CHEMUNG FINANCIAL CORPCHMG

CHEMUNG FINANCIAL CORP Income Taxes Disclosure

10-KFiled Mar 13, 20265 min read
INCOME TAXES
For the years ended December 31, 2025 and 2024, income tax expense attributable to income from operations consisted of the following (in thousands):
20252024
Current expense:
Federal$6,875 $4,877 
State630 416 
Total current7,505 5,293 
Deferred expense/(benefit):
Federal(2,938)1,029 
State(556)92 
Establishment of valuation allowance821 — 
Total deferred(2,673)1,121 
Income tax expense$4,832 $6,414 

The Corporation had no income taxes in foreign jurisdictions for the years ended December 31, 2025 and 2024.
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income tax expense as follows (in thousands, except percentages):
2025
AmountsPercentages
Income taxes at the U.S. federal statutory tax rate$4,187 21.0 %
State and local income taxes, net of federal income tax impact (a) 134 0.7 %
Changes in valuation allowances745 3.7 %
Nontaxable or nondeductible items
Municipal interest income(360)(1.8)%
Other91 0.5 %
Other adjustments35 0.1 %
Total$4,832 24.2 %
(a) State taxes in New York made up the majority (greater than 50 percent) of the tax effect in this category.
Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income tax expense as follows (in thousands) in accordance with the guidance prior to the adoption of ASU 2023-09:
 2024
Statutory federal tax rate21 %
Tax computed at statutory rate$6,318 
Increase (reduction) resulting from:
Tax-exempt income(528)
Dividend exclusion(10)
State taxes, net of Federal impact437 
Nondeductible interest expense51 
Other items, net146 
Income tax expense$6,414 
Effective tax rate21.3 %
For the year ended December 31, 2025, the Corporation made the following income tax payments, net of refunds received:
2025
U.S. federal taxes$5,950 
State and local taxes
New York398 
Total income taxes paid$6,348 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31, 2025 and 2024, are presented below (in thousands):
Deferred tax assets:
20252024
Allowance for credit losses$6,534 $5,858 
Depreciation1,334 1,122 
Deferred compensation and directors' fees1,656 1,444 
Operating lease liabilities1,253 1,435 
Purchase accounting adjustment – fixed assets154 154 
Net unrealized losses on securities available for sale12,484 22,487 
Defined benefit pension and other benefit plans448 527 
Nonaccrued interest381 381 
Accrued expense52 74 
Capital loss carryforward2,694 — 
Other items, net114 135 
Total gross deferred tax assets27,104 33,617 
Deferred tax liabilities:
Deferred loan fees and costs1,054 1,220 
Prepaid pension4,268 4,283 
Discount accretion195 163 
Core deposit intangible1,847 1,821 
REIT dividend1,107 775 
Operating lease right-of-use assets1,253 1,435 
Accrual for employee benefit plans15 11 
Other items, net285 241 
Total gross deferred tax liabilities10,024 9,949 
Valuation allowance821 — 
Net deferred tax asset$16,259 $23,668 

Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is recognized when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax assets, the level of historical taxable income and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. 

The sale of available for sale securities during the second quarter of 2025 resulted in a net loss of $17.5 million and occurred at the Bank, as well as the Corporation's REIT Entity. Under IRC Sec. 582(c)(1), in the case of banks, the sale or exchange of a bond, debenture, note or certificate or other evidence of indebtedness shall not be considered a sale or exchange of a capital asset. Therefore, the loss from the sale of securities at the Bank is considered ordinary in nature. However, the REIT is not considered a "bank" under IRC Sec. 582(c) and therefore, a sale of securities at the REIT are considered capital in nature. The capital loss amount of $11.5 million (gross) attributable to the REIT and represented a $2.7 million deferred tax asset subject to
a 5-year carryforward limitation. Based on its assessment during the fourth quarter of 2025, management determined to establish a valuation allowance against its deferred tax asset associated with the capital loss in the amount of $821 thousand.
The Corporation’s current tax planning strategies include the planned sale of appreciated investment securities and loans from the REIT entity. These transactions are intended to generate future capital gains sufficient to utilize the capital loss carryforward prior to its expiration. Management has demonstrated both the ability and intent to execute these strategies in a timely and economically feasible manner.
After detailed review, including various scenarios of changes in market interest rates, while the Corporation’s management has demonstrated the ability and intent to implement these prudent and reasonable actions, management determined that it is more likely than not that a portion of the deferred assets, including the capital loss carryforward, will not be realized. Further, management will continue to monitor all available positive and negative evidence on at least a quarterly basis, consistent with ASC 740, and will promptly adjust the valuation allowance assessment if facts and circumstances change materially.
As of December 31, 2025 and 2024, the Corporation did not have any unrecognized tax benefits.
The Corporation accounts for interest and penalties related to uncertain tax positions as part of its provision for Federal and State income taxes. As of December 31, 2025 and 2024, the Corporation did not accrue any interest or penalties related to its uncertain tax positions.
The Corporation is not currently subject to examinations by Federal taxing authorities for the years prior to 2022 and for New York State taxing authorities for the year prior to 2022. New York State taxing authorities recently completed audits of the Corporation for the years 2018, 2019, and 2020. There were no adjustments as a result of the New York State audits.

Historical Timeline

Fiscal YearFiled
2025Mar 13, 2026Showing above
2024Mar 14, 2025
2023Mar 13, 2024
2022Mar 22, 2023
2021Mar 23, 2022
2020Mar 24, 2021
2019Mar 12, 2020
2018Mar 13, 2019
2017Mar 8, 2018
2016Mar 8, 2017
2015Mar 11, 2016

About Income Taxes Disclosures

The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.

Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.

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