5. Business Combinations

Acquisition of Fort Orange Financial Corp.

On April 8, 2011, the Corporation completed its merger with Fort Orange Financial Corp. (“FOFC”), the holding company of Capital Bank & Trust Company (“Capital Bank”) based in Albany, New York, with FOFC being merged with and into the Corporation, and the Corporation being the surviving entity. Immediately following the merger, Capital Bank was merged with and into the Bank.

As of the date of the merger, Capital Bank's unaudited balance sheet included approximately $254 million in assets, a loan portfolio approximating $171 million and deposits of $199 million. With the completion of the acquisition, the Corporation became a $1.2 billion financial institution with 28 offices located in eight New York counties, as well as Bradford County in Pennsylvania. The Capital Bank branch locations are in Albany, Clifton Park, Latham and Slingerlands.

Under the terms of an Agreement and Plan of Merger (the “Agreement”) entered into on October 14, 2010, the Corporation purchased all of the outstanding shares of FOFC common stock in a stock and cash transaction valued at $31.9 million, based upon the Corporation's closing stock price on April 8, 2011 of $23.50. For each share of FOFC common stock outstanding immediately prior to the merger, each FOFC shareholder had the right to elect to receive: (i) all cash in the amount of $7.50 per share (“Cash Consideration”), (ii) all stock at an exchange ratio of 0.3571 of a share of the Corporation's common stock for each share of FOFC common stock (“Stock Consideration”) or (iii) a mix of Cash Consideration for 25% of their shares and Stock Consideration for 75% of their shares. The total consideration to be paid by the Corporation was subject to the requirement that 25% of the FOFC common stock be acquired for the Cash Consideration and 75% be acquired for the Stock Consideration. As a result of the merger, the Corporation issued approximately 1.01 million additional shares of its common stock.

The table below illustrates the reconciliation of shares outstanding and the calculation of the consideration effectively transferred.

Reconciliation of Shares Outstanding
FOFC shares outstanding at April 8, 2011	3,771,425
Percentage of stock consideration	75	%
FOFC shares exchanged for stock	2,828,569
Exchange Ratio	0.3571
Chemung Financial shares issued to FOFC shareholders (excludes fractional shares)	1,009,942

Chemung Financial shares outstanding April 8, 2011	3,565,610
Total Chemung Financial Shares at April 8, 2011 following the consummation of the transaction	4,575,552

Ownership % held by FOFC shareholders	22	%
Ownership % held by legacy Chemung Financial shareholders	78	%

Purchase Price Consideration (dollar amounts in thousands, except per share data)
FOFC shares outstanding at April 8, 2011		3,771,425
Percentage of stock consideration		75	%
FOFC shares exchanged for stock		2,828,569
Exchange Ratio		0.3571
Chemung Financial shares issued to FOFC shareholders (excludes fractional shares)		1,009,942
Purchase price per Chemung Financial common share	$	23.50
Total stock consideration paid	$	23,734
Total cash consideration paid		6,939
Cash paid for fractional shares		3
Cash paid for the settlement of FOFC stock options		545
Cash paid for severance payments		650
Total consideration paid	$	31,871

As a result of the FOFC merger, we recognized assets acquired and liabilities assumed at their acquisition date fair value as presented below: (in thousands).

Total Purchase Price				$	31,871

Net assets acquired:
Cash and due from banks	$	33,285
Securities available for sale		48,103
Loans, net		164,243
Accrued Interest Receivable		864
Premises and equipment		879
Core deposit intangible		2,646
Deferred tax asset		2,466
Other assets		3,046
Deposits		(200,468	)
Borrowings		(34,823	)
Accrued Interest Payable		(304	)
Other liabilities		(745	)

Net assets acquired				$	19,192

Goodwill resulting from the FOFC merger				$	12,679

The goodwill generated by the FOFC merger consists of, among other things, synergies and increased economies of scale, including the ability to offer more diverse and profitable products, greater diversity in the branch system which may lead to lower cost deposits, and an increased legal lending limit. We expect that no goodwill recognized as a result of the FOFC merger will be deductible for income tax purposes. Purchase accounting adjustments are subject to refinement as management finalizes their fair value measurements, including their analysis of identifiable intangible assets. Since the branches acquired were merged into the bank, there is no segment impact of the FOFC merger.

The fair value of the financial assets acquired included loans receivable with an unpaid principal balance of $170.7 million. Accounting principles generally accepted in the United States of America (“U.S. GAAP”) prohibits carrying over an allowance for loan losses for impaired loans purchased in the merger. The table below illustrates the fair value adjustments made to the unpaid principal balance in order to present a fair value of the loans acquired (in thousands).

Gross loans-unpaid principal balance at April 8, 2011	$	170,682
Market rate adjustment		38
Credit fair value adjustment on pools of homogeneous loans		(1,657	)
Credit fair value adjustment on loans with deteriorating credit quality		(4,820	)
Fair value of purchased loans at April 8, 2011	$	164,243

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the merger date. The credit adjustment on loans with deteriorating credit quality is derived in accordance with Accounting Standard Codification 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality” and represents the portion of the loan balance that has been deemed uncollectible based on our expectations of future cash flows for each respective loan.

The information below presents the recorded fair value on April 8, 2011 of the Corporation's purchased impaired loans with the accretable and non-accretable related adjustments from the perspective of total contractual cash flows (in thousands).

Contractually required principal and interest at acquisition	$	25,718
Contractual cash flows not expected to be collected (nonaccretable discount)		(5,849	)
Expected cash flows at acquisition		19,869
Interest component of expected cash flows (accretable yield)		(1,861	)
Fair value of loans acquired with deteriorating credit quality	$	18,008

The results of operations of the merged entity have been reflected in Chemung Financial Corporation's consolidated statements of income beginning as of the acquisition date. Pro forma condensed consolidated income statements for the three and six months ended June 30, 2011 and 2010 as if the merger occurred at the beginning of each period presented are as follows (in thousands):

	Six Months Ended June 30,				Three Months Ended June 30,
Financial assets:	2011		2010		2011		2010
Interest and dividend income	$	26,821	$	28,515	$	13,509	$	14,265
Interest expense		4,275		6,681		1,850		3,199
Net interest income		22,546		21,834		11,659		11,066
Provision for loan losses		1,225		1,675		125		695
Net interest income after provision for loan losses		21,321		20,159		11,534		10,371
Non-interest income	$	9,144	$	9,055	$	4,747	$	4,729
Non-interest expense		22,180		21,673		11,490		10,943
Income before income taxes		8,285		7,541		4,791		4,157
Income tax expense		2,718		2,427		1,606		1,345
Net income	$	5,567	$	5,114	$	3,185	$	2,812

Weighted average shares outstanding		4,629		4,616		4,629		4,614
Basic and diluted earnings per share	$	1.20	$	1.11	$	0.69	$	0.61

The consolidated income statement for the Corporation includes $2.718 million of net interest income, $28 thousand of non-interest income and net income of $1.115 million of the acquiree since the acquisition date.