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, 2013
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		[X]	Smaller reporting company		[   ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
YES:         NO:  X
The number of shares of the registrant's common stock, $.01 par value, outstanding on November 6, 2013 was 4,594,315.

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX

PART I.	FINANCIAL INFORMATION	PAGE
Item 1:	Financial Statements – Unaudited
	Consolidated Balance Sheets	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	37
Item 3:	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4:	Controls and Procedures	54
PART II.	OTHER INFORMATION	54
Item 1:	Legal Proceedings	54
Item 1A:	Risk Factors	54
Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	54
Item 6:	Exhibits	55
SIGNATURES		56
EXHIBIT INDEX

2

PART I. FINANCIAL INFORMATION

Item 1: Financial Statements-Unaudited

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

	SEPTEMBER 30,			DECEMBER 31,
	2013			2012
ASSETS
Cash and due from financial institutions	$	37,490,812		$	29,239,309
Interest-bearing deposits in other financial institutions		2,438,437			11,001,912
Total cash and cash equivalents		39,929,249			40,241,221
Trading assets, at fair value		313,021			348,241
Securities available for sale, at estimated fair value		259,275,117			239,685,763
Securities held to maturity, estimated fair value of $7,047,300   at September 30, 2013 and $6,421,486 at December 31, 2012		6,543,785			5,748,453
Federal Home Loan Bank and Federal Reserve Bank   Stock, at cost		6,724,950			4,710,300
Loans, net of deferred origination fees and costs,   and unearned income		967,634,345			893,516,941
Allowance for loan losses		(11,855,971	)		(10,432,650	)
Loans, net		955,778,374			883,084,291
Loans held for sale		866,430			1,057,309
Premises and equipment, net		25,086,834			25,484,385
Goodwill		21,824,443			21,824,443
Other intangible assets, net		4,481,019			5,143,820
Bank owned life insurance		2,774,487			2,711,681
Accrued interest receivable and other assets		17,493,059			18,119,801
Total assets	$	1,341,090,768		$	1,248,159,708
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits:
Non-interest-bearing	$	297,053,277		$	300,610,463
Interest-bearing		791,392,176			744,123,551
Total deposits		1,088,445,453			1,044,734,014
Securities sold under agreements to repurchase		30,499,228			32,710,650
Federal Home Loan Bank overnight advances		49,100,000			-
Federal Home Loan Bank term advances		26,045,925			27,225,363
Accrued interest payable and other liabilities		12,194,266			12,374,744
Total liabilities		1,206,284,872			1,117,044,771
Shareholders' equity:
Common stock, $.01 par value per share, 10,000,000   shares authorized; 5,310,076 issued at September 30, 2013     and December 31, 2012		53,101			53,101
Additional-paid-in capital		45,555,333			45,357,073
Retained earnings		110,740,100			107,078,182
Treasury stock, at cost (715,761 shares at September 30,   2013, 728,680 shares at December 31, 2012)		(18,265,940	)		(18,566,490	)
Accumulated other comprehensive loss		(3,276,698	)		(2,806,929	)
Total shareholders' equity		134,805,896			131,114,937
Total liabilities and shareholders' equity	$	1,341,090,768		$	1,248,159,708
See accompanying notes to unaudited consolidated financial statements.

3

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:		2013		2012		2013			2012
Loans, including fees	$	33,605,486	$	34,078,132		$	11,245,062	$	11,373,583
Taxable securities		3,120,023		4,142,224			1,002,968		1,306,484
Tax exempt securities		844,736		976,622			258,478		300,374
Interest-bearing deposits		20,539		122,693			2,848		34,573
Total interest and dividend income		37,590,784		39,319,671			12,509,356		13,015,014
Interest expense:
Deposits		1,790,994		2,486,771			572,385		759,778
Securities sold under agreements to repurchase		644,602		763,343			213,800		231,043
Borrowed funds		593,798		868,131			206,520		234,155
Total interest expense		3,029,394		4,118,245			992,705		1,224,976
Net interest income		34,561,390		35,201,426			11,516,651		11,790,038
Provision for loan losses		1,755,188		753,897			873,704		225,000
Net interest income after provision for loan losses		32,806,202		34,447,529			10,642,947		11,565,038
Other operating income:
Wealth management group fee income		5,448,240		5,170,016			1,813,113		1,667,628
Service charges on deposit accounts		3,377,489		3,143,061			1,222,445		1,110,897
Net gain on securities transactions		1,228		300,516			-		597
Net gain on sales of loans held for sale		424,867		270,265			133,698		125,885
Casualty gains		-		790,248			-		9,813
Net gains (losses) on sales of other real estate      owned		33,448		(72,004	)		17,452		(67,503	)
Income from bank owned life insurance		62,806		64,840			21,120		21,571
Other		3,499,290		3,328,328			1,142,825		1,123,831
Total other operating income		12,847,368		12,995,270			4,350,653		3,992,719
Other operating expenses:
Salaries and wages		14,138,310		13,710,584			4,721,318		4,661,858
Pension and other employee benefits		4,161,178		4,137,878			1,372,179		1,381,401
Net occupancy expenses		4,016,094		3,849,173			1,315,098		1,269,165
Furniture and equipment expenses		1,599,896		1,599,842			514,369		503,995
Data processing expense		3,432,772		3,279,379			1,192,035		971,601
Professional services		713,039		694,756			187,571		185,619
Amortization of intangible assets		662,801		808,258			213,723		260,069
Marketing and advertising expense		781,804		915,632			296,947		270,567
Other real estate owned expenses		137,844		286,137			75,476		154,238
FDIC insurance		625,216		615,360			205,845		205,317
Merger and acquisition related expenses		216,968		30,145			216,968		21,600
Loan expense		537,592		548,165			202,474		223,120
Other		3,905,449		3,677,793			1,298,699		1,231,911
Total other operating expenses		34,928,963		34,153,102			11,812,702		11,340,461
Income before income tax expense		10,724,607		13,289,697			3,180,898		4,217,296
Income tax expense		3,479,062		4,397,279			1,001,728		1,383,451
Net income	$	7,245,545	$	8,892,418		$	2,179,170	$	2,833,845
Weighted average shares outstanding		4,658,199		4,639,985			4,660,336		4,641,547
Basic and diluted earnings per share	$	1.56	$	1.92		$	0.47	$	0.61
See accompanying notes to unaudited consolidated financial statements.

4

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	Nine Months Ended September 30,							Three Months Ended September 30,
		2013				2012		2013			2012
Net income		$	7,245,545		$	8,892,418		$	2,179,170		$	2,833,845
Other comprehensive income
Unrealized holding (losses) gains on securities available for sale			(1,900,709	)		1,633,195			1,403,995			959,668
Reclassification adjustment gains realized in net income			(1,228	)		(300,516	)		-			(597	)
Net unrealized (losses) gains			(1,901,937	)		1,332,679			1,403,995			959,071
Tax effect			(731,105	)		544,460			539,696			368,668
Net of tax amount			(1,170,832	)		788,219			864,299			590,403
Change in funded status of defined benefit pension plan and other benefit plans
Reclassification adjustment for amortization of prior service costs			(62,358	)		(62,358	)		(20,786	)		(20,786	)
Reclassification adjustment for amortization of net actuarial loss			1,201,594			1,006,644			400,508			335,548
Total before tax effect			1,139,236			944,286			379,722			314,762
Tax effect			438,173			362,982			145,672			120,994
Net of tax amount			701,063			581,304			234,050			193,768
Total other comprehensive (loss) income			(469,769	)		1,369,523			1,098,349			784,171
Comprehensive income		$	6,775,776		$	10,261,941		$	3,277,519		$	3,618,016
See accompanying notes to unaudited consolidated financial statements.

5

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, 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
Balances at December 31, 2012	$	53,101	$	45,357,073		$	107,078,182		$	(18,566,490	)	$	(2,806,929	)	$	131,114,937
Net income		-		-			7,245,545			-			-			7,245,545
Other comprehensive income		-		-			-			-			(469,769	)		(469,769	)
Restricted stock awards		-		106,326			-			-			-			106,326
Restricted stock units for directors' deferred compensation plan		-		74,180			-			-			-			74,180
Cash dividends declared ($.78 per share)		-		-			(3,583,627	)		-			-			(3,583,627	)
Distribution of 7,969 shares of treasury stock for directors'   compensation		-		13,896			-			203,050			-			216,946
Distribution of 3,356 shares of treasury stock for deferred directors’   compensation		-		(74,623	)		-			85,577			-			10,954
Distribution of 4,116 shares of treasury stock for employee   compensation		-		7,278			-			104,876			-			112,154
Purchase of 3,094 shares of treasury stock		-		-			-			(92,630	)		-			(92,630	)
Sale of 2,369 shares of treasury stock		-		10,518			-			60,362			-			70,880
Forfeit 1,797 shares of restricted stock awards		-		60,685			-			(60,685	)					-
Balances at September 30, 2013	$	53,101	$	45,555,333		$	110,740,100		$	(18,265,940	)	$	(3,276,698	)	$	134,805,896
See accompanying notes to unaudited consolidated financial statements.

6

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	NINE MONTHS ENDED SEPTEMBER 30,
CASH FLOWS FROM OPERATING ACTIVITIES:	2013			2012
Net income	$	7,245,545		$	8,892,418
Adjustments to reconcile net income to net cash provided   by operating activities:
Amortization of intangible assets		662,801			808,258
Provision for loan losses		1,755,188			753,897
Depreciation and amortization of fixed assets		2,232,587			2,187,234
Amortization of premiums on securities, net		1,692,700			1,343,743
Gains on sales of loans held for sale, net		(424,867	)		(270,265	)
Proceeds from sales of loans held for sale		15,382,872			8,992,854
Loans originated and held for sale		(14,767,126	)		(9,491,912	)
Net gains on trading assets		(26,666	)		(28,261	)
Net gains on securities transactions		(1,228	)		(300,516	)
Proceeds from sales of trading assets		111,541			96,498
Purchase of trading assets		(49,655	)		(48,851	)
Net (gains) losses on sale of other real estate owned		(33,448	)		72,004
(Increase) decrease in other assets		(1,343,566	)		4,294,238
Decrease in prepaid FDIC assessment		1,969,526			559,406
Decrease in accrued interest payable		(113,986	)		(337,246	)
Expense related to restricted stock units for directors'   deferred compensation plan		74,180			65,151
Expense related to employee stock compensation		112,154			80,000
Expense related to employee stock awards		106,326			61,062
Increase (decrease) in other liabilities		409,573			(820,424	)
Income from bank owned life insurance		(62,806	)		(64,840	)
Net cash provided by operating activities		14,931,645			16,844,448
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales and calls of securities available for sale		10,533,633			70,370,086
Proceeds from maturities and principal collected on securities available for sale		36,204,217			21,396,640
Proceeds from maturities and principal collected on securities held to maturity		5,378,939			3,731,924
Purchases of securities available for sale		(69,920,613	)		(64,276,418	)
Purchases of securities held to maturity		(6,174,271	)		(1,582,507	)
Purchase of Federal Home Loan Bank and Federal Reserve Bank stock		(8,915,350	)		(26,250	)
Redemption of Federal Home Loan Bank and Federal Reserve Bank stock		6,900,700			775,100
Purchases of premises and equipment		(1,835,036	)		(2,287,654	)
Proceeds from sales of other real estate owned		137,200			294,229
Net increase in loans		(74,552,241	)		(78,356,344	)
Net cash used by investing activities		(102,242,822	)		(49,961,194	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing demand accounts,   savings accounts, and insured money market accounts		58,463,290			112,724,881
Net decrease in time deposits		(14,751,851	)		(28,042,200	)
Net decrease in securities sold under agreements to repurchase		(2,211,422	)		(4,189,186	)
Increase of Federal Home Loan Bank overnight advances		49,100,000			-
Repayments of Federal Home Loan Bank long term advances		(1,179,438	)		(15,298,177	)
Purchase of treasury stock		(92,630	)		(579,051	)
Sale of treasury stock		60,362			257,449
Cash dividends paid		(2,389,106	)		(3,427,087	)
Net cash provided by financing activities		86,999,205			61,446,629
Net (decrease) increase in cash and cash equivalents		(311,972)			28,329,883
Cash and cash equivalents, beginning of period		40,241,221			52,901,853
Cash and cash equivalents, end of period	$	39,929,249		$	81,231,736

7

(continued)

Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest	$	3,143,380	$	4,501,350
Income Taxes	$	4,310,174	$	3,500
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned	$	102,970	$	512,686
Dividends declared, not yet paid	$	1,194,521	$	1,143,770
See accompanying notes to unaudited consolidated financial statements.

8

 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

To assist the reader, the Corporation has provided the following list of commonly used acronyms

and abbreviations included in the Notes to Unaudited Consolidated Financial Statements.

FASB:  Financial Accounting Standards Board	OTTI:  Other-than-temporary impairment
FDIC:  Federal Deposit Insurance Corporation	PCI:  Purchased credit impaired
FHLB:  Federal Home Loan Bank	SEC:  Securities and Exchange Commission
GAAP:  U.S. generally accepted accounting principles	CDO: Collateralized Debt Obligation

Organization and Principles of Consolidation

Chemung Financial Corporation (the “Corporation”) is a bank holding company headquartered in Elmira, New

York.  The Corporation provides a wide range of financial and fiduciary services through its wholly-owned

subsidiaries, Chemung Canal Trust Company (the “Bank”), a state chartered bank, and CFS Group, Inc., a non-

bank financial services company.  The Corporation and the Bank are subject to the regulation of certain federal

and state agencies and undergo periodic examinations by those regulatory authorities.  The unaudited consolidated

financial statements include the accounts of the Corporation, the Bank and CFS Group, Inc.  All significant

intercompany accounts and transactions have been eliminated in consolidation.  Certain reclassifications of prior

period amounts have been made to conform with the current period presentation.  These reclassifications had no

impact on previously reported net income.

Basis of Presentation

The unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the

SEC in Article 10 of Regulation S-X and in accordance with the instructions to Form 10-Q and GAAP for interim

financial information.  Certain information, accounting policies and footnote disclosures normally included in

complete financial statements prepared in accordance with GAAP have been condensed or omitted in accordance

with such rules and regulations.  These unaudited consolidated financial statements should be read in conjunction

with the audited consolidated financial statements and notes thereto included in the Corporation’s annual report

on Form 10-K for the year ended December 31, 2012.

The preparation of financial statements in conformity with GAAP requires management to make estimates and

assumptions that affect the amounts reported in the unaudited consolidated financial statements and

accompanying notes.  Primary areas involving the use of estimates and assumptions include the allowance for

loan losses, other-than-temporary impairment of securities, the carrying amount of goodwill and the amortization

of other intangible assets.  Actual results could differ from those estimates.  In the opinion of management, all

adjustments considered necessary, consisting of normal recurring items, have been included for a fair presentation

of the accompanying unaudited consolidated financial statements.  Operating results for the three and nine months

ended September 30, 2013 are not necessarily indicative of the results that may be expected for the full year or

future periods.

Subsequent Events

The Corporation has evaluated events and transactions through the time the unaudited consolidated financial

statements were issued.  Financial statements are considered issued when they are widely distributed to all

shareholders and other financial statement users, or filed with the SEC.  In conjunction with applicable accounting

standards, all material subsequent events have been either recognized in the unaudited consolidated financial

statements or disclosed in the notes to the unaudited consolidated financial statements.

9

NOTE 2                      EARNING 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 4,658,199 and 4,639,985weighted average shares outstanding for the nine-

month periods ended September 30, 2013 and 2012, and 4,660,336 and 4,641,547weighted average shares

outstanding for the three-month periods ended September 30, 2013 and 2012, respectively.  There were no

dilutive common stock equivalents during the three or nine-month periods ended September 30, 2013 or 2012.

NOTE 3                      ADOPTION OF NEW ACCOUNTING STANDARDS

In February 2013, the FASB issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive

Income (Topic 220) – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income.”  

ASU 2013-02 amends recent guidance related to the reporting of comprehensive income to enhance the

transparency of the reporting of reclassifications out of accumulated other comprehensive income.  ASU 2013-02

became effective for the Corporation on January 1, 2013 and did not have a material impact on the Corporation’s

financial statements.  The additional disclosures are included in Note 8 Accumulated Other Comprehensive

Income or Loss.

NOTE 4                      SECURITIES

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

	September 30, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S.   Government sponsored enterprises	$	162,811,654	$	2,249,365	$	431,143	$	164,629,876
Mortgage-backed securities, residential		37,566,626		1,466,571		210		39,032,987
Collateralized mortgage obligations		1,475,620		25,081		-		1,500,701
Obligations of states and political subdivisions		34,172,574		1,066,825		4,862		35,234,537
Corporate bonds and notes		7,389,928		105,671		11,266		7,484,333
SBA loan pools		1,512,692		27,582		-		1,540,274
Trust Preferred securities		2,525,133		141,392		114,725		2,551,800
Corporate stocks		690,354		6,612,224		1,969		7,300,609
Total	$	248,144,581	$	11,694,711	$	564,175	$	259,275,117

	December 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government and U.S.   Government sponsored enterprises	$	138,041,393	$	3,549,821	$	-	$	141,591,214
Mortgage-backed securities, residential		29,591,883		1,923,366		-		31,515,249
Collateralized mortgage obligations		3,494,642		48,718		-		3,543,360
Obligations of states and political subdivisions		39,174,595		1,641,510		1,383		40,814,722
Corporate bonds and notes		11,412,167		239,468		-		11,651,635
SBA loan pools		1,682,736		41,404		-		1,724,140
Trust preferred securities		2,519,379		134,959		183,425		2,470,913
Corporate stocks		736,495		5,645,753		7,718		6,374,530
Total	$	226,653,290	$	13,224,999	$	192,526	$	239,685,763

10

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

	September 30, 2013
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	5,523,105	$	484,520	$	-	$	6,007,625
Time deposits with other financial institutions		1,020,680		18,995		-		1,039,675
Total	$	6,543,785	$	503,515	$	-	$	7,047,300

	December 31, 2012
	Amortized Cost		Unrealized Gains		Unrealized Losses		Estimated Fair Value
Obligations of states and political subdivisions	$	5,748,453	$	673,033	$	-	$	6,421,486

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, 2013
	Available for Sale				Held to Maturity
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Within One Year	$	32,358,309	$	32,675,479	$	2,086,483	$	2,124,736
After One, But Within Five Years		157,176,957		159,943,408		3,069,714		3,305,202
After Five, But Within Ten Years		16,734,998		16,767,359		1,387,588		1,617,362
After Ten Years		629,025		514,300		-		-
		206,899,289		209,900,546		6,543,785		7,047,300
Mortgage-backed securities, residential		37,566,626		39,032,987
Collateralized mortgage obligations		1,475,620		1,500,701
SBA loan pools		1,512,692		1,540,274
Total	$	247,454,227	$	251,974,508	$	6,543,785	$	7,047,300

The proceeds from sales and calls of securities resulting in gains or losses at September 30, 2013 and September 30, 2012 are listed below:

		2013		2012
Proceeds	$	10,533,633	$	70,370,086
Gross gains	$	1,228	$	300,516
Gross losses	$	-	$	-
Tax expense	$	472	$	115,518

The following tables summarize the investment securities available for sale with unrealized losses at September

30, 2013 and December 31, 2012 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, 2013	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
Obligations of U.S.   Government and U.S.   Government sponsored   Enterprises	$	61,924,270	$	431,143	$	-	$	-	$	61,924,270	$	431,143
Mortgage-backed securities,    residential		113,804		210		-		-		113,804		210
Obligations of states and   political subdivisions		1,003,268		4,579		250,635		283		1,253,903		4,862
Corporate bonds		2,735,068		11,266		-		-		2,735,068		11,266
Trust preferred securities		-		-		514,300		114,725		514,300		114,725
Corporate stocks		-		-		1,668		1,969		1,668		1,969
Total temporarily         impaired securities	$	65,776,410	$	447,198	$	766,603	$	116,977	$	66,543,013	$	564,175

11

	Less than 12 months				12 months or longer				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
December 31, 2012
Obligations of states and   political subdivisions	$	-	$	-	$	430,166	$	1,383	$	430,166	$	1,383
Trust preferred securities		-		-		445,600		183,425		445,600		183,425
Corporate stocks		-		-		45,912		7,718		45,912		7,718
Total temporarily         impaired securities	$	-	$	-	$	921,678	$	192,526	$	921,678	$	192,526

Other-Than-Temporary Impairment

As of September 30, 2013, the majority of the Corporation’s unrealized losses in the investment securities

portfolio related to obligations of U.S. Government and U.S. Government sponsored enterprises.  Because the

decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation

does not have the intent to sell these securities and it is likely that it will not be required to sell these securities

before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily

impaired at September 30, 2013.

As of September 30, 2013, $114,725 of the Corporation's unrealized losses in the investment securities portfolio

related to a CDO consisting of a pool of trust preferred securities. 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 amortized cost of a CDO consisting of a pool of trust

preferred securities.  This security was rated high quality at inception, but at September 30, 2013 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.  Assumptions

used in the model include expected future default rates and prepayments.  We assume no recoveries on defaults

and treat all interest payment deferrals as defaults.

Upon completion of the September 30, 2013 analysis, our model indicated no additional OTTI on this CDO.  This

security remained classified as available for sale and quarterly interest payments continue to be made.

When conducting the September 30, 2013 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.  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 $74,482 and $117,118, net of tax for

securities available for sale at September 30, 2013 and December 31, 2012, respectively.

12

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, 2013 and 2012:

	2013		2012
Beginning balance, January 1,	$	3,506,073	$	3,506,073
Amounts related to credit loss for which an other-than-temporary      impairment was not previously recognized		-		-
Additions/Subtractions:
Amounts realized for securities sold during the period		-		-
Amounts related to securities for which the company intends to sell      or that it will be more likely than not that the company will be required to      sell prior to recovery of amortized cost basis		-		-
Reductions for increase in cash flows expected to be collected that are      recognized over the remaining life of the security		-		-
Increases to the amount related to the credit loss for which other-than-temporary      impairment was previously recognized		-		-
Ending balance, September 30,	$	3,506,073	$	3,506,073

Beginning balance, July 1,	$	3,506,073	$	3,506,073
Amounts related to credit loss for which an other-than-temporary      impairment was not previously recognized		-		-
Additions/Subtractions:
Amounts realized for securities sold during the period		-		-
Amounts related to securities for which the company intends to sell      or that it will be more likely than not that the company will be required to      sell prior to recovery of amortized cost basis		-		-
Reductions for increase in cash flows expected to be collected that are      recognized over the remaining life of the security		-		-
Increases to the amount related to the credit loss for which other-than-temporary      impairment was previously recognized		-		-
Ending balance, September 30,	$	3,506,073	$	3,506,073

NOTE 5                      LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio, net of deferred origination fees and cost, and unearned income is

summarized as follows:

	September 30, 2013		December 31, 2012
Commercial and agricultural:
Commercial and industrial	$	140,152,331	$	133,154,615
Agricultural		623,656		696,666
Commercial mortgages:
Construction		21,752,696		43,269,303
Commercial mortgages		338,428,531		276,928,123
Residential mortgages		194,042,042		200,475,097
Consumer loans:
Credit cards		1,682,987		1,851,145
Home equity lines and loans		93,416,651		87,045,421
Indirect consumer loans		157,257,713		130,573,200
Direct consumer loans		20,277,738		19,523,371
Total loans, net of deferred origination         fees and costs, and unearned income	$	967,634,345	$	893,516,941
Interest receivable on loans		2,260,266		2,383,998
Total recorded investment in loans	$	969,894,611	$	895,900,939

The Corporation's concentrations of credit risk by loan type are reflected in the preceding table.  The

concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate

new loans generally follow the loan classifications in the table above.

13

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

and nine-month periods ending September 30, 2013 and 2012:

	Nine Months Ended
	September 30, 2013
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated			Total
Beginning balance:	$	1,707,596		$	4,427,698		$	1,565,571		$	2,705,639		$	26,146		$	10,432,650
Charge Offs:		(186,045	)		(44,049	)		(53,753	)		(909,414	)		-			(1,193,261	)
Recoveries:		453,461			53,402			65,124			289,407			-			861,394
Net recoveries (charge offs)		267,416			9,353			11,371			(620,007	)		-			(331,867	)
Provision		82,523			976,409			(25,311	)		747,713			(26,146	)		1,755,188
Ending balance	$	2,057,535		$	5,413,460		$	1,551,631		$	2,833,345		$	-		$	11,855,971

	Nine Months Ended
	September 30, 2012
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated				Total
Beginning balance:	$	3,143,372		$	2,570,149		$	1,309,649		$	2,192,729		$	443,420		$	9,659,319
Reclassification of acquired   loan discount		73,227			50,332			-			-			-			123,559
Charge Offs:		(5,792	)		(88,371	)		(82,442	)		(342,867	)		-			(519,472	)
Recoveries:		591,498			43,031			-			176,139			-			810,668
Net recoveries (charge-offs)		585,706			(45,340	)		(82,442	)		(166,728	)		-	)		291,196
Provision		(1,165,842	)		769,461			232,793			884,943			32,542			753,897
Ending balance	$	2,636,463		$	3,344,602		$	1,460,000		$	2,910,944		$	475,962		$	10,827,971

	Three Months Ended September 30, 2013
Allowance for loan losses	Commercial and Agricultural			Commercial Mortgages			Residential Mortgages		Consumer Loans			Unallocated		Total
Beginning balance:	$	1,878,697		$	5,134,410		$	1,515,424	$	2,791,694		$	-	$	11,320,225
Charge Offs:		(167,570	)		(44,049	)		-		(511,631	)		-		(723,250	)
Recoveries:		158,765			34,126			26,514		165,887			-		385,292
Net recoveries (charge offs)		(8,805	)		(9,923	)		26,514		(345,744	)		-		(337,958	)
Provision		187,643			288,973			9,693		387,395			-		873,704
Ending balance	$	2,057,535		$	5,413,460		$	1,551,631	$	2,833,345		$	-	$	11,855,971

	Three Months Ended September 30, 2012
Allowance for loan losses	Commercial  and Agricultural			Commercial Mortgages			Residential Mortgages			Consumer Loans			Unallocated		Total
Beginning balance:	$	3,004,211		$	3,075,712		$	1,424,816		$	2,474,185		$	413,648	$	10,392,572
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		(607,483	)		287,374			45,013			437,782			62,314		225,000
Ending balance	$	2,636,463		$	3,344,602		$	1,460,000		$	2,910,944		$	475,962	$	10,827,971

14

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

portfolio segment and based on impairment method as of September 30, 2013 and December 31, 2012:

	September 30, 2013
Allowance for loan losses	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance   attributable to loans:
Individually evaluated for   impairment	$	592,108	$	485,209	$	-	$	4,020	$	-	$	1,081,337
Collectively evaluated for   impairment		1,465,427		4,062,647		1,531,953		2,829,325		-		9,889,352
Acquired with deteriorated   credit quality		-		865,604		19,678		-		-		885,282
Total ending allowance balance	$	2,057,535	$	5,413,460	$	1,551,631	$	2,833,345	$	-	$	11,855,971

	December 31, 2012
Allowance for loan losses	Commercial  and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Unallocated		Total
Ending allowance balance   attributable to loans:
Individually evaluated for   impairment	$	133,437	$	59,201	$	-	$	-	$	-	$	192,638
Collectively evaluated for  impairment		1,459,432		3,533,365		1,565,571		2,705,639		26,146		9,290,153
Acquired with deteriorated   credit quality		114,727		835,132		-		-		-		949,859
Total ending allowance balance	$	1,707,596	$	4,427,698	$	1,565,571	$	2,705,639	$	26,146	$	10,432,650

-

	September 30, 2013
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually   evaluated for impairment	$	2,608,351	$	9,002,624	$	121,527	$	132,533	$	11,865,035
Loans collectively   evaluated for  impairment		137,775,852		343,187,539		194,172,367		273,149,608		948,285,366
Loans acquired with deteriorated   credit quality		702,070		8,784,945		257,195		-		9,744,210
Total ending loans balance	$	141,086,273	$	360,975,108	$	194,551,089	$	273,282,141	$	969,894,611

	December 31, 2012
Loans:	Commercial and Agricultural		Commercial Mortgages		Residential Mortgages		Consumer Loans		Total
Loans individually   evaluated for impairment	$	1,907,395	$	10,620,274	$	131,909	$	-	$	12,659,578
Loans collectively   evaluated for  impairment		131,045,609		301,172,164		200,622,600		239,689,455		872,529,828
Loans acquired with deteriorated   credit quality		1,241,418		9,225,847		244,268		-		10,711,533
Total ending loans balance	$	134,194,422	$	321,018,285	$	200,998,777	$	239,689,455	$	895,900,939

15

The following tables present loans individually evaluated for impairment recognized by class of loans as of September 30, 2013 and December 31, 2012, the

average recorded investment and interest income recognized by class of loans as of the three and nine-month periods ended September 30, 2013 and 2012:

	September 30, 2013						December 31, 2012
With no related allowance recorded:	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance			Recorded Investment		Allowance for Loan Losses Allocated
Commercial and agricultural:
Commercial & industrial	$	1,542,743	$	1,543,755	$	-	$	2,059,027	$	1,462,157	$	-
Commercial mortgages:
Construction		2,008,009		1,998,022		-		5,168,353		5,166,853		-
Commercial mortgages		5,447,063		5,458,928		-		5,678,565		5,090,399		-
Residential mortgages		121,527		121,527		-		131,909		131,909		-
Consumer loans:
Home equity lines & loans		72,495		74,320		-		-		-		-
With an allowance recorded:
Commercial and agricultural:
Commercial & industrial		1,064,032		1,064,595		592,108		446,330		445,238		133,437
Commercial mortgages:
Commercial mortgages		1,556,492		1,545,675		485,209		364,423		363,022		59,201
Consumer loans:
Home equity lines & loans		57,876		58,213		4,020		-		-		-
Total	$	11,870,237	$	11,865,035	$	1,081,337	$	13,848,607	$	12,659,578	$	192,638

16

		Nine-Months Ended September 30, 2013			Nine-Months Ended September 30, 2012				Three Months Ended September 30, 2013				Three Months Ended September 30, 2012
		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 and agricultural:
Commercial & industrial	$	1,528,613	$	52,269	$	843,910	$	-	$	1,599,481	$	17,710	$	177,457	$	-
Commercial mortgages:
Construction		3,625,534		64,027		10,454		-		2,576,130		21,577		10,454		-
Commercial mortgages		5,628,724		184,027		932,358		-		5,564,316		65,898		1,081,307		-
Residential mortgages		126,801		-		117,737		-		123,473		-		74,441		-
Consumer loans:
Home equity lines & loans		41,158		1,352		14,892		2,289		59,546		671		-		-
With an allowance recorded:
Commercial and agricultural:
Commercial & industrial		640,288		-		2,328,728		-		818,645		-		2,295,003		-
Commercial mortgages:
Construction		-		-		4,148		-		-		-		-		-
Commercial mortgages		847,220		-		1,712,578		-		1,333,381		-		830,049		-
Residential mortgages		-		-		32,001		-		-		-		64,003		-
Consumer loans:
Home equity lines & loans		43,601		2,343		-		-		58,177		1,094		-		-
Direct consumer loans		3,813		-		-		-		-		-		-		-
Total	$	12,485,752	$	304,198	$	5,996,806	$	2,289	$	12,133,149	$	106,950	$	4,532,714	$	-

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

17

The following tables present the recorded investment in past due and non-accrual status by class of loans as of September 30, 2013 and December 31, 2012:

September 30, 2013	Current		30-89 Days Past Due		90 Days or more Past Due and accruing			Loans acquired with deteriorated credit quality	Non-Accrual (1)			Total
Commercial and agricultural:
Commercial & industrial	$	138,320,091	$	35,277	$	-	$	702,070	$	1,403,804	$	140,461,242
Agricultural		625,031		-		-		-		-		625,031
Commercial mortgages:
Construction		19,028,779		-		1,455,128		773,841		542,893		21,800,641
Commercial mortgages		328,305,500		668,762		-		8,011,104		2,189,101		339,174,467
Residential mortgages		189,025,630		2,555,389		-		257,195		2,712,875		194,551,089
Consumer loans:
Credit cards		1,656,644		16,839		9,504		-		-		1,682,987
Home equity lines & loans		92,808,417		215,994		-		-		613,363		93,637,774
Indirect consumer loans		156,271,223		1,232,135		-		-		118,706		157,622,064
Direct consumer loans		20,237,164		39,679		-		-		62,473		20,339,316
Total	$	946,278,479	$	4,764,075	$	1,464,632	$	9,744,210	$	7,643,215	$	969,894,611

(1)  Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of September 30, 2013.

December 31, 2012	Current		30-89 Days Past Due		90 Days or more Past Due and accruing				Loans acquired with deteriorated credit quality	Non-Accrual (1)			Total
Commercial and agricultural:
Commercial & industrial	$	131,404,371	$	183,269	$	-		$	1,241,418	$	666,912	$	133,495,970
Agricultural		698,452		-		-			-		-		698,452
Commercial mortgages:
Construction		36,988,222		294,565		4,481,066			1,182,037		434,338		43,380,228
Other		266,261,798		1,750,806		-			8,043,810		1,581,643		277,638,057
Residential mortgages		194,185,617		4,145,868		-	`		244,268		2,423,024		200,998,777
Consumer loans:
Credit cards		1,847,837		-		3,308			-		-		1,851,145
Home equity lines & loans		86,486,781		211,739		-			-		571,365		87,269,885
Indirect consumer loans		129,789,672		852,818		-			-		335,285		130,977,775
Direct consumer loans		19,481,693		89,619		-			-		19,338		19,590,650
Total	$	867,144,443	$	7,528,684	$	4,484,374		$	10,711,533	$	6,031,905	$	895,900,939

(1)  Includes all loans on non-accrual status regardless of the number of days such loans were delinquent as of December 31, 2012.

18

Troubled Debt Restructurings:

As of September 30, 2013 and December 31, 2012, the Corporation has a recorded investment in troubled debt

restructurings of $7,245,570 and $5,728,610, respectively.  There were specific reserves of $241,973 allocated for

troubled debt restructurings at September 30, 2013 and no specific reserves allocated at December 31, 2012.  As

of September 30, 2013, troubled debt restructurings totaling $6,152,581 were accruing interest under the modified

terms and $1,092,989 were on non-accrual status.  As of December 31, 2012, troubled debt restructurings totaling

$5,363,712 were accruing interest under the modified terms and $364,898 were on non-accrual status.  The

Corporation has committed to lend additional amounts totaling up to $100,000 and $130,000 as of September 30,

2013 and December 31, 2012, respectively, to customers with outstanding loans that are classified as troubled

debt restructurings.

During the nine months ended September 30, 2013 and 2012, the terms of certain loans were modified as troubled

debt restructurings. The modification of the terms of such loans included one or a combination of the following:

reduced scheduled payments for greater than 3 months or an extension of the maturity date at a stated rate of

interest lower than the current market rate for new debt with similar risk.

The following table presents loans by class modified as troubled debt restructurings that occurred during the nine

months ended September 30, 2013 and September 30, 2012:

Nine months ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial & industrial		4	$	841,162	$	841,162
Commercial mortgages:
Commercial mortgages		1		133,000		133,000
Consumer loans:
Home equity lines & loans		3		134,225		134,225
Total		8	$	1,108,387	$	1,108,387
Nine months ended September 30, 2012
Troubled debt restructurings:
Commercial and agricultural:
Commercial & industrial		1	$	74,838	$	74,838
Consumer loans:
Home equity lines & loans		1	$	58,823		58,823
Total		2	$	133,661	$	133,661

The troubled debt restructurings described above increased the allowance for loan losses by $96,910 and resulted

in no charge offs during the nine months ended September 30, 2013.  The troubled debt restructurings described

above did not increase the allowance for loan losses and resulted in no charge offs during the nine months ended

September 30, 2012.

19

The following table presents loans by class modified as troubled debt restructurings that occurred during the three

months ended September 30, 2013 and September 30, 2012:

Three months ended September 30, 2013	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Consumer loans:
Home equity lines & loans		1	$	30,638	$	30,638
Total		1	$	30,638	$	30,638

Three months ended September 30, 2012	Number of Loans		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial & industrial		1	$	74,838	$	74,838
Total		1	$	74,838	$	74,838

The troubled debt restructurings described above increased the allowance for loan losses by $40,445 and resulted

in no charge offs during the three months ending September 30, 2013.  The troubled debt restructurings described

above did not increase the allowance for loan losses and resulted in no charge-offs during the three months ending

September 30, 2012.

There were no payment defaults on any loans previously modified as troubled debt restructurings during the nine

months ending September 30, 2013 or September 30, 2012, within twelve months following the modification.  

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

during the three months ending September 30, 2013 and September 30, 2012, 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 are not limited to: historic and future debt service coverage, collateral position,

operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry.  

Commercial relationship managers monitor all loans in their respective portfolios for any changes in the

borrower’s ability to service their debt and affirm the risk ratings for the loans at least annually.

For the retail loans, which include 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 at some future date.

20

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 analyses performed as of September 30, 2013 and December 31,

2012, the risk category of the recorded investment of loans by class of loans is as follows:

	September 30, 2013
		Not Rated		Pass		Loans acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial and agricultural:
Commercial & industrial		$	-	$	125,064,289	$	702,070	$	9,926,617	$	4,332,774	$	435,492
Agricultural			-		625,031		-		-		-		-
Commercial mortgages:
Construction			-		17,361,075		773,841		2,797,055		868,670		-
Commercial mortgages			-		305,969,292		8,011,104		16,146,231		9,047,840		-
Residential mortgages			191,650,301		-		257,195		-		2,643,593
Consumer loans
Credit cards			1,682,987		-		-		-		-		-
Home equity lines & loans			92,945,959		-		-		-		691,815		-
Indirect consumer loans			157,494,345		-		-		-		127,719		-
Direct consumer loans			20,284,471		-		-		-		54,845
Total		$	464,058,063	$	449,019,687	$	9,744,210	$	28,869,903	$	17,767,256	$	435,492

	December 31, 2012
		Not Rated		Pass		Loans acquired with deteriorated credit quality		Special Mention		Substandard		Doubtful
Commercial and agricultural:
Commercial & industrial		$	-	$	121,145,761	$	1,241,418	$	8,008,002	$	2,606,529	$	494,260
Agricultural			-		698,452		-		-		-		-
Commercial mortgages:
Construction			-		34,882,896		1,182,037		5,153,918		2,161,377		-
Other			-		247,793,150		8,043,810		11,974,716		9,826,381		-
Residential mortgages			198,336,641		-		244,268		-		2,417,868		-
Consumer loans
Credit cards			1,851,145		-		-		-		-		-
Home equity lines & loans			86,615,392		-		-		-		654,493		-
Indirect consumer loans			130,642,490		-		-		-		335,285		-
Direct consumer loans			19,571,312		-		-		-		19,338		-
Total		$	437,016,980	$	404,520,259	$	10,711,533	$	25,136,636	$	18,021,271	$	494,260

21

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

For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status

of the loan, which was previously presented, and by payment activity.  The following table presents the recorded

investment in residential and consumer loans based on payment activity as of September 30, 2013 and December

31, 2012:

	September 30, 2013
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	191,838,214	$	1,673,483	$	93,024,411	$	157,503,358	$	20,276,843
Non-Performing		2,712,875		9,504		613,363		118,706		62,473
Total	$	194,551,089	$	1,682,987	$	93,637,774	$	157,622,064	$	20,339,316

	December 31, 2012
			Consumer Loans
	Residential Mortgages		Credit Card		Home Equity Lines & Loans		Indirect Consumer Loans		Other Direct Consumer Loans
Performing	$	198,575,753	$	1,847,838	$	86,698,520	$	130,642,490	$	19,571,312
Non-Performing		2,423,024		3,307		571,365		335,285		19,338
	$	200,998,777	$	1,851,145	$	87,269,885	$	130,977,775	$	19,590,650

At the time of the merger with Fort Orange Financial Corp., the Corporation identified certain loans with evidence

of deteriorated credit quality, and the probability that the Corporation would be unable to collect all contractually

required payments from the borrower.  These loans are classified as PCI loans.  The Corporation adjusted its

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

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

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

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

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

management’s estimate of expected total cash payments and carrying value of the PCI loans from January 1, 2013

to September 30, 2013 and July 1, 2013 to September 30, 2013:

Nine months ended September 30, 2013	Balance at December 31, 2012			Income Accretion		All Other Adjustments			Balance at September 30, 2013
Contractually required principal and interest	$	16,896,078		$	-	$	(5,293,182	)	$	11,602,896
Contractual cash flows not expected to be collected   (nonaccretable discount)		(3,655,500	)		-		2,865,778			(789,722	)
Cash flows expected to be collected		13,240,578			-		(2,427,404	)		10,813,174
Interest component of expected cash flows (accretable yield)		(2,529,045	)		818,780		641,301			(1,068,964	)
Fair value of loans acquired with deteriorating credit quality	$	10,711,533		$	818,780	$	(1,786,103	)	$	9,744,210

Three months ended September 30, 2013	Balance at June 30, 2013			Income Accretion		All Other Adjustments			Balance at September 30, 2013
Contractually required principal and interest	$	14,700,338		$	-	$	(3,097,442	)	$	11,602,896
Contractual cash flows not expected to be collected   (nonaccretable discount)		(1,938,757	)		-		1,149,035			(789,722	)
Cash flows expected to be collected		12,761,581			-		(1,948,407	)		10,813,174
Interest component of expected cash flows (accretable yield)		(2,552,297	)		154,919		1,328,414			(1,068,964	)
Fair value of loans acquired with deteriorating credit quality	$	10,209,284		$	154,919	$	(619,993	)	$	9,744,210

22

NOTE 6                      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 OTTI as further described in Note 4.  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).

23

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, 2013 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	$	164,629,876	$	31,593,500	$	133,036,376	$	-
Mortgage-backed securities, residential		39,032,987		-		39,032,987		-
Obligations of states and political subdivisions		35,234,537		-		35,234,537		-
Collateralized mortgage obligations		1,500,701		-		1,500,701		-
Corporate bonds and notes		7,484,333		-		7,484,333		-
SBA loan pools		1,540,274		-		1,540,274		-
Trust Preferred securities		2,551,800		-		2,037,500		514,300
Corporate stocks		7,300,609		6,657,475		643,134		-
Total available for sale securities	$	259,275,117	$	38,250,975	$	220,509,842	$	514,300
Trading assets	$	313,021	$	313,021	$	-	$	-

24

			Fair Value Measurement at December 31, 2012 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Obligations of U.S. Government and U.S.   Government sponsored enterprises	$	141,591,214	$	37,698,000	$	103,893,214	$	-
Mortgage-backed securities, residential		31,515,249		-		31,515,249		-
Obligations of states and political subdivisions		40,814,722		-		40,814,722		-
Collateralized mortgage obligations		3,543,360		-		3,543,360		-
Corporate bonds and notes		11,651,635		-		11,651,635		-
SBA loan pools		1,724,140		-		1,724,140		-
Trust Preferred securities		2,470,913		-		2,025,313		445,600
Corporate stocks		6,374,530		5,720,533		653,997		-
Total available for sale securities	$	239,685,763	$	43,418,533	$	195,821,630	$	445,600
Trading assets	$	348,241	$	348,241	$	-	$	-

There were no transfers between Level 1 and Level 2 during the nine-month period ending September 30, 2013

or the year ending December, 31, 2012.

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, 2013

and 2012:

	Fair Value Measurement for  Nine-Months Ended September 30, 2013 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement for Nine-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3)
Trust Preferred Securities Available for Sale
Beginning balance December 31	$	445,600	$	294,910
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-		-
Impairment charge on investment securities		-		-
Included in other comprehensive income		68,700		150,690
Transfers in and/or out of Level 3		-		-
Ending balance September 30	$	514,300	$	445,600

25

	Fair Value Measurement for Three-Months Ended September 30, 2013 Using Significant Unobservable Inputs (Level 3)		Fair Value Measurement for Three-Months Ended September 30, 2012 Using Significant Unobservable Inputs (Level 3)
Trust Preferred Securities Available for Sale
Beginning balance June 30	$	514,300	$	343,035
Total gains/losses (realized/unrealized):
Included in earnings:
Income on securities		-		-
Impairment charge on investment securities		-		-
Included in other comprehensive income		-		102,565
Transfers in and/or out of Level 3		-		-
Ending balance September 30	$	514,300	$	445,600

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

			Fair Value Measurement at September 30, 2013 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 and agricultural:
Commercial &industrial	$	471,954	$	-	$	-	$	471,954
Commercial mortgages:				-		-
Other		1,071,283		-		-		1,071,283
Consumer loans:
Home equity lines & loans		53,856		-		-		53,856
Total Impaired Loans	$	1,597,093	$	-	$	-	$	1,597,093
Other real estate owned:
Commercial and agricultural:
Commercial and industrial	$	101,200	$	-	$	-	$	101,200
Commercial mortgages:
Other		265,702		-		-		265,702
Residential mortgages		129,939		-		-		129,939
Consumer loans:
Home equity lines & loans		66,959		-		-		66,959
Total Other real estate owned, net	$	563,800	$	-	$	-	$	563,800

26

			Fair Value Measurement at December 31, 2012 Using
Financial Assets:	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Impaired Loans:
Commercial and agricultural:
Commercial & industrial	$	235,501	$	-	$	-	$	235,501
Commercial mortgages:				-		-
Other		305,222		-		-		305,222
Total Impaired Loans	$	540,723	$	-	$	-	$	540,723
Other real estate owned:
Commercial and agricultural:
Commercial and industrial	$	101,200	$	-	$	-	$	101,200
Commercial mortgages:
Other		257,702		-		-		257,702
Residential mortgages		201,679		-		-		201,679
Consumer loans:
Home equity lines & loans		4,000		-		-		4,000
Total Other real estate owned, net	$	564,581	$	-	$	-	$	564,581

The following table presents information related to Level 3 non-recurring fair value measurement at September

30, 2013 and December 31, 2012:

Description	Fair Value at September 30, 2013		Technique	Unobservable Inputs
Impaired loans	$	1,597,093	Third party real estate and a 100% discount of personal property	1	Management discount based on underlying collateral characteristics and market conditions
Other real estate owned	$	563,800	Third party appraisals	1	Estimated holding  period
				2	Estimated closing costs

Description	Fair Value at December 31, 2012		Technique	Unobservable Inputs
Impaired loans	$	540,723	Third party real estate and a 100% discount of personal property	1	Management discount based on underlying collateral characteristics and market conditions
Other real estate owned	$	564,581	Third party appraisals	1	Estimated holding  period
				2	Estimated closing costs

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

loans, had a principal balance of $2,678,430 with a valuation allowance of $1,081,337as of September 30, 2013,

resulting in $311,110 and $888,699 increase in the provision for loan losses for the three and nine-month periods

ended September 30, 2013, respectively.  Impaired loans had a principal balance of $733,361, with a valuation

allowance of $192,638 as of December 31, 2012, resulting in no additional provision for loan losses for the year

ending December 31, 2012.

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

$563,800 at September 30, 2013.  The net carrying amount reflects the outstanding balance of $756,167, net of a

valuation allowance of $192,367, at September 30, 2013. There were no write downs for the three and nine-month

periods ending September 30, 2013.  OREO had a net carrying amount of $564,581 at December 31, 2012.  The

net carrying amount reflects the outstanding balance of $756,948, net of a valuation allowance of $192,367, at

December 31, 2012, which resulted in write downs of $116,840 for the year ending December 31, 2012.

27

The carrying amounts and estimated fair values of other financial instruments, at September 30, 2013 and

December 31, 2012, are as follows (dollars in thousands):

	Fair Value Measurements at September 30, 2013 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	$	37,491	$	37,491	$	-	$	-	$	37,491
Interest-bearing deposits in other    financial institutions		2,438		2,438		-		-		2,438
Trading assets		313		313		-		-		313
Securities available for sale		259,275		38,251		220,510		514		259,275
Securities held to maturity		6,544		-		7,047		-		7,047
Federal Home Loan and Federal   Reserve Bank stock		6,725		-		-		-		N/A
Net loans		955,778		-		-		985,182		985,182
Loans held for sale		866		-		866		-		-
Accrued interest receivable		4,142		360		1,549		2,233		4,142
Financial liabilities:
Deposits:
Demand, savings, and insured   money market accounts	$	866,507	$	866,507	$	-	$	-	$	866,507
Time deposits		221,938		-		222,944		-		222,944
Securities sold under agreements   to repurchase		30,499		-		31,757		-		31,757
Federal Home Loan Bank   term advances		26,046		-		27,207		-		27,207
Federal Home Loan Bank   overnight advances		49,100		-		49,103		-		49,103
Accrued interest payable		339		13		174		152		339
(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.

28

		Fair Value Measurements at December 31, 2012
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	$	29,239	$	29,239	$	-	$	-	$	29,239
Interest-bearing deposits in other   financial institutions		11,002		8,645		2,357		-		11,002
Trading assets		348		348		-		-		348
Securities available for sale		239,686		43,419		195,822		445		239,686
Securities held to maturity		5,748		-		6,421		-		6,421
Federal Home Loan and Federal   Reserve Bank stock		4,710		-		-		-		N/A
Net loans		883,084		-		-		916,289		916,289
Loans held for sale		1,057		-		1,057		-		1,057
Accrued interest receivable		3,788		175		1,257		2,356		3,788
Financial liabilities:
Deposits:
Demand, savings, and insured money market accounts	$	808,044	$	808,044	$	-	$	-	$	808,044
Time deposits		236,690		-		238,245		-		238,245
Securities sold under agreements   to repurchase		32,711		-		35,260		-		35,260
Federal Home Loan Bank   advances		27,225		-		29,688		-		29,688
Accrued interest payable		453		12		279		162		453
(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.

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.

29

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.

30

NOTE 7                      GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill included in the core banking segment during the periods ending September 30, 2013

and 2012 were as follows:

	2013		2012
Beginning of year	$	21,824,443	$	21,983,617
Acquired goodwill		-
Adjustment of Acquired goodwill (1)		-		(159,174	)
Ending balance September 30,	$	21,824,443	$	21,824,443
(1) Adjustment related to Fort Orange Financial Corp. acquisition.

Acquired intangible assets were as follows at September 30, 2013 and December 31, 2012:

	At September 30, 2013				At December 31, 2012
	Balance Acquired		Accumulated Amortization		Balance Acquired		Accumulated Amortization
Core deposit intangibles	$	3,819,798	$	2,173,923	$	3,819,798	$	1,796,853
Other customer relationship intangibles		6,063,423		3,228,279		6,063,423		2,942,548
Total	$	9,883,221	$	5,402,202	$	9,883,221	$	4,739,401

Aggregate amortization expense was $662,801 and $808,258 for the nine-month periods ended September 30, 2013 and 2012, respectively.

The remaining estimated aggregate amortization expense at September 30, 2013 is listed below:

Year	Estimated Expense
2013	$	213,723
2014		777,801
2015		681,176
2016		607,713
2017		557,893
2018 and thereafter		1,642,713
Total	$	4,481,019

31

NOTE 8                      ACCUMULATED OTHER COMPREHENSIVE INCOME OR LOSS

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

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

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

The following is a summary of the changes in accumulated other comprehensive income or loss by component,

net of tax, for the periods indicated:

	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at December 31, 2012	$	8,022,790		$	(10,829,719	)	$	(2,806,929	)
Other comprehensive income before   reclassification		(1,170,076	)		-			(1,170,076	)
Amounts reclassified from accumulated other   comprehensive income		(756	)		701,063			700,307
Net current period other comprehensive loss		(1,170,832	)		701,063			(469,769	)
Balance at September 30, 2013	$	6,851,958		$	(10,128,656	)	$	(3,276,698	)

	Unrealized Gains and Losses on Securities Available for Sale		Defined Benefit and Other Benefit Plans			Total
Balance at June 30, 2013	$	5,987,659	$	(10,362,706	)	$	(4,375,047	)
Other comprehensive income before   reclassification		864,299		-			864,299
Amounts reclassified from accumulated other   comprehensive income		-		234,050			234,050
Net current period other comprehensive loss		864,299		234,050			1,098,349
Balance at September 30, 2013	$	6,851,958	$	(10,128,656	)	$	(3,276,698	)

	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at December 31, 2011	$	7,987,055		$	(9,428,433	)	$	(1,441,378	)
Other comprehensive income before   reclassification		973,217			-			973,217
Amounts reclassified from accumulated other   comprehensive income		(184,998	)		581,304			396,306
Net current period other comprehensive income		788,219			581,304			1,369,523
Balance at September 30, 2012	$	8,775,274		$	(8,847,129	)	$	(71,855	)

	Unrealized Gains and Losses on Securities Available for Sale			Defined Benefit and Other Benefit Plans			Total
Balance at June 30, 2012	$	8,184,871		$	(9,040,897	)	$	(856,026	)
Other comprehensive income before   reclassification		590,771			-			590,771
Amounts reclassified from accumulated other   comprehensive income		(368	)		193,768			193,400
Net current period other comprehensive income		590,403			193,768			784,171
Balance at September 30, 2012	$	8,775,274		$	(8,847,129	)	$	(71,855	)

32

The following is the reclassification out of accumulated other comprehensive income for the periods indicated:

Details about Accumulated Other Comprehensive Income Components	Nine Months Ended September 30,							Affected Line Item  in the Statement Where Net Income is Presented
			2013			2012
Unrealized gains and losses on securities   available for sale:
Realized gains on securities available for sale		$	1,228		$	300,516			Net gains on securities transactions
Income tax expense			472			115,518			Income tax expense
Net of tax			756			184,998
Amortization of defined pension plan   and other benefit plan items:
Prior service costs (a)			62,358			62,358			Pension and other employee benefits
Actuarial losses (a)			(1,201,594	)		(1,006,644	)		Pension and other employee benefits
Income tax benefit			438,173			362,982			Income tax expense
Net of tax			(701,063	)		(581,304	)
Total reclassification for the period, net of tax		$	(700,307	)	$	(396,306	)

(a) These accumulated other comprehensive income components are included in the computation of net periodic

pension and other benefit plan costs (see Note 10 for additional information).

Details about Accumulated Other Comprehensive Income Components	Three Months Ended September 30,							Affected Line Item  in the Statement Where Net Income is Presented
			2013			2012
Unrealized gains and losses on securities   available for sale:
Realized gains on securities available for sale		$	-		$	597			Net gains on securities transactions
Income tax expense			-			230			Income tax expense
Net of tax			-			367
Amortization of defined pension plan   and other benefit plan items:
Prior service costs (a)			20,786			20,786			Pension and other employee benefits
Actuarial losses (a)			(400,508	)		(335,548	)		Pension and other employee benefits
Income tax benefit			145,672			120,994			Income tax expense
Net of tax			(234,050	)		(193,768	)
Total reclassification for the period, net of tax		$	(234,050	)	$	(193,401	)

(a) These accumulated other comprehensive income components are included in the computation of net periodic

pension and other benefit plan costs (see Note 10 for additional information).

33

NOTE 9                      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.

The Bank is a party in two legal proceedings involving its Wealth Management Group Services. In both

proceedings, the Bank, as trustee pursuant to written trust instruments, has sought judicial settlement of trust

accounts in the New York Surrogate’s Court for Chemung County. Individuals who are beneficiaries under the

trusts have filed formal objections and/or demand letters with the Court in both of these accounting proceedings,

objecting to the final settlement of the trust accounts. The objectants primarily assert that the Bank acted

imprudently by failing to diversify the trusts’ investments and they claim $9.6 million and $24.1 million,

consisting of damages and disallowed trustee’s commissions, plus unspecified legal fees in the respective

proceedings. These proceedings are pending in the Surrogate’s Court and are now in the discovery phase. While

the outcome of litigation is not predictable the Bank believes that the claims are without merit and is vigorously

defending them.  As of September 30, 2013, no amount has been accrued for potential losses related to these

proceedings as a potential loss is not considered probable or reasonably estimable in the opinion of management.

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.

NOTE 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
		2013			2012		2013				2012
Qualified Pension
Service cost, benefits earned during the period	$	1,048,212		$	970,053		$	349,404		$	323,351
Interest cost on projected benefit obligation		1,225,863			1,218,330			408,621			406,110
Expected return on plan assets		(2,181,516	)		(1,990,479	)		(727,172	)		(663,493	)
Amortization of unrecognized transition obligation		-			-			-			-
Amortization of unrecognized prior service cost		10,392			10,392			3,464			3,464
Amortization of unrecognized net loss		1,172,049			991,704			390,683			330,568
Net periodic pension expense	$	1,275,000		$	1,200,000		$	425,000		$	400,000
Supplemental Pension
Service cost, benefits earned during the period	$	30,012		$	26,076		$	10,004		$	8,692
Interest cost on projected benefit obligation		35,924			38,320			11,974			12,773
Expected return on plan assets		-			-			-			-
Amortization of unrecognized prior service cost		-			-			-			-
Amortization of unrecognized net loss		25,725			14,940			8,575			4,980
Net periodic supplemental pension expense	$	91,661		$	79,336			30,553		$	26,445
Postretirement, Medical and Life
Service cost, benefits earned during the period	$	36,106		$	26,250		$	12,045		$	8,750
Interest cost on projected benefit obligation		47,824			54,000			15,955			18,000
Expected return on plan assets		-			-			-			-
Amortization of unrecognized prior service cost		(72,750	)		(72,750	)		(24,250	)		(24,250	)
Amortization of unrecognized net loss		3,820			-			1,250			-
Net periodic postretirement, medical and life expense	$	15,000		$	7,500		$	5,000		$	2,500

34

NOTE 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.

Accounting policies for the segments are the same as those described in Note 1. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table.  Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment.  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.

		Three Months Ended September 30, 2013								Nine Months Ended September 30, 2013
		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	$	11,514,644	$	-	$	2,007		$	11,516,651	$	34,553,827	$	-	$	7,563		$	34,561,390
Provision for loan losses		873,704		-		-			873,704		1,755,188		-		-			1,755,188
Net interest income after provision for loan losses		10,640,940		-		2,007			10,642,947		32,798,639		-		7,563			32,806,202
Other operating income		2,402,021		1,813,113		135,519			4,350,653		6,714,682		5,448,240		684,446			12,847,368
Other operating expenses		10,275,098		1,371,418		166,186			11,812,702		30,137,242		4,174,319		617,402			34,928,963
Income before income tax expense		2,767,863		441,695		(28,660	)		3,180,898		9,376,079		1,273,921		74,607			10,724,607
Income tax expense		860,187		169,788		(28,247	)		1,001,728		2,995,405		489,695		(6,038	)		3,479,062
Segment net income	$	1,907,676	$	271,907	$	(413	)	$	2,179,170	$	6,380,674	$	784,226	$	80,645		$	7,245,545
Segment assets										$	1,334,375,485	$	5,023,415	$	1,691,868		$	1,341,090,768

		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	$	11,788,521	$	-	$	1,517		$	11,790,038	$	35,194,815	$	-		6,611		$	35,201,426
Provision for loan losses		225,000		-		-			225,000		753,897		-		-			753,897
Net interest income after provision for loan losses		11,563,521		-		1,517			11,565,038		34,440,918		-		6,611			34,447,529
Other operating income		2,112,173		1,667,628		212,918			3,992,719		7,303,607		5,170,016		521,647			12,995,270
Other operating expenses		9,887,762		1,277,545		175,154			11,340,461		29,456,209		4,120,082		576,811			34,153,102
Income before income tax expense		3,787,932		390,083		39,281			4,217,296		12,288,316		1,049,934		(48,553	)		13,289,697
Income tax expense (benefit)		1,235,752		149,948		(2,249	)		1,383,451		4,065,505		403,595		(71,821	)		4,397,279
Segment net income	$	2,552,180	$	240,135	$	41,530		$	2,833,845	$	8,222,811	$	646,339	$	23,268		$	8,892,418
Segment assets										$	1,279,106,549	$	5,249,476	$	2,623,832		$	1,286,979,857

35

NOTE 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 2013 and 2012, 7,969 and 10,238 shares, respectively, were re-issued from treasury to fund the

stock component of directors' compensation.  An expense of $185,263 and $156,863 related to this compensation

was recognized during the nine month period ending September 30, 2013 and September 30, 2012, respectively.  

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.

A summary of restricted stock activity from December 31, 2012 to September 30, 2013 is presented below:

	Shares	Weighted–Average Grant Date Fair Value
Nonvested at December 31, 2012	20,009	$	23.84
Granted	-		-
Vested	2,197		22.60
Forfeited or Cancelled	1,797		25.04
Nonvested at September 30, 2013	16,015	$	23.98

As of September 30, 2013, there was $313,272 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 3.60

years.  The total fair value of shares vested during the nine months ended September 30, 2013 was $66,780.

NOTE 13                      PENDING ACQUISITION

On July 10, 2013, the Bank, the wholly-owned banking subsidiary of the Corporation, entered into a Purchase and

Assumption Agreement with Bank of America, National Association (“BOA”) pursuant to which the Bank agreed

to acquire certain assets and assume certain liabilities of six BOA branch offices located in Auburn, Cortland,

Ithaca and Seneca Falls, New York. Subject to the terms of the Purchase Agreement, the Bank will acquire

approximately $261,000,000 in deposits and $1,600,000 in loans, for a purchase price equal to the sum of a

deposit premium of 1.5% based on the 30-day average balances prior to the close of the transaction, the aggregate

net book value of all assets and accrued interest on the loans acquired.  The Bank will not receive any loans that

are past due 30 days or more on the closing date.  The transaction, which has received regulatory approval, is

expected to close in the fourth quarter of 2013.

36

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

The purpose of this review is to present information about the financial condition and results of operations of

Chemung Financial Corporation (the “Corporation”) for the three and nine-month periods ended September 30,

2013 and 2012.  The following discussion and unaudited consolidated interim financial statements and related

notes included in this report should be read in conjunction with our 2012 Annual Report on Form 10-K, which

was filed with the Securities and Exchange Commission on March 15, 2013.  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.

To assist the reader, the Corporation has provided the following list of commonly used acronyms and

abbreviations included in Management’s Discussion and Analysis of Financial Condition and Results of

Operations.

CDO: Collateralized Debt Obligation	OTTI:  Other-than-temporary Impairment
FASB:  Financial Accounting Standards Board	PCI:  Purchased Credit Impaired
FDIC:  Federal Deposit Insurance Corporation	SEC:  Securities and Exchange Commission
FHLB:  Federal Home Loan Bank	TDR:  Troubled Debt Restructurings
GAAP:  U.S. generally accepted accounting principles

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.  All statements regarding,

among other things, the Corporation's expected financial condition and results of operations, 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,"

“believe” 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, including our local, state and national real estate markets

and employment trends, or changes in interest rates, credit risk, difficulties in managing the Corporation’s growth,

competition, changes in law or the regulatory environment, including the Dodd-Frank Wall Street Reform and

Consumer Protection Acts, the Jumpstart Our Business Startups Act, the capital ratios of Basel III, as adopted by the

federal banking authorities, political instability and changes in general business and economic trends or demand for

loans.  Information concerning these and other factors can be found in the Corporation’s periodic filings with the

SEC, including in our 2012 Annual Report on Form 10-K.  These filings are available publicly on the SEC's web site

at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com or upon request from the

Corporate Secretary at (607) 737-3746.  Except as otherwise required by law, the Corporation undertakes no

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

events, or otherwise.

Critical Accounting Policies, Estimates and Risks and Uncertainties

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

difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly

affect the Corporation's financial results under different assumptions and conditions.  The Corporation prepares its

financial statements in conformity with GAAP.  As a result, the Corporation is required to make certain estimates,

judgments and assumptions that it believes are reasonable based upon the information available at that time.

These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the

financial statements and the reported amounts of revenue and expenses during the periods presented.  Actual

results could be different from these estimates.

37

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

policy given the uncertainty in evaluating the level of the allowance required to cover probable incurred credit

losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's

results of operations.  While management's current evaluation of the allowance for loan losses indicates that the

allowance is adequate, under adversely different conditions or assumptions the allowance would need to be

increased.  For example, if historical loan loss experience significantly worsened or if current economic

conditions significantly deteriorated, additional provisions for loan losses would be required to increase the

allowance.  In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-

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

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

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

result, any declines in real estate values have been modest.  While management has concluded that the current

evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly

lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan

losses.

Management also considers the accounting policy relating to 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.  The Corporation uses an 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 the 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.  Assumptions used in the model include expected future default rates and prepayments.  We

assume no recoveries on defaults and treat all interest payment deferrals as defaults.  Additional default

assumptions were made based on credit quality ratios and performance measures of the remaining financial

institutions in the pool, as well as overall default rates based on historical bank debt default rate averages.

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.

38

Financial Condition

Summary

Assets totaled $1.341 billion at September 30, 2013 compared with $1.248 at December 31, 2012, an increase of

$92.9 million, or 7.4%.  The growth was due primarily to increases of $74.1 million, or 8.3%, in total portfolio

loans and $22.4 million, or 9.0%, in investment securities.  The increase in portfolio loans was due to strong

growth of $46.9 million in commercial loans and $33.6 million in consumer loans.

Total liabilities were $1.206 billion at September 30, 2013 compared with $1.117 billion at December 31, 2012,

an increase of $89.2 million, or 8.0%.  The increase was due primarily to increases of $43.7 million in deposits

and $47.9 million in FHLB advances.

Total equity was $134.8 million at September 30, 2013 compared with $131.1 million at December 31, 2012.  The

increase was due primarily to net income of $7.2 million for the nine months ended September 30, 2013, partially

offset by dividends declared of $3.6 million.  The total equity to total assets ratio was 10.05% at September 30,

2013 compared with 10.50% at December 31, 2012.  The tangible equity to tangible assets ratio was 8.25% at

September 30, 2013 compared with 8.53% at December 31, 2012.

The market value of total assets under management or administration in the Corporation’s Wealth Management

Group was $1.829 billion at September 30, 2013 compared with $1.735 billion at December 31, 2012.

On July 12, 2013, the Corporation announced that its banking subsidiary, Chemung Canal Trust Company entered

into an agreement with Bank of America to purchase six branch offices.  See the heading under this Item 2

entitled “Pending Acquisition” for more information.  Included in the acquisition process was management’s

decision to establish a pre-funding strategy based upon receiving $260.9 million in deposits during the fourth

quarter of 2013.  The objective of the strategy was to maximize revenue before and during the funds deployment

into new commercial and consumer loans.  In the short term, funds would be used to purchase investment

securities of varying maturities.  Management started the strategy during the third quarter of 2013 which produced

a $22.4 million increase in investment securities and a $49.1 million increase in short-term FHLB advances.  The

short-term FHLB advances will be paid off upon receipt of the deposits during the fourth quarter of 2013.  The

maturities and cash flows of the securities will be structured to provide funding for the anticipated deployment

into new commercial and consumer loans originated in the near future.

Cash and Cash Equivalents

Total cash and cash equivalents decreased slightly since December 31, 2012, due primarily to a decrease of $8.6

million in interest-bearing deposits in other financial institutions, partially offset by an increase of $8.3 million in

cash and due from financial institutions.

Securities

The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt

securities purchased for the bond portfolio to carry a minimum agency rating of "A".  After a credit analysis is

performed, the policy also allows the Corporation to purchase local municipal obligations that are not rated.  The

Corporation intends to maintain a reasonable level of securities to provide adequate liquidity and in order to have

securities available to pledge to secure public deposits, repurchase agreements and other types of transactions.  

Fluctuations in the fair value of the Corporation’s securities relate primarily to changes in interest rates.

39

Marketable securities are classified as Available for Sale, while investments in local municipal obligations are

generally classified as Held to Maturity.  The composition of the available for sale segment of the securities

portfolio is summarized as follows (in thousands of dollars):

	September 30, 2013						December 31, 2012
Securities Available for Sale	Amortized Cost		Estimated Fair Value		Unrealized Gains (Losses)		Amortized Cost		Estimated Fair Value		Unrealized Gains (Losses)
Obligations of U.S. Government and   U.S Government sponsored enterprises	$	162,812	$	164,630	$	1,818	$	138,041	$	141,591	$	3,550
Mortgage-backed securities, residential		37,567		39,033		1,466		29,592		31,515		1,923
Collateralized mortgage obligations		1,476		1,501		25		3,495		3,543		48
Obligations of states and political   subdivisions		34,173		35,235		1,062		39,175		40,815		1,640
Corporate bonds and notes		7,390		7,484		94		11,412		11,652		240
SBA loan pools		1,513		1,540		27		1,683		1,724		41
Trust preferred securities		2,525		2,552		27		2,519		2,471		(48	)
Corporate stocks		689		7,301		6,612		736		6,375		5,639
Totals	$	248,145	$	259,276	$	11,131	$	226,653	$	239,686	$	13,033

The available for sale segment of the securities portfolio totaled $259.3 million at September 30, 2013, an

increase of $19.6 million, or 8.2%, from $239.7 million at December 31, 2012.  The increase in the securities

portfolio was primarily related to a pre-funding strategy associated with the acquisition of six Bank of America

branches, scheduled to close in the fourth quarter of 2013.  The increase primarily consisted of purchases of $69.9

million, partially offset by sales and calls of $10.5 million, maturities and principal collected of $36.2 million and

a decrease of $1.9 million in unrealized gains.

The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the

Corporation’s market areas.  These securities totaled $6.5 million at September 30, 2013, a net increase of $0.8

million due primarily to the purchase of securities, from December 31, 2012.

Loans

The composition of the loan portfolio, net of deferred origination fees and costs, and unearned income is

summarized as follows (in thousands of dollars):

	September 30, 2013		December 31, 2012
Commercial and agricultural	$	139,893	$	133,851
Commercial mortgages		361,063		320,198
Residential mortgages		194,042		200,475
Consumer loans		272,636		238,993
Total loans, net	$	967,634	$	893,517

Portfolio loans totaled $967.6 million at September 30, 2013, an increase of $74.1 million, or 8.3%, from $893.5

million at December 31, 2012.  The increase in portfolio loans was due to strong growth of $46.9 million, or

10.3%, in commercial loans and $33.6 million in consumer loans.  The growth in commercial loans was due

primarily to an increase in commercial mortgages in the Albany, New York region, of the Corporation’s Capital

Bank division.  The growth in consumer loans was primarily in indirect consumer loans as the Corporation

extended into 2013 its loan program with reduced pricing on high quality indirect auto loans.

Residential mortgage loans totaled $194.0 million at September 30, 2013, a decrease of $6.4 million, or 3.2%,

from December 31, 2012.  In addition, during the nine months ended September 30, 2013, $14.9 million of newly

originated residential mortgages were sold in the secondary market to Federal Home Loan Mortgage Corporation

and $0.6 million in residential mortgages were sold to the State of New York Mortgage Agency.  During the

twelve months ended December 31, 2012, $15.8 million of residential mortgages were sold in the secondary

market.

40

The Corporation anticipates that future growth in portfolio loans will continue to be in commercial mortgages and

indirect consumer loans.

Non-Performing Assets

Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings and other real estate

owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure.

Past due status on all loans is based on the contractual terms of the loan.  It is generally the Corporation's policy

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

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

interest in full is not expected due to deterioration in the financial condition of the borrower.  At the time loans are

placed in non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed.  

All payments received on non-accrual loans are applied to principal.  Loans can be returned to accrual status when

they become current as to principal and interest and remain current for a period of six consecutive months or

when, in the opinion of management, the Corporation expects to receive all of its original principal and interest.  

In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept

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

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

	September 30, 2013		December 31, 2012
Non-accrual loans	$	6,550	$	5,667
Non-accrual troubled debt restructurings		1,093		365
Total non-performing loans	$	7,643	$	6,032
Other real estate owned		564		565
Total non-performing assets	$	8,207	$	6,597

Ratio of non-performing loans to total loans		0.79	%		0.68	%
Ratio of non-performing assets to total assets		0.61	%		0.53	%
Ratio of allowance for loan losses to non-performing loans		155.12	%		172.96	%
Accruing loans past due 90 days or more	$	1,465		$	4,484
Accruing troubled debt restructurings	$	6,153		$	5,364

Non-Performing Loans

The recorded investment in non-performing loans at September 30, 2013 totaled $7.6 million compared to $6.0

million at December 31, 2012, an increase of $1.6 million.  The increase in non-performing loans was due

primarily to an increase of $0.7 million in non-accrual commercial mortgages and $0.7 million in commercial and

industrial loans.  In addition, non-accrual residential mortgages increased $0.3 million while there was a slight

increase in non-accrual consumer loans.

The recorded investment in accruing loans past due 90 days or more totaled $1.5 million at September 30, 2013

compared with $4.5 million at December 31, 2012.  The decrease was due primarily to a $3.0 million reduction in

acquired construction loans not considered by management to be PCI loans, which for a variety of reasons are 90

days or more past their stated maturity dates.  These loans totaled $1.5 million at September 30, 2013.  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.

Not included in non-performing loans at September 30, 2013 are $9.2 million of acquired loans which the

Corporation has identified as PCI loans.  The PCI loans are accounted for under separate accounting guidance,

Accounting Standards Codification (“ASC”) Subtopic 310-30, “Receivables - Loans and Debt Securities

Acquired with Deteriorated Credit Quality” as disclosed in “Note 5 Loans and Allowance for Loan Losses” to the

unaudited interim financial statements.

41

Troubled Debt Restructurings

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that

minimize the potential for loss.  In that regard, the Corporation modified the terms of select loans to maximize

their collectability.  The modified loans are considered TDRs under current accounting guidance.  Modifications

generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment

amounts, interest rates or principal of the loan, and forgiveness of accrued interest.  As of September 30, 2013, the

Corporation had $1.1 million of non-accrual TDRs compared with $0.4 million as of December 31, 2012.  As of

September 30, 2013, the Corporation had $6.2 million of accruing TDRs compared with $5.4 million as of

December 31, 2012.  The increase in total TDRs was due primarily to restructuring the loans of four commercial

borrowers that experienced financial difficulties during the second quarter of 2013.

Impaired Loans

Impaired loans at September 30, 2013 totaled $11.9 million, including performing TDRs of $6.2 million,

compared to $12.7 million, including performing TDRs of $5.4 million, at December 31, 2012.  The decrease in

impaired loans was due primarily to a decrease of $1.6 million in commercial mortgages, partially offset by an

increase of $0.7 million in commercial and industrial loans.  Included in the impaired loan total at September 30,

2013 are loans totaling $2.7 million for which impairment allowances of $1.1 million have been specifically

allocated to the allowance for loan losses.  Included in the impaired loan total at December 31, 2012, are loans

totaling $0.8 million for which impairment allowances of $0.2 million have been specifically allocated to the

allowance for loan losses.  Not included in the impaired loan totals are acquired loans identified as PCI loans.

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

evaluations.  It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans

secured by real estate at the time a loan is determined to be impaired.  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.  In determining the amount of any specific allocation or charge-off, the

Corporation will make adjustments to reflect the estimated costs to sell the property.  Upon receipt and review of

the updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to

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

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

charge-offs.  Real estate values in the Corporation's market area had not increased dramatically in the prior

several years and, as a result, declines in real estate values have been modest.  Non-real estate collateral may be

valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii)

aging reports, that may be adjusted based on management’s knowledge of the client and client’s business.  If

market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.

42

Allowance for Loan Losses

The allowance is an amount that management believes will be adequate to absorb probable incurred losses on

existing loans.  The allowance for loan losses is increased through a provision for loan losses charged to

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

collectability of all or a portion of the principal is unlikely.  Management's evaluation of the adequacy of the

allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the credit

risk grade assigned to the loan, historical loan loss experience (general component) and review of specific

impaired loans (including evaluations of the underlying collateral and expected cash flows).  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 the borrower's ability to repay their

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. Factors considered by management in

determining impairment include payment status, collateral value, and the probability of collecting scheduled

principal and interest payments when due. Loans that experience insignificant payment delays and payment

shortfalls generally are not classified as impaired. Management determines the significance of payment delays and

payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan

and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment

record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be

impaired and is placed on nonaccrual status, all future payments received are applied to principal.

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.  Troubled debt restructurings are impaired loans.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current

factors.  Loans not impaired but classified as substandard and special mention use a historical loss factor on a

rolling five year history of net losses.  For all other unclassified loans, the historical loss experience is determined

by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two

years.  This actual loss experience is supplemented with other economic factors based on the risks present for

each portfolio class.  These economic factors include consideration of the following: (1) lending policies and

procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and

local economic and business conditions and developments, including the condition of various market segments,

(3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and

staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans and troubled debt

restructurings, (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board

of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend

of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of

such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements,

on the level of estimated credit losses in the Bank’s current portfolio and (10) impact of the global economy.

43

The allowance for loan losses was $11.9 million at September 30, 2013, up from $10.4 million at December 31,

2012.  The ratio of allowance for loan losses to total loans was 1.23% at September 30, 2013, up from 1.17% at

December 31, 2012.  The increase in the allowance for loan losses was due primarily to loan portfolio growth,

including allowances for this growth after consideration of the factors discussed above and higher net charge-offs.  

Net charge-offs for the nine months ended September 30, 2013 were $0.3 million compared with net recoveries of

$0.3 million for the prior year.  The increase in net charge-offs was primarily in the consumer loan portfolio.

The following table summarizes the activity in the allowance for loan losses for the nine months ended September

30, 2013 and 2012 (in thousands of dollars, except ratio data):

	Nine Months Ended
		September 30, 2013			September 30, 2012
Balance at beginning of period	$	10,433		$	9,659
Reclassification of acquired loan discount		-			124
Charge-offs:
Commercial and agricultural		186			6
Commercial mortgages		44			88
Residential mortgages		54			83
Consumer loans		909			343
Total charge-offs		1,193			520
Recoveries:
Commercial and agricultural		454			592
Commercial mortgages		53			43
Residential mortgages		65			-
Consumer loans		289			176
Total  recoveries		861			811
Net charge-offs (recoveries)		332			(291	)
Provision charged to operations		1,755			754
Balance at end of period	$	11,856		$	10,828
Ratio of net charge-offs (recoveries) to    average loans outstanding		0.05	%		(0.05)	%
Ratio of allowance for loan losses to    total loans outstanding		1.23	%		1.24	%

44

Deposits

A summary of deposits at September 30, 2013 and December 31, 2012 is as follows (in thousands of dollars):

	September 30, 2013		December 31, 2012		Dollar Change			Percent Change
Non-interest-bearing demand deposits	$	297,053	$	300,610	$	(3,557	)		(1.18	)%
Interest-bearing demand deposits		96,191		90,730		5,461			6.02	%
Insured money market accounts		289,459		243,115		46,344			19.06	%
Savings deposits		183,804		173,589		10,215			5.88	%
Time deposits		221,938		236,690		(14,752	)		(6.23	)%
Total	$	1,088,445	$	1,044,734	$	43,711			4.18	%

The growth in deposits is a result of the Corporation’s deposit strategy, which is to fund the Bank with stable,

low-cost deposits, primarily checking account deposits and other low interest-bearing deposit accounts.  A

checking account is the driver of a banking relationship and consumers consider the bank where they have their

checking account as their primary bank.  These customers will typically turn to their primary bank first when in

need of other financial services.  Strategies that have been developed and implemented to generate these deposits

include: (i) acquire deposits by entering new markets through de novo branching, (ii) an annual checking account

marketing campaign, (iii) training branch employees to identify and meet client financial needs with Bank

products and services, (iv) link business and consumer loans to primary checking account at the Bank, (v)

aggressively promote direct deposit of client’s payroll checks or benefit checks and (vi) constantly monitor the

Corporation’s pricing strategies to ensure competitive products and services.

Sorted by public, commercial and consumer sources, the $43.7 million growth in deposits was due to an increase

of $49.7 million in public funds, partially offset by decreases of $3.5 million in commercial deposits and $2.5

million in consumer deposits.  The growth in public funds was due primarily to increases of $29.8 million in

insured money market accounts and $11.9 million in interest-bearing demand deposits.  The Corporation had

anticipated a decline in time deposits since its strategy was to focus on core checking accounts.

The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates that it

will continue using brokered deposits as a secondary source of funding to support growth.  The Corporation’s use

of brokered deposits as part of its funding strategy complies with the FDIC’s guidance and regulations on the use

of brokered deposits by insured banks.  Brokered deposits include funds obtained through brokers, and the Bank’s

participation in the Certificate of Deposit Account Registry Service (“CDARS”) program and Insured Cash

Sweep (“ICS”) service.  The CDARS and ICS programs both involve a network of financial institutions that

exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the

single institution limit.  Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis,

so that the equivalent of an original deposit comes back to the originating institution.

In the summary of deposits table above, ICS funds were included in insured money market accounts.  Funds

obtained through brokers or CDARS were included in time deposits.  Deposits obtained through brokers

were $6.0 million as of September 30, 2013 compared with $8.8 million as of December 31, 2012.  Deposits obtained

through CDARS and ICS were $9.3 million and $17.1 million, respectively, as of September 30, 2013.  Deposits

obtained through CDARS were $8.1 million as of December 31, 2012.

Borrowings

Both FHLB term advances and securities sold under agreements to repurchase decreased $1.2 million and $2.2

million, respectively, during the nine months ended September 30, 2013.  The increase of $49.1 million in FHLB

overnight advances was related to a pre-funding strategy associated with the acquisition of six Bank of America

branches, scheduled to close in the fourth quarter of 2013.  The overnight FHLB advances will be paid off after

the acquisition is closed.

45

Shareholders’ Equity

Total shareholders’ equity was $134.8 million at September 30, 2013 compared with $131.1 million at December

31, 2012.  The increase was due primarily to $7.2 million in net income for 2013, partially offset by dividends

declared of $3.6 million.  The total shareholders’ equity to total assets ratio was 10.05% at September 30, 2013

compared with 10.50% at December 31, 2012.  The tangible equity to tangible assets ratio was 8.25% at

September 30, 2013 compared with 8.53% at December 31, 2012.  Book value per share increased to $28.93

at September 30, 2013 from $28.20 at December 31, 2012.

The Corporation and the Bank are subject to capital adequacy guidelines of the Federal Reserve and establish a

framework for the classification of financial holding companies and financial institutions into five categories:  

well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically

undercapitalized.  As of September 30, 2013, both the Corporation’s and the Bank’s capital ratios were in excess

of those required to be considered well-capitalized under regulatory capital guidelines.

Results of Operations

Comparison of Nine Months Ended September 30, 2013 and 2012

Net Income

Net income for the nine months ended September 30, 2013 was $7.2 million, a decrease of $1.7 million, or

18.5%, compared with $8.9 million for the nine months ended September 30, 2012.  Earnings per share for the

nine months ended September 30, 2013 was $1.56, compared with $1.92 for the nine months ended September

30, 2012.  Return on average assets and return on average equity for nine months ended September 30, 2013 were

0.76% and 7.25%, respectively, compared with 0.95% and 9.12%, respectively, for the same period in the prior

year.

The decline in 2013 earnings was due primarily to a decrease of $0.6 million in net interest income and reductions

of $0.3 million in net gain on securities transactions and $0.8 million in pre-tax casualty gains from insurance

reimbursements.  In addition, the provision for loan losses increased $1.0 million and non-interest expense

increased $0.8 million.  These items were partially offset by an increase of $0.9 million in the remaining non-

interest income categories and a reduction of $0.9 million in income taxes.

Net Interest Income

Net interest income, which is the difference between income received on interest-earning assets, such as loans and

securities, and interest paid on interest-bearing liabilities, such as deposits and borrowings, is the largest

contributor to earnings.

Net interest income for the nine months ended September 30, 2013 totaled $34.6 million, a decrease of $0.6

million, or 1.8%, compared with $35.2 million for the same period in the prior year.  Net interest margin was

3.93% for the nine months ended September 30, 2013 compared with 4.10% for the same period in the prior year.  

The decline in net interest income was primarily due to a 31 basis point decrease in yield on interest-earning

assets, partially offset by a 17 basis point decline in the cost of funds and an increase of $30.6 million in average

earning assets.  The decline in net interest margin was due primarily to yields on interest-earning assets

decreasing as a faster rate than the cost of interest-bearing liabilities.  The decrease in yield on interest-earning

assets was attributable to a 66 basis point decrease in yield on loans, a result of loans continuing to reprice at

current historically low market rates.

46

Average Consolidated Balance Sheet and Interest Analysis

The following table sets forth certain information related to the Corporation’s average consolidated balance sheets

and its consolidated statements of income for the nine month periods ended September 30, 2013 and 2012.  The

table also reflects the average yield on assets and average cost of liabilities for the nine month periods ended

September 30, 2013 and 2012.  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.

(in thousands of dollars)	Nine Months Ended September 30, 2013								Nine Months Ended September 30, 2012
Assets	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Earning assets:
Loans	$	929,906		$	33,605		4.83	%	$	829,396		$	34,078		5.49	%
Taxable securities		193,016			3,120		2.16	%		219,985			4,142		2.52	%
Tax-exempt securities		43,101			845		2.62	%		49,796			977		2.62	%
Interest-bearing deposits		10,873			21		0.25	%		47,075			123		0.35	%
Total earning assets		1,176,896			37,591		4.27	%		1,146,252			39,320		4.58	%
Non-earning assets:
Cash and due from banks		23,291								23,967
Premises and equipment, net		25,144								24,762
Other assets		46,918								51,815
Allowance for loan losses		(10,924	)							(10,262	)
AFS valuation allowance		11,881								13,698
Total	$	1,273,206							$	1,250,232
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	95,218			70		0.10	%	$	88,005			70		0.11	%
Savings and insured money   market deposits		446,094			613		0.18	%		409,081			622		0.20	%
Time deposits		229,362			1,108		0.65	%		261,549			1,795		0.92	%
Federal Home Loan Bank   advances and securities sold     under agreements repurchase		61,690			1,239		2.68	%		73,944			1,631		2.95	%
Total interest-bearing liabilities		832,364			3,030		0.49	%		832,579			4,118		0.66	%
Non-interest-bearing liabilities:
Demand deposits		296,089								278,473
Other liabilities		11,039								8,962
Total liabilities		1,139,492								1,120,014
Shareholders' equity		133,714								130,218
Total	$	1,273,206							$	1,250,232
Net interest income				$	34,561							$	35,202
Net interest rate spread(1)							3.78	%							3.92	%
Net interest margin(2)							3.93	%							4.10	%

(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 income divided by average earning assets

47

Changes Due to Volume and Rate

Net interest income can be analyzed in terms of the impact of changes in rates and volumes.  The following table

illustrates the extent to which changes in interest rates and in the volume of average interest-earning assets and

interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the periods

indicated.  Information is provided in each category with respect to (i) changes attributable to changes in volume

(changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates

multiplied by prior volume); and (iii) the net changes.  For purposes of this table, changes that are not due solely

to volume or rate changes have been allocated to these categories based on the respective percentage changes in

average volume and rate.  Due to the numerous simultaneous volume and rate changes during the periods

analyzed, it is not possible to precisely allocate changes between volume and rates.  In addition, average earning

assets include non-accrual loans and no tax equivalent adjustments were made.

	Nine Months Ended                 September 30, 2013 vs. 2012
			Increase/(Decrease)
(in thousands of dollars)	Total Change			Due to Volume			Due to Rate
Interest and dividends earned on:
Loans	$	(473	)		3,862			(4,335	)
Taxable investment securities		(1,022	)		(476	)		(546	)
Tax-exempt investment securities		(132	)		(132	)		-
Interest-bearing deposits		(102	)		(75	)		(27	)
Total earning assets	$	(1,729	)	$	3,179		$	(4,908	)
Interest paid on:
Interest-bearing demand deposits	$	-		$	6		$	(6	)
Savings and insured money market deposits		(9	)		53			(62	)
Time deposits		(687	)		(202	)		(485	)
FHLB advances and securities sold under   agreements to repurchase		(392	)		(255	)		(137	)
Total interest-bearing liabilities	$	(1,088	)	$	(398	)	$	(690	)
Net interest income	$	(641	)	$	3,577		$	(4,218	)

Provision for Loan Losses

The provision for loan losses for the nine months ended September 30, 2013 totaled $1.8 million compared with

$0.8 million for the nine months ended September 30, 2012.  The increase in the provision for loan losses was due

primarily to one commercial and industrial loan, loan portfolio growth and higher net charge-offs.

Non-Interest Income

Non-interest income for the nine months ended September 30, 2013 totaled $12.8 million, a decrease of $0.2

million, or 1.1%, compared with $13.0 million for the same period in the prior year.  The decline was due

primarily to reductions of $0.8 million in casualty gains from insurance reimbursements and $0.3 million in net

gain on securities transactions.  These items were partially offset by increases $0.3 million in Wealth

Management Group fee income, $0.2 million in service charges on deposit accounts and $0.2 million in net gain

on sales of loans held for sale.

48

Non-Interest Expense

Non-interest expense for the nine months ended September 30, 2013 totaled $34.9 million, an increase of $0.7

million, or 2.3%, compared with $34.2 million for the same period in the prior year.  The increase was due

primarily to increases of $0.4 million in salaries and wages, $0.2 million in acquisition expenses and $0.2 million

in data processing costs.  These items were primarily offset by decreases of $0.1 million in other real estate owned

expenses and $0.1 million in amortization of intangible assets.  The increase in salaries and wages was due

primarily to compensation related to merit increases and incentive plans.

Income Taxes

Income tax expense for the nine months ended September 30, 2013 totaled $3.5 million, a decrease of $0.9

million, compared with $4.4 million for the same period in the prior year.  Income tax expense reflects an

effective tax rate of 32.4% for the nine months ended September 30, 2013 compared with 33.1% for the same

period in the prior year.  The decrease in the effective tax rate was due primarily to an increase in the relative

percentage of tax exempt income to pre-tax income.

Comparison of Three Months Ended September 30, 2013 and 2012

Net Income

Net income for the three months ended September 30, 2013 was $2.2 million, a decrease of $0.6 million, or

23.1%, compared with $2.8 million for the three months ended September 30, 2012.  Earnings per share for the

three months ended September 30, 2013 was $0.47 compared with $0.61 for the three months ended September

30, 2012.  Return on average assets and return on average equity for the three months ended September 30, 2013

were 0.67% and 6.45%, respectively, compared with 0.89% and 7.92%, respectively, for the same period in the

prior year.

The decrease in net income for the three months ended September 30, 2013 was due primarily to a decline of $0.3

million in net interest income and increases of $0.6 million in the provision for loan losses and $0.5 million in

non-interest expense.  These items were partially offset by an increase of $0.4 million in non-interest income and

a reduction of $0.4 million in income taxes.

Net Interest Income

Net interest income for the three months ended September 30, 2013 totaled $11.5 million, a decrease of $0.3

million, or 2.3%, compared with $11.8 million for the same period in the prior year.  Net interest margin was

3.84% for the three months ended September 30, 2013 compared with 4.04% for the same period in the prior year.  

The decline in net interest income was due primarily to a 29 basis point decrease in the yield on interest-earning

assets, partially offset by a 12 basis point decline in the cost of funds and an increase of $29.5 million in average

earning assets.  The decline in net interest margin was primarily due to yields on interest-earning assets

decreasing at a faster rate than the cost of interest-bearing liabilities.  The decrease in yield on interest-earning

assets was attributable to a 52 basis point decrease in yield on loans, a result of loans continuing to reprice at

current historically low market rates.

49

Average Consolidated Balance Sheet and Interest Analysis

The following table sets forth certain information related to the Corporation’s average consolidated balance sheets

and its consolidated statements of income for the three month periods ended September 30, 2013 and 2012.  The

table also reflects the average yield on assets and average cost of liabilities for the three month periods ended

September 30, 2013 and 2012.  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.

Average Consolidated Balance Sheet and Interest Analysis (continued)

(in thousands of dollars)	Three Months Ended September 30, 2013								Three Months Ended September 30, 2012
Assets	Average Balance			Interest		Yield/ Rate			Average Balance			Interest		Yield/ Rate
Earning assets:
Loans	$	950,657		$	11,245		4.69	%	$	867,972		$	11,374		5.21	%
Taxable securities		195,337			1,003		2.04	%		208,000			1,306		2.50	%
Tax-exempt securities		39,470			258		2.60	%		46,811			300		2.55	%
Interest-bearing deposits		4,514			3		0.25	%		37,696			35		0.36	%
Total earning assets		1,189,978			12,509		4.17	%		1,160,479			13,015		4.46	%
Non-earning assets:
Cash and due from banks		23,512								24,823
Premises and equipment, net		25,006								24,585
Other assets		46,465								49,482
Allowance for loan losses		(11,300	)							(10,534	)
AFS valuation allowance		9,916								13,813
Total	$	1,283,577							$	1,262,648
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Interest-bearing demand deposits	$	88,854			22		0.10	%	$	92,703			25		0.11	%
Savings and insured money   market deposits		455,818			205		0.18	%		415,368			207		0.20	%
Time deposits		226,278			345		0.61	%		252,826			528		0.83	%
Federal Home Loan Bank   advances and securities sold     under agreements repurchase		66,889			420		2.50	%		65,039			465		2.85	%
Total interest-bearing liabilities		837,839			992		0.47	%		825,936			1,225		0.59	%
Non-interest-bearing liabilities:
Demand deposits		299,603								294,612
Other liabilities		12,180								9,914
Total liabilities		1,149,622								1,130,462
Shareholders' equity		133,955								132,186
Total	$	1,283,577							$	1,262,648
Net interest income				$	11,517							$	11,790
Net interest rate spread(1)							3.70	%							3.87	%
Net interest margin(2)							3.84	%							4.04	%

(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 income divided by average earning assets

50

Changes Due to Volume and Rate

Net interest income can be analyzed in terms of the impact of changes in rates and volumes.  The following table

illustrates the extent to which changes in interest rates and in the volume of average interest-earning assets and

interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three

month periods ended September 30, 2013 and September 30, 2012.  Information is provided in each category with

respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes

attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes.  For

purposes of this table, changes that are not due solely to volume or rate changes have been allocated to these

categories based on the respective percentage changes in average volume and rate.  Due to the numerous

simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes

between volume and rates.  In addition, average earning assets include non-accrual loans and no tax equivalent

adjustments were made.

	Three Months Ended September 30, 2013 vs. 2012
	Increase/(Decrease)
(in thousands of dollars)		Total Change			Due to Volume			Due to Rate
Interest and dividends earned on:
Loans		$	(129	)	$	1,048		$	(1,177	)
Taxable investment securities			(303	)		(75	)		(228	)
Tax-exempt investment securities			(42	)		(47	)		5
Interest-bearing deposits			(32	)		(24	)		(8	)
Total earning assets		$	(506	)	$	902		$	(1,408	)
Interest paid on:
Interest-bearing demand deposits		$	(3	)	$	(1	)	$	(2	)
Savings and insured money market deposits			(2	)		19			(21	)
Time Deposits			(183	)		(51	)		(132	)
FHLB advances and securities sold under   agreements to repurchase			(45	)		13			(58	)
Total interest-bearing liabilities		$	(233	)	$	(20	)	$	(213	)
Net interest income		$	(273	)	$	922		$	(1,195	)

Provision for Loan Losses

The provision for loan losses for the three months ended September 30, 2013 totaled $0.9 million compared with

$0.2 million for the three months ended September 30, 2012.  The increase in the provision for loan losses was

due primarily to one commercial and industrial loan, loan portfolio growth and higher net charge-offs.

Non-Interest Income

Non-interest income for the three months ended September 30, 2013 totaled $4.4 million, an increase of $0.4

million, or 9.0%, compared with $4.0 million for the same period in the prior year.  The increase was due

primarily to increases of $0.1 million in Wealth Management fee income, $0.1 million in service charges on

deposit accounts and $0.1 million in net gain on sales of other real estate owned.

Non-Interest Expense

Non-interest expense for the three months ended September 30, 2013 totaled $11.8 million, an increase of $0.5

million, or 4.2%, compared with $11.3 million for the same period in the prior year.  The decrease was due

primarily to increases of $0.2 million in data processing costs and $0.2 million in acquisition expenses.

51

Income Taxes

Income tax expense for the three months ended September 30, 2013 totaled $1.0 million, a decrease of $0.4

million, compared with $1.4 million for the same period in the prior year.  Income tax expense reflects an

effective tax rate of 31.5% for the three months ended September 30, 2013 compared with 32.8% for the same

period in the prior year.  The decrease in the effective tax rate was due primarily to an increase in the relative

percentage of tax exempt income to pre-tax income.

Liquidity and Capital Resources

Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and

the operating, investing, and financing activities of the Corporation.  The Corporation uses a variety of resources

to meet its liquidity needs.  These include short term investments, cash flow from lending and investing activities,

core deposit growth and non-core funding sources, such as time deposits of $100,000 or more, securities sold

under agreements to repurchase and other borrowings.

The Corporation is a member of the FHLB, which allows it to access borrowings that 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 $53.9 million and $104.5 million at September 30, 2013 and

December 31, 2012, respectively.  The Corporation also had a total of $28.0 million of unsecured lines of credit

with four different financial institutions, all of which was available at September 30, 2013 and December 31,

2012.

During the nine months ended September 30, 2013, cash and cash equivalents decreased slightly.  The major uses

of cash included purchases of securities totaling $76.1 million and a net increase of $74.1 million in loans.  These

items were partially offset by proceeds from sales, maturities, calls and principal reductions on securities totaling

$52.1 million, net increases of $47.9 million in borrowings and $43.7 million in deposits, and $14.9 million

provided by operating activities.

As of September 30, 2013, the Bank’s Tier I leverage ratio, Tier I and total risk-based capital ratios were 8.57%,

10.71% and 12.19%, respectively.  All of the ratios were in excess of those required to be considered well-

capitalized under regulatory capital standards.

During the nine months ended September 30, 2013, the Corporation declared cash dividends totaling $0.78 per

share compared with $0.75 per share for the same period in the prior year.

Interest Rate Risk

Management considers interest rate risk to be the most significant market risk for the Corporation.  Market risk is

the risk of loss from adverse changes in market prices and rates.  Interest rate risk is the exposure to adverse

changes in the net income of the Corporation as a result of changes in interest rates.

The Corporation’s primary earnings source is net interest income, which is affected by changes in the level of

interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the

level and composition of deposits and liabilities, and credit quality of earning assets.

52

The Corporation’s objectives in its asset and liability management are to maintain a strong, stable net interest

margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce

vulnerability of its operations to changes in interest rates.  The Corporation's Asset/Liability Committee

(“ALCO”) has the strategic responsibility for setting the policy guidelines on acceptable exposure to interest rate

risk.  These guidelines contain specific measures and limits regarding the risks, which are monitored on a regular

basis.  The ALCO is made up of the president and chief executive officer, the chief financial officer, the asset

liability management officer, and other officers representing key functions.

Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates.  It is the

assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution.

For that reason, the ALCO has established tolerance limits based upon a 200-basis point change in interest rates.  

At September 30, 2013, it is estimated that an immediate 200-basis point decrease in interest rates would

negatively impact the next 12 months net interest income by 9.36% and an immediate 200-basis point increase

would negatively impact the next 12 months net interest income by 10.33%.  Both are within the Corporation's

policy guideline of 15%.  Given the overall low level of current interest rates and the unlikely event of a 200-basis

point decline from this point, management additionally modeled an immediate 100-basis point decline and an

immediate 300-basis point increase in interest rates.  When applied, it is estimated these scenarios would result in

negative impacts to net interest income of 4.10% and 15.44%, respectively.

A related component of interest rate risk is the expectation that the market value of the Corporation’s capital

account will fluctuate with changes in interest rates.  This component is a direct corollary to the earnings-impact

component: an institution exposed to earnings erosion is also exposed to shrinkage in market value.  At

September 30, 2013, it is estimated that an immediate 200-basis point decrease in interest rates would negatively

impact the market value of the Corporation’s capital account by 4.80% and an immediate 200-basis point increase

in interest rates would negatively impact the market value by 6.01%.  Both are within the Corporation’s policy

guideline of 15%.  Management also modeled the impact to the market value of the Corporation’s capital with an

immediate 100-basis point decline and an immediate 300-basis point increase in interest rates, based on the

current interest rate environment.  When applied, it is estimated these scenarios would result in negative impacts

to the market value of the Corporation’s capital of 2.79% and 9.44%, respectively.  Both are within the

Corporation's policy guideline of 15%.

Management does recognize the need for certain hedging strategies during periods of anticipated higher

fluctuations in interest rates and the Funds Management Policy provides for limited use of certain derivatives

in asset liability management. These strategies were not employed during the nine months ended September 30,

2013.

Pending Acquisition

On July 10, 2013, the Bank, the wholly-owned banking subsidiary of the Corporation entered into a Purchase and

Assumption Agreement with Bank of America, National Association (“BOA”) pursuant to which the Bank agreed

to acquire certain assets and assume certain liabilities of six BOA branch offices located in Auburn, Cortland,

Ithaca and Seneca Falls, New York. Subject to the terms of the Purchase Agreement, the Bank will acquire

approximately $261.0 million in deposits and $1.6 million in loans, for a purchase price equal to the sum of a

deposit premium of 1.5% based on the 30-day average balances prior to the close of the transaction, the aggregate

net book value of all assets and accrued interest on the loans acquired.  The Bank will not receive any loans that

are past due 30 days or more on the closing date.  The deposits acquired will initially be used to fund the purchase

of investment securities of varying maturities.  The maturities and cash flows of these securities will be structured

to provide funding for the anticipated deployment into new commercial and consumer loans originated in the near

future.  The transaction will close in the fourth quarter of 2013.  Additional information concerning this

transaction was included in the Corporation’s Current Report on Form 8-K filed with the SEC on July 12, 2013.

53

ITEM 3:                      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Information required by this Item is set forth herein in Management's Discussion and Analysis of Financial

Condition and Results of Operations under the heading "Interest Rate Risk."

ITEM 4:                      CONTROLS AND PROCEDURES

The Corporation's management, with the participation of our President and Chief Executive Officer, who is the

Corporation's principal executive officer, and our Chief Financial Officer and Treasurer, who is the Corporation's

principal financial officer, has evaluated the effectiveness of the Corporation's disclosure controls and procedures

as of September 30, 2013 pursuant to Rule 13a-15 of the Securities Exchange Act of 1934, as amended.  Based

upon that evaluation, the principal executive officer and principal financial officer have concluded that the

Corporation's disclosure controls and procedures are effective as of September 30, 2013.  In addition, there have

been no changes in the Corporation’s internal control over financial reporting during the most recent fiscal quarter

that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over

financial reporting.

PART II.	OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS
	For information related to this item, please see Note 9 to the Corporation’s financial statements included herein.
ITEM 1A.	RISK FACTORS
	There have been no material changes in the risk factors set forth in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2012, filed with the Securities and Exchange Commission on March 15, 2013.
ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds
(c)	Issuer Purchases of Equity Securities (1)
Period		Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly announced plans or programs		Maximum number of shares that may yet be purchased under the plans or programs
7/1/13-7/30/13			-	$	-		-		121,906
8/1/13-8/31/13			-	$	-		-		121,906
9/1/13-9/30/13			-	$	-		-		121,906
Quarter ended 9/30/13			-	$	-		-		121,906
(1) On December 19, 2012, the Corporation’s Board of Directors approved a stock repurchase plan authorizing the purchase of up to 125,000 shares of the Corporation's outstanding common stock.  This plan replaces the plan approved on November 2009, which expired in November 2012.  Purchases may be made from time to time on the open-market or in private negotiated transactions and will be at the discretion of management.  As of September 30, 2013, a total of 3,094 shares had been purchased under this plan.

54

ITEM 6.	EXHIBITS
	The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888.
	3.1  Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984.  (Filed as Exhibit 3.1 to Registrant’s Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference).
	3.2  Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988.  (Filed as Exhibit 3.2 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference).
	3.3  Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998.  (Filed as Exhibit 3.4 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated herein by reference).
	3.4  Amended and Restated Bylaws of the Registrant, as amended to May 16, 2012. (Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 18, 2012 and incorporated herein by reference).
	31.1  Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
	31.2  Certification of Chief Financial Officer and Treasurer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
	32.1  Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*
	32.2  Certification of Chief Financial Officer and Treasurer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*
	101.INS  Instance Document*
	101.SCH  XBRL Taxonomy Schema*
	101.CAL  XBRL Taxonomy Calculation Linkbase*
	101.DEF  XBRL Taxonomy Definition Linkbase*
	101.LAB  XBRL Taxonomy Label Linkbase*
	101.PRE  XBRL Taxonomy Presentation Linkbase*
*	Filed herewith.

55

SIGNATURES

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

CHEMUNG FINANCIAL CORPORATION

DATED:  November 7, 2013	By:  /s/ Ronald M. Bentley
	Ronald M. Bentley, President and Chief Executive Officer (Principal Executive Officer)

DATED:   November 7, 2013	By:  /s/ Karl F. Krebs
	Karl F. Krebs, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

56

EXHIBIT INDEX

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

3.1  Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984.  (Filed as Exhibit 3.1 to Registrant’s Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference).

3.2  Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988.  (Filed as Exhibit 3.2 to Registrant's Form 10-K filed with the SEC on March 13, 2008 and incorporated herein by reference).

3.3  Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998.  (Filed as Exhibit 3.4 of the Registrant's Form 10-K for the year ended December 31, 2005 and incorporated herein by reference).

3.4  Amended and Restated Bylaws of the Registrant, as amended to May 16, 2012. (Filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on May 18, 2012 and incorporated herein by reference).

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

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

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

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

101.INS  Instance Document*

101.SCH  XBRL Taxonomy Schema*

101.CAL  XBRL Taxonomy Calculation Linkbase*

101.DEF  XBRL Taxonomy Definition Linkbase*

101.LAB  XBRL Taxonomy Label Linkbase*

101.PRE  XBRL Taxonomy Presentation Linkbase*