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Item 7. Management’s Discussion and Analysis

2022-03-23 compared with 2021-03-24 · 282 added, 520 removed, 717 unchanged (53% of the section changed)

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Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies and Estimates

Critical accounting policies include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions.

Critical Accounting Estimates

Critical accounting estimates include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions.

The Corporation prepares its financial statements in conformity with GAAP.

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Allowance for Loan Losses

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the 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.

Management considers the allowance for loan losses to be a critical accounting estimate given the 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.

The allowance is established through a provision for loan losses in the Consolidated Statements of Income and is established based on management’s evaluation of the probable inherent losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.

Management's evaluation of the adequacy of the allowance for loan losses is performed on a quarterly basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans.

While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses.

Actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class.

These qualitative factors include consideration of the following:

(1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, and more recently the expected impact of COVID-19 on the various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues:

unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy, including the impact of COVID-19.

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.

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The determination of the allowance also includes an evaluation of non-impaired loans and is based on historical loss experience adjusted for current factors.

Please see Note 1 to the Corporation's consolidated financial statements which begins on page F-10, for further discussion.

Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses.

Goodwill is not amortized, but is tested for impairment at the reporting unit level, defined as the segment level, at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred.

In assessing impairment, the Corporation has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount.

If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.

The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment.

Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value.

Significant judgment is applied when goodwill is assessed for impairment.

This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections.

The selection and weighting of the various fair value techniques may result in a higher or lower fair value.

Judgment is applied in determining the weightings that are most representative of fair value.

Goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred.

As of December 31, 2020, the Corporation elected to proceed to a quantitative calculation to compare the reporting unit's fair value with its' carrying value.

We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including:

(1) forecasted revenues, expenses, and cash flows;

(2) current discount rates;

(3) our market capitalization;

(4) observable market transactions and multiples;

(5) changes to the regulatory environment;

and (6) the nature and amount of government support that has been and is expected to be provided in the future.

Please see Note 1 to the Corporation's consolidated financial statements which begins on page F-10, for further discussion.

Risks and Uncertainties

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home.

This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment.

Since the COVID-19 pandemic, millions of people have filed claims for unemployment, and stock markets have remained volatile and in particular bank stocks have significantly declined in value.

Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry.

Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences.

We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business.

The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.

The Corporation's consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses established.

Management evaluated the potential impact of the COVID-19 pandemic as it related to the loan portfolio and as part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes.

Certain allowance qualitative factors were increased based on an assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.

Management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio.

While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, Management has designated certain industries as most impacted by COVID-19.

For a discussion of the effect of COVID-19 on our business, see pages 57-58 of this Form 10-K.

Please refer to Note 1 in the Corporation's consolidated financial statements which begins on page F-10, for further discussion.

Consolidated Financial Highlights

As of or for the Years Ended

December 31, December 31, December 31,

December 31, December 31,

(in thousands, except per share data) 2021 2020

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Return on average tangible equity (a) 14.49 % 11.24 %

Efficiency ratio (unadjusted) (g) 66.56 % 69.03 % 67.94 %

Efficiency ratio (unadjusted) (f) 62.24 % 66.56 %

Efficiency ratio (adjusted) (a) (b) 61.71 % 65.71 %

Non-interest expense to average assets (a) (c) 2.73 % 3.16 % 3.31 %

Non-interest expense to average assets 2.30 % 2.73 %

Loans to deposits 70.44 % 75.40 %

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As of or for the Years Ended

December 31, December 31, December 31,

December 31, December 31,

(in thousands, except per share data) 2021 2020

AVERAGE BALANCES

Loans (d) $ 1,456,096 $ 1,296,426 $ 1,320,059

Loans (c) $ 1,545,579 $ 1,456,096

Interest-earning assets 2,324,498 1,945,062

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ASSET QUALITY

Net charge-offs $ 6,792 $ 1,411 $ 5,369

Non-performing loans (e) 9,952 18,008 12,254

Non-performing assets (f) 10,189 18,525 12,828

Net charge-offs (recoveries) $ (84) $ 6,792

Non-performing loans (d) 8,114 9,952

Non-performing assets (e) 8,227 10,189

Allowance for loan losses 21,025 20,924

Annualized net charge-offs to average loans 0.47 % 0.11 % 0.41 %

Annualized net charge-offs (recoveries) to average loans (0.01) % 0.47 %

Non-performing loans to total loans 0.54 % 0.65 %

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(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal accruals and settlements divided by the total of fully taxable equivalent net interest income plus non-interest income less net gains on securities transactions.

(c) For the non-interest expense to average assets ratio, non-interest expense does not include legal accruals and settlements.

See Note 17 of the audited consolidated financial statements for further discussion.

(d) Loans include loans held for sale.

Loans do not reflect the allowance for loan losses.

(e) Non-performing loans include non-accrual loans only.

(f) Non-performing assets include non-performing loans plus other real estate owned.

(g) Efficiency ratio (unadjusted) is non-interest bearing expense divided by the total of net interest income plus non-interest income.

(d) Non-performing loans include non-accrual loans only.

(e) Non-performing assets include non-performing loans plus other real estate owned.

(f) Efficiency ratio (unadjusted) is non-interest bearing expense divided by the total of net interest income plus non-interest income.

Executive Summary

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Efficiency ratio (adjusted) (a) 61.71 % 65.71 %

Non-interest expense to average assets (a) 2.73 % 3.16 %

Non-interest expense to average assets 2.30 % 2.73 %

(a) See the GAAP to Non-GAAP reconciliations on pages 64-67

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Return on average equity for the year ended December 31, 2021 was 12.94%, compared with 9.94% for the prior year.

The increase in net income for the year ended December 31, 2020, compared to the prior year, was driven by increases in net interest income and non-interest income and a decrease in the provision for loan losses, partially offset by an increase in non-interest expenses and income tax expense.

The increase in net income for the year ended December 31, 2021, compared to the prior year, was driven by increases in net interest income and non-interest income and decreases in the provision for loan losses and non-interest expenses, partially offset by an increase in income tax expense.

Net interest income

Net interest income increased $2.7 million, or 4.2% in 2021, compared with the prior year.

The increase was due primarily to the impact of an increase of $270.4 million in average interest-earning assets, offset by the impact of a thirty-nine basis points decline in net interest margin.

The increase was due primarily to the impact of an increase of $379.4 million in average interest-earning assets, offset by the impact of a forty-one basis points decline in net interest margin.

Non-interest income

Non-interest income increased $2.7 million, or 13.0% in 2021, compared to the prior year.

The increase was due primarily to increases of $1.3 million in net gains on sales of residential mortgage loans sold into the secondary market, $0.2 million in net gains on the sale of four commercial loans, three of which were non-performing, $0.4 million in interest rate swap fees earned, and a $0.6 million credit adjustment to Chemung Risk Management loss reserves, offset by a decrease of $1.3 million in service charges on deposit accounts primarily attributable to a decrease in NSF and overdraft fees as compared to the prior year.

The increase was due primarily to increases of $1.6 million in wealth management group fee income, $0.8 million in interchange revenue from debit card transactions, $0.2 million in change in fair value of equity investments, and a $0.7 million one-time refund of real estate taxes, sales tax rebates and Mastercard incentives as compared to the prior year, offset by a $0.7 million decrease in net gains on sales of residential mortgage loans sold into the secondary market.

Non-interest expenses

Non-interest expenses increased $0.2 million, or 0.4% in 2020, compared to the prior year.

The increase was due primarily to increases of $0.8 million in salaries and wage expense, $0.5 million in FDIC insurance expense, and $0.4 million in loan expenses, offset by decreased spending across most other categories, including $0.4 million in furniture and equipment expenses, $0.3 million in marketing and advertising expenses, and $0.3 million in pension and other employee benefits, and a $0.5 million increase in the credit related to the net periodic pension and post-retirement benefits.

The increase in salaries and wage expense was primarily attributed to annual merit increases and an increase in commission and reward expenses.

The increase in FDIC insurance expense was primarily attributed to the receipt of a $0.4 million credit in 2019 related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment.

The increase in loan expenses was primarily attributed to legal fees associated with a legal action taken by the Corporation related to the $4.2 million impairment of a commercial credit disclosed in the Corporation's Current Report on Form 8-K, dated September 12, 2019, and an increase in loan volume during 2020 when compared to the prior year.

The decrease in furniture and equipment expenses was primarily attributed to normal depreciation and a reduction in one-time service contract expenditures.

The decrease in marketing and advertising expenses was primarily attributed to the cancellation of directed marketing initiatives due to the COVID-19 pandemic.

The decrease in pension and other employee benefits in 2020 was primarily attributed to a decrease in healthcare expenses when compared to the prior year.

The increase in the credit related to the net periodic pension and post-retirement benefits was primarily due to a change in factors used to prepare annual actuarial estimates.

Non-interest expenses decreased $0.3 million, or 0.5% in 2021, compared to the prior year.

The decrease was due primarily to a decrease of $1.3 million in other non-interest expense, a $0.6 million increase in the credit related to the net periodic pension and post-retirement benefits, and a decrease of $0.4 million in furniture and equipment expenditures, offset by increases of $0.9 million in data processing expense, $0.5 million in pension and other employee benefits, $0.4 million in FDIC insurance, and $0.2 million in professional services.

For the years ended December 31, 2021 and 2020, the ratio of non-interest expense to average assets was 2.30% and 2.73%, respectively.

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The provision for loan losses decreased $4.2 million, or 99.6% in 2021, compared to the prior year.

The decrease in provision for loan losses in 2020 was primarily due to a specific impairment of $4.2 million related to a participation interest in a commercial credit in the prior year.

The Corporation is closely monitoring the loan portfolio for effects related to COVID-19.

In 2020, the Company increased the allowance by $4.5 million for probable incurred credit losses related to the COVID-19 pandemic, of which $4.0 million remains part of the allowance at year end.

Net charge-offs were $6.8 million in 2020, compared with $1.4 million for the prior year.

The increase in net charge-offs was due primarily to a charge-off of a large commercial participation loan for $3.8 million and a $2.1 million partial charge-off of a commercial loan.

The general component of the allowance based on historical loss experience was reduced in total by $1.6 million, primarily a result of the decrease in the pandemic related reserve which included $1.4 million released and $0.2 million utilized for downgraded loans, with a remaining balance of $2.4 million at December 31, 2021.

The December 31, 2021 provision included a $1.5 million increase in reserves for impaired loans, primarily due to the impairment of one commercial real estate loan.

Net recoveries were $0.1 million in 2021, compared with net charge-offs of $6.8 million in 2020.

The decrease in net charge-offs when compared to the prior year was due primarily to a charge-off of a large commercial participation loan for $3.8 million and a $2.1 million partial charge-off of a commercial loan in 2020.

In 2020, net charge-offs of $6.8 million were offset by a decline in reserves for impaired loans of $6.6 million.

Additionally, the general component of the allowance based on historical loss experience increased by $2.8 million with the establishment of a $4.0 million reserve at year-end 2020 related to the pandemic, partially offset by a decrease of $1.2 million due to a net decrease in the historical loss factors due to a large 2018 loan charge-off which no longer impacted the calculation.

Reserves also increased by $0.9 million in 2020 on other classified loans.

Income tax expense

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The increase in income tax expense was primarily due to an increase in pretax income.

The following table presents selected financial information for the years indicated, and the dollar and percent change (in thousands, except per share and ratio data):

Years Ended December 31,

2019 2018 Change Percentage Change

Net interest income $ 60,611 $ 60,480 $ 131 0.2 %

Non-interest income 20,073 23,074 (3,001) (13.0) %

Non-interest expenses 55,696 56,766 (1,070) (1.9) %

Pre-provision income 24,988 26,788 (1,800) (6.7) %

Provision for loan losses 5,945 3,153 2,792 88.6 %

Income tax expense 3,434 4,009 (575) (14.3) %

Net income $ 15,609 $ 19,626 $ (4,017) (20.5) %

Basic and diluted earnings per share $ 3.21 $ 4.06 $ (0.85) (20.9) %

Selected financial ratios

Return on average assets 0.88 % 1.14 %

Return on average equity 8.86 % 12.76 %

Net interest margin, fully taxable equivalent 3.64 % 3.72 %

Efficiency ratio (adjusted) (a) 67.95 % 67.22 %

Non-interest expense to average assets (a) 3.16 % 3.31 %

(a) See the GAAP to Non-GAAP reconciliations on pages 75-78.

Net income for the year ended December 31, 2019 was $15.6 million, or $3.21 per share, compared to net income of $19.6 million, or $4.06 per share, for the prior year.

Return on average equity for the year ended December 31, 2019 was 8.86%, compared with 12.76% for the prior year.

The decrease in net income for the year ended December 31, 2019, compared with the prior year, was driven by a decrease in non-interest income and an increase in the provision for loan losses, partially offset by an increase in net interest income and decreases in non-interest expenses and income tax expense.

Net interest income

Net interest income increased $0.1 million, or 0.2% in 2019, compared with the prior year.

The increase was due primarily to the impact of an increase of $35.9 million in average interest-earning assets, offset by the impact of an eight basis points decline in net interest margin.

Non-interest income

Non-interest income decreased $3.0 million, or 13.0% in 2019, compared to the prior year.

The decrease was due primarily to decreases of $1.9 million in the change in fair value of equity investments, $0.9 million in other non-interest income, $0.2 million in net gains (losses) on sales of other real estate owned, and $0.3 million in service charges on deposit accounts, offset by an increase of $0.2 million in WMG fee income and an increase of $0.2 million in CFS fee and commission income.

The decrease in the change in fair value of equity investments was due primarily to the $2.1 million increase in the fair value of Visa Class B shares in the prior year, and a $0.1 million loss related to an investment in a limited partnership in the current year.

Subsequent to the change in fair value, the Visa Class B shares were sold during the third quarter of 2018.

The decrease in other non-interest income was due to a $0.4 million state sales tax refund in the prior year, a decrease of $0.1 million in rental income from other property owned in the prior year, and a decrease of $0.1 million in interest rate swap income primarily due to changes in market value in the current year.

The increase in WMG fee income can be mostly attributed to an increase in the market value of assets under management and additional fee income from terminating trusts.

CFS fee and commission income increased in 2019 compared to the prior year due to an increase in transaction activity.

Non-interest expense

Non-interest expense decreased $1.1 million, or 1.9% in 2019, compared to the prior year.

The decrease was due primarily to decreases of $1.0 million in legal accruals and settlements, $0.6 million in net occupancy expenses, $0.6 million in FDIC insurance expense, $0.3 million in professional services, $0.3 million in other real estate owned expenses, and $0.2 in marketing and advertising expenses.

These items were partially offset by increases of $1.1 million in salaries and wages, $0.4 million in pension and other employee benefits, $0.4 million in data processing expenses, and $0.1 million in other non-interest expenses.

The decrease in legal accruals and settlements was due to the resolution by way of a settlement agreement in the matter of Fane v.

Chemung Canal Trust Company .

This matter was settled in March 2018.

Additional information can be found in Note 17 of the audited Consolidated Financial Statements.

The decrease in net occupancy and furniture and equipment expenses was mostly attributable to a reduction in depreciation expense related to mechanical equipment, the closing of two branches in 2019, and the reduction in non-capitalizable fixed asset purchases as compared to the prior year due to the opening of two new branches in 2018.

The decrease in FDIC insurance expense was primarily due to the receipt of a $0.4 million credit related to the Deposit Insurance Fund’s (DIF) minimum reserve ratio assessment.

The decrease in professional services was due to consulting fees incurred in the prior year associated with a sales tax refund in the prior year.

The decrease in other real estate owned expenses can be attributed to a reduction in the number of OREO properties in 2019 as compared to 2018.

The decrease in marketing and advertising expenses was due to an increased marketing effort in 2018 to support the opening of two denovo branches during the year.

The increase in salaries and wages can be attributed to annual merit increases and a lower vacancy rate in 2019.

The increase in pension and other employee benefits can be attributed to full vesting of stock awards related to an executive retirement and an increase in payroll tax and health insurance expenses.

The increase in other non-interest expense can be attributed to a $0.3 million charge taken to recognize the impairment of a fixed asset.

For the years ended December 31, 2019 and 2018, non-interest expense to average assets was 3.16% and 3.31%, respectively.

Provision for loan losses

The provision for loan losses increased $2.8 million, or 88.6% in 2019, compared to the prior year.

The increase was primarily the result of specific impairments in loans identified as impaired, including $1.8 million in specific reserves related to a commercial real estate loan and $4.2 million in specific reserves related to a participating interest in a commercial and industrial credit, offset by a decline in volume and loss factors on commercial and consumer unclassified pooled loans.

Net charge-offs were $1.4 million in 2019, compared with $5.4 million for the prior year.

The decrease in net charge-offs was due primarily to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018.

Income tax expense

Income tax expense decreased $0.6 million, or 14.3% in 2019, compared to the prior year.

The effective tax rate for 2019 increased to 18.0% compared with 17.0% for the prior year.

The decrease in income tax expense was primarily due to a decrease in pretax income.

Consolidated Results of Operations

The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the years ended December 31, 2020 and 2019 and for the years ended December 31, 2019 and 2018.

For a discussion of the Critical Accounting Policies and Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see pages 42 and 43.

The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the years ended December 31, 2021 and 2020.

For a discussion of the Critical Accounting Estimates that affect the Consolidated Results of Operations, see page 37.

Net Interest Income

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Fully taxable equivalent net interest margin was 2.84% for the year ended December 31, 2021 compared with 3.25% for the prior year.

The increase in net interest income was primarily due to increases of $0.8 million in interest income on loans, including fees, and $0.7 million in interest and dividend income on taxable securities, and a decrease of $2.3 million in total interest expense, offset by a decrease of $1.5 million in interest income on interest-earning deposits.

The increase in interest income on loans was due primarily to an increase of $1.7 million in interest income on commercial loans primarily attributable to a $157.8 million increase in the average balance of commercial loans and the recognition of $3.8 million of PPP loan fees, partially offset by a decrease in the average commercial portfolio yield of 56 basis points due to a decrease in interest rates.

Interest income on mortgage loans increased $0.9 million primarily due to an increase of $28.2 million in the average balance of mortgage loans, partially offset by a decrease in average mortgage portfolio yield of nine basis points due to a decrease in interest rates.

These increases were offset by a decrease of $1.8 million in interest income on consumer loans which can be attributed to both decreases in the average balances and average portfolio yield on consumer loans.

The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $77.7 million, partially offset by a decrease in average interest rates.

The decrease in interest on interest-earning deposits was due primarily to the sharp drop in interest rates on overnight deposits with the average yield on interest-earning deposits declining from 2.26% in 2019 to 0.54% in 2020, offset by a $38.9 million increase in the average balance of interest-earning deposits.

The decrease in interest expense on deposits was due primarily to the decreases in average rates paid on interest-bearing checking, savings and money market products in response to the Federal Reserve's 50 and 100 basis points drop on overnight rates in March, 2020.

Average interest-earning assets increased $270.4 million in 2020 when compared to the prior year.

The average yield on average interest-earning assets decreased 56 basis points, while the average cost of interest-bearing liabilities decreased 25 basis points, as compared to the prior year.

The following table presents net interest income for the years indicated, and the dollar and percent change (in thousands):

Years Ended December 31,

2019 2018 Change Percentage Change

Interest and dividend income $ 66,932 $ 64,553 $ 2,379 3.7 %

Interest expense 6,321 4,073 2,248 55.2 %

Net interest income $ 60,611 $ 60,480 $ 131 0.2 %

Net interest income for the year ended December 31, 2019 totaled $60.6 million, an increase of $0.1 million, or 0.2%, compared with $60.5 million for the prior year.

Fully taxable equivalent net interest margin was 3.64% for the year ended December 31, 2019 compared with 3.72% for the prior year.

The increase in total interest and dividend income in 2019 was due primarily to increases in interest income on interest-earning deposits of $1.5 million, interest and fees from loans of $0.4 million, and interest income from taxable securities of $0.5 million, compared to the prior year.

The increase in total interest expense in 2019 was due primarily to an increase in interest expense on deposits of $2.9 million, offset by decreases in interest expense on securities sold under agreements to repurchase of $0.1 million, and interest expense on borrowed funds of $0.5 million, compared to the prior year.

The increase in net interest income was primarily due to an increase of $2.9 million in interest and dividend income on taxable securities and a decrease of $0.6 million in total interest expense, offset by decreases of $0.6 million in interest income on interest-earning deposits, and $0.2 million in interest income on loans, including fees.

The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $343.0 million and the one-time recognition of $0.6 million related to prepayment penalties on a Fannie Mae Delegated Underwriting and Servicing (DUS) obligation.

The increase in average invested balances was primarily due to the purchase of various mortgage-backed securities, SBA loan pools, U.S.

Treasury securities and corporate subordinated debt issues during the year, with excess liquidity due to the increase in customer deposits related to the Corporation’s participation in the PPP and various stimulus program deposits received by customers.

The decrease in interest expense on deposits was due primarily to the decreases in average rates paid on interest-bearing checking, and savings and money market products, due to the low interest rate environment.

The decrease in interest income on interest-earning deposits was due primarily to the drop in interest rates on overnight deposits with the average yield on interest-earning deposits declining from 0.54% in 2020 to 0.17% in 2021, and a decrease of $53.1 million in the average balance of interest-earning deposits in 2021 when compared to the prior year, due to

lower average interest-earning deposit levels.

The decrease in interest income on loans, including fees was due primarily to decreases in the commercial, consumer and mortgage loan portfolio average yields due to a decrease in interest rates, partially offset by increases in average invested balances in the commercial and mortgage loan portfolios.

These increases were primarily due to increased originations of loans secured by non-owner occupied and multi-family commercial properties and residential mortgage loans.

Average interest-earning assets increased $379.4 million in 2021 when compared to the prior year.

The average yield on average interest-earning assets increased 6 basis points, while the average cost of interest-bearing liabilities increased 20 basis points, as compared to the prior year.

As compared to 2018, total interest income increased by $2.4 million.

Interest income on interest-earning deposits was up $1.5 million due to a $67 million increase in average balances, and income on taxable securities increased by $0.5 million mainly due to an increase in average yield of 24 basis points.

The increase in average interest-earning deposits was primarily driven by decreases in average total loan balances and increases in average total deposits.

Additionally, interest on Commercial loans increased by $1.1 million due to an increase in average balances as well as an increase in average rates.

This was offset by a decline of $0.5 million in consumer loan income, which declined mainly due to a decrease in average volume, and a decline of $0.2 million in mortgage loan income.

Total interest expense increased by $2.2 million.

This was mostly driven by interest on savings and money market deposits, time deposits, and interest-bearing demand deposits, which increased by $1.0 million, $1.4 million, and $0.4 million respectively, mainly due to increases in average rates due to competitive factors.

This increase in expense was offset by a decrease in borrowing expense of $0.6 million, which was driven mainly due to a decrease in average volume due to a decline in average overnight FHLBNY advances.

Average interest-bearing liabilities increased $236.2 million when compared to the prior year.

The average yield on average interest-earning assets decreased 47 basis points, while the average cost of interest-bearing liabilities decreased nine basis points, as compared to the prior year.

Average Consolidated Balance Sheet and Interest Analysis

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Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments.

Loan fee income was $4.0 million and $3.7 million for the years ended December 31, 2021 and 2020, respectively, and was comprised primarily of fees related to the Paycheck Protection Program.

AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

Year Ended December 31,

2020 2019 2018

(in thousands) Average Balance Interest Yield/

Rate Average Balance Interest Yield/

Interest-earning assets:

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Time deposits 254,718 2,119 0.83 % 190,072 2,211 1.16 %

Long-term advances, and other debt 9,729 161 1.65 % 4,187 148 3.53 % 31,590 750 2.37 %

Capital leases and other debt 4,420 135 3.05 % 9,729 161 1.65 %

Total interest-bearing liabilities 1,479,418 3,419 0.23 % 1,243,221 3,988 0.32 %

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RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

2019 2019 vs.

Increase/(Decrease) Increase/(Decrease)

Increase/(Decrease)

(in thousands) Total

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Volume Due to

Change Due to

Volume Due to

Interest income

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Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth.

M anagement continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio.

Management continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio.

As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes.

During 2020, management increased certain allowance qualitative factors based on its assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.

Based on this analysis, the provision for loan losses for the years ended December 31, 2020, 2019 and 2018 were $4.2 million, $5.9 million and $3.2 million, respectively.

The decrease in provision for loan losses in 2020 was primarily due to a specific impairment of $4.2 million related to a participation interest in a commercial credit in the prior year.

The Corporation is closely monitoring the loan portfolio for effects related to COVID-19.

In 2020, the Company increased the allowance by $4.5 million for probable incurred credit losses related to the COVID-19 pandemic, of which $4.0 million remains part of the allowance at year end.

The increase in provision for loan losses in 2019, as compared to 2018, was primarily the result of specific impairments in loans identified as impaired, including $1.8 million in specific reserves related to a commercial real estate loan and $4.2 million in specific reserves related to a participating interest in a commercial and industrial credit, offset by a decline in volume and loss factors on commercial and consumer unclassified pooled loans.

Net charge-offs for the years ended December 31, 2020, 2019 and 2018 were $6.8 million, $1.4 million and $5.4 million, respectively.

During 2020, management increased certain allowance qualitative factors based on its assessment of the impact of the pandemic on local, national, and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.

During 2021, as conditions improved somewhat, management adjusted certain qualitative factors resulting in a total decrease in the pandemic related reserve of $1.6 million.

Based on this analysis, the provision for loan losses for the years ended December 31, 2021, and 2020 were $17.0 thousand and $4.2 million, respectively.

The December 31, 2021 provision included a $1.5 million increase in reserves for impaired loans, primarily due to the impairment of one commercial real estate loan.

In 2020, net charge-offs of $6.8 million were offset by a decline in reserves for impaired loans of $6.6 million.

Reserves also increased by $0.9 million in 2020 on other classified loans.

Net recoveries for the year ended December 31, 2021, were $0.1 million.

Net charge-offs for the year ended December 31, 2020 were $6.8 million.

Non-interest income

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Interchange revenue from debit card transactions 4,844 4,068 776 19.1 %

Net gains on securities transactions — 19 (19) N/M

Change in fair value of equity investments 246 89 157 176.4 %

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Non-interest income for the year ended December 31, 2021 was $23.9 million compared with $21.1 million for the prior year, an increase of $2.7 million, or 13.0%.

The increase was due primarily to increases of $1.5 million in net gains on sales of loans held for sale and $0.9 million in other non-interest income, offset by a decrease of $1.3 million in service charges on deposit accounts.

Net gains on sales of loans held for sale

Net gains on sales of loans held for sale increased in 2020 compared to the prior year primarily due to net gains on sales of residential mortgage loans sold into the secondary market and net gains on the sale of four commercial loans, three of which were non-performing.

Other non-interest income

Other non-interest income increased in 2020 compared to the prior year primarily due to an increase in interest rate swap fees earned and a credit adjustment to Chemung Risk Management loss reserves.

Service charges on deposit accounts

Service charges on deposit accounts decreased in 2020 compared to the prior year due to a decrease in NSF and overdraft fee income.

The following table presents non-interest income for the years indicated, and the dollar and percent change (in thousands):

Years Ended December 31,

2019 2018 Change Percentage Change

WMG fee income $ 9,503 $ 9,317 $ 186 2.0 %

Service charges on deposit accounts 4,460 4,727 (267) (5.6) %

The increase was due primarily to increases of $1.6 million in wealth management group fee income, $0.8 million in interchange revenue from debit card transactions, $0.4 million in CFS fee and commission income, $0.2 million in change in fair value of equity investments, and $0.5 million in other non-interest income, when compared to the prior year, offset by a $0.7 million decrease in net gains on sales of loans held for sale.

Wealth Management Group Fee Income

The increase in wealth management group fee income was primarily attributed to new business relationships and an increase in the market value of total assets under management or administration, and represents record fee income for the segment.

Interchange Revenue from Debit Card Transactions

Net gains on securities transactions 19 — 19 N/M

Change in fair value of equity investments 81 2,004 (1,923) (96.0) %

Net gains on sales of loans held for sale 248 351 (103) (29.3) %

Net gains (losses) on sales of other real estate owned (99) 90 (189) (210.0) %

Income from bank owned life insurance 63 66 (3) (4.5) %

The increase in interchange revenue from debit card transactions was primarily attributable to an increase in consumer debit card usage when compared to the prior year.

CFS Fee and Commission Income

Other 1,021 1,969 (948) (48.1) %

Total non-interest income $ 20,073 $ 23,074 $ (3,001) (13.0) %

Total non-interest income for year ended December 31, 2019 decreased $3.0 million compared to the prior year.

WMG fee income

WMG fee income increased in 2019 compared to the prior year primarily due to an increase in average assets under management and additional fee income from terminating trusts.

Service charges on deposit accounts

Service charges on deposit accounts decreased in 2019 compared to the prior year due to a decrease in overdraft fee income.

Net gains (losses) on sales of other real estate owned

Net losses on sales of other real estate owned was due to losses on properties sold.

CFS fee and commission income increased in 2021 compared to the prior year primarily due to new business relationships.

Change in Fair Value of Equity Investments

Change in fair value of equity investments decreased in 2019 compared to the prior year due primarily to the increase in the fair value of Visa Class B shares in the prior year.

Subsequent to the change in fair value, the Visa Class B shares were sold during the third quarter of 2018.

CFS fee and commission income

CFS fee and commission income increased in 2019 compared to the prior year due to an increase in transaction activity.

Change in fair value of equity investments increased in 2021 compared to the prior year primarily due to an increase in the assets held and the market value thereon.

Other non-interest income

Other non-interest income decreased in 2019 compared to the prior year due primarily to a one time refund in sales tax in 2018, a decrease in swap fees and a decline in rental income on OREO properties.

Other non-interest income increased compared to the prior year primarily due to a $0.7 million one-time refund of real estate taxes, sales tax rebates and Mastercard incentives received in 2021.

Net Gains on Sales of Loans Held for Sale

Net gains on sales of loans held for sale decreased primarily due to a decrease in net gains on sales of residential mortgage loans sold into the secondary market when compared to the prior year.

Non-interest expenses

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Total non-interest expenses $ 55,682 $ 55,935 $ (253) (0.5) %

Non-interest expense increased $0.2 million, or 0.4% in 2020.

Compensation expenses

Compensation expenses remained flat in 2020 compared to the prior year.

Salaries and wage expense increased due to annual merit increases and an increase in commission and reward expense related to facilitating nearly 1,300 PPP loans.

This increase was offset by a decrease in pension and other employee benefits primarily attributed to a decrease in healthcare expenses when compared to the prior year.

The increase in the credit related to the net periodic pension and post-retirement benefits was primarily due to a change in factors used to prepare annual actuarial estimates.

Non-compensation expenses

The increase in FDIC insurance expense was primarily attributed to the receipt of a $0.4 million credit in 2019 related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment.

The increase in loan expenses was primarily attributed to legal fees associated with a legal action taken by the Corporation related to the $4.2 million impairment of a commercial credit disclosed in the Corporations' Current Report on Form 8-K, dated September 12, 2019, and an increase in loan volume during 2020 when compared to the prior year.

The decrease in furniture and equipment expenses was primarily attributed to normal depreciation and a reduction in one-time service contract expenditures.

The decrease in marketing and advertising expenses was primarily attributed to the cancellation of directed marketing initiatives due to the COVID-19 pandemic.

The following table presents non-interest expense for the years indicated, and the dollar and percent change (in thousands):

Years Ended December 31,

2019 2018 Change Percentage Change

Compensation expenses:

Salaries and wages $ 23,420 $ 22,322 $ 1,098 4.9 %

Pension and other employee benefits 5,902 5,524 378 6.8 %

Other components of net periodic pension cost (benefits) (541) (770) 229 29.7 %

Total compensation expenses 28,781 27,076 1,705 6.3 %

Non-compensation expenses:

Net occupancy 5,969 6,550 (581) (8.9) %

Furniture and equipment 2,497 2,550 (53) (2.1) %

Data processing 7,386 6,997 389 5.6 %

Professional services 1,885 2,169 (284) (13.1) %

Legal settlements — 989 (989) (100.0) %

Amortization of intangible assets 609 734 (125) (17.0) %

Marketing and advertising 932 1,181 (249) (21.1) %

Other real estate owned expense 115 422 (307) (72.7) %

FDIC insurance 537 1,142 (605) (53.0) %

Loan expense 787 863 (76) (8.8) %

Other 6,198 6,093 105 1.7 %

Total non-compensation expenses 26,915 29,690 (2,775) (9.3) %

Total non-interest expenses $ 55,696 $ 56,766 $ (1,070) (1.9) %

Non-interest expense decreased $0.3 million, or 0.5% in 2021.

The decrease was due primarily to a decrease of $0.4 million in total non-compensation expenses, offset by an increase of $0.1 million in total compensation expenses.

Compensation expenses

Compensation expenses increased in 2019 compared to the prior year due to increases in salaries and wages, and pension and other employee benefit expense.

The increase in salaries and wages can be attributed to annual merit increases and a lower vacancy rate in 2019.

The increase in pension and other employee benefits can be partially attributed to full vesting of stock awards related to an executive retirement and increases in payroll tax and health insurance expenses.

Compensation expenses increased $0.1 million, or 0.5% when compared to the prior year, primarily due to increases of $0.5 million in pension and other employee benefit expense and $0.2 million in salaries and wages, partially offset by a $0.6 million increase in the credit related to the net periodic pension and post-retirement benefits.

Pension and other employee benefits increased primarily due to an increase in healthcare costs when compared to the prior year.

The increase in salaries and wages was primarily due to annual merit increases offset by a decrease in salaries and wage expense during the year when compared to the prior year.

The increase in the credit related to the net periodic pension and post-retirement benefits was primarily due to a change in factors used to prepare annual actuarial estimates.

Non-compensation expenses

The decrease in legal accruals and settlements was due to the resolution by way of a settlement agreement in the matter of Fane v.

Chemung Canal Trust Company .

This matter was settled in March 2018.

Additional information can be found in Note 17 of the audited Consolidated Financial Statements.

The decrease in FDIC insurance expense was primarily due to the receipt of a $0.4 million credit related to the Deposit Insurance Fund’s (DIF) minimum reserve ratio assessment.

The decrease in professional services was due to consulting fees incurred in the prior year associated with a sales tax refund in the prior year.

The decrease in other real estate owned expenses can be attributed to a reduction in the number of OREO properties in 2019 as compared to 2018.

The decrease in marketing and advertising expenses was due to an increased marketing effort in 2018 to support the opening of two denovo branches during the year.

The increase in other non-interest expense can be attributed to a $0.3 million charge taken to recognize the impairment of a fixed asset.

Non-compensation expenses decreased $0.4 million, or 1.4%, primarily due to decreases of $1.3 million in other non-interest expense, and a decrease of $0.4 million in furniture and equipment expenditures, offset by increases of $0.9 million in data processing expense, $0.4 million in FDIC insurance, and $0.2 million in professional services.

The decrease in other non-interest expense was primarily due to a $0.7 million reserve established in 2020 related to a compliance matter with NYS Department of Financial Services, and the subsequent $0.3 million release of the remaining reserve upon resolution of the matter in 2021, as described in the Corporation's Form 8-K filed June 29, 2021.

Also contributing to the decrease was $0.4 million in costs related to the closing of a branch location, including equipment and leasehold improvements and a $0.2 million lease buy-out in the prior year, and a $0.4 million decrease due to a change in restricted stock vesting requirements based upon the adoption of the Corporation's 2021 Equity Incentive Plan as approved by shareholders on June 8, 2021.

Furniture and equipment expenditures decreased primarily due to a decrease in depreciable assets and an overall decrease in building furniture and equipment expenditures when compared to the prior year.

Data processing expenses increased primarily due to investment in new initiatives in the current year and a $0.2 million credit received in the prior year.

FDIC insurance increased primarily due to an increase in the assessment base due to increased average asset balances.

Professional services increased primarily due to additional consulting services in the current year.

Income tax expense

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The increase in income tax expense can be attributed to an increase in pre-tax income.

The following table presents income tax expense and the effective tax rate for the years indicated, and the dollar and percent change (in thousands):

Years Ended December 31,

2019 2018 Change Percentage Change

Income before income tax expense $ 19,043 $ 23,635 $ (4,592) (19.4) %

Income tax expense $ 3,434 $ 4,009 $ (575) (14.3) %

Effective tax rate 18.0 % 17.0 %

The effective tax rate increased to 18.0% for the year ended December 31, 2019 compared with 17.0% for the prior year.

The increase in the effective tax rate can be attributed to a tax benefit of $0.4 million recorded in December 2018 due to the enactment of the Tax Act.

The decrease in income tax expense can be attributed to a decrease in pre-tax income.

The Effect of COVID-19 on Our Business

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At the date of this filing all of our 31 branches are open with normal business hours.

The Corporation further assisted its customer base as the initial Paycheck Protection Program (PPP) moved forward with its Forgiveness phase, with the Small Business Administration (SBA) beginning to approve forgiveness applications on October 2, 2020.

The Corporation is also participating in the latest round of PPP, and began accepting applications on January 19, 2021.

The Corporation further assisted its customer base as the Paycheck Protection Program (PPP) moved forward with its Forgiveness phase, with the Small Business Administration (SBA).

Management did not experience any negative effects on our ability to maintain operations and financial reporting systems, and has not identified any impact on business continuity plans.

Management does not anticipate additional risk with respect to its ability to maintain internal control over financial reporting and disclosure controls and procedures, nor does it expect any changes in such controls and procedures.

On June 17, 2020 the New York legislature passed, and Governor Cuomo signed, new legislation which allows certain borrowers to extend the period of forbearance on a primary residence if financial hardship is demonstrated as a result of COVID-19.

On June 17, 2020 the New York legislature passed, and Governor Cuomo signed, new legislation which allowed certain borrowers to extend the period of forbearance on a primary residence if financial hardship is demonstrated as a result of COVID-19.

At its highest point as of May 31, 2020, total loan forbearances represented 15.77% of the Corporation's total loan portfolio.

As of December 31, 2020, total loan forbearances decreased to 1.35% of the total loan portfolio.

As of December 31, 2020, 76.2% of total loan forbearances related to accommodation and food services, 19.0% to entertainment and recreation, and 4.8% to other industries.

As of December 31, 2021, no loan forbearances due to COVID-19 remained.

COVID-19 Loan Modifications Outstanding As Of

June 30, 2020 September 30, 2020 December 31, 2020

June 30, 2020 December 31, 2020 December 31, 2021

# Clients Total Loan Balance # Clients Total Loan Balance # Clients Total Loan Balance

Commercial 172 $167.7 million 31 $43.3 million 13 $19.8 million

Retail and Residential 457 $18.0 million 43 $2.5 million 18 $1.0 million

Commercial 172 $167.7 million 13 $19.8 million 0 $ —

Retail and Residential 457 $18.0 million 18 $1.0 million 0 $ —

The above reflects the uncertain economic situation whereby the initial response by customers prompted a quick reaction to the unknown potential impact of COVID-19 on their business.

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As part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Congress established the Paycheck Protection Program (PPP) under the direction of the United States Small Business Administration (SBA).

Included in the legislation, and additional legislation approved by Congress on April 23, 2020, June 5, 2020 and December 27, 2020, was a total of $659 billion to assist small businesses by providing SBA guaranteed loans to help pay for payroll, in addition to other expenses such as interest expense on mortgages, rent or utility payments.

expenses such as interest expense on mortgages, rent or utility payments.

PPP loans have an interest rate of 1.0% and two-year or five-year loan terms to maturity.

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As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans.

The PPP ended new loans in May, 2021.

The Corporation successfully navigated the processes set forth by the SBA and assisted customers and non-customers through Phase 1 of the PPP, originating a total of 1,260 loans.

As of December 31, 2021, 100 loans totaling $4.0 million were outstanding related to Phase 1 of the PPP, a portion of which may not be forgiven.

The Corporation then assisted the businesses who received PPP loans with the forgiveness application phase of the program.

As of December 31, 2020, the Corporation submitted 157 loans, a total of $49.0 million, to the SBA for forgiveness of which $39.0 million, 141 loans, was forgiven by the SBA.

A second round of COVID-19 Relief totaling $248 billion to provide PPP loans to certain eligible small businesses was included in the Consolidated Appropriation Act of 2021, signed into law by the President on December 27, 2020.

A total of 589 applications have been funded for a total of $64.2 million, as of the date of this filing.

As of December 31, 2021, 1,170 loans totaling $186.3 million were forgiven by the SBA related to Phase 1 of the PPP.

A second phase of COVID-19 Relief totaling $248 billion to provide PPP loans to certain eligible small businesses was included in the Consolidated Appropriation Act of 2021, signed into law by the President on December 27, 2020.

As of December 31, 2021, 510 loans totaling $39.1 million were outstanding related to Phase 2 of the PPP, a portion of which may not be forgiven.

As of December 31, 2021, 365 loans totaling $38.4 million, were forgiven by the SBA.

As of March 11, 2022, 319 PPP loans totaling $22.6 million were outstanding related to Phases 1 and 2 of the PPP, a portion of which may not be forgiven.

As of March 11, 2022, 1,810 loans totaling $244.3 million, representing Phases 1 and 2 of the PPP, were forgiven by the SBA.

Participation in Paycheck Protection Program Liquidity Facility ("PPPLF")

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Nor has the Corporation experienced any significant or unusual activity related to customer reaction to the COVID-19 pandemic that would create stress on the Corporation's liquidity position.

With respect to the Corporation's credit risk and lending activities, management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth.

Management continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio.

As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes.

With respect to the Corporation's credit risk and lending activities, management has taken actions to identify and assess additional possible credit exposure due to the changing environment caused by the COVID-19 crisis based upon the industry types within our current loan portfolio.

Lending risks, as mentioned, are being monitored by industry, based upon NAICS code, with specific attention being paid to those industries that may experience greater stress during this time.

The COVID-19 pandemic is expected to continue to impact the Corporation's financial results, as well as demand for its services and products.

The short and long-term implications of the COVID-19 pandemic, and related monetary and fiscal stimulus measures, on the Corporation's future revenues, earnings results, allowance for loan losses, capital reserves, and liquidity are uncertain at this time.

Financial Condition

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Total deposits $ 2,155,433 $ 2,037,774 $ 117,659 5.8 %

Capital lease obligation 3,849 4,085 (236) (5.8) %

Capital lease obligations and FHLBNY advances 18,164 3,849 14,315 371.9 %

Other liabilities 33,423 38,129 (4,706) (12.3) %

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The increase in securities available for sale and held to maturity can be mostly attributed to purchases of investment securities exceeding sales, maturities and calls.

The increase in total loans, net, can be mostly attributed to the growth of $206.5 million in commercial loans and $51.1 million in residential mortgages, offset by a decrease of $14.4 million in indirect consumer and $15.9 million in other consumer loans.

$150.9 million of the increase in loans related to the PPP.

The decrease in total loans, net, can be mostly attributed to decreases of $25.7 million in commercial loans and $12.4 million in consumer loans, offset by an increase of $19.9 million in residential mortgage loans.

During 2021, PPP loans contributed a net decrease of $107.8 million to the total loan portfolio as of December 31, 2021 due to a total of $185.5 million of paydowns received from the SBA for loan forgiveness, offset by $77.7 million in new Phase 2 loans.

Goodwill and other intangible assets, net

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There were no impairments of goodwill or other intangible assets during the years ended December 31, 2021 and 2020.

The increase in other assets can be mostly attributed to an increase of $8.2 million in interest rate swap assets, offset by a decrease in fixed assets of $3.2 million primarily due to normal depreciation.

The increase in deposits can be attributed to increases of $152.2 million in non-interest bearing demand deposits, $124.6 million in time deposits, $82.1 million in interest-bearing demand deposits, $73.3 million in money market accounts and $33.5 million in savings accounts.

The increase in deposits can be attributed to increases of $119.2 million in non-interest bearing demand deposits, $2.5 million in interest-bearing demand deposits, $51.0 million in money market accounts and $34.3 million in savings accounts, offset by a decrease of $89.4 million in time deposits.

The increase in non-interest-bearing demand deposits was mostly attributable to an increase in personal customer deposits.

The increase in interest-bearing demand deposits was due primarily to an increase in commercial deposits and the increase in time deposits was primarily due to an increase in municipal certificates of deposit.

The increase in interest-bearing demand deposits was due primarily to an increase in commercial deposits.

The increase in money market accounts can mostly be attributed to an increase in ICS deposits, and an increase in personal customer deposits.

The decrease in time deposits was primarily due to a decrease in municipal certificates of deposit.

Overall, customer deposits were impacted by the receipt of stimulus checks and PPP loan disbursements during the year.

Capital Lease Obligations and FHLBNY Advances

The increase in capital lease obligations and FHLBNY advances can be mostly attributed to $14.6 million in FHLBNY overnight advances.

Other Liabilities

The increase in other liabilities can be mostly attributed to an increase of $8.2 million in interest rate swap liabilities.

The decrease in other liabilities can be mostly attributed to a decrease of $5.6 million in interest rate swap liabilities, primarily due to changes in interest rates.

Shareholders’ equity

The increase in shareholders' equity was due primarily to an increase in retained earnings of $20.9 million, which was a result of earnings of $26.4 million, offset by $5.6 million in dividends declared during the current year.

The increase in accumulated other comprehensive income of $8.2 million can mostly be attributed to an increase in the fair value of the securities portfolio.

Also, treasury stock increased $5.8 million primarily due to the Corporation's common stock repurchase program.

As of December 31, 2020, all 250,000 shares were repurchased at an average cost of $29.40 per share.

As previously announced on January 8, 2021, the Corporation announced a new stock repurchase program.

Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares.

The decrease in accumulated other comprehensive income (loss) of $8.9 million can mostly be attributed to a decrease in the fair value of the securities portfolio.

Also, treasury stock increased $0.3 million primarily due to the Corporation's common stock repurchase program, offset by the impact of the issuance of shares related to the Corporation's employee benefit plans.

As of December 31, 2021, a total of 34,921 shares of common stock at a total cost of $1.3 million were repurchased by the Corporation under its share repurchase program.

The weighted average cost was $38.55 per share repurchased.

Remaining buyback authority under the share repurchase program was 215,079 shares at December 31, 2021.

As of March 11, 2022, 49,184 shares have been repurchased, at an average cost of $40.42 per share.

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The market value of total assets under management or administration in WMG was $2.325 billion, including $344.2 million of assets held under management or administration for the Corporation, at December 31, 2021 compared with $2.091 billion, including $305.5 million of assets held under management or administration for the Corporation, at December 31, 2020, an increase of $234.0 million, or 11.2%.

The increase in total assets under management or administration for the Corporation can be mostly attributed to new business relationships and an increase in the market value of the assets under management.

Balance Sheet Comparisons

The table below contains selected average balance sheet information for each year in the five-year period ended December 31, 2020 (in millions):

SELECTED AVERAGE BALANCE SHEET INFORMATION

% Change Compounded Annual

2019 to Growth 5

Average Balance Sheet 2020 2019 2018 2017 2016 2020 Years

The table below contains selected year-end and average balance sheet information at and for the years December 31, 2021 and 2020 (in millions):

SELECTED BALANCE SHEET INFORMATION

YEAR-END BALANCE SHEET AVERAGE BALANCE SHEET

% Change % Change

2020 to 2020 to

2021 2020 2021 2021 2020 2021

Total assets $ 2,418.5 $ 2,279.5 6.1 % $ 2,421.8 $ 2,046.8 18.3 %

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Borrowings (4) 18.2 3.8 378.9 % 4.4 9.7 (54.6) %

Allowance for loan losses 21.0 20.9 0.5 % 21.1 24.7 (14.6) %

Shareholders’ equity 211.5 199.7 5.9 % 204.2 193.7 5.4 %

(1) Average interest-earning assets include securities available for sale at estimated fair value and securities held to maturity based on amortized cost, loans and loans held for sale net of deferred loan fees, interest-earning deposits, FHLBNY stock, FRBNY stock and federal funds sold.

For 2017-2020, average interest-earning assets also include equity investments.

(2) Average loans and loans held for sale, net of deferred loan fees.

(3) Average balances for investments include securities available for sale at estimated fair value and securities held to maturity, based on amortized cost, FHLBNY stock, FRBNY stock, federal funds sold and interest-earning deposits.

For 2017-2020, average balances for investments securities also include equity investments.

(3) Average balances for investments include securities available for sale at estimated fair value and securities held to maturity, based on amortized cost, equity investments, FHLBNY stock, FRBNY stock, federal funds sold and interest-earning deposits.

(4) Average borrowings include overnight and PPPLF advances, securities sold under agreements to repurchase and capitalized lease obligations.

The table below contains selected year-end balance sheet information for each year in the five-year period ended December 31, 2020 (in millions):

SELECTED YEAR-END BALANCE SHEET INFORMATION

% Change Compounded Annual

2019 to Growth 5

Ending Balance Sheet 2020 2019 2018 2017 2016 2020 Years

Total assets $ 2,279.5 $ 1,787.8 $ 1,755.3 $ 1,707.6 $ 1,657.2 27.5 % 7.1 %

Interest-earning assets (1) 2,178.5 1,699.6 1,661.5 1,620.1 1,560.0 28.2 % 7.4 %

Loans (2) 1,536.6 1,310.4 1,312.4 1,312.4 1,200.7 17.3 % 5.6 %

Allowance for loan losses 20.9 23.5 18.9 21.2 14.3 (11.1) % 7.9 %

Investments (3) 641.8 389.2 349.1 307.8 359.3 64.9 % 12.5 %

Deposits 2,037.8 1,572.1 1,569.2 1,467.4 1,456.3 29.6 % 7.8 %

Borrowings (4) 3.8 4.1 4.3 74.2 41.4 (7.3) % (43.2) %

Shareholders’ equity 199.7 182.6 165.0 149.8 143.7 9.4 % 7.8 %

(1) Interest-earning assets include securities available for sale, at estimated fair value and securities held to maturity based on amortized cost, equity investments, loans and loans held for sale net of deferred loan fees, interest-earning deposits, FHLBNY stock, FRBNY stock and federal funds sold.

(2) Loans and loans held for sale, net of deferred loan fees.

(3) Investments include securities available for sale, at estimated fair value, securities held to maturity, at amortized cost, equity investments, FHLBNY stock, FRBNY stock, federal funds sold and interest-earning deposits.

(4) Borrowings include FHLBNY overnight and term advances, securities sold under agreements to repurchase and capitalized lease obligations.

Cash and Cash Equivalents

Total cash and cash equivalents decreased $13.4 million since December 31, 2019, due to a decrease of $17.6 million in interest-earning deposits in other financial institutions, offset by an increase of $4.3 million in cash and due from financial institutions.

Total cash and cash equivalents decreased $81.6 million since December 31, 2020, due to decrease s of $69.5 million in interest-earning deposits in other financial institutions, and $12.1 million in cash and due from financial institutions.

The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt securities purchased for the bond portfolio to carry a minimum agency rating of "Baa." After an independent credit analysis is performed, the policy also allows the Corporation to purchase local municipal obligations that are not rated.

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Marketable securities are classified as Available for Sale, while investments in local municipal obligations are generally classified as Held to Maturity.

The composition of the available for sale and held to maturity securities portfolios are summarized in the tables below (in thousands):

SECURITIES AVAILABLE FOR SALE

December 31, 2020 December 31, 2019 December 31, 2018

Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value

Obligations of U.S.

Government sponsored enterprises $ — $ — $ — $ — $ 5,489 $ 5,472

Mortgage-backed securities, residential 458,245 467,866 225,029 225,234 189,111 183,192

Obligations of states and political

subdivisions 40,662 43,405 41,265 42,845 44,390 44,152

Other securities (a) 43,455 43,340 15,962 16,011 9,506 9,442

Totals $ 542,362 $ 554,611 $ 282,256 $ 284,090 $ 248,496 $ 242,258

(a) Other securities consists of corporate bonds and SBA loan pools.

The available for sale segment of the securities portfolio totaled $792.0 million at December 31, 2021, an increase of $237.4 million, or 42.8%, from $554.6 million at December 31, 2020.

The increase resulted primarily from new purchases which exceeded maturities and calls.

The increase in purchased securities is primarily due to a significant increase in customer deposits related to the Corporation's participation in PPP and various stimulus program deposits received by customers, which resulted in excess cash levels.

HELD TO MATURITY SECURITIES

December 31, 2020 December 31, 2019 December 31, 2018

Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value

Obligations of states and political subdivisions $ 326 $ 326 $ 1,045 $ 1,045 $ 3,020 $ 3,020

Time deposits with other financial institutions 2,143 2,175 2,070 2,094 1,855 1,838

Totals $ 2,469 $ 2,501 $ 3,115 $ 3,139 $ 4,875 $ 4,858

New purchases during the year were primarily in mortgage-backed securities, SBA loan pools, U.S.

Treasury securities and corporate subordinated debt issues.

The increase in purchased securities was primarily due to a significant increase in customer deposits related to the Corporation's participation in PPP and various stimulus program deposits received by customers, which resulted in excess cash levels.

The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas.

These securities totaled $2.5 million at December 31, 2020, a decrease of $0.6 million or 20.7%, from $3.1 million at December 31, 2019, due primarily to maturities.

These securities totaled $3.8 million at December 31, 2021, an increase of $1.3 million or 53.5%, from $2.5 million at December 31, 2020, due primarily to new purchases.

Non-marketable equity securities at December 31, 2021 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $2.4 million, respectively.

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The investment in these stocks is regulated by regulatory policies of the respective institutions.

The table below sets forth the carrying amounts and maturities of available for sale and held to maturity debt securities at December 31, 2020 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) (in thousands):

MATURITIES AND YIELDS OF AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES

The table below sets forth the carrying amounts and maturities of held to maturity debt securities at December 31, 2021 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) (in thousands):

MATURITIES AND YIELDS OF HELD TO MATURITY SECURITIES

Within One Year After One, But Within Five Years After Five, But Within Ten Years After Ten Years

Amount Yield Amount Yield Amount Yield Amount Yield

Obligations of U.S.

Government and U.S.

Government sponsored enterprises $ — N/A $ — N/A $ — N/A $ — N/A

Mortgage-backed securities, residential 3,089 3.58 % 327,054 1.38 % 115,937 1.85 % 21,786 2.66 %

Obligations of states and political subdivisions 114 2.26 % 24,934 2.54 % 17,876 2.57 % 808 2.52 %

Obligations of states and political subdivisions 1,038 2.93 % 319 4.06 % 800 3.92 % — N/A

Time deposits with other institutions 1,133 1.32 % 500 0.48 % — N/A — N/A

Corporate bonds and notes — N/A 4,036 4.82 % 4,998 4.45 % — N/A

SBA loan pools — N/A 58 1.75 % 16,568 1.67 % 17,679 1.59 %

Total $ 3,945 3.45 % $ 357,483 1.50 % $ 155,379 2.00 % $ 40,273 2.19 %

Corporate bonds and notes — N/A — N/A — N/A — N/A

Total $ 2,171 2.09 % $ 819 1.87 % $ 800 3.92 % $ — N/A

The weighted-average yield on the Corporation's held to maturity debt securities at December 31, 2021 were 2.55% related to obligations of states and political subdivisions, and 1.91% related to time deposits with other institutions.

Management evaluates securities for OTTI on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

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Management reviews these systems on a regular basis.

The table below presents the Corporation’s loan composition by type and percentage of total loans at the end of each of the last five years (in thousands):

The table below presents the Corporation’s loan composition by type and percentage of total loans at the end of December 31, 2021 and December 31, 2020 (in thousands):

LOAN COMPOSITION

December 31, 2020 to

2021 % 2020 % 2021

Commercial and agricultural:

Commercial and industrial $ 256,893 16.9 % $ 368,663 24.0 % (30.3) %

Agricultural 394 — % 283 — % 39.2 %

Commercial mortgages:

Construction 82,204 5.4 % 61,945 4.0 % 32.7 %

Commercial mortgages 720,358 47.5 % 654,663 42.7 % 10.0 %

Residential mortgages 259,334 17.1 % 239,401 15.6 % 8.3 %

Indirect consumer loans 120,538 7.9 134,973 10.3 149,380 11.4 153,060 11.7 139,572 11.6

Consumer loans:

Home equity lines and loans 70,670 4.7 % 78,547 5.1 % (10.0) %

Indirect consumer loans 118,569 7.8 % 120,538 7.8 % (1.6) %

Direct consumer loans 9,827 0.6 % 12,423 0.8 % (20.9) %

Total $ 1,518,249 100.0 % $ 1,536,463 100.0 %

Portfolio loans totaled $1.536 billion at December 31, 2020 and $1.309 billion at December 31, 2019.

Changes included an increase of $206.5 million, or 23.5%, in total commercial loans (comprised of commercial mortgages and commercial and agricultural loans), and an increase in residential mortgages of $51.1 million or 27.1%, offset by decreases in indirect consumer loans of $14.4 million or 10.7%, and consumer loans of $15.9 million or 14.8%.

$150.9 million of the increase in commercial loans related to the PPP.

The decreases in indirect consumer loans, primarily automobile loans, and consumer loans, primarily home equity lines and loans, were primarily due to overall economic conditions related to the pandemic, resulting in decreased demand.

Residential mortgage loans totaled $239.4 million at December 31, 2020, an increase of $51.1 million, or 27.1%, from December 31, 2019.

The increase in residential mortgages was mainly due to new originations retained in the portfolio, primarily driven by lower interest rates.

Portfolio loans totaled $1.518 billion at December 31, 2021 and $1.536 billion at December 31, 2020, a decrease of $18.2 million, or 1.2%.

Changes included decreases of $111.7 million, or 30.3%, in commercial and agricultural loans, and $12.4 million, or 5.9%, in total consumer loans, partially offset by increases of $86.0 million, or 12.0%, in commercial real estate loans, and $19.9 million, or 8.3% in residential mortgage loans.

The decrease in commercial and agricultural loans was primarily a result of the net decrease in PPP loans of $107.8 million during the year.

During 2021, $147.1 million was received from the SBA for loan forgiveness of Phase 1 loans, while $77.7 million of Phase 2 loans were originated and $38.4 million was received from the SBA for loan forgiveness of Phase 2 loans.

PPP loan balances of $43.2 million remained at December 31, 2021, with $4.0 million and $39.2 million of Phase 1 and Phase 2 loans respectively.

The decrease in total consumer loans was primarily related to a $7.9 million decrease in total home equity lines and loans, along with smaller decreases in both direct and indirect consumer loans.

The increase in total commercial real estate loans was a result of a $20.3 million increase in construction loans and a $65.7 million increase in commercial real estate loans, primarily driven by increases in loans secured by non-owner occupied and multi-family properties.

The increase in residential mortgage loans was due to new originations retained in the portfolio driven by the continuing low interest rate environment, as increased volume continued throughout the pandemic.

The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):

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*All loans, excluding those originated by the Capital Bank Division.

^ Includes $47.0 million in the Corporation's new Western New York Market as of December 31, 2021.

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by changes in economic or other conditions.

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No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of December 31, 2021 and 2020.

The table below shows the maturity of only commercial and agricultural loans and commercial mortgages outstanding as of December 31, 2020.

The table below shows the maturity of loans outstanding as of December 31, 2021.

Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

LOAN AMOUNTS CONTRACTUALLY DUE AFTER DECEMBER 31, 2021

Within One Year After One But Within Five Years After Five Years Total

Commercial and agricultural and commercial mortgages $ 89,270 $ 509,245 $ 487,039 $ 1,085,554

Within One Year After One But Within Five Years After Five But Within 15 Years After 15 Years Total

Commercial and agricultural:

Commercial and industrial $ 52,384 $ 140,296 $ 59,212 $ 5,001 $ 256,893

Agricultural 79 308 7 — 394

Commercial mortgages:

Construction 7,543 23,196 44,797 6,668 82,204

Commercial mortgages 19,176 175,533 496,486 29,163 720,358

Residential mortgages 4,741 7,127 138,512 108,954 259,334

Consumer loans:

Home equity lines and loans 391 4,398 43,299 22,582 70,670

Indirect consumer loans 2,228 66,206 48,145 1,990 118,569

Direct consumer loans 154 5,505 4,003 165 9,827

Total $ 86,696 $ 422,569 $ 834,461 $ 174,523 $ 1,518,249

Loans maturing with:

After One But Within Five Years After Five But Within 15 Years After 15 Years Total

Fixed interest rates $ 265,381 $ 398,614 $ 82,949 $ 746,944

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(1) These loans are not included in nonperforming assets above.

Interest income recorded on non-accrual and troubled debt restructured loans was $76.0 thousand, $72.0 thousand, and $61.0 thousand as of December 31, 2020, 2019 and 2018, respectively.

Interest income recorded on non-accrual and troubled debt restructured loans was $146.0 thousand, and $76.0 thousand, as of December 31, 2021, 2020, respectively.

Non-Performing Loans

Non-performing loans totaled $8.1 million at December 31, 2021, or 0.54% of total loans, compared with $10.0 million at December 31, 2020, or 0.65% of total loans.

The decrease in non-performing loans at December 31, 2020 as compared to December 31, 2019 was primarily due to the charge off of one large commercial mortgage in the second quarter of 2020, and one participating interest in a commercial credit in the fourth quarter of 2020.

In the fourth quarter of 2020, the Corporation sold four commercial loans with total balances of $4.9 million, three of which were non-performing with total balances of $3.8 million.

The decrease in non-performing loans at December 31, 2021 as compared to December 31, 2020 was primarily due to payments received on non-performing loans across all loan portfolios.

Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $8.2 million, or 0.34% of total assets, at December 31, 2021, compared with $10.2 million, or 0.45% of total assets, at December 31, 2020.

The recorded investment in accruing loans past due 90 days or more totaled less than $0.1 million at December 31, 2020, consistent with the prior year.

The recorded investment of accruing loans past due 90 days or more was less than $0.1 million at December 31, 2021 and December 31, 2020.

There were no PCI loans as of December 31, 2021 and December 31, 2020.

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Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest.

Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 related modifications and therefore will not be treated as TDRs through the earlier of January 1, 2022 or 60 days after the national emergency of COVID-19 ends.

As of December 31, 2021 and 2020, the Corporation had $4.6 million and $3.9 million of non-accrual TDRs, respectively.

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Impaired Loans

The unpaid principal balance of impaired loans at December 31, 2020 totaled $16.5 million, including TDRs of $6.7 million, compared to $15.7 million at December 31, 2019, including TDRs of $9.0 million.

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement.The unpaid principal balance of impaired loans at December 31, 2021 totaled $18.2 million, including TDRs of $10.3 million, compared to $16.5 million at December 31, 2020, including TDRs of $6.7 million.

The recorded investment of impaired loans at December 31, 2021 totaled $11.6 million compared to $10.6 million at December 31, 2020.

Included in the recorded investment of impaired loans at December 31, 2021, were loans totaling $5.2 million for which impairment allowances of $3.0 million have been specifically allocated to the allowance for loan losses.

The decrease in recorded investment in impaired loans was primarily due to decreases in the commercial mortgage and commercial and industrial portfolios, offset by an increase in the residential mortgage portfolio.

The decrease in the commercial mortgage loan segment of the portfolio related to the sale of three loans amounting to $4.1 million and a $2.1 million charge off of a loan, offset by the recognition of impairment for two loans amounting to $2.8 million.

The decrease in the impaired commercial and industrial loan segment of the portfolio was due to a $3.8 million charge off of a participating interest in a loan offset by a $1.9 million increase related to the impairment of three loans.

The increase in the residential mortgage loan segment of the portfolio related to the recognition of impairment for three loans amounting to $0.8 million.

The increase in recorded investment in impaired loans was primarily due to a $2.9 million increase in commercial real estate impaired loans, partially offset by a $1.0 million decrease in commercial and industrial impaired loans, a $0.3 million decrease in residential mortgage impaired loans and a $0.5 million decrease in home equity impaired lines and loans.

As of December 31, 2020, the impaired loan total included $1.8 million of loans for which specific impairment allowances of $1.5 million were allocated to the allowance for loan losses.

The increase in impaired loans was primarily in the commercial loan segment of the loan portfolio related to the recognition of impairment for a commercial real estate loan to one borrower in the amount of $1.9 million in the first quarter and the recognition of impairment for a commercial and industrial participation loan to one borrower for $4.2 million during the third quarter of 2019.

As of December 31, 2020, the impaired loan total included $1.8 million of loans for which specific impairment allowances of $1.5 million were allocated to the allowance for loan losses.

The majority of the Corporation's impaired loans are secured and measured for impairment based on collateral evaluations.

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If a loan is determined to be impaired and is placed on non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors.

The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors.

Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five-year history of net losses.

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These qualitative factors include consideration of the following:

(1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments and more recently the expected impact of COVID-19 on various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues:

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The allowance for loan losses was $21.0 million at December 31, 2021, compared to $20.9 million at December 31, 2020.

The Corporation continues to closely monitor the loan portfolio for effects related to the COVID-19 pandemic.

Changes in governmental policies during the pandemic placed stress on certain industries while other industries initially anticipated to be highly impacted by the pandemic demonstrated resilience.

As a result, the Corporation re-evaluated various qualitative factors used to calculate the provision.

In addition the Corporation charged off one large commercial mortgage and one participating interest in a commercial credit.

In 2020, the Corporation increased the allowance by $4.5 million for probable incurred credit losses related to the COVID-19 pandemic, of which $4.0 million remains part of the allowance at year end.

In the fourth quarter of 2020, the Corporation sold and released reserves for three non-performing commercial loans.

The allowance for loan losses was 259.17% of non-performing loans at December 31, 2021 compared to 210.25% at December 31, 2020.

The ratio of allowance for loan losses to total loans was 1.38% at December 31, 2021 and 1.36% at December 31, 2020, respectively.

Net charge-offs for the years ended December 31, 2020 and 2019 were $6.8 million and $1.4 million, respectively.

The table below summarizes the Corporation’s allocation of the allowance for loan losses and percent of loans by category to total loans for each year in the five-year period ended December 31, 2020 (in thousands):

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES

Balance at end of year applicable to:

2020 % 2019 % 2018 % 2017 % 2016 %

The ratio of the allowance for loan losses to total loans excluding PPP loans was 1.43% at December 31, 2021, compared to 1.51% at December 31, 2020.

The Corporation continues to closely monitor the loan portfolio for effects related to the COVID-19 pandemic.

Changes in governmental policies and economic pressures during the pandemic placed stress on certain industries while other industries initially anticipated to be highly impacted by the pandemic demonstrated resilience.

Based upon management review of these factors and the uncertainty that the pandemic continues to present, there was no change to the pandemic related portion of the allowance during the fourth quarter of 2021, with a balance of $2.4 million as of December 31, 2021.

To date the Corporation has released $1.9 million and utilized $0.5 million of the pandemic related provision.

Net recoveries for the year ended December 31, 2021 were $0.1 million compared with net charge-offs of $6.8 million for the year ended December 31, 2020.

The ratio of net charge-offs (recoveries) to average loans outstanding was (0.01)% for 2021 compared to 0.47% for 2020.

The table below summarizes the Corporation’s allowance for loan losses, non-accrual loans, and ratio of net charge-offs and recoveries to average loans outstanding by loan category for the years ended December 31, 2021 and December 31, 2020, by category (in thousands):

ALLOWANCE FOR LOAN LOSSES AND LOAN CREDIT RATIOS BY LOAN CATEGORY

Balance at December 31, 2021 Allowance for loan losses Allowance to loans 1

Non-performing loans Non-performing loans to loans 1

Allowance to non-performing loans Net

charge-offs (recoveries) to average loans

Commercial and agricultural $ 3,591 1.40 % $ 1,932 0.75 % 185.87 % (0.09) %

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Consumer loans 2,075 1.04 % 1,265 0.64 % 164.03 % 0.05 %

$ 20,924 100.0 $ 23,478 100.0 $ 18,944 100.0 $ 21,161 100.0 $ 14,253 100.0

The table below summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 2020 (in thousands, except ratio data):

Total $ 21,025 1.38 % $ 8,114 0.54 % 259.17 % (0.01) %

Balance at December 31, 2020 Allowance for loan losses Allowance to loans 1

Non-performing loans Non-performing loans to loans 1

Allowance to non-performing loans Net

charge-offs (recoveries) to average loans

Commercial and agricultural $ 4,493 1.22 % $ 2,167 0.59 % 207.34 % 1.33 %

Commercial mortgages 11,496 1.60 % 4,470 0.62 % 257.18 % 0.31 %

Residential mortgages 2,079 0.87 % 1,632 0.68 % 127.39 % (0.01) %

Consumer loans 2,856 1.35 % 1,683 0.80 % 169.70 % 0.32 %

Total $ 20,924 1.36 % $ 9,952 0.65 % 210.25 % 0.47 %

Consolidated Ratios at December 31, 2021 2020

Non-performing loans to total loans 0.54 % 0.65 %

Allowance for loan losses to total loans 1.38 % 1.36 %

Allowance for loan losses to total loans, net of PPP 1.43 % 1.51 %

Allowance for loan losses to non-performing loans 259.17 % 210.25 %

1 Ratio is a percentage of loan category.

The increase in the allowance to non-accrual loans is primarily due to a $1.8 million decrease in non-accrual loans from 2020 to 2021.

The decrease in net charge-offs and recoveries to outstanding loans ratios was primarily due to the charge-off of a large commercial participation loan for $3.8 million and a $2.1 million partial charge-off of a commercial loan in 2020.

Refer to Note 4 of the audited Consolidated Financial Statements appearing elsewhere in this report for components used in credit ratios presented above.

The table below summarizes the Corporation's loan loss experience for the years ended December 31, 2021 and 2020 (in thousands, except ratio data):

SUMMARY OF LOAN LOSS EXPERIENCE

Years Ended December 31,

2020 2019 2018 2017 2016

Allowance for loan losses at beginning of year $ 20,924 $ 23,478

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Total 823 587

Net charge-offs 6,793 1,411 5,370 2,114 2,444

Net charge-offs (recoveries) (84) 6,793

Provision charged to operations 17 4,239

Allowance for loan losses at end of year $ 21,025 $ 20,924

Ratio of net charge-offs during year to average loans outstanding 0.47 % 0.11 % 0.41 % 0.17 % 0.20 %

Ratio of allowance for loan losses to total loans outstanding 1.36 % 1.79 % 1.44 % 1.61 % 1.19 %

Net charge-offs for the year ended December 31, 2020 were $6.8 million compared with $1.4 million for the year ended December 31, 2019.

The ratio of net charge-offs to average loans outstanding was 0.47% for 2020 compared to 0.11% for 2019.

The increase in net charge-offs in 2020 can be attributed to the charge-offs of a $3.8 million participating interest in a commercial credit and a $2.1 million commercial mortgage.

Other Real Estate Owned

At December 31, 2021, OREO totaled $0.1 million compared to $0.2 million at December 31, 2020.

The decrease in other real estate owned was due primarily to seven residential properties and one commercial property sold during 2020 in the amount of $0.7 million.

The table below summarizes the Corporation’s deposit composition by segment at December 31, 2020, 2019, and 2018, and the dollar and percent change from December 31, 2019 to December 31, 2020 and December 31, 2018 to December 31, 2019 (in thousands):

The decrease in other real estate owned was due primarily to three residential properties and one commercial property sold during 2021.

The table below summarizes the Corporation’s deposit composition by segment at December 31, 2021, and 2020, and the dollar and percent change from December 31, 2020 to December 31, 2021 (in thousands):

Percentage Change from Prior Year

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At December 31, 2021, demand deposit and money market accounts comprised 77.9% of total deposits compared with 73.9% at December 31, 2020.

The growth in deposits was attributable to increases of $152.2 million in non-interest-bearing demand deposits, $124.6 million in time deposits, $82.1 million in interest-bearing demand deposits, $73.3 million in insured money market accounts, and $33.5 million in savings deposits.

The increase in non-interest-bearing demand deposits was mainly attributable to an increase in personal customer deposits.

The increase in time deposits was primarily due to an increase in municipal certificates of deposit, and the increase in interest-bearing demand deposits was due primarily to commercial deposits.

The increase in money market accounts can be mostly attributed to increases in ICS deposits personal customer deposits and personal customer deposits.

The overall increase in deposits was partially attributed to the receipt of stimulus checks and PPP loan disbursements.

The growth in deposits was attributable to increases of $119.2 million in non-interest-bearing demand deposits, $2.5 million in interest-bearing demand deposits, $51.0 million in insured money market accounts, and $34.3 million in savings deposits, offset by a decrease of $89.4 million in time deposits.

The growth in deposits was due primarily to increases of $76.1 million in consumer funds, and $42.8 million in commercial deposits, offset by a decrease of $1.5 million in public deposits.

The increase in deposits was partially due to the collection of stimulus funds and PPP loan disbursements.

At December 31, 2021, public funds deposits totaled $378.9 million compared to $308.9 million at December 31, 2020.

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Public Funds:

2020 2019 2018

Non-interest-bearing demand deposits $ 31,739 $ 7,738

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Percentage of public funds to total deposits 17.6 % 15.2 %

The aggregate amount of the Corporation's outstanding uninsured deposits was $366.5 million and $407.6 million as of December 31, 2021 and 2020, respectively.

As of December 31, 2021, the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than or equal to $250,000 was $29.3 million.

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Over 6 through 12 months 9,648

Over 1 year to 3 years 43,656

Over 3 years 4,477

Over 12 months 12,817

The table below presents the Corporation's deposits balance by bank division (in thousands):

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Information regarding deposits is included in Note 8 to the consolidated financial statements appearing elsewhere in this report.

There were no outstanding FHLBNY advances at December 31, 2020 and 2019 respectively.

For each of the three years ended December 31, 2020, 2019 and 2018, respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity.

Information regarding securities sold under agreements to repurchase and FHLBNY advances is included in Notes 9 and 10 of the audited Consolidated Financial Statements appearing elsewhere in this report.

The following is a summary of securities sold under agreements to repurchase as of and for the years ended December 31, 2020, 2019 and 2018 (in thousands):

2020 2019 2018

Balance at December 31 $ — $ — $ —

Maximum month-end balance $ — $ — $ 10,000

Average balance during year $ — $ — $ 3,644

The following is a summary of FHLBNY overnight advances as of and for the years ended December 31, 2020, 2019, and 2018 (in thousands):

2020 2019 2018

Balance at December 31 $ — $ — $ —

Maximum month-end balance $ — $ — $ 76,500

Average balance during year $ — $ — $ 23,539

The following is a summary of FHLBNY term advances as of and for the years ended December 31, 2020, 2019, and 2018.

The carrying amount includes the advance plus purchase accounting adjustments that are amortized over the term of the advance (in thousands):

2020 2019 2018

Balance at December 31 $ — $ — $ —

Maximum month-end balance $ — $ — $ —

Average balance during year $ — $ — $ 5

FHLBNY overnight advances increased $14.6 million at December 31, 2021 when compared to 2020, for which there were no outstanding FHLBNY advances.

For each year ended December 31, 2021, and 2020 respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity.

There were no FHLBNY term advances as of and for the years ended December 31, 2021, and 2020.

Information regarding FHLBNY advances is included in Note 9 of the audited Consolidated Financial Statements appearing elsewhere in this report.

There were no securities sold under agreements to repurchase as of and for the years ended December 31, 2021, or 2020.

The Corporation offers interest rate swap agreements to qualified commercial loan customers.

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Shareholders’ Equity

Total shareholders’ equity was $199.7 million at December 31, 2020, compared with $182.6 million at December 31, 2019, an increase of $17.1 million, or 9.3%.

Total shareholders’ equity was $211.5 million at December 31, 2021, compared with $199.7 million at December 31, 2020, an increase of $11.8 million, or 5.9%, primarily due to an increase in retained earnings.

The increase in retained earnings of $20.9 million was due primarily to earnings of $26.4 million offset by $5.6 million in dividends declared during the year.

The increase in accumulated other comprehensive income of $8.2 million can be attributed to an increase in the fair market value of the securities portfolio as a result of a decrease in interest rates.

Treasury stock increased $5.8 million, due to the Corporation's common stock repurchase program.

The decrease in accumulated other comprehensive income (loss) of $8.9 million can primarily be attributed to a decrease in the fair market value of the securities portfolio.

Treasury stock increased $0.3 million primarily due to the Corporation's common stock repurchase program, offset by the impact of the issuance of shares related to the Corporation's employee benefit plans.

Total shareholders’ equity to total assets ratio was 8.74% at December 31, 2021 compared with 8.76% at December 31, 2020.

Tangible equity to tangible assets ratio decreased to 7.87% at December 31, 2020, from 9.07% at December 31, 2019.

Tangible equity to tangible assets ratio increased to 7.91% at December 31, 2021, from 7.87% at December 31, 2020.

The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories:

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As of December 31, 2021, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.

A comparison of the Bank’s actual capital ratios to the ratios required to be adequately or well-capitalized at December 31, 2020 and 2019, is included in Footnote 20 of the audited Consolidated Financial.

A comparison of the Bank’s actual capital ratios to the ratios required to be adequately or well-capitalized at December 31, 2021 and 2020, is included in Footnote 20 of the audited Consolidated Financial Statements.

For more information regarding current capital regulations see Part I-“Business-Supervision and Regulation-Regulatory Capital Requirements.”

Cash dividends declared during 2020, 2019 and 2018 each totaled $5.0 million respectively, or $1.04 per share.

Dividends declared during 2020 amounted to 25.73% of net income compared to 32.28%, and 25.42% of net income for 2019 and 2018, respectively.

Beginning second quarter of 2021, the Corporation increased quarterly dividends to shareholders 19.2% to $0.31 per share.

Cash dividends declared during 2021 totaled $5.6 million, or $1.19 per share, compared to $5.0 million, or $1.04 per share in 2020.

Dividends declared during 2021 amounted to 21.02% of net income compared to 25.73% of net income for 2020.

Management seeks to continue generating sufficient capital internally, while continuing to pay dividends to the Corporation’s shareholders.

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Purchases may be made from time to time on the open market or in privately negotiated transactions at the discretion of management.

On March 18, 2020, the Corporation's Board of Directors approved a stock repurchase program which replaced the previously authorized repurchase program.

As of December 31, 2020, all 250,000 shares have been repurchased at an average cost of $29.40 per share.

On January 8, 2021, the Corporation announced that the Board of Directors approved a stock repurchase program.

Under the repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares.

The repurchase program permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission.

As of March 11, 2022, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program at the weighted average cost of $40.42 per share.

The remaining buyback authority under the share repurchase program was 200,816 shares as of the March 11, 2022.

On April 27, 2020, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933.

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The SEC declared the registration statement effective on May 7, 2020.

On January 8, 2021, the Corporation announced that the Board of Directors approved a new stock repurchase program.

Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares.

As of March 12, 2021, the Corporation repurchased a total of 20,265 shares of common stock at a total cost of $721,410.82 under the repurchase program at the weighted average cost of $34.98 per share.

The remaining buyback authority under the share repurchase program was 229,375 shares as of the March 12, 2021.

Off-balance Sheet Arrangements

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with GAAP 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, commitments to fund new loans, interest rate swaps, and risk participation agreements.

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.

The table below shows the Corporation’s off-balance sheet arrangements as of December 31, 2020 (in thousands):

COMMITMENT MATURITY BY PERIOD

Total 2021 2022-2023 2024-2025 2026 and thereafter

Standby letters of credit $ 16,094 $ 15,152 $ 480 $ 207 $ 255

Unused portions of lines of credit (1) 199,311 199,311 — — —

Commitments to fund new loans 67,515 67,515 — — —

Total $ 282,920 $ 281,978 $ 480 $ 207 $ 255

(1) Not included in this total are unused portions of home equity lines of credit, credit card lines and consumer overdraft protection lines of credit, since no contractual maturity dates exist for these types of loans.

Commitments to outside parties under these lines of credit were $54.8 million, $6.4 million and $8.8 million, respectively, at December 31, 2020.

Contractual Obligations

The table below shows the Corporation’s contractual obligations under long-term agreements as of December 31, 2020 (in thousands).

Note references are to the Notes of the Consolidated Financial Statements:

CONTRACTUAL OBLIGATIONS

Payments Due by Period

Total 2021 2022 - 2023 2024 - 2025 2026 and thereafter

Time Deposits (Note 8) $ 285,731 $ 193,113 $ 88,674 $ 1,084 $ 2,860

Operating leases (Note 6) 8,666 907 1,712 1,698 4,349

Capital leases (Note 6) 4,809 388 782 800 2,839

Data processing services and other 604 480 124 — —

Total (1) $ 299,810 $ 194,888 $ 91,292 $ 3,582 $ 10,048

(1) Not included in the above total is the Corporation's obligation regarding the Pension Plan and Other Benefit Plans.

Please refer to Part IV Item 15 Note 14 for information regarding these obligations at December 31, 2020.

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.

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The Corporation also had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which were available at December 31, 2021.

The Corporation had a total of $58.0 million of unsecured lines of credit with five different financial institutions, all of which was available at December 31, 2019.

The Corporation had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which was available at December 31, 2020.

The PPPLF was created by the Board of Governors of the Federal Reserve System on April 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act.

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The Corporation fully repaid the funds on May 28, 2020.

The Corporation has a detailed Funds Management Policy that includes sections on liquidity measurement and management, and a Liquidity Contingency Plan that provide for the prompt and comprehensive response to unexpected demands for liquidity.

This policy and plan are established and revised as needed by the management and Board ALCO committees.

The ALCO is responsible for measuring liquidity, establishing liquidity targets and implementing strategies to achieve selected targets.

The ALCO is responsible for coordinating activities across the Corporation to ensure that prudent levels of contingent or standby liquidity are available at all times.

Based on the ongoing assessment of the liquidity considerations, management believes the Corporation’s sources of funding meet anticipated funding needs.

Consolidated Cash Flows Analysis

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Investing activities

Cash used in investing activities during the year ended December 31, 2021 predominantly resulted from purchases of securities available for sale, offset by maturities, and principal collected on securities available for sale.

Cash used in investing activities during the year ended December 31, 2020 predominantly resulted from purchases of securities available for sale and a net increase in loans, offset by maturities, and principal collected on securities available for sale.

Cash used in investing activities during the year ended December 31, 2019 predominantly resulted from purchases of securities available for sale, offset by sales, maturities and principal collected on securities available for sale.

Financing activities

Cash provided by financing activities during the year ended December 31, 2020 resulted from an increase in deposits, offset by the payment of dividends to shareholders and the repurchase of treasury shares through the Corporation's common stock repurchase program.

Cash used in financing activities during the year ended December 31, 2019 predominantly resulted from payment of dividends to shareholders, offset by an increase in deposits.

Cash provided by financing activities during the year ended December 31, 2021 resulted from an increase in deposits and FHLBNY overnight advances, offset by the payment of dividends to shareholders and the repurchase of treasury shares through the Corporation's common stock repurchase program.

Cash provided by financing activities during the year ended December 31, 2020 predominantly resulted from an increase in deposits, offset by the payment of dividends to shareholders and the repurchase of treasury shares through the Corporation's common stock repurchase program.

Off-balance Sheet Arrangements

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with GAAP are not recorded in the financial statements.

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.

The table below shows the Corporation’s off-balance sheet arrangements as of December 31, 2021 (in thousands):

COMMITMENT MATURITY BY PERIOD

Total 2022 2023-2024 2025-2026 2027 and thereafter

Standby letters of credit $ 7,974 $ 6,943 $ 362 $ 414 $ 255

Unused portions of lines of credit (1) 224,214 224,214 — — —

Commitments to fund new loans 67,330 67,330 — — —

Total $ 299,518 $ 298,487 $ 362 $ 414 $ 255

Commitments to outside parties under these lines of credit were $53.9 million, $6.1 million and $8.9 million, respectively, at December 31, 2021.

Capital Resources

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The new rule took effect on January 1, 2020.

Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8% beginning in the second quarter of 2020 through the end of 2020.

Beginning in 2021, the community bank leverage ratio will increase to 8.5% for the calendar year.

Community banks will have until Jan.

1, 2022, before the community bank leverage ratio requirement will return to 9%.

Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8.5% for 2021.

The community bank leverage ratio requirement returned to 9.0% on January 1, 2022.

The Bank has not elected to use the community bank leverage ratio.

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If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

Management believes that,

as of December 31, 2020 and December 31, 2019, the Corporation and Bank met all capital adequacy requirements to which they were subject.

Management believes that, as of December 31, 2021 and December 31, 2020 the Corporation and Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2018, the Corporation is no longer subject to FRB consolidated capital requirements applicable to bank holding companies, which are similar to those applicable to the Bank, until it reaches $3.0 billion in assets.

As of December 31, 2021, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.

To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below.

To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios.

There have been no conditions or events since that notification that management believes have changed the Bank's capital category.

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There is no threshold for well-capitalized status for bank holding companies.

The Corporation’s and the Bank’s actual and required regulatory capital ratios were as follows (in thousands, except ratio data):

Actual Minimal Capital Adequacy Minimal Capital Adequacy with Capital Buffer To Be Well

Capitalized Under Prompt Corrective Action Provisions

As of December 31, 2020 Amount Ratio Amount Ratio Amount Ratio Amount Ratio

Total Capital (to Risk Weighted Assets):

Consolidated $ 192,960 13.62 % N/A N/A N/A N/A N/A N/A

Bank $ 185,606 13.12 % $ 113,182 8.00 % $ 148,551 10.50 % $ 141,478 10.00 %

Tier 1 Capital (to Risk Weighted Assets):

Consolidated $ 175,216 12.37 % N/A N/A N/A N/A N/A N/A

Bank $ 167,881 11.87 % $ 84,887 6.00 % $ 120,256 8.50 % $ 113,182 8.00 %

Common Equity Tier 1 Capital (to Risk Weighted Assets):

Consolidated $ 175,216 12.37 % N/A N/A N/A N/A N/A N/A

Bank $ 167,881 11.87 % $ 63,665 4.50 % $ 99,034 7.00 % $ 91,960 6.50 %

Tier 1 Capital (to Average Assets):

Consolidated $ 175,216 7.90 % N/A N/A N/A N/A N/A N/A

Bank $ 167,881 7.59 % $ 88,474 4.00 % N/A N/A $ 110,592 5.00 %

Actual Minimum Capital Adequacy Minimal Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions

As of December 31, 2019 Amount Ratio Amount Ratio Amount Ratio Amount Ratio

Total Capital (to Risk Weighted Assets):

Consolidated $ 182,239 13.98 % N/A N/A N/A N/A N/A N/A

Bank $ 175,062 13.45 % $ 104,136 8.00 % $ 136,679 10.50 % $ 130,170 10.00 %

Tier 1 Capital (to Risk Weighted Assets):

Consolidated $ 165,859 12.73 % N/A N/A N/A N/A N/A N/A

Bank $ 158,702 12.19 % $ 78,102 6.00 % $ 110,645 8.50 % $ 104,136 8.00 %

Common Equity Tier 1 Capital (to Risk Weighted Assets):

Consolidated $ 165,859 12.73 % N/A N/A N/A N/A N/A N/A

Bank $ 158,702 12.19 % $ 58,577 4.50 % $ 91,119 7.00 % $ 84,611 6.50 %

Tier 1 Capital (to Average Assets):

Consolidated $ 165,859 9.35 % N/A N/A N/A N/A N/A N/A

Bank $ 158,702 8.98 % $ 70,719 4.00 % N/A N/A $ 88,399 5.00 %

Refer to Note 19 of the audited Consolidated Financial Statements appearing elsewhere in this report for a table summarizing the Corporation's and the Bank's actual and required regulatory capital ratios.

For more information regarding current capital regulations see Part I-“Business-Supervision and Regulation-Regulatory Capital Requirements.”

Dividend Restrictions

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Adoption of New Accounting Standards

For a discussion of the impact of recently issued accounting standards, please see Note 1 to the Corporation's consolidated financial statements which begins on page F-10.

For a discussion of the impact of recently issued accounting standards, please see Note 1 to the Corporation's audited Consolidated Financial Statements which begins on page F-10.

Explanation and Reconciliation of the Corporation’s Use of Non-GAAP Measures

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As of or for the Years Ended

(in thousands, except ratio data) December 31, December 31, December 31,

2020 2019 2018

(in thousands, except ratio data) December 31, December 31,

NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT

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As of or for the Years Ended

(in thousands, except ratio data) December 31, December 31, December 31,

2020 2019 2018

(in thousands, except ratio data) December 31, December 31,

EFFICIENCY RATIO

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Non-interest income (GAAP) $ 23,870 $ 21,124

changes in fair value of equity investments — — (2,093)

net (gains) losses on security transactions — —

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As of or for the Years Ended

(in thousands, except per share and ratio data) December 31, December 31, December 31,

2020 2019 2018

(in thousands, except per share and ratio data) December 31, December 31,

TANGIBLE EQUITY AND TANGIBLE ASSETS (YEAR END)

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As of or for the Years Ended

December 31, December 31, December 31,

December 31, December 31,

(in thousands, except ratio data) 2021 2020

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As of or for the Years Ended

(in thousands, except per share and ratio data) December 31, December 31, December 31,

2020 2019 2018

(in thousands, except per share and ratio data) December 31, December 31,

NON-GAAP NET INCOME

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Average basic and diluted shares outstanding 4,683 4,802

Reported basic and diluted earnings (loss) per share (GAAP) $ 4.01 $ 3.21 $ 4.06

Reported basic and diluted earnings per share (GAAP) $ 5.64 $ 4.01

Reported return on average assets (GAAP) 1.09 % 0.94 %

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis