Edgar Filing: CHEMUNG FINANCIAL CORP

chmg930201210q.htm

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

For Quarterly period ended September 30, 2012
Or
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 0-13888

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

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

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

(607) 737-3711 or (800) 836-3711

(Registrant's telephone number, including area code)

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

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

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

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

The number of shares of the registrant's common stock, $.01 par value, outstanding on November 12, 2012 was 4,572,875.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION	PAGE

Item 1:	Financial Statements – Unaudited

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

	Notes to Unaudited Consolidated Financial Statements	9

Item 2:	Management's Discussion and Analysis of Financial Condition and Results of Operations	40

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	56

Item 4:	Controls and Procedures	56

PART II.	OTHER INFORMATION	57

Item 1A:	Risk Factors	57

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	57

Item 6:	Exhibits	58

SIGNATURES		59

INDEX TO EXHIBITS

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	SEPTEMBER 30, 2012			DECEMBER, 31, 2011
ASSETS
Cash and due from financial institutions	$	35,323,663		$	28,204,699
Interest-bearing deposits in other financial institutions		45,908,073			24,697,154
Total cash and cash equivalents		81,231,736			52,901,853

Trading assets, at fair value		274,995			294,381
Securities available for sale, at estimated fair value		253,668,954			280,869,810
Securities held to maturity, estimated fair value of $6,881,172 at September 30, 2012 and $9,175,956 at December 31, 2011		6,162,503			8,311,921
Federal Home Loan Bank and Federal Reserve Bank Stock, at cost		4,760,500			5,509,350
Loans, net of deferred origination fees and costs, and unearned income		876,358,135			796,915,177
Allowance for loan losses		(10,827,971	)		(9,659,320	)
Loans, net		865,530,164			787,255,857

Loans held for sale		1,164,750			395,427
Premises and equipment, net		24,862,825			24,762,405
Goodwill		21,824,443			21,983,617
Other intangible assets, net		5,382,282			6,190,540
Bank owned life insurance		2,689,944			2,625,104
Other assets		19,426,761			25,159,322

Total assets	$	1,286,979,857		$	1,216,259,587

LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	302,508,720		$	258,835,961
Interest-bearing		780,666,800			739,656,878
Total deposits		1,083,175,520			998,492,839

Securities sold under agreements to repurchase		32,917,656			37,106,842
Federal Home Loan Bank term advances		28,045,741			43,343,918
Accrued interest payable		462,902			800,148
Dividends payable		1,143,770			1,141,081
Other liabilities		8,354,161			9,445,319
Total liabilities		1,154,099,750			1,090,330,147

Shareholders' equity:
Common stock, $.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at September 30, 2012 and December 31, 2011		53,101			53,101
Additional-paid-in capital		45,537,843			45,582,861
Retained earnings		106,091,543			100,628,900
Treasury stock, at cost (734,997 shares at September 30, 2012; 741,003 shares at December 31, 2011)		(18,730,525	)		(18,894,044	)
Accumulated other comprehensive income (loss)		(71,855	)		(1,441,378	)

Total shareholders' equity		132,880,107			125,929,440

Total liabilities and shareholders' equity	$	1,286,979,857		$	1,216,259,587

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	Nine Months Ended					Three Months Ended
	September 30,		September 30,			September 30,			September 30,
Interest and dividend income:		2012		2011		2012			2011
Loans, including fees	$	34,078,132	$	31,456,406		$	11,373,583	$	11,673,216
Taxable securities		4,142,224		4,347,409			1,306,484		1,504,393
Tax exempt securities		976,622		1,035,068			300,374		350,557
Interest-bearing deposits		122,693		166,955			34,573		65,139
Total interest and dividend income		39,319,671		37,005,838			13,015,014		13,593,305

Interest expense:
Deposits		2,532,630		3,325,900			774,741		1,138,130
Borrowed funds		868,131		783,022			234,155		285,084
Securities sold under agreements to repurchase		763,343		1,056,095			231,043		326,542
Total interest expense		4,164,104		5,165,017			1,239,939		1,749,756
Net interest income		35,155,567		31,840,821			11,775,075		11,843,549
Provision for loan losses		753,897		833,333			225,000		583,333
Net interest income after provision for loan losses		34,401,670		31,007,488			11,550,075		11,260,216

Other operating income:
Wealth management group fee income		5,170,016		5,131,119			1,667,628		1,746,958
Service charges on deposit accounts		3,143,061		3,180,733			1,110,897		1,130,824
Net gain on securities transactions		300,516		1,108,091			597		428,882
Other-than-temporary loss on investment securities:
Total impairment losses		-		(67,400	)		-		(67,400	)
Loss recognized in other comprehensive income		-		-			-		-
Net impairment loss recognized in earnings		-		(67,400	)		-		(67,400	)
Net gain on sales of loans held for sale		270,265		132,902			125,885		53,571
Casualty gains		790,248		-			9,813		-
Gains on sales of other real estate owned		20,426		89,404			-		442
Income from bank owned life insurance		64,840		65,932			21,571		22,321
Other		3,328,329		3,779,231			1,123,830		1,012,865
Total other operating income		13,087,701		13,420,012			4,060,221		4,328,463

Other operating expenses:
Salaries and wages		13,710,584		12,534,215			4,661,858		4,272,613
Pension and other employee benefits		4,137,878		3,296,814			1,381,401		1,172,044
Net occupancy expenses		3,849,173		3,663,005			1,269,165		1,230,490
Furniture and equipment expenses		1,599,842		1,549,048			503,995		486,518
Data processing expense		3,279,379		2,881,150			971,601		976,050
Amortization of intangible assets		808,258		753,192			260,069		288,001
Marketing and advertising expense		915,632		790,797			270,567		307,986
Losses on sales of other real estate owned		92,430		1,671			67,503		-
Other real estate owned expenses		286,137		86,040			154,238		37,549
FDIC insurance		615,360		737,281			205,317		294,897
Merger related expenses		30,145		2,243,919			21,600		20,500
Other		4,874,856		4,724,854			1,625,686		1,530,740
Total other operating expenses		34,199,674		33,261,986			11,393,000		10,617,388
Income before income tax expense		13,289,697		11,165,514			4,217,296		4,971,291
Income tax expense		4,397,279		3,589,455			1,383,451		1,680,351
Net income	$	8,892,418	$	7,576,059		$	2,833,845	$	3,290,940
Weighted average shares outstanding		4,639,985		4,297,777			4,641,547		4,637,392
Basic and diluted earnings per share	$	1.92	$	1.76		$	0.61	$	0.71

See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Nine Months Ended September 30							Three Months Ended September 30,
		2012				2011		2012			2011

Net income		$	8,892,418		$	7,576,059		$	2,833,845		$	3,290,940

Other comprehensive income
Unrealized holding gains on securities available for sale			1,633,195			5,448,351			959,668			294,210
Change in unrealized gains (losses) on securities available for sale for which a portion of an other-than-temporary impairment has been recognized in earnings, net of reclassification			-			27,725			-			(9,425	)
Reclassification adjustment gains realized in net income			(300,516	)		(1,108,091	)		(597	)		(428,882	)
Net unrealized gains (losses)			1,332,679			4,367,985			959,071			(144,097	)
Less: Tax effect			544,460			1,689,798			368,668			(55,746	)
Net of tax amount			788,219			2,678,187			590,403			(88,351	)

Change in funded status of defined benefit pension plan and other benefit plans			944,286			464,097			314,762			154,699
Less: Tax effect			362,982			179,541			120,994			59,847
Net of tax amount			581,304			284,556			193,768			94,852

Total other comprehensive income			1,369,523			2,962,743			784,171			6,501

Comprehensive income		$	10,261,941		$	10,538,802		$	3,618,016		$	3,297,441



See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

	Common Stock		Additional Paid-in Capital			Retained Earnings			Treasury Stock			Accumulated Other Comprehensive Income (Loss)			Total
Balances at December 31, 2010	$	43,001	$	22,022,122		$	94,407,620		$	(19,166,655	)	$	102,475		$	97,408,563
Net income		-		-			7,576,059			-			-			7,576,059
Other comprehensive income		-		-			-			-			2,962,743			2,962,743
Restricted stock awards		-		21,226			-			-			-			21,226
Restricted stock units for directors' deferred compensation plan		-		61,129			-			-			-			61,129
Cash dividends declared ($.75 per share)		-		-			(3,175,394	)		-			-			(3,175,394	)
Distribution of 10,378 shares of treasury stock for directors’ compensation		-		(33,831	)		-			265,262			-			231,431
Distribution of 2,392 shares of treasury stock for employee compensation		-		(6,140	)		-			61,140			-			55,000
Distribution of 286 shares of treasury stock for deferred directors’ compensation		-		(7,364	)		-			7,310						(54	)
Distribution of 4,387 shares of treasury stock for employee restricted stock awards		-		(60,800	)		-			112,090			-			51,290
Purchase of 13,981 shares of treasury stock		-		-			-			(327,413	)		-			(327,413	)
Sale of 3,900 shares of treasury stock		-		(10,101	)		-			99,606			-			89,505
Issuance of 1,009,942 shares related to FOFC Merger		10,100		23,723,538			-			-			-			23,733,638
Balances at September 30, 2011	$	53,101	$	45,709,779		$	98,808,285		$	(18,948,660	)	$	3,065,218		$	128,687,723

Balances at December 31, 2011	$	53,101	$	45,582,861		$	100,628,900		$	(18,894,044	)	$	(1,441,378	)	$	125,929,440
Net income		-		-			8,892,418			-			-			8,892,418
Other comprehensive income		-		-			-			-			1,369,523			1,369,523
Restricted stock awards		-		61,062			-			-			-			61,062
Restricted stock units for directors' deferred compensation plan		-		65,151			-			-			-			65,151
Cash dividends declared ($.75 per share)		-		-			(3,429,775	)		-			-			(3,429,775	)
Distribution of 10,238 shares of treasury stock for directors' compensation		-		(28,121	)		-			261,069			-			232,948
Distribution of 3,453 shares of treasury stock for employee compensation		-		(8,052	)		-			88,052			-			80,000
Distribution of 3,240 shares of treasury stock for deferred directors’ compensation		-		(81,747	)		-			82,588						841
Distribution of 2,095 shares of treasury stock for employee restricted stock awards		-		(53,412	)		-			53,412			-			-
Purchase of 23,120 shares of treasury stock		-		-			-			(579,051	)		-			(579,051	)
Sale of 10,100 shares of treasury stock		-		101			-			257,449			-			257,550
Balances at September 30, 2012	$	53,101	$	45,537,843		$	106,091,543		$	(18,730,525	)	$	(71,855	)	$	132,880,107
See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	Nine Months Ended September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2012			2011
Net income	$	8,892,418		$	7,576,059
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of intangible assets		808,258			753,192
Provision for loan losses		753,897			833,333
Depreciation and amortization of fixed assets		2,187,234			2,129,738
Amortization of premiums on securities, net		1,343,743			960,973
Gains on sales of loans held for sale, net		(270,265	)		(132,902	)
Proceeds from sales of loans held for sale		8,992,854			5,523,214
Loans originated and held for sale		(9,491,912	)		(4,977,727	)
Net losses (gains) on sale of other real estate owned		72,004			(87,733	)
Net (gains) losses on trading assets		(28,261	)		14,966
Net gains on securities transactions		(300,516	)		(1,108,091	)
Net impairment loss recognized on investment securities		-			67,400
Proceeds from sales of trading assets		96,498			-
Purchase of trading assets		(48,851	)		(264,244	)
Decrease in other assets		4,294,238			3,001,325
Decrease (increase) in prepaid FDIC assessment		559,406			(49,464	)
Decrease in accrued interest payable		(337,246	)		(265,000	)
Expense related to restricted stock units for directors' deferred compensation plan		65,151			61,129
Expense related to employee stock compensation		80,000			55,000
Expense related to employee stock awards		61,062			21,226
Decrease in other liabilities		(820,424	)		(2,243,010	)
Income from bank owned life insurance		(64,840	)		(65,932	)
Net cash provided by operating activities		16,844,448			11,803,452

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale		70,370,086			67,741,210
Proceeds from maturities and principal collected on securities available for sale		21,396,640			23,608,123
Proceeds from maturities and principal collected on securities held to maturity		3,731,924			3,448,732
Purchases of securities available for sale		(64,276,418	)		(95,911,022	)
Purchases of securities held to maturity		(1,582,507	)		(3,319,281	)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock		(26,250	)		(1,002,500	)
Redemption of Federal Home Loan Bank and Federal Reserve Bank stock		775,100			237,250
Purchases of premises and equipment		(2,287,654	)		(1,307,723	)
Cash paid Fort Orange Financial Corporation acquisition		-			(8,137,816	)
Cash received Fort Orange Financial Corporation acquisition		-			33,284,995
Proceeds from sales of other real estate owned		294,229			356,207
Net increase in loans		(78,356,344	)		(10,967,168	)
Net cash (used) provided by investing activities		(49,961,194	)		8,031,007

CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, NOW accounts, savings accounts, and insured money market accounts		112,724,881			70,452,474
Net decrease in time deposits and individual retirement accounts		(28,042,200	)		(15,073,756	)
Net decrease in securities sold under agreements to repurchase		(4,189,186	)		(13,889,730	)
Repayments of Federal Home Loan Bank long term advances		(15,298,177	)		(317,990	)
Purchase of treasury stock		(579,051	)		(327,413	)
Sale of treasury stock		257,449			89,505
Cash dividends paid		(3,427,087	)		(2,914,582	)
Net cash provided by financing activities		61,446,629			38,018,508
Net increase in cash and cash equivalents		28,329,883			57,852,967
Cash and cash equivalents, beginning of period		52,901,853			60,619,777
Cash and cash equivalents, end of period	$	81,231,736		$	118,472,744

(continued)

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	4,501,350	$	5,126,397
Income Taxes	$	3,500	$	3,340,847
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	512,686	$	308,976


See accompanying notes to unaudited consolidated financial statements.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

position as of September 30, 2012 and December 31, 2011, and results of operations for the three and

nine-month periods ended September 30, 2012 and 2011, and changes in shareholders' equity and cash

flows for the nine-month periods ended September 30, 2012 and 2011. Subsequent events were

evaluated for any required recognition or disclosure. The results for the periods presented are not

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

2. Earnings Per Common Share

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

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

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

basic earnings per share. All outstanding unvested share based payment awards that contain rights to

nonforfeitable dividends are considered participating securities for this calculation. Restricted stock

awards are grants of participating securities. The impact of the participating securities on earnings per

share is not material. Earnings per share information is adjusted to present comparative results for stock

splits and stock dividends that occur. Earnings per share were computed by dividing net income by

4,639,985 and 4,297,777 weighted average shares outstanding for the nine-month periods ended

September 30, 2012 and 2011, respectively and 4,641,547 and 4,637,392 weighted average shares

outstanding for the three-month periods ended September 30, 2012 and 2011, respectively. There were

no dilutive common stock equivalents during the three and nine-month periods ended September 30,

2012 or 2011.

3. Adoption of New Accounting Standards

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

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

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

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

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

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

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

in Note 4.

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

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

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

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

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

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

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

presenting it as part of the consolidated statements of shareholders’ equity.

4. Fair Value

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the

principal or most advantageous market for the asset or liability in an orderly transaction between market

participants on the measurement date. There are three levels of inputs that may be used to measure fair

value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the

entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices

for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that

are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions

about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods and significant assumptions to estimate fair value:

Investment Securities: The fair values of securities available for sale are usually determined by

obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix

pricing, which is a mathematical technique widely used to value debt securities without relying

exclusively on quoted prices for the specific securities but rather by relying on the securities'

relationship to other benchmark quoted securities (Level 2 inputs).

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

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

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

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

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

now priced using Level 3 inputs.

The Corporation utilizes an external model for pricing these securities. This is the same model used in

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

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

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

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

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

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

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

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

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

Trading Assets: Securities that are held to fund a deferred compensation plan are recorded at fair value

with changes in fair value included in earnings. The fair values of trading assets are determined by

quoted market prices (Level 1 inputs).

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value.

Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part

of the allowance for loan loss accounting. For collateral dependent loans, fair value is commonly based

on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of

approaches including comparable sales and the income approach. Adjustments are routinely made in the

appraisal process by independent appraisers to adjust for differences between the comparable sales and

income data available. Such adjustments are usually significant and typically result in a Level 3

classification of the inputs for determining fair value. Non-real estate collateral may be valued using an

appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or

discounted based on management’s historical knowledge, changes in market conditions from the time of

the valuation, and management’s expertise and knowledge of the client and client’s business, typically

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

additional impairment and adjusted accordingly.

Other Real Estate Owned: Assets acquired through or instead of loan foreclosures are initially recorded

at fair value less costs to sell when acquired, establishing a new cost basis. These assets are

subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is

commonly based on recent real estate appraisals. These appraisals may utilize a single valuation

approach or a combination of approaches including comparable sales and the income approach.

Adjustments are routinely made in the appraisal process by independent appraisers to adjust for

differences between the comparable sales and income data available. Such adjustments are usually

significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent impaired loans and other real estate owned (“OREO”) are

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

(for residential properties) whose qualifications and licenses have been reviewed and verified by the

Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches

utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well

as the overall resulting fair value in comparison with independent data sources such as recent market

data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period

prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on

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

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

			Fair Value Measurement at September 30, 2012 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	146,650,654	$	37,917,000	$	108,733,654	$	-
Mortgage-backed securities, residential		36,285,767		-		36,285,767		-
Obligations of states and political subdivisions		41,609,614		-		41,609,614		-
Collateralized mortgage obligations		4,727,378		-		4,727,378		-
Corporate bonds and notes		13,764,840		-		13,764,840		-
SBA loan pools		1,783,390		-		1,783,390		-
Trust Preferred securities		2,462,006		-		2,016,406		445,600
Corporate stocks		6,385,305		5,731,308		653,997		-
Total available for sale securities	$	253,668,954	$	43,648,308	$	209,575,046	$	445,600

Trading assets	$	274,995	$	274,995	$	-	$	-

			Fair Value Measurement at December 31, 2011 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	152,079,770	$	35,950,000	$	116,129,770	$	-
Mortgage-backed securities, residential		50,766,604		-		50,766,604		-
Obligations of states and political subdivisions		46,512,971		-		46,512,971		-
Trust Preferred securities		2,310,066		-		2,015,156		294,910
Corporate bonds and notes		13,684,199		-		13,684,199		-
Collateralized mortgage obligations		7,536,753		-		7,536,753		-
SBA loan pools		1,949,606		-		1,949,606		-
Corporate stocks		6,029,841		5,339,839		690,002		-
Total available for sale securities	$	280,869,810	$	41,289,839	$	239,285,061	$	294,910

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

There were no transfers between Level 1 and Level 2 during the three or nine-month periods ending

September 30, 2012 or the year ending December, 31, 2011.

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

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

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

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

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

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

payment deferrals as defaults and assumes no recoveries on defaults.

The tables below present a reconciliation of all assets measured at fair value on a recurring basis

using significant unobservable inputs (Level 3) for the three and nine-month periods ending

September 30, 2012 and 2011:

	Fair Value Measurement for Nine-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement for Nine-Months Ended September 30, 2011 Using Significant Unobservable Inputs (Level 3)
Trust Preferred Securities Available for Sale
Beginning balance	$	294,910	$	334,585
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-		-
Impairment charge on investment securities		-		(67,400	)
Included in other comprehensive income		150,690		27,725
Transfers in and/or out of Level 3		-		-
Ending balance September 30	$	445,600	$	294,910

	Fair Value Measurement for Three-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement for Three-Months Ended September 30, 2011 Using Significant Unobservable Inputs (Level 3)
Trust Preferred Securities Available for Sale
Beginning balance	$	343,035	$	371,735
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-		-
Impairment charge on investment securities		-		(67,400	)
Included in other comprehensive income		102,565		(9,425	)
Transfers in and/or out of Level 3		-		-
Ending balance September 30	$	445,600	$	294,910

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

			Fair Value Measurement at September 30, 2012 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial, financial and agricultural:
Commercial and industrial	$	1,324,350	$	-	$	-	$	1,324,350
Commercial mortgages:				-		-
Other		423,036		-		-		423,036
Total Impaired Loans	$	1,747,386	$	-	$	-	$	1,747,386

Other real estate owned:
Commercial, financial and agricultural:
Commercial and industrial	$	101,200	$	-	$	-	$	101,200
Commercial mortgages:
Other		400,755		-		-		400,755
Residential mortgages		427,871		-		-		427,871
Consumer loans:
Home equity lines & loans		4,000		-		-		4,000
Total Other real estate owned, net	$	933,826	$	-	$	-	$	933,826

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

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

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

dependent loans, had a principal balance of $2,790,932 with a valuation allowance of $1,043,546 as of

September 30, 2012, resulting in no additional provision for loan losses for the three and nine-month

periods ending September 30, 2012. Impaired loans had a principal balance of $6,095,645, with a

valuation allowance of $1,942,206 as of December 31, 2011, resulting in a $958,333 provision for loan

losses for the year ending December 31, 2011.

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

amount of $933,826 at September 30, 2012. The net carrying amount reflects the outstanding balance of

$1,126,193 net of a valuation allowance of $192,367 at September 30, 2012, which resulted in a write

down of $96,600 and $116,840 for the three and nine-month periods ending September 30, 2012.

OREO had a net carrying amount of $897,755 at December 31, 2011. The net carrying amount reflects

the outstanding balance of $1,009,162 net of a valuation allowance of $111,407 at December 31, 2011,

which resulted in write downs of $12,120 for the year ending December 31, 2011.

The carrying amounts and estimated fair values of other financial instruments, at September 30, 2012

and December 31, 2011, are as follows (dollars in thousands):

	Fair Value Measurements at September 30, 2012 Using
Financial assets:	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions	$	35,324	$	35,324	$	-	-	$	35,324
Interest-bearing deposits in other financial institutions		45,908		42,796		3,112	-		45,908
Trading assets		275		275		-	-		275
Securities available for sale		253,669		43,648		209,575	446		253,669
Securities held to maturity		6,163		-		6,881	-		6,881
Federal Home Loan and Federal Reserve Bank stock		4,761		-		-	-		N/A
Net loans		865,530		-		-	899,909		899,909
Loans held for sale		1,165		-		1,165	-		1,165
Accrued interest receivable		4,411		333		1,634	2,444		4,411

Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts		834,228		834,228		-	-		834,228
Time deposits		248,948		-		250,568	-		250,568
Securities sold under agreements to repurchase		32,918		-		35,671	-		35,671
Federal Home Loan Bank advances		28,046		-		30,740	-		30,740
Accrued interest payable		463		15		448	-		463
Dividends payable		1,144		1,144		-	-		1,144

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

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

(1) Fair value estimates are made at a specific point in time, based on relevant market information and

information about the financial instrument. These estimates are subjective in nature and involve uncertainties

and matters of significant judgment and, therefore, cannot be determined with precision. Changes in

assumptions could significantly affect the estimates.

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

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

For those short-term instruments that generally mature in 90 days or less, the carrying value

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

bearing deposits with the Federal Home Loan Bank of New York (“FHLB”) and Federal Reserve Bank

of New York (“FRB”) are classified as Level 1, and time deposits are classified as Level 2.

FHLB and FRB Stock

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

transferability.

Loans Receivable

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

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

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

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

are classified as Level 2.

Deposits

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

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

classified as Level 1.

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

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

monthly maturities and classified as Level 2.

Securities Sold Under Agreements to Repurchase (Repurchase Agreements)

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

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

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

Federal Home Loan Bank Advances

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

discounted cash flows to maturity and classified as Level 2.

Accrued Interest Receivable and Payable

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

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

with.

5. Goodwill and Intangible Assets

The changes in goodwill included in the core banking segment during the periods ending September 30,

2012 and 2011 were as follows:

	2012			2011
Beginning of year	$	21,983,617		$	9,872,375
Acquired goodwill		-			12,284,838
Adjustment of Acquired goodwill (1)		(159,174	)		-
September 30,	$	21,824,443		$	22,157,213

(1) Adjustment related to Fort Orange Financial Corp. acquisition.

Acquired intangible assets were as follows at September 30, 2012 and December 31, 2011:

	At September 30, 2012				At December 31, 2011
	Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization
Core deposit intangibles	$	3,819,798	$	1,655,826	$	3,819,798	$	1,213,118
Other customer relationship intangibles		6,063,423		2,845,113		6,063,423		2,479,563
Total	$	9,883,221	$	4,500,939	$	9,883,221	$	3,692,681

Aggregate amortization expense was $808,258 and $753,192 for the nine-month periods ended

September 30, 2012 and 2011, respectively.

The remaining estimated aggregate amortization expense at September 30, 2012 is listed below:

Year	Estimated Expense
2012	$	238,462
2013		876,524
2014		777,801
2015		681,176
2016		607,713
2017 and thereafter		2,200,606
Total	$	5,382,282

6. Accumulated Other Comprehensive Income or Loss

Accumulated other comprehensive income or loss represents the net unrealized holding gains or losses

on securities available for sale and the funded status of the Corporation's defined benefit pension plan

and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect.

The following is a summary of the accumulated other comprehensive income or loss balance, net of tax:

	Balance at December 31, 2011				Current Period Change		Balance at September 30, 2012
Unrealized gains on securities available for sale		$	7,987,055		$	788,219	$	8,775,274
Unrealized loss on pension plans and other benefit plans			(9,428,433	)		581,304		(8,847,129	)
Total		$	(1,441,378	)	$	1,369,523	$	(71,855	)

7. Commitments and Contingencies

The Corporation is a party to certain financial instruments with off-balance sheet risk such as

commitments under standby letters of credit, unused portions of lines of credit, overdraft protection and

commitments to fund new loans. In accordance with U.S. GAAP, these financial instruments are not

recorded in the financial statements. The Corporation's policy is to record such instruments when

funded. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity

risk. Such transactions are generally used by the Corporation to manage clients' requests for funding

and other client needs.

On February 14, 2011 and April 14, 2011, the Bank received separate settlement demands from

representatives of beneficiaries of certain trusts for which the Bank has acted as trustee. The settlement

demands relate to alleged claims of, among other things, breach of the Bank’s fiduciary duties as trustee,

including the Bank’s alleged failure to adequately diversify the relevant trust portfolios. The

beneficiaries seek aggregate damages of up to approximately $27.0 million. On September 16, 2011,

the beneficiaries objected in the Surrogate’s Court of the State of New York, County of Chemung (the

“Surrogate’s Court”) to accountings with respect to the above-mentioned trusts provided by the Bank,

based on allegations similar to those offered in the settlement demands. The matter remains pending at

the Surrogate’s Court. Although these matters are inherently unpredictable, management will defend

against these claims vigorously. Management has concluded that it is reasonably possible, but not

probable, that the financial position, results of operations or cash flows of the Corporation could be

materially adversely affected in any particular period by the unfavorable resolution of these claims, not

withstanding any potential recovery under applicable insurance coverage. An amount of loss or range of

loss cannot be reasonably estimated at this time.

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, 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.

8. Securities

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

	September 30, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	142,730,477	$	3,920,177	$	-	$	146,650,654
Mortgage-backed securities, residential		33,801,646		2,484,121		-		36,285,767
Collateralized Mortgage obligations		4,653,401		74,909		931		4,727,379
Obligations of states and political subdivisions		39,800,910		1,810,542		1,838		41,609,614
Corporate bonds and notes		13,421,730		346,574		3,464		13,764,840
SBA loan pools		1,743,803		39,587		-		1,783,390
Trust Preferred securities		2,517,440		127,991		183,425		2,462,006
Corporate stocks		744,715		5,645,849		5,260		6,385,304
Total	$	239,414,122	$	14,449,750	$	194,918	$	253,668,954

	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises	$	149,140,715	$	3,022,726	$	83,671	$	152,079,770
Mortgage-backed securities, residential		48,129,271		2,637,334		-		50,766,605
Collateralized mortgage obligations		7,412,471		135,603		11,321		7,536,753
Obligations of states and political subdivisions		44,561,789		1,954,265		3,083		46,512,971
Corporate bonds and notes		13,461,675		418,969		196,446		13,684,198
SBA loan pools		1,915,419		34,187		-		1,949,606
Trust preferred securities		2,538,285		132,516		360,735		2,310,066
Corporate stocks		788,030		5,246,655		4,844		6,029,841
Total	$	267,947,655	$	13,582,255	$	660,100	$	280,869,810

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

	September 30, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	6,162,503	$	718,669	$	-	$	6,881,172

	December 31, 2011
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	8,311,921	$	864,035	$	-	$	9,175,956

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:

	September 30, 2012
	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Within One Year	$	58,024,142	$	58,383,376	$	1,606,365	$	1,633,074
After One, But Within Five Years		133,178,606		138,326,611		3,147,444		3,490,139
After Five, But Within Ten Years		6,638,784		7,331,527		1,408,694		1,757,959
After Ten Years		629,025		445,600		-		-
Mortgage-backed securities, residential		33,801,646		36,285,767		-		-
Collateralized mortgage obligations		4,653,401		4,727,379		-		-
SBA loan pools		1,743,803		1,783,390		-		-
Total	$	238,669,407	$	247,283,650	$	6,162,503	$	6,881,172

Proceeds from sales and calls of securities available for sale for the three and nine months ended

September 30, 2012 were $1,002,052 and $70,370,086, respectively. Realized gross gains on these sales

and calls were $597 and $300,516 during the three and nine month periods ended September 30, 2012,

respectively. There were no sales or calls of securities available for sale that resulted in losses for the

three or nine-months ended September 30, 2012.

Proceeds from sales and calls of securities available for sale for the three and nine months ended

September 30, 2011, were $11,085,156 and $67,741,210, respectively. Realized gross gains on these

sales and calls were $428,882 and $1,108,091 during the three and nine month periods ended

September 30, 2011, respectively. There were no sales or calls of securities available for sale that

resulted in losses for the three or nine-months ended September 30, 2011.

The following tables summarize the investment securities available for sale and held to maturity with

unrealized losses at September 30, 2012 and December 31, 2011 by aggregated major security type and

length of time in a continuous unrealized loss position:

	Less than 12 months				12 months or longer				Total
September 30, 2012	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Collateralized mortgage obligations	$	22,087		70	$	178,729	$	861	$	200,816	$	931
Obligations of states and political subdivisions		430,847		1,838		-		-		430,847		1,838
Corporate bonds and notes		-		-		494,297		3,464		494,297		3,464
Trust preferred securities		-		-		445,600		183,425		445,600		183,425
Corporate stocks		-		-		48,370		5,260		48,370		5,260
Total temporarily impaired securities	$	452,934	$	1,908	$	1,166,996	$	193,010	$	1,619,930	$	194,918

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

Other-Than-Temporary Impairment (“OTTI”)

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

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

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

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

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

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

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

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

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

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

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

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

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

new amortized cost basis of the investment.

As of September 30, 2012, the majority of the Corporation's unrealized losses in the investment

securities portfolio related to one pooled trust preferred security. The decline in fair value on this

security is primarily attributable to the financial crisis and resulting credit deterioration and financial

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

the future receipt of both principal and interest payments on this security. This fact combined with the

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

investment in this security if it was sold at this time.

Our analysis of this investment includes a $629,025 book value collateralized debt obligation ("CDO")

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

September 30, 2012 Moody's rated this security as Caa3, which is defined as substantial risk of default.

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

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

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

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

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

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

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

interest payment deferrals or defaults of underlying trust preferred securities.

Upon completion of the September 30, 2012 analysis, our model indicated no additional OTTI on this

CDO. This security remained classified as available for sale and represented $183,425 of the unrealized

losses reported at September 30, 2012. Payments continue to be made as agreed on this security.

When conducting the September 30, 2012 analysis, the present value of expected future cash flows

using a discount rate equal to the yield in effect at the time of purchase was compared to the previous

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

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

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

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

market conditions and interest rates. This comparison indicated an increase in value during the quarter,

based on factors other than credit, which resulted in a gain reported in other comprehensive income.

Changes in credit quality may or may not correlate to changes in the overall fair value of the impaired

securities as the change in credit quality is only one component in assessing the overall fair value of the

impaired securities. Therefore, the recognition of additional credit related OTTI could result in a gain

reported in other comprehensive income. Total OTTI recognized in accumulated other comprehensive

income was $111,329 and $220,459 for securities available for sale at September 30, 2012 and

December 31, 2011, respectively.

The tables below present a roll forward of the cumulative credit losses recognized in earnings for the

three and nine-month periods ending September 30, 2012 and 2011:

	2012		2011
Beginning balance, January 1,	$	3,506,073	$	3,438,673
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-		-
Additions/Subtractions:
Amounts realized for securities sold during the period		-		-
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		-		-
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security		-		-
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-		67,400

Ending balance, September 30,	$	3,506,073	$	3,506,073

Beginning balance, July 1,	$	3,506,073	$	3,438,673
Amounts related to credit loss for which an other-than-temporary impairment was not previously recognized		-		-
Additions/Subtractions:
Amounts realized for securities sold during the period		-		-
Amounts related to securities for which the company intends to sell or that it will be more likely than not that the company will be required to sell prior to recovery of amortized cost basis		-		-
Reductions for increase in cash flows expected to be collected that are recognized over the remaining life of the security		-		-
Increases to the amount related to the credit loss for which other-than-temporary impairment was previously recognized		-		67,400

Ending balance, September 30,	$	3,506,073	$	3,506,073

9. Loans and Allowance for Loan Losses

The composition of the loan portfolio is summarized as follows:

	September 30, 2012		December 31, 2011
Commercial, financial and agricultural	$	133,365,046	$	142,209,279
Commercial mortgages		311,126,130		264,589,013
Residential mortgages		193,049,212		193,599,853
Indirect consumer loans		130,969,296		97,165,447
Consumer loans		107,848,451		99,351,585

	$	876,358,135	$	796,915,177

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

their examination.

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

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

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

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

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

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

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

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

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

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

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

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

with the accounting policy for the allowance for loan losses.

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

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

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

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

actual loss history experienced by the Corporation over the most recent eight quarters. This actual loss

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

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

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

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

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

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

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

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

Risk Characteristics

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

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

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

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

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

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

if any.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The following tables present activity in the allowance for loan losses for the three and nine months

ending September 30, 2012, by portfolio segment and by loans originated by the Corporation (referred

to as “Legacy” loans) and loans acquired (referred to as “Acquired” loans) in the merger with Fort

Orange Financial Corp. (“FOFC”), which was completed on April 8, 2011. The allowance for loan

losses on Acquired loans represents any valuation allowances established after acquisition for decreases

in cash flows expected to be collected on purchased credit impaired loans.

In addition, the following tables present activity in the allowance for loan losses for the three and nine

months ending September 30, 2011, by portfolio segment for Legacy loans. The allowance for loan

losses on Acquired loans was established during the quarter ending March 31, 2012, therefore, there was

no activity for the three and nine months ending September 30, 2011.

Legacy Loans	Nine Months Ended September 30, 2012
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated		Total
Beginning balance:	$	3,143,373		$	2,570,149		$	1,309,649		$	2,192,729		$	443,420	$	9,659,320
Charge Offs:		(5,792	)		(39,314	)		(82,442	)		(342,867	)		-		(470,415	)
Recoveries:		591,497			43,031			-			176,139			-		810,667
Net recoveries (charge offs)		585,705			3,717			(82,442	)		(166,728	)		-		340,252
Provision		(1,300,269	)		682,991			232,793			884,943			32,542		533,000
Ending balance	$	2,428,809		$	3,256,857		$	1,460,000		$	2,910,944		$	475,962	$	10,532,572

Acquired Loans	Nine Months Ended September 30, 2012
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages			Residential Mortgages		Consumer Loans		Unallocated		Total
Beginning balance:	$	-	$	-		$	-	$	-	$	-	$	-
Reclassification of acquired loan discount		73,228		50,331			-		-		-		123,559
Charge Offs:		-		(49,057	)		-		-		-		(49,057	)
Recoveries:		-		-			-		-		-		-
Net recoveries		73,228		1,274			-		-		-		74,502
Provision		134,427		86,470			-		-		-		220,897
Ending balance	$	207,655	$	87,744		$	-	$	-	$	-	$	295,399

Legacy Loans	Three Months Ended September 30, 2012
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated		Total
Beginning balance:	$	2,796,556		$	2,987,968		$	1,424,816		$	2,474,185		$	413,648	$	10,097,173
Charge Offs:		-			(31,019	)		(9,829	)		(69,439	)		-		(110,287	)
Recoveries:		239,735			12,535			-			68,416			-		320,686
Net recoveries (charge offs)		239,735			(18,484	)		(9,829	)		(1,023	)		-		210,399
Provision		(607,482	)		287,373			45,013			437,782			62,314		225,000
Ending balance	$	2,428,809		$	3,256,857		$	1,460,000		$	2,910,944		$	475,962	$	10,532,572

Acquired Loans	Three Months Ended September 30, 2012
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Beginning balance:	$	207,655	$	87,744	$	-	$	-	$	-	$	295,399
Reclassification of acquired loan discount		-		-		-		-		-		-
Charge Offs:		-		-		-		-		-		-
Recoveries:		-		-		-		-		-		-
Net charge offs		-		-		-		-		-		-
Provision		-		-		-		-		-
Ending balance	$	207,655	$	87,744	$	-	$	-	$	-	$	295,399

Legacy Loans	Nine Months Ended September 30, 2011
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	2,118,299		$	2,575,058		$	1,301,780		$	2,727,022		$	775,972		$	9,498,131
Charge Offs:		(593,995	)		(3,764	)		(39,312	)		(542,621	)		-			(1,179,692	)
Recoveries:		314,797			33,304			30,324			146,726			-			525,151
Net recoveries (charge offs)		(279,198	)		29,540			(8,988	)		(395,895	)		-			(654,541	)
Provision		1,444,245			(69,375	)		(61,068	)		(184,348	)		(296,121	)		833,333
Ending balance	$	3,283,346		$	2,535,223		$	1,231,724		$	2,146,779		$	479,851		$	9,676,923

Legacy Loans	Three Months Ended September 30, 2011
Allowance for loan losses	Commercial, Financial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	3,081,433		$	2,612,655		$	1,246,880		$	2,297,459		$	517,245		$	9,755,672
Charge Offs:		(590,992	)		-			(39,312	)		(201,966	)		-			(832,270	)
Recoveries:		109,391			7,201			-			53,596			-			170,188
Net recoveries (charge offs)		(481,601	)		7,201			(39,312	)		(148,370	)		-			(662,082	)
Provision		683,514			(84,633	)		24,156			(2,310	)		(37,394	)		583,333
Ending balance	$	3,283,346		$	2,535,223		$	1,231,724		$	2,146,779		$	479,851		$	9,676,923

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

loans by portfolio segment based on impairment method as of September 30, 2012 and December 31,

2011. The recorded investment excludes Acquired loans except for those loans acquired with

deteriorated credit quality:

	September 30, 2012
Allowance for loan losses	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	946,255	$	97,291	$	-	$	-	$	-	$	1,043,546
Collectively evaluated for impairment		1,482,554		3,159,566		1,460,000		2,910,944		475,962		9,489,026
Acquired with deteriorated credit quality		207,655		87,744		-		-		-		295,399
Total ending allowance balance	$	2,636,464	$	3,344,601	$	1,460,000	$	2,910,944	$	475,962	$	10,827,971

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

	September 30, 2012
Loans:	Commercial, Financial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually evaluated for impairment	$	2,445,154	$	1,777,782	$	136,844	$	-	$	4,359,780
Loans collectively evaluated for impairment		112,741,589		234,567,883		179,469,401		233,911,200		760,690,073
Acquired with deteriorated credit quality		1,152,448		11,400,980		239,911		-		12,793,339
Total ending loans balance	$	116,339,191	$	247,746,645	$	179,846,156	$	233,911,200	$	777,843,192

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

The following tables present loans individually evaluated for impairment recognized by class of loans as of September 30, 2012 and December 31, 2011, the average recorded investment and interest income recognized by class of loans as of the three and nine-month periods ending September 30, 2012 and 2011:

	September 30, 2012						December 31, 2011
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance			Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	372,788	$	174,129	$	-	$	3,512,860	$	2,914,776	$	-
Commercial mortgages:
Construction		10,454		10,454		-		10,454		10,454		-
Other		1,854,966		1,246,775		-		1,091,026		860,648		-
Residential mortgages		136,844		136,844		-		178,925		179,337		-
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		2,670,391		2,271,025		946,255		2,360,252		2,360,267		1,528,651
Commercial mortgages:
Construction		-		-		-		8,295		8,295		8,295
Other		520,327		520,553		97,291		4,098,627		3,724,166		405,260
Total	$	5,565,770	$	4,359,780	$	1,043,546	$	11,260,439	$	10,057,943	$	1,942,206

		Nine Months Ended September 30, 2012			Nine Months Ended September 30, 2011				Three Months Ended September 30, 2012				Three Months Ended September 30, 2011
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial	$	843,910	$	-	$	3,100,655	$	25,049	$	177,457	$	-	$	3,032,483	$	6,290
Commercial mortgages:
Construction		10,454		-		24,490		-		10,454		-		20,602		-
Other		932,358		-		3,447,948		-		1,081,307		-		3,397,079		-
Residential mortgages		117,737		-		307,997		-		74,441		-		257,799		-
Consumer loans:
Home equity lines & loans		14,892		2,289		-		-		-		-		-		-
With an allowance recorded:
Commercial, financial and agricultural:
Commercial & industrial		2,328,728		-		1,953,474		82,548		2,295,003		-		2,918,444		82,548
Commercial mortgages:
Construction		4,148		-		27,351		-		-		-		15,557		-
Other		1,712,578		-		821,994		17,070		830,049		-		823,995		17,070
Residential mortgages		32,001		-		-		-		64,003		-		-		-
Total	$	5,996,806	$	2,289	$	9,683,909	$	124,667	$	4,532,714	$	-	$	10,465,959	$	105,908

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

on accrual by class of loans as of the periods ending September 30, 2012 and December 31, 2011. This table

includes Acquired loans except for those loans with evidence of credit deterioration at the time of

the FOFC merger:

	September 30, 2012				December 31, 2011
	Non-Accrual		Loans Past Due Over 90 Days Still Accruing		Non-Accrual		Loans Past Due Over 90 Days Still Accruing
Commercial, financial and agricultural:
Commercial & industrial	$	2,806,183	$	17,281	$	5,611,805	$	-
Commercial mortgages:
Construction		434,338		4,565,392		18,749		7,295,104
Other		2,054,326		-		4,778,384		-
Residential mortgages		2,363,170		-		2,611,096		-
Consumer loans
Credit cards		-		11,921		-		9,053
Home equity lines & loans		473,981		-		455,418		-
Indirect consumer loans		501,745		-		113,349		-
Other direct consumer loans		31,316		-		22,287		-
Total	$	8,665,059	$	4,594,594	$	13,611,088	$	7,304,157

The commercial mortgages included in loans past due over 90 days still accruing at September 30, 2012

and December 31, 2011, were construction loans acquired in the FOFC acquisition, which for a variety

of reasons are 90 days or more past their stated maturity dates. However, the borrowers continue to

make required interest payments. Additionally, these loans carry third party credit enhancements, and

based upon the strength of those credit enhancements, the Corporation has not identified these loans as

purchased credit impaired loans and expects to incur no losses on these loans.

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

30, 2012 and December 31, 2011 and by Legacy loans and Acquired loans:

	September 30, 2012
Legacy Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	7,353	$	-	$	189,912	$	197,265	$	-	$	114,455,637	$	114,652,902
Agricultural		-		-		-		-		-		533,841		533,841
Commercial mortgages:
Construction		-		-		10,454		10,454		-		30,653,785		30,664,239
Other		59,389		73,584		305,495		438,468		-		205,242,958		205,681,426
Residential mortgages		1,571,579		428,641		622,623		2,622,843		-		176,983,403		179,606,246
Consumer loans:
Credit cards		10,399		3,629		11,921		25,949		-		1,753,893		1,779,842
Home equity lines & loans		196,670		272,940		198,814		668,424		-		79,586,618		80,255,042
Indirect consumer loans		656,927		127,026		414,905		1,198,858		-		130,130,094		131,328,952
Other direct consumer loans		19,295		14,865		23,221		57,381		-		20,489,982		20,547,363
Total	$	2,521,612	$	920,685	$	1,777,345	$	5,219,642	$	-	$	759,830,211	$	765,049,853

	September 30, 2012
Acquired Loans:	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days Past Due		Total Past Due			Loans Acquired with deteriorated credit quality	Loans Not Past Due			Total
Commercial, financial and agricultural:
Commercial & industrial	$	95,799	$	4,994	$	361,159	$	461,952	$	1,152,448	$	18,760,978	$	20,375,378
Commercial mortgages:
Construction		-		-		4,989,277		4,989,277		1,179,177		1,728,428		7,896,882
Other		547,737		-		286,997		834,734		10,221,803		54,897,378		65,953,915
Residential mortgages		614,844		-		201,442		816,286		239,911		12,923,490		13,979,687
Consumer loans:
Home equity lines & loans		-		-		-		-		-		5,470,998		5,470,998
Other direct consumer loans		-		-		-		-		-		92,309		92,309
Total	$	1,258,380	$	4,994	$	5,838,875	$	7,102,249	$	12,793,339	$	93,873,581	$	113,769,169

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

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

Troubled Debt Restructurings:

The Corporation has no allocated specific reserves to customers whose loan terms have been modified in

troubled debt restructurings included in non-accrual loans as of September 30, 2012. The Corporation

had $217,866 allocated specific reserves to customers whose loan terms have been modified in troubled

debt restructurings which are included in non-accrual loans as of December 31, 2011. The Corporation

has not committed to lend any additional amounts as of September 30, 2012 or December 31, 2011 to

customers with outstanding loans that are classified as trouble debt restructurings.

During the nine months ended September 30, 2012, two loans in the aggregate amount of $133,661 were

modified as troubled debt restructurings by the Corporation. One of these loans totaling $58,823 was

paid off during the second quarter of 2012. The modifications of the terms of these loans included an

extension of a maturity date and the postponement of scheduled amortized payments for greater than a

three month period. During the three months ended September 30, 2012, one loan with a principal

balance of $74,838 was modified as a troubled debt restructuring by the Corporation. Additionally,

there were no payment defaults on any loans previously modified as troubled debt restructurings within

twelve months following the modification. A loan is considered to be in payment default once it is 90

days contractually past due under the modified terms.

Credit Quality Indicators:

The Corporation establishes a risk rating at origination for all commercial loans. The main factors

considered in assigning risk ratings include, but not limited to: historic and future debt service coverage,

collateral position, operating performance, liquidity, leverage, payment history, management ability, and

the customer’s industry. Commercial relationship managers monitor all loans in their respective

portfolios for any changes in the borrower’s ability to service their debt and affirm the risk ratings for

the loans at least annually.

For the retail loans, which include lines of credit, installment, mortgage, and home equity loans, 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 as some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth

and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-

defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by

the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as

substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on

the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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

process are considered to be not rated loans. Based on the analysis’s performed as of September 30,

2012 and December 31, 2011, the risk category of the recorded investment of loans by class of loans is

as follows:

	September 30, 2012
Legacy Loans:	Not Rated		Pass		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial	$	-	$	102,309,471	$	7,723,549	$	2,348,857	$	2,271,025
Agricultural		-		533,841		-		-		-
Commercial mortgages:
Construction		-		29,708,671		198,373		757,195		-
Other		-		189,704,790		10,730,594		4,887,276		358,766
Residential mortgages		177,499,107		-		-		2,107,139		-
Consumer loans:
Credit cards		1,779,842		-		-		-		-
Home equity lines & loans		79,780,903		-		-		474,139		-
Indirect consumer loans		130,827,207		-		-		501,745		-
Other direct consumer loans		20,516,047		-		-		31,316		-
Total	$	410,403,106	$	322,256,773	$	18,652,516	$	11,107,667	$	2,629,791

	September 30, 2012
Acquired Loans:		Not Rated		Pass		Loans Acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial, financial and agricultural:
Commercial & industrial		$	-	$	18,341,646	$	1,152,448	$	520,125	$	278,788	$	82,371
Commercial mortgages:
Construction			-		251,220		1,179,177		5,044,630		1,421,855		-
Other			-		52,881,017		10,221,803		1,329,016		1,328,509		193,570
Residential mortgages			13,483,746		-		239,911		-		256,030		-
Consumer loans
Home equity lines & loans			5,470,998		-		-		-		-		-
Other direct consumer loans			92,309		-		-		-		-		-
Total		$	19,047,053	$	71,473,883	$	12,793,339	$	6,893,771	$	3,285,182	$	275,941

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

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

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan

losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on

the aging status of the loan, which was previously presented, and by payment activity. The following

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

September 30, 2012 and December 31, 2011:

	September 30, 2012
			Consumer Loans
Legacy Loans:	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	177,499,107	$	1,767,921	$	79,781,061	$	130,827,207	$	20,516,047
Non-Performing		2,107,139		11,921		473,981		501,745		31,316
	$	179,606,246	$	1,779,842	$	80,255,042	$	131,328,952	$	20,547,363

Acquired Loans:
Performing	$	13,723,657	$	-	$	5,470,998	$	-	$	92,309
Non-Performing		256,030		-				-		-
Total	$	13,979,687	$	-	$	5,470,998	$	-	$	92,309

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

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

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

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

adjustments were made for changes in expected cash flows due to loans refinanced beyond original

maturity dates, impairments recognized subsequent to the acquisition, advances made for taxes or

insurance to protect collateral held and payments received in excess of amounts originally expected.

The tables below summarize the changes in total contractually required principal and interest cash

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

January 1, 2012 to September 30, 2012 and from July 1, 2012 to September 30, 2012:

Nine Months Ended September 30, 2012	Balance at December 31, 2011			Income Accretion		All Other Adjustments			Balance at September 30, 2012
Contractually required principal and interest	$	21,260,381		$	-	$	(1,811,021	)	$	19,449,360
Contractual cash flows not expected to be collected (nonaccretable discount)		(4,662,346	)		-		776,839			(3,885,507	)
Cash flows expected to be collected		16,598,035			-		(1,034,182	)		15,563,853
Interest component of expected cash flows (accretable yield)		(1,843,603	)		1,481,515		(2,391,636	)		(2,753,724	)
Fair value of loans acquired with deteriorating credit quality	$	14,754,432		$	1,481,515	$	(3,425,818	)	$	12,810,129

Three Months Ended September 30, 2012	Balance at June 30, 2012			Income Accretion		All Other Adjustments			Balance at September 30, 2012
Contractually required principal and interest	$	19,834,397		$	-	$	(385,037	)	$	19,449,360
Contractual cash flows not expected to be collected (nonaccretable discount)		(3,978,427	)		-		92,920			(3,885,507	)
Cash flows expected to be collected		15,855,970			-		(292,117	)		15,563,853
Interest component of expected cash flows (accretable yield)		(2,971,148	)		310,344		(92,920	)		(2,753,724	)
Fair value of loans acquired with deteriorating credit quality	$	12,884,822		$	310,344	$	(385,037	)	$	12,810,129

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

	Nine Months Ended						Three Months Ended
	September 30,			September 30,			September 30,				September 30,
		2012			2011		2012				2011
Qualified Pension
Service cost, benefits earned during the period	$	970,053		$	777,402		$	323,351		$	259,134
Interest cost on projected benefit obligation		1,218,330			1,178,868			406,110			392,956
Expected return on plan assets		(1,990,479	)		(1,757,019	)		(663,493	)		(585,673	)
Amortization of unrecognized transition obligation		-			-			-			-
Amortization of unrecognized prior service cost		10,392			22,410			3,464			7,470
Amortization of unrecognized net loss		991,704			507,339			330,568			169,113
Net periodic pension expense	$	1,200,000		$	729,000		$	400,000		$	243,000

Supplemental Pension
Service cost, benefits earned during the period	$	26,076		$	22,968		$	8,692		$	7,656
Interest cost on projected benefit obligation		38,320			40,330			12,773			13,443
Expected return on plan assets		-			-			-			-
Amortization of unrecognized prior service cost		-			-			-			-
Amortization of unrecognized net loss		14,940			7,098			4,980			2,366
Net periodic supplemental pension expense	$	79,336		$	70,396		$	26,445		$	23,465

Postretirement, Medical and Life
Service cost, benefits earned during the period	$	26,250		$	24,750		$	8,750		$	8,250
Interest cost on projected benefit obligation		54,000			56,250			18,000			18,750
Expected return on plan assets		-			-			-			-
Amortization of unrecognized prior service cost		(72,750	)		(72,750	)		(24,250	)		(24,250	)
Amortization of unrecognized net gain		-			-			-			-
Net periodic postretirement, medical and life expense	$	7,500		$	8,250		$	2,500		$	2,750

11. Segment Reporting

The Corporation manages its operations through two primary business segments: core banking and wealth management group services. The core banking segment

provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential

mortgage loans, primarily in the Corporation's local markets and to invest in securities. The wealth management group services segment provides revenues by

providing trust and investment advisory services to clients.

Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results is shown in the

following table. Income taxes are allocated based on the separate taxable income of each segment and indirect overhead expenses are allocated based on reasonable

and equitable allocations applicable to the reportable segment. Holding company amounts are the primary differences between segment amounts and consolidated

totals, and are reflected in the "Holding Company and Other" column below, along with amounts to eliminate transactions between segments (dollars in thousands):

		Three Months Ended September 30, 2012									Nine Months Ended September 30, 2012
		Core Banking		Wealth Management Group Services			Holding Company And Other			Consolidated Totals	Core Banking		Wealth Management Group Services			Holding Company And Other			Consolidated Totals
Net interest income	$	11,774	$	-		$	1		$	11,775	$	35,149	$	-		$	7		$	35,156
Provision for loan losses		225		-			-			225		754		-			-			754
Net interest income after provision for loan losses		11,549		-			1			11,550		34,395		-			7			34,402
Other operating income		2,180		1,668			212			4,060		7,396		5,170			522			13,088
Other operating expenses		9,510		1,708			175			11,393		28,344		5,279			577			34,200
Income or (loss) before income tax expense		4,219		(40	)		38			4,217		13,447		(109	)		(48	)		13,290
Income tax expense (benefit)		1,400		(15	)		(2	)		1,383		4,512		(42	)		(72	)		4,398
Segment net income (loss)	$	2,819	$	(25	)	$	40		$	2,834	$	8,935	$	(67	)	$	24		$	8,892

Segment assets											$	1,279,107	$	5,249		$	2,624		$	1,286,980

		Three Months Ended September 30, 2011									Nine Months Ended September 30, 2011
		Core Banking		Wealth Management Group Services			Holding Company And Other			Consolidated Totals	Core Banking		Wealth Management Group Services			Holding Company And Other		Consolidated Totals
Net interest income	$	11,842	$	-		$	1		$	11,843	$	31,834	$	-		$	6	$	31,840
Provision for loan losses		583		-			-			583		833		-			-		833
Net interest income after provision for loan losses		11,259		-			1			11,260		31,001		-			6		31,007
Other operating income		2,465		1,747			116			4,328		7,284		5,131			1,005		13,420
Other operating expenses		8,638		1,843			136			10,617		27,259		5,450			553		33,262
Income or (loss) before income tax expense		5,086		(96	)		(19	)		4,971		11,026		(319	)		458		11,165
Income tax expense (benefit)		1,742		(37	)		(25	)		1,680		3,589		(123	)		123		3,589
Segment net income (loss)	$	3,344	$	(59	)	$	6		$	3,291	$	7,437	$	(196	)	$	335	$	7,576

Segment assets											$	1,257,067	$	5,856		$	3,001	$	1,265,924

12. Stock Based Compensation

Board of Director’s Stock Compensation

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

amount of fees individually earned during the previous year for service as a director. The common

shares are distributed to the Corporation's individual board members from treasury shares of the

Corporation on or about January 15 following the calendar year of service.

Additionally, the President and 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 2012, 10,238 shares were re-issued from treasury to fund the stock component of

directors' compensation. An expense of $156,863 related to this compensation was recognized during

the period ending September 30, 2012. This expense is accrued as shares are earned.

Restricted Stock Plan

Pursuant to the Corporation’s Restricted Stock Plan (the “Plan”), the Corporation may make

discretionary grants of restricted stock to officers other than the Corporation's Chief Executive Officer.

Compensation expense is recognized over the vesting period of the awards based on the fair value of the

stock at issue date. The maximum number of shares as to which stock awards may be granted under the

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

A summary of restricted stock activity from December 31, 2011 to September 30, 2012 is presented below:

	Shares		Weighted –Average Grant Date Fair Value
Nonvested at December 31, 2011	12,458		$	22.33
Granted	2,095			23.87
Vested	(824	)		22.59
Forfeited or Cancelled	-			-
Nonvested at September 30, 2012	13,729		$	22.55

As of September 30, 2012, there was $262,866 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 3.97 years.

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

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

operations of the Corporation during the three and nine-month periods ended September 30, 2012, with

comparisons to the comparable periods in 2011, as applicable. The following discussion and the

unaudited consolidated interim financial statements and related notes included in this report should be

read in conjunction with our 2011 Annual Report on Form 10-K, which was filed with the Securities and

Exchange Commission on March 28, 2012. The results for the periods presented are not necessarily

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

Forward-looking Statements

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(607) 737-3746. 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.

Critical Accounting Policies, Estimates and Risks and Uncertainties

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

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

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

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

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

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

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

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

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

Allowance for Loan Losses

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

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

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

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

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

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

experience significantly worsened or if current economic conditions significantly deteriorated,

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

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

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

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

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

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

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

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

require additional provisions for loan losses.

Other-Than-Temporary Impairment

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

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

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

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

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

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

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

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

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

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

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

recognized in other comprehensive income. For the three and nine-month periods ended September 30,

2012, the Corporation recognized no OTTI charges.

Goodwill and Other Intangible Assets

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

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

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

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

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

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

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

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

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

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

income.

Financial Condition

Consolidated assets at September 30, 2012 totaled $1.287 billion, an increase of $70.7 million, or 5.8%,

since December 31, 2011. The growth was primarily due to increases of $79.4 million, or 10.0%, in

total portfolio loans and $28.3 million in cash and cash equivalents, partially offset by a decrease of

$29.4 million in investment securities. Total liabilities increased $63.8 million to $1.154 billion at

September 30, 2012, compared with December 31, 2011, primarily due to an increase of $84.7 million

in deposits, partially offset by a decrease of $19.5 million in borrowings. Total equity was $132.9

million at September 30, 2012, an increase of $7.0 million from December 31, 2011, primarily due to

the Corporation’s net income of $8.9 million for the nine months ended September 30, 2012.

Loans

The composition of the loan portfolio is summarized as follows:

	September 30, 2012		December 31, 2011
Commercial, financial and agricultural	$	133,365,046	$	142,209,279
Commercial mortgages		311,126,130		264,589,013
Residential mortgages		193,049,212		193,599,853
Indirect Consumer loans		130,969,296		97,165,447
Consumer loans		107,848,451		99,351,585
Total loans, net of deferred origination fees and cost, and unearned income	$	876,358,135	$	796,915,177

The increase in portfolio loans was due to strong growth of $42.3 million, or 21.5%, in consumer loans

and $37.7 million, or 9.3%, in commercial loans. The growth in consumer loans was primarily due to

increases of $33.8 million in indirect consumer loans and $5.2 million in direct consumer installment

loans and $2.7 million in home equity loans. During the second quarter of 2012, the Corporation

implemented an indirect consumer loan program with reduced pricing on high quality indirect auto loans

in an effort to put excess liquidity to better use. In addition, the Corporation implemented a marketing

campaign for direct consumer loans during the second quarter of 2012. The growth in commercial loans

was primarily due to an increase of $33.9 million in commercial loans in the Capital Bank (as defined

herein) division in the Albany, New York region, which was the former market area of Fort Orange

Financial Corp ("FOFC"), which was acquired in April 2011.

For the nine months ended September 30, 2012, $8.7 million of newly originated residential mortgages

were sold in the secondary market to Freddie Mac, with an additional $0.6 million originated and sold to

the State of New York Mortgage Agency.

Securities

The available-for-sale segment of the securities portfolio totaled $253.7 million at September 30, 2012,

a decrease of $27.2 million, or 9.7%, from December 31, 2011. The decrease resulted from sales and

calls of $70.4 million, maturities of $4.1 million and principal paydowns of $17.3 million. These items

were partially offset by purchases of $64.3 million. Sales and calls of securities included a $25.4 million

U.S. Treasury bond, $43.0 million in federal agency bonds and $2.0 million in municipal bonds. All of

the maturities were in municipal bonds. Principal paydowns were primarily in mortgage-backed securities

and collateralized mortgage obligations. Purchases included a $27.5 million U.S. Treasury bond,

$35.0 million in federal agency bonds and $1.8 million in municipal bonds.

The held-to-maturity segment of the securities portfolio, consisting of local municipal obligations,

totaled $6.2 million at September 30, 2012, a decrease of $2.1 million from December 31, 2011.

Cash and Cash Equivalents

As noted above, cash and cash equivalents increased $28.3 million since December 31, 2011, primarily

due to a $21.2 million increase in interest-bearing deposits at other financial institutions. The increase in

interest-bearing deposits at other financial institutions was a result of the significant increase in deposits

and a decrease in the securities portfolio, partially offset by the growth in the loan portfolio and the

paydown of borrowings. Additionally, cash and due from financial institutions increased $7.1 million

due to an $8.1 million increase in the volume of items in process of clearing through the Federal Reserve

Bank and JP Morgan Chase, offset by a $1.0 million decrease in branch cash levels. With total cash and

due from banks totaling $81.2 million at September 30, 2012, the Corporation continues to maintain a

strong liquidity position and evaluate alternative investment of these funds with caution given the

historically low interest rate environment and the inherent interest rate risk associated with longer term

securities portfolio investments.

Other Assets

A $5.7 million decrease in other assets was due principally to a $4.0 million decrease in the over

payment of 2011 estimated income taxes and a $1.9 million decrease in net deferred tax assets.

Deposits

Since December 31, 2011, total deposits increased $84.7 million, or 8.5%, to $1.083 billion, with public

fund balances increasing $44.8 million and all other deposits increasing $39.9 million. The increase in

public fund deposits was primarily due to increases in NOW account and insured money market account

(“IMMA”) balances totaling $25.0 million and $11.5 million, respectively, as well as a $7.4 million

increase in demand deposits. The increase in all other period-end deposits reflects a $59.2 million

increase in IMMA balances, as well as increases in demand deposits and NOW accounts totaling $36.3

million and $9.6 million, respectively. These increases were partially offset by a $37.2 million decrease

in savings balances and a $28.0 million decrease in certificates of deposit. Both the decrease in savings

balances and the increase in IMMA accounts were impacted by an initiative to convert funds from the

former Capital Bank tiered interest rate savings accounts into the Capital Bank Privilege IMMA

account.

Other Borrowings

Both a $15.3 million decrease in Federal Home Loan Bank of New York (“FHLB”) term advances and a

$4.2 million decrease in securities sold under agreements to repurchase reflect the maturity of obligations

during the nine months ended September 30, 2012.

Shareholders’ Equity

Since December 31, 2011, shareholders’ equity increased $7.0 million, or 5.5%, primarily due to net

income of $8.9 million for the nine months ended September 30, 2012 and a $1.4 million increase in

accumulated other comprehensive income, partially offset by cash dividends of $3.4 million.

Asset Quality

Non-Performing Loans

The recorded investment in non-performing loans at September 30, 2012, totaled $13.3 million

compared to $20.9 million at year-end 2011, a decrease of $7.6 million. Not included in the non-

performing loan totals are loans acquired in the April 2011 acquisition of FOFC and its wholly owned

subsidiary, Capital Bank & Trust Company ("Capital Bank"), which the Corporation has identified as

purchased credit impaired (“PCI”) loans totaling $12.8 million at September 30, 2012, which are

accounted for under separate accounting guidance, Accounting Standards Codification (“ASC”)

Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality”

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

decreases in non-accrual loans and loans 90 days or more past due totaling $4.9 million and $2.7

million, respectively. The decrease in non-accrual loans was primarily due to a $5.2 million reduction in

non-accrual commercial loans to one borrower. Included in the $5.2 million reduction were $5.1 million

of funds received from United States Department of Agriculture (“USDA”) guarantees. Other non-

accrual commercial loans increased slightly from December 31, 2011 to September 30, 2012.

Additionally, during the nine months ended September 30, 2012, non-accrual residential mortgages

decreased $0.2 million, while non-accrual consumer loans increased $0.4 million. It is generally the

Corporation's policy that a loan 90 days past due be placed in non-accrual status unless factors exist that

would eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at

any time if payment of principal or interest in full is not expected due to deterioration in the financial

condition of the borrower. Loans remain in non-accrual status until the loans have been brought current

and remain current for a period of six months. In the case of non-accrual loans where a portion of the

loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal

balance has been recovered.

The recorded investment in accruing loans 90 days or more past due totaled $4.6 million at September

30, 2012, compared with $7.3 million at year-end 2011, a decrease of $2.7 million. This decrease was

primarily due to a $2.7 million decrease in construction loans not considered by management to be PCI

loans acquired in the FOFC acquisition, which for a variety of reasons are 90 days or more past their

stated maturity dates. These loans totaled $4.6 million at September 30, 2012. However, the borrowers

continue to make required interest payments. Additionally, these loans carry third party credit

enhancements, and based upon the strength of those credit enhancements, the Corporation has not

identified these loans as PCI loans and expects to incur no losses on these loans.

At September 30, 2012, there was no change to other real estate owned (“OREO”) compared with

December 31, 2011, as it remained at $0.9 million. During the nine months ended September 30, 2012,

seven properties totaling $0.5 million were placed in OREO and seven properties totaling $0.4 million

were sold. Additionally, the Corporation recognized a write-down on one property totaling $0.1 million

following the acceptance of a purchase offer on this property.

Impaired Loans

Impaired loans at September 30, 2012, totaled $4.4 million compared to $10.1 million at December 31,

2011. Not included in the impaired loan totals are loans acquired in the FOFC acquisition which the

Corporation has identified as PCI loans, as these loans are accounted for under ASC Subtopic 310-30 as

noted under the above discussion of non-performing loans. The decrease of $5.7 million in impaired

loans was primarily due to a $5.2 million reduction in non-accrual commercial loans to one borrower.

Included in the $5.2 million reduction were $5.1 million of funds received from USDA guarantees.

Included in the impaired loan total at September 30, 2012, are loans totaling $2.8 million for which

impairment allowances of $1.0 million have been specifically allocated to the allowance for loan losses.

As of December 31, 2011, the impaired loan total included $6.1 million of loans for which specific

impairment allowances of $1.9 million were allocated to the allowance for loan losses. The decrease

in the amount of impaired loans for which specific allowances were allocated to the allowance for loan

losses was due in large part to the above mentioned receipt of funds under USDA guarantees. The

reduction in specific impairment allowances allocated to the allowance for loan losses was also related

to the above mentioned receipt of funds as well as improvement in the collateral position on an impaired

loan. The majority of the Corporation's impaired loans are secured and measured for impairment based

on collateral evaluations. It is the Corporation's policy to obtain updated appraisals on loans secured by

real estate at the time a loan is determined to be impaired. Prior to the receipt of the updated appraisal,

an impairment measurement is performed based upon the most recent appraisal on file to determine the

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

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

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

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

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

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

result, declines in real estate values have been modest.

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

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

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

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

paid in full. Non-real estate collateral may be valued using an appraisal, net book value per the

borrower’s financial statements, or aging reports, adjusted or discounted based on management’s

historical knowledge, changes in market conditions from the time of the valuation, and management’s

expertise and knowledge of the client and client’s business.

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

	September 30, 2012		December 31, 2011
Non-accrual loans	$	8,665,059	$	13,611,088
Accruing loans past due 90 days or more		4,594,392		7,304,157
Total non-performing loans	$	13,259,451	$	20,915,245
Other real estate owned		933,826		897,755
Total non-performing assets	$	14,193,277	$	21,813,000

In addition to non-performing loans, as of September 30, 2012, the Corporation has identified

commercial relationships totaling $7.3 million as potential problem loans, as compared to $8.2 million at

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

information about possible credit problems of the related borrowers causes management to have serious

doubts as to the ability of such borrowers to comply with the present loan repayment terms, which may

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

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

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

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

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

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

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

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

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

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

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

national fiscal uncertainties, including their potential effects on our borrowers.

For the three months ended September 30, 2012, the provision for loan loss expense totaled $0.2 million

compared with $0.6 million for the same period in 2011, a decrease of $0.4 million. This decrease was

due principally to the improvement in the volume of non-performing and impaired loans, resulting in a

reduction in allocations to the allowance for loan losses related to these loans, which was offset in part

by loan portfolio growth and allowances for this growth after consideration of the factors discussed

above. For the nine months ended September 30, 2012 and September 30, 2011, the provision for loan

loss expense totaled $0.8 million.

During the third quarter of this year, the Corporation recorded net recoveries of $0.2 million compared

with net charge-offs of $0.7 million during the third quarter of the prior year. This improvement was

primarily due to lower commercial loan charge-offs in the current quarter compared with the same

quarter in the prior year. The prior year quarter had one large commercial loan charge-off for $0.6

million. In addition, consumer loan charge-offs declined in the current quarter compared with the same

quarter in the prior year. For the nine months ended September 30, 2012, net recoveries totaled $0.3

million compared with net charge-offs of $0.7 million for the same period in the prior year. This

improvement was primarily in commercial loans as net recoveries were $0.5 million for the nine months

ended September 30, 2012, compared with net charge-offs of $0.3 million for the same period in the

prior year. In addition, consumer loan net charge-offs declined by $0.2 million for the current year

compared with the prior year. At September 30, 2012, the Corporation's allowance for loan losses on

Legacy loans (which are defined as total loans excluding loans acquired in the FOFC acquisition) totaled

$10.5 million, resulting in a coverage ratio of allowance to non-performing loans of 79.4%. This ratio,

as well as the ratio of allowance to total loans, was impacted by the April 2011 FOFC acquisition, as

current accounting rules do not allow the acquiror to transfer the acquiree’s allowance for loan losses to

the acquiror’s balance sheet. Rather, the acquiree’s overall loan quality is a component in determining

the fair value of loans acquired, which are carried on the balance sheet at fair value. The ratio of the

allowance for loan losses to total loans was 1.24% at September 30, 2012. Excluding loans acquired in

the FOFC acquisition, the allowance for loan losses on Legacy loans to total Legacy loans was 1.38%

and represents an amount that management believes is adequate to absorb probable incurred loan losses

on the Corporation’s Legacy loan portfolio.

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

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

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

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

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

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

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

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

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

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

of the loan categories to which they relate.

At September 30, 2012, in addition to the qualitative factors allocated within the allowance, the

Corporation maintained $0.5 million of the allowance as unallocated. While some improvements have

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

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

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

loans and total loans compared to peers on a regular basis. This analysis also suggests that it would be

prudent to maintain the unallocated portion of the allowance at this time.

Activity in the allowance for loan losses was as follows:

	Nine Months Ended September 30, 2012
		Legacy Loans			Acquired Loans
Balance at beginning of period	$	9,659,320		$	-
Reclassification of acquired loan discount		-			123,599
Charge-offs:
Commercial, financial and agricultural		(5,792	)		-
Commercial mortgages		(39,314	)		(49,057	)
Residential mortgages		(82,442	)		-
Consumer loans		(342,867	)		-
Total		(470,415	)		(49,057	)
Recoveries:
Commercial, financial and agricultural		591,497			-
Commercial mortgages		43,031			-
Residential mortgages		-			-
Consumer loans		176,139			-
Total		810,667			-
Net recoveries (charge-offs)		340,252			(49,057	)
Provision charged to operations		533,000			220,897
Balance at end of period	$	10,532,572		$	295,399

	Nine Months Ended September 30, 2011

Balance at beginning of period	$	9,498
Charge-offs:
Commercial, financial and agricultural		(594	)
Commercial mortgages		(4	)
Residential mortgages		(39	)
Consumer loans		(543	)
Total		(1,180	)
Recoveries:
Commercial, financial and agricultural		315
Commercial mortgages		33
Residential mortgages		30
Consumer loans		148
Total		526
Net recoveries (charge-offs)		(654	)
Provision charged to operations		833
Balance at end of period	$	9,677

Results of Operations

Third Quarter of 2012 vs. Third Quarter of 2011

Net income for the third quarter of 2012 totaled $2.8 million, a decrease of $0.5 million, or 13.9%,

compared with third quarter 2011 net income of $3.3 million. Earnings per share for the current quarter

totaled $0.61 compared with $0.71 for the same period in the prior year. The decline was attributable to

an increase of $0.8 million in non-interest expense and a reduction of $0.4 million in net gain on

securities transactions. These items were partially offset by reductions of $0.4 million in the provision

for loan loss expense and $0.3 million in income taxes. Return on average assets and return on average

equity for the current quarter were 0.89% and 8.53%, respectively, compared with 1.05% and 10.18%,

respectively, for the third quarter of 2011.

Net interest income, which is the difference between the income we make on interest-earning assets and

the expense we incur on interest-bearing liabilities, is the largest component of the Corporation’s net

income. Net interest income for the third quarter of 2012 decreased slightly compared with the third

quarter of 2011, and the net interest margin decreased seven basis points to 4.04%. The decrease in net

interest income and margin was due to a 26 basis point decrease in the yield on average earning assets,

partially offset by a 21 basis point decrease in the cost of average interest-bearing liabilities. Average

earning assets increased $17.7 million, or 1.5%, as an $82.8 million increase in average loans was

partially offset by decreases in average interest bearing deposits at other financial institutions and

average investment securities totaling $43.6 million and $21.5 million, respectively. While average

earning assets increased 1.5%, total interest and dividend income decreased $0.6 million, or 4.3%, as the

yield on average earning assets decreased 26 basis points to 4.46%.

Total average funding liabilities for the third quarter of 2012, including non-interest bearing demand

deposits, totaled $1.121 billion, an increase of $11.8 million, or 1.1%, compared with the third quarter

of last year. The increase in average funding liabilities was primarily due to an increase of $33.2 million

in average deposits, partially offset by a decrease of $21.5 million in average borrowings. Average non-

interest-bearing deposits increased $38.7 million, while total average interest-bearing deposits were down

$5.4 million. The decrease in average interest-bearing deposits was due to a $61.5 million decrease in

average time deposits and a $34.4 million decrease in average savings accounts. These decreases were

partially offset by a $78.4 million increase in average IMMA accounts and a $12.0 million increase in

average NOW accounts. The decrease in average borrowings was primarily due to decreases in average

securities sold under agreements to repurchase and average FHLB term borrowings totaling $9.9 million

and $11.6 million, respectively. While average interest-bearing liabilities decreased $26.9 million, or 3.2%,

interest expense decreased $0.5 million or 29.1%, as the cost of average interest-bearing liabilities

decreased 21 basis points to 0.60%.

For the three months ended September 30, 2012, the provision for loan loss expense totaled $0.2 million

compared with $0.6 million for the same period in 2011, a decrease of $0.4 million. This decrease was

principally due to the improvement in the volume of non-performing and impaired loans, resulting in a

reduction in allocations to the allowance for loan losses related to these loans, which was offset in part

by loan portfolio growth and allowances for this growth. Management’s evaluation of the adequacy of

the allowance for loan losses takes into consideration several factors, including an analysis of historical

loss factors, the evaluation of collateral, recent charge-off experience, overall credit quality, current

economic conditions, global and national fiscal uncertainties and loan growth.

For the third quarter of 2012, non-interest income totaled $4.1 million, a decrease of $0.3 million, or

6.2%, compared with the third quarter of last year due primarily to a $0.4 million decrease in net gain on

securities transactions.

For the third quarter of 2012, non-interest expense totaled $11.4 million, an increase of $0.8 million, or

7.3%, compared with $10.6 million for the third quarter of last year. The increase was primarily due to

increases of $0.4 million in salaries and wages, $0.2 million in pension and other employee benefits and

$0.1 million in other real estate owned expenses. The increase in salaries and wages was primarily due

to an increase in employees in the Capital Bank division and additional compensation related to merit

increases and incentive compensation. The increase in pension and other employee benefits was

primarily due to higher pension costs and health benefits. The increase in other real estate owned

expense was due to the write-down of a commercial property.

A $0.3 million decrease in income tax expense reflects a $0.8 million reduction in pre-tax income, and a

decrease in the effective tax rate from 33.8% to 32.8%, due primarily to an increase in the relative

percentage of tax exempt income to pre-tax income.

Year-to-Date 2012 vs. Year-to-Date 2011

Net income for the nine-month period ended September 30, 2012, totaled $8.9 million, an increase of

$1.3 million, or 17.4%, compared with $7.6 million for the nine-month period ended September 30,

2011. The improvement was attributable to an increase of $3.3 million in net interest income, partially

offset by increases of $0.9 million in non-interest expense and $0.8 million in income taxes, and a

reduction of $0.3 million in non-interest income. Earnings per share for the nine months ended

September 30, 2012, was $1.92 compared with $1.76 for the same period in the prior year. Return on

average assets and return on average equity for the nine months ended September 30, 2012, were 0.95%

and 9.12%, respectively, compared with 0.88% and 8.66%, respectively, for the same period in the prior

year. Year-to-date net income improved significantly due primarily to an increase in net interest income

and a $2.2 million decrease in pre-tax one-time merger transaction costs, both related to the FOFC

acquisition. In addition, the Corporation recognized $0.8 million in pre-tax casualty gains from

insurance reimbursements related to the September 2011 flooding of the Owego and Tioga offices.

For the nine months ended September 30, 2012, net interest income totaled $35.2 million, an increase of

$3.3 million, or 10.4%, compared with the same period in 2011, and the net interest margin increased

eight basis points to 4.10%. These increases reflect a higher level of average earning assets due in large

part to the FOFC acquisition and a 20 basis point decrease in the cost of average interest-bearing

liabilities, partially offset by a ten basis point decrease in the yield on average earning assets. Average

earning assets increased $88.0 million or 8.3%, as increases in average loans and investment securities

totaling $106.8 million and $9.1 million, respectively, were partially offset by a $27.9 million decrease

in average interest-bearing deposits at other financial institutions. Included in the growth in average

loans and investment securities are the Capital Bank division’s assets for a full nine months in 2012

compared with six months in 2011. Due to the increase in average earning assets, total interest and

dividend income increased $2.3 million or 6.3% despite a ten basis point decrease in yield to 4.58%.

For the nine months ended September 30, 2012, total average funding liabilities, including non-interest-

bearing demand deposits, increased $83.4 million, or 8.1%, to $1.111 billion compared with the same

period in the prior year. The growth was primarily due to an increase of $89.4 million in average deposits,

partially offset by a decrease of $6.0 million in borrowings. These increases include increases in average

deposits and borrowings in the Capital Bank division of $47.4 million and $4.1 million, respectively. In

total, average non-interest bearing deposits increased $42.8 million, with the Capital Bank division's non-

interest bearing deposits comprising $11.8 million of that increase. Average interest-bearing deposits

increased $46.6 million, including a $35.6 million increase in average interest-bearing deposits in the

Capital Bank’s division. The increase in average interest-bearing deposits was reflected principally in a $60.9

million increase in average IMMA balances, a $3.1 million increase in average savings balances and a

$16.1 million increase in average NOW accounts. These increases were partially offset by a $33.5 million

decrease in average time deposits. While average interest-bearing liabilities increased $40.6 million or

5.1%, interest expense decreased $1.0 million or 19.4%, as the average cost of interest-bearing liabilities

decreased 20 basis points to 0.67%.

For the nine months ended September 30, 2012, the provision for loan loss expense totaled $0.8 million,

level with the prior year.

Year-to-date non-interest income for 2012 was $13.1 million compared with $13.4 million for the same

period in the prior year, a decrease of $0.3 million, or 2.5%. The decline was primarily due to decreases

of $0.8 million in net gain on securities transactions and $0.5 million in revenue from our equity

investment in Cephas Capital Partners, L.P. (“Cephas”). The decrease in revenue from our equity

investment in Cephas was due in large part to a gain recognized during the first quarter of last year on

the exercise of stock warrants held in one of their investments. These items were partially offset by $0.8

million in casualty gains from insurance reimbursements related to the September 2011 flooding of the

Owego and Tioga offices and an increase in net gain on sale of loans held for sale.

Year-to-date non-interest expense for 2012 was $34.2 million compared with $33.3 million for the same

period in the prior year, an increase of $0.9 million, or 2.8%. Excluding $2.2 million in merger related

expenses from the prior year, non-interest expense increased $3.2 million, or 10.2% for the nine months

ended September 30, 2012. This increase was primarily due to increases of $1.2 million in salaries and

wages, $0.8 million in pension and other employee benefits, $0.4 million in data processing expenses

and $0.2 million in other real estate owned expenses. The increase in salaries and wages was primarily

due to the operation of the Capital Bank division for nine months during 2012 compared with six

months during 2011, and additional compensation related to merit increases and incentive compensation.

The increase in pension and other employee benefits was primarily due to higher pension costs, health

benefits and payroll taxes. The increase in data processing expenses was primarily due to higher

hardware and software maintenance fees and check card processing costs that included conversion

costs for a new processor.

A $0.8 million increase in income tax expense reflects a $2.1 million increase in pre-tax income, and an

increase in the effective tax rate to 33.1% from 32.2%, due primarily to a decrease in the relative

percentage of tax exempt income to pre-tax income.

Average Consolidated Balance Sheet and Interest Analysis

For the purpose of the table below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance

computations. Investment securities are stated at amortized cost. No tax equivalent adjustments have been made in calculating yields on obligations of states and

political subdivisions. (dollars in thousands)

	Nine Months Ended September 30, 2012								Nine Months Ended September 30, 2011								Three Months Ended September 30, 2012								Three Months Ended September 30, 2011
Assets	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Earning assets:
Loans	$	829,396		$	34,078		5.49	%	$	722,583		$	31,456		5.82	%	$	867,972		$	11,374		5.21	%	$	785,193		$	11,673		5.90	%
Taxable securities		219,985			4,142		2.52	%		208,891			4,348		2.78	%		208,000			1,306		2.50	%		223,282			1,504		2.67	%
Tax-exempt securities		49,796			977		2.62	%		51,813			1,035		2.67	%		46,811			300		2.55	%		53,014			351		2.62	%
Interest-bearing deposits		47,075			123		0.35	%		75,012			167		0.30	%		37,696			35		0.36	%		81,313			65		0.32	%
Total earning assets		1,146,252			39,320		4.58	%		1,058,299			37,006		4.68	%		1,160,479			13,015		4.46	%		1,142,802			13,593		4.72	%

Non-earning assets:
Cash and due from banks		23,967								22,380								24,823								23,783
Premises and equipment, net		24,762								24,270								24,585								24,327
Other assets		51,815								45,863								49,482								51,867
Allowance for loan losses		(10,262	)							(9,731	)							(10,534	)							(9,894	)
AFS valuation allowance		13,698								11,690								13,813								13,727
Total	$	1,250,232							$	1,152,771							$	1,262,648							$	1,246,612

Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	88,005		$	70		0.11	%	$	71,906		$	63		0.12	%	$	92,703		$	25		0.11	%	$	80,665		$	25		0.13	%
Savings and insured money market deposits		409,081			668		0.22	%		345,040			663		0.26	%		415,368			222		0.21	%		371,306			248		0.26	%
Time deposits		261,549			1,795		0.92	%		295,080			2,600		1.18	%		252,826			528		0.83	%		314,348			865		1.09	%
Federal Home Loan Bank advances and securities sold under agreements to Repurchase		73,944			1,631		2.95	%		79,984			1,839		3.07	%		65,039			465		2.85	%		86,520			612		2.80	%
Total interest-bearing liabilities		832,579			4,164		0.67	%		792,010			5,165		0.87	%		825,936			1,240		0.60	%		852,839			1,750		0.81	%

Non-interest-bearing liabilities:
Demand deposits		278,473								235,656								294,612								255,957
Other liabilities		8,962								8,096								9,914								9,511
Total liabilities		1,120,014								1,035,762								1,130,462								1,118,307
Shareholders' equity		130,218								117,009								132,186								128,305
Total	$	1,250,232							$	1,152,771							$	1,262,648							$	1,246,612
Net interest income				$	35,156							$	31,841							$	11,775							$	11,843
Net interest rate spread(1)							3.91	%							3.81	%							3.86	%							3.91	%
Net interest margin(2)							4.10	%							4.02	%							4.04	%							4.11	%
(1) Net interest rate spread is the difference in the yield received on earning assets less the rate paid on interest-bearing liabilities.
(2) Net interest margin is the ratio of net interest indcome divided by average earning assets.

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

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

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

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

of non-performing loans is reflected in the change due to rate, but does not affect changes due to

volume. No tax equivalent adjustments were made.

	Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011									Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
	Increase (Decrease) Due to (1)									Increase (Decrease) Due to (1)
	Volume			Rate			Net			Volume			Rate			Net
Interest and dividends earned on:
Loans	$	4,483		$	(1,861	)	$	2,622		$	1,144		$	(1,443	)	$	(299	)
Taxable securities		225			(431	)		(206	)		(102	)		(96	)		(198	)
Tax-exempt securities		(39	)		(19	)		(58	)		(41	)		(10	)		(51	)
Interest-bearing deposits		(69	)		25			(44	)		(39	)		9			(30	)

Total earning assets	$	3,056		$	(742	)	$	2,314		$	199			(777	)		(578	)

Interest paid on:
Demand deposits	$	13		$	(6	)	$	7		$	4		$	(4	)	$	-
Savings and insured money market deposits		114			(109	)		5			27			(53	)		(26	)
Time deposits		(273	)		(532	)		(805	)		(152	)		(185	)		(337	)
Federal Home Loan Bank advances and securities sold under agreements to repurchase		(135	)		(73	)		(208	)		(156	)		9			(147	)

Total interest-bearing liabilities	$	255		$	(1,256	)	$	(1,001	)	$	(54	)	$	(456	)	$	(510	)

Net interest income	$	2,801		$	514		$	3,315		$	253		$	(321	)	$	(68	)
(1) The change in interest due to both rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

Liquidity and Capital Resources

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

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

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

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

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

The Corporation is a member of the FHLB, which allows it to access borrowings which enhance

management's ability to satisfy future liquidity needs. Based on available collateral and current

advances outstanding, the Corporation was eligible to borrow up to a total of $96.2 million and $69.8

million at September 30, 2012 and December 31, 2011, respectively.

During the nine months ended September 30, 2012, cash and cash equivalents increased $28.3 million

compared with an increase of $57.9 million during the same period for the prior year. In addition to

cash provided by operating activities, major sources of cash during the nine months ended September

30, 2012, included proceeds from sales, maturities, calls and principal reductions on securities totaling

$95.5 million and a $84.7 million increase in deposits. Proceeds from the above were used primarily to

fund purchases of securities totaling $65.9 million, a $78.4 million increase in loans, a $15.3 million

reduction in FHLB long term advances, a decrease in securities sold under agreements to repurchase

totaling $4.2 million, the payment of cash dividends in the amount of $3.4 million and purchases of

fixed assets totaling $2.3 million.

In addition to cash provided by operating activities, major sources of cash during the nine months ended

September 30, 2011, included proceeds from sales, maturities, calls and principal reductions on

securities totaling $94.8 million, a $55.4 million increase in deposits and $25.1 million in net cash

received in the FOFC acquisition. These proceeds were used primarily to fund purchases of securities

totaling $99.2 million, a net decrease in securities sold under agreements to repurchase totaling $13.9

million, a $11.0 million net increase in loans, the payment of cash dividends in the amount of $2.9

million and purchases of fixed assets totaling $1.3 million, as well as $0.8 million increase in FHLB and

Federal Reserve Bank stock and purchases of treasury shares totaling $0.3 million.

As of September 30, 2012, the Bank’s leverage ratio was 8.30%. The Tier I and Total Risk Adjusted

Capital ratios were 11.18% and 12.65%, respectively. All of the above ratios are in excess of the

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

York State Department of Financial Services.

During the nine months ended September 30, 2012, the Corporation declared cash dividends totaling

$0.75 per share, unchanged from the dividends declared during the same period of 2011.

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

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

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

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

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

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

market or in privately negotiated transactions at the discretion of management. Through September 30,

2012, a total of 66,364 shares had been purchased under this program. During the nine months ended

September 30, 2012, the Corporation purchased 23,120 shares at an average cost of $25.05 per share.

During the nine months ended September 30, 2012, the Corporation re-issued 29,126 shares from treasury

to fund the stock component of directors’ 2011 compensation, distributions under the directors’ deferred

compensation plan, stock grants to executive officers and funding for the Corporation’s Profit Sharing,

Savings and Investment Plan.

Interest Rate Risk

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

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

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

measures and limits regarding these risks, which are monitored on a regular basis. The ALCO is made

up of the president & chief executive officer, the chief financial officer, the asset liability management

officer, and other officers representing key functions.

The ALCO is also responsible for supervising the preparation and annual revisions of the financial

segments of the annual budget, which is built upon the committee's economic and interest-rate

assumptions. It is the responsibility of the ALCO to modify prudently the Corporation's asset/liability

policies.

Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates.

It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a

financial institution. For that reason, the ALCO has established tolerance limits based upon a 200-basis

point change in interest rates. At September 30, 2012, it is estimated that an immediate 200-basis point

decrease in interest rates would negatively impact the next 12 months net interest income by 10.05% and

an immediate 200-basis point increase would negatively impact the next 12 months net interest income

by 3.97%. Both are within the Corporation's policy guideline of 15% established by ALCO. Given the

overall low level of current interest rates and the unlikely event of a 200-basis point decline from this

point, management additionally modeled an immediate 100-basis point decline and an immediate 300-

basis point increase in interest rates. When applied, it is estimated these scenarios would result in

negative impacts to net interest income of 5.29% and 6.32%, respectively. Management is comfortable

with the amount of exposure at these levels.

A related component of interest rate risk is the expectation that the market value of our capital account

will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact

component: an institution exposed to earnings erosion is also exposed to shrinkage in market value. At

September 30, 2012, it is estimated that an immediate 200-basis point decrease in interest rates would

negatively impact the market value of our capital account by 5.40% and an immediate 200-basis point

increase in interest rates would positively impact the market value by 1.37%. Both are within the

established tolerance limit of 15%. Management also modeled the impact to the market value of our

capital with an immediate 100-basis point decline and an immediate 300-basis point increase in interest

rates, based on the current interest rate environment. When applied, it is estimated these scenarios

would result in negative impacts to the market value of our capital of 7.10% and 0.32%, respectively.

Management is also comfortable with the level of exposures at these levels.

Management does recognize the need for certain hedging strategies during periods of anticipated higher

fluctuations in interest rates and the Board-approved Funds Management Policy provides for limited use

of certain derivatives in asset liability management. These strategies were not employed during the nine

months ended September 30, 2012.

Adoption of New Accounting Standards

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

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