PENSION PLAN AND OTHER BENEFIT PLANS

Pension Plan

The Corporation has a noncontributory defined benefit pension plan covering a majority of employees. The plan's defined benefit formula generally based payments to retired employees upon their length of service multiplied by a percentage of the average monthly pay over the last five years of employment.

New employees hired on or after the July 10, 2010 were not eligible to participate in the plan, however, existing participants at that time continued to accrue benefits. On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-based and service-based component of the formula used to determine retirement benefits in the pension plan were frozen so that participants will no longer earn further retirement benefits. During the fourth quarter of 2018, the Corporation offered terminated, vested employees the option to receive lump sum settlement payments. A payout to participants of $3.3 million during the year ended December 31, 2018 is reflected in the projected benefit obligation and fair value of assets tables presented below. A settlement charge of $828 thousand has been recognized during the year ended December 31, 2018 in order to accelerate the recognition of a portion of the plan's unrecognized net loss.

The Corporation uses a December 31 measurement date for its pension plan.

The following table presents (1) changes in the plan's projected benefit obligation and plan assets, and (2) the plan's funded status at December 31, 2018 and 2017 (in thousands):



Change in projected benefit obligation:	2018			2017
Benefit obligation at beginning of year	$	42,240		$	39,791
Service cost	—			—
Interest cost	1,551			1,646
Actuarial (gain) loss	(2,491		)	2,634
Curtailments	—			—
Settlements	(3,288		)	—
Benefits paid	(1,990		)	(1,831		)
Benefit obligation at end of year	$	36,022		$	42,240



Change in plan assets:	2018			2017
Fair value of plan assets at beginning of year	$	46,672		$	41,560
Actual return on plan assets	82			6,943
Employer contributions	—			—
Settlements	(3,288		)	—
Benefits paid	(1,990		)	(1,831		)
Fair value of plan assets at end of year	$	41,476		$	46,672

Funded status	$	5,454		$	4,432

Amount recognized in accumulated other comprehensive income (loss) at December 31, 2018 and 2017 consist of the following (in thousands):



	2018		2017
Net actuarial loss	$	9,075	$	9,356
Prior service cost	—		—
Total before tax effects	$	9,075	$	9,356

The accumulated benefit obligation at December 31, 2018 and 2017 was $36.0 million and $42.2 million, respectively.

The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2018, 2017 and 2016 were as follows:



	2018		2017		2016
Discount rate	4.35	%	3.74	%	4.16	%
Assumed rate of future compensation increase	N/A		N/A		N/A

Components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) in 2018, 2017 and 2016 consist of the following (in thousands):



Net periodic benefit cost	2018			2017			2016
Service cost, benefits earned during the year	$	—		$	—		$	1,047
Interest cost on projected benefit obligation	1,551			1,646			1,883
Expected return on plan assets	(3,309		)	(3,144		)	(3,019		)
Amortization of net loss	188			267			1,549
Amortization of prior service cost	—			—			7
Recognized (gain) loss due to settlements	828			—			—
Net periodic cost (benefit)	$	(742	)	$	(1,231	)	$	1,467



Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):	2018			2017			2016
Net actuarial (gain) loss	$	736		$	(1,165	)	$	(5,526	)
Recognized loss	(1,016		)	(267		)	(1,549		)
Amortization of prior service cost	—			—			(7		)
Total recognized in other comprehensive income (loss) (before tax effect)	$	(280	)	$	(1,432	)	$	(7,082	)

Total recognized in net (benefit) cost and other comprehensive income (loss) (before tax effect)	$	(1,022	)	$	(2,663	)	$	(5,615	)

During 2018, the plan's total unrecognized net loss decreased by $0.3 million. Because the total unrecognized net gain or loss in the plan exceeds 10% of the projected benefit obligation or 10% of the plan assets, and the plan is frozen, the excess will be amortized over the average future life expectancy of all plan participants. Prior to the plan freeze on December 31, 2016, the excess had been amortized over the average future working lifetime of all plan participants. As of January 1, 2018, the average expected future life expectancy of all participants which was 26.38 years. Actual results for 2019 will depend on the 2019 actuarial valuation of the plan.



Amounts expected to be recognized in net periodic cost during 2019 (in thousands):
Loss recognition	$	196
Prior service cost recognition	$	—

The principal actuarial assumptions used in determining the net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 were as follows:



	2018		2017		2016
Discount rate	3.74	%	4.16	%	4.39	%
Expected long-term rate of return on assets	7.25	%	7.75	%	7.75	%
Assumed rate of future compensation increase	N/A		N/A		5.00	%

The Corporation changes important assumptions whenever changing conditions warrant. At December 31, 2018 the Corporation used IRS Static 2019 Mortality Table with Mortality Improvement Scale 2019 (MP-2019) as a basis for the Plan's valuation. At December 31, 2017, the Corporation used IRS Static 2018 Mortality Table as a basis for the Plan's valuation. The discount rate is evaluated at least annually and the expected long-term return on plan assets will typically be revised every three to five years, or as conditions warrant.

The Corporation's overall investment strategy is to achieve a mix of investments for long-term growth and for near-term benefit payments with a wide diversification of asset types. The target allocations for plan assets are shown in the table below. Equity securities primarily include investments in common or preferred shares of both U.S. and international companies. Debt securities include U.S. Treasury and Government bonds as well as U.S. Corporate bonds. Other investments may consist of mutual funds, money market funds and cash & cash equivalents. While no significant changes in the asset allocations are expected during 2019, the Corporation may make changes at any time.

The expected return on plan assets was determined based on a CAPM using historical and expected future returns of the various asset classes, reflecting the target allocations described below.



Asset Class	Target Allocation 2018	Percentage of Plan Assets at December 31,				Expected Long-Term Rate of Return
		2018		2017
Large cap domestic equities	20% - 50%	38	%	40	%	10.3	%
Mid-cap domestic equities	0% - 15%	2	%	6	%	10.6	%
Small-cap domestic equities	0% - 10%	6	%	7	%	10.8	%
International equities	0% - 20%	4	%	13	%	10.3	%
Intermediate fixed income	30% - 70%	37	%	29	%	4.7	%
Alternative assets	0% - 10%	—	%	—	%	7.5	%
Cash	0% - 20%	13	%	5	%	2.5	%
Total		100	%	100	%

The investment policy of the plan is to provide for long-term growth of principal and income without undue exposure to risk. The focus is on long-term capital appreciation and income generation. The Corporation maintains an IPS that guides the investment allocation in the plan. The IPS describes the target asset allocation positions as shown in the table above.

The Corporation has appointed an Employee Pension and Profit Sharing Committee to manage the general philosophy, objectives and process of the plan. The Employee Pension and Profit Sharing Committee meets with the Investment Manager periodically to review the plan's performance and to ensure that the current investment allocation is within the guidelines set forth in the IPS. Only the Employee Pension and Profit Sharing Committee, in consultation with the Investment Manager, can make adjustments to maintain target ranges and for any permanent changes to the IPS. Quarterly, the Board of Directors' Trust and Employee Benefits Committee reviews the performance of the plan with the Investment Manager.

As of December 31, 2018 and 2017, the Corporation's pension plan did not hold any direct investment in the Corporation's common stock.

The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument held by the pension plan:

Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. The fair value hierarchy described below requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).

Discounted cash flows are calculated using spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.

The fair value of the plan assets at December 31, 2018 and 2017, by asset class are as follows (in thousands):



			Fair Value Measurement at December 31, 2018 Using
Plan Assets	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	5,476	$	5,476	$	—	$	—
Equity securities:
U.S. companies	16,244		16,244		—		—
International companies	—		—		—		—

Mutual funds	16,242		16,242		—		—

Debt securities:
U.S. Treasuries/Government bonds	2,031		—		2,031		—
U.S. Corporate bonds	1,483		—		1,483		—
Total plan assets	$	41,476	$	37,962	$	3,514	$	—



			Fair Value Measurement at December 31, 2017 Using
Plan Assets	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	2,066	$	2,066	$	—	$	—
Equity securities:
U.S. companies	20,865		20,865		—		—
International companies	—		—		—		—

Mutual funds	19,253		19,253		—		—

Debt securities:
U.S. Treasuries/Government bonds	2,217		—		2,217		—
U.S. Corporate bonds	2,271		—		2,271		—
Total plan assets	$	46,672	$	42,184	$	4,488	$	—

The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten for the pension plan (in thousands):



Calendar Year	Future Expected Benefit Payments
2019	$	2,181
2020	$	2,198
2021	$	2,212
2022	$	2,235
2023	$	2,252
2024-2028	$	11,331

The Corporation does not expect to contribute to the plan during 2019. Funding requirements for subsequent years are uncertain and will significantly depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements.

For tax planning, financial planning, cash flow management or cost reduction purposes the Corporation may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.

Defined Contribution Profit Sharing, Savings and Investment Plan

On October 20, 2016, the Bank amended its defined contribution profit sharing, savings, and investment plan for all active participants to supersede the current contribution formula used by the Plan, which included eliminating the 1000 hours of service requirement to participate in employer contributions. Beginning on January 1, 2017, the Bank began contributing a non-discretionary 3% of gross annual wages for each participant, regardless of the participant’s deferral, and eliminated discretionary contributions for participants hired prior to July 1, 2010. Additionally, beginning January 1, 2017 the Bank began contributing a 50% match up to 6% of gross annual wages.

Expense related to both plans totaled $1,217 thousand, $1,160 thousand, and $609 thousand for the years ended December 31, 2018, 2017 and 2016, respectively. The plan's assets at December 31, 2018, 2017 and 2016 include 148,716, 155,336, and 174,957 shares, respectively, of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds.

Defined Benefit Health Care Plan

On October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan, effective January 1, 2017. The effects of this freeze are reflected in the defined benefit health care plan disclosures as of December 31, 2017 and 2016.

The Corporation uses a December 31 measurement date for its defined benefit health care plan.

The following table presents (1) changes in the plan's accumulated postretirement benefit obligation and (2) the plan's funded status at December 31, 2018 and 2017 (in thousands):



Changes in accumulated postretirement benefit obligation:	2018			2017
Accumulated postretirement benefit obligation - beginning of year	$	441		$	423
Service cost	—			—
Interest cost	16			20
Participant contributions	73			76
Amendments	—			—
Actuarial (gain) loss	22			98
Benefits paid	(189		)	(176		)
Accumulated postretirement benefit obligation at end of year	$	363		$	441



Change in plan assets:	2018			2017
Fair value of plan assets at beginning of year	$	—		$	—
Employer contribution	116			100
Plan participants’ contributions	73			76
Benefits paid	(189		)	(176		)
Fair value of plan assets at end of year	$	—		$	—

Unfunded status	$	(363	)	$	(441	)

Amount recognized in accumulated other comprehensive income (loss) at December 31, 2018 and 2017 consist of the following (in thousands):



	2018			2017
Net actuarial loss	$	491		$	592
Prior service credit	(661		)	(881		)
Total before tax effects	$	(170	)	$	(289	)



Weighted-average assumption for disclosure as of December 31:	2018		2017		2016
Discount rate	4.35	%	3.74	%	4.16	%
Health care cost trend: Initial (Pre-65/Post 65)	6.95% / 5.45%		6.50	%	6.50	%
Health care cost trend: Ultimate (Pre-65/Post 65)	4.75% / 4.75%		5.00	%	5.00	%
Year ultimate cost trend reached	2024		2021		2020

The components of net periodic postretirement benefit cost for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



Net periodic cost (benefit)	2018			2017			2016
Service cost	$	—		$	—		$	43
Interest cost	16			20			66
Amortization of prior service benefit	(220		)	(220		)	(97		)
Recognized actuarial loss	123			143			20
Recognized prior service benefit due to curtailments	—			—			(337		)
Net periodic postretirement cost (benefit)	$	(81	)	$	(57	)	$	(305	)



Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):	2018			2017			2016
Net actuarial loss	$	22		$	98		$	139
Recognized actuarial loss	(123		)	(143		)	(20		)
Prior service credit	—			—			(1,101		)
Amortization of prior service benefit	220			220			434
Total recognized in other comprehensive income (loss)(before tax effect)	$	119		$	175		$	(548	)

Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect)	$	38		$	118		$	(853	)

During 2018 the plan's total unrecognized net loss decreased by $101 thousand. Because the total unrecognized net gain or loss in the plan exceeds 10% of the accumulated postretirement benefit obligation, the excess will be amortized over the average future life expectancy of all plan participants. As of January 1, 2018, the average future life expectancy of all plan participants was 5.0 years. Previous to the plan freeze as of December 31, 2016, the amortization period was based upon average future working lifetime of active employees. Actual results for 2019 will depend on the 2019 actuarial valuation of the plan.



Amounts expected to be recognized in net periodic cost during 2019 (in thousands):
Loss recognition	$	114
Prior service cost recognition	$	(220	)

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plan. A one-percentage point change in assumed health care cost trend rates would have the following effects (in thousands):



Effect of a 1% increase in health care trend rate on:	2018		2017		2016
Benefit obligation	$	4	$	5	$	2
Total service and interest cost	$	—	$	—	$	—



Effect of a 1% decrease in health care trend rate on:	2018			2017			2016
Benefit obligation	$	(4	)	$	(6	)	$	(3	)
Total service and interest cost	$	—		$	—		$	—



Weighted-average assumptions for net periodic cost as of December 31:	2018		2017		2016
Discount rate	3.74	%	4.16	%	4.39	%
Health care cost trend: Initial	6.50	%	6.50	%	7.00	%
Health care cost tread: Ultimate	5.00	%	5.00	%	5.00	%
Year ultimate reached	2021		2020		2019

The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten (in thousands):



Calendar Year	Future Estimated Benefit Payments
2019	$	132
2020	$	81
2021	$	42
2022	$	33
2023	$	33
2024-2028	$	58

The Corporation’s policy is to contribute the amount required to fund postretirement benefits as they become due to retirees. The amount expected to be required in contributions to the plan during 2019 is $132 thousand.

Executive Supplemental Pension Plan

The Corporation also sponsors an Executive Supplemental Pension Plan for certain former executive officers to restore certain pension benefits that may be reduced due to limitations under the Internal Revenue Code. The benefits under this plan are unfunded as of December 31, 2018 and 2017.

The Corporation uses a December 31 measurement date for its Executive Supplemental Pension Plan.

The following table presents Executive Supplemental Pension plan status at December 31, 2018 and 2017 (in thousands):



Change in projected benefit obligation:	2018			2017
Benefit obligation at beginning of year	$	1,289		$	1,248
Service cost	—			—
Interest cost	46			50
Actuarial (gain) loss	(47		)	66
Benefits paid	(109		)	(75		)
Projected benefit obligation at end of year	$	1,179		$	1,289



Changes in plan assets:	2018			2017
Fair value of plan assets at beginning of year	$	—		$	—
Employer contributions	109			75
Benefits paid	(109		)	(75		)
Fair value of plan assets at end of year	$	—		$	—

Unfunded status	$	(1,179	)	$	(1,289	)

Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2018 and 2017 consist of the following (in thousands):



	2018		2017
Net actuarial loss	$	174	$	228
Prior service cost	—		—
Total before tax effects	$	174	$	228

Accumulated benefit obligation at December 31, 2018 and 2017 was $1.2 million and $1.3 million, respectively.



Weighted-average assumption for disclosure as of December 31:	2018		2017		2016
Discount rate	4.35	%	3.74	%	4.16	%
Assumed rate of future compensation increase	N/A		N/A		N/A

The components of net periodic benefit cost for the years ended December 31, 2018, 2017 and 2016 are as follows (in thousands):



Net periodic benefit cost	2018		2017		2016
Service cost	$	—	$	—	$	43
Interest cost	46		50		51
Recognized actuarial loss	7		3		26
Net periodic postretirement benefit cost	$	53	$	53	$	120



Other changes in plan assets and benefit obligation recognized in other comprehensive income (loss):	2018			2017			2016
Net actuarial (gain) loss	$	(47	)	$	66		$	18
Recognized actuarial loss	(7		)	(3		)	(26		)
Total recognized in other comprehensive income (loss) (before tax effect)	$	(54	)	$	63		$	(8	)

Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect)	$	(1	)	$	116		$	112

During 2018, the plan's total unrecognized net loss decreased by $54 thousand. Because the unrecognized net gain or loss exceeds the greater of 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized over the average future life expectancy of all participants. Previously, the excess had been amortized over the average future working lifetime of active participants, however, there are no longer any active participants in the plan as of January 1, 2017, so the amortization period was changed to be the average future life expectancy of all plan participants. As of January 1, 2018, the average future life expectancy of plan participants was 13.40 years.



Amounts expected to be recognized in net periodic cost during 2019 (in thousands):
Loss recognition	$	4
Prior service cost recognition	$	—



Weighted-average assumptions for net periodic cost as of December 31:	2018		2017		2016
Discount rate	3.74	%	4.16	%	4.39	%
Salary scale	N/A		N/A		N/A

The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten for the Supplemental Pension Plan (in thousands):



Calendar Year	Future Estimated Benefit Payments
2019	$	109
2020	$	107
2021	$	105
2022	$	103
2023	$	100
2024-2028	$	443

The Corporation expects to contribute $110 thousand to the plan during 2019. Corporation contributions are equal to the benefit payments to plan participants.

Defined Contribution Supplemental Executive Retirement Plan

The Corporation also sponsors a Defined Contribution Supplemental Executive Retirement Plan for certain current executive officers, which was initiated in 2012. The plan is unfunded as of December 31, 2018 and is intended to provide nonqualified deferred compensation benefits payable at retirement, disability, death or certain other events. The accrued obligation for the plan as of December 31, 2018 and 2017 was $1,214 thousand and $872 thousand, respectively. A total of $341 thousand, $279 thousand, and $262 thousand was expensed during the years ended December 31, 2018, 2017, and 2016, respectively. In addition to each participants account being credited with the annual company contribution, each account will receive a quarterly interest credit that will equal the average yield on five year U.S. Treasury Notes.