Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

YES [ ] NO [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

YES [ ] NO [X]

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

Indicated by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES [ ] NO [X]

Based upon the closing price of the registrant's Common Stock as of June 30, 2008, the aggregate market value of the voting stock held by non-affiliates of the registrant was $50,776,640.

As of February 28, 2009 there were 3,518,621 shares of Common Stock, $0.01 par value outstanding.

Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 6, 2009 are incorporated by reference into Part III, Items 10, 11, 12, 13, and 14 of this Form 10-K.

The Corporation has been a financial holding company since June 22, 2000. This provides the Corporation with the flexibility to offer an array of financial services, such as insurance products, mutual funds, and brokerage services. The Corporation believes that this allows it to better serve the needs of its clients as well as provide an additional source of fee based income. To that end, the Corporation established a financial services subsidiary, CFS Group, Inc., which commenced operations during September 2001. As such, the Corporation now operates as a financial holding company with two subsidiaries, Chemung Canal Trust Company, a full-service community bank with full trust powers, and CFS Group, Inc., a subsidiary offering non-banking financial services such as mutual funds, annuities, brokerage services and insurance.

The Securities and Exchange Commission (the "SEC") maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding the Corporation. In addition, we maintain a corporate web site at www.chemungcanal.com. We make available free of charge through our web site our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports pursuant to Section 13(a) or 15(d) of the Exchange Act and filed with the SEC. These items are available as soon as reasonably practicable after we electronically file or furnish such material with or to the SEC. The contents of our web site are not a part of this report. These materials are also available free of charge by written request to: Jane H. Adamy, Senior Vice President and Secretary, Chemung Canal Trust Company, One Chemung Canal Plaza, Elmira, NY 14901.

The Bank is a New York chartered commercial bank which engages in full-service commercial and consumer banking and trust business. The Bank's services include accepting time, demand and savings deposits, including NOW accounts, regular savings accounts, insured money market accounts, investment certificates, fixed-rate certificates of deposit and club accounts. The Bank's services also include making secured and unsecured commercial and consumer loans, financing commercial transactions (either directly or participating with regional industrial development and community lending corporations), and making commercial, residential and home equity mortgage loans, revolving credit loans with overdraft checking protection and small business loans. Additional services include renting safe deposit facilities and the provision of networked automated teller facilities.

Trust services provided by the Bank include services as executor and trustee under wills and agreements, and guardian, custodian, trustee and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, pension, estate planning and employee benefit administrative services.

CFS Group, Inc., a wholly owned subsidiary of the Corporation, commenced operations in September 2001 and offers an array of financial services including mutual funds, full and discount brokerage services, annuity and other insurance products and tax preparation services.

For additional information, which focuses on the results of operations of the Corporation and its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.

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There have been no material changes in the manner of doing business by the Corporation or its subsidiaries during the fiscal year ended December 31, 2008.

Subsequent Event

On January 21, 2009, Chemung Financial Corporation and Canton Bancorp, Inc. executed a definitive agreement to merge. Under this agreement, Chemung Financial Corporation will purchase all of the outstanding shares of Canton Bancorp, Inc. in an all cash transaction valued at $7.7 million. Canton Bancorp, Inc. is the holding company of the Bank of Canton, which is headquartered in Canton, PA and has offices in Towanda and Troy, PA. Upon completion of the transaction, all three offices will become full service branches of Chemung Canal Trust Company.

The Bank of Canton has approximately $80 million in assets, including a loan portfolio approximating $62 million and deposits of nearly $70 million.

The completion of the transaction, which is subject to regulatory approval and the approval of Canton Bancorp, Inc. shareholders, is expected to take place in the second quarter of 2009.

Seven of the Bank's 20 full-service offices, including the main office, are located in Chemung County, New York. The Bank's other thirteen full-service offices are located in the adjacent counties of Broome, Schuyler, Steuben, Tioga and Tompkins, with a Trust and Investment Center located in Herkimer County. All of the Bank's facilities are located in New York State. The Corporation defines its primary market areas as those areas within a 25-mile radius of its offices in Broome, Chemung, Herkimer, Steuben, Schuyler, Tioga and Tompkins counties, including the northern tier of Pennsylvania. The Bank's lending policy restricts substantially all lending efforts to these geographical regions.

Within these market areas, the Bank encounters intense competition in the lending and deposit gathering aspects of its business from commercial and thrift banking institutions, credit unions and other providers of financial services, such as brokerage firms, investment companies, insurance companies and Internet vendors. The Bank also competes with non-financial institutions, including retail stores and certain utilities that maintain their own credit programs, as well as governmental agencies that make available loans to certain borrowers. Unlike the Bank, many of these competitors are not subject to regulation as extensive as that of the Bank and, as a result, they may have a competitive advantage over the Bank in certain respects. This is particularly true of credit unions because their pricing structure is not encumbered by income taxes.

Competition for the Bank's Trust Department investment services comes primarily from brokerage firms and independent investment advisors. These firms devote much of their considerable resources toward gaining larger positions in these markets. The market value of the Bank's trust assets under administration totaled approximately $1.6 billion at year-end 2008. The Trust and Investment Division is responsible for the largest component of non-interest revenue.

The Bank is chartered under the laws of New York State and is supervised by the New York State Banking Department ("NYSBD"). The Bank also is a member bank of the Federal Reserve System and, as such, the Federal Reserve Board serves as its primary

======================================================4===================================================
federal regulator.

CFS Group, Inc. is subject to supervision by other regulatory authorities as determined by the activities in which it is engaged. Insurance activities are supervised by the New York State Insurance Department, and brokerage activities are subject to supervision by the SEC and the Financial Industry Regulatory Authority ("FINRA").

The Corporation is subject to capital adequacy guidelines of the Federal Reserve Board. The guidelines apply on a consolidated basis and require bank holding companies to maintain a minimum ratio of Tier 1 capital to total average assets (or "leverage ratio") of 4%. For the most highly rated bank holding companies, the minimum ratio is 3%. The Federal Reserve Board capital adequacy guidelines also require bank holding companies to maintain a minimum ratio of Tier 1 capital to risk-weighted assets of 4% and a minimum ratio of qualifying total capital to risk-weighted assets of 8%. Any bank holding company whose capital does not meet the minimum capital adequacy guidelines is considered to be undercapitalized, and is required to submit an acceptable plan to the Federal Reserve Board for achieving capital adequacy. In addition, an undercapitalized company's ability to pay dividends to its shareholders and expand its lines of business through the acquisition of new banking or non-banking subsidiaries also could be restricted by the Federal Reserve Board. The Federal Reserve Board may set higher minimum capital requirements for bank holding companies whose circumstances warrant it, such as companies anticipating significant growth or facing unusual risks. As of December 31, 2008, the Corporation's leverage ratio was 8.94%, its ratio of Tier 1 capital to risk-weighted assets was 11.97% and its ratio of qualifying total capital to risk-weighted assets was 13.58%. The Federal Reserve Board has not advised the Corporation that it is subject to any special capital requirements.

The Bank is subject to leverage and risk-based capital requirements and minimum capital guidelines of the Federal Reserve Board that are similar to those applicable to the Corporation. As of December 31, 2008, the Bank was in compliance with all minimum capital requirements. The Bank's leverage ratio was 8.59%, its ratio of Tier 1 capital to risk-weighted assets was 11.50%, and its ratio of qualifying total capital to risk-weighted assets was 13.10%.

The Bank also is subject to substantial regulatory restrictions on its ability to pay dividends to the Corporation. Under Federal Reserve Board and NYSBD regulations, the Bank may not pay a dividend without prior approval of the Federal Reserve and the NYSBD if the total amount of all dividends declared during such calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two calendar years. As of December 31, 2008, approximately $8.9 million was available for the payment of dividends by the Bank to the Corporation without prior approval, after giving effect to the payment of dividends in the fourth quarter of 2008. The Bank's ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements.

The deposits of the Bank are insured up to regulatory limits by the Federal Deposit Insurance Corporation (the "FDIC"). The Federal Deposit Insurance Reform Act of 2005 gave the FDIC increased flexibility in assessing premiums on banks and savings associations, including the Bank, to pay for deposit insurance and in managing its deposit insurance reserves. The FDIC has adopted regulations to implement its new authority. Under these regulations, all insured depository institutions are placed into one of four risk categories. The Bank is in Risk Category I, the most favorable category. As of January 1, 2009, all insured institutions will pay a base rate assessment of $0.12 to $0.50 per $100 of deposits for the first quarter of 2009 of assessable deposits based on the risk of loss to the Depository Insurance Fund ("DIF") posed by the particular institution. Institutions, such as the Bank, in Risk Category I will be assessed within a range of $0.12 to $0.14 per $100 of deposits for the first quarter of 2009. This is a substantial increase from the base rate assessment of $0.02 to $0.04 per $100 of assessable deposits that was in effect during 2008. The increase in the base rate assessment from 2008 to 2009 is due to the financial crises affecting the banking system and financial markets. For institutions such as the Bank, which do not have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and certain financial ratios and other measurements of its financial condition. For institutions that have a long-term public debt rating, the individual risk assessment is based on its supervisory ratings and its debt rating. On February 27, 2009, the FDIC issued new rules to take effect April 1, 2009 to change the way the FDIC differentiates risk and appropriate assessment rates. Base assessment rates set to take effect on April

=====================================================5====================================================
1, 2009 will range from 12 to 45 basis points, but giving effect to certain risk adjustments in the rule issued by the FDIC on February 27, 2009, assessments may range from 7 to 77.5 basis points. For institutions such as the Bank, in Risk Category I, risk-adjusted assessments will range from 7 to 24 basis points. In addition, the FDIC also issued an interim rule on February 27, 2009 that will impose an emergency special assessment of 20 basis points in addition to its risk-based assessment. This assessment will be imposed on June 30, 2009 and collected on September 30, 2009. The Federal Deposit Insurance Reform Act of 2005 also provided a credit to all insured depository institutions, based on the amount of their insured deposits at year-end 1996, that may be used as an offset to the premiums that are assessed. The Bank received a $598 thousand credit which entirely offset its 2007 and partially offset its 2008 deposit insurance settlement. Due to the full utilization of the Bank's credit in 2008, the systemic increase in deposit insurance assessments and the emergency special assessment, the Bank will be subject to increased deposit premium expenses in future periods.

On October 14, 2008, the FDIC announced a new program, the Temporary Liquidity Guarantee Program ("TLGP") that provides unlimited deposit insurance on funds invested in noninterest-bearing transaction deposit accounts in excess of the existing deposit insurance limit of $250,000. Participating institutions will be assessed a $0.10 surcharge per $100 of deposits above the existing deposit insurance limit. The TLGP also provides that the FDIC, for an additional fee, will guarantee qualifying senior unsecured debt issued prior to October 2009 by participating banks and certain qualifying holding companies. The Bank and the Corporation have elected to opt in to both portions of the TLGP.

The Federal Deposit Insurance Act provides for additional assessments to be imposed on insured depository institutions to pay for the cost of Financing Corporation ("FICO") funding. The FICO assessments are adjusted quarterly to reflect changes in the assessment base of the DIF and do not vary depending upon a depository institution's capitalization or supervisory evaluation. During 2008, FDIC assessments for purposes of funding FICO bond obligations ranged from an annualized $0.0114 per $100 of deposits for the first quarter of 2008 to $0.0110 per $100 of deposits for the fourth quarter of 2008. The Bank paid $72 thousand of FICO assessments in 2008. For the first quarter of 2009, the FICO assessment rate is $0.0114 per $100 of deposits.

Transactions between the Bank, and either the Corporation or CFS Group, Inc., are governed by sections 23A and 23B of the Federal Reserve Act and Federal Reserve Board regulations thereunder. Generally, sections 23A and 23B are intended to protect insured depository institutions from suffering losses arising from transactions with non-insured affiliates, by placing quantitative and qualitative limitations on covered transactions between a bank and any one affiliate as well as all affiliates of the bank in the aggregate, and requiring that such transactions be on terms that are consistent with safe and sound banking practices.

In 2007, the Federal Reserve Board and SEC issued Regulation R to clarify that traditional banking activities involving some elements of securities brokerage activities, such as most trust and fiduciary activities, may continue to be performed by banks rather than being "pushed" out to affiliates supervised by the SEC. These rules took effect for the Bank on January 1, 2009.

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Periodic disclosures by companies in various industries of the loss or theft of computer-based nonpublic customer information have led several members of Congress to call for the adoption of national standards for the safeguarding of such information and the disclosure of security breaches. Several committees of both houses of Congress have conducted hearings on data security and related issues, and have proposed legislation regarding these issues.

Under Title III of the USA PATRIOT Act, also known as the International Money Laundering Abatement and Anti-Terrorism Financing Act of 2001, all financial institutions are required in general to identify their customers, adopt formal and comprehensive anti-money laundering programs, scrutinize or prohibit altogether certain transactions of special concern, and be prepared to respond to inquiries from U.S. law enforcement agencies concerning their customers and their transactions. Additional information-sharing among financial Institution, regulators, and law enforcement authorities is encouraged by the presence of an exemption from the privacy provisions of the GLB Act for financial institutions that comply with this provision and the authorization of the Secretary of the Treasury to adopt rules to further encourage cooperation and information-sharing. The effectiveness of a financial institution in combating money laundering activities is a factor to be considered in any application submitted by the financial institution under the Bank Merger Act, which applies to the Bank, or the BHC Act, which applies to the Corporation.

Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, financial and reputational consequences for the institution. In that regard, in 2008 the Bank was notified by the Federal Reserve Bank of New York of deficiencies in its Bank Secrecy Act ("BSA") and Anti Money Laundering ("AML") compliance program. Subsequent to that notification, the Bank has taken corrective action and believes it is now in compliance with the applicable regulations. Among the primary areas the Bank has addressed are customer due diligence, transaction monitoring, employee training and internal testing of compliance.

The Sarbanes-Oxley Act of 2002 implemented a broad range of measures to increase corporate responsibility, enhance penalties for accounting and auditing improprieties at publicly traded companies, and protect investors by improving the accuracy and reliability of corporate disclosures for companies that have securities registered under the Exchange Act, including publicly-held financial holding companies such as the Corporation. It includes very specific additional disclosure requirements and corporate governance rules, and the SEC and securities exchanges have adopted extensive additional disclosures, corporate governance and other related rules pursuant to its mandate. The Act represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a board of directors and management and between a board of directors and its committees. In addition, the federal banking regulators have adopted generally similar requirements concerning the certification of financial statements by bank officials.

In the past two years, declining housing values have resulted in deteriorating economic conditions across the U.S., resulting in significant writedowns in the values of mortgage-backed securities and derivative securities by financial institutions, government sponsored entities, and major commercial and investment banks. This has led to decreased confidence in financial markets among borrowers, lenders, and depositors as well as extreme volatility in the capital and credit markets and the failure of some entities in the financial sector. The Company is fortunate that the markets it serves have been impacted to a lesser extent than many areas around the country.

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In response to the financial crises affecting the banking system and financial markets, there have been several recent announcements of Federal programs designed to purchase assets from, provide equity capital to, and guarantee the liquidity of, the industry.

On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (the "EESA") was signed into law. The EESA authorizes the U.S. Treasury to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities, and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. The Corporation did not originate or invest in sub-prime assets and, therefore, does not expect to participate in the sale of any of our assets into these programs. EESA also increased the FDIC deposit insurance limit for most accounts from $100,000 to $250,000 through December 31, 2009.

On October 14, 2008, the U.S. Treasury announced that it will purchase equity stakes in a wide variety of banks and thrifts. Under this program, known as the Troubled Asset Relief Program Capital Purchase Program (the "TARP Capital Purchase Program"), the U.S. Treasury will make $250 billion of capital available (from the $700 billion authorized by the EESA) to U.S. financial institutions in the form of preferred stock. In conjunction with the purchase of preferred stock, the U.S. Treasury will receive warrants to purchase common stock with an aggregate market price equal to 15% of the preferred investment. Participating financial institutions will be required to adopt the U.S. Treasury's standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the TARP Capital Purchase Program, as well as the more stringent executive compensation limits enacted as part of the American Recovery and Reinvestment Act of 2009 (the "ARRA" or "Stimulus Bill"), which was signed into law on February 17, 2009. The Corporation chose not to participate in the TARP Capital Purchase Program.

As of December 31, 2008, the Corporation and its subsidiaries employed 309 persons on a full-time equivalent basis. None of the Corporation's employees are covered by collective bargaining agreements, and the Corporation believes that its relationship with its employees is good.

Financial Information About Foreign and Domestic Operations and Export Sales

Neither the Corporation nor its subsidiaries relies on foreign sources of funds or income.

The following disclosures present certain summarized statistical data covering the Corporation and its subsidiaries. See also Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7, of this report for other required statistical data.

The following table sets forth the carrying amount of available for sale and held to maturity investment securities at the dates indicated (in thousands of dollars):

Included in the above table are $191,255, $165,321 and $184,830 (in thousands of dollars) of securities available for sale at December 31, 2008, 2007 and 2006, respectively. Also included in the above table are $8,439, $4,480 and $6,866 (in thousands of dollars) of securities held to maturity at December 31, 2008, 2007 and 2006, respectively.

The following table sets forth the carrying amounts and maturities of debt securities at December 31, 2008 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security). Federal tax equivalent adjustments have not been made in calculating yields on municipal obligations (in thousands of dollars):

The following table shows the maturity of loans (excluding residential mortgages, indirect consumer, and consumer loans) outstanding as of December 31, 2008. Also provided are the amounts due after one year, classified according to the sensitivity to changes in interest rates (in thousands of dollars):

The allocated portions of the allowance reflect management's estimates of specific known risk elements in the respective portfolios. Beginning in 2006 and continuing during 2007 and 2008, management refined the methodology followed in evaluating the allowance for loan losses to include a more detailed analysis of historical loss factors for pools of similarly graded loans, as well as implementing a specific collateral review of relationships graded special mention, substandard or doubtful with outstanding balances of $1.0 million or greater. Among the factors considered in allocating portions of the allowance by loan type are the current levels of past due, non-accrual and impaired loans, as well as historical loss experience and the

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evaluation of collateral. In addition, management has more formally documented factors considered in determining the appropriate level of unallocated allowance, including current economic conditions, forecasted trends in the credit quality cycle, loan growth, entry into new markets, and industry and peer group trends. Beginning in 2007, these amounts, which had previously been shown as unallocated, have been included in the allocated portion of the loan categories to which they relate. The following table summarizes the Corporation's allocation of the loan loss allowance for each year in the five-year period ended December 31, 2008:

The allocation of the allowance to each category does not restrict the use of the allowance to absorb losses in any category.

The average daily amounts of deposits and rates paid on such deposits is summarized for the periods indicated in the following table (in thousands of dollars):

Scheduled maturities of time deposits at December 31, 2008 are summarized as follows (in thousands of dollars):

Maturities of time deposits in denominations of $100,000 or more outstanding at December 31, 2008 are summarized as follows (in thousands of dollars):

Information regarding securities sold under agreements to repurchase and FHLB advances is included in notes 9 and 10 to the consolidated financial statements appearing elsewhere in this report.

The Corporation's business is subject to many risks and uncertainties. Although the Corporation seeks ways to manage these risks and develop programs to control those that management can, the Corporation ultimately cannot predict the extent to which these risks and uncertainties could affect results. Actual results may differ materially from management's expectations. Some of the significant risks and uncertainties are discussed below.

Changes in economic conditions or interest rates. The results of operations for financial institutions, including the Corporation, may be materially and adversely affected by changes in prevailing local and national economic conditions, including declines in real estate market values, rapid increases or decreases in interest rates and changes in the monetary and fiscal policies of the federal government. The national and global economic and credit markets continue to experience high levels of volatility and disruption which are particularly acute in the financial sector and may depress overall the market value of financial institutions, limit access to capital, or have a materially adverse effect on the financial condition or results of operations of banking companies in general, including the Corporation. Although the Corporation remains well capitalized, the possible duration and severity of the adverse economic cycle is unknown and may increase the Corporation's exposure to these risks. Federal legislation has been passed and U.S. Treasury, Federal Reserve Bank and FDIC programs are underway to address economic stabilization, yet the effectiveness of these programs in stabilizing the economy and the banking system at large is uncertain.

The Corporation's profitability is heavily influenced by the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. Substantially all of the Bank's loans are to businesses and individuals in the southern tier of New York and northern tier of Pennsylvania, and any decline in the economy of this area could adversely affect results. Like most financial institutions, the Corporation's net interest spread and margin will be affected by general economic conditions and other factors that influence market interest rates and the ability to respond to changes in such rates. At any given time, assets and liabilities may be such that they are affected differently by a given change in interest rates. For additional information, see Part II, Item 7, "Interest Rate Risk."

Credit Risk. A significant source of risk for the Bank arises from the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Loans originated by the Bank can be either secured or unsecured depending on the nature of the loan. With respect to secured loans, the collateral securing the repayment of these loans includes a wide variety of real and personal property that may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in prevailing economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when in fact it is not. The Bank has adopted underwriting and credit monitoring procedures and policies, including the establishment and review of the allowance for loan losses and regular review of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss by assessing the likelihood of nonperformance and the value of available collateral, monitoring loan performance and diversifying the Bank's credit portfolio. Such policies and procedures, however, may not prevent unexpected losses that could have

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a material adverse effect on the Bank's business, financial condition, results of operations or liquidity. For further information regarding asset quality, see Part II, Item 7, "Management of Credit Risk-Loan Portfolio" and "Asset Quality."

Litigation risk. Neither the Corporation nor its subsidiaries are a party to any material pending legal proceedings. If in the future any legal action is determined adversely to the Corporation, or if any legal action resulted in the Corporation paying a substantial settlement, then such adverse determination or settlement may have a material adverse effect on the Corporation's financial condition.

Difficulties in managing our growth. As part of the Corporation's strategy for continued growth, we may open additional branches. New branches do not initially contribute to operating profits due to the impact of overhead expenses and the start-up phase of generating loans and deposits. To the extent that additional branches are opened, the Corporation may experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse affect on the Corporation's levels of net income, return on average equity and return on average assets.

In addition, the Corporation may acquire banks and related businesses that it believes provide a strategic fit with its business such as the recently announced pending acquisition of Canton Bancorp. Inc. To the extent that the Corporation grows through acquisitions, it cannot provide assurance that such strategic decisions will be accretive to earnings.

Competition. The Corporation faces substantial competition in all phases of its operations from a variety of different competitors. Future growth and success will depend on the ability to compete effectively in this highly competitive environment. The Corporation competes for deposits, loans and other financial services with a variety of banks, thrifts, credit unions and other financial institutions as well as other entities which provide financial services. Some of the financial institutions and financial services organizations with which we compete are not subject to the same degree of regulation as the Corporation. Many competitors have been in business for many years, have established customer bases, are larger, and have substantially higher lending limits. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties. For further information, see Part II, Item 7, "Competition."

Government regulation. The financial services industry is heavily regulated under both federal and state law. These regulations are primarily intended to protect customers, not creditors or shareholders. As a financial holding company, the Corporation is also subject to extensive regulation by the Federal Reserve, in addition to other regulatory organizations. The ability to establish new facilities or make acquisitions is conditioned upon the receipt of the required regulatory approvals from these organizations. Regulations affecting banks and financial services companies undergo continuous change, and the Corporation cannot predict the ultimate effect of such changes, which could have a material adverse effect on profitability or financial condition. For further information, see Part I, Item 1, "Supervision and Regulation."

Technological change and breach of information security. The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. The Corporation's future success will depend, in part, on the ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. There can be no assurance that the Corporation will be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to customers.

Despite instituted safeguards, the Corporation cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted and the Corporation could be exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation's business, financial condition,

results of operations or liquidity.

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

The Corporation and the Bank currently conduct all their business activities from the Bank's main office in Elmira, NY, 19 full-service branch locations and one representative office situated in a seven-county area, owned office space adjacent to the Bank's main office in Elmira, NY and twelve off-site automated teller facilities (ATMs), eight of which are located on leased property. The main office is a six-story structure located at One Chemung Canal Plaza, Elmira, New York, in the downtown business district. The main office consists of approximately 59,342 square feet of space, of which 745 square feet is occupied by the Corporation's subsidiary CFS Group, with the remaining 58,597 square feet entirely occupied by the Bank. The combined square footage of the 19 branch banking facilities totals approximately 84,038 square feet. The office building adjacent to the main office was acquired during 1995 and consists of approximately 33,186 square feet of which 30,766 square feet are occupied by operating departments of the Bank and 2,420 square feet are leased. The leased automated teller facility spaces total approximately 384 square feet.

The Bank operates six of its facilities (Bath, Binghamton, Community Corners, Oakdale Mall, Tioga and Vestal Offices) and eight automated teller facilities (four Byrne Dairy Food Stores, Convenient Food Mart, Elmira/Corning Regional Airport, General Revenue Corp. and Ithaca College) under lease arrangements. The rest of its offices, including the main office and the adjacent office building, are owned by the Bank. All properties owned or leased by the Bank are considered to be in good condition.

The Corporation holds no real estate in its own name.

Neither the Corporation nor its subsidiaries are a party to any material pending legal proceedings.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of shareholders during the fourth quarter of 2008.

The Corporation's stock is traded in the over-the-counter market under the symbol CHMG.OB.

Below are the quarterly market price ranges for the Corporation's stock for the past two years, based upon actual transactions as reported by securities brokerage firms which maintain a market or conduct trades in the Corporation's stock and other transactions known by the Corporation's management.

Below are the dividends paid quarterly by the Corporation for each share of the Corporation's common stock over the last two years:

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The Bank is also subject to legal limitations on the amount of dividends that can be paid to the Corporation without prior regulatory approval. Dividends are limited to retained net profits, as defined by regulations, for the current year and the two preceding years. At December 31, 2008, approximately $8.9 million was available for the declaration of dividends from the Bank to the Corporation.

As of February 28, 2009 there were 563 registered holders of record of the Corporation's stock.

The table below sets forth the information with respect to purchases made by the Corporation of our common stock during the quarter ended December 31, 2008:

The cumulative total return includes (1) dividends paid and (2) changes in the share price of the Corporation's common stock and assumes that all dividends were reinvested. The above graph assumes that the value of the investment in Chemung Financial Corporation and each index was $100 on December 31, 2003.

The Total Returns Index for NASDAQ Stock Market (U.S. Companies) and Bank Stocks indices were obtained from SNL Financial LC, Charlottesville, VA.

ITEM 6. SELECTED FINANCIAL DATA

The following table presents selected financial data as of and for the years ended December 31, 2004, 2005, 2006, 2007 and 2008. The selected financial data is derived from our audited consolidated financial statements appearing elsewhere in this report.

The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes thereto appearing elsewhere in this report.

Chemung Financial Corporation, through its wholly owned subsidiaries, Chemung Canal Trust Company (the "Bank") and CFS Group, Inc., a financial services company, provides a wide range of banking, financing, fiduciary and other financial services within its local market areas.

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the inherent 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 have not increased dramatically in the prior several years, and, as a result, current 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 other-than-temporary impairment of investment securities to be a critical accounting policy. If the Company deems any investment security's decline in market value to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings. 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 Company's financial statements could vary if management's conclusions were to change as to whether an other-than-temporary impairment exists. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. In analyzing an issuer's financial condition, the Company's management considers whether the securities are issued by the U.S. Government or its agencies, whether downgrades by bond rating agencies have occurred and industry analysts' reports. The Company's management currently conducts impairment evaluations at least on a quarterly basis and has concluded that, at December 31, 2008, one collateralized debt obligation consisting of a pool of trust preferred securities issued by financial institutions was considered to be other-than-temporarily impaired. This investment had a cost basis of $1.563 million and a fair value of $760 thousand at December 31, 2008, resulting in an $803 thousand write-down of this security which was charged against earnings.

Management of Credit Risk - Loan Portfolio

The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing

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education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.

The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the president & CEO, three executive vice presidents, business client division manager, retail client division manager, commercial loan manager, consumer loan manager, mortgage loan manager and credit manager, implements the Board-approved loan policy.

The Corporation is subject to intense competition throughout the southern tier of New York State and the northern tier of Pennsylvania in the lending and deposit gathering aspects of its business from commercial and thrift banking institutions, credit unions and other providers of financial services, such as brokerage firms, investment companies, insurance companies and Internet vendors. The Corporation also competes with non-financial institutions, including retail stores and certain utilities that maintain their own credit programs, as well as governmental agencies that make available loans to certain borrowers. Unlike the Corporation, many of these competitors are not subject to regulation as extensive as that of the Corporation and, as a result, they may have a competitive advantage over the Corporation in certain respects. Additionally, the pricing structure of credit unions is not encumbered by income taxes.

Competition for the Corporation's trust and investment services comes primarily from brokerage firms and independent investment advisors. These firms devote considerable resources toward gaining larger positions in these markets. The market value of trust assets under administration by the Corporation totaled approximately $1.6 billion at year-end 2008. The Trust and Investment Division is responsible for the largest component of the Corporation's non-interest revenue.

Consolidated assets at December 31, 2008 totaled $838.3 million as compared to $788.9 million at year-end 2007, an increase of $49.4 million or 6.3%. As discussed in greater detail below, this increase was due in large part to the Corporation's acquisition of three branch offices from Manufacturers and Traders Trust Company ("M&T") on March 14, 2008. At that time, the Corporation assumed approximately $64.6 million of deposits and acquired $12.6 million of loans. Additionally, during the second quarter of 2008, the Corporation completed a $50.0 million leveraged purchase of investment securities, the principal reason for a $29.9 million increase in the securities portfolio since December 31, 2007. Other increases in period-end assets are reflected primarily in a $25.7 million increase in loans, net of deferred fees and costs and unearned income and a $7.9 million increase in goodwill and other intangible assets. These increases were somewhat offset principally by a $6.6 million decrease in other assets, a $5.7 million decrease in cash and cash equivalents and a $2.7 million decrease in Federal Home Loan Bank of New York ("FHLB") and Federal Reserve Bank stock.

As noted above, total loans, net of deferred fees and costs and unearned income increased $25.7 million or 4.8% during 2008. Significant growth was realized in both consumer and commercial loans (including commercial mortgages) which were up $14.9 million and $13.8 million, respectively. The consumer loan increase was primarily due to a $10.2 million increase in installment loans and a $9.0 million increase in home equity balances. The increase in installment loans was principally due to an increased volume of indirect automobile loan originations, while the home equity increase resulted principally from loans acquired in the M&T branch acquisition. These increases were partially offset by a $4.3 million decrease in student loans resulting from the sale of loans during the year. Additionally, during the third quarter of 2008, management made the decision to discontinue originating new student loans in light of significantly lower interest rates and increased costs associated with these loans. The increase in commercial loans reflects the fact that demand remained strong throughout 2008. Residential mortgages decreased $3.0 million since year-end 2007, reflecting a softening in demand as well as the sale of newly originated mortgages in the secondary mortgage market.

The available for sale segment of the securities portfolio totaled $191.3 million at December 31, 2008, an increase of $26.0 million or 15.7% from December 31, 2007. At

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amortized cost, the available for sale portfolio increased approximately $28.1 million, with unrealized appreciation related to the available for sale portfolio decreasing $2.1 million. The increase in the available for sale portfolio at amortized cost reflects the above mentioned leveraged securities purchase whereby the Corporation purchased $50.0 million of mortgage-backed securities leveraged with $45.0 million of securities sold under agreements to repurchase at laddered maturity dates. In total, since December 31, 2007, mortgage-backed securities increased $43.8 million, with municipal and trust preferred securities increasing $2.9 million and $3.0 million, respectively. These increases were partially offset by a net $21.6 million decrease in federal agency bonds resulting from $46.6 million of agency bonds that were called or matured since December 31, 2007, offset by agency bond purchases totaling $25.0 million. The decrease in unrealized appreciation related to the available for sale portfolio reflects the impact of the stock market decline during 2008 on the Corporation's stock portfolio, as well as the impact of an illiquid market on the fair value of corporate bonds and trust preferred securities, offset to some extent by the impact of lower market interest rates on other bonds. The held to maturity portion of the portfolio, consisting of local municipal obligations, increased approximately $3.9 million from $4.5 million at December 31, 2007 to $8.4 million at December 31, 2008.

A $7.3 million increase in goodwill along with a $574 thousand increase in other intangible assets, net, reflects the Corporation's acquisition on March 14, 2008 of the M&T branch offices and the acquisition on May 30, 2008 of Cascio Financial Strategies from Joseph M. Cascio, Sr. The identified intangible assets from the M&T branch acquisition consist of a core deposit intangible of approximately $1.1 million and a customer relationship intangible of $331 thousand, both of which are being amortized over 7.25 years. Goodwill resulting from the acquisition totaled $7.3 million. The identified intangible assets from the acquisition of Cascio Financial Strategies are a purchased relationship intangible of $498 thousand and a covenant not to compete of $2 thousand, which are being amortized over 5 years. During the first quarter of 2008, the Corporation recognized $226 thousand in accelerated amortization of the purchased relationship intangible associated with the purchase of the trust relationships from Partners Trust in May of 2007, as a large account was closed during that quarter.

A $6.6 million decrease in other assets was principally due to a decrease in the funded position of the Corporation's qualified defined benefit pension plan, partially offset by an increase in net deferred tax assets. A $5.7 million decrease in cash and cash equivalents is primarily due to lower period end federal transit items and branch cash levels, somewhat offset by an increase in interest bearing deposits, primarily on deposits maintained with the Federal Reserve Bank of New York.

Since December 31, 2007, total deposits have increased $84.3 million or 14.7% from $572.6 million to $656.9 million, with $57.1 million of this increase associated with the M&T branch acquisition. Period-end non-interest bearing demand deposits increased $12.2 million, due in large part to the branch acquisition. A $72.1 million increase in interest bearing balances was reflected primarily in a $ 31.5 million increase in insured money market ("IMMA") accounts, a $23.5 million increase in time deposits and a $12.9 million increase in savings balances, as well as a $4.3 million increase in NOW accounts. The increase in IMMA accounts includes $16.0 million in IMMA balances at the offices acquired from M&T, as well as increases in other personal and non-personal balances. The increase in time deposits was due to balances at the three new offices, which at December 31, 2008 totaled $25.1 million, while the increase in savings accounts included $5.3 million in savings balances at the three new offices, as well as an increase in other personal savings balances. The increase in NOW account balances included $1.7 million in deposits related to the M&T branch acquisition.

A $32.2 million increase in securities sold under agreements to repurchase reflects the above mentioned funding related to the leveraged securities purchases, while the significant increase in deposits was the principal factor in the $62.4 million reduction in short term borrowings under the Corporation's line of credit with the FHLB.

As of December 31, 2008, approximately $1.9 million of trust preferred securities at amoritized cost issued by single institutions and $3.0 million of collateralized debt obligations consisting of pools of trust preferred securities at amortized cost, had credit ratings below "A". The two single issue trust preferred securities had a rating of "BBB" by Standard & Poors, while one trust preferred pool had a rating of "B3" by Moody's and another had a rating of "Ba3" by Moody's.

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Marketable securities are classified as Available for Sale, while local direct investments in municipal obligations are classified as Held to Maturity. The Available for Sale portfolio at December 31, 2008 totaled $191.3 million compared to $165.3 million a year earlier. At year-end 2008, the total net unrealized appreciation in the securities available for sale portfolio was $5.9 million, compared to $8.0 million a year ago. The components of this change are set forth below.

Non-marketable equity securities carried by the Corporation at December 31, 2008 include 10,969 shares of Federal Reserve Bank stock and 26,065 shares of the Federal Home Loan Bank of New York stock. They are carried at their cost of $548 thousand and $2.607 million, respectively. The fair value of these securities is assumed to approximate their cost. The number of shares of these two investments is regulated by regulatory policies of the respective institutions.

Non-performing loans at year-end 2008 totaled $4.544 million compared to $3.573 million at year-end 2007, an increase of $971 thousand. This increase resulted from a $597 thousand increase in non-accrual loans and a $458 thousand increase in accruing loans 90 days or more past due, partially offset by an $84 thousand decrease in troubled debt restructurings. The increase in non-accrual loans was primarily due to a $517 thousand increase in non-accruing consumer loans and a $140 thousand increase in non-accruing commercial loans, offset by a $78 thousand decrease in non-accruing mortgages. The $458 thousand increase in accruing loans 90 days or more past due was principally due to higher mortgage delinquencies, while the decrease in troubled debt restructurings reflects principal reductions made over the past year.

At December 31, 2008, Other Real Estate Owned ("OREO") totaled $324 thousand consisting of six residential rental properties, two commercial properties and one single family home. At December 31, 2007 the Corporation had no properties classified as OREO.

Non-Performing Assets

The following table summarizes the Corporation's non-performing assets (in thousands of dollars):

Information with respect to interest income on non-accrual and troubled debt restructured loans for the years ended December 31 is as follows (in thousands of dollars):

In addition to non-performing loans, as of December 31, 2008, the Corporation, through its credit administration and loan review functions, has identified 13 commercial relationships totaling $10.0 million in potential problem loans, as compared to $11.1 million (14 relationships) at December 31, 2007. Potential problem loans are loans that are currently performing, but where known information

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about possible credit problems of the related borrowers causes management to have serious doubts as to the ability of such borrowers to comply with the present loan repayment terms, and which may result in the disclosure of such loans as non-performing at some time in the future. At the Corporation, potential problem loans are typically loans that are performing but are classified in the Corporation's loan rating system as "substandard." Management cannot predict the extent to which economic conditions may worsen or other factors which may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on non-accrual, become restructured, or require increased allowance coverage and provisions for loan losses.

Included in the Corporation's investment portfolio at December 31, 2008 are two collateralized debt obligations consisting of pools of trust preferred securities issued by other financial institutions. While we continue to receive all contractual payments on these securities, given the continued weakness in the economy, and the financial services sector in particular, there can be no assurance that these securities will not become non-performing at some future date.

Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as historical loan loss experience, review of specific problem loans (including evaluation of the underlying collateral) changes in the composition and volume of the loan portfolio, recent charge-off experience, overall portfolio quality and current economic conditions that may affect the borrowers' ability to pay. The provision for loan losses during 2008 and 2007 totaled $1.450 million and $1.255 million, respectively. While net charge-offs increased only $12 thousand, this $195 thousand increase was principally related to loan growth during 2008, an analysis of historical loan loss experience and a continuing weak economic outlook. At December 31, 2008, the Corporation's allowance for loan losses totaled $9.106 million, resulting in a coverage ratio of allowance to non-performing loans of 200.4%. The allowance for loan losses is an amount that management believes will be adequate to absorb probable loan losses on existing loans. Net loan charge-offs during 2008 totaled $797 thousand or 0.14% of average outstanding loans, compared to $785 thousand or 0.15% of average outstanding loans in 2007. This $12 thousand increase was due principally to increases in net consumer loan and home equity charge-offs of $570 thousand and $33 thousand respectively, offset by a $593 thousand decrease in net commercial loan charge-offs. The allowance for loan losses to total loans at December 31, 2008 was 1.61% as compared to 1.57% as of December 31, 2007.

The following summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 2008 (in thousands of dollars):

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.

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The Corporation is a member of the Federal Home Loan Bank of New York ("FHLB"), which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. At December 31, 2008, the Corporation maintained a $165.7 million line of credit with the FHLB, as compared to $149.4 million at December 31, 2007.

During 2008, cash and cash equivalents decreased $5.7 million as compared to an increase of $2.8 million during 2007. In addition to cash provided by operating activities, a major source of cash during 2008 was the net cash received in the M&T branch acquisition totaling $43.5 million. The major factors netting to that amount included cash received for the deposits assumed totaling $64.6 million, which was offset by the purchase of $12.6 million of loans, the payment of an $8.4 million premium for the deposits assumed, and the purchase of fixed assets totaling $120 thousand. Other primary sources of cash during 2008 included proceeds from maturities and principal payments on securities totaling $68.2 million, a $32.2 million increase in securities sold under agreements to repurchase, a $19.4 million increase in other deposits and $2.7 million from net redemptions of FHLB and Federal Reserve Bank stock. Proceeds from the above were used primarily to fund purchases of securities totaling $100.4 million, a $62.4 million net reduction of FHLB advances, an $18.7 million net increase in loans, purchases of fixed assets in the amount of $4.2 million, payment of cash dividends totaling $3.5 million and the purchase of $930 thousand of treasury stock.

In addition to cash provided by operating activities, other primary sources of cash during 2007 included a net increase in FHLB advances of $54.5 million, proceeds from maturities and principal payments on securities totaling $36.9 million and proceeds from the sale of OREO totaling $2.4 million. Proceeds from the above were used primarily to fund a $62.2 million net increase in loans, a $12.5 million decrease in deposits, purchases of securities totaling $11.8 million, a $5.3 million purchased intangible related to the purchase of the trust business of Partners Trust, purchases of premises and equipment totaling $4.1 million, a net reduction of securities sold under agreements to repurchase in the amount of $3.8 million, the payment of cash dividends totaling $3.4 million, net purchases of FHLB and Federal Reserve Bank stock in the amount of $2.3 million and purchases of treasury stock totaling $1.2 million.

As of December 31, 2008, the Corporation's consolidated leverage ratio was 8.94%. The Tier I and Total Risk Adjusted Capital ratios were 11.97% and 13.58%, respectively. All of the above ratios are in excess of the requirements for being considered "well capitalized" by the FDIC, the Federal Reserve and the New York State Banking Department.

On October 14, 2008, the United States Treasury announced that it would purchase up to $250 billion of senior perpetual preferred stock from qualified financial institutions under its $700 billion Troubled Asset Relief Program ("TARP"). This component of TARP is referred to as the TARP Capital Purchase Program. Following a thorough analysis of this program, including consultation with legal and financial advisors, the Board of Directors of the Corporation, based upon management's recommendation, concluded that the Corporation would not participate in the program. This decision was based upon the strong capital position of the Corporation as referenced above, and management's conclusion that this strong capital position was sufficient to meet its short and longer term strategic initiatives.

Cash dividends declared during 2008 totaled $3.515 million or $1.00 per share compared to $3.413 million or $0.97 per share in 2007 and $3.422 million or $0.96 per share in 2006. Dividends declared during 2008 amounted to 42.1% of net income compared to 47.0% and 51.9% of 2007 and 2006 net income, respectively. It is management's objective to continue generating sufficient capital internally, while retaining an adequate dividend payout ratio to our shareholders.

When shares of the Corporation become available in the market, we may purchase them after careful consideration of our capital position. On November 19, 2008, the Corporation's Board of Directors authorized the repurchase of up to 90,000 shares over a one year period, either through open market or privately negotiated transactions. This program replaced the share repurchase program that had been approved in November of 2006, and expired in November of 2008. Since the inception of the share repurchase program approved in November of 2006, a total of 89,249 treasury shares had been purchased through December 31, 2008, of which 9,136 shares were purchased under the program approved on November 19, 2008. During 2008, the Corporation purchased 37,124 shares at a total cost of $930 thousand or an average price of $25.06 per share. Additionally, during 2008, 20,221 shares were re-issued

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from treasury to fund the stock component of directors' 2007 compensation, distributions under the Corporation's directors' deferred stock plan, a stock grant to an executive officer and funding for the Corporation's profit sharing, savings and investment plan. During 2007, 40,325 treasury shares were purchased at a total cost of $1.239 million or an average price of $30.73 per share, while in 2006, 73,496 shares were purchased at a cost of $2.265 million or an average price of $30.82 per share.

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in the financial statements. The Corporation is also 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 and commitments to fund new loans. 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.

As of December 31, 2008, the Corporation has off-balance sheet arrangements as follows (in thousands of dollars):

As of December 31, 2008, the Corporation is contractually obliged under long-term agreements as follows (in thousands of dollars):

As discussed below, the net income increase resulted principally from increases in net interest income and non-interest income, somewhat offset by an increase in operating expenses.

Net interest income increased $4.732 million or 18.2% from $25.936 million to $30.668 million, with the net interest margin increasing 34 basis points to 4.05%. This improvement in net interest income and margin resulted principally from increases in average loans and securities and an 86 basis point decrease in the average cost of interest-bearing liabilities, partially offset by a 28 basis point decrease in the average yield on earning assets. A $58.8 million or 8.4% increase in average earning assets reflects a $41.6 million increase in average loans, as well as increases in average securities and fed funds sold and interest-bearing deposits totaling $14.4 million and $2.8 million, respectively. The increase in average loans is reflective of growth in all segments of the loan portfolio, with average consumer loans increasing $20.2 million, average commercial loans increasing $11.0 million and average mortgages increasing $10.4 million. Approximately $9.2

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million of the increase in average loans is related to the M&T branch acquisition. The increase in average securities was principally due to the above mentioned $50.0 million leverage transaction completed during the second quarter of 2008. While on average, earning assets increased 8.4%, total interest and dividend income was up $1.563 million or 3.6%, as the average yield on earning assets was down 28 basis points to 6.00%.

Total average funding liabilities, including non-interest bearing demand deposits, increased $62.8 million or 9.3% due to increases in average deposits and other borrowed funds of $57.2 million and $5.6 million, respectively. Approximately $49.5 million of the increase in average deposits was related to the M&T branch acquisition. In total, average non-interest bearing deposits increased $9.8 million, while average interest-bearing deposits increased $47.4 million. The increase in average interest-bearing deposits was reflected primarily in higher average insured money market and time deposits of $24.4 million and $12.3 million, respectively. Additionally, average savings and NOW account balances increased $6.9 million and $3.7 million, respectively. The increase in average other borrowings was due to a $17.6 million increase in average securities sold under agreements to repurchase, offset by decreases in overnight and term advances from the FHLB totaling $10.6 million and $1.3 million, respectively. While average interest-bearing liabilities increased $53.0 million or 10.0%, interest expense decreased $3.169 million or 17.7%, as the average cost of interest-bearing liabilities decreased 86 basis points from 3.40% to 2.54%.

The 2008 provision for loan losses of $1.450 million was $195 thousand higher than a year ago. As discussed under the Asset Quality section of this report, this increase reflects loan growth and a continuing weak economic outlook, and reflects management's evaluation of the adequacy of the allowance for loan losses based upon a number of factors, including an analysis of historical loss factors, the evaluation of collateral, recent charge-off experience, overall credit quality, the current economic environment and loan growth.

Non-interest income during 2008 increased $509 thousand or 3.1% from $16.629 million to $17.138 million. This increase was negatively impacted by an $803 thousand impairment charge on investment securities, as during the fourth quarter of 2008 the Corporation recognized an other-than-temporary impairment ("OTTI") charge on a collateralized debt obligation consisting of a pool of trust preferred securities issued by financial institutions. This security had a cost basis of $1.563 million and a fair value of $760 thousand at December 31, 2008. Despite the fact that we continue to receive all contractual payments on this security, the conclusion that it was OTTI was based on a cash flow analysis with several factors considered, including higher deferrals and defaults by the issuers of the underlying securities, downgrades by rating agencies and the continued weakness in the U.S. economy, and the financial services sector in particular. Excluding this write-down, all other non-interest income increased $1.313 million or 7.9%. This increase was due in large part to a $580 thousand increase in gains on securities transactions, a $467 thousand gain resulting from the sale of our credit card merchant processing business in the fourth quarter of 2008 and a $489 thousand increase in Trust and Investment Center fee income. The increase in gains on securities transactions was impacted to a great extent by the initial public offering ("IPO") of Visa, Inc. ("Visa") during the first quarter of this year. As a Visa member institution, the Corporation was issued shares of Visa prior to the IPO, approximately 39% of which were redeemed by Visa following the IPO, resulting in a net pre-tax gain of $411 thousand. The increase in Trust and Investment Center fee income reflects additional revenue resulting from the acquisition of the trust relationships of Partners Trust in May of 2007 and the accrual of trustee fees on a large new estate acquired during the fourth quarter of 2008, partially offset by lower asset market values related to the decline in the stock market during 2008. Other significant increases include a $341 thousand increase in service charges, a $199 thousand increase in check card interchange fee income and a $179 thousand increase in revenue from our equity investment in Cephas Capital Partners, LP, a Small Business Investment Company limited partnership. These increases were partially offset primarily by a $672 thousand decrease in gains on the sale of OREO related to the sale of two commercial properties during 2007.

Operating expenses during 2008 increased $3.448 million or 11.3% from $30.520 million to $33.968 million, with approximately $2.0 million of this increase associated with the M&T branch acquisition in March of 2008, and the acquisition of the trust relationships from Partners Trust in May of 2007. Specific areas having the greatest impact on the total operating expense increase included a $1.041 million increase in salaries and wages, a $796 thousand increase in net occupancy costs, a $682 thousand increase in amortization of intangible assets and a $384

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thousand increase in data processing costs. The increase in salaries and wages was primarily related to merit increases during 2008, the aforementioned acquisitions and higher incentive compensation. Higher occupancy expenses were impacted by increased rent expense associated with the branch offices acquired from M&T, as well as a land lease related to a new office to replace our existing Cayuga Heights office. This new office, which was under construction during 2008, was opened in January of 2009. The increase in occupancy costs also reflects higher depreciation and maintenance expenses. The increase in amortization expense is related to acquisitions, and includes $226 thousand in accelerated amortization of the intangible related to the purchase of the trust relationships of Partners Trust associated with the closing of a large account during the first quarter of 2008, which was offset by the payment of fees due under a pre-existing agreement. Higher data processing costs were principally affected by increases in trust department and check card processing costs, higher software maintenance costs and conversion costs associated with the M&T acquisition. In addition to the above, the cost of employee benefits increased $310 thousand, principally due to higher health insurance and payroll tax expenses.

The $505 thousand increase in income tax expense was due primarily to the $1.599 million increase in pre-tax income. The Corporation's effective tax rate was substantially unchanged at 32.6% in 2008 compared to 32.7% in 2007.

Consolidated net income in 2007 totaled $7.259 million, an increase of 10.2% compared to $6.589 million in 2006. Earnings per share increased 11.6% from $1.81 per share to $2.02 per share on 47,372 fewer average shares outstanding. Dividends declared per share increased from $0.96 to $0.97 per share.

As discussed below, this improvement in earnings resulted from higher net interest income and non-interest income, partially offset by increases in the provision for loan losses and operating expenses, as well as a higher effective tax rate.

Net interest income increased $1.390 million or 5.7%, from $24.546 million in 2006 to $25.936 million in 2007, with the net interest margin increasing 2 basis points to 3.71%. Average earning assets increased $32.7 million or 4.9%, as a $70.3 million or 15.6% increase in average loans was somewhat offset primarily by a $36.6 million or 17.1% decrease in the average securities portfolio, as proceeds from the securities decrease were used to support loan growth during 2007. The increase in average loans reflects growth in all portfolio segments, with average mortgages increasing $35.6 million, average consumer loans increasing $26.7 million and average commercial loans up $8.0 million. While average earning assets increased 4.9%, total interest and dividend income was up $4.251 million or 10.7% as the average yield increased 33 basis points to 6.28%, due in large part to loan growth.

Total average funding liabilities, including non-interest bearing demand deposits, increased $42.6 million or 6.7% compared to the 2006 averages due to a $24.3 million increase in average deposits and an $18.3 million increase in other borrowings. The increase in average deposits was principally due to a $19.2 million increase in average time deposits, as well as increases in average demand deposit and insured money market balances of $6.7 million and $4.5 million, respectively. These increases were somewhat offset primarily by a $5.5 million decrease in average savings account balances. The increase in other borrowings reflects higher average term and overnight advances from the FHLB, these borrowings being utilized to fund loan growth. While average interest bearing liabilities increased 7.3%, total interest expense increased 19.0%, with the average cost of interest bearing liabilities increasing 33 basis points to 3.40%.

The provision for loan losses during 2007 and 2006 totaled $1.255 million and $125 thousand, respectively. This $1.130 million increase reflects both loan growth as well as charge-offs during 2007 of commercial loans for which no prior allocation to the allowance for loan losses had been made. Additionally, during 2006, the provision for loan losses was reduced significantly when a commercial loan for which a $2.022 million specific reserve had been allocated was paid off, resulting in a charge-off of only $208 thousand at that time.

Non-interest income during 2007 increased $2.317 million or 16.2% from $14.312 million to $16.629 million. This increase was impacted to a great extent by a $1.444 million increase in Trust and Investment Center fee income as well as a $668 thousand increase in gains on the sale of Other Real Estate Owned ("OREO"), these being properties that had been acquired through foreclosure proceedings. The increase in Trust and Investment Center fee income was primarily due to increased

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revenue related to the Corporation's acquisition in May 2007 of the trust business of Partners Trust, as well as higher retirement services and investment management revenue, while the increase in gains on the sale of OREO resulted principally from the sale of two commercial properties that had been foreclosed on during 2006. In addition to the above, other significant increases during 2007 included a $306 thousand increase in service charges on deposit accounts, a $114 thousand increase in credit card merchant earnings, a $111 thousand increase in debit card interchange fee income and a $101 thousand increase in cash management fee income. These increases were offset to some extent primarily by a $280 thousand decrease in revenue from the Corporation's equity investment in Cephas Capital Partners, LP, a Small Business Investment Company limited partnership, and a $204 thousand decrease in revenue generated from OREO, this decrease associated with the aforementioned sale of two commercial properties.

Operating expenses during 2007 increased $997 thousand or 3.4%, from $29.523 million to $30.520 million. The principal factors in this increase include $1.786 million increase in salaries and wages, as well as increases in net occupancy expenses and amortization of intangible assets totaling $275 thousand and $236 thousand, respectively. The increase in salaries and wages was primarily related to merit increases effective in January 2007, the addition to staff in conjunction with the purchase of the trust business of Partners Trust and higher levels of incentive compensation. The increase in net occupancy costs was primarily due to higher depreciation, maintenance and rent expense, while higher amortization expense was related to amortization of the purchase intangible related to the trust relationship acquisition. The above increases were offset primarily by a $668 thousand decrease in pension and other employee benefits, a $495 thousand decrease in OREO expenses and a $167 thousand decrease in data processing costs. The reduction in the cost of pension and other employee benefits resulted primarily from decreases in expenses associated with the Corporation's defined benefit pension plan and post-retirement medical plan totaling $783 thousand and $200 thousand, respectively, offset to some extent primarily by increases in health insurance and payroll taxes of $183 thousand and $82 thousand, respectively. The decrease in pension expense is primarily due to an increase in the expected return on plan assets, due in large part to the Corporation's $10.0 million contribution to the plan in 2006, while the reduction in post-retirement medical benefits resulted from an amendment to this plan effective July 1, 2006. Prior to this amendment, all retirees age 55 or older were eligible for coverage under the Corporation's self insured plan, contributing 40% of the cost of the coverage. Under the amended plan, coverage for retirees age 65 and older who reside in the designated plan area is provided under a group plan offered through Blue Cross, Blue Shield called Medicare Blue PPO, with the retiree paying 100% of the cost of coverage. Current retirees age 65 and older who reside outside of the designated area, as well as current and future retirees between the ages of 55 and 65, will continue to be eligible for coverage under the Corporation's self insured plan, with the retiree contribution increasing from 40% to 50%. The decrease in OREO expenses is due to the sale of two commercial properties during 2007, while the reduction in data processing costs is related to the fact that during the fourth quarter of 2006, the Corporation changed its ATM processing vendor, and at that time incurred a $191 thousand termination fee with its prior vendor.

A $909 thousand increase in income tax expense and the increase in the effective tax rate from 28.5% to 32.7% reflects an increase in pre-tax income and a decrease in the relative percentage of tax-exempt income to pre-tax income, as well as an increase in New York State tax expense primarily due to the implications of New York State minimum tax and a change in the New York State tax rate.