BUSINESS COMBINATION

12 Months Ended

Dec. 31, 2011

BUSINESS COMBINATION [Abstract]

BUSINESS COMBINATION

(21)           BUSINESS COMBINATION

Acquisition of Fort Orange Financial Corp.

On April 8, 2011, the Corporation completed its merger with Fort Orange Financial Corp. (“FOFC”), the holding

company of Capital Bank & Trust Company (“Capital Bank”) based in Albany, New York, with FOFC being

merged with and into the Corporation, and the Corporation being the surviving entity.  Immediately following the

merger, Capital Bank was merged with and into the Bank.

As of the date of the merger, Capital Bank's unaudited balance sheet included approximately $254 million in

assets, a loan portfolio approximating $171 million and deposits of $199 million.   The Capital Bank branch

locations are in Albany, Clifton Park, Latham and Slingerlands.

Under the terms of an Agreement and Plan of Merger (the “Agreement”) entered into on October 14, 2010, the

Corporation purchased all of the outstanding shares of FOFC common stock in a stock and cash transaction

valued at $31.9 million, based upon the Corporation's closing stock price on April 8, 2011 of $23.50.  For each

share of FOFC common stock outstanding immediately prior to the merger, each FOFC shareholder had the right

to elect to receive: (i) all cash in the amount of $7.50 per share (“Cash Consideration”), (ii) all stock at an

exchange ratio of 0.3571 of a share of the Corporation's common stock for each share of FOFC common stock

(“Stock Consideration”) or (iii) a mix of Cash Consideration for 25% of their shares and Stock Consideration for

75% of their shares.  The total consideration to be paid by the Corporation was subject to the requirement that

25% of the FOFC common stock be acquired for the Cash Consideration and 75% be acquired for the Stock

Consideration.  As a result of the merger, the Corporation issued approximately 1.01 million additional shares of

its common stock.

The table below illustrates the calculation of the consideration effectively transferred.

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

As a result of the FOFC merger, we recognized assets acquired and liabilities assumed at their acquisition date

fair value as presented below: (in thousands).

Total Purchase Price				$	31,871
Net assets acquired:
Cash and due from banks	$	33,285
Securities available for sale		46,524
Federal Home Loan Bank Stock		1,578
Loans		164,168
Accrued Interest Receivable		864
Premises and equipment		879
Core deposit intangible		2,646
Deferred tax asset		2,652
Other assets		3,534
Deposits		(200,468	)
Borrowings		(34,823	)
Accrued Interest Payable		(304	)
Other liabilities		(775	)
Net assets acquired				$	19,760
Goodwill resulting from the FOFC merger				$	12,111

The goodwill generated by the FOFC merger consists of, among other things, synergies and increased economies

of scale, including the ability to offer more diverse and profitable products, greater diversity in the branch system

which may lead to lower cost deposits, and an increased legal lending limit.  We expect that no goodwill

recognized as a result of the FOFC merger will be deductible for income tax purposes.  Purchase accounting

adjustments are subject to refinement as management finalizes their fair value measurements, including their

analysis of identifiable intangible assets.  Since the branches acquired were merged into the Bank, there is no

segment impact of the FOFC merger.

The fair value of the financial assets acquired included loans receivable with an unpaid principal balance of

$170.7 million.  U.S. generally accepted accounting principles (“U.S. GAAP”) prohibits carrying over an

allowance for loan losses for loans purchased in the merger.  The table below illustrates the fair value adjustments

made to the unpaid principal balance in order to present a fair value of the loans acquired (in thousands).

Gross loans-unpaid principal balance at April 8, 2011, net of deferred fees and costs	$	170,607
Fair value adjustment on loans other than those with evidence of credit deterioration		(1,619	)
Credit fair value adjustment on loans with deteriorating credit quality		(4,820	)
Fair value of purchased loans at April 8, 2011	$	164,168

The fair value adjustment on loans other than those with evidence of credit deterioration represents adjustments a

 prospective acquirer would make to the unpaid principal balance to account for differences between the

contractual yield on the portfolio and market interest rates, for credit, and for liquidity.  The market rate

adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the

stated rates of the acquired loans.  The credit adjustment made on these loans represents the changes in credit quality

of the underlying borrowers from the loan inception to the merger date.  The credit adjustment on loans with

deteriorating credit quality is derived in accordance with Accounting Standard Codification 310-30, “Loans and

Debt Securities Acquired with Deteriorated Credit Quality” and represents the portion of the loan balance that has

been deemed uncollectible based on our expectations of future cash flows for each respective loan.

The information below presents the recorded fair value on April 8, 2011 of the Corporation's purchased impaired

loans with the accretable and non-accretable related adjustments from the perspective of total contractual cash

flows (in thousands).

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

The results of operations of the merged entity have been reflected in Chemung Financial Corporation's

consolidated statements of income beginning as of the acquisition date.  Pro forma condensed consolidated

income statements for the periods ended December 31, 2011 and 2010 as if the merger had occurred on January 1,

2010 are as follows (in thousands):

	December 31,
Financial assets:	2011		2010
Interest and dividend income	$	54,056	$	56,101
Interest expense		7,658		12,350
Net interest income		46,398		43,751
Provision for loan losses		1,933		2,835
Net interest income after provision for loan losses		44,465		40,916
Non-interest income	$	17,517	$	20,137
Non-interest expense		44,288		43,279
Income before income taxes		17,694		17,774
Income tax expense		5,843		6,159
Net income	$	11,851	$	11,615
Weighted average shares outstanding		4,629		4,616
Basic and diluted earnings per share	$	2.56	$	2.52

Direct costs related to the FOFC merger were expensed as incurred.  Merger and integration expenses incurred by

the Corporation and FOFC of $2.542 million and $706 thousand for the years ended December 31, 2011 and

2010, respectively, were excluded from the pro forma information presented above.  

The consolidated income statement for the Corporation includes $8.875 million of net interest income, $132

thousand of non-interest income and net income of $3.326 million of the acquiree since the acquisition date