
85,382
$
198,366
44,426
752
647
463
344,820
701
15
—
—
—
—
56
$
$
$
$
14,840
701
—
198,366
44,426
504
647
407
329,732
$
— $
15
63
$
— $
15
$
$
$
$
—
—
—
248
—
—
248
—
—
48
During the year ended December 31, 2016, the Corporation transferred corporate stocks with a fair market value of $158 thousand
at the date of transfer (and $103 thousand at December 31, 2016) from Level 2 to Level 1 due to the corporation's stock becoming
publicly listed. There were no transfers between Level 1 and Level 2 during the year ended December 31, 2015.
F-55
The significant unobservable inputs used in the fair value measurement of the Corporation’s collateralized mortgage 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 and liabilities measured at fair value on a recurring basis using significant
unobservable inputs (Level 3) for the year ended December 31:
(in thousands)
Assets (Liabilities)
Corporate Bonds and Notes
Derivative Liabilities
2016
2015
2016
2015
Balance of recurring Level 3 assets at January 1
$
248
$
— $
Derivative instruments entered into
Total gains or losses for the period:
Included in earnings - other non-interest income
Included in other comprehensive income
—
—
2
—
—
—
Transfers into Level 3
Balance of recurring Level 3 assets at December 31
—
250
$
248
248
$
$
(48) $
(25)
5
—
—
(68) $
(18)
(1)
(29)
—
—
(48)
As of December 31, 2015, one corporate bond was transferred from Level 2 and into Level 3 because of a lack of observable
market data for these investments due to a decrease in the market activity of these securities. The Corporation's valuations for the
corporate bond was supported by an analysis prepared by an independent third party and approved by management.
The following table presents information related to Level 3 recurring fair value measurement at December 31, 2016 and
December 31, 2015 (in thousands):
Fair Value at
December 31,
2016
Valuation Technique
Unobservable Inputs
$
$
250 Discounted cash flow
Credit spread
68 Historical trend
Credit default rate
Fair Value at
December 31,
2015
Valuation Technique
Unobservable Inputs
$
$
248 Discounted cash flow
Credit spread
48 Historical trend
Credit default rate
Description
Corporate bonds
and notes
Derivative
liabilities
Description
Corporate bonds
and notes
Derivative
liabilities
Range
[Weighted Average]
at December 31, 2016
1.73% - 1.73%
[1.73%]
4.92% - 4.92%
[4.92%]
Range
[Weighted Average]
at December 31, 2015
1.73% - 1.73%
[1.73%]
5.83% - 5.83%
[5.83%]
F-56
Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):
Financial Assets:
Impaired Loans:
Commercial mortgages:
Commercial mortgages
Consumer loans:
Home equity lines and loans
Total impaired loans
Other real estate owned:
Residential mortgages
$
$
$
Total other real estate owned, net $
Financial Assets:
Impaired Loans:
Commercial mortgages:
Commercial mortgages
Consumer loans:
Home equity lines and loans
Total impaired loans
Other real estate owned:
Commercial mortgages:
Commercial mortgages
Residential mortgages
$
$
$
Total other real estate owned, net $
Fair Value Measurement at December 31, 2016 Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Fair Value
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
2,631
$
219
2,850
$
344
344
$
$
— $
—
— $
— $
— $
— $
—
— $
— $
— $
2,631
219
2,850
344
344
Fair Value Measurement at December 31, 2015 Using
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
Fair Value
Significant Other
Observable Inputs
(Level 2)
Significant
Unobservable Inputs
(Level 3)
2,629
$
287
2,916
$
1,491
39
1,530
$
$
— $
—
— $
— $
—
— $
— $
—
— $
1,491
—
1,491
$
$
2,629
287
2,916
—
39
39
F-57
The following table presents information related to Level 3 non-recurring fair value measurement at December 31, 2016 and
December 31, 2015 (in thousands):
Asset
Fair Value
Valuation Technique Unobservable Inputs
Impaired loans:
Commercial mortgages:
Commercial mortgages
Consumer loans:
$
2,631
Income approach
Capitalization Rate
Range
[Weighted Average]
at December 31,
2016
9.00% - 10.00%
[9.52%]
Home equity lines and loans
219 Sales comparison
Discount to appraised
value
22.98% - 22.98%
[22.98%]
OREO:
Residential mortgages
$
$
$
2,850
344 Sales comparison
Discount to appraised
value
20.80% - 48.17%
[30.50%]
344
Asset
Fair Value
Valuation Technique Unobservable Inputs
Range
[Weighted Average]
at December 31,
2015
Impaired loans:
Commercial mortgages:
Commercial mortgages
Consumer loans:
$
2,629 Sales comparison
Discount to appraised
value
10.00% - 17.19%
[16.06%]
Home equity lines and loans
287 Sales comparison
Discount to appraised
value
18.04% - 18.04%
[18.04%]
OREO:
Residential mortgages
$
$
$
2,916
39 Sales comparison
39
Discount to appraised
value
22.30% - 22.30%
[22.30%]
FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments:
Cash, Due From and Interest-Bearing Deposits in Other Financial Institutions
For those short-term instruments that generally mature in 90 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 FHLBNY and FRBNY 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 FHLBNY and FRBNY stock due to restrictions on its transferability.
F-58
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.
Loans Held for Sale
Certain mortgage loans are originated with the intent to sell. Loans held for sale are recorded at the lower of cost or fair value in
the aggregate. 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
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.
FHLBNY Term 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.
Commitments to Extend Credit
The fair value of commitments to extend credit is based on fees currently charged to enter into similar agreements, the counter-
party's credit standing and discounted cash flow analysis. The fair value of these commitments to extend credit approximates the
recorded amounts of the related fees and is not material at December 31, 2016 and 2015.
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.
F-59
The carrying amounts and estimated fair values of other financial instruments, at December 31, 2016 and December 31, 2015, are
as follows (in thousands):
Fair Value Measurements at
December 31, 2016 Using
Quoted
Prices
in Active
Markets
for Identical
Assets
(Level 1)
Carrying
Amount
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Estimated
Fair Value
(1)
$
28,205
$
28,205
$
— $
— $
28,205
45,957
774
303,402
4,705
4,041
1,186,037
412
4,000
693
45,957
774
170
—
—
—
—
9
—
—
—
302,982
981
—
—
412
784
693
—
—
250
3,931
—
1,205,814
—
3,207
—
45,957
774
303,402
4,912
N/A
1,205,814
412
4,000
693
$ 1,312,237
144,106
$
1,312,237
—
$
— $
144,460
— $ 1,312,237
144,460
—
27,606
9,093
210
761
—
—
25
—
27,880
9,189
185
693
—
—
—
68
27,880
9,189
210
761
Financial assets:
Cash and due from financial
institutions
Interest-bearing deposits in other
financial institutions
Trading assets
Securities available for sale
Securities held to maturity
FHLBNY and FRBNY stock
Loans, net
Loans held for sale
Accrued interest receivable
Derivative assets
Financial liabilities:
Deposits:
Demand, savings, and insured
money market accounts
Time deposits
Securities sold under agreements
to repurchase
FHLBNY term advances
Accrued interest payable
Derivative liabilities
(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.
F-60
Fair Value Measurements at
December 31, 2015 Using
Quoted
Prices
in Active
Markets
for Identical
Assets
(Level 1)
Carrying
Amount
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
24,886
$
24,886
$
— $
— $
Estimated
Fair Value
(1)
24,886
1,299
701
344,820
4,566
4,797
1,154,373
1,076
4,015
15
1,299
701
14,840
—
—
—
—
39
—
—
—
329,732
—
—
—
1,076
1,141
15
—
—
248
4,822
—
1,178,081
—
2,835
—
1,299
701
344,820
4,822
N/A
1,178,081
1,076
4,015
15
$ 1,234,216
166,079
$
1,234,216
—
$
— $
166,551
— $ 1,234,216
166,551
—
28,453
13,900
19,203
209
63
—
—
—
17
—
29,128
13,901
19,658
192
15
—
—
—
—
48
29,128
13,901
19,658
209
63
Financial Assets:
Cash and due from financial institutions
Interest-bearing deposits in other
financial institutions
Trading assets
Securities available for sale
Securities held to maturity
FHLBNY and FRBNY stock
Loans, net
Loans held for sale
Accrued interest receivable
Derivative assets
Financial liabilities:
Deposits:
Demand, savings, and insured
money market accounts
Time deposits
Securities sold under agreements
to repurchase
FHLBNY overnight advances
FHLBNY term advances
Accrued interest payable
Derivative liabilities
(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.
(18)
REGULATORY CAPITAL REQUIREMENTS
The Corporation and the Bank are subject to regulatory capital requirements administered by federal banking agencies. Capital
adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets,
liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications
are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. The
final rules implementing Basel III rules became effective for the Corporation on January 1, 2015 with full compliance with all of
the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under Basel III rules, the
Corporation must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital
conservation buffer is being phased in from 0.00% for 2015 to 2.50% by 2019. The capital conservation buffer for 2016 is 0.625%.
The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan
and other benefit plans are not included in computing regulatory capital. Management believes as of December 31, 2016, the
Corporation and the Bank meet all capital adequacy requirements to which they are subject.
F-61
Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial
condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital restoration plans are required. Management believes that,
as of December 31, 2016 and 2015, the Corporation and the Bank met all capital adequacy requirements to which they were
subject.
As of December 31, 2016, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must
maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in
the table below. There have been no conditions or events since that notification that management believes have changed the Bank's
or the Corporation's capital category.
The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations
limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount
of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net
income of the preceding two years, subject to the capital requirements in the table below. During 2017, the Bank could, without
prior approval, declare dividends of approximately $15.2 million plus any 2017 net income retained to the date of the dividend
declaration.
The actual capital amounts and ratios of the Corporation and the Bank are presented in the following tables (in thousands):
Actual
Minimal Capital
Adequacy
Amount
Ratio
Amount
Ratio
Minimal Capital
Adequacy with
Capital Buffer
Ratio
Amount
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
Ratio
Amount
As of December 31, 2016
Total Capital (to Risk Weighted
Assets):
Consolidated
Bank
$145,269
$140,020
12.14% $ 95,748
11.71% $ 95,640
8.00% $103,229
8.00% $103,112
N/A
8.625%
8.625% $119,550
N/A
10.00%
Tier 1 Capital (to Risk Weighted
Assets):
Consolidated
Bank
$130,911
$125,736
10.94% $ 71,811
10.52% $ 71,730
6.00% $ 79,292
6.00% $ 79,202
N/A
6.625%
6.625% $ 95,640
N/A
8.00%
Common Equity Tier 1 Capital (to
Risk Weighted Assets):
Consolidated
Bank
$130,911
$125,736
10.94% $ 53,858
10.52% $ 53,798
4.50% $ 61,339
4.50% $ 61,270
N/A
5.125%
5.125% $ 77,708
Tier 1 Capital (to Average Assets):
Consolidated
Bank
$130,911
$125,736
7.81% $ 67,031
7.52% $ 66,919
4.00%
4.00%
N/A
N/A
N/A
N/A
N/A $ 83,649
N/A
6.50%
N/A
5.00%
F-62
As of December 31, 2015
Total Capital (to Risk Weighted Assets):
Actual
Minimum Capital
Adequacy
To Be Well Capitalized
Under Prompt
Corrective Action
Provisions
Amount
Ratio
Amount
Ratio
Amount
Ratio
Consolidated
Bank
$ 139,049
$ 135,058
12.26% $
11.93% $
90,704
90,548
N/A
8.00%
8.00% $ 113,185
N/A
10.00%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated
Bank
$ 124,787
$ 120,881
11.01% $
10.68% $
68,028
67,911
6.00%
6.00% $
N/A
90,548
N/A
8.00%
Common Equity Tier 1 Capital (to Risk
Weighted Assets):
Consolidated
Bank
Tier 1 Capital (to Average Assets):
$ 124,787
$ 120,881
11.01% $
10.68% $
51,021
50,933
4.50%
4.50% $
N/A
73,571
Consolidated
Bank
$ 124,787
$ 120,881
7.83% $
7.59% $
63,772
63,701
4.00%
4.00% $
N/A
79,626
N/A
6.50%
N/A
5.00%
(19)
ACCUMULATED OTHER COMPREHENSIVE INCOME OR LOSS
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 changes in accumulated other comprehensive income or loss by component, net of tax, for the
periods indicated (in thousands):
Balance at December 31, 2015
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income (loss)
Net current period other comprehensive income (loss)
Balance at December 31, 2016
$
$
$
210
(3,952)
(614)
(4,566)
(4,356) $
Unrealized
Gains and
Losses on
Securities
Available
for Sale
Defined
Benefit
and Other
Benefit
Plans
(11,152) $
3,341
1,413
4,754
(6,398) $
Unrealized
Gains and
Losses on
Securities
Available
for Sale
$
$
1,960
(1,520)
(230)
(1,750)
210
Balance at December 31, 2014
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income (loss)
Net current period other comprehensive loss
Balance at December 31, 2015
F-63
Defined
Benefit
and Other
Benefit
Plans
(10,745) $
(1,268)
861
(407)
(11,152) $
$
$
Total
(10,942)
(611)
799
188
(10,754)
Total
(8,785)
(2,788)
631
(2,157)
(10,942)
Balance at January 1, 2014
Other comprehensive income (loss) before reclassification
Amounts reclassified from accumulated other comprehensive income (loss)
Net current period other comprehensive income (loss)
Balance at December 31, 2014
Unrealized
Gains and
Losses on
Securities
Available
for Sale
Defined
Benefit
and Other
Benefit
Plans
$
$
6,043
146
(4,229)
(4,083)
1,960
$
$
(5,888) $
(5,221)
364
(4,857)
(10,745) $
Total
155
(5,075)
(3,865)
(8,940)
(8,785)
The following is the reclassification out of accumulated other comprehensive income (loss) for the periods indicated (in thousands):
Details about Accumulated Other
Comprehensive Income (Loss) Components
Year Ended December 31,
2016
2015
2014
Affected Line Item
in the Statement Where
Net Income is Presented
Unrealized gains and losses on securities available
for sale:
Realized gains on securities available for sale
$
(987) $
Tax effect
Net of tax
373
(614)
Amortization of defined pension plan and other
benefit plan items:
(372) $ (6,869) Net gains on securities transactions
142
(230)
Income tax expense
2,640
(4,229)
Prior service costs (a)
Actuarial losses (a)
Tax effect
Net of tax
674
(90)
1,595
(856)
1,413
1,484
(533)
861
Total reclassification for the period, net of tax
$
799
$
631
Pension and other employee
benefits
(90)
Pension and other employee
benefits
Income tax expense
681
(227)
364
$ (3,865)
(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension
and other benefit plan costs (see Note 12 for additional information).
(20)
SEGMENT REPORTING
The Corporation manages its operations through two primary business segments: core banking and WMG. The core banking
segment provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial,
commercial real estate, and residential mortgage loans, primarily in the Corporation’s local markets and to invest in securities.
The WMG services segment provides revenues by providing trust and investment advisory services to clients.
Accounting policies for the segments are the same as those described in Note 1. Summarized financial information concerning
the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following
table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated
based on reasonable and equitable allocations applicable to the reportable segment. CFS amounts are the primary differences
between segment amounts and consolidated totals, and are reflected in the Holding Company, CFS, and CRM column below,
along with amounts to eliminate transactions between segments (in thousands). CRM was formed during the second quarter of
2016, therefore, is not included within prior year comparative information.
F-64
Year ended December 31, 2016
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Other operating expenses
Income (loss) before income tax expense
Income tax expense (benefit)
Segment net income (loss)
Segment assets
Year ended December 31, 2015
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Other operating expenses
Income before income tax expense
Income tax expense (benefit)
Segment net income
Segment assets
Year ended December 31, 2014
Interest and dividend income
Interest expense
Net interest income
Provision for loan losses
Net interest income after provision for loan losses
Other operating income
Legal settlements
Other operating expenses
Income (loss) before income tax expense
Income tax expense (benefit)
Segment net income
Segment assets
Core
Banking
WMG
Consolidated
Totals
$
Holding
Company,
CFS and CRM
9
—
9
—
9
515
1,151
(627)
(286)
(341) $
— $
—
—
—
—
8,316
5,676
2,640
997
1,643
$
56,168
3,839
52,329
2,437
49,892
21,149
56,610
14,431
4,404
10,027
4,586
$
2,493
$
1,657,179
WMG
Holding
Company and
CFS
Consolidated
Totals
— $
—
— $
—
—
8,522
5,517
3,005
1,149
1,856
$
$
4
—
4
—
4
906
1,028
(118)
(111)
(7) $
54,244
3,602
50,642
1,571
49,071
20,447
55,427
14,091
4,658
9,433
4,282
$
1,201
$
1,619,964
WMG
Holding
Company
and CFS
Consolidated
Totals
— $
—
—
—
—
7,746
4,250
5,355
(1,859)
(715)
(1,144) $
12
—
12
—
12
824
—
875
(39)
(83)
44
4,357
$
1,598
$
$
$
53,213
3,645
49,568
3,981
45,587
26,756
4,250
56,227
11,866
3,709
8,157
1,524,539
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
56,159
3,839
52,320
2,437
49,883
12,318
49,783
12,418
3,693
8,725
1,650,100
Core
Banking
54,240
3,602
50,638
1,571
49,067
11,019
48,882
11,204
3,620
7,584
1,614,481
Core
Banking
53,201
3,645
49,556
3,981
45,575
18,186
—
49,997
13,764
4,507
9,257
1,518,584
F-65
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
DATED: MARCH 8, 2017
CHEMUNG FINANCIAL CORPORATION
By: /s/ Anders M. Tomson
Anders M. Tomson, President and Chief Executive Officer
(Principal Executive Officer)
DATED: MARCH 8, 2017
By: /s/ Karl F. Krebs
Karl F. Krebs, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Larry H. Becker
Larry H. Becker
/s/ Ronald M. Bentley
Ronald M. Bentley
/s/ Bruce W. Boyea
Bruce W. Boyea
/s/ David J. Dalrymple
David J. Dalrymple
/s/ Robert H. Dalrymple
Robert H. Dalrymple
Clover M. Drinkwater
/s/ Stephen M. Lounsberry, III
Stephen M. Lounsberry, III
/s/ John F. Potter
John F. Potter
Director
Director
Director
March 8, 2017
March 10, 2017
March 8, 2017
Director and Chairman of the Board of Directors
March 8, 2017
March 8, 2017
March 8, 2017
March 8, 2017
Director
Director
Director
Director
F-66
Signature
Richard W. Swan
/s/ G. Thomas Tranter, Jr.
G. Thomas Tranter, Jr.
/s/ Kevin B. Tully
Kevin B. Tully
/s/ Thomas R. Tyrrell
Thomas R. Tyrrell
/s/ Anders M. Tomson
Anders M. Tomson
/s/ Karl F. Krebs
Karl F. Krebs
(signature’s continued)
Title
Director
Director
Director
Director
Date
March 8, 2017
March 8, 2017
March 8, 2017
Chief Executive Officer and President
March 8, 2017
Chief Financial Officer and Treasurer
March 8, 2017
F-67
Exhibit
3.1
3.2
3.3
3.4
4.1
10.1
10.2
10.3
10.4
10.5
10.6
10.7
10.8
10.9
21
23
31.1
31.2
32.1
32.2
EXHIBIT INDEX
The following exhibits are either filed with this Form 10-K or are incorporated herein by
reference. The Corporation’s Securities Exchange Act file number is 000-13888.
Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as
incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31,
2007 filed with the Commission on March 13, 2008).
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation,
dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the
year ended December 31, 2007 filed with the Commission on March 13, 2008).
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation,
dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the
year ended December 31, 2005 and filed with the Commission on March 15, 2006).
Amended and Restated Bylaws of Chemung Financial Corporation, as amended to June 17, 2015
(as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on
June 18, 2015).
Specimen Stock Certificate (filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended
December 31, 2002 and incorporated herein by reference).
Change of Control Agreement dated September 20, 2006 between Chemung Canal Trust Company
and Ronald M. Bentley, President & COO (filed as Exhibit 10.1 to Registrant's Form 10-Q for the
quarter ended September 30, 2006 and incorporated herein by reference). Mr. Bentley retired as of
December 31, 2016.
Executive Severance Agreement dated September 20, 2006 between Chemung Canal Trust
Company and Ronald M. Bentley, President & COO (filed as Exhibit 10.2 to Registrant's Form 10-
Q for the quarter ended September 30, 2006 and incorporated herein by reference). Mr. Bentley
retired as of December 31, 2016.
Chemung Financial Corporation 2014 Omnibus Plan and Component Plans (Chemung Financial
Corporation Restricted Stock Plan, Chemung Financial Corporation Incentive Compensation Plan,
Chemung Financial Corporation Directors’ Compensation Plan and Chemung Financial
Corporation/Chemung Canal Trust Company Directors’ Deferred Fee Plan). (Filed as Exhibits
10.1, 10.2, 10.3, 10.4 and 10.5 to Registrant’s Form S-8 filed with the SEC on January 27, 2015 and
incorporated herein by reference).
Change of Control Agreement dated September 1, 2015 between Chemung Canal Trust Company
and Thomas W. Wirth, Executive Vice President. (Filed as Exhibit 10.1 to Registrant’s Form 8-K
filed with the SEC on September 3, 2015 and incorporated herein by reference).
Change of Control Agreement dated January 19, 2011 between Chemung Canal Trust Company and
Louis C. DiFabio, Executive Vice President. (Filed as Exhibit 10.12 to Registrant’s Form 10-K
filed with the SEC on March 16, 2011 and incorporated herein by reference).
Change of Control Agreement dated August 28, 2015 between Chemung Canal Trust Company and
Anders M. Tomson, President and Chief Operating Officer. (Filed as Exhibit 10.1 to Registrant’s
Form 8-K filed with the SEC on September 1, 2015 and incorporated herein by reference).
Change of Control Agreement dated November 7, 2011 between Chemung Canal Trust Company
and Karen R. Makowski, Executive Vice President and Chief Administration and Risk Officer (filed
as Exhibit 10.16 to Registrant’s Form 10-K on March 28, 2012 and incorporated herein by
reference).
Change of Control Agreement dated October 16, 2013 between Chemung Canal Trust Company
and Karl F. Krebs, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.1 to
Registrant’s Form 8-K filed with the SEC on October 17, 2013 and incorporated herein by
reference).
Change of Control Agreement dated August 17, 2016 between Chemung Canal Trust Company and
Kimberly A. Hazelton, Executive Vice President (filed as Exhibit 10.1 to Registrant’s Form 8-K
filed with the SEC on August 17, 2016 and incorporated herein by reference).
Subsidiaries of the Registrant.*
Consent of Crowe Horwath LLP, Independent Registered Public Accounting Firm.*
Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.*
Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a)
under the Securities Exchange Act of 1934.*
Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b)
under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
Instance Document
101.INS
101.SCH XBRL Taxonomy Schema*
101.CAL XBRL Taxonomy Calculation Linkbase*
101.DEF
XBRL Taxonomy Definition Linkbase*
101.LAB
101.PRE
XBRL Taxonomy Label Linkbase*
XBRL Taxonomy Presentation Linkbase*
* Filed herewith.
EXHIBIT 21
CHEMUNG FINANCIAL CORPORATION
Subsidiary List
Name
Chemung Canal Trust Company
CFS Group, Inc.
Chemung Risk Management, Inc.
State of Incorporation
New York
New York
Nevada
EXHIBIT 23
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the registration statement on Form S-8 (File No. 333-104663 and 333-201715),
Form S-3 (File No. 333-185400) and registration statement on Form S-4 (File No. 333-171504) of Chemung Financial Corporation
of our report dated March 8, 2017, related to the consolidated financial statements and effectiveness of internal control over
financial reporting, appearing in this Annual Report on Form 10-K of Chemung Financial Corporation for the year ended
December 31, 2016.
/s/ Crowe Horwath LLP
Livingston, New Jersey
March 8, 2017
EXHIBIT 31.1
CERTIFICATION OF PRESIDENT AND CHIEF EXECUTIVE OFFICER OF CHEMUNG FINANCIAL
CORPORATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934.
I, Anders M. Tomson, certify that:
1. I have reviewed this report on Form 10-K of Chemung Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 8, 2017
By: /s/ Anders M. Tomson
President and Chief Executive Officer
(Principal Executive Officer)
CERTIFICATION OF CHIEF FINANCIAL OFFICER AND TREASURER OF CHEMUNG FINANCIAL
CORPORATION PURSUANT TO RULE 13a-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934.
EXHIBIT 31.2
I, Karl F. Krebs, certify that:
1. I have reviewed this report on Form 10-K of Chemung Financial Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present
in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) and internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) and 15d-15(f) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in
which this report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period
covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred
during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize
and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal control over financial reporting.
Date: March 8, 2017
By: /s/ Karl F. Krebs
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF CHEMUNG FINANCIAL CORPORATION
PURSUANT TO RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND 19 U.S.C. §1350.
EXHIBIT 32.1
The undersigned, the Chief Executive Officer of Chemung Financial Corporation (the "Corporation"), hereby certifies
that, to his knowledge on the date hereof:
a) the Annual Report on Form 10-K of the Corporation for the period ended December 31, 2016, filed on the
date hereof with the Securities and Exchange Commission (the "Report") fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
b) information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Corporation.
/s/ Anders M. Tomson
Anders M. Tomson
President and Chief Executive Officer
March 8, 2017
CERTIFICATION OF CHIEF FINANCIAL OFFICER AND TREASURER OF CHEMUNG FINANCIAL
CORPORATION PURSUANT TO RULE 13a-14(b) UNDER THE SECURITIES EXCHANGE ACT OF 1934 AND 19
U.S.C. §1350.
EXHIBIT 32.2
The undersigned, the Chief Financial Officer and Treasurer of Chemung Financial Corporation (the "Corporation"),
hereby certifies that, to his knowledge on the date hereof:
a) the annual Report on Form 10-K of the Corporation for the period ended December 31, 2016, filed on the
date hereof with the Securities and Exchange Commission (the "Report") fully complies with the requirements
of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
b) information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Corporation.
/s/ Karl F. Krebs
Karl F. Krebs
Chief Financial Officer and Treasurer
March 8, 2017
Board of Directors
Anders M. Tomson
President & CEO,
Chemung Financial Corporation,
Chemung Canal Trust Company
and CFS Group, Inc.
David J. Dalrymple
Chairman of the Board, Chemung
Financial Corporation, Chemung
Canal Trust Company, and President,
Dalrymple Gravel & Contracting
Larry H. Becker
COO, Windsor
Development Group, Inc.
Ronald M. Bentley
Retired President & CEO,
Chemung Financial Corporation,
Chemung Canal Trust Company
and CFS Group, Inc.
Robert H. Dalrymple
Vice President & Secretary
Dalrymple Holding Corporation
Clover M. Drinkwater
Partner
Sayles & Evans
Bruce W. Boyea
Chairman, President & CEO,
Security Mutual Life Insurance
Company of New York
Stephen M. Lounsberry III
President, Applied
Technology Manufacturing
John F. Potter
President, Seneca
Beverage Corporation
Richard W. Swan
Retired Chairman of the Board,
Swan and Sons-Morss Co., Inc.
G. Thomas Tranter Jr.
President
Corning Enterprises
Kevin Tully
Partner, Teal, Becker &
Chiaramonte, CPA’s PC
Thomas R. Tyrrell
Vice President
Rose & Kiernan, Inc.
Capital Bank Division Advisory Board
Spencer Jones
Dawn Homes Management
Carl Becker
Vice President & Counsel
The Windsor Company
Dr. Lee McElroy
Director of Athletics
Rensselaer Polytechnic
Institute
Denise Gonick
President &
Chief Executive Officer
MVP Healthcare
Gerald D. Jennings
Former Mayor
City of Albany
Paul Kasselman
President
Kasselman Electric Inc.
Raymond J. Kinley Jr.
Retired President
& Chief Executive Officer
Clough Harbour & Associates
Jim Menzies
Founder
Leontine Consulting LLC
Gregory Oberting
President
Interstate Commodities, Inc.
Dean A. Rueckert
President
Rueckert Advertising
and Public Relations
Joseph A. Reilly
President
Empire Broadcasting
Mark J. Rosen
President
Dawn Homes Management
Eugene M. Sneeringer Jr.
Principal
Sneeringer Monahan
Provost Redgrave
Edward J. Trombly
Partner
Hiscock & Barclay
Bank Officers
EXECUTIVE MANAGEMENT TEAM
Louis C. DiFabio
Executive Vice President
Business Client Services
Anders M. Tomson
President & Chief Executive Officer
Pamela D. Burns
Senior Vice President
Human Resources
Michael J. Crimmins
Senior Vice President
Support Services
Kimberly A. Hazelton
Executive Vice President
Retail Client Services
Karl F. Krebs
Executive Vice President
Chief Financial Officer & Treasurer
Karen R. Makowski
Executive Vice President
Chief Administrative & Risk Officer
Brendan P. McCormick
Senior Vice President & Auditor
Kathleen S. McKillip
Assistant Treasurer, Corporate Secretary
Thomas W. Wirth
Executive Vice President
Wealth Management Group (WMG)
Michael J. Wayne
Senior Vice President, Marketing
SENIOR VICE PRESIDENTS
Catherine B. Crandall
WMG Estate Administration
Daniel D. Fariello
Commercial Lending
Marianne T. Kalec
Retail Lending
J. Edmond Morton IV
WMG Regional Manager
Robert M. Pichette
Commercial Lending
Timothy P. Rubery
Commercial Lending
Joseph J. Tascone
WMG Investment Services
Thomas J. Whitaker
Finance
VICE PRESIDENTS
Yvonne L. Albee
Regulatory Risk
Dawn L. Aubin
Genesee St./Grant Ave.
Judy L. Barton
Bank Operations
Roberta Bastow
Commercial Lending
Michael J. Battersby
Branch Administration
Michael D. Blatt
WMG Investment
Services
Marci L. Cartwright
WMG Business
Development
Matthew R. Crabtree
Finance
Gary K. Earley
WMG Estate
Administration
Mark J. Fife
Commercial Lending
Yvette M. Francisco
Loan Review
Thomas E. Funk
Finance
Victoria A. Harkins
WMG Prestige Banking
Christopher Kennedy
Commercial Lending
Nino J. Pellegrino
Business Development
Kevin Harrigan
Commercial Lending
John T. Kite
Commercial Lending
Ronald W. Poole
Commercial Lending
James S. Hartle
Branch Administration
Scott T. Heffner
Marketing
Mary Keefe
Business Services
Christopher K. Kelly
WMG Retirement
Services Group
Michael S. Lares
WMG Investment
Services
Robert A. Roemmelt Jr.
Arnot Road/Elmira
Heights
Eileen M. McCarthy
WMG Support Services
Jennifer Sczepanski
Branch Administration
D. Tavis McKeon
Branch Administration
John J. Sentigar
Information Technology
Mary Anne Narosky
Business Client Services
Andrea L. Seymour
Logistical Support
John E. Shea
WMG Relationship
Manager
Michael R. Smith
Cortland/Seneca Falls
George R. Spencer
Business Development
Gregory Stewart
WMG Relationship
Manager
Theresa A. Wagner
Deposit Operations
Sheila A. Washburn
Bank Operations
ASSISTANT VICE PRESIDENTS
Sherry L. Armstrong
Community Corners
Kimberly A. Bailey
Canton
Gregory J. Bruno
Clifton Park
David E. Carlson
Troy
Joel A. Crimmins
Commercial Lending
Constance L. English
Corning
Larisa A. Benderskaya
Latham/Wolf Rd.
Pamela L. Colomaio
Bath
Jennifer L. Fulton
Finance
Bruce E. Boughton
Montour Falls
Alison J. Conklin-DeVita
Main Office/Southport
Sandra L. Grooms
Elmira Rd./The Station
ASSISTANT TREASURERS
Laura L. Bennett, Real Estate Lending
Cheryl A. DeBlock, Binghamton
Michael L. Hart
WMG Estate
Administration
Matthew Keefe
Regulatory Risk
Lashonda R. Love
State Street/Slingerlands
Jack D. Narosky
Business Development
Sheryl J. Scott
Big Flats
Brenda S. Praschunus
Horseheads
David Wakeman
Resource Recovery
Randi Richer
Commercial Loan
Operations
Sue A. Williams
Waverly
Patrick J. McFarland, Regulatory Risk
Allison A. Strife, Human Resources
Marcia L. Boor, Business Services
Karen A. Dimmick, Westside
Julianne E. Meeker, Computer Operations
Todd N. Trencansky, Vestal
Amy S. Chervinsky, Commercial Lending
Matthew T. Howard, Audit
Michael J. Novotny, Retail Lending
Charolette R. Truxal, Oakdale Mall
Elizabeth M. Courtright, Regulatory Risk
Tara J. Humphrey, Retail Loan Operations
Aimee G. O’Connor, Towanda
Devin E. Wandell, WMG Estate Administration
Jennifer J. Cruise, WMG Support Services
Barbara L. Keller, Indirect Lending
Jessica L. Ryan, Watkins Glen
Jean A. Wise-Wicks, Painted Post
Sarah A. Darling, Owego
Megan J. Kozdemba, Real Estate Lending
Thomas E. Smith, Regulatory Risk
Kristen E. Wolowitz, Real Estate Lending
CFS GROUP, INC.
Kristen N. Woodward, Contact Center
Sean F. Beliles, Vice President
Joseph M. Cascio, Vice President
Effective as of February 28, 2017.
Other Information
Forward-looking Statements: This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private
Securities Litigation Reform Act of 1995. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All
statements regarding the Corporation’s expected financial position and operating results, the Corporation’s business strategy, the Corporation’s financial plans, forecasted demographic and eco-
nomic 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 the Corporation’s growth, competition, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. Information
concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s 2016
Annual Report on Form 10-K. These filings are available publicly on the SEC’s website at www.sec.gov, on the Corporation’s website at chemungcanal.com or upon request from the Corporate
Secretary at (607) 737-3746. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new
information, future events or otherwise.
Dividend Reinvestment and Stock Purchase Plan: Registered shareholders of Chemung Financial Corporation, through The Dividend Reinvestment and Stock Purchase Plan, may
reinvest their dividends or make quarterly cash payments to purchase additional stock of the Corporation. Shareholders not enrolled in the plan may view and print a descriptive
brochure and enrollment form at www.amstock.com or receive the plan documents upon written request to the Corporation’s secretary at the following address: Chemung Financial
Corporation, Attn: Corporate Secretary, P.O Box 1522, Elmira, NY 14902-1522.
Form 10-K Annual Report: A copy of the Corporation’s Form 10-K Annual Report is available without charge to shareholders after March 31, 2017, upon written request to the
Corporation’s secretary. A copy is also available on our Transfer Agent, American Stock Transfer & Trust Company’s website at www.astproxyportal.com/ast/01079.
Annual Meeting: The Annual Meeting of Shareholders will be held on Thursday, May 11, 2017, at 2:00 p.m. at the downtown Holiday Inn, Elmira – Riverview.
BRADFORD
5 W. Main St., Canton
304 Main St., Towanda
159 Canton St., Troy
CHEMUNG
437 Maple St., Big Flats
One Chemung Canal Plaza, Elmira
628 W. Church St., Elmira
100 W. McCann’s Blvd., Elmira Heights
29 Arnot Rd., Horseheads
602 S. Main St., Horseheads
951 Pennsylvania Ave., Southport
SENECA
54 Fall St., Seneca Falls
BROOME
127 Court St., Binghamton
601-635 Harry L. Dr., Johnson City
100 Rano Blvd., Vestal
CORTLAND
1094 Highway 222, Cortland
STEUBEN
410 W. Morris St., Bath
149 W. Market St., Corning
243 N. Hamilton St., Painted Post
TOMPKINS
909 Hanshaw Rd., Ithaca
304 Elmira Rd., Ithaca
806 W. Buffalo St., Ithaca
CAYUGA
110 Genesee St., Auburn
185 Grant Ave., Auburn
SCHUYLER
303 W. Main St., Montour Falls
318 N. Franklin St., Watkins Glen
TIOGA
203 Main St., Owego
1054 St. Rte. 17C, Owego
405 Chemung St., Waverly
CAPITAL REGION
132 State St., Albany
65 Wolf Rd., Albany
25 Park Ave., Clifton Park
581 Loudon Rd., Latham
1365 New Scotland Rd., Slingerlands
For a complete list of office hours and directions, visit chemungcanal.com or capitalbank.com.
For general information, call our Contact Center at 800.836.3711.