

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

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

For Quarterly period ended ~~June 30, 2018~~March 31, 2019



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

Commission File No. 000-13888



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

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

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

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

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

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

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

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

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

The number of shares of the registrant's common stock, $.01 par value, outstanding on ~~July 31, 2018~~May 3, 2019 was ~~4,803,888.~~4,837,455.



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

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX



		PAGES
	Glossary of Abbreviations and Terms	3

PART I.	FINANCIAL INFORMATION

Item 1:	Financial Statements – Unaudited

	Consolidated Balance Sheets	67
	Consolidated Statements of Income	78
	Consolidated Statements of Comprehensive Income	89
	Consolidated Statements of Shareholders’ Equity	910
	Consolidated Statements of Cash Flows	1011

	Notes to Unaudited Consolidated Financial Statements	1213

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	4339

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	7465

Item 4:	Controls and Procedures	7566

PART II.	OTHER INFORMATION

Item 1:	Legal Proceedings	7667

Item 1A:	Risk Factors	7667

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	7667

Item 3:	Defaults Upon Senior Securities	7667

Item 4:	Mine Safety Disclosures	7667

Item 5:	Other Information	7667

Item 6:	Exhibits	7768

SIGNATURES		7869

EXHIBIT INDEX

GLOSSARY OF ABBREVIATIONS AND TERMS

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

Abbreviations



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



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

Terms



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



Long term lease obligation	An obligation extending beyond the current year, which is related to a long term ~~capital~~finance lease that is considered to have the economic characteristics of asset ownership.
Mortgage-backed securities	A type of asset-backed security that is secured by a collection of mortgages.
Municipal clients	A political unit, such as a city, town, or village, incorporated for local self-government.
N/A	Data is not applicable or available for the period presented.
N/M	Not meaningful.
Non-GAAP	A calculation not made according to GAAP.
Obligations of state and political subdivisions	An obligation that is guaranteed by the full faith and credit of a state or political subdivision that has the power to tax.



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



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

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)


(in thousands, except share and per share data)	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
ASSETS
Cash and due from financial institutions	$	30,837		$	27,966		$	28,153		$	33,040
Interest-earning deposits in other financial institutions	3,978			2,763			97,657			96,932
Total cash and cash equivalents	34,815			30,729			125,810			129,972

Equity investments, at estimated fair value	2,112			2,337			2,032			1,909
Securities available for sale, at estimated fair value	265,157			293,091			266,721			242,258
Securities held to maturity, estimated fair value of $3,790 at June 30, 2018 and $3,776 at December 31, 2017	3,806			3,781
Securities held to maturity, estimated fair value of $3,857 at March 31, 2019 and $4,858 at December 31, 2018							3,861			4,875
FHLBNY and FRBNY Stock, at cost	5,816			5,784			3,143			3,138

Loans, net of deferred loan fees	1,334,444			1,311,824			1,299,037			1,311,906
Allowance for loan losses	(19,645		)	(21,161		)	(19,745		)	(18,944		)
Loans, net	1,314,799			1,290,663			1,279,292			1,292,962

Loans held for sale	684			542			658			502
Premises and equipment, net	26,049			26,657			24,279			24,980
Operating lease right-of-use assets							8,391			—
Goodwill	21,824			21,824			21,824			21,824
Other intangible assets, net	1,709			2,085			1,188			1,351
Bank-owned life insurance	3,014			2,982			3,063			3,048
Accrued interest receivable and other assets	30,381			27,145			29,310			28,524

Total assets	$	1,710,166		$	1,707,620		$	1,769,572		$	1,755,343

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	462,233		$	467,610		$	462,000		$	484,433
Interest-bearing	1,016,676			999,836			1,104,502			1,084,804
Total deposits	1,478,909			1,467,446			1,566,502			1,569,237

FHLBNY overnight advances	58,950			57,700
Securities sold under agreements to repurchase	—			10,000
FHLBNY term advances	—			2,000
Long term capital lease obligation	4,411			4,517
Long term finance lease obligation							4,250			4,304
Operating lease liabilities							8,399			—
Dividends payable	1,249			1,232			1,257			1,254
Accrued interest payable and other liabilities	14,867			14,912			17,630			15,519
Total liabilities	1,558,386			1,557,807			1,598,038			1,590,314

Shareholders' equity:
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at June 30, 2018 and December 31, 2017	53			53
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at March 31, 2019 and December 31, 2018							53			53
Additional paid-in capital	45,873			45,967			46,174			45,820
Retained earnings	132,973			128,453			146,340			143,129
Treasury stock, at cost; 507,471 shares at June 30, 2018 and 559,094 shares at December 31, 2017	(12,998		)	(14,320		)
Treasury stock, at cost; 474,174 shares at March 31, 2019 and 488,844 shares at December 31, 2018							(12,191		)	(12,562		)
Accumulated other comprehensive loss	(14,121		)	(10,340		)	(8,842		)	(11,411		)
Total shareholders' equity	151,780			149,813			171,534			165,029

Total liabilities and shareholders' equity	$	1,710,166		$	1,707,620		$	1,769,572		$	1,755,343

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(in thousands, except per share data)	2018			2017			2018			2017			2019			2018
Interest and dividend income:
Loans, including fees	$	14,300		$	12,817		$	28,350		$	25,316		$	14,489		$	14,050
Taxable securities	1,264			1,398			2,553			2,820			1,195			1,289
Tax exempt securities	295			276			603			514			273			308
Interest-earning deposits	10			193			32			348			708			22
Total interest and dividend income	15,869			14,684			31,538			28,998			16,665			15,669
Interest expense:
Deposits	608			549			1,109			1,087			1,461			501
Securities sold under agreements to repurchase	44			95			137			288			—			93
Borrowed funds	200			90			375			179			37			175
Total interest expense	852			734			1,621			1,554			1,498			769
Net interest income	15,017			13,950			29,917			27,444			15,167			14,900
Provision for loan losses	2,362			421			3,071			1,461			1,093			709
Net interest income after provision for loan losses	12,655			13,529			26,846			25,983			14,074			14,191

Non-interest income:
WMG fee income	2,373			2,269			4,689			4,378			2,276			2,316
Service charges on deposit accounts	1,144			1,225			2,308			2,409			1,104			1,164
Interchange revenue from debit card transactions	996			964			2,031			1,884			1,031			1,035
Net gains (losses) on security transactions	—			12			—			12
Changes in fair value of equity investments													89			(2		)
Net gains on sales of loans held for sale	59			53			105			122			48			46
Net gains (losses) on sales of other real estate owned	(48		)	(9		)	(4		)	8			(83		)	44
Income from bank-owned life insurance	17			18			33			35			15			16
Other	784			490			1,638			1,021			445			856
Total non-interest income	5,325			5,022			10,800			9,869			4,925			5,475

Non-interest expenses:
Salaries and wages	5,564			5,422			11,278			10,697			5,721			5,714
Pension and other employee benefits	1,518			1,540			3,176			3,091			1,545			1,658
Other components of net periodic pension and postretirement benefits	(408		)	(333		)	(816		)	(666		)	(141		)	(408		)
Net occupancy expenses	1,643			1,702			3,251			3,308
Furniture and equipment expenses	702			781			1,360			1,462
Data processing expense	1,764			1,587			3,506			3,191
Net occupancy													1,567			1,608
Furniture and equipment													528			658
Data processing													1,727			1,742
Professional services	508			417			1,048			717			405			540
Legal accruals and settlements	989			850			989			850
Amortization of intangible assets	182			213			376			439			163			194
Marketing and advertising expenses	255			118			604			367
Other real estate owned expenses	100			11			238			31
Marketing and advertising													268			349
Other real estate owned													31			138
FDIC insurance	301			309			618			634			265			317
Loan expense	184			166			353			282			196			169
Other	1,665			1,549			3,152			2,974			1,222			1,487
Total non-interest expenses	14,967			14,332			29,133			27,377			13,497			14,166
Income before income tax expense	3,013			4,219			8,513			8,475			5,502			5,500
Income tax expense	486			1,263			1,547			2,540			1,034			1,061
Net income	$	2,527		$	2,956		6,966			$	5,935		$	4,468		$	4,439

Weighted average shares outstanding	4,828			4,797			4,825			4,793			4,860			4,822
Basic and diluted earnings per share	$	0.52		$	0.62		$	1.44		$	1.24		$	0.92		$	0.92

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
(in thousands)	2018			2017			2018			2017			2019			2018
Net income	$	2,527		$	2,956		$	6,966		$	5,935		$	4,468		$	4,439
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities available for sale	(400		)	2,854			(4,839		)	6,020			3,430			(4,439		)
Reclassification adjustment for gains realized in net income	—			(12		)	—			(12		)
Net unrealized gains (losses)	(400		)	2,842			(4,839		)	6,008
Tax effect	(101		)	1,078			(1,233		)	2,267			874			(1,132		)
Net of tax amount	(299		)	1,764			(3,606		)	3,741			2,556			(3,307		)

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	(55		)	(55		)	(110		)	(110		)	(55		)	(55		)
Reclassification adjustment for amortization of net actuarial loss	73			88			146			176			73			73
Total before tax effect	18			33			36			66			18			18
Tax effect	4			13			9			25			5			5
Net of tax amount	14			20			27			41			13			13

Total other comprehensive income (loss)	(285		)	1,784			(3,579		)	3,782			2,569			(3,294		)

Comprehensive income	$	2,242		$	4,740		$	3,387		$	9,717		$	7,037		$	1,145

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

(UNAUDITED)


(in thousands, except share and per share data)	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total			Common Stock		Additional Paid-in Capital		Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Loss			Total
Balances at January 1, 2017	$	53	$	45,603		$	124,111		$	(15,265	)	$	(10,754	)	$	143,748
Net income	—		—			5,935			—			—			5,935
Other comprehensive income	—		—			—			—			3,782			3,782
Restricted stock awards	—		107			—			—			—			107
Restricted stock units for directors' deferred compensation plan	—		49			—			—			—			49
Cash dividends declared ($0.52 per share)	—		—			(2,461		)	—			—			(2,461		)
Distribution of 7,880 shares of treasury stock for directors' compensation	—		68			—			201			—			269
Distribution of 5,861 shares of treasury stock for employee compensation	—		50			—			150			—			200
Distribution of 2,438 shares of treasury stock for deferred directors’ compensation	—		(51		)	—			62			—			11
Sale of 8,788 shares of treasury stock (a)	—		97			—			225			—			322
Forfeiture of 1,139 shares of restricted stock awards	—		43			—			(43		)	—			—
Balances at June 30, 2017	$	53	$	45,966		$	127,585		$	(14,670	)	$	(6,972	)	$	151,962


Balances at December 31, 2017, as reported	$	53	$	45,967		$	128,453		$	(14,320	)	$	(10,340	)	$	149,813		$	53	$	45,967	$	128,453		$	(14,320	)	$	(10,340	)	$	149,813
Cumulative effect of accounting change (b)	—		—			40			—			(202		)	(162		)
Cumulative effect of accounting change (a)																		—		—		40			—			(202		)	(162		)
Balances at January 1, 2018, as adjusted	53		45,967			128,493			(14,320		)	(10,542		)	149,651			53		45,967		128,493			(14,320		)	(10,542		)	149,651
Net income	—		—			6,966			—			—			6,966			—		—		4,439			—			—			4,439
Other comprehensive loss	—		—			—			—			(3,579		)	(3,579		)	—		—		—			—			(3,294		)	(3,294		)
Restricted stock awards	—		232			—			—			—			232			—		163		—			—			—			163
Restricted stock units for directors' deferred compensation plan	—		47			—			—			—			47			—		25		—			—			—			25
Cash dividends declared ($0.52 per share)	—		—			(2,486		)	—			—			(2,486		)
Cash dividends declared ($0.26 per share)																		—		—		(1,238		)	—			—			(1,238		)
Distribution of 6,015 shares of treasury stock for directors' compensation	—		147			—			154			—			301			—		147		—			154			—			301
Distribution of 1,784 shares of treasury stock for employee compensation	—		44			—			45			—			89			—		44		—			45			—			89
Distribution of 36,681 shares of treasury stock for deferred directors’ compensation	—		(722		)	—			940			—			218
Sale of 7,143 shares of treasury stock (a)	—		158			—			183			—			341
Balances at June 30, 2018	$	53	$	45,873		$	132,973		$	(12,998	)	$	(14,121	)	$	151,780
Sale of 2,648 shares of treasury stock (b)																		—		58		—			68			—			126
Balances at March 31, 2018																		$	53	$	46,404	$	131,694		$	(14,053	)	$	(13,836	)	$	150,262


Balances at January 1, 2019																		$	53	$	45,820	$	143,129		$	(12,562	)	$	(11,411	)	$	165,029
Net income																		—		—		4,468			—			—			4,468
Other comprehensive income																		—		—		—			—			2,569			2,569
Restricted stock awards																		—		101		—			—			—			101
Restricted stock units for directors' deferred compensation plan																		—		11		—			—			—			11
Distribution of 439 shares of treasury stock grants for employee restricted stock awards																		—		—		—			11			—			11
Cash dividends declared ($0.26 per share)																		—		—		(1,257		)	—			—			(1,257		)
Distribution of 8,465 shares of treasury stock for directors' compensation																		—		139		—			218			—			357
Distribution of 2,373 shares of treasury stock for employee compensation																		—		39		—			61			—			100
Repurchase of 272 shares of common stock																		—		—		—			(13		)	—			(13		)
Sale of 3,665 shares of treasury stock (b)																		—		64		—			94			—			158
Balances at March 31, 2019																		$	53	$	46,174	$	146,340		$	(12,191	)	$	(8,842	)	$	171,534

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

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

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

~~CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES~~

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(UNAUDITED)~~


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES							CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS							CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)							(UNAUDITED)
(in thousands)	Six Months Ended June 30,						Three Months Ended March 31,
CASH FLOWS FROM OPERATING ACTIVITIES:	2018			2017			2019			2018
Net income	$	6,966		$	5,935		$	4,468		$	4,439
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets	376			439			163			194
Provision for loan losses	3,071			1,461			1,093			709
Net losses on disposal of fixed assets	10			31			9			7
Depreciation and amortization of fixed assets	1,816			1,946			816			889
Amortization of right-of-use asset							159			—
Amortization of premiums on securities, net	608			736			236			305
Gains on sales of loans held for sale, net	(105		)	(122		)	(48		)	(46		)
Proceeds from sales of loans held for sale	5,308			6,204			2,416			3,611
Loans originated and held for sale	(5,345		)	(6,056		)	(2,524		)	(3,213		)
Net gains on equity investments	(36		)	(64		)
Net gains on securities transactions	—			(12		)
Changes in fair value on equity investments							(89		)	2
Net (gains) losses on sales of other real estate owned	4			(8		)	83			(44		)
Purchase of equity investments	(50		)	(39		)	(34		)	(28		)
Expense related to restricted stock units for directors' deferred compensation plan	47			49			11			25
Expense related to employee stock compensation	89			200			100			89
Expense related to employee restricted stock awards	232			107			101			163
Income from bank-owned life insurance	(33		)	(35		)	(15		)	(16		)
Increase in other assets and accrued interest receivable	(4,197		)	(132		)	(1,147		)	(2,486		)
Decrease in accrued interest payable	(33		)	(47		)
Payments made on operating leases							(151		)	—
(Increase) decrease in accrued interest payable							47			(29		)
Increase (decrease) in other liabilities	1,825			(1,594		)	1,550			2,409
Net cash provided by operating activities	10,553			8,999			7,244			6,980

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale	820			1,075
Proceeds from maturities and principal collected on securities available for sale	21,666			24,624
Proceeds from sales of securities available for sale							—			285
Proceeds from maturities, calls, and principal paydowns on securities available for sale							8,198			9,078
Proceeds from maturities and principal collected on securities held to maturity	585			1,544			1,074			261
Purchases of securities available for sale	—			(41,306		)	(29,467		)	—
Purchases of securities held to maturity	(610		)	(1,767		)	(60		)	(120		)
Purchase of FHLBNY and FRBNY stock	(17,123		)	(173		)	(5		)	(6,437		)
Redemption of FHLBNY and FRBNY stock	17,091			450			—			9,124
Purchases of premises and equipment	(1,218		)	(890		)	(124		)	(375		)
Proceeds from sales of other real estate owned	1,295			176			313			157
Net increase in loans	(27,451		)	(53,083		)
Net cash used in investing activities	(4,945		)	(69,350		)
Net (increase) decrease in loans							12,550			(8,572		)
Net cash (used in) provided by investing activities							(7,521		)	3,401

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts	(16,269		)	79,997			(9,502		)	52,670
Net increase (decrease) in time deposits	27,732			(11,303		)	6,767			(1,916		)
Net decrease in securities sold under agreements to repurchase	(10,000		)	(15,669		)
Net increase in FHLBNY overnight advances	1,250			—
Net decrease in FHLBNY overnight advances							—			(57,700		)
Repayments of FHLBNY long term advances	(2,000		)	(55		)	—			(2,000		)
Payments made on capital leases	(106		)	(102		)
Payments made on finance leases							(54		)	(53		)
Sale of treasury stock	341			322			158			126
Cash dividends paid	(2,470		)	(2,455		)	(1,254		)	(1,233		)
Net cash (used in) provided by financing activities	(1,522		)	50,735
Net cash used in financing activities							(3,885		)	(10,106		)
Net increase (decrease) in cash and cash equivalents	4,086			(9,616		)	(4,162		)	275
Cash and cash equivalents, beginning of period	30,729			74,162			129,972			30,729
Cash and cash equivalents, end of period	$	34,815		$	64,546		$	125,810		$	31,004
(continued)

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED

(UNAUDITED)


(in thousands)	Six Months Ended June 30,				Three Months Ended March 31,
Supplemental disclosure of cash flow information:	2018		2017		2019		2018
Cash paid (received) for:
Interest	$	1,654	$	1,601	$	1,451	$	798
Income taxes	$	1,355	$	4,050	$	—	$	(175	)
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	244	$	116	$	27	$	5
Dividends declared, not yet paid	$	1,249	$	1,231	$	1,257	$	1,238
Distribution of treasury stock for directors' compensation	$	301	$	269	$	357	$	301
Distribution of treasury stock for deferred directors' compensation	$	218	$	11

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

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

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

Basis of Presentation

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

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The ~~unconsolidated~~unaudited consolidated financial statements should be read in conjunction with the Corporation's ~~2017~~2018 Annual Report on Form 10-K for the year ended December 31, ~~2017.~~2018. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.

Reclassifications

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

Recent Accounting Pronouncements

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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal years beginning after December 15, 2018. The Corporation is currently evaluating the impact of the adoption of this guidance on its consolidated financial statements. The Corporation anticipates that the adoption of the CECL model will result in an increase to the Corporation's allowance for loan losses. The Corporation has established a committee to oversee the implementation of CECL and has selected a vendor to assist in the implementation process. In 2018, the committee ~~plans to begin~~began establishing parameters which will be used in the CECL model with the selected vendor. The Corporation further plans to run its current incurred loss model and a CECL model concurrently for twelve months prior to the adoption of this guidance on January 1, 2020.

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

Adoption of New Accounting Standards

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

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

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

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

On January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The Corporation adopted the new lease guidance using the modified retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, allowing entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted. In ~~March 2017,~~addition, the ~~FASB issued~~Corporation elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Corporation to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities of approximately $8.6 million as of January 1, 2019. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.

On January 1, 2019, the Corporation adopted ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The objective of the ASU is to align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. The amendment requires that the premium be amortized to the earliest call date, but does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The ~~amendments in this ASU are effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2018. The~~ adoption of the ASU isdid not ~~expected to~~ have a significant impact on the Corporation's consolidated financial statements.

NOTE 2 EARNING PER COMMON SHARE (shares in thousands)

Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Issuable shares, including those related to directors’ restricted stock units and directors’ stock compensation, are considered outstanding and are included in the computation of basic earnings per share. All outstanding unvested share based payment awards that contain rights to non-forfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities and are considered outstanding at grant date. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur. Earnings per share were computed by dividing net income by ~~4,828~~4,860 and ~~4,797~~4,822 weighted average shares outstanding for the three-month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017, respectively. Earnings per share were computed by dividing net income by 4,825 and 4,793weighted average shares outstanding for the six- month periods ended June 30, 2018 and 2017,~~ respectively. There were no common stock equivalents during the ~~three and six-month~~three-month periods ended ~~June 30, 2018~~March 31, 2019 or ~~2017.~~2018.

NOTE 3 SECURITIES

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


	June 30, 2018								March 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	15,489	$	11	$	50	$	15,450	$	5,492	$	9	$	13	$	5,488
Mortgage-backed securities, residential	207,708		69		9,137		198,640		207,277		283		3,622		203,938
Obligations of states and political subdivisions	47,574		37		582		47,029		47,733		619		20		48,332
Corporate bonds and notes	249		1		—		250		250		—		1		249
SBA loan pools	3,832		—		44		3,788		8,777		—		63		8,714
Total	$	274,852	$	118	$	9,813	$	265,157	$	269,529	$	911	$	3,719	$	266,721


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

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


	June 30, 2018								March 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	1,481	$	—	$	—	$	1,481	$	2,006	$	—	$	—	$	2,006
Time deposits with other financial institutions	2,325		—		16		2,309		1,855		—		4		1,851
Total	$	3,806	$	—	$	16	$	3,790	$	3,861	$	—	$	4	$	3,857


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

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


	June 30, 2018								March 31, 2019
	Available for Sale				Held to Maturity				Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	16,875	$	16,873	$	884	$	882	$	11,600	$	11,592	$	1,866	$	1,863
After one, but within five years	19,459		19,347		2,689		2,675		13,500		13,590		1,995		1,994
After five, but within ten years	26,495		26,053		233		233		26,902		27,402		—		—
After ten years	483		456		—		—		1,473		1,485		—		—
	63,312		62,729		3,806		3,790		53,475		54,069		3,861		3,857
Mortgage-backed securities, residential	207,708		198,640		—		—		207,277		203,938		—		—
SBA loan pools	3,832		3,788		—		—		8,777		8,714		—		—
Total	$	274,852	$	265,157	$	3,806	$	3,790	$	269,529	$	266,721	$	3,861	$	3,857

~~The~~There were no proceeds from sales and calls of securities resulting in gains or losses for the three months ended ~~June 30, 2018~~March 31, 2019 and ~~2017 are listed below (in thousands):~~

2018 2017
Proceeds $ —
$ 540
Gross gains —
12
Tax expense —
4

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

2018 2017
Proceeds $ —
$ 540
Gross gains —
12
Tax expense —
4

2018.

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


	Less than 12 months				12 months or longer				Total				Less than 12 months				12 months or longer				Total
June 30, 2018	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
March 31, 2019													Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	14,948	$	50	$	—	$	—	$	14,948	$	50	$	—	$	—	$	4,984	$	13	$	4,984	$	13
Mortgage-backed securities, residential	65,746		2,193		130,586		6,944		196,332		9,137		10,651		—		158,684		3,622		169,335		3,622
Obligations of states and political subdivisions	36,819		488		1,709		94		38,528		582		1,387		—		4,285		20		5,672		20
Corporate bonds and notes													249		1		—		—		249		1
SBA loan pools	243		1		3,545		43		3,788		44		5,668		18		3,046		45		8,714		63
Total temporarily impaired securities	$	117,756	$	2,732	$	135,840	$	7,081	$	253,596	$	9,813	$	17,955	$	19	$	170,999	$	3,700	$	188,954	$	3,719


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

Other-Than-Temporary Impairment

As of ~~June 30, 2018,~~March 31, 2019, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage-backed securities. At ~~June 30, 2018,~~March 31, 2019, all of the unrealized losses related to mortgage-backed securities were issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because it is not likely that the Corporation will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at ~~June 30, 2018.~~March 31, 2019.

Equity Investments

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

NOTE 4 LOANS AND ALLOWANCE FOR LOAN LOSSES

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


	June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	193,092	$	198,463	$	204,171	$	202,526
Agricultural	424		544		326		328
Commercial mortgages:
Construction	45,543		45,558		46,590		54,476
Commercial mortgages, other	621,150		598,772		611,510		606,694
Residential mortgages	193,423		194,440		181,428		182,724
Consumer loans:
Credit cards	1,367		1,517		—		1,449
Home equity lines and loans	99,052		100,591		97,042		98,145
Indirect consumer loans	162,813		153,060		142,383		149,380
Direct consumer loans	17,580		18,879		15,587		16,184
Total loans, net of deferred origination fees and costs	$	1,334,444	$	1,311,824	1,299,037		1,311,906
Interest receivable on loans	3,666		3,758		3,995		3,703
Total recorded investment in loans	$	1,338,110	$	1,315,582	$	1,303,032	$	1,315,609

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

The following tables present the activity in the allowance for loan losses by portfolio segment for the ~~three and six-month~~three-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


	Three Months Ended June 30, 2018															Three Months Ended March 31, 2019
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Total			Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance	$	7,003		$	8,640		$	1,407		$	4,340		$	21,390		$	5,383		$	8,184	$	1,226		$	4,151		$	18,944
Charge-offs	(3,624		)	(145		)	(71		)	(463		)	(4,303		)	(7		)	—		(2		)	(439		)	(448		)
Recoveries	11			1			—			184			196			11			1		—			144			156
Net recoveries (charge-offs)	(3,613		)	(144		)	(71		)	(279		)	(4,107		)	4			1		(2		)	(295		)	(292		)
Provision	1,579			244			109			430			2,362			42			1,289		(9		)	(229		)	1,093
Ending balance	$	4,969		$	8,740		$	1,445		$	4,491		$	19,645		$	5,429		$	9,474	$	1,215		$	3,627		$	19,745

Three Months Ended June 30, 2017
Allowance for loan losses Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Beginning balance $ 1,650
$ 7,749
$ 1,512
$ 4,049
$ 14,960
Charge-offs (2 ) —
(48 ) (397 ) (447 )
Recoveries 36
2
13
119
170
Net recoveries (charge-offs) 34
2
(35 ) (278 ) (277 )
Provision 199
27
40
155
421
Ending balance $ 1,883
$ 7,778
$ 1,517
$ 3,926
$ 15,104

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

Six Months Ended June 30, 2017
Allowance for loan losses Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Beginning balance: $ 1,589
$ 7,270
$ 1,523
$ 3,871
$ 14,253
Charge-offs: (7 ) —
(60 ) (825 ) (892 )
Recoveries: 61
3
30
188
282
Net recoveries (charge-offs) 54
3
(30 ) (637 ) (610 )
Provision 240
505
24
692
1,461
Ending balance $ 1,883
$ 7,778
$ 1,517
$ 3,926
$ 15,104



	Three Months Ended March 31, 2018
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance	$	6,976		$	8,514	$	1,316		$	4,355		$	21,161
Charge-offs	(19		)	—		(94		)	(458		)	(571		)
Recoveries	9			1		5			76			91
Net recoveries (charge-offs)	(10		)	1		(89		)	(382		)	(480		)
Provision	37			125		180			367			709
Ending balance	$	7,003		$	8,640	$	1,407		$	4,340		$	21,390

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018										March 31, 2019
Allowance for loan losses:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total		Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	1,285	$	453	$	—	$	—	$	1,738	$	1,748	$	2,228	$	—	$	—	$	3,976
Collectively evaluated for impairment	3,684		8,287		1,445		4,491		17,907		3,681		7,246		1,215		3,627		15,769
Total ending allowance balance	$	4,969	$	8,740	$	1,445	$	4,491	$	19,645	$	5,429	$	9,474	$	1,215	$	3,627	$	19,745


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


	June 30, 2018										March 31, 2019
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total		Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,017	$	6,847	$	417	$	61	$	9,342	$	2,136	$	9,278	$	392	$	167	$	11,973
Loans collectively evaluated for impairment	192,040		661,711		193,514		281,503		1,328,768		203,001		650,880		181,548		255,630		1,291,059
Total ending loans balance	$	194,057	$	668,558	$	193,931	$	281,564	$	1,338,110	$	205,137	$	660,158	$	181,940	$	255,797	$	1,303,032


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

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


	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial	$	643	$	647	$	—	$	861	$	867	$	—	$	304	$	304	$	—	$	345	$	346	$	—
Commercial mortgages:
Construction	336		338		—		364		365		—		292		293		—		307		308		—
Commercial mortgages, other	4,366		4,370		—		4,135		4,138		—		3,915		3,843		—		4,007		3,935		—
Residential mortgages	439		417		—		450		427		—		420		392		—		424		402		—
Consumer loans:
Home equity lines and loans	60		61		—		64		64		—		164		167		—		54		55		—
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	1,370		1,370		1,285		5,231		5,266		5,135		1,832		1,832		1,748		1,780		1,782		1,743
Commercial mortgages:
Commercial mortgages, other	2,173		2,139		453		2,989		2,799		802		5,141		5,142		2,228		1,902		1,903		446
Total	$	9,387	$	9,342	$	1,738	$	14,094	$	13,926	$	5,937	$	12,068	$	11,973	$	3,976	$	8,819	$	8,731	$	2,189

The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans ~~as of~~for the ~~three and six-month~~three-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands):


	Three Months Ended June 30, 2018				Three Months Ended June 30, 2017				Six Months Ended June 30, 2018				Six Months Ended June 30, 2017				Three Months Ended March 31, 2019				Three Months Ended March 31, 2018
With no related allowance recorded:	Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)		Average Recorded Investment		Interest Income Recognized (1)
Commercial and agricultural:
Commercial and industrial	$	710	$	7	$	626	$	8	$	762	$	15	$	649	$	17	$	325	$	1	$	820	$	9
Commercial mortgages:
Construction	345		3		1,555		3		352		6		1,130		6		301		2		359		3
Commercial mortgages, other	4,290		5		5,879		32		4,240		10		6,538		90		3,889		5		4,175		5
Residential mortgages	421		2		417		2		423		4		410		4		397		2		426		2
Consumer loans:
Home equity lines & loans	61		1		71		1		62		2		79		1		111		1		63		1
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial	3,196		—		84		1		3,886		—		56		1		1,807		—		5,144		—
Commercial mortgages:
Commercial mortgages, other	2,467		1		4,461		4		2,578		3		3,723		7		3,523		—		2,797		1
Consumer loans:
Home equity lines and loans	—		—		180		—		—		—		240		—
Total	$	11,490	$	19	$	13,273	$	51	$	12,303	$	40	$	12,825	$	126	$	10,353	$	11	$	13,784	$	21

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

The following table ~~present~~presents the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	Non-accrual				Loans Past Due 90 Days or More and Still Accruing				Non-accrual				Loans Past Due 90 Days or More and Still Accruing
	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		March 31, 2019		December 31, 2018		March 31, 2019		December 31, 2018
Commercial and agricultural:
Commercial and industrial	$	1,513	$	5,250	$	3	$	5	$	2,081	$	2,048	$	11	$	10
Commercial mortgages:
Construction	123		135		—		—		101		109		—		—
Commercial mortgages, other	6,101		6,520		—		—		8,680		5,529		—		—
Residential mortgages	2,981		3,160		—		—		2,550		2,655		—		—
Consumer loans:
Credit cards	—		—		14		24		—		—		—		9
Home equity lines and loans	1,359		1,310		—		—		1,022		1,183		—		—
Indirect consumer loans	673		935		—		—		632		693		—		—
Direct consumer loans	40		14		—		—		33		37		—		—
Total	$	12,790	$	17,324	$	17	$	29	$	15,099	$	12,254	$	11	$	19

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


	June 30, 2018														March 31, 2019
	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Acquired with Deteriorated Credit Quality		Loans Not Past Due		Total		30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due		Loans Not Past Due		Total
Commercial and agricultural:
Commercial and industrial	$	392	$	—	$	17	$	409	$	—	$	193,223	$	193,632	$	713	$	22	$	105	$	840	$	203,970	$	204,810
Agricultural	—		—		—		—		—		425		425		7		26		—		33		294		327
Commercial mortgages:
Construction	—		—		—		—		—		45,671		45,671		3,187		—		—		3,187		43,548		46,735
Commercial mortgages, other	992		93		3,339		4,424		—		618,463		622,887		555		—		279		834		612,589		613,423
Residential mortgages	1,117		492		1,261		2,870		—		191,061		193,931		2,249		158		1,026		3,433		178,507		181,940
Consumer loans:
Credit cards	11		11		14		36		—		1,332		1,368		—		—		—		—		—		—
Home equity lines and loans	359		196		787		1,342		—		97,995		99,337		372		16		474		862		96,519		97,381
Indirect consumer loans	979		218		231		1,428		—		161,778		163,206		855		121		284		1,260		141,495		142,755
Direct consumer loans	56		24		22		102		—		17,551		17,653		47		9		29		85		15,576		15,661
Total	$	3,906	$	1,034	$	5,671	$	10,611	$	—	$	1,327,499	$	1,338,110	$	7,985	$	352	$	2,197	$	10,534	$	1,292,498	$	1,303,032


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

Troubled Debt Restructurings:

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

As of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, the Corporation has a recorded investment in TDRs of ~~$7.1~~$6.7 million and ~~$7.7~~$6.8 million, respectively. There were specific reserves of ~~$0.5~~$0.8 million and ~~$0.7~~$0.9 million allocated for TDRs at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. As of ~~June 30, 2018,~~March 31, 2019, TDRs totaling ~~$1.4~~$0.8 million were accruing interest under the modified terms and ~~$5.7~~$5.9 million were on non-accrual status. As of December 31, ~~2017,~~2018, TDRs totaling ~~$1.7~~$0.8 million were accruing interest under the modified terms and $6.0 million were on non-accrual status. The Corporation had committed no additional amounts as of both ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, to customers with outstanding loans that are classified as TDRs.

There were no loans modified as TDRs during the three month period ended June 30, 2018 while the terms of certain loans were modified as TDRs during the three month period ended June 30, 2017. The modification of the terms of two commercial & industrial term loans and one commercial line of credit during the three months ended June 30, 2017 included consolidating the loans into one commercial & industrial loan, extending the maturity date by approximately two years and lowering the monthly payment. An additional piece of equipment was taken as collateral but was not considered to be of greater value than the concessions given. The modification of the terms of a residential mortgage loan during the three months ended June 30, 2017 included an extension of the maturity date by approximately five years and a postponement of the scheduled amortized past due payments to the end of the loan.

During the ~~six months~~three-month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ the terms of certain loans were modified as TDRs. The modification of the terms of one home equity loan during the three months ended March 31, 2019 included a reduction in the stated interest rate for the remaining life of the loan, an extension of the maturity date for approximately three years and a reduction of the scheduled amortized payment of the loan for greater than a three month period. The modification of the terms of one commercial &and industrial term loan during the ~~six~~three months ended ~~June 30,~~March 31, 2018 included an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk. In addition to the modifications noted above, the modification of the terms of one commercial mortgage loan during the six months ended June 30, 2017 included a reduction of the scheduled amortized payments of the loan for greater than a three month period.

~~The following table presents loans by class modified as TDRs that occurred during the three month period ended June 30, 2017 (dollars in thousands):~~

June 30, 2017 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial 3
$ 171
$ 171
Residential mortgages 1
105
105
Total 4
$ 276
$ 276

~~The TDRs described above increased the allowance for loan losses by $0.1 million and resulted in no charge-offs during the three month period ended June 30, 2017.~~

The following tables presents loans by class modified as TDRs that occurred during the ~~six months~~three month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (dollars in thousands):

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

Commercial and agricultural:

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



March 31, 2019	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Consumer loans:
Home equity lines and loans	1	$	137	$	137
Total	1	$	137	$	137


June 30, 2017	Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
March 31, 2018						Number of Loans	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial	3	$	171	$	171	1	$	100	$	100
Commercial mortgages:
Commercial mortgages	1	$	166	$	166
Residential mortgages	1	105		105
Total	5	$	442	$	442	1	$	100	$	100

The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the ~~six months~~three month periods ended ~~June 30,~~March 31, 2019 and 2018. ~~The TDRs described above increased the allowance for loan losses by $0.1 million and resulted in no charge-offs during the six months ended June 30, 2017.~~

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three ~~and six~~ month periods ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~

2018.

Credit Quality Indicators

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

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

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

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

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

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

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


	June 30, 2018														March 31, 2019
	Not Rated		Pass		Special Mention		Substandard		Doubtful		Loans acquired with deteriorated credit quality		Total		Not Rated		Pass		Special Mention		Substandard		Doubtful		Total
Commercial and agricultural:
Commercial and industrial	$	—	$	179,814	$	9,843	$	2,619	$	1,356	$	—	$	193,632	$	—	$	191,835	$	4,704	$	6,468	$	1,803	$	204,810
Agricultural	—		425		—		—		—		—		425		—		327		—		—		—		327
Commercial mortgages:
Construction	—		45,548		—		123		—		—		45,671		—		46,634		—		101		—		46,735
Commercial mortgages	—		598,395		10,639		12,526		1,327		—		622,887		—		580,440		15,928		12,442		4,613		613,423
Residential mortgages	190,776		—		—		3,155		—		—		193,931		179,390		—		—		2,550		—		181,940
Consumer loans:
Credit cards	1,368		—		—		—		—		—		1,368		—		—		—		—		—		—
Home equity lines and loans	97,978		—		—		1,359		—		—		99,337		96,359		—		—		1,022		—		97,381
Indirect consumer loans	162,533		—		—		673		—		—		163,206		142,123		—		—		632		—		142,755
Direct consumer loans	17,613		—		—		40		—		—		17,653		15,628		—		—		33		—		15,661
Total	$	470,268	$	824,182	$	20,482	$	20,495	$	2,683	$	—	$	1,338,110	$	433,500	$	819,236	$	20,632	$	23,248	$	6,416	$	1,303,032



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

December 31, 2017
Not Rated Pass Special Mention Substandard Doubtful Loans acquired with deteriorated credit quality Total
Commercial and agricultural:
Commercial and industrial $ —
$ 186,556
$ 4,447
$ 6,605
$ 1,422
$ —
$ 199,030
Agricultural —
546
—
—
—
—
546
Commercial mortgages:

Construction —
45,553
—
135
—
—
45,688
Commercial mortgages —
575,321
9,665
13,331
1,377
792
600,486
Residential mortgages 191,777
—
—
3,160
—
—
194,937
Consumer loans:

Credit cards 1,516
—
—
—
—
—
1,516
Home equity lines and loans 99,568
—
—
1,310
—
—
100,878
Indirect consumer loans 152,598
—
—
934
—
—
153,532
Direct consumer loans 18,955
—
—
14
—
—
18,969
Total $ 464,414
$ 807,976
$ 14,112
$ 25,489
$ 2,799
$ 792
$ 1,315,582

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


	June 30, 2018										March 31, 2019
			Consumer Loans										Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans		Residential Mortgages		Credit Card		Home Equity Lines and Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	190,950	$	1,368	$	97,978	$	162,533	$	17,613	$	179,390	$	—	$	96,359	$	142,123	$	15,628
Non-Performing	2,981		—		1,359		673		40		2,550		—		1,022		632		33
	$	193,931	$	1,368	$	99,337	$	163,206	$	17,653	$	181,940	$	—	$	97,381	$	142,755	$	15,661


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

NOTE 5 FAIR VALUE

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

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

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

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

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

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

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

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

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

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

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

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


			Fair Value Measurement at June 30, 2018 Using								Fair Value Measurement at March 31, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	15,450	$	—	$	15,450	$	—	$	5,488	$	—	$	5,488	$	—
Mortgage-backed securities, residential	198,640		—		198,640		—		203,938		—		203,938		—
Obligations of states and political subdivisions	47,029		—		47,029		—		48,332		—		48,332		—
Corporate bonds and notes	250		—		250		—		249		—		249		—
SBA loan pools	3,788		—		3,788		—		8,714		—		8,714		—
Total available for sale securities	$	265,157	$	—	$	265,157	$	—	$	266,721	$	—	$	266,721	$	—

Equity investments	$	1,277	$	1,277	$	—	$	—	$	1,198	$	1,198	$	—	$	—
Derivative assets	2,304		—		2,304		—		4,091		—		4,091		—

Financial Liabilities:
Derivative liabilities	$	2,322	$	—	$	2,304	$	18	$	4,321	$	—	$	4,091	$	230

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

March 31, 2019.


			Fair Value Measurement at December 31, 2017 Using								Fair Value Measurement at December 31, 2018 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	15,491	$	—	$	15,491	$	—	$	5,472	$	—	$	5,472	$	—
Mortgage-backed securities, residential	219,909		—		219,909		—		183,192		—		183,192		—
Obligations of states and political subdivisions	53,132		—		53,132		—		44,152		—		44,152		—
Corporate bonds and notes	251		—		251		—		247		—		247		—
SBA loan pools	4,308		—		4,308		—		9,195		—		9,195		—
Total available for sale securities	$	293,091	$	—	$	293,091	$	—	$	242,258	$	—	$	242,258	$	—

Equity investments	$	1,192	$	1,192	$	—	$	—	$	1,075	$	1,075	$	—	$	—
Derivative assets	974		—		974		—		3,142		—		3,142		—

Financial Liabilities:
Derivative liabilities	$	1,049	$	—	$	974	$	75	$	3,282	$	—	$	3,142	$	140

There were no transfers between Level 1 and Level 2 during the three ~~and six~~ month ~~periods~~period ended ~~June 30, 2017.~~March 31, 2018.

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three-month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and June 30, 2017~~ (in thousands):

Assets (Liabilities)
Corporate Bonds and Notes Derivative Liabilities
June 30, 2018 June 30, 2017 June 30, 2018 June 30, 2017
Balance of recurring Level 3 assets at April 1 $ —
$ 251
$ (50 ) $ (65 )
Derivative instruments entered into —
—
(1 ) —
Total gains or losses for the period:
Included in earnings - other non-interest income —
—
33
(6 )
Included in other comprehensive income —
1
—
—
Balance of recurring Level 3 assets at June 30 $ —
$ 252
$ (18 ) $ (71 )

The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the six month periods ended June 30, 2018 and June 30, 2017 (in thousands):


	Assets (Liabilities)										Assets (Liabilities)
	Corporate Bonds and Notes				Derivative Liabilities						Corporate Bonds and Notes				Derivative Liabilities
	June 30, 2018		June 30, 2017		June 30, 2018			June 30, 2017			March 31, 2019		March 31, 2018		March 31, 2019			March 31, 2018
Balance of recurring Level 3 assets at January 1	$	—	$	250	$	(75	)	$	(68	)	$	—	$	—	$	(140	)	$	(75	)
Derivative instruments entered into	—		—		(1		)	—			—		—		(24		)	—
Total gains or losses for the period:
Included in earnings - other non-interest income	—		—		58			(3		)	—		—		(66		)	25
Included in other comprehensive income	—		2		—			—			—		—		—			—
Transfers out of Level 3	—		—		—			—			—		—		—			—
Balance of recurring Level 3 assets at June 30	$	—	$	252	$	(18	)	$	(71	)
Balance of recurring Level 3 assets at March 31,											$	—	$	—	$	(230	)	$	(50	)

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

Description

Fair Value at
June 30,
2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at June 30, 2018

Fair Value at
March 31,
2019

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at March 31, 2019

Derivative liabilities

Historical trend

Credit default rate

6.76% - 6.76%
[6.76%]

230

Historical trend

Credit default rate

7.27% - 7.27%
[7.27%]

Description

Fair Value at
December 31,
2017

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at December 31, 2017

Fair Value at
December 31,
2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at December 31, 2018

Derivative liabilities

Historical trend

Credit default rate

5.67% - 5.67%
[5.67%]

140

Historical trend

Credit default rate

7.46% - 7.46%
[7.46%]

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

Fair Value Measurement at June 30, 2018 Using
Financial Assets: Fair Value Quoted Prices in Active Markets for Identical Assets
(Level 1) Significant Other Observable Inputs
(Level 2) Significant Unobservable Inputs
(Level 3) Total Gains (Losses)
Impaired Loans:
Commercial and agricultural:
Commercial and industrial $ 12
$ —
$ —
$ 12
$ —
Total impaired loans $ 12
$ —
$ —
$ 12
$ —
Other real estate owned:

Commercial mortgages:

Commercial mortgages $ 534
$ —
$ —
$ 534
$ —
Residential mortgages 204
—
—
204
—
Consumer loans:

Home equity lines and loans 148
—
—
148
—
Total other real estate owned, net $ 886
$ —
$ —
$ 886
$ —


			Fair Value Measurement at December 31, 2017 Using											Fair Value Measurement at March 31, 2019 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)			Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total Gains (Losses)
Impaired Loans:
Commercial and agricultural:
Commercial and industrial	$	96	$	—	$	—	$	96	$	(70	)
Commercial mortgages:
Commercial mortgages	411		—		—		411		(105		)	$	2,913	$	—	$	—	$	2,913	$	(1,785	)
Total impaired loans	$	507	$	—	$	—	$	507	$	(175	)	$	2,913	$	—	$	—	$	2,913	$	(1,785	)
Other real estate owned:
Commercial mortgages:
Commercial mortgages	$	1,483	$	—	$	—	$	1,483	$	(43	)	$	62	$	—	$	—	$	62	$	—
Residential mortgages	382		—		—		382		—			27		—		—		27		—
Consumer loans:
Home equity lines and loans	75		—		—		75		—			55		—		—		55		—
Total other real estate owned, net	$	1,940	$	—	$	—	$	1,940	$	(43	)	$	144	$	—	$	—	$	144	$	—



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

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

Description

Fair Value at June 30, 2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
June 30, 2018

Fair Value at March 31, 2019

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
March 31, 2019

Impaired loans:

Commercial and agricultural:

Commercial and industrial

Sales comparison

Discount to appraised value

0.00% - 0.00%
[0.00%]

Commercial mortgages:

Commercial mortgages

2,913

Sales comparison

Discount to appraised value

10.00% - 11.76%
[10.89%]

2,913

OREO:

Commercial mortgages:

Commercial mortgages

534

Sales comparison

Discount to appraised value

10.00% - 22.95%
[19.98%]

Sales comparison

Discount to appraised value

22.00% - 22.00%
[22.00%]

Residential mortgages

204

Sales comparison

Discount to appraised value

17.28% - 39.78%
[20.44%]

Sales comparison

Discount to appraised value

13.14% -13.14%
[13.14%]

Consumer loans:

Home equity lines and loans

148

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

886

144

Description

Fair Value at December 31, 2017

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
December 31, 2017

Fair Value at December 31, 2018

Valuation Technique

Unobservable Inputs

Range
[Weighted Average]
at
December 31, 2018

Impaired loans:

Commercial and agricultural:

Commercial and industrial

Sales comparison

Discount to appraised value

0.00% - 36.07%
[33.02%]

1,456

Sales comparison

Discount to appraised value

11.76% - 11.76%
[11.76%]

Commercial mortgages:

Commercial mortgages

411

Sales comparison

Discount to appraised value

10.00% - 89.98%
[51.35%]

507

1,456

OREO:

Commercial mortgages:

Commercial mortgages

1,483

Sales comparison

Discount to appraised value

10.00% - 22.95%
[19.75%]

213

Sales comparison

Discount to appraised value

10.00% - 24.80%
[17.72%]

Residential mortgages

382

Sales comparison

Discount to appraised value

17.28% - 27.97%
[20.77%]

204

Sales comparison

Discount to appraised value

20.80% - 39.78%
[22.94%]

Consumer loans:

Home equity lines and loans

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

157

Sales comparison

Discount to appraised value

20.80% - 20.80%
[20.80%]

1,940

574

FAIR VALUE OF FINANCIAL INSTRUMENTS

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


	June 30, 2018										March 31, 2019
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)		Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	30,837	$	30,837	$	—	$	—	$	30,837	$	28,153	$	28,153	$	—	$	—	$	28,153
Interest-bearing deposits in other financial institutions	3,978		3,978		—		—		3,978
Interest-earning deposits in other financial institutions											97,657		97,657		—		—		97,657
Equity investments	1,277		1,277		—		—		1,277		1,198		1,198		—		—		1,198
Securities available for sale	265,157		—		265,157		—		265,157		266,721		—		266,721		—		266,721
Securities held to maturity	3,806		—		2,309		1,481		3,790		3,861		—		1,851		2,006		3,857
FHLBNY and FRBNY stock	5,816		—		—		—		N/A		3,143		—		—		—		N/A
Loans, net and loans held for sale	1,315,483		—		—		1,296,697		1,296,697		1,279,950		—		—		1,277,534		1,277,534
Accrued interest receivable	4,404		1		737		3,666		4,404		4,940		18		927		3,995		4,940
Derivative assets	2,304		—		2,304		—		2,304		4,091		—		4,091		—		4,091

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,332,815	$	1,332,815	$	—	$	—	$	1,332,815	$	1,409,509	$	1,409,509	$	—	$	—	$	1,409,509
Time deposits	146,094		—		146,315		—		146,315		156,993		—		157,939		—		157,939
FHLBNY overnight advances	58,950		—		58,949		—		58,949
Accrued interest payable	115		21		94		—		115		279		41		238		—		279
Derivative liabilities	2,322		—		2,304		18		2,322		4,321		—		4,091		230		4,321

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


	December 31, 2017										December 31, 2018
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)		Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	27,966	$	27,966	$	—	$	—	$	27,966	$	33,040	$	33,040	$	—	$	—	$	33,040
Interest-bearing deposits in other financial institutions	2,763		2,763		—		—		2,763
Interest-earning deposits in other financial institutions											96,932		96,932		—		—		96,932
Equity investments	1,192		1,192		—		—		1,192		1,075		1,075		—		—		1,075
Securities available for sale	293,091		—		293,091		—		293,091		242,258		—		242,258		—		242,258
Securities held to maturity	3,781		—		1,830		1,946		3,776		4,875		—		1,838		3,020		4,858
FHLBNY and FRBNY stock	5,784		—		—		—		N/A		3,138		—		—		—		N/A
Loans, net	1,291,205		—		—		1,289,584		1,289,584
Loans held for sale	542		—		542		—		542
Loans, net and loans held for sale											1,293,464		—		—		1,287,495		1,287,495
Accrued interest receivable	4,642		1		867		3,774		4,642		4,480		80		697		3,703		4,480
Derivative assets	974		—		974		—		974		3,142		—		3,142		—		3,142

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	1,349,084	$	1,349,084	$	—	$	—	$	1,349,084	$	1,419,011	$	1,419,011	$	—	$	—	$	1,419,011
Time deposits	118,362		—		118,598		—		118,598		150,226		—		150,938		—		150,938
Securities sold under agreements to repurchase	10,000		—		10,058		—		10,058
FHLBNY overnight advances	57,700		—		57,700		—		57,700
FHLBNY term advances	2,000		—		2,001		—		2,001
Accrued interest payable	148		24		124		—		148		232		26		206		—		232
Derivative liabilities	1,049		—		974		75		1,049		3,282		—		3,142		140		3,282

NOTE 6 LEASES

Operating Leases

The Corporation leases certain branch properties under long-term, operating lease agreements. The leases expire at various dates through 2033 and generally include renewal options. As of March 31, 2019, the weighted average remaining lease term was 12.1 years with a weighted average discount rate of 3.37%. Rent expense was $0.2 million for the three months ended March 31, 2019. Certain leases provide for increases in future minimum annual rent payments as defined in the lease agreements. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees.

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



	March 31, 2019			December 31, 2018
Operating lease right-of-use asset	$	8,550		$	—
Less: accumulated amortization	(159		)	—
Operating lease right-of-use-assets, net	$	8,391		$	—

The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of March 31, 2019 (in thousands):



Year	Amount
2019	$	686
2020	932
2021	899
2022	831
2023	851
2024 and thereafter	6,090
Total minimum lease payments	10,289
Less: amount representing interest	(1,890		)
Present value of net minimum lease payments	$	8,399

As of March 31, 2019, the Corporation had no operating leases that were signed, but had not yet commenced.

Finance Leases

The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of March 31, 2019, the weighted average remaining lease term was 13.7 years with a weighted average discount rate of 3.51%. The Corporation has included these leases in premises and equipment as of March 31, 2019 and December 31, 2018 as follows (in thousands):



	March 31, 2019			December 31, 2018
Buildings	$	5,572		$	5,572
Less: accumulated depreciation	(1,291		)	(1,208		)
Net book value	$	4,281		$	4,364

The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value of net minimum lease payments as of March 31, 2019 (in thousands):



Year	Amount
2019	$	276
2020	376
2021	388
2022	391
2023	391
2024 and thereafter	3,639
Total minimum lease payments	5,461
Less: amount representing interest	(1,211		)
Present value of net minimum lease payments	$	4,250

As of March 31, 2019, the Corporation had no finance leases that were signed, but had not yet commenced.

Related Party Transactions

The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through August 2019 from a member of the Corporation's Board of Directors with monthly rent expense totaling $4 thousand per month. Rent paid to this Board of Directors member totaled $12 thousand for both of the three month periods ended March 31, 2019 and 2018.

The Bank leases its branch located at 2 Rush Street, Schenectady, New York, under a lease agreement through February 2033 from a member of the Corporation's Board of Directors with monthly rent expense totaling $8 thousand per month. Rent paid to this

Board of Directors member totaled $24 thousand and $12 thousand for the three month periods ended March 31, 2019 and 2018, respectively.

NOTE 67 GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill included in the core banking segment during the ~~six~~three month periods ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were as follows (in thousands):


	2018		2017		2019		2018
Beginning of year	$	21,824	$	21,824	$	21,824	$	21,824
Acquired goodwill	—		—		—		—
Ending balance June 30,	$	21,824	$	21,824
Ending balance March 31,					$	21,824	$	21,824

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


	At June 30, 2018				At December 31, 2017				At March 31, 2019				At December 31, 2018
	Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization
Core deposit intangibles	$	5,975	$	5,395	$	5,975	$	5,196	$	5,975	$	5,651	$	5,975	$	5,576
Other customer relationship intangibles	5,633		4,504		5,633		4,327		5,633		4,769		5,633		4,681
Total	$	11,608	$	9,899	$	11,608	$	9,523	$	11,608	$	10,420	$	11,608	$	10,257

Aggregate amortization expense was $0.2 million for both of the three month periods ended ~~June 30, 2018~~March 31, 2019 and ~~2017. Aggregate amortization expense was $0.4 million for both of the six month periods ended June 30, 2018 and 2017, respectively.~~2018.

The remaining estimated aggregate amortization expense at ~~June 30, 2018~~March 31, 2019 is listed below (in thousands):


Year	Estimated Expense		Estimated Expense
2018	$	358
2019	609		$	446
2020	484		484
2021	258		258
2022	—		—
2023			—
Total	$	1,709	$	1,188

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

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

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

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

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

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

NOTE 8 COMMITMENTS AND CONTINGENCIES

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

The following table lists the contractual amounts of financial instruments with off-balance sheet risk at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 (in thousands):


	June 30, 2018				December 31, 2017				March 31, 2019				December 31, 2018
	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	17,062	$	32,329	$	16,019	$	28,591	$	11,520	$	21,741	$	9,137	$	18,033
Unused lines of credit	1,473		199,478		1,604		200,353		442		219,178		848		212,601
Standby letters of credit	—		14,416		—		15,022		—		16,241		—		16,161

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

In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. ~~Except for the above matter as~~As of ~~June 30, 2018,~~March 31, 2019, we believe that we are not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.

NOTE 9 ACCUMULATED OTHER COMPREHENSIVE LOSS

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

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

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



	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at January 1, 2019	$	(4,646	)	$	(6,765	)	$	(11,411	)
Other comprehensive income before reclassification	2,556			—			2,556
Amounts reclassified from accumulated other comprehensive income	—			13			13
Net current period other comprehensive income	2,556			13			2,569
Balance at March 31, 2019	$	(2,090	)	$	(6,752	)	$	(8,842	)

Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total
Balance at April 1, 2017 $ (2,379 ) $ (6,377 ) $ (8,756 )
Other comprehensive loss before reclassification 1,772
—
1,772
Amounts reclassified from accumulated other comprehensive income (8 ) 20
12
Net current period other comprehensive income 1,764
20
1,784
Balance at June 30, 2017 $ (615 ) $ (6,357 ) $ (6,972 )



	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at January 1, 2018	$	(3,415	)	$	(6,925	)	$	(10,340	)
Cumulative effect of account change	(202		)	—			(202		)
Balance at January 1, 2018, as adjusted	(3,617		)	(6,925		)	(10,542		)
Other comprehensive loss before reclassification	(3,307		)	—			(3,307		)
Amounts reclassified from accumulated other comprehensive income	—			13			13
Net current period other comprehensive income (loss)	(3,307		)	13			(3,294		)
Balance at March 31, 2018	$	(6,924	)	$	(6,912	)	$	(13,836	)

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

Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total
Balance at January 1, 2017 $ (4,356 ) $ (6,398 ) $ (10,754 )
Other comprehensive income before reclassification 3,749
—
3,749
Amounts reclassified from accumulated other comprehensive income (8 ) 41
33
Net current period other comprehensive income 3,741
41
3,782
Balance at June 30, 2017 $ (615 ) $ (6,357 ) $ (6,972 )

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

Details about Accumulated Other Comprehensive Income Components Three Months Ended
June 30, Affected Line Item
in the Statement Where
Net Income is Presented
2018 2017
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale $ —
$ (12 ) Net gains (losses) on securities transactions
Tax effect —
4
Income tax expense
Net of tax —
(8 )
Amortization of defined pension plan and other benefit plan items:

Prior service costs (a) $ (55 ) $ (55 ) Other components of net periodic pension and postretirement benefits
Actuarial losses (a) 73
88
Other components of net periodic pension and postretirement benefits
Tax effect (4 ) (13 ) Income tax expense
Net of tax 14
20

Total reclassification for the period, net of tax $ 14
$ 12

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


Details about Accumulated Other Comprehensive Income Components	Six Months Ended June 30,						Affected Line Item in the Statement Where Net Income is Presented	Three Months Ended March 31,						Affected Line Item in the Statement Where Net Income is Presented
	2018			2017				2019			2018
Unrealized gains and losses on securities available for sale:
Realized gains on securities available for sale	$	—		$	(12	)	Net gains (losses) on securities transactions
Tax effect	—			4			Income tax expense
Net of tax	—			(8		)
Amortization of defined pension plan and other benefit plan items:
Prior service costs (a)	(110		)	(110		)	Other components of net periodic pension and postretirement benefits	$	(55	)	$	(55	)	Other components of net periodic pension and postretirement benefits
Actuarial losses (a)	146			176			Other components of net periodic pension and postretirement benefits	73			73			Other components of net periodic pension and postretirement benefits
Tax effect	(9		)	(25		)	Income tax expense	(5		)	(5		)	Income tax expense
Net of tax	27			41
Total reclassification for the period, net of tax	$	27		$	33			$	13		$	13

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

NOTE 10 REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following ~~table presents~~tables present the Corporation's non-interest income by revenue stream and reportable segment for the three ~~and six~~ months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands). Items outside the scope of ASC 606 are noted as such.


	Three Months Ended June 30, 2018											Three Months Ended March 31, 2019
Revenue by Operating Segment:	Core Banking			WMG		Holding Company, CFS, and CRM^(c)			Total			Core Banking			WMG		Holding Company, CFS, and CRM^(b)		Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	939		$	—	$	—		$	939		$	888		$	—	$	—	$	888
Other	205			—		—			205			216			—		—		216
Interchange revenue from debit card transactions	996			—		—			996			1,031			—		—		1,031
WMG fee income	—			2,373		—			2,373			—			2,276		—		2,276
CFS fee and commission income	—			—		135			135			—			—		168		168
Net gains (losses) on sales of OREO	(48		)	—		—			(48		)	(83		)	—		—		(83		)
Net gains on sales of loans^(a)	59			—		—			59			48			—		—		48
Loan servicing fees^(a)	22			—		—			22			35			—		—		35
Changes in fair value of equity investments^(a)												73			—		16		89
Other^(a)	649			—		(5		)	644			257			—		—		257
Total non-interest income (loss)	$	2,822		$	2,373	$	130		$	5,325		$	2,465		$	2,276	$	184	$	4,925


	Three Months Ended June 30, 2017 (b)											Three Months Ended March 31, 2018
Revenue by Operating Segment:	Core Banking			WMG		Holding Company, CFS, and CRM^(c)			Total			Core Banking			WMG		Holding Company, CFS, and CRM^(b)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	971		$	—	$	—		$	971		$	965		$	—	$	—		$	965
Other	254			—		—			254			199			—		—			199
Interchange revenue from debit card transactions	964			—		—			964			1,035			—		—			1,035
WMG fee income	—			2,269		—			2,269			—			2,316		—			2,316
CFS fee and commission income	—			—		174			174			—			—		110			110
Net gains (losses) on sales of OREO	(9		)	—		—			(9		)	44			—		—			44
Net gains on sales of loans^(a)	53			—		—			53			46			—		—			46
Loan servicing fees^(a)	21			—		—			21			22			—		—			22
Net gains (losses) on sales of securities^(a)	12			—		—			12
Changes in fair value of equity investments^(a)												(10		)	—		8			(2		)
Other^(a)	368			—		(55		)	313			882			—		(142		)	740
Total non-interest income	$	2,634		$	2,269	$	119		$	5,022		$	3,183		$	2,316	$	(24	)	$	5,475

(a) Not within scope of ASC 606.

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

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

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

Six Months Ended June 30, 2018
Revenue by Operating Segment: Core Banking WMG
Holding Company, CFS, and CRM^(c)
Total
Non-interest income
Service charges on deposit accounts
Overdraft fees $ 1,904
$ —
$ —
$ 1,904
Other 404
—
—
404
Interchange revenue from debit card transactions 2,031
—
—
2,031
WMG fee income —
4,689
—
4,689
CFS fee and commission income —
—
245
245
Net gains (losses) on sales of OREO (4 ) —
—
(4 )
Net gains on sales of loans^(a)
105
—
—
105
Loan servicing fees^(a)
45
—
—
45
Other^(a)
1,520
—
(139 ) 1,381
Total non-interest income (loss) $ 6,005
$ 4,689
$ 106
$ 10,800

Six Months Ended June 30, 2017 (b)
Revenue by Operating Segment: Core Banking WMG
Holding Company, CFS, and CRM^(c)
Total
Non-interest income

Service charges on deposit accounts

Overdraft fees $ 1,950
$ —
$ —
$ 1,950
Other 459
—
—
459
Interchange revenue from debit card transactions 1,884
—
—
1,884
WMG fee income —
4,378
—
4,378
CFS fee and commission income —
—
312
312
Net gains on sales of OREO 8
—
—
8
Net gains on sales of loans^(a)
122
—
—
122
Loan servicing fees^(a)
41
—
—
41
Net gains (losses) on sales of securities^(a)
12
—
—
12
Other^(a)
763
—
(60 ) 703
Total non-interest income $ 5,239
$ 4,378
$ 252
$ 9,869

~~(a) Not within scope of ASC 606.~~

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

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

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

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

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

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

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

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

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

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


	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2018			2017			2019			2018
Qualified Pension Plan
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	384			403			769			806			379			385
Expected return on plan assets	(826		)	(785		)	(1,652		)	(1,570		)	(554		)	(826		)
Amortization of unrecognized transition obligation	—			—			—			—			—			—
Amortization of unrecognized prior service cost	—			—			—			—			—			—
Amortization of unrecognized net loss	44			58			87			116			49			43
Net periodic pension benefit	$	(398	)	$	(324	)	$	(796	)	$	(648	)	$	(126	)	$	(398	)

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

Postretirement Plan, Medical and Life
Service cost, benefits earned during the period	$	—		$	—		$	—		$	—		$	—		$	—
Interest cost on projected benefit obligation	4			4			7			8			3			3
Expected return on plan assets	—			—			—			—			—			—
Amortization of unrecognized prior service cost	(55		)	(55		)	(110		)	(110		)	(55		)	(55		)
Amortization of unrecognized net loss	27			29			55			58			23			28
Net periodic postretirement, medical and life benefit	$	(24	)	$	(22	)	$	(48	)	$	(44	)	$	(29	)	$	(24	)

NOTE 12 SEGMENT REPORTING

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

Accounting policies for the segments are the same as those described in Note 1 of the Corporation’s ~~2017~~2018 Annual Report on Form 10-K, which was filed with the SEC on March ~~8, 2018.~~13, 2019. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment. The Holding Company, CFS, and CRM column below includes amounts to eliminate transactions between segments (in thousands).

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

Three months ended June 30, 2017
Core Banking WMG Holding Company, CFS, and CRM Consolidated Totals
Interest and dividend income $ 14,680
$ —
$ 4
$ 14,684
Interest expense 734
—
—
734
Net interest income 13,946
—
4
13,950
Provision for loan losses 421
—
—
421
Net interest income after provision for loan losses 13,525
—
4
13,529
Other non-interest income 2,634
2,269
119
5,022
Legal accruals and settlements 850
—
—
850
Other non-interest expenses 11,700
1,467
315
13,482
Income (loss) before income tax expense (benefit) 3,609
802
(192 ) 4,219
Income tax expense (benefit) 1,018
304
(59 ) 1,263
Segment net income (loss) $ 2,591
$ 498
$ (133 ) $ 2,956

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

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


	Six months ended June 30, 2017									Three months ended March 31, 2019
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals		Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	28,991	$	—	$	7		$	28,998	$	16,652	$	—	$	13		$	16,665
Interest expense	1,554		—		—			1,554		1,498		—		—			1,498
Net interest income	27,437		—		7			27,444		15,154		—		13			15,167
Provision for loan losses	1,461		—		—			1,461		1,093		—		—			1,093
Net interest income after provision for loan losses	25,976		—		7			25,983		14,061		—		13			14,074
Other non-interest income	5,239		4,378		252			9,869		2,465		2,276		184			4,925
Legal accruals and settlements	850		—		—			850
Other non-interest expenses	23,144		2,772		611			26,527		11,625		1,575		297			13,497
Income (loss) before income tax expense (benefit)	7,221		1,606		(352		)	8,475		4,901		701		(100		)	5,502
Income tax expense (benefit)	2,066		609		(135		)	2,540		889		179		(34		)	1,034
Segment net income (loss)	$	5,155	$	997	$	(217	)	$	5,935	$	4,012	$	522	$	(66	)	$	4,468

Segment assets	$	1,706,266	$	4,863	$	7,443		$	1,718,572	$	1,758,795	$	3,697	$	7,080		$	1,769,572



	Three months ended March 31, 2018
	Core Banking		WMG		Holding Company, CFS, and CRM			Consolidated Totals
Interest and dividend income	$	15,662	$	—	$	7		$	15,669
Interest expense	769		—		—			769
Net interest income	14,893		—		7			14,900
Provision for loan losses	709		—		—			709
Net interest income after provision for loan losses	14,184		—		7			14,191
Other non-interest income	3,183		2,316		(24		)	5,475
Other non-interest expenses	12,415		1,478		273			14,166
Income (loss) before income tax expense (benefit)	4,952		838		(290		)	5,500
Income tax expense (benefit)	894		213		(46		)	1,061
Segment net income (loss)	$	4,058	$	625	$	(244	)	$	4,439

Segment assets	$	1,688,034	$	4,090	$	7,830		$	1,699,954

NOTE 13 STOCK COMPENSATION

Board of Directors' Stock Compensation

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

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

During January 2019 and 2018, 8,465 and ~~2017,~~ 6,015 ~~and 7,880~~ shares, respectively, were re-issued from treasury to fund the stock component of directors' compensation. An expense of ~~$100~~$93 thousand and ~~$75~~$85 thousand related to this compensation was recognized during the three month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017, respectively. An expense of $184 thousand and $154 thousand related to this compensation was recognized during the six month periods ended June 30, 2018 and 2017,~~ respectively. This expense is accrued as shares are earned.

Restricted Stock Plan

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

A summary of restricted stock activity for the three month period ended ~~June 30, 2018~~March 31, 2019 is presented below:

Shares Weighted–Average Grant Date Fair Value
Nonvested at April 1, 2018 23,933
$ 38.12
Granted —
—
Vested (849 ) 44.84
Forfeited or cancelled —
—
Nonvested at June 30, 2018 23,084
$ 37.88

~~A summary of restricted stock activity for the six month period ended June 30, 2018 is presented below:~~


	Shares		Weighted–Average Grant Date Fair Value		Shares		Weighted–Average Grant Date Fair Value
Nonvested at January 1, 2018	25,522		$	38.01
Nonvested at January 1, 2019					29,694		$	40.81
Granted	—		—		439		45.66
Vested	(2,438	)	39.28		(697	)	34.58
Forfeited or cancelled	—		—		—		—
Nonvested at June 30, 2018	23,084		$	37.88
Nonvested at March 31, 2019					29,436		$	41.03

As of ~~June 30, 2018,~~March 31, 2019, there was ~~$838 thousand~~$1.1 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of ~~3.26~~3.41 years. The total fair value of shares vested was ~~$112~~$32 thousand and ~~$16~~$73 thousand for the ~~six~~three month periods ended ~~June 30,~~March 31, 2019 and 2018, ~~and 2017,~~ respectively.

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

Introduction

The following is the MD&A of the Corporation in this Quarterly Report on Form 10-Q for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s ~~2017~~2018 Annual Report on Form 10-K, which was filed with the SEC on March ~~8, 2018,~~13, 2019, for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 3–5.6.

The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below and in Part I, Item 1A, Risk Factors, on pages ~~17–24~~19–28 of the Corporation’s ~~2017~~2018 Form 10-K. For a discussion of use of non-GAAP financial measures, see pages ~~64–67~~67–70 of the Corporation's ~~2017~~2018 Form 10-K or pages ~~70-73~~60-64 in this Form 10-Q.

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

Forward-looking Statements

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

Consolidated Financial Highlights


																As of or for the
	As of or for the Three Months Ended															Six Months Ended						As of or for the Three Months Ended
	June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			June 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,
(in thousands, except per share data)	2018			2018			2017			2017			2017			2018			2017			2019			2018			2018			2018			2018
RESULTS OF OPERATIONS
Interest income	$	15,869		$	15,669		$	15,560		$	15,497		$	14,684		$	31,538		$	28,998		$	16,665		$	16,879		$	16,136		$	15,869		$	15,669
Interest expense	852			769			780			734			734			1,621			1,554			1,498			1,395			1,057			852			769
Net interest income	15,017			14,900			14,780			14,763			13,950			29,917			27,444			15,167			15,484			15,079			15,017			14,900
Provision for loan losses	2,362			709			6,272			1,289			421			3,071			1,461
Net interest income after provision for loan losses	12,655			14,191			8,508			13,474			13,529			26,846			25,983
Provision (credit) for loan losses																						1,093			(218		)	300			2,362			709
Net interest income after provision (credit) for loan losses																						14,074			15,702			14,779			12,655			14,191
Non-interest income	5,325			5,475			5,456			5,166			5,022			10,800			9,869			4,925			4,893			7,381			5,325			5,475
Non-interest expense	14,967			14,166			13,111			13,276			14,332			29,133			27,377			13,497			14,205			13,428			14,967			14,166
Income before income tax expense	3,013			5,500			853			5,364			4,219			8,513			8,475			5,502			6,390			8,732			3,013			5,500
Income tax expense	486			1,061			3,012			1,710			1,263			1,547			2,540			1,034			660			1,802			486			1,061
Net income (loss)	$	2,527		$	4,439		$	(2,159	)	$	3,654		$	2,956		$	6,966		$	5,935
Net income																						$	4,468		$	5,730		$	6,930		$	2,527		$	4,439

Basic and diluted earnings per share	$	0.52		$	0.92		$	(0.45	)	$	0.76		$	0.62		$	1.44		$	1.24		$	0.92		$	1.18		$	1.43		$	0.52		$	0.92
Average basic and diluted shares outstanding	4,828			4,822			4,809			4,802			4,797			4,825			4,793			4,860			4,843			4,834			4,828			4,822

PERFORMANCE RATIOS - Annualized
Return on average assets	0.59		%	1.06		%	(0.50		)%	0.85		%	0.69		%	0.82		%	0.70		%	1.03		%	1.29		%	1.61		%	0.59		%	1.06		%
Return on average equity	6.70		%	11.96		%	(5.53		)%	9.46		%	7.90		%	9.31		%	8.06		%	10.83		%	14.29		%	17.81		%	6.70		%	11.96		%
Return on average tangible equity (a)	7.94		%	14.21		%	(6.55		)%	11.24		%	9.43		%	11.05		%	9.66		%	12.56		%	16.74		%	21.01		%	7.94		%	14.21		%
Efficiency ratio (a) (b)	67.47		%	68.21		%	63.43		%	64.83		%	69.28		%	67.84		%	69.27		%
Efficiency ratio (unadjusted) (f)																						67.18		%	69.71		%	59.79		%	73.58		%	69.53		%
Efficiency ratio (adjusted) (a) (b)																						66.04		%	68.49		%	64.72		%	67.47		%	68.21		%
Non-interest expense to average assets	3.52		%	3.37		%	3.01		%	3.09		%	3.34		%	3.45		%	3.23		%	3.12		%	3.21		%	3.13		%	3.52		%	3.37		%
Loans to deposits	90.23		%	86.94		%	89.40		%	83.85		%	82.14		%	90.23		%	82.14		%	82.93		%	83.60		%	83.80		%	90.23		%	86.94		%

YIELDS / RATES - Fully Taxable Equivalent
Yield on loans	4.33		%	4.34		%	4.26		%	4.34		%	4.18		%	4.34		%	4.18		%	4.54		%	4.54		%	4.36		%	4.33		%	4.34		%
Yield on investments	2.21		%	2.22		%	2.15		%	2.16		%	2.01		%	2.22		%	2.01		%	2.42		%	2.16		%	2.18		%	2.21		%	2.22		%
Yield on interest-earning assets	3.94		%	3.94		%	3.82		%	3.86		%	3.65		%	3.94		%	3.65		%	4.07		%	4.01		%	3.96		%	3.94		%	3.94		%
Cost of interest-bearing deposits	0.24		%	0.20		%	0.20		%	0.20		%	0.20		%	0.22		%	0.20		%	0.54		%	0.48		%	0.33		%	0.24		%	0.20		%
Cost of borrowings	2.41		%	2.23		%	2.42		%	2.95		%	2.82		%	2.31		%	2.94		%	3.52		%	3.58		%	2.38		%	2.41		%	2.23		%
Cost of interest-bearing liabilities	0.32		%	0.29		%	0.28		%	0.27		%	0.26		%	0.30		%	0.28		%	0.55		%	0.50		%	0.39		%	0.32		%	0.29		%
Interest rate spread	3.62		%	3.65		%	3.54		%	3.59		%	3.39		%	3.64		%	3.37		%	3.52		%	3.51		%	3.57		%	3.62		%	3.65		%
Net interest margin, fully taxable equivalent	3.73		%	3.75		%	3.63		%	3.68		%	3.47		%	3.74		%	3.46		%
Net interest margin, fully taxable equivalent (a)																						3.71		%	3.68		%	3.71		%	3.73		%	3.75		%

CAPITAL
Total equity to total assets at end of period	8.88		%	8.84		%	8.77		%	8.91		%	8.84		%	8.88		%	8.84		%	9.69		%	9.40		%	8.92		%	8.88		%	8.84		%
Tangible equity to tangible assets at end of period (a)	7.60		%	7.55		%	7.48		%	7.62		%	7.53		%	7.60		%	7.53		%	8.50		%	8.19		%	7.69		%	7.60		%	7.55		%

Book value per share	$	31.42		$	31.16		$	31.10		$	32.11		$	31.67		$	31.42		$	31.67		$	35.27		$	33.99		$	32.35		$	31.42		$	31.16
Tangible book value per share (a)	26.55			26.24			26.14			27.09			26.60			26.55			26.60			30.54			29.22			27.53			26.55			26.24
Period-end market value per share	50.11			46.47			48.10			47.10			40.88			50.11			40.88			46.93			41.31			42.43			50.11			46.47
Dividends declared per share	0.26			0.26			0.26			0.26			0.26			0.52			0.52			0.26			0.26			0.26			0.26			0.26

AVERAGE BALANCES
Loans and loans held for sale (c)	$	1,328,386		$	1,315,207		$	1,291,414		$	1,259,919		$	1,237,189		$	1,321,834		$	1,226,377		$	1,296,200		$	1,306,556		$	1,330,071		$	1,328,386		$	1,315,207
Earning assets	1,625,591			1,623,748			1,639,257			1,615,833			1,634,955			1,624,676			1,620,290			1,671,063			1,680,269			1,625,132			1,625,591			1,623,748
Total assets	1,703,722			1,703,047			1,727,616			1,707,111			1,723,664			1,703,386			1,709,014			1,753,788			1,756,765			1,704,721			1,703,722			1,703,047
Deposits	1,495,410			1,488,708			1,516,390			1,512,685			1,532,819			1,492,076			1,514,374			1,565,371			1,576,629			1,501,082			1,495,410			1,488,708
Total equity	151,216			150,495			154,767			153,244			150,155			150,857			148,408			167,385			159,032			154,331			151,216			150,495
Tangible equity (a)	127,591			126,665			130,759			129,024			125,720			127,130			123,864			144,293			135,766			130,891			127,591			126,665

ASSET QUALITY
Net charge-offs	$	4,107		$	480		$	805		$	699		$	277		$	4,587		$	610


ASSET QUALITY															ASSET QUALITY
Net charge-offs															$	292		$	472		$	310		$	4,107		$	480
Non-performing loans (d)	12,790		17,280		17,324		14,028		15,208		12,790		15,208		15,099			12,254			12,629			12,790			17,280
Non-performing assets (e)	13,676		19,113		19,264		14,216		15,545		13,676		15,545		15,304			12,828			13,356			13,676			19,113
Allowance for loan losses	19,645		21,390		21,161		15,694		15,104		19,645		15,104		19,745			18,944			19,635			19,645			21,390

Annualized net charge-offs to average loans	1.24	%	0.15	%	0.25	%	0.22	%	0.10	%	0.70	%	0.10	%	0.09		%	0.14		%	0.09		%	1.24		%	0.15		%
Non-performing loans to total loans	0.96	%	1.31	%	1.32	%	1.09	%	1.21	%	0.96	%	1.21	%	1.16		%	0.93		%	0.96		%	0.96		%	1.31		%
Non-performing assets to total assets	0.80	%	1.12	%	1.13	%	0.82	%	0.90	%	0.80	%	0.90	%	0.86		%	0.73		%	0.76		%	0.80		%	1.12		%
Allowance for loan losses to total loans	1.47	%	1.62	%	1.61	%	1.22	%	1.21	%	1.47	%	1.21	%	1.52		%	1.44		%	1.49		%	1.47		%	1.62		%
Allowance for loan losses to non-performing loans	153.60	%	123.78	%	122.15	%	111.88	%	99.32	%	153.60	%	99.32	%	130.77		%	154.59		%	155.48		%	153.60		%	123.78		%

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

In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies. Refer to pages ~~70-73~~60-64 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.

Executive Summary

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

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


	Three Months Ended June 30,											Three Months Ended March 31,
	2018			2017			Change			Percentage Change		2019			2018			Change			Percentage Change
Net interest income	$	15,017		$	13,950		$	1,067		7.6	%	$	15,167		$	14,900		$	267		1.8	%
Non-interest income	5,325			5,022			303			6.0	%	4,925			5,475			(550		)	(10.0	)%
Non-interest expense	14,967			14,332			635			4.4	%	13,497			14,166			(669		)	(4.7	)%
Pre-provision income	5,375			4,640			735			15.8	%	6,595			6,209			386			6.2	%
Provision for loan losses	2,362			421			1,941			461.0	%	1,093			709			384			54.2	%
Income tax expense	486			1,263			(777		)	(61.5	)%	1,034			1,061			(27		)	(2.5	)%
Net income	$	2,527		$	2,956		$	(429	)	(14.5	)%	$	4,468		$	4,439		$	29		0.7	%

Basic and diluted earnings per share	$	0.52		$	0.62		$	(0.10	)	(16.1	)%	$	0.92		$	0.92		$	—		—	%

Selected financial ratios:
Return on average assets	0.59		%	0.69		%						1.03		%	1.06		%
Return on average equity	6.70		%	7.90		%						10.83		%	11.96		%
Net interest margin, fully taxable equivalent	3.73		%	3.47		%						3.71		%	3.75		%
Efficiency ratio	67.47		%	69.28		%
Efficiency ratio (adjusted) (a)												66.04		%	68.21		%
Non-interest expenses to average assets	3.52		%	3.34		%						3.12		%	3.37		%

Net income for the ~~second~~first quarter of ~~2018~~2019 was ~~$2.5~~$4.5 million, or ~~$0.52~~$0.92 per share, compared with ~~$3.0~~$4.4 million, or ~~$0.62~~$0.92 per share, for the same period in the prior year. Return on average equity for the current quarter was ~~6.70%~~10.83%, compared with ~~7.90%~~11.96% for the prior year quarter. The ~~decrease~~increase in net income was driven by ~~increases in non-interest expense and provision for loan losses, partially offset by increases~~an increase in net interest income and a decrease in non-interest ~~income~~expense, partially offset by an increase in the provision for loan losses and a decrease in ~~income tax expense.~~non-interest income.

Net interest income

Net interest income increased ~~$1.1~~$0.3 million, or ~~7.6%~~1.8%, compared with the same period in the prior year. The increase was due primarily to increases in interest income from the commercial loan portfolio and ~~indirect consumer loan portfolios and~~interest-earning deposits, along with a decrease in interest expense on ~~securities sold under agreements to repurchase,~~borrowed funds, partially offset by ~~decreases~~a decrease in interest income from the residential mortgage portfolio, taxable ~~securities~~ and ~~interest-earning deposits~~tax-exempt securities, and an increase in interest expense on ~~deposits and borrowed funds.~~interest-bearing deposits.

Non-interest income

Non-interest income ~~increased $0.3~~decreased $0.6 million, or ~~6.0%~~10.0%, compared with the same period in the prior year. The ~~increase~~decrease was due primarily to ~~increases~~decreases in ~~WMG fee~~other non-interest income and service charges on deposit accounts, along with a net loss on sales of other real estate owned. The decrease in other non-interest ~~income.~~income was due to the $0.4 million New York State sales tax refund received in March 2018. These items were partially offset by an increase in the fair market value of equity investments.

Non-interest expense

Non-interest expense ~~increased $0.6~~decreased $0.7 million, or ~~4.4%~~4.7%, compared with the same period in the prior year. The ~~increase~~decrease was due primarily to ~~increases~~decreases in ~~salaries~~pension and ~~wages, data processing~~other employee benefits, furniture and equipment expenses, ~~legal accruals and settlements, marketing and advertising expenses,~~professional services, other real estate owned expenses and other non-interest ~~expenses.~~expenses, partially offset by a reduced credit in other components of net periodic pension and postretirement benefits. For the three months ended ~~June 30, 2018,~~March 31, 2019, non-interest expense to average assets was ~~3.52%~~3.12%, compared with ~~3.34%~~3.37% for the same period in the prior year.

Provision for loan losses

The provision for loan losses increased ~~$1.9~~$0.4 million, or ~~461.0%~~54.2%, compared to the same period in the prior year. The increase was due primarily to an increase in the historical loss factor of the commercial and industrial loan portfolio, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018, compared to the same period in the prior year.specific impairments. Net charge-offs ~~increased $3.8~~decreased $0.2 million, compared with the same period in the prior ~~year, mostly due to the previously mentioned charge-off of multiple loans to one borrower.~~year.

Income tax expense

Income tax expense ~~decreased $0.8~~was $1.0 million, ~~or 61.5%,~~a slight decrease compared to the same period in the prior year. The ~~decrease was due primarily to the decline in the Federal income~~effective tax rate decreased from 34% to 21%, with the enactment of the Tax Act. Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation’s state income tax. Finally, the Corporation recognized a $1.2 million decline in income before income tax expense19.3% for the first quarter ~~when compared~~of 2018 to ~~the same period in the prior year.~~

~~The following table presents selected financial information~~18.8% for the ~~periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):~~

Six Months Ended
June 30,
2018 2017 Change Percentage Change
Net interest income $ 29,917
$ 27,444
$ 2,473
9.0 %
Non-interest income 10,800
9,869
931
9.4 %
Non-interest expense 29,133
27,377
1,756
6.4 %
Pre-provision income 11,584
9,936
1,648
16.6 %
Provision for loan losses 3,071
1,461
1,610
110.2 %
Income tax expense 1,547
2,540
(993 ) (39.1 )%
Net income $ 6,966
$ 5,935
$ 1,031
17.4 %

Basic and diluted earnings per share $ 1.44
$ 1.24
$ 0.20
16.1 %

Selected financial ratios:

Return on average assets 0.82 % 0.70 %

Return on average equity 9.31 % 8.06 %

Net interest margin, fully taxable equivalent 3.74 % 3.46 %

Efficiency ratio 67.84 % 69.27 %

Non-interest expense to average assets 3.45 % 3.23 %

Net income for the six months ended June 30, 2018 was $7.0 million, or $1.44 per share, compared with $5.9 million, or $1.24 per share, for the same period in the prior year. Return on average equity for the six months ended June 30, 2018 was 9.31%, compared with 8.06% for the same period in the prior year. The increase in net income from the prior year period was driven by increases in net interest income and non-interest income and a reduction in income tax expense, partially offset by increases in non-interest expense and provision for loan losses.

~~Net interest income~~

Net interest income increased $2.5 million, or 9.0%, compared with the same period in the prior year. The increase was due primarily to increases in interest income from the commercial and indirect consumer loan portfolios and tax exempt securities and a decrease in interest expense on securities sold under agreements to repurchase, partially offset by decreases in interest income from taxable securities and interest-earning deposits and an increase in interest expense on deposits and borrowed funds.

~~Non-interest income~~

Non-interest income increased $0.9 million, or 9.4%, compared to the same period in the prior year. The increase was due primarily to increases in WMG fee income, interchange revenue from debit card transactions, and other non-interest income.

~~Non-interest expense~~

Non-interest expense increased $1.8 million, or 6.4%, compared to the same period in the prior year. The increase was due primarily to increases in salaries and wages, data processing expenses, professional services, marketing and advertising expenses, other real estate owned expenses, and other non-interest expenses, partially offset by decreases in furniture and equipment expenses and an increased credit in other componentsfirst quarter of ~~net periodic pension benefits. For the six months ended June 30, 2018, non-interest expense to average assets was 3.45%, compared with 3.23% for the same period in the prior year.~~

~~Provision for loan losses~~

The provision for loan losses increased $1.6 million, or 110.2%, compared to the same period in the prior year. The increase was due primarily to an increase in the historical loss factor of the commercial and industrial loan portfolio, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the first six months of 2018, compared to the same period in the prior year. Net charge-offs increased $4.0 million, compared with the same period in the prior year, mostly due to the previously mentioned charge-off of multiple loans to one borrower.

~~Income tax expense~~

Income tax expensed decreased $1.0 million, or 39.1%, compared to the same period in the prior year. The decrease was due primarily to the decline in the Federal income tax rate from 34% to 21%, with the enactment of the Tax Act. Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation’s state income tax.2019.

Consolidated Results of Operations

The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. For a discussion of the Critical Accounting Policies, Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see page 7060 of this Form 10-Q and page 6067 of the Corporation’s ~~2017~~2018 Form 10-K.

Net Interest Income

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


	Three Months Ended June 30,								Three Months Ended March 31,
	2018		2017		Change		Percentage Change		2019		2018		Change		Percentage Change
Interest and dividend income	$	15,869	$	14,684	$	1,185	8.1	%	$	16,665	$	15,669	$	996	6.4	%
Interest expense	852		734		118		16.1	%	1,498		769		729		94.8	%
Net interest income	$	15,017	$	13,950	$	1,067	7.6	%	$	15,167	$	14,900	$	267	1.8	%

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

Net interest income for the three months ended ~~June 30, 2018~~March 31, 2019 totaled ~~$15.0~~$15.2 million compared with ~~$14.0~~$14.9 million for the same period in the prior year, an increase of ~~$1.1~~$0.3 million, or ~~7.6%.~~1.8%, due primarily to a $1.0 million increase in total interest and dividend income, offset by a $0.7 million increase in total interest expense. Interest and fees from loans increased ~~$1.5~~$0.4 million and interest from interest-earning deposits increased $0.7 million, while interest and dividends from investments ~~including interest-earning deposits,~~ decreased ~~$0.3~~$0.1 million in the ~~second~~first quarter of ~~2018~~2019 as compared to the same period in the prior year. Interest expense on deposits ~~and borrowed funds both~~ increased ~~$0.1~~$1.0 million, while interest expense on securities sold under agreements to repurchase decreased $0.1 million and interest expense on borrowed funds decreased $0.1 million in the ~~second~~first quarter of ~~2018~~2019 when compared to the same period in the prior year. Fully taxable equivalent net interest margin was ~~3.73%~~3.71% in the first quarter of 2019, compared with 3.75% for the ~~three months ended June 30, 2018~~same period in the prior year. The average yield on interest-earning assets increased 13 basis points, while the average cost of interest-bearing liabilities increased 26 basis points in the first quarter of 2019, compared ~~with 3.47% for~~to the same period in the prior year. Average interest-earning assets ~~decreased $9.4~~increased $47.3 million in the ~~second~~first quarter of 2018, compared to the same period in the prior year due primarily to a decrease in the average balances of interest-earning deposits and taxable securities. The average yield on interest-earning assets increased 29 basis points, while the average cost of interest-bearing liabilities increased six basis points in the second quarter of 2018,2019, compared to the same period in the prior year. The increase in interest and dividend income for the ~~average yield on interest-earning assets~~current quarter can be mostly attributed to aaverage yield increases of 18 basis points on commercial loans, 29 basis points in consumer loans, 18 basis points in taxable securities and 23 basis points ~~increase~~ in ~~the average yield on commercial loans,~~interest-earning deposits, due to ~~an increase in PRIME and LIBOR, and~~rising interest rates, along with a ~~$75.9~~$9.5 million increase in the average balance of commercial loans, primarily commercial real estate, and a $110.0 million increase in the average balance of interest-earning deposits, compared to the same period in the prior year. The increase in interest expense for the ~~average cost of interest-bearing liabilities~~current quarter can be mostly attributed to ~~a 14 basis points~~an increase in ~~the average cost of~~interest rates on interest-bearing deposit accounts, including promotional interest rates on time deposits, ~~and~~offset by a ~~$14.2~~$44.5 million ~~increase~~decrease in the average balance of ~~FHLB~~FHLBNY advances, and repos, offset by a 41 basis points decline in the average cost of FHLB advances and repos due to the maturity of one $4.0 million FHLB advance (3.90% rate) in October 2017, one $2.0 million FHLB term advance (3.05%) in January 2018, and one $10.0 million repurchase agreement (3.72% rate) in May 2018.

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

Six Months Ended
June 30,
2018 2017 Change Percentage Change
Interest and dividend income $ 31,538
$ 28,998
$ 2,540
8.8 %
Interest expense 1,621
1,554
67
4.3 %
Net interest income $ 29,917
$ 27,444
$ 2,473
9.0 %

Net interest income for the six months ended June 30, 2018 totaled $29.9 million compared with $27.4 million for the same period in the prior year, an increase of $2.5 million, or 9.0%. Interest and fees from loans increased $3.0 million, while interest from investments, including interest-earning deposits, decreased $0.5 million for the six months ended June 30, 2018 as compared to the same period in the prior year. Interest expense on borrowed funds increased $0.2 million, while interest expense on securities sold under agreements to repurchase, decreased $0.2 million for the six months ended June 30, 2018 as compared to the same period in the prior year. Fully taxable equivalent net interest margin was 3.74% for the six months ended June 30, 2018 compared with 3.46% for the same period in the prior year. Average interest-earning assets increased $4.4 million for the six months ended June 30, 2018 as compared to the same period in the prior year due primarily to an increase in the average balance of commercial and consumer loans and tax-exempt securities. The average yield on interest-earning assets increased 29 basis points, while the average cost of interest-bearing liabilities increased two basis points for the six months ended June 30, 2018 as compared to the same period in the prior year. The increase in the average yield on interest-earning assets can be mostly attributed to a 24 basis points increase in the average yield on commercial loans, due to an increase in PRIME and LIBOR, and a $79.7 million increase in the average balance of commercial loans, compared to the same period in the prior year. The increase in the average cost of interest-bearing liabilities can be attributed to a two basis points increase in the average cost of savings and money market accounts, a five basis points increase in the average cost of time deposits and a $12.6 million increase in the average balance of FHLB advances and repos, offset by a 63 basis points decline in the average cost of FHLB advances and repos due to the maturity of one $4.0 million FHLB term advance (3.90% rate) in October 2017, one $3.0 million FHLB term advance (2.91% rate) in December 2017, one $2.0 million FHLB term advance (3.05% rate) in January 2018, and one $10.0 million repurchase agreement (3.72% rate) in May 2018.other debt.

Average Consolidated Balance Sheet and Interest Analysis

The following ~~tables present~~table presents certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. For the purpose of the ~~tables~~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)	Three Months Ended June 30, 2018								Three Months Ended June 30, 2017								Three Months Ended March 31, 2019								Three Months Ended March 31, 2018
	Average Balance			Interest			Yield/Rate		Average Balance			Interest			Yield/Rate		Average Balance			Interest			Yield/Rate (3)		Average Balance			Interest			Yield/Rate (3)
Interest-earning assets:
Commercial loans	$	855,121		$	9,663		4.53	%	$	779,218		$	8,357		4.30	%	$	854,201		$	9,927		4.71	%	$	844,674		$	9,431		4.53	%
Mortgage loans	194,244			1,800			3.72	%	201,093			1,867			3.72	%	181,721			1,721			3.84	%	194,917			1,811			3.77	%
Consumer loans	279,021			2,873			4.13	%	256,878			2,658			4.15	%	260,278			2,878			4.48	%	275,616			2,845			4.19	%
Taxable securities	240,800			1,266			2.11	%	275,275			1,400			2.04	%	213,702			1,198			2.27	%	250,015			1,291			2.09	%
Tax-exempt securities	52,527			363			2.77	%	51,027			401			3.15	%	47,295			333			2.86	%	54,624			379			2.81	%
Interest-earning deposits	3,878			10			1.03	%	71,464			193			1.08	%	113,866			708			2.52	%	3,902			22			2.29	%
Total interest-earning assets	1,625,591			15,975			3.94	%	1,634,955			14,876			3.65	%	1,671,063			16,765			4.07	%	1,623,748			15,779			3.94	%

Non-earning assets:
Cash and due from banks	27,130								24,446								27,976								27,252
Premises and equipment, net	26,287								28,205								25,026								26,545
Other assets	56,002								54,033								54,696								53,753
Allowance for loan losses	(21,218		)						(15,060		)						(19,253		)						(21,253		)
AFS valuation allowance	(10,070		)						(2,915		)						(5,720		)						(6,998		)
Total assets	$	1,703,722							$	1,723,664							$	1,753,788							$	1,703,047

Interest-bearing liabilities:
Interest-bearing demand deposits	$	131,863		$	28		0.09	%	$	142,892		$	33		0.09	%	$	195,814		$	205		0.42	%	$	151,511		$	35		0.09	%
Savings and insured money market deposits	774,020			419			0.22	%	822,989			394			0.19	%	754,295			795			0.43	%	769,997			374			0.20	%
Time deposits	130,432			161			0.50	%	137,502			122			0.36	%	153,264			461			1.22	%	117,120			92			0.32	%
FHLBNY advances, securities sold under agreements to repurchase, and other debt	40,557			244			2.41	%	26,341			185			2.82	%	4,268			37			3.52	%	48,720			268			2.23	%
Total interest-bearing liabilities	1,076,872			852			0.32	%	1,129,724			734			0.26	%	1,107,641			1,498			0.55	%	1,087,348			769			0.29	%

Non-interest-bearing liabilities:
Demand deposits	459,095								429,436								461,998								450,080
Other liabilities	16,539								14,349								16,764								15,124
Total liabilities	1,552,506								1,573,509								1,586,403								1,552,552
Shareholders' equity	151,216								150,155								167,385								150,495
Total liabilities and shareholders’ equity	$	1,703,722							$	1,723,664							$	1,753,788							$	1,703,047
Fully taxable equivalent net interest income				15,123								14,142								15,267								15,010
Net interest rate spread (1)							3.62	%							3.39	%							3.52	%							3.65	%
Net interest margin, fully taxable equivalent (2)							3.73	%							3.47	%							3.71	%							3.75	%
Taxable equivalent adjustment				(106		)						(192		)						(100		)						(110		)
Net interest income				$	15,017							$	13,950							$	15,167							$	14,900

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

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

(3) Annualized.

AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands) Six Months Ended
June 30, 2018 Six Months Ended
June 30, 2017
Average Balance Interest Yield/ Rate Average Balance Interest Yield/ Rate
Interest-earning assets:
Commercial loans $ 849,927
$ 19,096
4.53 % $ 770,267
$ 16,387
4.29 %
Mortgage loans 194,579
3,610
3.74 % 199,740
3,754
3.79 %
Consumer loans 277,328
5,717
4.16 % 256,370
5,300
4.17 %
Taxable securities 245,382
2,557
2.10 % 273,935
2,823
2.08 %
Tax-exempt securities 53,570
742
2.79 % 47,910
747
3.14 %
Interest-bearing deposits 3,890
32
1.66 % 72,068
348
0.97 %
Total interest-earning assets 1,624,676
31,754
3.94 % 1,620,290
29,359
3.65 %

Non-earning assets:

Cash and due from banks 27,191

25,161

Premises and equipment, net 26,415

28,429

Other assets 54,882

53,994

Allowance for loan losses (21,236 )

(14,706 )

AFS valuation allowance (8,542 )

(4,154 )

Total assets $ 1,703,386

$ 1,709,014

Interest-bearing liabilities:

Interest-bearing demand deposits $ 141,632
$ 63
0.09 % $ 147,895
$ 67
0.09 %
Savings and insured money market deposits 772,019
793
0.21 % 803,269
771
0.19 %
Time deposits 123,813
253
0.41 % 139,366
250
0.36 %
FHLBNY advances, securities sold under agreements to repurchase, and other debt 44,616
512
2.31 % 31,973
466
2.94 %
Total interest-bearing liabilities 1,082,080
1,621
0.30 % 1,122,503
1,554
0.28 %

Non-interest-bearing liabilities:

Demand deposits 454,612

423,844

Other liabilities 15,837

14,259

Total liabilities 1,552,529

1,560,606

Shareholders' equity 150,857

148,408

Total liabilities and shareholders’ equity $ 1,703,386

$ 1,709,014

Fully taxable equivalent net interest income
30,133

27,805

Net interest rate spread (1)

3.64 %

3.37 %
Net interest margin, fully taxable equivalent (2)

3.74 %

3.46 %
Taxable equivalent adjustment
(216 )

(361 )
Net interest income
$ 29,917

$ 27,444

~~(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.~~

Changes Due to Rate and Volume

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The ~~tables~~table below ~~illustrate~~illustrates the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three ~~and six~~ months ended ~~June 30, 2018~~March 31, 2019 and ~~2017.~~2018. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For ~~purposes~~purpose of ~~these tables,~~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 interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.

RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
Three Months Ended
June 30, 2018 vs. 2017
Increase/(Decrease)
Total Change Due to Volume Due to Rate
(in thousands)
Interest and dividend income on:
Commercial loans $ 1,306
$ 843
$ 463
Mortgage loans (67 ) (67 ) —
Consumer loans 215
228
(13 )
Taxable investment securities (134 ) (180 ) 46
Tax-exempt investment securities (38 ) 12
(50 )
Interest-earning deposits (183 ) (174 ) (9 )
Total interest and dividend income, fully taxable equivalent 1,099
662
437

Interest expense on:
Interest-bearing demand deposits (5 ) (5 ) —
Savings and insured money market deposits 25
(27 ) 52
Time deposits 39
(6 ) 45
FHLBNY advances, securities sold under agreements to repurchase and other debt 59
89
(30 )
Total interest expense 118
51
67
Net interest income, fully taxable equivalent $ 981
$ 611
$ 370


RATE/VOLUME ANALYSIS OF NET INTEREST INCOME										RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
	Six Months Ended June 30, 2018 vs. 2017										Three Months Ended March 31, 2019 vs. 2018
	Increase/(Decrease)										Increase/(Decrease)
	Total Change			Due to Volume			Due to Rate				Total Change			Due to Volume			Due to Rate
(in thousands)
Interest and dividend income on:
Commercial loans	$	2,709		$	1,758		$	951			$	496		$	109		$	387
Mortgage loans	(144		)	(95		)	(49		)		(90		)	(124		)	34
Consumer loans	417			430			(13		)		33			(161		)	194
Taxable investment securities	(266		)	(293		)	27				(93		)	(198		)	105
Tax-exempt investment securities	(5		)	83			(88		)		(46		)	(53		)	7
Interest-earning deposits	(316		)	(462		)	146				686			684			2
Total interest and dividend income	2,395			1,421			974
Total interest and dividend income, fully taxable equivalent											986			257			729

Interest expense on:
Interest-bearing demand deposits	(4		)	(4		)	—				170			13			157
Savings and insured money market deposits	22			(37		)	59				421			(8		)	429
Time deposits	3			(30		)	33				369			37			332
FHLBNY advances, securities sold under agreements to repurchase and other debt	46			159			(113		)		(231		)	(331		)	100
Total interest expense	67			88			(21		)		729			(289		)	1,018
Net interest income, fully taxable equivalent	$	2,328		$	1,333		$	995			$	257		$	546		$	(289	)

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 ~~both~~ the ~~second~~first quarter of 2019 and 2018 ~~and 2017~~ were ~~$2.4~~$1.1 million and ~~$0.4~~$0.7 million, respectively. The increase ~~in the~~was due primarily to recording a $1.9 million provision for ~~loan losses for the three months ended June 30, 2018, compared to the same period in the prior year, can be mostly attributed to an increase in the historical loss factor of the~~a $3.4 million commercial and industrial loan portfolio, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018 when compared to the same period in the prior year.

The provision for loan losses for the six months ended June 30, 2018 and 2017 were $3.1 million and $1.5 million, respectively. The increase in the provision for loan losses for the six months ended June 30, 2018, compared to the same period in the prior year, can be mostly attributed to an increase in the historical loss factor of the commercial and industrial loan portfolio, due to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the six months ended June 30, 2018 when compared to the same period in the prior year.

relationship. Net charge-offs for the ~~three months ended June 30, 2018 and 2017~~first quarter of 2019 were ~~$4.1 million and~~ $0.3 million, ~~respectively. Net charge-offs~~compared with $0.5 million for the six months ended June 30, 2018 and 2017 were $4.6 million and $0.6 million, respectively. As previously discussed, the increase in net charge offs for the three and six months ended June 30, 2018 can be attributed to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the secondfirst quarter of ~~2018.~~2018, a decrease $0.2 million.

Non-interest income

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


	Three Months Ended June 30,											Three Months Ended March 31,
	2018			2017			Change			Percentage Change		2019			2018			Change			Percentage Change
WMG fee income	$	2,373		$	2,269		$	104		4.6	%	$	2,276		$	2,316		$	(40	)	(1.7	)%
Service charges on deposit accounts	1,144			1,225			(81		)	(6.6	)%	1,104			1,164			(60		)	(5.2	)%
Interchange revenue from debit card transactions	996			964			32			3.3	%	1,031			1,035			(4		)	(0.4	)%
Net gains on securities transactions	—			12			(12		)	(100.0	)%
Changes in fair value of equity investments												89			(2		)	91			N/M
Net gains on sales of loans held for sale	59			53			6			11.3	%	48			46			2			4.3	%
Net gains (losses) on sales of other real estate owned	(48		)	(9		)	(39		)	433.3	%	(83		)	44			(127		)	(288.6	)%
Income from bank owned life insurance	17			18			(1		)	(5.6	)%	15			16			(1		)	(6.3	)%
CFS fee and commission income	136			174			(38		)	(21.8	)%	168			110			58			52.7	%
Other	648			316			332			105.1	%	277			746			(469		)	(62.9	)%
Total non-interest income	$	5,325		$	5,022		$	303		6.0	%	$	4,925		$	5,475		$	(550	)	(10.0	)%

Total non-interest income for the ~~second~~first quarter of ~~2018 increased $0.3~~2019 decreased $0.6 million compared with the same period in the prior year. The ~~increase~~decrease was ~~mostly~~primarily due to ~~increases in WMG fee income and other non-interest income.~~

~~WMG fee income~~

The increase in WMG fee income, compared to the same period in the prior year, can be mostly attributed to an increase in assets under management or administration. The market value of total assets under management or administration in WMG was $1.894 billion at June 30, 2018, including $289.7 million of assets under management or administration for the Corporation, compared to $1.826 billion at June 30, 2017, including $323.9 million of assets under management or administration for the Corporation, an increase of $68.2 million, or 3.7%.

~~Other~~

~~The increase~~decreases in other non-interest income ~~compared to the same period in the prior year, can be mostly attributed to an increase in swap fee income~~ and net gains (losses) on sales of other real estate owned, ~~rental income.~~

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

Six Months Ended
June 30,

2018 2017 Change Percentage Change
WMG fee income $ 4,689
$ 4,378
$ 311
7.1 %
Service charges on deposit accounts 2,308
2,409
(101 ) (4.2 )%
Interchange revenue from debit card transactions 2,031
1,884
147
7.8 %
Net gains on securities transactions —
12
(12 ) (100.0 )%
Net gains on sales of loans held for sale 105
122
(17 ) (13.9 )%
Net gains (losses) on sales of other real estate owned (4 ) 8
(12 ) (150.0 )%
Income from bank owned life insurance 33
35
(2 ) (5.7 )%
CFS fee and commission income 246
313
(67 ) (21.4 )%
Other 1,392
708
684
96.6 %
Total non-interest income $ 10,800
$ 9,869
$ 931
9.4 %

Total non-interest income for the six months ended June 30, 2018 increased $0.9 million compared with the same period in the prior year. The increase was mostly due to increases in WMG fee income, interchange revenue from debit card transactions, and other non-interest income, partially offset by ~~a decrease in service charges on deposit accounts.~~

~~WMG fee income~~

~~The increase in WMG fee income, compared to the same period in the prior year, can be mostly attributed to~~ an increase in ~~assets under management or administration. The~~the fair market value of total assets under management or administration in WMG was $1.894 billion at June 30, 2018, including $289.7 million of assets under management or administration for the Corporation, compared to $1.826 billion at June 30, 2017, including $323.9 million of assets under management or administration for the Corporation, an increase of $68.2 million, or 3.7%.equity investments.

~~Service charges on deposit accounts~~Other non-interest income

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

~~Other~~

~~The increase in~~ other non-interest income ~~compared~~was due to the ~~same period in the prior year, can be mostly attributed to a~~ $0.4 million New York State sales tax refund received ~~during~~in March 2018.

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

The $0.1 million decrease in net gains (losses) on sales of other real estate owned was due to the sales of seven properties in the first quarter of 2019 which resulted in a net loss on sales versus the sales of three properties in the first quarter of 2018 ~~and increases~~which resulted in ~~swap fee income and other real estate owned rental income.~~a net gain on sales.

Changes in fair value of equity investments

The increase in the fair value of equity investments was primarily due to an increase in the market value of the investments held in the corporation's deferred compensation plan.

Non-interest expense

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


	Three Months Ended June 30,											Three Months Ended March 31,
	2018			2017			Change			Percentage Change		2019			2018			Change			Percentage Change
Compensation expense:
Salaries and wages	$	5,564		$	5,422		$	142		2.6	%	$	5,721		$	5,714		$	7		0.1	%
Pension and other employee benefits	1,518			1,540			(22		)	(1.4	)%	1,545			1,658			(113		)	(6.8	)%
Total compensation expense	7,082			6,962			120			1.7	%	7,266			7,372			(106		)	(1.4	)%

Non-compensation expense:
Other components of net periodic pension and postretirement benefits	(408		)	(333		)	(75		)	22.5	%	(141		)	(408		)	267			N/M
Net occupancy expense	1,643			1,702			(59		)	(3.5	)%
Furniture and equipment expense	702			781			(79		)	(10.1	)%
Data processing expense	1,764			1,587			177			11.2	%
Net occupancy												1,567			1,608			(41		)	(2.5	)%
Furniture and equipment												528			658			(130		)	(19.8	)%
Data processing												1,727			1,742			(15		)	(0.9	)%
Professional services	508			417			91			21.8	%	405			540			(135		)	(25.0	)%
Legal accruals and settlements	989			850			139			16.4	%
Amortization of intangible assets	182			213			(31		)	(14.6	)%	163			194			(31		)	(16.0	)%
Marketing and advertising expense	255			118			137			116.1	%
Other real estate owned expense	100			11			89			809.1	%
Marketing and advertising												268			349			(81		)	(23.2	)%
Other real estate owned expenses												31			138			(107		)	(77.5	)%
FDIC insurance	301			309			(8		)	(2.6	)%	265			317			(52		)	(16.4	)%
Loan expense	184			166			18			10.8	%
Loan expenses												196			169			27			16.0	%
Other	1,665			1,549			116			7.5	%	1,222			1,487			(265		)	(17.8	)%
Total non-compensation expense	7,885			7,370			515			7.0	%	6,231			6,794			(563		)	(8.3	)%
Total non-interest expense	$	14,967		$	14,332		$	635		4.4	%	$	13,497		$	14,166		$	(669	)	(4.7	)%

Total non-interest expense for the ~~second~~first quarter of ~~2018 increased $0.6~~2019 decreased $0.7 million compared with the same period in the prior year. The ~~increase~~decrease was due to ~~increases~~decreases in both compensation expense and non-compensation expense.

Compensation expense

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

reduced health care costs.

Non-compensation expense

The ~~increase~~decrease in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to ~~increases~~decreases in ~~data processing, legal accruals~~furniture and ~~settlements, marketing and advertising expenses,~~equipment expense, professional services, other real estate owned ~~expenses,~~expense, and other non-interest expenses. The ~~increase~~decrease in ~~data processing can be attributed~~furniture and equipment expense was due primarily to ~~the timing of projects and the addition of two new~~ ~~denovo~~ ~~branches~~runoff in ~~2018. The increase~~depreciation expense related to mechanical equipment, as well as a reduction in ~~legal accruals and settlements can be attributed to the settlement agreement in the matter of~~ ~~Fane vs. Chemung Canal Trust Company~~ (the "Action") during the second quarter of 2018. As noted within the Current Report on Form 8-K filed on June 15, 2018, the two parties agreed to release each other from any and all liabilities, claims, counterclaims, demands, charges, complaints and causes of action, to dismiss the Action with prejudice, and the Bank agreed to pay Fane $3.3 million in connection with the settlement of the Action. The increase in marketing and advertising expenses can be attributed to the promotion of two new ~~denovo~~ ~~branches in 2018 and the timing of campaigns and sponsored events. The increase in other real estate owned expenses can be attributed to additional OREO properties,~~non-capitalized fixed asset purchases as compared to the prior year ~~period.~~

period due to the opening of two new branches in 2018. The ~~following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):~~

Six Months Ended
June 30,

2018 2017 Change Percentage Change
Compensation expense:
Salaries and wages $ 11,278
$ 10,697
$ 581
5.4 %
Pension and other employee benefits 3,176
3,091
85
2.7 %
Total compensation expense 14,454
13,788
666
4.8 %

Non-compensation expense:

Other components of net periodic pension and postretirement benefits (816 ) (666 ) (150 ) N/M
Net occupancy expense 3,251
3,308
(57 ) (1.7 )%
Furniture and equipment expense 1,360
1,462
(102 ) (7.0 )%
Data processing expense 3,506
3,191
315
9.9 %
Professional services 1,048
717
331
46.2 %
Legal accruals and settlements 989
850
139
16.4 %
Amortization of intangible assets 376
439
(63 ) (14.4 )%
Marketing and advertising expense 604
367
237
64.6 %
Other real estate owned expense 238
31
207
667.7 %
FDIC insurance 618
634
(16 ) (2.5 )%
Loan expense 353
282
71
25.2 %
Other 3,152
2,974
178
6.0 %
Total non-compensation expense 14,679
13,589
1,090
8.0 %
Total non-interest expense $ 29,133
$ 27,377
$ 1,756
6.4 %

~~Total non-interest expense for the six months ended June 30, 2018 increased $1.8 million compared~~decrease in professional services was due primarily to consulting costs associated with the ~~same period~~New York State sales tax refund received in ~~the prior year.~~March 2018. The ~~increase~~decrease in OREO expense was due to ~~increases in compensation expense and non-compensation expense.~~

~~Compensation expense~~

The increase in compensation expense, compared to the same period in the prior year, can be mostly attributable to an increase in salaries and wages. The increase in salaries and wages can be attributed to annual merit increases and an increasea decrease in the number of ~~employees associated with two~~ ~~denovo~~ ~~branches opened in 2018, compared to the same period in the prior year. The Bank opened one~~ ~~denovo~~ ~~branch in Schenectady, New York in January 2018 and one~~ ~~denovo~~ ~~branch in Wilton, New York in May 2018.~~

~~Non-compensation expense~~

The increase in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to increases in data processing, professional services, legal accruals and settlements, marketing and advertising expenses, other real estate owned expenses, and other non-interest expenses. The increase in data processing can be attributed to the timing of projects and the addition of two new ~~denovo~~ ~~branches in 2018. The increase in legal accruals and settlements can be attributed to the settlement agreement in the matter of~~ ~~Fane vs. Chemung Canal Trust Company~~ (the "Action") during the second quarter of 2018. As noted within the Current Report on Form 8-K filed on June 15, 2018, the two parties agreed to release each other from any and all liabilities, claims, counterclaims, demands, charges, complaints and causes of action, to dismiss the Action with prejudice, and the Bank agreed to pay Fane $3.3 million in connection with the settlement of the Action. The increase in marketing and advertising expenses can be attributed to the promotion of two new ~~denovo~~ ~~branches in 2018 and the timing of campaigns and sponsored events. The increase in other real estate owned expenses can be attributed to additional OREO properties, compared to the prior year period.~~properties.

Income tax expense

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


	Three Months Ended June 30,											Three Months Ended�� March 31,
	2018			2017			Change			Percentage Change		2019			2018			Change			Percentage Change
Income before income tax expense	$	3,013		$	4,219		$	(1,206	)	(28.6	)%	$	5,502		$	5,500		$	2		—	%
Income tax expense	486			1,263			(777		)	(61.5	)%	1,034			1,061			(27		)	(2.5	)%
Effective tax rate	16.1		%	29.9		%						18.8		%	19.3		%

Income tax expense was $1.0 million for both three month periods ended March 31, 2019 and 2018. The ~~decrease in the~~ effective tax rate ~~was due primarily to the decline in the Federal income tax rate~~decreased from 34% to 21%, with the enactment of the Tax Act. Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation’s state income tax. Finally, the Corporation recognized a $1.2 million decline in income before income tax expense19.3% for the first quarter ~~when compared~~of 2018 to 18.8% for the ~~same period in the prior year.~~first quarter of 2019.

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

Six Months Ended
June 30,

2018 2017 Change Percentage Change
Income before income tax expense $ 8,513
$ 8,475
$ 38
0.4 %
Income tax expense 1,547
2,540
(993 ) (39.1 )%
Effective tax rate 18.2 % 30.0 %

The decrease in the effective tax rate was due primarily to the decline in the Federal income tax rate from 34% to 21%, with the enactment of the Tax Act. Additionally, the Corporation increased income generated from CCTC Funding Corp., a real estate investment trust subsidiary of the Bank, reducing the Corporation’s state income tax.

Financial Condition

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


	June 30, 2018			December 31, 2017			Change			Percentage Change		March 31, 2019			December 31, 2018			Change			Percentage Change
ASSETS
Total cash and cash equivalents	$	34,815		$	30,729		$	4,086		13.3	%	$	125,810		$	129,972		$	(4,162	)	(3.2	)%
Total investment securities	274,779			302,656			(27,877		)	(9.2	)%
Total investment securities, FHLB, and FRB stock												275,757			252,180			23,577			9.3	%

Loans, net of deferred loan fees	1,334,444			1,311,824			22,620			1.7	%	1,299,037			1,311,906			(12,869		)	(1.0	)%
Allowance for loan losses	(19,645		)	(21,161		)	1,516			(7.2	)%	(19,745		)	(18,944		)	(801		)	4.2	%
Loans, net	1,314,799			1,290,663			24,136			1.9	%	1,279,292			1,292,962			(13,670		)	(1.1	)%

Goodwill and other intangible assets, net	23,533			23,909			(376		)	(1.6	)%	23,012			23,175			(163		)	(0.7	)%
Other assets	62,240			59,663			2,577			4.3	%	65,701			57,054			8,647			15.2	%
Total assets	$	1,710,166		$	1,707,620		$	2,546		0.1	%	$	1,769,572		$	1,755,343		$	14,229		0.8	%

LIABILITIES AND SHAREHOLDERS' EQUITY
Total deposits	$	1,478,909		$	1,467,446		$	11,463		0.8	%	$	1,566,502		$	1,569,237		$	(2,735	)	(0.2	)%
FHLBNY advances and other debt	63,361			74,217			(10,856		)	(14.6	)%	4,250			4,304			(54		)	(1.3	)%
Other liabilities	16,116			16,144			(28		)	(0.2	)%	27,286			16,773			10,513			62.7	%
Total liabilities	1,558,386			1,557,807			579			—	%	1,598,038			1,590,314			7,724			0.5	%

Total shareholders’ equity	151,780			149,813			1,967			1.3	%	171,534			165,029			6,505			3.9	%
Total liabilities and shareholders’ equity	$	1,710,166		$	1,707,620		$	2,546		0.1	%	$	1,769,572		$	1,755,343		$	14,229		0.8	%

Cash and Cash Equivalents

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

Investment securities

The ~~decrease~~increase in investment securities can be mostly attributed to ~~pay-downs, maturities,~~purchases in the amount of $29.5 million and ~~an increase~~a decrease in unrealized ~~losses.~~losses, partially offset by pay-downs and maturities.

Loans, net

The ~~increase~~decrease in total loans can be attributed to ~~increases~~decreases of ~~$22.4~~$3.1 million in commercial mortgages, ~~and $9.8~~$7.0 million in indirect consumer loans, $3.1 million in other consumer loans and $1.3 million in residential mortgages, partially offset by ~~decreases~~an increase of ~~$5.5~~$1.6 million in commercial and agriculture ~~loans, $1.0 million in residential mortgages, and $3.0 million in other consumer~~ loans.

Goodwill and other intangible assets, net

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

Other assets

The increase in other assets can be mostly attributed to ~~the fair market value adjustment to interest rate swaps~~an increase of ~~$1.3~~$8.4 million ~~at June 30, 2018 and increases~~ in operating ~~prepaid~~lease right-of-use assets ~~and~~related to the ~~net deferred tax asset~~adoption of ASU No. 2016-02 Leases as ~~compared to December 31, 2017.~~of January 1, 2019.

Deposits

The ~~increase~~decrease in deposits can be attributed to a decrease of $22.4 million in non-interest-bearing demand deposits, offset by increases of ~~$8.6~~$8.2 million in interest-bearing demand deposits, $2.5 million in money market accounts, ~~$3.7~~$2.2 million in savings ~~deposits,~~accounts and ~~$27.7~~$6.8 million in time ~~deposits, due to a rate promotion, offset by decreases of $5.4 million~~deposits. The decrease in non-interest-bearing demand deposits ~~and $23.2 million~~was mainly attributed to an outflow of commercial deposits. The increase in ~~interest-bearing demand deposits.~~time deposits can be attributed to a rate promotion.

~~FHLBNY advances and~~Other liabilities

The increase in other ~~debt~~

~~The decrease in FHLBNY advances and other debt~~liabilities can be mostly attributed to an increase in ~~deposits and decline in securities, offset by growth in~~operating lease liabilities related to the ~~loan portfolio.~~

January 1, 2019 adoption of ASU No. 2016-02 Leases.

Shareholders’ equity

Shareholders’ equity was $171.5 million at March 31, 2019 compared with $165.0 million at December 31, 2018. The increase ~~in retained earnings of $4.5 million~~ was due primarily to earnings of ~~$7.0~~$4.5 million, offset by ~~$2.5~~$1.3 million in dividends declared during the ~~first half~~three months ended March 31, 2019. The decrease of ~~2018. The increase~~$2.6 million in accumulated other comprehensive loss ~~of $3.8 million~~ can be mostly attributed to the ~~decline~~increase in the fair market value of the securities portfolio. Also, ~~additional-paid-in capital decreased $0.1 million and~~ treasury stock decreased ~~$1.3~~$0.4 million, due to the issuance of shares to the ~~Corporation’s~~Corporation's employee benefit stock plans and directors' stock plans.

Assets under management or administration

The market value of total assets under management or administration in WMG was ~~$1.894~~$1.805 billion at ~~June 30, 2018,~~March 31, 2019, including ~~$289.7~~$282.1 million of assets held under management or administration for the Corporation, compared with ~~$1.952~~$1.768 billion at December 31, ~~2017,~~2018, including ~~$346.8~~$283.0 million of assets held under management or administration for the Corporation, ~~a decrease~~an increase of ~~$57.6~~$36.7 million, or ~~3.0%~~2.1%. The ~~decline~~growth in total assets under management or administration can be mostly attributed to ~~a decrease~~an increase in the ~~Corporation's pledged securities portfolio for municipal deposits, which is held by WMG.~~market value of total assets.

Securities

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

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

																									SECURITIES AVAILABLE FOR SALE
	June 30, 2018						December 31, 2017						March 31, 2019						December 31, 2018
	Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value		Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value		Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value		Amortized Cost		Estimated Fair Value		Percent of Total Estimated Fair Value
Obligations of U.S. Government sponsored enterprises	$	15,489	$	15,450	5.8	%	$	15,492	$	15,491	5.3	%	$	5,492	$	5,488	2.1	%	$	5,489	$	5,472	2.3	%
Mortgage-backed securities, residential and collateralized mortgage obligations	207,708		198,640		74.9	%	224,939		219,909		75.0	%	207,277		203,938		76.4	%	189,111		183,192		75.6	%
Obligations of states and political subdivisions	47,574		47,029		17.8	%	52,928		53,132		18.1	%	47,733		48,332		18.1	%	44,390		44,152		18.2	%
Other securities	4,081		4,038		1.5	%	4,588		4,559		1.6	%	9,027		8,963		3.4	%	9,506		9,442		3.9	%
Total	$	274,852	$	265,157	100.0	%	$	297,947	$	293,091	100.0	%	$	269,529	$	266,721	100.0	%	$	248,496	$	242,258	100.0	%

The available for sale segment of the securities portfolio totaled ~~$265.2~~$266.7 million at ~~June 30, 2018, a decrease~~March 31, 2019, an increase of ~~$27.9~~$24.5 million, or ~~9.5%~~10.1%, from ~~$293.1~~$242.3 million at December 31, ~~2017.~~2018. The ~~decrease~~increase can be mostly attributed to ~~pay-downs,~~purchases in the amount of $29.5 million, largely mortgage-backed securities, offset by maturities and ~~an increase in unrealized losses.~~paydowns.

The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled ~~$3.8~~$3.9 million at ~~June 30, 2018, flat compared to~~March 31, 2019, a decrease of $1.0 million, or 20.6%, from $4.9 million at December 31, ~~2017.~~2018, mostly attributed to maturities.

Loans

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

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

																			LOANS
	June 30, 2018		December 31, 2017		Dollar Change			Percentage Change		March 31, 2019		December 31, 2018		Dollar Change			Percentage Change
Commercial and agricultural	$	193,516	$	199,007	$	(5,491	)	(2.8	)%	$	204,497	$	202,854	$	1,643		0.8	%
Commercial mortgages	666,693		644,330		22,363			3.5	%	658,100		661,170		(3,070		)	(0.5	)%
Residential mortgages	193,423		194,440		(1,017		)	(0.5	)%	181,428		182,724		(1,296		)	(0.7	)%
Indirect consumer loans	162,813		153,060		9,753			6.4	%	142,383		149,380		(6,997		)	(4.7	)%
Other consumer loans	117,999		120,987		(2,988		)	(2.5	)%	112,629		115,778		(3,149		)	(2.7	)%
Total loans, net of deferred loan fees	$	1,334,444	$	1,311,824	$	22,620		1.7	%	$	1,299,037	$	1,311,906	$	(12,869	)	(1.0	)%

Portfolio loans totaled ~~$1.334~~$1.299 billion at ~~June 30, 2018, an increase~~March 31, 2019, a decrease of ~~$22.6~~$12.9 million, or ~~1.7%~~1.0%, from $1.312 billion at December 31, ~~2017.~~2018. The ~~increase~~decrease in loans can be attributed to ~~increases~~decreases of ~~$22.4~~$3.1 million in commercial mortgages, ~~and $9.8~~$7.0 million in indirect consumer loans, $3.1 million in other consumer loans and $1.3 million in residential mortgages, partially offset by ~~decreases~~an increase of ~~$5.5~~$1.6 million in commercial and agricultural ~~loans, $1.0 million in residential mortgages, and $3.0 million in other consumer~~ loans. ~~The growth in commercial mortgages was due primarily to an increase in the Capital Bank division in the Albany, New York region.~~ The decline in commercial mortgages, indirect consumer loans, and ~~agricultural~~other consumer loans can be mostly ~~attributable~~attributed to the ~~charge-off of multiple large commercial loans to one borrower for $3.6 million~~portfolio runoff rate exceeding production during the ~~second quarter of 2018.~~quarter.

Residential mortgage loans totaled ~~$193.4~~$181.4 million at ~~June 30, 2018,~~March 31, 2019, a decrease of ~~$1.0~~$1.3 million, or ~~0.5%~~0.7%, from December 31, ~~2017.~~2018. During the ~~six~~three months ended ~~June 30, 2018, $5.0~~March 31, 2019, $2.1 million of newly originated residential mortgages were sold in the secondary market to Freddie Mac and $0.2 million of residential mortgages were sold to the State of New York Mortgage Agency.

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

																					LOANS BY DIVISION
	June 30, 2018		December 31, 2017		December 31, 2016		December 31, 2015		December 31, 2014		March 31, 2019		December 31, 2018		December 31, 2017		December 31, 2016		December 31, 2015
Chemung Canal Trust Company*	$	624,177	$	630,732	$	636,836	$	683,137	$	724,099	$	591,139	$	603,133	$	630,732	$	636,836	$	683,137
Capital Bank Division	710,267		681,092		563,454		485,496		397,475		707,898		708,773		681,092		563,454		485,496
Total loans	$	1,334,444	$	1,311,824	$	1,200,290	$	1,168,633	$	1,121,574	$	1,299,037	$	1,311,906	$	1,311,824	$	1,200,290	$	1,168,633

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

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were ~~45.4%~~46.3% and ~~48.1%~~47.2% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018.

Non-Performing Assets

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

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

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

													NON-PERFORMING ASSETS
	June 30, 2018			December 31, 2017			March 31, 2019			December 31, 2018
Non-accrual loans	$	7,076		$	11,389		$	9,204		$	6,305
Non-accrual troubled debt restructurings	5,714			5,935			5,895			5,949
Total non-performing loans	12,790			17,324			15,099			12,254
Other real estate owned	886			1,940			205			574
Total non-performing assets	$	13,676		$	19,264		$	15,304		$	12,828

Ratio of non-performing loans to total loans	0.96		%	1.32		%	1.16		%	0.93		%
Ratio of non-performing assets to total assets	0.80		%	1.13		%	0.86		%	0.73		%
Ratio of allowance for loan losses to non-performing loans	153.60		%	122.14		%	130.77		%	154.59		%

Accruing loans past due 90 days or more (1)	$	17		$	29		$	11		$	19
Accruing troubled debt restructurings (1)	1,360			1,728			776			816
(1) These loans are not included in non-performing assets above.

Non-Performing Loans

Non-performing loans totaled ~~$12.8~~$15.1 million at ~~June 30, 2018,~~March 31, 2019, or ~~0.96%~~1.16% of total loans, compared with ~~$17.3~~$12.3 million at December 31, ~~2017,~~2018, or ~~1.32%~~0.93% of total loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was ~~$13.7~~$15.3 million, or ~~0.80%~~0.86% of total assets, at ~~June 30, 2018,~~March 31, 2019, compared with ~~$19.3~~$12.8 million, or ~~1.13%~~0.73% of total assets, at December 31, ~~2017.~~2018. The ~~decline~~increase in non-performing ~~assets~~loans can be mostly attributed to one commercial relationship for $3.4 million, partially offset by decreases in non-performing loans in the ~~charge-off of multiple large~~residential mortgage and consumer loan portfolios. The increase in non-performing assets can also be attributed to the one commercial ~~loans to one borrower~~relationship for ~~$3.6~~$3.4 million, ~~and~~partially offset by the sale of ~~one~~multiple other real estate owned ~~property~~properties during the ~~second~~first quarter of ~~2018.~~

Not included in non-performing loan totals are $0.8 million of acquired loans that the Corporation has identified as PCI loans as of December 31, 2017. The PCI loans are accounted for under separate accounting guidance, Accounting Standards Codification (“ASC”) Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality” as disclosed in Note 4 of the financial statements. There were no PCI loans as of June 30, 2018.2019.

Accruing Loans Past due 90 Days or More

The recorded investment in accruing loans past due 90 days or more totaled ~~$17~~$11 thousand at ~~June 30, 2018,~~March 31, 2019, a decrease of ~~$12~~$8 thousand from December 31, ~~2017.~~2018.

Troubled Debt Restructurings

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation modified the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest. As of ~~June 30, 2018,~~March 31, 2019, the Corporation had ~~$5.7~~$5.9 million of non-accrual TDRs compared with ~~$5.9~~$6.0 million as of December 31, ~~2017.~~2018. As of ~~June 30,~~March 31, 2019 and December 31, 2018, the Corporation had ~~$1.4~~$0.8 million of accruing ~~TDRs compared with $1.7 million as of December 31, 2017.~~TDRs.

Impaired Loans

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Impaired loans at ~~June 30, 2018~~March 31, 2019 totaled ~~$9.4~~$12.1 million, including TDRs of ~~$7.1~~$6.7 million, compared to ~~$14.1~~$8.8 million, including TDRs of ~~$7.7~~$6.8 million, at December 31, 2017. 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.2018. The ~~decrease~~increase in impaired loans was due primarily to ~~a decrease~~an increase in impaired commercial ~~and industrial loans,~~mortgages, mostly due to the ~~charge-off~~impairment of ~~multiple large~~a commercial ~~loans~~mortgage to one borrower for ~~$3.6~~$3.4 million during the ~~second~~first quarter of ~~2018.~~2019. Included in the recorded investment of impaired loans at ~~June 30, 2018, are~~March 31, 2019, were loans totaling ~~$3.5~~$7.0 million for which impairment allowances of ~~$1.7~~$4.0 million have been specifically allocated to the allowance for loan losses. As of December 31, ~~2017,~~2018, the impaired loan total included ~~$8.1~~$3.7 million of loans for which specific impairment allowances of ~~$5.9~~$2.2 million were allocated to the allowance for loan losses. The ~~decrease~~increase in impaired loans with specific impairment allowances can be mostly attributed to the ~~charge-off~~impairment of ~~multiple large~~a commercial ~~loans~~mortgage to one borrower for ~~$3.6~~$3.4 million during the ~~second~~first quarter of ~~2018.~~2019.

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

Allowance for Loan Losses

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

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

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

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

The allowance for loan losses was ~~$19.6~~$19.7 million at ~~June 30, 2018, down from $21.2~~March 31, 2019, compared with $18.9 million at December 31, ~~2017.~~2018. The ratio of allowance for loan losses to total loans was ~~1.47%~~1.52% at ~~June 30, 2018, down from 1.61%~~March 31, 2019, compared with 1.44% at December 31, ~~2017.~~2018. Net charge-offs for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ were ~~$4.6~~$0.3 million and ~~$0.6~~$0.5 million, respectively. ~~The increase in net charge-offs can be mostly attributed to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018.~~

The table below summarizes the Corporation’s loan loss experience for the ~~six~~three months ended ~~June 30,~~March 31, 2019 and 2018 ~~and 2017~~ (in thousands, except ratio data):

													SUMMARY OF LOAN LOSS EXPERIENCE
	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Balance at beginning of period	$	21,161		$	14,253
Balance of allowance for loan losses at beginning of period							$	18,944		$	21,161

Charge-offs:
Commercial and agricultural	3,644			7			7			19
Commercial mortgages	145			—
Residential mortgages	165			60			2			94
Consumer loans	921			825			439			458
Total charge-offs	4,875			892			448			571

Recoveries:
Commercial and agricultural	21			61			11			9
Commercial mortgages	2			3			1			1
Residential mortgages	5			30			—			5
Consumer loans	260			188			144			76
Total recoveries	288			282			156			91

Net charge-offs	4,587			610			292			480
Provision for loan losses	3,071			1,461			1,093			709
Balance at end of period	$	19,645		$	15,104
Balance of allowance for loan losses at end of period							$	19,745		$	21,390

Ratio of net charge-offs to average loans outstanding	1.24		%	0.10		%	0.09		%	0.15		%
Ratio of allowance for loan losses to total loans outstanding	1.47		%	1.21		%	1.52		%	1.62		%

Deposits

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

																			DEPOSITS
	June 30, 2018		December 31, 2017		Dollar Change			Percentage Change		March 31, 2019		December 31, 2018		Dollar Change			Percentage Change
Non-interest-bearing demand deposits	$	462,233	$	467,610	$	(5,377	)	(1.1	)%	$	462,000	$	484,433	$	(22,433	)	(4.6	)%
Interest-bearing demand deposits	125,867		149,026		(23,159		)	(15.5	)%	187,834		179,603		8,231			4.6	%
Insured money market accounts	522,328		513,782		8,546			1.7	%	540,476		537,948		2,528			0.5	%
Savings deposits	222,387		218,666		3,721			1.7	%	219,199		217,027		2,172			1.0	%
Time deposits	146,094		118,362		27,732			23.4	%	156,993		150,226		6,767			4.5	%
Total	$	1,478,909	$	1,467,446	$	11,463		0.8	%	$	1,566,502	$	1,569,237	$	(2,735	)	(0.2	)%

Deposits totaled ~~$1.479~~$1.567 billion at ~~June 30, 2018~~March 31, 2019 compared with ~~$1.467~~$1.569 billion at December 31, ~~2017, an increase~~2018, a decrease of ~~$11.5~~$2.7 million, or ~~0.8%~~0.2%. The ~~increase~~decrease was attributable to a decrease of $22.4 million in non-interest-bearing demand deposits, offset by increases of ~~$8.5~~$8.2 million in interest-bearing demand deposits, $2.5 million in money market accounts, ~~$3.7 million in savings deposits, and $27.7~~$6.8 million in time deposits, ~~offset by decreases of $5.4~~and $2.2 million in ~~non-interest bearing~~savings deposits. The decrease in non-interest-bearing demand deposits ~~and $23.2 million in interest-bearing demand~~was mainly attributed to a seasonal outflow of commercial deposits. The increase in time deposits can be attributed to a rate ~~promotion during the second quarter of 2018.~~promotion. At ~~June 30, 2018,~~March 31, 2019, demand deposit and money market accounts comprised ~~75.0%~~76.0% of total deposits compared with ~~77.0%~~76.6% at December 31, ~~2017.~~2018.

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

																					DEPOSITS BY DIVISION
	June 30, 2018		December 31, 2017		December 31, 2016		December 31, 2015		December 31, 2014		March 31, 2019		December 31, 2018		December 31, 2017		December 31, 2016		December 31, 2015
Chemung Canal Trust Company*	$	1,281,129	$	1,264,883	$	1,249,870	$	1,219,282	$	1,119,377	$	1,343,519	$	1,328,658	$	1,264,883	$	1,249,870	$	1,219,282
Capital Bank Division	197,780		202,563		206,473		181,013		160,637		222,983		240,579		202,563		206,473		181,013
Total loans	$	1,478,909	$	1,467,446	$	1,456,343	$	1,400,295	$	1,280,014
Total											$	1,566,502	$	1,569,237	$	1,467,446	$	1,456,343	$	1,400,295

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

In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits. The recently enacted Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained ~~using a deposit broker~~ through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations. This will apply to the Corporation's participation in the CDARS and ICS programs. Brokered deposits include funds obtained through ~~brokers, and the Bank’s participation in the CDARS and ICS programs.~~brokers. There were no deposits obtained through brokers as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017.~~2018. Deposits obtained through the CDARS and ICS programs were ~~$219.4~~$194.7 million and ~~$187.7~~$193.6 million as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The increase in CDARS and ICS deposits was due to the seasonal inflow of current municipal client balances.

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

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

Borrowings

Borrowings decreased ~~$10.8~~$0.1 million from ~~$74.2~~$4.3 million at December 31, ~~2017~~2018 to ~~$63.4~~$4.2 million at ~~June 30, 2018, mostly attributed~~March 31, 2019, attributable to ~~a decline of $10.0 million in securities sold under agreements to repurchase. The decline in repurchase agreements was due to the maturity of one $10.0 million repurchase agreement in May 2018.~~normal recurring finance lease payments.

Shareholders’ Equity

~~Shareholders’~~Total shareholders' equity ~~was $151.8~~increased $6.5 million ~~at June 30, 2018 compared with $149.8~~from $165.0 million at December 31, ~~2017.~~2018 to $171.5 million at March 31, 2019, due primarily to an increase in retained earnings and a decrease in accumulated other comprehensive loss. The increase in retained earnings of $3.2 million was due primarily ~~due~~ to earnings of ~~$7.0~~$4.5 million, ~~and a reduction of~~offset by $1.3 million in ~~treasury stock, offset by a~~dividends declared during the three months ended March 31, 2019. The decrease ~~of of $0.1 million in additional-paid-in-capital, an increase of $3.8 million~~ in accumulated other comprehensive loss of $2.6 million can be mostly ~~attributable~~attributed to the ~~decrease~~increase in the fair market value of the securities ~~portfolio,~~portfolio. Also, treasury stock decreased $0.4 million, due to the issuance of shares pursuant to the Corporation's employee benefit plans and ~~$2.5 million in dividends declared during~~ the ~~six months ended June 30, 2018.~~ directors' stock compensation plans.

The total shareholders’ equity to total assets ratio was ~~8.88%~~9.69% at ~~June 30, 2018~~March 31, 2019 compared with ~~8.77%~~9.40% at December 31, ~~2017.~~2018. The tangible equity to tangible assets ratio was ~~7.60%~~8.50% at ~~June 30, 2018~~March 31, 2019 compared with ~~7.48%~~8.19% at December 31, ~~2017.~~2018. Book value per share increased to ~~$31.42~~$35.27 at ~~June 30, 2018~~March 31, 2019 from ~~$31.10~~$33.99 at December 31, ~~2017.~~2018.

The ~~Corporation and the~~ Bank ~~are~~is 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, under-capitalized, significantly under-capitalized and critically under-capitalized. As of ~~June 30, 2018,~~March 31, 2019, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital ~~guidelines and the Corporation met capital requirements under regulatory~~ guidelines.

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

Off-balance Sheet Arrangements

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

Liquidity

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

The Corporation is a member of the FHLBNY which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. Based on available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of ~~$68.4~~$117.0 million and ~~$73.5~~$112.6 million at ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017,~~2018, respectively. The Corporation also had a total of ~~$38.0~~$28.0 million of unsecured lines of credit with ~~five~~four different financial institutions, all of which was available at ~~June 30, 2018~~March 31, 2019 and at December 31, ~~2017.~~2018.

Consolidated Cash Flows Analysis

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

													CONSOLIDATED SUMMARY OF CASH FLOWS
(in thousands)	Six Months Ended June 30,						Three Months Ended March 31,
	2018			2017			2019			2018
Net cash provided by operating activities	$	10,553		$	8,999		$	7,244		$	6,980
Net cash used in investing activities	(4,945		)	(69,350		)
Net cash (used in) provided by financing activities	(1,522		)	50,735
Net cash (used in) provided by investing activities							(7,521		)	3,401
Net cash used in financing activities							(3,885		)	(10,106		)
Net increase (decrease) in cash and cash equivalents	$	4,086		$	(9,616	)	$	(4,162	)	$	275

Operating activities

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

Cash provided by operating activities in the first ~~six~~three months of ~~2018~~2019 and ~~2017~~2018 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

Cash used in investing activities during the first ~~six~~three months of 2019 predominantly resulted from purchases of securities available for sale, offset by maturities and principal paydowns on securities available for sale and a net decrease in loans. Cash provided by investing activities during the first three months of 2018 predominantly resulted from ~~a net increase in loans offset by~~ calls, maturities, and principal collected in securities available for ~~sale. Cash used in investing activities during the first six months~~sale and redemption of ~~2017 predominantly resulted from~~FHLBNY stock, offset by a net increase in loans and purchases of ~~securities, offset by sales, calls, maturities, and principal collected in securities available for sale.~~

FHLBNY stock.

Financing activities

Cash used in financing activities during the first ~~six~~three months of 2019 predominantly resulted from a net decrease in deposits. Cash used in financing activities during the first three months of 2018 predominantly resulted from ~~a net increase in deposits, offset by the maturity of one $10.0 million repurchase agreement and~~ the repayment of FHLBNY overnight ~~and long term advances. Cash provided by financing activities during the first six months of 2017 predominantly resulted from a net increase in deposits,~~advances, offset by ~~the maturity of one $10.0 million repurchase agreement.~~increases in deposits.

Capital Resources

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

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

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. Management believes that, as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017, the Corporation and~~2018, the Bank met all capital adequacy requirements to which ~~they were~~it was subject.

As of ~~June 30, 2018,~~March 31, 2019, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank's ~~or the Corporation's~~ capital category.

The regulatory capital ratios as of ~~June 30, 2018~~March 31, 2019 and December 31, ~~2017~~2018 were calculated under Basel III rules. ~~There is no threshold for well-capitalized status for bank holding companies.~~

The Bank’s actual and required regulatory capital ratios as of March 31, 2019 were as follows (in thousands, except ratio data):



	Actual				Minimum Capital Adequacy				Minimum Capital Adequacy with Capital Buffer				To Be Well Capitalized Under Prompt Corrective Action Provisions
As of March 31, 2019	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
Total Capital (to Risk Weighted Assets):
Consolidated	$	173,612	13.39	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	165,871	12.81	%	$	103,577	8.00	%	$	127,852	9.875	%	$	129,471	10.00	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	157,364	12.14	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	149,643	11.56	%	$	77,682	6.00	%	$	101,958	7.875	%	$	103,577	8.00	%
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	157,364	12.14	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	149,643	11.56	%	$	58,262	4.50	%	$	82,538	6.375	%	$	84,156	6.50	%
Tier 1 Capital (to Average Assets):
Consolidated	$	157,364	9.07	%	N/A		N/A		N/A		N/A		N/A		N/A
Bank	$	149,643	8.64	%	$	69,257	4.00	%	N/A		N/A		$	86,571	5.00	%

The Corporation’s and the Bank’s actual and required regulatory capital ratios ~~for the periods indicated,~~as of December 31, 2018 were as follows (in thousands, except ratio data):

Actual Minimum Capital Adequacy Minimum Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions
As of June 30, 2018 Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets):
Consolidated $ 158,793
12.11 % $ 104,864
8.00 % $ 129,441
9.875 % N/A
N/A
Bank $ 149,889
11.45 % $ 104,763
8.00 % $ 129,316
9.875 % $ 130,953
10.00 %
Tier 1 Capital (to Risk Weighted Assets):

Consolidated $ 142,368
10.86 % $ 78,648
6.00 % $ 103,225
7.875 % N/A
N/A
Bank $ 133,479
10.19 % $ 78,572
6.00 % $ 103,126
7.875 % $ 104,763
8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):

Consolidated $ 142,368
10.86 % $ 58,986
4.50 % $ 83,563
6.375 % N/A
N/A
Bank $ 133,479
10.19 % $ 58,929
4.50 % $ 83,483
6.375 % $ 85,120
6.50 %
Tier 1 Capital (to Average Assets):

Consolidated $ 142,368
8.44 % $ 67,467
4.00 % N/A
N/A
N/A
N/A
Bank $ 133,479
7.94 % $ 67,233
4.00 % N/A
N/A
$ 84,041
5.00 %


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

Dividend Restrictions

The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At ~~June 30, 2018,~~March 31, 2019, the Bank could, without prior approval, declare dividends of approximately ~~$11.1~~$21.6 million.

Adoption of New Accounting Standards

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

Critical Accounting Policies, Estimates and Risks and Uncertainties

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

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

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

The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on pages 6–11. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.

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

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

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

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




	As of the Three Months Ended
(in thousands, except ratio data)	March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,
(in thousands, except ratio data)	2019			2018			2018			2018			2018
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
Net interest income (GAAP)	$	15,167		$	15,484		$	15,079		$	15,017		$	14,900
Fully taxable equivalent adjustment	100			105			99			106			110
Fully taxable equivalent net interest income (non-GAAP)	$	15,267		$	15,589		$	15,178		$	15,123		$	15,010

Average interest-earning assets (GAAP)	$	1,671,063		$	1,680,269		$	1,625,132		$	1,625,591		$	1,623,748

Net interest margin - fully taxable equivalent (non-GAAP)	3.71		%	3.68		%	3.71		%	3.73		%	3.75		%

Efficiency Ratio

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


																As of the
	As of the Three Months Ended															Six Months Ended						As of the Three Months Ended
(in thousands, except ratio data)	June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			June 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,
(in thousands, except ratio data)	2018			2018			2017			2017			2017			2018			2017			2019			2018			2018			2018			2018
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT AND EFFICIENCY RATIO
EFFICIENCY RATIO
Net interest income (GAAP)	$	15,017		$	14,900		$	14,780		$	14,763		$	13,950		$	29,917		$	27,444		$	15,167		$	15,484		$	15,079		$	15,017		$	14,900
Fully taxable equivalent adjustment	106			110			206			220			192			216			361			100			105			99			106			110
Fully taxable equivalent net interest income (non-GAAP)	$	15,123		$	15,010		$	14,986		$	14,983		$	14,142		$	30,133		$	27,805		$	15,267		$	15,589		$	15,178		$	15,123		$	15,010

Non-interest income (GAAP)	$	5,325		$	5,475		$	5,456		$	5,166		$	5,022		$	10,800		$	9,869		$	4,925		$	4,893		$	7,381		$	5,325		$	5,475
Less: changes in fair value of equity investments																						—			—			(2,093		)	—			—
Less: net (gains) losses on security transactions	—			—			(97		)	—			(12		)	—			(12		)	—			—			—			—			—
Adjusted non-interest income (non-GAAP)	$	5,325		$	5,475		$	5,359		$	5,166		$	5,010		$	10,800		$	9,857		$	4,925		$	4,893		$	5,288		$	5,325		$	5,475

Non-interest expense (GAAP)	$	14,967		$	14,166		$	13,111		$	13,276		$	14,332		$	29,133		$	27,377		$	13,497		$	14,205		$	13,428		$	14,967		$	14,166
Less: amortization of intangible assets	(182		)	(194		)	(207		)	(214		)	(213		)	(376		)	(439		)	(163		)	(176		)	(182		)	(182		)	(194		)
Less: legal reserve	(989		)	—			—			—			(850		)	(989		)	(850		)	—			—			—			(989		)	—
Adjusted non-interest expense (non-GAAP)	$	13,796		$	13,972		$	12,904		$	13,062		$	13,269		$	27,768		$	26,088		$	13,334		$	14,029		$	13,246		$	13,796		$	13,972

Average interest-earning assets (GAAP)	$	1,625,591		$	1,623,748		$	1,639,257		$	1,615,833		$	1,634,955		$	1,624,676		$	1,620,290

Net interest margin - fully taxable equivalent (non-GAAP)	3.73		%	3.75		%	3.63		%	3.68		%	3.47		%	3.74		%	3.46		%
Efficiency ratio (non-GAAP)	67.47		%	68.21		%	63.43		%	64.83		%	69.28		%	67.84		%	69.27		%
Efficiency ratio (unadjusted)																						67.18		%	69.71		%	59.79		%	73.58		%	69.53		%
Efficiency ratio (adjusted)																						66.04		%	68.49		%	64.72		%	67.47		%	68.21		%

Tangible Equity and Tangible Assets (Period-End)

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


																As of or for the
	As of or for the Three Months Ended															Six Months Ended						As of or for the Three Months Ended
(in thousands, except per share and ratio data)	June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			June 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,
(in thousands, except per share and ratio data)	2018			2018			2017			2017			2017			2018			2017			2019			2018			2018			2018			2018
TANGIBLE EQUITY AND TANGIBLE ASSETS
(PERIOD END)
Total shareholders' equity (GAAP)	$	151,780		$	150,262		$	149,813		$	154,277		$	151,962		$	151,780		$	151,962		$	171,534		$	165,029		$	156,499		$	151,780		$	150,262
Less: intangible assets	(23,533		)	(23,715		)	(23,909		)	(24,116		)	(24,330		)	(23,533		)	(24,330		)	(23,012		)	(23,175		)	(23,351		)	(23,533		)	(23,715		)
Tangible equity (non-GAAP)	$	128,247		$	126,547		$	125,904		$	130,161		$	127,632		$	128,247		$	127,632		$	148,522		$	141,854		$	133,148		$	128,247		$	126,547

Total assets (GAAP)	$	1,710,166		$	1,699,954		$	1,707,620		$	1,731,682		$	1,718,572		$	1,710,166		$	1,718,572		$	1,769,572		$	1,755,343		$	1,753,864		$	1,710,166		$	1,699,954
Less: intangible assets	(23,533		)	(23,715		)	(23,909		)	(24,116		)	(24,330		)	(23,533		)	(24,330		)	(23,012		)	(23,175		)	(23,351		)	(23,533		)	(23,715		)
Tangible assets (non-GAAP)	$	1,686,633		$	1,676,239		$	1,683,711		$	1,707,566		$	1,694,242		$	1,686,633		$	1,694,242		$	1,746,560		$	1,732,168		$	1,730,513		$	1,686,633		$	1,676,239

Total equity to total assets at end of period (GAAP)	8.88		%	8.84		%	8.77		%	8.91		%	8.84		%	8.88		%	8.84		%	9.69		%	9.40		%	8.92		%	8.88		%	8.84		%
Book value per share (GAAP)	$	31.42		$	31.16		$	31.10		$	32.11		$	31.67		$	31.42		$	31.67		$	35.27		$	33.99		$	32.35		$	31.42		$	31.16

Tangible equity to tangible assets at end of period (non-GAAP)	7.60		%	7.55		%	7.48		%	7.62		%	7.53		%	7.60		%	7.53		%	8.50		%	8.19		%	7.69		%	7.60		%	7.55		%
Tangible book value per share (non-GAAP)	$	26.55		$	26.24		$	26.14		$	27.09		$	26.60		$	26.55		$	26.60		$	30.54		$	29.22		$	27.53		$	26.55		$	26.24

Tangible Equity (Average)

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


																As of or for the
	As of or for the Three Months Ended															Six Months Ended						As of or for the Three Months Ended
	June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			June 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,
(in thousands, except ratio data)	2018			2018			2017			2017			2017			2018			2017			2019			2018			2018			2018			2018
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP)	$	151,216		$	150,495		$	154,767		$	153,244		$	150,155		$	150,857		$	148,408		$	167,385		$	159,032		$	154,331		$	151,216		$	150,495
Less: average intangible assets	(23,625		)	(23,830		)	(24,008		)	(24,220		)	(24,435		)	(23,727		)	(24,544		)	(23,092		)	(23,266		)	(23,440		)	(23,625		)	(23,830		)
Average tangible equity (non-GAAP)	$	127,591		$	126,665		$	130,759		$	129,024		$	125,720		$	127,130		$	123,864		$	144,293		$	135,766		$	130,891		$	127,591		$	126,665

Return on average equity (GAAP)	6.70		%	11.96		%	(5.53		)%	9.46		%	7.90		%	9.31		%	8.06		%	10.83		%	14.29		%	17.81		%	6.70		%	11.96		%
Return on average tangible equity (non-GAAP)	7.94		%	14.21		%	(6.55		)%	11.24		%	9.43		%	11.05		%	9.66		%	12.56		%	16.74		%	21.01		%	7.94		%	14.21		%

Adjustments for Certain Items of Income or Expense

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


																As of or for the
	As of or for the Three Months Ended															Six Months Ended						As of or for the Three Months Ended
(in thousands, except per share and ratio data)	June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			June 30,			June 30,			March 31,			Dec. 31,			Sept. 30,			June 30,			March 31,
(in thousands, except per share and ratio data)	2018			2018			2017			2017			2017			2018			2017			2019			2018			2018			2018			2018
NON-GAAP NET INCOME
Reported net income (GAAP)	$	2,527		$	4,439		$	(2,159	)	$	3,654		$	2,956		$	6,966		$	5,935		$	4,468		$	5,730		$	6,930		$	2,527		$	4,439
Net (gains) losses on security transactions (net of tax)	—			—			(60		)	—			(8		)	—			(8		)
Net changes in fair value of investments (net of tax)																						—			—			(1,559		)	—			—
Legal reserve (net of tax)	737			—			—			—			528			737			528			—			—			—			737			—
Revaluation of net deferred tax asset	—			—			2,927			—			—			—			—			—			(445		)	—			—			—
Non- GAAP net income	$	3,264		$	4,439		$	708		$	3,654		$	3,476		$	7,703		$	6,455		$	4,468		$	5,285		$	5,371		$	3,264		$	4,439

Average basic and diluted shares outstanding	4,828			4,822			4,809			4,802			4,797			4,825			4,793			4,860			4,843			4,834			4,828			4,822

Reported basic and diluted earnings per share (GAAP)	$	0.52		$	0.92		$	(0.45	)	$	0.76		$	0.62		$	1.44		$	1.24		$	0.92		$	1.18		$	1.43		$	0.52		$	0.92
Reported return on average assets (GAAP)	0.59		%	1.06		%	(0.50		)%	0.85		%	0.69		%	0.82		%	0.70		%	1.03		%	1.29		%	1.61		%	0.59		%	1.06		%
Reported return on average equity (GAAP)	6.70		%	11.96		%	(5.53		)%	9.46		%	7.90		%	9.31		%	8.06		%	10.83		%	14.29		%	17.81		%	6.70		%	11.96		%

Non-GAAP basic and diluted earnings per share	$	0.68		$	0.92		$	0.15		$	0.76		$	0.72		$	1.60		$	1.35		$	0.92		$	1.09		$	1.11		$	0.68		$	0.92
Non-GAAP return on average assets	0.77		%	1.06		%	0.16		%	0.85		%	0.81		%	0.91		%	0.76		%	1.03		%	1.19		%	1.25		%	0.77		%	1.06		%
Non-GAAP return on average equity	8.66		%	11.96		%	1.81		%	9.46		%	9.29		%	10.30		%	8.77		%	10.83		%	13.18		%	13.81		%	8.66		%	11.96		%

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

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

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

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

Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. For that reason, the ALCO has established tolerance limits based upon a 200-basis point change in interest rates, with appropriate floors set for interest-bearing liabilities. At ~~June 30, 2018,~~March 31, 2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the next 12 months net interest income by ~~9.61%~~13.01% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by ~~2.59%~~8.02%. Both are within the Corporation's policy guideline of 15%. Given the overall low level of current interest rates and the unlikely event of a 200-basis point decline at this time, management additionally modeled an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates. When applied, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the next 12 months net interest income by ~~4.55%~~4.82% and an immediate 300-basis point increase would positively impact the next 12 months net interest income by ~~3.78%~~11.95%.

A related component of interest rate risk is the expectation that the market value of the Corporation’s equity account will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact component: an institution exposed to earnings erosion is also exposed to a decline in market value. At ~~June 30, 2018,~~March 31, 2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by ~~12.16% and an~~15.38%, slightly above the Corporation's policy guidelines of 15%. An immediate 200-basis point increase in interest rates would positively impact the market value by ~~4.53%. Both are~~8.58%, which is within the Corporation’s policy guideline of 15%. Management also modeled the impact to the market value of the Corporation’s capital with an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates, based on the current interest rate environment. When applied, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by ~~5.27%~~5.61% and an immediate 300-basis point increase in interest rates would positively impact the market value by ~~6.28%~~12.15%.

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

Credit Risk

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

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

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Corporation's management, with the participation of its Chief Executive Officer, who is the Corporation's principal executive officer, and its Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of ~~June 30, 2018~~March 31, 2019 pursuant to Rule 13a-15 of the Exchange Act, as amended. Based upon that evaluation, the principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures are effective as of ~~June 30, 2018.~~March 31, 2019. In addition, there have been no changes in the Corporation’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

~~For information related~~In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of March 31, 2019, we believe that we are not a party to ~~this item, please see Note 8 to the Corporation’s~~any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial ~~statements included herein.~~results or liquidity.

ITEM 1A. RISK FACTORS

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

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



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs	Maximum number of shares that may yet be purchased under the plans or programs
4/1/~~18-4/30/18~~1/19-1/31/19	—	$	—	—	121,906
5/2/1/~~18-5/31/18~~19-2/28/19	—	—		—	121,906
6/3/1/~~18-6/30/18~~19-3/31/19	—	—		—	121,906
Quarter ended ~~6/30/18~~3/31/19	—	$	—	—	121,906
(1) On December 19, 2012, the Corporation’s Board of Directors approved a stock repurchase plan authorizing the purchase of up to 125,000 shares of the Corporation's outstanding common stock. Purchases may be made from time to time on the open market or in private negotiated transactions and will be at the discretion of management. For the three months ended ~~June 30, 2018,~~March 31, 2019, no shares had been purchased under this plan. Since inception of the plan, a total of 3,094 shares have been purchased under the plan.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Not applicable.

ITEM 6. EXHIBITS

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



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

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

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

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

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

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

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

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

101.INS	Instance Document*

101.SCH	XBRL Taxonomy Schema*

101.CAL	XBRL Taxonomy Calculation Linkbase*

101.DEF	XBRL Taxonomy Definition Linkbase*

101.LAB	XBRL Taxonomy Label Linkbase*

101.PRE	XBRL Taxonomy Presentation Linkbase*

*	Filed herewith.

SIGNATURES

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

CHEMUNG FINANCIAL CORPORATION



DATED: ~~August 1, 2018~~May 6, 2019	By: /s/ Anders M. Tomson
	Anders M. Tomson President and Chief Executive Officer (Principal Executive Officer)



DATED: ~~August 1, 2018~~May 6, 2019	By: /s/ Karl F. Krebs
	Karl F. Krebs Chief Financial Officer and Treasurer (Principal Financial Officer)

EXHIBIT INDEX

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



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

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

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

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

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

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

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

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

101.INS	Instance Document*

101.SCH	XBRL Taxonomy Schema*

101.CAL	XBRL Taxonomy Calculation Linkbase*

101.DEF	XBRL Taxonomy Definition Linkbase*

101.LAB	XBRL Taxonomy Label Linkbase*

101.PRE	XBRL Taxonomy Presentation Linkbase*

*	Filed herewith.



	Three Months Ended June 30, 2017
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages		Residential Mortgages			Consumer Loans			Total
Beginning balance	$	1,650		$	7,749	$	1,512		$	4,049		$	14,960
Charge-offs	(2		)	—		(48		)	(397		)	(447		)
Recoveries	36			2		13			119			170
Net recoveries (charge-offs)	34			2		(35		)	(278		)	(277		)
Provision	199			27		40			155			421
Ending balance	$	1,883		$	7,778	$	1,517		$	3,926		$	15,104



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



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



	Six Months Ended June 30, 2017 (b)
Revenue by Operating Segment:	Core Banking		WMG		Holding Company, CFS, and CRM^(c)			Total
Non-interest income
Service charges on deposit accounts
Overdraft fees	$	1,950	$	—	$	—		$	1,950
Other	459		—		—			459
Interchange revenue from debit card transactions	1,884		—		—			1,884
WMG fee income	—		4,378		—			4,378
CFS fee and commission income	—		—		312			312
Net gains on sales of OREO	8		—		—			8
Net gains on sales of loans^(a)	122		—		—			122
Loan servicing fees^(a)	41		—		—			41
Net gains (losses) on sales of securities^(a)	12		—		—			12
Other^(a)	763		—		(60		)	703
Total non-interest income	$	5,239	$	4,378	$	252		$	9,869



	Shares		Weighted–Average Grant Date Fair Value
Nonvested at April 1, 2018	23,933		$	38.12
Granted	—		—
Vested	(849	)	44.84
Forfeited or cancelled	—		—
Nonvested at June 30, 2018	23,084		$	37.88



RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
	Three Months Ended June 30, 2018 vs. 2017
	Increase/(Decrease)
	Total Change			Due to Volume			Due to Rate
(in thousands)	Total Change			Due to Volume			Due to Rate
Interest and dividend income on:
Commercial loans	$	1,306		$	843		$	463
Mortgage loans	(67		)	(67		)	—
Consumer loans	215			228			(13		)
Taxable investment securities	(134		)	(180		)	46
Tax-exempt investment securities	(38		)	12			(50		)
Interest-earning deposits	(183		)	(174		)	(9		)
Total interest and dividend income, fully taxable equivalent	1,099			662			437

Interest expense on:
Interest-bearing demand deposits	(5		)	(5		)	—
Savings and insured money market deposits	25			(27		)	52
Time deposits	39			(6		)	45
FHLBNY advances, securities sold under agreements to repurchase and other debt	59			89			(30		)
Total interest expense	118			51			67
Net interest income, fully taxable equivalent	$	981		$	611		$	370