PENSION PLAN AND OTHER BENEFIT PLANS

Pension Plan

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

New employees hired on or after the July 10, 2010 were not eligible to participate in the plan, however, existing participants at that time continued to accrue benefits. On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-based and service-based component of the formula used to determine retirement benefits in the pension plan were frozen so that participants will no longer earn further retirement benefits.

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

The following table presents (1) changes in the plan's projected benefit obligation and plan assets, and (2) the plan's funded status at December 31, 2016 and 2015 (in thousands):



Change in projected benefit obligation:	2016			2015
Benefit obligation at beginning of year	$	43,797		$	45,544
Service cost	1,047			1,231
Interest cost	1,883			1,806
Actuarial (gain) loss	913			(3,199		)
Curtailments	(6,161		)	—
Benefits paid	(1,688		)	(1,585		)
Benefit obligation at end of year	$	39,791		$	43,797



Change in plan assets:	2016			2015
Fair value of plan assets at beginning of year	$	39,951		$	43,336
Actual return on plan assets	3,297			(1,800		)
Employer contributions	—			—
Benefits paid	(1,688		)	(1,585		)
Fair value of plan assets at end of year	$	41,560		$	39,951

Funded status	$	1,769		$	(3,846	)

Amount recognized in accumulated other comprehensive income (loss) at December 31, 2016 and 2015 consist of the following (in thousands):



	2016		2015
Net actuarial loss	$	10,788	$	17,863
Prior service cost	—		7
Total before tax effects	$	10,788	$	17,870

The accumulated benefit obligation at December 31, 2016 and 2015 was $39.8 million and $37.7 million, respectively.

The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2016, 2015 and 2014 were as follows:



	2016		2015		2014
Discount rate	4.16	%	4.39	%	4.09	%
Assumed rate of future compensation increase	N/A		5.00	%	5.00	%

Components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) in 2016, 2015 and 2014 consist of the following (in thousands):



Net periodic benefit cost	2016			2015			2014
Service cost, benefits earned during the year	$	1,047		$	1,231		$	1,045
Interest cost on projected benefit obligation	1,883			1,806			1,738
Expected return on plan assets	(3,019		)	(3,287		)	(3,174		)
Amortization of net loss	1,549			1,414			649
Amortization of prior service cost	7			7			7
Net periodic cost	$	1,467		$	1,171		$	265



Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):	2016			2015			2014
Net actuarial (gain) loss	$	(5,526	)	$	1,888		$	8,195
Recognized loss	(1,549		)	(1,414		)	(649		)
Amortization of prior service cost	(7		)	(7		)	(7		)
Total recognized in other comprehensive income (loss) (before tax effect)	$	(7,082	)	$	467		$	7,539

Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect)	$	(5,615	)	$	1,638		$	7,804

During 2016 the plan's total unrecognized net loss decreased by $7.1 million. Because the total unrecognized net gain or loss in the plan exceeds 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized. Due to the plan freeze effective December 31, 2016, this excess will now be amortized over the average total life expectancy of all participants which was 28.49 years as of January 1, 2016. Prior to the plan freeze, the excess was amortized over the average future working lifetime of active participants which was 8.76 year as of January 1, 2016. Actual results for 2017 will depend on the 2017 actuarial valuation of the plan.



Amounts expected to be recognized in net periodic cost during 2017 (in thousands):
Loss recognition	$	233
Prior service cost recognition	$	—

The principal actuarial assumptions used in determining the net periodic benefit cost for the years ended December 31, 2016, 2015 and 2014 were as follows:



	2016		2015		2014
Discount rate	4.39	%	4.09	%	4.92	%
Expected long-term rate of return on assets	7.75	%	7.75	%	7.75	%
Assumed rate of future compensation increase	5.00	%	5.00	%	5.00	%

The Corporation changes important assumptions whenever changing conditions warrant. At December 31, 2016, the Corporation used Retirement Plan 2014 (RP-2014) and Mortality Improvement Scale 2016 (MP-2016) as a basis for the Plan's valuation. At December 31, 2015, the Corporation used Retirement Plan 2014 (RP-2014) and Mortality Improvement Scale 2015 (MP-2015) as a basis for the Plan's valuation. The discount rate is evaluated at least annually and the expected long-term return on plan assets will typically be revised every three to five years, or as conditions warrant. Other material assumptions include the compensation increase rates, rates of employee terminations, and rates of participant mortality.

The Corporation's overall investment strategy is to achieve a mix of investments for long-term growth and for near-term benefit payments with a wide diversification of asset types. The target allocations for plan assets are shown in the table below. Equity securities primarily include investments in common or preferred shares of both U.S. and international companies. Debt securities include U.S. Treasury and Government bonds as well as U.S. Corporate bonds. Other investments may consist of mutual funds, money market funds and cash & cash equivalents. While no significant changes in the asset allocations are expected during 2017, the Corporation may make changes at any time.

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



Asset Class	Target Allocation 2016	Percentage of Plan Assets at December 31,				Expected Long-Term Rate of Return
		2016		2015
Large cap domestic equities	30% - 60%	57	%	58	%	10.3	%
Mid-cap domestic equities	0% - 20%	5	%	4	%	10.6	%
Small-cap domestic equities	0% - 15%	2	%	3	%	10.8	%
International equities	0% - 25%	7	%	6	%	10.3	%
Intermediate fixed income	20% - 50%	26	%	23	%	4.7	%
Alternative assets	0% - 10%	—	%	2	%	7.5	%
Cash	0% - 20%	3	%	4	%	2.5	%
Total		100	%	100	%

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

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

As of December 31, 2016 and 2015, the Corporation's pension plan did not hold any direct investment in the Corporation's common stock.

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

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

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

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

The fair value of the plan assets at December 31, 2016 and 2015, by asset class are as follows (in thousands):



			Fair Value Measurement at December 31, 2016 Using
Plan Assets	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	1,324	$	1,324	$	—	$	—
Equity securities:
U.S. companies	19,972		19,972		—		—
International companies	847		847		—		—

Mutual funds	14,680		14,680		—		—

Debt securities:
U.S. Treasuries/Government bonds	2,218		—		2,218		—
U.S. Corporate bonds	2,519		—		2,519		—
Total plan assets	$	41,560	$	36,823	$	4,737	$	—



			Fair Value Measurement at December 31, 2015 Using
Plan Assets	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Cash	$	1,486	$	1,486	$	—	$	—
Equity securities:
U.S. companies	23,424		23,424		—		—
International companies	1,277		1,277		—		—

Mutual funds	8,548		8,548		—		—

Debt securities:
U.S. Treasuries/Government bonds	2,468		—		2,468		—
U.S. Corporate bonds	2,748		—		2,748		—
Total plan assets	$	39,951	$	34,735	$	5,216	$	—

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



Calendar Year	Future Expected Benefit Payments
2017	$	2,055
2018	$	2,106
2019	$	2,150
2020	$	2,176
2021	$	2,213
2022-2026	$	11,292

The Corporation does not expect to contribute to the plan during 2017. Funding requirements for subsequent years are uncertain and will significantly depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements.

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

Defined Contribution Profit Sharing, Savings and Investment Plan

The Corporation also sponsors a defined contribution profit sharing, savings and investment plan which covers all eligible employees with a minimum of 1,000 hours of annual service. The Corporation makes discretionary matching and profit sharing contributions to the plan for employees hired prior to July 1, 2010 based on the financial results of the Corporation. The Corporation also contributes to a non-discretionary 401K plan which covers all eligible employees hired after July 1, 2010. Expense related to both plans totaled $609 thousand, $639 thousand, and $620 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. The plan's assets at December 31, 2016, 2015 and 2014 include 174,957, 169,398, and 170,714 shares, respectively, of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds.

Defined Benefit Health Care Plan

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

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

The following table presents (1) changes in the plan's accumulated postretirement benefit obligation and (2) the plan's funded status at December 31, 2016 and 2015 (in thousands):



Changes in accumulated postretirement benefit obligation:	2016			2015
Accumulated postretirement benefit obligation - beginning of year	$	1,664		$	1,663
Service cost	43			46
Interest cost	66			70
Participant contributions	87			83
Amendments	(1,101		)	—
Actuarial (gain) loss	138			215
Benefits paid	(474		)	(413		)
Accumulated postretirement benefit obligation at end of year	$	423		$	1,664



Change in plan assets:	2016			2015
Fair value of plan assets at beginning of year	$	—		$	—
Employer contribution	387			330
Plan participants’ contributions	87			83
Benefits paid	(474		)	(413		)
Fair value of plan assets at end of year	$	—		$	—

Funded status	$	(423	)	$	(1,664	)

Amount recognized in accumulated other comprehensive income (loss) at December 31, 2016 and 2015 consist of the following (in thousands):



	2016			2015
Net actuarial loss	$	636		$	517
Prior service credit	(1,101		)	(434		)
Total before tax effects	$	(465	)	$	83



Weighted-average assumption for disclosure as of December 31:	2016		2015		2014
Discount rate	4.16	%	4.39	%	4.09	%
Health care cost trend: Initial	6.50	%	7.00	%	7.00	%
Health care cost trend: Ultimate	5.00	%	5.00	%	5.00	%
Year ultimate cost trend reached	2020		2019		2018

The components of net periodic postretirement benefit cost for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):



Net periodic cost (benefit)	2016			2015			2014
Service cost	$	43		$	46		$	39
Interest cost	66			70			72
Amortization of prior service benefit	(97		)	(97		)	(97		)
Recognized actuarial loss	20			20			3
Recognized prior service benefit due to curtailments	(337		)	—			—
Net periodic postretirement cost (benefit)	$	(305	)	$	39		$	17



Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):	2016			2015			2014
Net actuarial gain	$	139		$	216		$	177
Recognized actuarial loss	(20		)	(20		)	(3		)
Prior service credit	(1,101		)	—			—
Amortization of prior service benefit	434			97			97
Total recognized in other comprehensive income (loss)(before tax effect)	$	(548	)	$	293		$	271

Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect)	$	(853	)	$	332		$	288

During 2016 the plan's total unrecognized net loss increased by $119 thousand. Because the total unrecognized net gain or loss in the plan exceeds 10% of the accumulated postretirement benefit obligation, the excess will be amortized over the average future working lifetime of active plan participants. As of January 1, 2016, the average future working lifetime of active participants was 14.3 years. Since the plan was frozen as of December 31, 2016, the amortization period moved to the average future life expectancy of the remaining retirees, which at January 1, 2016 was 5.0 years. Actual results for 2017 will depend on the 2017 actuarial valuation of the plan.



Amounts expected to be recognized in net periodic cost during 2017 (in thousands):
Loss recognition	$	119
Prior service cost recognition	$	(220	)

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



Effect of a 1% increase in health care trend rate on:	2016		2015		2014
Benefit obligation	$	2	$	3	$	5
Total service and interest cost	$	—	$	—	$	—



Effect of a 1% decrease in health care trend rate on:	2016			2015			2014
Benefit obligation	$	(3	)	$	(3	)	$	(6	)
Total service and interest cost	$	—		$	—		$	—



Weighted-average assumptions for net periodic cost as of December 31:	2016		2015		2014
Discount rate	4.39	%	4.09	%	4.92	%
Health care cost trend: Initial	7.00	%	7.00	%	8.00	%
Health care cost tread: Ultimate	5.00	%	5.00	%	5.00	%
Year ultimate reached	2019		2018		2018

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



Calendar Year	Future Estimated Benefit Payments
2017	$	115
2018	$	104
2019	$	71
2020	$	49
2021	$	27
2022-2026	$	67

The Corporation’s policy is to contribute the amount required to fund postretirement benefits as they become due to retirees. The amount expected to be required in contributions to the plan during 2017 is $115 thousand.

Executive Supplemental Pension Plan

The Corporation also sponsors an Executive Supplemental Pension Plan for certain former executive officers to restore certain pension benefits that may be reduced due to limitations under the Internal Revenue Code. The benefits under this plan are unfunded as of December 31, 2016 and 2015.

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

The following table presents Executive Supplemental Pension plan status at December 31, 2016 and 2015 (in thousands):



Change in projected benefit obligation:	2016			2015
Benefit obligation at beginning of year	$	1,210		$	1,244
Service cost	43			44
Interest cost	51			49
Actuarial (gain) loss	19			(52		)
Benefits paid	(75		)	(75		)
Projected benefit obligation at end of year	$	1,248		$	1,210



Changes in plan assets:	2016			2015
Fair value of plan assets at beginning of year	$	—		$	—
Employer contributions	75			75
Benefits paid	(75		)	(75		)
Fair value of plan assets at end of year	$	—		$	—

Unfunded status	$	(1,248	)	$	(1,210	)

Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2016 and 2015 consist of the following (in thousands):



	2016		2015
Net actuarial loss	$	165	$	173
Prior service cost	—		—
Total before tax effects	$	165	$	173

Accumulated benefit obligation at December 31, 2016 and 2015 was $1.2 million.



Weighted-average assumption for disclosure as of December 31:	2015		2015		2014
Discount rate	4.16	%	4.39	%	4.09	%
Assumed rate of future compensation increase	N/A		5.00	%	5.00	%

The components of net periodic benefit cost for the years ended December 31, 2016, 2015 and 2014 are as follows (in thousands):



Net periodic benefit cost	2016		2015		2014
Service cost	$	43	$	44	$	38
Interest cost	51		49		55
Recognized actuarial loss	26		50		29
Net periodic postretirement benefit cost	$	120	$	143	$	122



Other changes in plan assets and benefit obligation recognized in other comprehensive income (loss):	2016			2015			2014
Net actuarial (gain) loss	$	18		$	(52	)	$	110
Recognized actuarial loss	(26		)	(50		)	(29		)
Total recognized in other comprehensive income (loss) (before tax effect)	$	(8	)	$	(102	)	$	81

Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect)	$	112		$	41		$	203

During 2016, the plan's total unrecognized net loss decreased by $8 thousand. Because the unrecognized net gain or loss exceeds the greater of 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized. Due to the fact that the plan no longer has any active participants, this excess will now be amortized over the average total life expectancy of all participants which was 15.05 as of January 1, 2017. In prior years, the excess was amortized over the average future working lifetime of active participants which was 4.00 years as of January 1, 2017.



Amounts expected to be recognized in net periodic cost during 2017 (in thousands):
Loss recognition	$	3
Prior service cost recognition	$	—



Weighted-average assumptions for net periodic cost as of December 31:	2016		2015		2014
Discount rate	4.39	%	4.09	%	4.92	%
Salary scale	N/A		5.00	%	5.00	%

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



Calendar Year	Future Estimated Benefit Payments
2017	$	74
2018	$	108
2019	$	106
2020	$	104
2021	$	102
2022-2026	$	462

The Corporation expects to contribute $75 thousand to the plan during 2017. Corporation contributions are equal to the benefit payments to plan participants.

Defined Contribution Supplemental Executive Retirement Plan

The Corporation also sponsors a Defined Contribution Supplemental Executive Retirement Plan for certain current executive officers, which was initiated in 2012. The plan is unfunded as of December 31, 2016 and is intended to provide nonqualified deferred compensation benefits payable at retirement, disability, death or certain other events. The balance in the plan as of December 31, 2016 and 2015 was $1,043 thousand and $772 thousand, respectively. A total of $262 thousand, $231 thousand, and $213 thousand was expensed during the years ended December 31, 2016, 2015, and 2014, respectively. In addition to each participants account being credited with the annual company contribution, each account will receive a quarterly interest credit that will equal the average yield on five year U.S. Treasury Notes.