CHEMUNG FINANCIAL CORP 10-K

Item 9A. CONTROLS AND PROCEDURES (a) Evaluation of Disclosure Controls and Procedures The Corporation's management, with the participation of our Chief Executive Officer, who is the Corporation's principal executive officer, and our Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, evaluated the effectiveness of the Corporation's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of December 31, 2021. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer and Treasurer have concluded that the Corporation's disclosure controls and procedures are effective as of December 31, 2021. (b) Management's Report on Internal Control over Financial Reporting We, as members of management of the Corporation, are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Corporation's internal control over financial reporting is a process designed to provide reasonable assurance to the Corporation's management and Board of Directors regarding the reliability of financial reporting and the preparation of the Corporation's financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. As of December 31, 2021 management assessed the effectiveness of the Corporation's internal control over financial reporting based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The objective of this assessment was to determine whether the Corporation's internal control over financial reporting was effective as of December 31, 2021. Based on the assessment, we assert that the Corporation maintained effective internal control over financial reporting as of December 31, 2021 based on the specified criteria. (c) Changes in Internal Control over Financial Reporting During the fourth quarter of 2021, there have been no changes in the Corporation’s internal control over financial reporting that have materially affected, or that are reasonably likely to material affect, the Corporation’s internal control over financial reporting. /s/ Anders M. Tomson /s/ Karl F. Krebs Anders M. Tomson Karl F. Krebs President and Chief Executive Officer Chief Financial Officer and Treasurer March 23, 2022 March 23, 2022 Item 9B. OTHER INFORMATION None. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. 69 PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information responsive to this Item 10 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2022 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2021 fiscal year end. ITEM 11. EXECUTIVE COMPENSATION Information responsive to this Item 11 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2022 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2021 fiscal year end. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS Information responsive to this Item 12 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2022 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2021 fiscal year end. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Information responsive to this Item 13 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2022 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2021 fiscal year end. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Information responsive to this Item 14 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2022 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2021 fiscal year end. 70 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) (1) The following consolidated financial statements of the Corporation appear on pages F-1 through F-60 of this report and are incorporated in Part II, Item 8: Report of Independent Registered Public Accounting Firm-Crowe LLP Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2021 and 2020 Consolidated Statements of Income for the two years ended December 31, 2021 Consolidated Statements of Comprehensive Income for the two years ended December 31, 2021 Consolidated Statements of Shareholders' Equity for the two years ended December 31, 2021 Consolidated Statements of Cash Flows for the two years ended December 31, 2021 Notes to Consolidated Financial Statements (2) Financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto under Item 8, "Financial Statements and Supplementary Data". (b) The following exhibits are either filed with this Form 10-K or are incorporated herein by reference. The Corporation's Securities Exchange Act file number is 000-13888. Exhibit The following exhibits are either filed with this Form 10-K or are incorporated herein by reference. The Corporation’s Securities Exchange Act file number is 000-13888. 3.1 Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008). 3.2 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008). 3.3 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006). 3.4 Amended and Restated Bylaws of Chemung Financial Corporation, as amended November 17, 2021 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K and filed with the Commission on November 19, 2021). 4.1 Specimen Stock Certificate (filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). 4.2 Description of Common Stock Registered Under Section 12 of the Securities Exchange Act of 1934, filed herewith (as incorporated by reference to Exhibit 4.2 to Registrant's Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020). 10.1 Chemung Financial Corporation 2014 Omnibus Plan and Component Plans (Chemung Financial Corporation Restricted Stock Plan, Chemung Financial Corporation Incentive Compensation Plan, Chemung Financial Corporation Directors’ Compensation Plan and Chemung Financial Corporation/Chemung Canal Trust Company Directors’ Deferred Fee Plan) (filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to Registrant’s Form S-8 filed with the Commssion on January 27, 2015 and incorporated herein by reference). 10.2 Change of Control Agreement dated December 19, 2018 between Chemung Canal Trust Company and Anders M. Tomson, President and Chief Executive Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commission on December 19, 2018 and incorporated herein by reference). 71 10.3 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Karl F. Krebs, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference). 10.4 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Thomas W. Wirth, Executive Vice President (filed as Exhibit 10.4 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference). 10.5 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Daniel D. Fariello, President of Capital Bank Division (filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference). 10.6 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Loren D. Cole, Executive Vice President and Chief Information Officer, (as incorporated by reference to Exhibit 10.8 to Registrant’s Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020). 10.7 Change of Control Agreement dated January 4, 2021 between Chemung Canal Trust Company and Jeffrey P. Kenefick, Regional President (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on January 5, 2021 and incorporated herein by reference). 10.8 Chemung Financial Corporation 2021 Equity Incentive Plan (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on June 8, 2021 and incorporated herein by reference). 10.9 Consent Order between Chemung Canal Trust Company and the New York State Department of Financial Services dated June 24, 2021 (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on June 29, 2021 and incorporated herein by reference). 10.10 Form of Incentive Stock Option Award Agreement (filed as Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (333-257227) filed with the Commission on June 21, 2021 and incorporated herein by reference). 10.11 Form of Non-Qualified Stock Option Award Agreement (filed as Exhibit 10.3 to Registrant's Registration Statement on Form S-8 (333-257227) filed with the Commission on June 21, 2021 and incorporated herein by reference). 10.12 Chemung Canal Trust Company Defined Contribution Supplemental Executive Retirement Plan* 21 Subsidiaries of the Registrant.* 23.0 Consent of Crowe LLP, Independent Registered Public Accounting Firm.* 31.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* 31.2 Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* 32.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.* 32.2 Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.* 101.INS Instance Document 101.SCH XBRL Taxonomy Schema* 101.CAL XBRL Taxonomy Calculation Linkbase* 101.DEF XBRL Taxonomy Definition Linkbase* 101.LAB XBRL Taxonomy Label Linkbase* 101.PRE XBRL Taxonomy Presentation Linkbase* * Filed herewith. ITEM 16. 10-K SUMMARY None. 72 CHEMUNG FINANCIAL CORPORATION INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Pages F-1 to F-60 Page Report of Independent Registered Public Accounting Firm-Crowe LLP F- 1 Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 2021 and 2020 F- 3 Consolidated Statements of Income for the two years ended December 31, 2021 F- 4 Consolidated Statements of Comprehensive Income (Loss) for the two years ended December 31, 2021 F- 5 Consolidated Statements of Shareholders' Equity for the two years ended December 31, 2021 F- 6 Consolidated Statements of Cash Flows for the two years ended December 31, 2021 F- 8 Notes to Consolidated Financial Statements F- 10 73 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Shareholders Chemung Financial Corporation and Subsidiaries Elmira, New York Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation and Subsidiaries (the "Company") as of December 31, 2021 and 2020, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses – Loans Collectively Evaluated for Impairment. As described in Note 1 and Note 4 to the consolidated financial statements, the Company’s allowance for loan losses is the amount that management believes will be adequate to absorb probable incurred losses on existing loans. The allowance for loan losses was $21.0 million at December 31, 2021, which includes $18.0 million related to loans collectively evaluated for impairment. The general valuation covers non-impaired loans and is based on historical loss experience adjusted for current 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. For all other unclassified loans, the historical loss experience is determined by portfolio class and is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include considerations of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic business conditions and developments, including the condition of various market segments, (3) loan volume, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity F-1 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: secured vs. 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. We identified the allowance for loan losses for loans collectively evaluated for impairment as a critical audit matter because of the significant auditor judgment involved in evaluating management’s significant judgment applied in determining the subjective assumptions relating to: 1) the classification of loans subject to an adjusted loss history, and 2) the determination of the qualitative factors on the allowance for loan losses. The primary procedures we performed to address this critical audit matter included: a. Testing the effectiveness of controls over the evaluation of the allowance related to loans collectively evaluated for impairment, including addressing: i. Grading of loans from independent loan review and management’s annual credit reviews. ii. Management’s judgments and assumptions related to the qualitative assessment and the resulting allocation to the allowance, including the data used in the determination of qualitative factors. a. Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the allowance related to loans collectively evaluated for impairment, which included: i. Evaluation of loan grades of the commercial portfolio to ensure proper inclusion in pass categories or criticized and classified categories. ii. Evaluation of the data used as a basis for the adjustments relating to the qualitative factors. iii. Evaluation of the reasonableness of management’s judgments and assumptions related to the qualitative assessment and the resulting allocation to the allowance Crowe LLP ( 173 ) We have served as the Company's auditor since 2006. Livingston, New Jersey March 23, 2022 F-2 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, (in thousands, except share and per share amounts) 2021 2020 ASSETS Cash and due from financial institutions $ 17,365 $ 29,467 Interest-earning deposits in other financial institutions 9,616 79,071 Total cash and cash equivalents 26,981 108,538 Equity investments, at fair value 2,964 2,542 Securities available for sale, at estimated fair value 792,026 554,611 Securities held to maturity, estimated fair value of $ 3,796 at December 31, 2021 and $ 2,501 at December 31, 2020 3,790 2,469 FHLBNY and FRBNY Stock, at cost 4,218 3,150 Loans, net of deferred loan fees 1,518,249 1,536,463 Allowance for loan losses ( 21,025 ) ( 20,924 ) Loans, net 1,497,224 1,515,539 Loans held for sale 396 170 Premises and equipment, net 17,969 20,119 Operating lease right-of-use assets 7,234 7,145 Goodwill 21,824 21,824 Other intangible assets, net 15 258 Bank owned life insurance 2,825 3,059 Accrued interest and other assets 41,009 40,027 Total assets $ 2,418,475 $ 2,279,451 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing $ 739,607 $ 620,423 Interest-bearing 1,415,826 1,417,351 Total deposits 2,155,433 2,037,774 FHLBNY overnight advances 14,570 — Capital lease obligation 3,594 3,849 Operating lease liabilities 7,378 7,264 Dividends payable 1,450 1,214 Accrued interest payable and other liabilities 24,595 29,651 Total liabilities 2,207,020 2,079,752 Shareholders' equity: Common stock, $ 0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at December 31, 2021 and December 31, 2020 53 53 Additional-paid-in capital 46,901 46,764 Retained earnings 188,877 168,006 Treasury stock, at cost ( 636,720 shares at December 31, 2021; 642,239 shares at December 31, 2020) ( 17,846 ) ( 17,525 ) Accumulated other comprehensive (loss) income ( 6,530 ) 2,401 Total shareholders' equity 211,455 199,699 Total liabilities and shareholders' equity $ 2,418,475 $ 2,279,451 See accompanying notes to consolidated financial statements. F-3 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, (in thousands, except per share amounts) 2021 2020 Interest and Dividend Income: Loans, including fees $ 58,861 $ 59,089 Taxable securities 8,935 6,004 Tax exempt securities 1,061 1,060 Interest-earning deposits 151 754 Total interest and dividend income 69,008 66,907 Interest Expense: Deposits 3,284 3,827 Borrowed funds 135 161 Total interest expense 3,419 3,988 Net interest income 65,589 62,919 Provision for loan losses 17 4,239 Net interest income after provision for loan losses 65,572 58,680 Non-Interest Income: Wealth management group fee income 11,072 9,492 Service charges on deposit accounts 3,214 3,134 Interchange revenue from debit card transactions 4,844 4,068 Net gains on securities transactions — — Change in fair value of equity investments 246 89 Net gain on sales of loans held for sale 1,073 1,730 Net gains (losses) on sales of other real estate owned ( 16 ) ( 79 ) Income from bank owned life insurance 52 161 Other 3,385 2,529 Total non-interest income 23,870 21,124 Non-Interest Expenses: Salaries and wages 24,413 24,250 Pension and other employee benefits 6,086 5,553 Other components of net periodic pension cost (benefit) ( 1,583 ) ( 1,017 ) Net occupancy expenses 5,873 5,885 Furniture and equipment expenses 1,669 2,078 Data processing expense 8,519 7,576 Professional services 1,932 1,725 Legal accruals and settlements — — Amortization of intangible assets 243 484 Marketing and advertising expense 792 631 Other real estate owned expenses 40 102 FDIC insurance 1,408 987 Loan expense 1,037 1,173 Other 5,253 6,508 Total non-interest expenses 55,682 55,935 Income before income tax expense 33,760 23,869 Income tax expense 7,335 4,607 Net income $ 26,425 $ 19,262 Weighted average shares outstanding 4,683 4,802 Basic and diluted earnings per share $ 5.64 $ 4.01 See accompanying notes to consolidated financial statements. F-4 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME YEARS ENDED DECEMBER 31, (in thousands) 2021 2020 Net income $ 26,425 $ 19,262 Other comprehensive income (loss): Unrealized holding gains (losses) on securities available for sale ( 15,632 ) 10,415 Reclassification adjustment gains realized in net income — — Net unrealized gains (losses) ( 15,632 ) 10,415 Tax effect 4,010 ( 2,656 ) Net of tax amount ( 11,622 ) 7,759 Change in funded status of defined benefit pension plan and other benefit plans: Net gain (loss) arising during the period 3,655 506 Reclassification adjustment for amortization of prior service benefit ( 220 ) ( 220 ) Prior service credit — — Reclassification adjustment for partial pension settlement loss included in pension expense — — Reclassification adjustment for amortization of net actuarial losses 212 300 Total before tax effect 3,647 586 Tax effect ( 956 ) ( 145 ) Net of tax amount 2,691 441 Total other comprehensive income (loss) ( 8,931 ) 8,200 Comprehensive income $ 17,494 $ 27,462 See accompanying notes to consolidated financial statements. F-5 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Balances at December 31, 2019 $ 53 $ 46,382 $ 153,701 $ ( 11,710 ) $ ( 5,799 ) $ 182,627 Net income — — 19,262 — — 19,262 Other comprehensive income — — — 8,200 8,200 Restricted stock awards — 672 — — — 672 Distribution of 6,426 shares of treasury stock granted for directors’ deferred compensation plan — ( 182 ) — 168 — ( 14 ) Distribution of 14,805 shares of treasury stock granted for employee restricted stock awards, net — ( 403 ) — 403 — — Restricted stock units for directors' deferred compensation plan — 29 — — — 29 Cash dividends declared ($ 1.04 per share) — — ( 4,957 ) — — ( 4,957 ) Distribution of 7,923 shares of treasury stock for directors' compensation — 145 — 205 — 350 Distribution of 2,274 shares of treasury stock for employee compensation — 42 — 59 — 101 Sale of 36,104 shares of treasury stock (a) — 74 — 944 — 1,018 Repurchase of 257,018 shares of common stock — — — ( 7,589 ) — ( 7,589 ) Forfeiture of 112 shares of restricted stock awards — 5 — ( 5 ) — $ — Balances at December 31, 2020 $ 53 $ 46,764 $ 168,006 $ ( 17,525 ) $ 2,401 $ 199,699 (continued) F-6 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Balances at December 31, 2020 $ 53 $ 46,764 $ 168,006 $ ( 17,525 ) $ 2,401 $ 199,699 Net income — — 26,425 — — 26,425 Other comprehensive loss — — — ( 8,931 ) ( 8,931 ) Restricted stock awards — 535 — — — 535 Distribution of 2,707 shares of treasury stock granted for directors’ deferred compensation plan — ( 72 ) — 75 — 3 Distribution of 20,763 shares of treasury stock granted for employee restricted stock awards, net — ( 578 ) — 578 — — Restricted stock units for directors' deferred compensation plan — 19 — — — 19 Cash dividends declared ($ 1.19 per share) — — ( 5,554 ) — ( 5,554 ) Distribution of 9,291 shares of treasury stock for directors' compensation — 64 — 253 — 317 Distribution of 3,860 shares of treasury stock for employee compensation — 27 — 105 — 132 Sale of 10,322 shares of treasury stock (a) — 142 — 284 — 426 Repurchase of 41,424 shares of common stock — — — ( 1,616 ) — ( 1,616 ) Balances at December 31, 2021 $ 53 $ 46,901 $ 188,877 $ ( 17,846 ) $ ( 6,530 ) $ 211,455 (a) All treasury stock sales were completed at the prevailing market price with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan which is a defined contribution plan sponsored by the Bank. See accompanying notes to consolidated financial statements. F-7 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) YEARS ENDED DECEMBER 31, CASH FLOWS FROM OPERATING ACTIVITIES: 2021 2020 Net income $ 26,425 $ 19,262 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of right-of-use assets 759 856 Amortization of intangible assets 243 484 Deferred income tax (benefit) expense 570 ( 86 ) Provision for loan losses 17 4,239 Loss on disposal of fixed assets 16 247 Depreciation and amortization of fixed assets 2,501 2,918 Amortization of premiums on securities, net 5,373 1,842 Gains on sales of loans held for sale, net ( 1,073 ) ( 1,730 ) Proceeds from sales of loans held for sale 38,157 47,996 Loans originated and held for sale ( 37,310 ) ( 45,251 ) Net (gains) losses on sale of other real estate owned 16 46 Write-downs on OREO — 38 Net change in fair value of equity investments ( 246 ) ( 89 ) Net gains on securities transactions — — Proceeds from sales of trading assets 161 91 Purchase of trading assets ( 337 ) ( 370 ) (Increase) decrease in other assets ( 1,954 ) ( 9,883 ) Increase (decrease) in accrued interest payable ( 53 ) ( 37 ) Expense related to restricted stock units for directors' deferred compensation plan 19 29 Expense related to employee stock compensation 132 101 Expense related to employee restricted stock awards 535 672 Payments on operating leases ( 1,202 ) ( 820 ) Increase (decrease) in other liabilities 2,764 8,265 Income from bank owned life insurance ( 52 ) ( 161 ) Net cash provided by operating activities 35,461 28,659 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sales of securities available for sale — — Proceeds from maturities, calls, and principal paydowns on securities available for sale 143,193 67,888 Proceeds from maturities and principal collected on securities held to maturity 937 2,007 Purchases of securities available for sale ( 401,594 ) ( 329,836 ) Purchases of securities held to maturity ( 2,277 ) ( 1,361 ) Purchase of FHLBNY and FRBNY stock ( 3,467 ) ( 51 ) Redemption of FHLBNY and FRBNY stock 2,399 — Purchases of premises and equipment ( 367 ) ( 867 ) Proceeds from sale of other real estate owned 210 627 Proceeds from sale of loans — 5,227 Proceeds from bank owned life insurance 286 213 Net (increase) decrease in loans 18,196 ( 239,695 ) Net cash (used by) provided by investing activities ( 242,484 ) ( 495,848 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts 207,033 341,081 Net increase (decrease) in time deposits ( 89,374 ) 124,555 Net change in FHLBNY overnight advances 14,570 — Principal payments made on capital lease ( 255 ) ( 236 ) Purchase of treasury stock ( 1,616 ) ( 7,589 ) Sale of treasury stock 426 1,018 Cash dividends paid ( 5,318 ) ( 5,006 ) Net cash (used in) provided by financing activities 125,466 453,823 Net increase (decrease) in cash and cash equivalents ( 81,557 ) ( 13,366 ) Cash and cash equivalents, beginning of period 108,538 121,904 Cash and cash equivalents, end of period $ 26,981 $ 108,538 (Continued) F-8 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2021 2020 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 3,472 $ 4,025 Income Taxes $ 5,675 $ 6,005 Supplemental disclosure of non-cash activity: Transfer of loans to other real estate owned $ 102 $ 431 Dividends declared, not yet paid $ 1,450 $ 1,214 Repurchase of common stock in lieu of employee payroll taxes $ ( 270 ) $ ( 238 ) Distribution of treasury stock for directors' deferred compensation plan $ 3 $ ( 14 ) Distribution of treasury stock for directors' compensation $ 317 $ 350 Forfeiture of shares of restricted stock awards $ — $ ( 5 ) See accompanying notes to consolidated financial statements. F-9 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 and 2020 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION The Corporation, through its wholly-owned subsidiaries, the Bank and CFS Group, Inc., provides a wide range of banking, financing, fiduciary and other financial services to its clients. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory agencies. CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in conformity with GAAP and include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash and amounts due from banks and demand interest-bearing deposits with other financial institutions. Time deposits with other financial institutions are classified as held-to-maturity securities and are not included in cash and cash equivalents. EQUITY INVESTMENTS Securities that are held to fund a non-qualified deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value and interest and dividend income included in earnings. SECURITIES Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized cost. Securities to be held for indefinite periods of time or not intended to be held to maturity are classified as available for sale and carried at fair value. Unrealized holding gains and losses on securities classified as available for sale are excluded from earnings and are reported as accumulated other comprehensive income (loss) in shareholders' equity, net of the related tax effects, until realized. Realized gains and losses are determined using the specific identification method. Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings. F-10 In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows. Premiums and discounts are amortized or accreted over the life of the related security as an adjustment of yield using the interest method. Dividend and interest income is recognized when collected. FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK STOCK The Bank is a member of both the FHLBNY and the FRBNY. FHLBNY members are required to own a certain amount of stock based on the level of borrowings and other factors, while FRBNY members are required to own a certain amount of stock based on a percentage of the Bank’s capital stock and surplus. FHLBNY and FRBNY stock are carried at cost and classified as non-marketable equities and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported as income. LOANS Loans are stated at the amount of unpaid principal balance net of deferred loan fees. Additionally, recorded investment in loans includes interest receivable on loans. The Corporation has the ability and intent to hold its loans for the foreseeable future. The Corporation’s loan portfolio is comprised of the following segments: (i) commercial and agricultural, (ii) commercial mortgages, (iii) residential mortgages, and (iv) consumer loans. Commercial and agricultural loans primarily consist of loans to small to mid-sized businesses in the Corporation’s market area in a diverse range of industries. These loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Commercial mortgage loans are generally non-owner occupied commercial properties or owner occupied commercial real estate with larger balances. Repayment of these loans is often dependent upon the successful operation and management of the properties and the businesses occupying the properties, as well as on the collateral securing the loan. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from their employment and other income, but are secured by real property. Consumer loans include home equity lines of credit and home equity loans, which exhibit many of the same characteristics as residential mortgages. Indirect and other consumer loans are typically secured by depreciable assets, such as automobiles or boats, and are dependent on the borrower’s continuing financial stability. Interest on loans is accrued and credited to operations using the interest method. Past due status is based on the contractual terms of the loan. The accrual of interest is generally discontinued and previously accrued interest is reversed when loans become 90 days delinquent. Loans may also be placed on non-accrual status if management believes such classification is otherwise warranted. All payments received on non-accrual loans are applied to principal. Loans are returned to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its original principal and interest. Loan origination fees and certain direct loan origination costs are deferred and amortized over the life of the loan as an adjustment to yield, using the interest method. TROUBLED DEBT RESTRUCTURINGS A TDR is a formally renegotiated loan in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not have been granted to the borrower otherwise. Not all loans that are restructured as a TDR are classified as non-accrual before the restructuring occurs. Restructured loans can convert from non-accrual to accrual status when said loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms and when, in the opinion of management, the Bank expects to receive all of its contractual principal and interest due under the restructured terms. TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Bank determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired. The Bank incorporates recent historical experience related to TDRs, including the performance of TDRs that subsequently default, into the calculation of the allowance by loan portfolio segment. Section 4013 of the CARES Act, signed into law of March 27, 2020, gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under ASC 310-40, Receivables: Troubled Debt Restructurings by Creditors, in certain situations. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan F-11 modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan, until January 1, 2022. All loan modifications made by the Corporation in response to the COVID-19 pandemic have been in accordance with Section 4013 of the CARES Act. ALLOWANCE FOR LOAN LOSSES The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses on existing loans. The allowance is established based on management’s evaluation of the probable incurred credit losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances. A loan is classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are established based on management’s analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on nonaccrual 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. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Bank over the most recent two years . This 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, (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: secured vs. 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. The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as 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. LOANS HELD FOR SALE Certain mortgage loans are originated with the intent to sell. The Bank typically retains the right to service the mortgages upon sale. Loans held for sale are recorded at the lower of cost or fair value in the aggregate and are regularly evaluated for changes in fair value. Commitments to sell the loans that are originated for sale are recorded at fair value. If necessary, a valuation allowance is established with a charge to income for unrealized losses attributable to a change in market rates. F-12 CAPITAL LEASES Capital leases are recorded at the lesser of the present value of future cash outlays using a discounted cash flow, or fair value at the beginning of the lease term. Initially, the capital lease is recorded as a building asset, which is depreciated over the shorter of the term of the lease or the estimated life of the asset, and a corresponding long term lease obligation, which amortizes as payments are made toward the lease. Interest expense is also incurred using the discount rate determined at the beginning of the lease term. PREMISES AND EQUIPMENT Land is carried at cost, while buildings, equipment, leasehold improvements and furniture are stated at cost less accumulated depreciation and amortization. Depreciation is charged to current operations under the straight-line method over the estimated useful lives of the assets, which range from 15 to 50 years for buildings and from 3 to 10 years for equipment and furniture. Amortization of leasehold improvements and leased equipment is recognized on the straight-line method over the shorter of the lease term or the estimated life of the asset. Leases of branch offices, which have been capitalized, are included within buildings and depreciated on the straight-line method over the shorter of the lease term or the estimated life of the asset. BANK OWNED LIFE INSURANCE BOLI is recorded at the amount that can be realized under the insurance contracts at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the cash surrender value are recorded in other income. OTHER REAL ESTATE Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at estimated fair value of the property less estimated costs to dispose at the time of acquisition to establish a new carrying value. Write downs from the carrying value of the loan to estimated fair value, which are required at the time of foreclosure, are charged to the allowance for loan losses. Subsequent adjustments to the carrying values of such properties resulting from declines in fair value are charged to operations in the period in which the declines occur. INCOME TAXES The Corporation files a consolidated tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for unused tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates to apply to taxable income in the years in which temporary differences are expected to be recovered or settled, or the tax loss carry forwards are expected to be utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded. WEALTH MANAGEMENT GROUP FEE INCOME Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Corporation. Wealth Management Group income is recognized on the accrual method as earned based on contractual rates applied to the balances of individual trust accounts. The unaudited market value of trust assets under administration total $ 2.325 billion, including $ 344.2 million of assets held under management or administration for the Corporation, at December 31, 2021 and $ 2.091 billion, including $ 305.5 million of assets held under management or administration for the Corporation, at December 31, 2020. F-13 POSTRETIREMENT BENEFITS Pension Plan: The Chemung Canal Trust Company Pension Plan is a non-contributory defined benefit pension plan. The Pension Plan is a “qualified plan” under the IRS Code and therefore must be funded. Contributions are deposited to the Plan and held in trust. The Plan assets may only be used to pay retirement benefits and eligible plan expenses. The plan was amended such that new employees hired on or after July 1, 2010 would not be eligible to participate in the plan, however, existing participants at that time would continue to accrue benefits. Under the Plan, pension benefits are based upon final average annual compensation where the annual compensation is total base earnings paid plus commissions. Bonuses, overtime, and dividends are excluded. The normal retirement benefit equals 1.2 % of final average compensation (highest consecutive five years of annual compensation in the prior ten years ) times years of service (up to a maximum of 25 years), plus 1 % of average monthly compensation for each additional year of service (up to a maximum of 10 years), plus 0.65 % of average monthly compensation in excess of covered compensation for each year of credited service up to 35 years. Covered compensation is the average of the social security taxable wage base in effect for the 35 year period prior to normal social security retirement age. On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-based and service-based component of the formula used to determine retirement benefits in the pension plan were frozen so that participants will no longer earn further retirement benefits. During the fourth quarter of 2018, the Corporation offered terminated, vested employees the option to receive lump sum settlement payments. The effects of these changes are reflected in the pension plan disclosures as of December 31, 2018. See Note 13 for further details. Defined Contribution Profit Sharing, Savings and Investment Plan: The Corporation also sponsors a 401(K) defined contribution profit sharing, savings and investment plan which covers all eligible employees. The Corporation contributes a non-discretionary 3 % of gross annual wages (as defined by the 401(k) plan) for each participant, regardless of the participant’s deferral, in addition to a 50 % match up to 6 % of gross annual wages. All contributions made on or after January 1, 2017 will vest immediately. The plan's assets consist of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds. The plan’s expense is the amount of non-discretionary and matching contributions and is charged to non-interest expenses in the consolidated statements of income. Defined Benefit Health Care Plan: The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to employees who meet minimum age and service requirements. This plan was amended effective July 1, 2006. Prior to this amendment, all retirees age 55 or older were eligible for coverage under the Corporation's self-insured health care plan, contributing 40 % of the cost of the coverage. Under the amended plan, coverage for Medicare eligible retirees who reside in the Central New York geographic area is provided under a group sponsored plan with Excellus BlueCross BlueShield called Medicare Blue PPO, with the retiree paying 100 % of the premium. Excellus BlueCross BlueShield assumes full liability for the payment of health care benefits incurred after July 1, 2006. Current Medicare eligible retirees who reside outside of the Central New York geographic area were eligible for coverage under the Corporation's self-insured plan through December 31, 2009, contributing 50 % of the cost of coverage. Effective January 1, 2010, these out of area retirees were eligible for coverage under a Medicare Supplement Plan C administered by Excellus BlueCross BlueShield, contributing 50 % of the premium. Current retirees between the ages of 55 and 65 , will continue to be eligible for coverage under the Corporation's self-insured plan, contributing 50 % of the cost of the coverage. Employees who retired after July 1, 2006, and become Medicare eligible will only have access to the Medicare Blue PPO plan. Additionally, effective July 1, 2006, dental benefits were eliminated for all retirees. The cost of the plan is based on actuarial computations of current and future benefits for employees, and is charged to non-interest expenses in the consolidated statements of income. On October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan, effective January 1, 2017. The effects of this freeze are reflected in the pension plan disclosures as of December 31, 2019 and 2018. See Note 13 for further details. F-14 Executive Supplemental Pension Plan: U.S. laws place limitations on compensation amounts that may be included under the Pension Plan. The Executive Supplemental Pension Plan was provided to executives in order to produce total retirement benefits, as a percentage of compensation that is comparable to employees whose compensation is not restricted by the annual compensation limit. Pension amounts, which exceed the applicable Internal Revenue Service code limitations, will be paid under the Executive Supplemental Pension Plan. The Executive Supplemental Pension Plan is a “non-qualified plan” under the Internal Revenue Service Code. Contributions to the Plan are not held in trust; therefore, they may be subject to the claims of creditors in the event of bankruptcy or insolvency. When payments come due under the Plan, cash is distributed from general assets. The cost of the plan is based on actuarial computations of current and future benefits for executives, and is charged to non-interest expense in the consolidated statements of income. Defined Contribution Supplemental Executive Retirement Plan: The Defined Contribution Supplemental Executive Retirement Plan is provided to certain executives to motivate and retain key management employees by providing a nonqualified retirement benefit that is payable at retirement, disability, death and certain other events. The Supplemental Executive Retirement Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. The plan’s expense is the Corporation’s annual contribution plus interest credits. STOCK-BASED COMPENSATION 2021 Equity Incentive Plan On June 8, 2021, the Corporation's shareholders approved the Corporation's 2021 Equity Incentive Plan (the "2021 Plan") which provides for the grant of stock-based awards to officers, employees and directors of the Corporation and the Bank. A Form S-8 Registration Statement was filed with the SEC on June 18, 2021 registering shares to be awarded under the 2021 Plan. The prior plan shall remain in existence solely for the purpose of administering outstanding grants. The 2021 Plan is designed to align the interests of the Corporation’s executives, senior managers and directors with the interests of the Corporation and its shareholders, to ensure the Corporation’s compensation practices are competitive and comparable with those of its peers, and to promote the retention of select management-level employees and directors. Under the terms of the 2021 Plan, the Compensation and Personnel Committee may approve discretionary grants of restricted shares of the Corporation’s common stock to or for the benefit of employees selected to participate in the 2021 Plan, the chief executive officer and members of the Board of Directors. Awards are based on the performance, responsibility and contributions of the individual and are targeted at the median of the peer group. The maximum number of shares of the Corporation’s common stock that may be awarded as restricted shares related to the 2021 Plan may not exceed 170,000 , upon which time the 2021 Plan will be amended, presented and approved by the Corporation's shareholders to include additional shares of the Corporation's common stock. Awards under the 2021 Plans may be vested no earlier than the first anniversary of the date on which the award is granted. Compensation expense for shares granted will be recognized over the vesting period of the award based upon average closing price of the Corporation's stock for each of the prior 30 trading days ending on the grant date. A Directors Deferred Fee Plan, an addendum to the 2021 Plan, for non-employee directors of the Corporation or the Bank, provides that directors may elect to defer receipt of all or any part of their fees. Deferrals are either credited with interest compounded quarterly at the Applicable Federal Rate for short-term debt instruments or converted to units, which appreciate or depreciate, as would an actual share of the Corporation’s common stock purchased on the deferral date. Cash deferrals will be paid into an interest bearing account and paid in cash. Units will be paid in shares of common stock. All directors’ fees are charged to non-interest expenses in the consolidated statements of income. See Note 14 for further details. F-15 Non-qualified Deferred Compensation Plan: The Deferred Compensation Plan allows a select group of management and employees to defer all or a portion of their annual compensation to a future date. Eligible employees are generally highly compensated employees and are designated by the Board of Directors from time to time. Investments in the plan are recorded as equity investments and deferred amounts are an unfunded liability of the Corporation. The plan requires deferral elections be made before the beginning of the calendar year during which the participant will perform the services to which the compensation relates. Participants in the Plan are required to elect a form of distribution, either lump sum payment or annual installments not to exceed ten years , and a time of distribution, either a specified age or a specified date. The terms and conditions for the deferral of compensation are subject to the provisions of 409A of the IRS Code. The income from investments is recorded in dividend income and non-interest income in the consolidated statements of income. The cost of the plan is recorded in non-interest expenses in the consolidated statements of income. GOODWILL AND INTANGIBLE ASSETS Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Corporation has selected December 31 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. The balances are reviewed for impairment on an ongoing basis or whenever events or changes in business circumstances warrant a review of the carrying value. If impairment is determined to exist, the related write-down of the intangible asset's carrying value is charged to operations. Based on these impairment reviews, the Corporation determined that goodwill and other intangible assets were not impaired at December 31, 2021. The Corporation's intangible assets with definite useful lives resulted from the purchase of the trust business of Partners Trust Bank in May of 2007 with a remaining balance of $ 15 thousand. The intangible assets related to the acquisition of six branches of Bank of America in November of 2013, were fully amortized at December 31, 2020. The identifiable core deposit intangible related to the FOFC acquisition was being amortized using a 10 year accelerated method and was fully amortized at December 31, 2021. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE The Corporation has the ability to enter into sales of securities under agreements to repurchase. The agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities in the consolidated balance sheets. The amount of the securities underlying the agreements continues to be carried in the Corporation's securities portfolio. The Corporation has agreed to repurchase securities identical to those sold. The securities underlying the agreements are under the Corporation's control. DERIVATIVES The Corporation utilizes interest rate swaps with commercial borrowers and third-party counterparties as well as agreements with lead banks in participation loan relationships wherein the Corporation guarantees a portion of the fair value of an interest rate swap entered into by the lead bank. These transactions are accounted for as derivatives. The Company’s derivatives are entered into in connection with its asset and liability management activities and not for trading purposes. The Company does not have any derivatives that are designated as hedges and therefore all derivatives are considered free standing and are recorded at fair value as derivative assets or liabilities on the consolidated balance sheets, with changes in fair value recognized in the consolidated statements of income as non-interest income. Premiums received when entering into derivative contracts are recognized as part of the fair value of the derivative asset or liability and are carried at fair value with any gain/loss at inception and any changes in fair value reflected in income. The Corporation does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back interest rate swap program. The Corporation may need to post collateral, either cash or certain qualified securities, in proportion to potential increases in unrealized loss positions. F-16 OTHER FINANCIAL INSTRUMENTS The Corporation is a party to certain other financial instruments with off-balance sheet risk such as unused portions of lines of credit and commitments to fund new loans. The Corporation's policy is to record such instruments when funded. ADVERTISING COSTS Costs for advertising products and services or for promoting our corporate image are expensed as incurred. EARNINGS PER COMMON SHARE Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Issuable shares including those related to directors' restricted stock units are considered outstanding and are included in the computation of basic earnings per share. All outstanding unvested share based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities. The impact of the participating securities on earnings per share is not material. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur. COMPREHENSIVE INCOME (LOSS) Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and changes in the funded status of the Corporation’s defined benefit pension plan and other benefit plans, net of the related tax effect, which are also recognized as separate components of equity. SEGMENT REPORTING The Corporation has identified separate operating segments and internal financial information is primarily reported and aggregated in two lines of business, banking and wealth management services. RECLASSIFICATION Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation. Reclassification adjustments had no impact on prior year net income or shareholders' equity. RECENT ACCOUNTING PRONOUNCEMENTS On January 1, 2020, the Corporation adopted ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20 ). This ASU amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year, and also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. The adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements. On January 1, 2020, the Corporation adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The objective of the ASU is to simplify the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. The adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements. In June, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal years beginning after F-17 December 15, 2018. In November 2019, the FASB adopted changes to delay the effective date of ASU 2016-13 to January, 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay. The Corporation has established a committee to oversee the implementation of CECL and has selected a vendor to assist in the implementation process. The model chosen utilizes a loss driver analysis which includes reasonable and supportable forecasts to estimate future losses. This analysis includes different methods such as discounted cash flows, remaining life and vintage analysis, which are used depending on the nature of the portfolio segment. The Corporation is running its current incurred loss model and a CECL model concurrently. The Corporation is in the process of updating its policies and internal controls accordingly. The Corporation expects to recognize a one-time cumulative-effect adjustment to our allowance for loan losses upon adoption of CECL, effective of January 1, 2023, consistent with regulatory expectations set forth in interagency guidance. In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment . The update simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The adoption of this guidance, effective January 1, 2020, did not have a material impact on the Company's consolidated financial statements. (2) RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS Generally, the Corporation is required to maintain balances with the Federal Reserve Bank of New York based upon outstanding balances of deposit transaction accounts. However, as announced on March 15, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent, effective March 26, 2020, due to the COVID-19 pandemic. Therefore, at December 31, 2021 and 2020, there were no reserve requirements with the Federal Reserve Bank of New York. The Corporation also maintains a pre-funded settlement account with a financial institution in the amount of $ 1.6 million for electronic funds transaction settlement purposes at December 31, 2021 and 2020. The Corporation also maintains a collateral restricted account with a financial institution related to the Corporation's interest rate swap program. The account serves as collateral in the event of default on the interest rate swaps with the counterparties. The collateral held at the financial institution was $ 7.6 million as of December 31, 2021, and $ 19.1 million collateral held at the financial institution as of December 31, 2020. (3) SECURITIES Amortized cost and estimated fair value of securities available for sale at December 31, 2021 and 2020 are as follows (in thousands): 2021 2020 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value U.S. treasury notes and bonds $ 61,084 $ 60,431 $ — $ — Mortgage-backed securities, residential $ 582,060 $ 577,361 $ 458,245 $ 467,866 Obligations of states and political subdivisions 40,299 42,303 40,662 43,405 Corporate bonds and notes 22,750 22,848 9,000 9,035 SBA loan pools 89,216 89,083 34,455 34,305 Total $ 795,409 $ 792,026 $ 542,362 $ 554,611 F-18 Gross unrealized gains and losses on securities available for sale at December 31, 2021 and 2020, were as follows (in thousands): 2021 2020 Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses U.S. treasury notes and bonds $ 27 $ 680 $ — $ — Mortgage-backed securities, residential $ 4,032 $ 8,731 $ 9,822 $ 201 Obligations of states and political subdivisions 2,004 — 2,743 — Corporate bonds and notes 180 82 47 12 SBA loan pools 344 477 42 192 Total $ 6,587 $ 9,970 $ 12,654 $ 405 The amortized cost and estimated fair value of debt securities available for sale are shown below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands): December 31, 2021 Amortized Cost Fair Value Within one year $ 1,302 $ 1,307 After one, but within five years 37,598 39,099 After five, but within ten years 25,087 25,652 After ten years 470 500 Mortgage-backed securities, residential 582,060 577,361 U.S. treasury notes and bonds 59,676 59,024 SBA loan pools 89,216 89,083 Total $ 795,409 $ 792,026 Actual maturities may differ from contractual maturities above because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. There were no proceeds from sales and calls of securities resulting in gains or losses during the years ended December 31, 2021 and 2020. Amortized cost and estimated fair value of securities held to maturity at December 31, 2021 and 2020 are as follows (in thousands): 2021 2020 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Obligations of states and political subdivisions $ 2,157 $ 2,157 $ 326 $ 326 Time deposits with other financial institutions 1,633 1,639 2,143 2,175 $ 3,790 $ 3,796 $ 2,469 $ 2,501 Gross unrealized gains and losses on securities held to maturity at December 31, 2021 and 2020, were as follows (in thousands): 2021 2020 Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses Time deposits with other financial institutions $ 6 $ — $ 32 $ — Total $ 6 $ — $ 32 $ — There were no sales of securities held to maturity in 2021 or 2020. F-19 The contractual maturity of securities held to maturity is as follows at December 31, 2021 (in thousands): December 31, 2021 Amortized Cost Fair Value Within one year $ 2,171 $ 2,176 After one, but within five years 819 820 After five, but within ten years 800 800 Total $ 3,790 $ 3,796 The following table summarizes the investment securities available for sale with unrealized losses at December 31, 2021 and December 31, 2020 by aggregated major security type and length of time in a continuous unrealized position (in thousands): Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 2021 U.S. treasury notes and bonds $ 49,084 $ 680 $ — $ — $ 49,084 $ 680 Mortgage-backed securities, residential 293,720 4,502 122,050 4,229 415,770 8,731 Corporate bonds and notes 4,928 72 1,989 10 6,917 82 SBA loan pools 51,235 296 13,769 181 65,004 477 Total temporarily impaired securities $ 398,967 $ 5,550 $ 137,808 $ 4,420 $ 536,775 $ 9,970 Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses 2020 Mortgage-backed securities, residential $ 70,037 $ 200 $ 970 $ 1 $ 71,007 $ 201 Corporate bonds and notes 2,988 12 — — 2,988 12 SBA loan pools 15,245 156 3,636 36 18,881 192 Total temporarily impaired securities $ 88,270 $ 368 $ 4,606 $ 37 $ 92,876 $ 405 Other-Than-Temporary-Impairment As of December 31, 2021, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage-backed securities. At December 31, 2021, the unrealized losses related to mortgage-backed securities issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac as well as corporate bonds and notes. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell these securities and it is not likely that it will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at December 31, 2021. Pledged Securities The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $ 242.9 million at December 31, 2021 and $ 180.8 million at December 31, 2020. There are no securities pledged to secure securities sold under agreements to repurchase at December 31, 2021 and 2020, respectively. Concentrations There are no securities of a single issuer (other than securities of U.S. Government sponsored enterprises) that exceed 10% of shareholders' equity at December 31, 2021 or 2020. F-20 Equity Method Investments The Corporation has an equity investment in Cephas Capital Partners, L.P. This small business investment company was established for the purpose of providing financing to small businesses in market areas served by the Corporation, including minority-owned small businesses and those that are anticipated to create jobs for the low to moderate income levels in the targeted areas. As of December 31, 2021 and 2020, this investment totaled $ 0.1 million and $ 0.2 million, respectively, is included in other assets, and is accounted for under the equity method of accounting. (4) LOANS AND ALLOWANCE FOR LOAN LOSSES The composition of the loan portfolio, net of deferred loan fees is summarized as follows (in thousands): December 31, 2021 December 31, 2020 Commercial and agricultural: Commercial and industrial $ 256,893 $ 368,663 Agricultural 394 283 Commercial mortgages: Construction 82,204 61,945 Commercial mortgages 720,358 654,663 Residential mortgages 259,334 239,401 Consumer loans: Home equity lines and loans 70,670 78,547 Indirect consumer loans 118,569 120,538 Direct consumer loans 9,827 12,423 Total loans, net of deferred loan fees 1,518,249 1,536,463 Interest receivable on loans 4,133 5,035 Total recorded investment in loans $ 1,522,382 $ 1,541,498 Residential mortgages held for sale as of December 31, 2021 and 2020 totaling $ 0.4 million and $ 0.2 million, respectively, are not included in the above table. Residential mortgages totaling $ 204.2 million at December 31, 2021 and $ 101.9 million at December 31, 2020 were pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLBNY. As of December 31, 2021, the Corporation had outstanding loan balances of $ 43.2 million for PPP loans which are included in commercial and industrial loans in the table above. These loans require no allowance for loan losses as of December 31, 2021 since they are government guaranteed loans. The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2021 and 2020, respectively (in thousands): December 31, 2021 Allowance for loan losses Commercial, and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Beginning balance: $ 4,493 $ 11,496 $ 2,079 $ 2,856 $ 20,924 Charge Offs: ( 28 ) ( 43 ) ( 75 ) ( 593 ) ( 739 ) Recoveries: 312 3 10 498 823 Net (charge offs) recoveries 284 ( 40 ) ( 65 ) ( 95 ) 84 Provision ( 1,186 ) 2,100 ( 211 ) ( 686 ) 17 Ending balance $ 3,591 $ 13,556 $ 1,803 $ 2,075 $ 21,025 F-21 December 31, 2020 Allowance for loan losses Commercial, and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Beginning balance: $ 10,227 $ 8,869 $ 1,252 $ 3,130 $ 23,478 Charge Offs: ( 4,068 ) ( 2,143 ) ( 56 ) ( 1,113 ) ( 7,380 ) Recoveries: 89 14 86 398 587 Net recoveries (charge offs) ( 3,979 ) ( 2,129 ) 30 ( 715 ) ( 6,793 ) Provision ( 1,755 ) 4,756 797 441 4,239 Ending balance $ 4,493 $ 11,496 $ 2,079 $ 2,856 $ 20,924 The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2021 and December 31, 2020 (in thousands): December 31, 2021 Allowance for loan losses Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Ending allowance balance attributable to loans: Individually evaluated for impairment $ 1,394 $ 1,571 $ — $ 65 $ 3,030 Collectively evaluated for impairment 2,197 11,985 1,803 2,010 17,995 Total ending allowance balance $ 3,591 $ 13,556 $ 1,803 $ 2,075 $ 21,025 December 31, 2020 Allowance for loan losses Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Ending allowance balance attributable to loans: Individually evaluated for impairment $ 1,401 $ 74 $ — $ 52 $ 1,527 Collectively evaluated for impairment 3,092 11,422 2,079 2,804 19,397 Total ending allowance balance $ 4,493 $ 11,496 $ 2,079 $ 2,856 $ 20,924 December 31, 2021 Loans: Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Loans individually evaluated for impairment $ 2,427 $ 7,967 $ 938 $ 315 $ 11,647 Loans collectively evaluated for impairment 255,586 796,858 259,029 199,262 1,510,735 Total ending loans balance $ 258,013 $ 804,825 $ 259,967 $ 199,577 $ 1,522,382 December 31, 2020 Loans: Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Loans individually evaluated for impairment $ 3,400 $ 5,117 $ 1,271 $ 801 $ 10,589 Loans collectively evaluated for impairment 366,852 714,028 238,742 211,287 1,530,909 Total ending loans balance $ 370,252 $ 719,145 $ 240,013 $ 212,088 $ 1,541,498 F-22 The following tables present loans individually evaluated for impairment recognized by class of loans as of December 31, 2021 and December 31, 2020, the average recorded investment and interest income recognized by class of loans as of the years ended December 31, 2021 and 2020 (in thousands): December 31, 2021 December 31, 2020 Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated With no related allowance recorded: Commercial and agricultural: Commercial and industrial $ 954 $ 948 $ — $ 1,960 $ 1,963 $ — Commercial mortgages: Construction 129 130 — 188 189 — Commercial mortgages 6,940 4,278 — 6,814 4,760 — Residential mortgages 951 938 — 1,283 1,271 — Consumer loans: Home equity lines and loans 185 169 — 645 631 — With an allowance recorded: Commercial and agricultural: Commercial and industrial 5,350 1,479 1,394 5,228 1,437 1,401 Commercial mortgages: Commercial mortgages 3,550 3,559 1,571 258 168 74 Consumer loans: Home equity lines and loans 146 146 65 170 170 52 Total $ 18,205 $ 11,647 $ 3,030 $ 16,546 $ 10,589 $ 1,527 December 31, 2021 December 31, 2020 Average Recorded Investment Interest Income Recognized (1) Average Recorded Investment Interest Income Recognized (1) With no related allowance recorded: Commercial and agricultural: Commercial and industrial $ 1,505 $ 6 $ 936 $ 16 Commercial mortgages: Construction 159 6 219 8 Commercial mortgages 4,650 30 4,103 16 Residential mortgages 1,015 40 952 25 Consumer loans: Home equity lines & loans 273 7 446 7 With an allowance recorded: Commercial and agricultural: Commercial and industrial 1,505 8 4,981 4 Commercial mortgages: Commercial mortgages 2,236 49 2,949 — Consumer loans: Home equity lines and loans 157 — 104 — Total $ 11,500 $ 146 $ 14,690 $ 76 (1) Cash basis interest income approximates interest income recognized. F-23 The following tables present the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of December 31, 2021 and December 31, 2020 (in thousands): Non-accrual Loans Past Due 90 Days or More and Still Accruing 2021 2020 2021 2020 Commercial and agricultural: Commercial and industrial $ 1,932 $ 2,167 $ 4 $ 2 Commercial mortgages: Construction 34 55 — — Commercial mortgages 3,844 4,415 — — Residential mortgages 1,039 1,632 — — Consumer loans: Home equity lines and loans 790 1,159 — — Indirect consumer loans 462 519 — — Direct consumer loans 13 5 — — Total $ 8,114 $ 9,952 $ 4 $ 2 F-24 The following tables present the aging of the recorded investment in loans as of December 31, 2021 and December 31, 2020 (in thousands): December 31, 2021 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Loans Not Past Due Total Commercial and agricultural: Commercial and industrial $ 413 $ 148 $ 26 $ 587 $ 257,031 $ 257,618 Agricultural — — — — 395 395 Commercial mortgages: Construction — — — — 82,435 82,435 Commercial mortgages 24 224 1,302 1,550 720,840 722,390 Residential mortgages 580 32 652 1,264 258,703 259,967 Consumer loans: Home equity lines and loans 256 69 424 749 70,105 70,854 Indirect consumer loans 1,179 424 255 1,858 116,997 118,855 Direct consumer loans 24 11 13 48 9,820 9,868 Total $ 2,476 $ 908 $ 2,672 $ 6,056 $ 1,516,326 $ 1,522,382 December 31, 2020 30 - 59 Days Past Due 60 - 89 Days Past Due 90 Days or More Past Due Total Past Due Loans Not Past Due Total Commercial and agricultural: Commercial and industrial $ 520 $ 14 $ 30 $ 564 $ 369,404 $ 369,968 Agricultural — — — — 284 284 Commercial mortgages: Construction — — — — 62,164 62,164 Commercial mortgages 1,438 3,696 308 5,442 651,539 656,981 Residential mortgages 817 406 461 1,684 238,329 240,013 Consumer loans: Home equity lines and loans 521 41 474 1,036 77,725 78,761 Indirect consumer loans 1,268 198 252 1,718 119,135 120,853 Direct consumer loans 34 2 — 36 12,438 12,474 Total $ 4,598 $ 4,357 $ 1,525 $ 10,480 $ 1,531,018 $ 1,541,498 F-25 Troubled Debt Restructurings: A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan. 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. At its highest point as of May 31, 2020, in conformance with section 4013 of the CARES Act, total loan forbearances represented 15.77 % of the Corporation's total loan portfolio, or $ 242.5 million. As of December 31, 2021, in conformance with Section 4013 of the CARES Act, no loans remained in modified status. As of December 31, 2021 and 2020, the Corporation has a recorded investment in TDRs of $ 10.3 million and $ 6.7 million, respectively. There were specific reserves of $ 1.9 million allocated for TDRs at December 31, 2021 and $ 0.4 million allocated for December 31, 2020. As of December 31, 2021, TDRs totaling $ 5.6 million were accruing interest under the modified terms and $ 4.7 million were on non-accrual status. As of December 31, 2020, TDRs totaling $ 2.8 million were accruing interest under the modified terms and $ 3.9 million were on non-accrual status. The Corporation has committed no additional amounts to customers with outstanding loans that are classified as TDRs as of December 31, 2021 and 2020. During the years ended December 31, 2021 and 2020, the terms of certain loans were modified as TDRs. During the year ended December 31, 2021, the terms and conditions of two commercial and industrial and four commercial mortgage loans were modified as TDRs. The modification of the terms of all of these loans included a postponement or reduction of the scheduled amortized payments for greater than a three month period. During the year ended December 31, 2020, the modification of the terms of one residential mortgage loan included the postponement of scheduled amortized payments for a period of greater than three-months. Additionally, two commercial and industrial loans were modified with the maturity date extended on both loans and one with an extension at a stated rate lower than the current market rate for new debt with similar risk. Additionally, two commercial and industrial loans had payments deferred and both loans were risk rated Substandard while one loan was in non-accrual status prior to the modification. The modifications of four commercial mortgage loans included the deferral of payments with three of the loans risk rated Substandard and in non-accrual status, three of the borrowers were over one year past due in real estate taxes and two of the loans were over 30 days past due in payments. The modifications of three residential mortgages included the deferral of payments while all three were in non-accrual status prior to the modifications, two were risk rated Substandard and one was over 30 days past due in payments. The modifications of three home equity lines and loans included the deferral of payments while all three loans were risk rated Substandard and in non-accrual status prior to the modifications. The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2021 and 2020 (in thousands): December 31, 2021 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Troubled debt restructurings: Commercial and agricultural: Commercial and industrial 2 $ 502 $ 502 Commercial mortgages: Commercial mortgages 4 6,094 6,094 Total 6 $ 6,596 $ 6,596 The TDRs described above increased the allowance for loan losses by $ 1.7 million and resulted in no charge offs during the year ended December 31, 2021. F-26 December 31, 2020 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment Troubled debt restructurings: Commercial and agricultural: Commercial and industrial 4 $ 2,068 $ 2,068 Commercial mortgages: Commercial mortgages 4 1,297 1,297 Residential mortgages 4 997 997 Consumer loans: Home equity lines and loans 3 738 738 Total 15 $ 5,100 $ 5,100 The TDRs described above increased the allowance for loan losses by $ 0.2 million and resulted in no charge offs during the year ended December 31, 2020. A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no payment defaults on any loans previously modified as troubled debt restructurings during the year ended December 31, 2021, within twelve months following the modification. The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2020: December 31, 2020 Number of Loans Recorded Investment Consumer loans: Home equity lines and loans 1 $ 170 Total 1 $ 170 Credit Quality Indicators The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower’s ability to service their debt and affirm the risk ratings for the loans at least annually. For the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment. Retail loans are not rated until they become 90 days past due. The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines): Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position as some future date. Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. F-27 Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. Based on the analyses performed as of December 31, 2021 and 2020, the risk category of the recorded investment of loans by class of loans is as follows (in thousands): December 31, 2021 Not Rated Pass Special Mention Substandard Doubtful Total Commercial and agricultural: Commercial and industrial $ — $ 250,529 $ 2,892 $ 3,108 $ 1,089 $ 257,618 Agricultural — 395 — — — 395 Commercial mortgages: Construction — 82,404 — 31 — 82,435 Commercial mortgages — 672,741 31,072 17,458 1,119 722,390 Residential mortgages 258,928 — 1,039 — 259,967 Consumer loans Home equity lines and loans 70,064 — — 790 — 70,854 Indirect consumer loans 118,393 — — 462 — 118,855 Direct consumer loans 9,855 — — 13 — 9,868 Total $ 457,240 $ 1,006,069 $ 33,964 $ 22,901 $ 2,208 $ 1,522,382 December 31, 2020 Not Rated Pass Special Mention Substandard Doubtful Total Commercial and agricultural: Commercial and industrial $ — $ 360,500 $ 2,999 $ 5,092 $ 1,377 $ 369,968 Agricultural — 284 — — — 284 Commercial mortgages: Construction — 59,885 — 2,279 — 62,164 Commercial mortgages — 616,090 23,631 16,128 1,132 656,981 Residential mortgages 238,381 — — 1,632 — 240,013 Consumer loans Home equity lines and loans 77,602 — — 1,159 — 78,761 Indirect consumer loans 120,334 — — 519 — 120,853 Direct consumer loans 12,470 — — 4 — 12,474 Total $ 448,787 $ 1,036,759 $ 26,630 $ 26,813 $ 2,509 $ 1,541,498 The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. Non-performing loans include non-accrual loans and non-accrual troubled debt restructurings. F-28 The following table presents the recorded investment in residential and consumer loans based on payment activity as of December 31, 2021 and 2020 (in thousands): December 31, 2021 Consumer Loans Residential Mortgages Home Equity Lines and Loans Indirect Consumer Loans Other Direct Consumer Loans Performing $ 258,928 $ 70,064 $ 118,393 $ 9,855 Non-Performing 1,039 790 462 13 Total $ 259,967 $ 70,854 $ 118,855 $ 9,868 December 31, 2020 Consumer Loans Residential Mortgages Home Equity Lines and Loans Indirect Consumer Loans Other Direct Consumer Loans Performing $ 238,381 $ 77,602 $ 120,334 $ 12,470 Non-Performing 1,632 1,159 519 4 Total $ 240,013 $ 78,761 $ 120,853 $ 12,474 (5) PREMISES AND EQUIPMENT Premises and equipment at December 31, 2021 and 2020 are as follows (in thousands): 2021 2020 Land $ 4,710 $ 4,803 Buildings 40,726 41,957 Projects in progress 5 65 Equipment and furniture 37,183 37,183 Leasehold improvements 5,318 5,285 87,942 89,293 Less accumulated depreciation and amortization 69,973 69,174 Net book value $ 17,969 $ 20,119 Depreciation expense was $ 2.5 million and $ 2.9 million for 2021 and 2020, respectively. Capital Leases The Corporation leases certain buildings under capital leases. The lease arrangements require monthly payments through 2036. The Corporation has included these leases in premises and equipment as follows: 2021 2020 Buildings $ 5,572 $ 5,572 Accumulated depreciation ( 2,208 ) ( 1,875 ) Net book value $ 3,364 $ 3,697 F-29 (6) LEASES Operating Leases The Corporation leases certain branch properties under long-term, operating lease agreements. The leases expire at various dates through 2033 and generally include renewal options. As of December 31, 2021, the weighted average remaining lease term was 9.5 years with a weighted average discount rate of 3.33 %. Rent expense was 1.0 million for each of the years ended December 31, 2021 and 2020, respectively. Certain leases provide for increases in future minimum annual rent payments as defined in the lease agreements. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees. The Corporation's operating lease obligation increased $ 0.8 million as of December 31, 2021 due to modification agreements, the addition of a new location in Clarence, New York, and the relocation of an existing branch location in Bath, New York. Leased branch properties at December 31, 2021 and December 31, 2020 consist of the following (in thousands): December 31, 2021 December 31, 2020 Operating lease right-of-use asset $ 7,145 $ 8,001 Less: accumulated amortization ( 759 ) ( 705 ) Less: lease termination ( 313 ) ( 151 ) Add: new lease agreement and modifications $ 1,161 $ — Operating lease right-of-use-assets, net $ 7,234 $ 7,145 The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of December 31, 2021 (in thousands): Year Amount 2022 $ 979 2023 992 2024 924 2025 841 2026 845 2027 and thereafter 4,021 Total minimum lease payments 8,602 Less: amount representing interest ( 1,224 ) Present value of net minimum lease payments $ 7,378 As of December 31, 2021, the Corporation had no operating leases that were signed, but had not yet commenced. Finance Leases The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of December 31, 2021, the weighted average remaining lease term was 11.1 years years with a weighted average discount rate of 3.37 %. The Corporation has included these leases in premises and equipment as of December 31, 2021 and December 31, 2020. F-30 The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value of net minimum lease payments as of December 31, 2021 (in thousands): Year Amount 2022 $ 391 2023 391 2024 391 2025 409 2026 425 2027 and thereafter 2,415 Total minimum lease payments 4,422 Less: amount representing interest ( 828 ) Present value of net minimum lease payments $ 3,594 As of December 31, 2021, the Corporation had no finance leases that were signed, but had not yet commenced. (7) GOODWILL AND INTANGIBLE ASSETS The changes in goodwill included in the core banking segment during the years ended December 31, 2021 and 2020 were as follows (in thousands): 2021 2020 Beginning of year $ 21,824 $ 21,824 Acquired goodwill — — End of year $ 21,824 $ 21,824 Acquired intangible assets were as follows at December 31, 2021 and 2020 (in thousands): At December 31, 2021 At December 31, 2020 Balance Acquired Accumulated Amortization Balance Acquired Accumulated Amortization Core deposit intangibles $ 5,975 $ 5,974 $ 5,975 $ 5,962 Other customer relationship intangibles 5,633 5,619 5,633 5,388 Total $ 11,608 $ 11,593 $ 11,608 $ 11,350 Aggregate amortization expense was $ 0.2 million and $ 0.5 million for 2021 and 2020, respectively. The remaining estimated aggregate amortization expense at December 31, 2021 is listed below (in thousands): Year Estimated Expense 2022 $ 15 Total $ 15 F-31 (8) DEPOSITS A summary of deposits at December 31, 2021 and 2020 is as follows (in thousands): 2021 2020 Non-interest-bearing demand deposits $ 739,607 $ 620,423 Interest-bearing demand deposits 284,721 282,172 Insured money market accounts 654,553 603,583 Savings deposits 280,195 245,865 Time deposits 196,357 285,731 Total $ 2,155,433 $ 2,037,774 Scheduled maturities of time deposits at December 31, 2021, are summarized as follows (in thousands): Year Maturities 2022 $ 165,290 2023 16,067 2024 10,695 2025 876 2026 226 2027 3,203 Total $ 196,357 Time deposits that meet or exceed the FDIC Insurance limit of $250 thousand at December 31, 2021 and 2020 were $ 28.8 million and $ 31.2 million, respectively. (9) FEDERAL HOME LOAN BANK TERM ADVANCES AND OVERNIGHT ADVANCES As of December 31, 2021, FHLBNY fixed rate term advances and overnight advances totaled $ 14.6 million. There were no FHLBNY fixed rate term advances and overnight advances as of December 31, 2020. The following is a summary of FHLBNY fixed rate term advances and overnight advances as of December 31, 2021. The carrying amount includes the advance balance plus purchase accounting adjustments that are amortized over the term of the advance (in thousands): 2021 Amount Rate Maturity Date Call Date $ 14,570 0.34 % January 3, 2022 - $ 14,570 0.34 % The Bank has pledged $ 204.2 million and $ 101.9 million of first mortgage loans under a blanket lien arrangement at December 31, 2021 and 2020, respectively, as collateral for future borrowings. Based on this collateral and additional securities held, the Bank's unused borrowing capacity at the FHLBNY was $ 161.0 million at December 31, 2021. F-32 (10) REVENUE FROM CONTRACTS WITH CUSTOMERS All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following tables present the Corporation's non-interest income by revenue stream and reportable segment for the years ended December 31, 2021 and 2020 (in thousands). Items outside the scope of ASC 606 are noted as such. Year ended December 31, 2021 Revenue by Operating Segment: Core Banking WMG Holding Company, CFS, and CRM (b) Total Non-interest income Service charges on deposit accounts Overdraft fees $ 2,266 $ — $ — $ 2,266 Other 948 — — 948 Interchange revenue from debit card transactions 4,844 — — 4,844 WMG fee income — 11,072 — 11,072 CFS fee and commission income — — 1,043 1,043 Net gains (losses) on sales of OREO ( 16 ) — — ( 16 ) Net gains on sales of loans (a) 1,073 — — 1,073 Loan servicing fees (a) 148 — — 148 Change in fair value of equity securities (a) 161 — 85 246 Income from bank-owned life insurance (a) 52 — 52 Other (a) 2,264 — ( 70 ) 2,194 Total non-interest income $ 11,740 $ 11,072 $ 1,058 $ 23,870 (a) Not within scope of ASC 606. (b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments. Year ended December 31, 2020 Revenue by Operating Segment: Core Banking WMG Holding Company, CFS, and CRM (b) Total Non-interest income Service charges on deposit accounts Overdraft fees $ 2,304 $ — $ — $ 2,304 Other 830 — — 830 Interchange revenue from debit card transactions 4,068 — — 4,068 WMG fee income — 9,492 — 9,492 CFS fee and commission income — — 657 657 Net gains (losses) on sales of OREO ( 79 ) — — ( 79 ) Net gains on sales of loans (a) 1,730 — — 1,730 Loan servicing fees (a) 121 — — 121 Change in fair value of equity securities (a) 139 — ( 50 ) 89 Income from bank-owned life insurance (a) 161 — — 161 Other (a) 1,708 — 43 1,751 Total non-interest income $ 10,982 $ 9,492 $ 650 $ 21,124 (a) Not within scope of ASC 606. (b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments. F-33 A description of the Corporation's revenue streams accounted for under ASC 606 follows: Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which included services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are recognized at the time the maintenance occurs. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance. Interchange Income from Debit Card Transactions: The Corporation earns interchange fees from debit cardholder transactions conducted through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to cardholder. WMG Fee Income (Gross): The Corporation earns wealth management fees from its contracts with trust customers to manage assets for investment, and/or to conduct transactions on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at quarter-end. CFS Fee and Commission Income (Net): The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The Corporation (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers. Investment brokerage fees are presented net of related costs. The Corporation also earns fees from tax services provided to its customers. Net Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present. (11) DERIVATIVES As part of the Corporation's product offerings, the Corporation acts as an interest rate swap counterparty for certain commercial borrowers in the normal course of servicing our customers. The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's consolidated balance sheets. The Corporation manages its exposure to such interest rate swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps it has with the commercial borrowers. These positions directly offset each other and the Corporation's exposure is the fair value of the derivatives due to potential changes in credit risk of our commercial borrowers and third parties. The Corporation also enters into risk participation agreements with dealer banks on commercial loans in which it participates. The Corporation receives an upfront fee for participating in the credit exposure of the interest rate swap associated with the commercial loan in which it is a participant and the fee received is recognized immediately in other non-interest income. The Corporation is exposed to its share of the credit loss equal to the fair value of the interest rate swap in the event of nonperformance by the counterparty of the interest rate swap. The Corporation determines the fair value of the credit loss exposure using an estimated credit default rate based on the historical performance of similar assets. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. At December 31, 2021, the Corporation held derivatives not designated as hedging instruments with a total notional amount of $ 490.0 million. Derivatives not designated as hedging instruments included back-to-back interest rate swaps of $ 471.5 million, consisting of $ 235.7 million of interest rate swaps with commercial borrowers and an additional $ 235.7 million of offsetting interest rate swaps with third-party counter-parties on substantially the same terms, and risk participation agreements with dealer banks of $ 18.6 million. Free-standing derivatives are not designated as hedges for accounting purposes and are therefore recorded at fair value with changes in fair value recorded in other non-interest income. F-34 The following table presents information regarding our derivative financial instruments, at December 31: 2021 Number of Instruments Notional Amount Weighted Average Maturity (in years) Weighted Average Interest Rate Received Weighted Average Contract Pay Rate Fair Value Other Assets/ (Other Liabilities) Derivatives not designated as hedging instruments: Interest rate swap agreements on loans with commercial loan customers 35 $ 235,730 7.7 3.83 % 2.14 % $ ( 9,711 ) Interest rate swap agreements with third-party counter-parties 35 235,730 7.7 2.14 % 3.83 % 9,498 Risk participation agreements 4 18,552 2.2 ( 15 ) Total 74 $ 490,012 $ ( 228 ) 2020 Number of Instruments Notional Amount Weighted Average Maturity (in years) Weighted Average Interest Rate Received Weighted Average Contract Pay Rate Fair Value Other Assets/ (Other Liabilities) Derivatives not designated as hedging instruments: Interest rate swap agreements on loans with commercial loan customers 26 $ 179,085 7.7 3.95 % 2.20 % $ ( 15,024 ) Interest rate swap agreements with third-party counter-parties 26 179,085 7.7 2.20 % 3.95 % 14,702 Risk participation agreements 4 18,840 2.8 ( 35 ) 56 $ 377,010 $ ( 357 ) Off-balance sheet exposure for the risk participation agreements was $ 0.5 million and $ 0.4 million for December 31, 2021 and December 31, 2020, respectively. Amounts included in the Consolidated Statements of Income related to derivatives not designated as hedging were as follows: Years Ended December 31, 2021 2020 Derivatives not designated as hedging instruments: Interest rate swap agreements with commercial loan customers: Unrealized (loss) recognized in non-interest income $ 5,313 $ ( 8,224 ) Interest rate swap agreements with third-party counter-parties: Unrealized gain recognized in non-interest income ( 5,204 ) 8,236 Risk participation agreements: Unrealized gain (loss) recognized in non-interest income 20 ( 4 ) Unrealized gain (loss) recognized in non-interest income $ 129 $ 8 F-35 ( 12) INCOME TAXES For the years ended December 31, 2021 and 2020, income tax expense attributable to income from operations consisted of the following (in thousands): 2021 2020 Current expense: Federal $ 5,732 $ 4,413 State 1,033 280 Total current 6,765 4,693 Deferred expense/(benefit): Federal 527 ( 136 ) State 43 50 Total deferred 570 ( 86 ) Income tax expense $ 7,335 $ 4,607 Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income tax expense as follows (in thousands): 2021 2020 Statutory federal tax rate 21 % 21 % Tax computed at statutory rate $ 7,090 $ 5,013 Increase (reduction) resulting from: Tax-exempt income ( 380 ) ( 395 ) 831(b) premium adjustment ( 291 ) ( 296 ) Dividend exclusion ( 8 ) ( 5 ) State taxes, net of Federal impact 803 118 Nondeductible interest expense 4 5 Other items, net 117 167 Income tax expense $ 7,335 $ 4,607 Effective tax rate 21.7 % 19.3 % The higher tax expense in 2021 when compared to 2020 can be attributed to an increase in pretax income. F-36 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020, are presented below (in thousands): 2021 2020 Deferred tax assets: Allowance for loan losses $ 5,546 $ 5,393 Accrual for employee benefit plans — 47 Depreciation 979 681 Deferred compensation and directors' fees 1,130 1,045 Operating lease liabilities 1,976 1,831 Purchase accounting adjustment – loans — 1 Purchase accounting adjustment – fixed assets 153 149 Gain on deemed sale of securities — 54 Net unrealized losses on securities available for sale 886 — Accounting for defined benefit pension and other benefit plans 1,347 2,302 Nonaccrued interest 473 687 Accrued expense 139 158 Other items, net 127 48 Total gross deferred tax assets 12,756 12,396 Deferred tax liabilities: Deferred loan fees and costs 355 274 Prepaid pension 3,715 3,344 Net unrealized gains on securities available for sale — 3,124 Discount accretion 78 50 Core deposit intangible 1,556 1,353 REIT dividend 608 616 Operating lease right-of-use assets 1,976 1,831 Accrual for employee benefit plans 3 — Other 344 168 Total gross deferred tax liabilities 8,635 10,760 Net deferred tax asset $ 4,121 $ 1,636 Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is recognized when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax assets, the level of historical taxable income and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance is necessary. As of December 31, 2021 and 2020, the Corporation did no t have any unrecognized tax benefits. The Corporation accounts for interest and penalties related to uncertain tax positions as part of its provision for Federal and State income taxes. As of December 31, 2021 and 2020, the Corporation did no t accrue any interest or penalties related to its uncertain tax positions. The Corporation is not currently subject to examinations by Federal taxing authorities for the years prior to 2018 and for New York State taxing authorities for the year prior to 2018. New York State taxing authorities are currently auditing the Corporation with the years 2018, 2019, and 2020. The Corporation does not anticipate material adjustments as a result of the New York State audits. F-37 (13) PENSION PLAN AND OTHER BENEFIT PLANS Pension Plan The Corporation has a noncontributory defined benefit pension plan covering a majority of employees. The plan's defined benefit formula generally based payments to retired employees upon their length of service multiplied by a percentage of the average monthly pay over the last five years of employment. New employees hired on or after the July 10, 2010 were not eligible to participate in the plan, however, existing participants at that time continued to accrue benefits. On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-based and service-based component of the formula used to determine retirement benefits in the pension plan were frozen so that participants will no longer earn further retirement benefits. The Corporation uses a December 31 measurement date for its pension plan. The following table presents (1) changes in the plan's projected benefit obligation and plan assets, and (2) the plan's funded status at December 31, 2021 and 2020 (in thousands): Change in projected benefit obligation: 2021 2020 Benefit obligation at beginning of year $ 42,781 $ 39,886 Service cost — — Interest cost 1,084 1,300 Actuarial (gain) loss ( 1,300 ) 3,735 Curtailments — — Settlements — — Benefits paid ( 2,161 ) ( 2,140 ) Benefit obligation at end of year $ 40,404 $ 42,781 Change in plan assets: 2021 2020 Fair value of plan assets at beginning of year $ 50,134 $ 45,557 Actual return on plan assets 5,014 6,717 Employer contributions — — Settlements — — Benefits paid ( 2,161 ) ( 2,140 ) Fair value of plan assets at end of year $ 52,987 $ 50,134 Funded status $ 12,583 $ 7,353 Amount recognized in accumulated other comprehensive income (loss) at December 31, 2021 and 2020 consist of the following (in thousands): 2021 2020 Net actuarial loss $ 4,833 $ 8,602 Prior service cost — — Total before tax effects $ 4,833 $ 8,602 The accumulated benefit obligation at December 31, 2021 and 2020 was $ 40.4 million and $ 42.8 million, respectively. Actuarial gains in the Projected Benefit Obligation (PBO) in 2021 were primarily the result of the increase in discount rate. The increase in discount rate caused the PBO to decrease by $ 1.3 million. Other sources of gain/loss such as plan experience, updated census data and minor adjustments to actuarial assumptions generated a combined loss of less than 1 % of expected year end obligations. F-38 The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2021 and 2020 were as follows: 2021 2020 Discount rate 2.87 % 2.61 % Assumed rate of future compensation increase N/A N/A Weighted-average interest crediting rate N/A N/A Components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) in 2021 and 2020 consist of the following (in thousands): Net periodic benefit cost 2021 2020 Service cost, benefits earned during the year $ — $ — Interest cost on projected benefit obligation 1,084 1,300 Expected return on plan assets ( 2,696 ) ( 2,444 ) Amortization of net loss 151 213 Amortization of prior service cost — — Recognized (gain) loss due to settlements — — Net periodic cost (benefit) $ ( 1,461 ) $ ( 931 ) Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): 2021 2020 Net actuarial (gain) loss $ ( 3,618 ) $ ( 538 ) Recognized loss ( 151 ) ( 213 ) Amortization of prior service cost — — Total recognized in other comprehensive income (loss) (before tax effect) $ ( 3,769 ) $ ( 751 ) Total recognized in net (benefit) cost and other comprehensive income (loss) (before tax effect) $ ( 5,230 ) $ ( 1,682 ) During 2021, the plan's total unrecognized net loss decreased by $ 3.8 million. The variance between the actual and expected return on plan assets during 2021 decreased the total unrecognized net loss by $ 2.3 million. Because the total unrecognized net gain or loss in the plan exceeds 10 % of the projected benefit obligation or 10 % of the plan assets, and the plan is frozen, the excess will be amortized over the average future life expectancy of all plan participants. Prior to the plan freeze on December 31, 2016, the excess had been amortized over the average future working lifetime of all plan participants. As of January 1, 2021, the average expected future life expectancy of all participants which was 23.07 years. Actual results for 2022 will depend on the 2022 actuarial valuation of the plan. The principal actuarial assumptions used in determining the net periodic benefit cost for the years ended December 31, 2021, 2020 were as follows: 2021 2020 Discount rate 2.61 % 3.33 % Expected return on assets 5.50 % 5.50 % Assumed rate of future compensation increase N/A N/A Weighted-average interest crediting rate N/A N/A The Corporation changes important assumptions whenever changing conditions warrant. At December 31, 2021 the Corporation used IRS Static 2022 Mortality Table with Mortality Improvement Scale MP-2020 as a basis for the Plan's valuation. At December 31, 2020, the Corporation used IRS Static 2021 Mortality Table with Mortality Improvement Scale MP-2019 as a basis for the Plan's valuation. The discount rate is evaluated at least annually and the expected long-term return on plan assets will typically be revised every three to five years , or as conditions warrant. F-39 The Corporation's overall investment strategy is to achieve a mix of investments for long-term growth and for near-term benefit payments with a wide diversification of asset types. The target allocations for plan assets are shown in the table below. Equity securities primarily include investments in common or preferred shares of both U.S. and international companies. Debt securities include U.S. Treasury and Government bonds as well as U.S. Corporate bonds. Other investments may consist of mutual funds, money market funds and cash & cash equivalents. While no significant changes in the asset allocations are expected during 2022, the Corporation may make changes at any time. The expected return on plan assets was determined based on a CAPM using historical and expected future returns of the various asset classes, reflecting the target allocations described below. Asset Class Target Allocation 2021 Percentage of Plan Assets at December 31, Expected Long-Term Rate of Return 2021 2020 Large cap domestic equities 20 % - 50 % 42 % 43 % 10.1 % Mid-cap domestic equities 0 % - 15 % — % 2 % 10.5 % Small-cap domestic equities 0 % - 10 % 5 % 3 % 9.0 % International equities 0 % - 20 % 4 % 3 % 11.1 % Intermediate fixed income 30 % - 70 % 45 % 45 % 4.2 % Alternative assets 0 % - 10 % — % — % — % Cash 0 % - 20 % 4 % 4 % 1.1 % Total 100 % 100 % The investment policy of the plan is to provide for long-term growth of principal and income without undue exposure to risk. The focus is on long-term capital appreciation and income generation. The Corporation maintains an IPS that guides the investment allocation in the plan. The IPS describes the target asset allocation positions as shown in the table above. The Corporation has appointed an Employee Pension and Profit Sharing Committee to manage the general philosophy, objectives and process of the plan. The Employee Pension and Profit Sharing Committee meets with the Investment Manager periodically to review the plan's performance and to ensure that the current investment allocation is within the guidelines set forth in the IPS. Only the Employee Pension and Profit Sharing Committee, in consultation with the Investment Manager, can make adjustments to maintain target ranges and for any permanent changes to the IPS. Quarterly, the Board of Directors' Trust and Employee Benefits Committee reviews the performance of the plan with the Investment Manager. As of December 31, 2021 and 2020, the Corporation's pension plan did not hold any direct investment in the Corporation's common stock. The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument held by the pension plan: Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. The fair value hierarchy described below requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). Discounted cash flows are calculated using spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations. F-40 The fair value of the plan assets at December 31, 2021 and 2020, by asset class are as follows (in thousands): Fair Value Measurement atDecember 31, 2021 Using Plan Assets Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash $ 2,270 $ 2,270 $ — $ — Equity securities: U.S. companies 21,927 21,927 — — Mutual funds 26,345 26,345 — — Debt securities: U.S. Treasuries/Government bonds 2,181 2,181 — — U.S. Corporate bonds 264 264 — — Total plan assets $ 52,987 $ 52,987 $ — $ — Fair Value Measurement atDecember 31, 2020 Using Plan Assets Carrying Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Cash $ 2,047 $ 2,047 $ — $ — Equity securities: U.S. companies 21,716 21,716 — — Mutual funds 23,778 23,778 — — Debt securities: U.S. Treasuries/Government bonds 2,318 2,318 — — U.S. Corporate bonds 275 275 — — Total plan assets $ 50,134 $ 50,134 $ — $ — The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten for the pension plan (in thousands): Calendar Year Future Expected Benefit Payments 2022 $ 2,295 2023 $ 2,329 2024 $ 2,336 2025 $ 2,328 2026 $ 2,326 2027-2031 $ 11,344 F-41 The Corporation does not expect to contribute to the plan during 2022. Funding requirements for subsequent years are uncertain and will significantly depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes the Corporation may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law. Defined Contribution Profit Sharing, Savings and Investment Plan On October 20, 2016, the Bank amended its defined contribution profit sharing, savings, and investment plan for all active participants to supersede the current contribution formula used by the Plan, which included eliminating the 1000 hours of service requirement to participate in employer contributions. Beginning on January 1, 2017, the Bank began contributing a non-discretionary 3 % of gross annual wages for each participant, regardless of the participant’s deferral, and eliminated discretionary contributions for participants hired prior to July 1, 2010. Additionally, beginning January 1, 2017 the Bank began contributing a 50 % match up to 6 % of gross annual wages. Expense related to both plans totaled $ 1.3 million for the years ended December 31, 2021 and 2020. The plan's assets at December 31, 2021 and 2020 include 118,081 and 137,698 shares, respectively, of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds. Defined Benefit Health Care Plan On October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan, effective January 1, 2017. The effects of this freeze are reflected in the defined benefit health care plan disclosures as of December 31, 2017. The Corporation uses a December 31 measurement date for its defined benefit health care plan. The following table presents (1) changes in the plan's accumulated postretirement benefit obligation and (2) the plan's funded status at December 31, 2021 and 2020 (in thousands): Changes in accumulated postretirement benefit obligation: 2021 2020 Accumulated postretirement benefit obligation - beginning of year $ 249 $ 332 Service cost — — Interest cost 6 9 Participant contributions 20 35 Amendments — — Actuarial (gain) loss ( 37 ) ( 57 ) Benefits paid ( 44 ) ( 70 ) Accumulated postretirement benefit obligation at end of year $ 194 $ 249 Change in plan assets: 2021 2020 Fair value of plan assets at beginning of year $ — $ — Employer contribution 24 35 Plan participants’ contributions 20 35 Benefits paid ( 44 ) ( 70 ) Fair value of plan assets at end of year $ — $ — Unfunded status $ ( 194 ) $ ( 249 ) F-42 Amount recognized in accumulated other comprehensive income (loss) at December 31, 2021 and 2020 consist of the following (in thousands): 2021 2020 Net actuarial loss $ 208 $ 286 Prior service credit — ( 220 ) Total before tax effects $ 208 $ 66 Weighted-average assumption for disclosure as of December 31: 2021 2020 Discount rate 2.87 % 2.61 % Assumed rate of future compensation increase N/A N/A Health care cost trend: Initial (Pre-65/Post 65) 6.95 % / 5.45 % 6.95 % / 5.45 % Health care cost trend: Ultimate (Pre-65/Post 65) 4.75 % / 4.75 % 4.75 % / 4.75 % Year ultimate cost trend reached 2027 2026 The components of net periodic postretirement benefit cost for the years ended December 31, 2021 and 2020 are as follows (in thousands): Net periodic cost (benefit) 2021 2020 Service cost $ — $ — Interest cost 6 9 Expected return on plan assets — — Amortization of prior service benefit ( 220 ) ( 220 ) Recognized actuarial loss 42 74 Recognized prior service benefit due to curtailments — — Net periodic postretirement cost (benefit) $ ( 172 ) $ ( 137 ) Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): 2021 2020 Net actuarial (gain) loss $ ( 37 ) $ ( 57 ) Recognized actuarial loss ( 42 ) ( 74 ) Prior service credit — — Amortization of prior service benefit 220 220 Total recognized in other comprehensive income (loss)(before tax effect) $ 141 $ 89 Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect) $ ( 31 ) $ ( 48 ) Actuarial gain for 2021 is primarily the net impact of an increase in discount rate, which decreased the Accumulated Postretirement Benefit Obligation (APBO) by $ 4 thousand and claims and date experience, which (combined) decreased the APBO by $ 31 thousand. During 2021 the plan's total unrecognized net loss decreased by $ 79 thousand. Because the total unrecognized net gain or loss in the plan exceeds 10 % of the accumulated postretirement benefit obligation, the excess will be amortized over the average future life expectancy of all plan participants. As of January 1, 2021, the average future life expectancy of all plan participants was 6.0 years. Previous to the plan freeze as of December 31, 2016, the amortization period was based upon average future working lifetime of active employees. Actual results for 2022 will depend on the 2022 actuarial valuation of the plan. The change in unrecognized gain/loss is one measure of the degree to which important assumptions have coincided with actual experience. During 2021, the unrecognized net loss decreased by 31 % of the December 31, 2020 accumulated postretirement benefit obligation. The Corporation changes important assumptions whenever changing conditions warrant. The discount rate and per capita costs are typically changed at least annually. Other material assumptions include rates of participant mortality and rates of increase in medical costs. F-43 Weighted-average assumptions for net periodic cost as of December 31: 2021 2020 Discount rate 2.61 % 3.33 % Expected return on plan assets N/A N/A Assumed rate of future compensation increase N/A N/A Health care cost trend: Initial 6.95 % / 5.45 % 6.95 % / 5.45 % Health care cost tread: Ultimate 4.75 % / 4.75 % 4.75 % / 4.75 % Year ultimate reached 2026 2025 The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten (in thousands): Calendar Year Future Estimated Benefit Payments 2022 $ 33 2023 $ 35 2024 $ 19 2025 $ 18 2026 $ 17 2026-2030 $ 64 The Corporation’s policy is to contribute the amount required to fund postretirement benefits as they become due to retirees. The amount expected to be required in contributions to the plan during 2022 is $ 33 thousand. Executive Supplemental Pension Plan The Corporation also sponsors an Executive Supplemental Pension Plan for certain former executive officers to restore certain pension benefits that may be reduced due to limitations under the Internal Revenue Code. The benefits under this plan are unfunded as of December 31, 2021 and 2020. The Corporation uses a December 31 measurement date for its Executive Supplemental Pension Plan. The following table presents Executive Supplemental Pension plan status at December 31, 2021 and 2020 (in thousands): Change in projected benefit obligation: 2021 2020 Benefit obligation at beginning of year $ 1,251 $ 1,232 Service cost — — Interest cost 31 39 Actuarial (gain) loss — 89 Benefits paid ( 109 ) ( 109 ) Projected benefit obligation at end of year $ 1,173 $ 1,251 Changes in plan assets: 2021 2020 Fair value of plan assets at beginning of year $ — $ — Employer contributions 109 109 Benefits paid ( 109 ) ( 109 ) Fair value of plan assets at end of year $ — $ — Unfunded status $ ( 1,173 ) $ ( 1,251 ) F-44 Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2021 and 2020 consist of the following (in thousands): 2021 2020 Net actuarial loss $ 339 $ 359 Prior service cost — — Total before tax effects $ 339 $ 359 Accumulated benefit obligation at December 31, 2021 and 2020 was $ 1.2 million and $ 1.3 million, respectively. Weighted-average assumption for disclosure as of December 31: 2021 2020 Discount rate 2.87 % 2.61 % Assumed rate of future compensation increase N/A N/A Weighted-average interest crediting rate N/A N/A The components of net periodic benefit cost for the years ended December 31, 2021 and 2020 are as follows (in thousands): Net periodic benefit cost 2021 2020 Service cost $ — $ — Interest cost 31 39 Recognized actuarial loss 19 13 Net periodic postretirement benefit cost $ 50 $ 52 Other changes in plan assets and benefit obligation recognized in other comprehensive income (loss): 2021 2020 Net actuarial (gain) loss $ — $ 89 Recognized actuarial loss ( 19 ) ( 13 ) Total recognized in other comprehensive income (loss) (before tax effect) $ ( 19 ) $ 76 Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect) $ 31 $ 128 During 2021, there was a $ 24 thousand gain in the projected benefit obligation as a result of the increase in discount rate. Offsetting this was a mortality loss of $ 26 thousand. Other sources of gains/losses, including the update in mortality table, generated losses of less than 1 % of expected year end obligations. During 2021, the plan's total unrecognized net loss decreased by $ 20 thousand. Because the total unrecognized net gain or loss exceeds the greater of 10 % of the projected benefit obligation or 10 % of the plan assets, the excess will be amortized over the average future life expectancy of all participants. Previously, the excess had been amortized over the average future working lifetime of active participants, however, there are no longer any active participants in the plan as of January 1, 2017, so the amortization period was changed to be the average future life expectancy of all plan participants. As of January 1, 2022, the average future life expectancy of plan participants was 11.39 years. Weighted-average assumptions for net periodic cost as of December 31: 2021 2020 Discount rate 2.61 % 3.33 % Expected asset return N/A N/A Assumed rate of future compensation increase N/A N/A Weighted-average interest crediting rate N/A N/A The discount rate was determined by projecting the plan's expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that resulted in the same projected benefit obligation. F-45 The change in unrecognized net gain.loss is one measure of the degree to which important assumptions have coincided with actual experience. During 2021 the unrecognized net loss decreased by 1.6 % of the December 31, 2020 projected benefit obligation. The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten for the Supplemental Pension Plan (in thousands): Calendar Year Future Estimated Benefit Payments 2022 $ 108 2023 $ 106 2024 $ 103 2025 $ 99 2026 $ 95 2027-2031 $ 403 The Corporation expects to contribute $ 110 thousand to the plan during 2022. Corporation contributions are equal to the benefit payments to plan participants. Funding requirements for subsequent years are uncertain and will significantly depend upon changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes, the Corporation may increases, accelerate, decrease or delay contributions to the plan to the extent permitted by law. Defined Contribution Supplemental Executive Retirement Plan The Corporation also sponsors a Defined Contribution Supplemental Executive Retirement Plan for certain current executive officers, which was initiated in 2012. The plan is unfunded as of December 31, 2021 and is intended to provide nonqualified deferred compensation benefits payable at retirement, disability, death or certain other events. The accrued obligation for the plan as of December 31, 2021 and 2020 was $ 2.4 million and $ 2.0 million, respectively. A total of $ 0.4 million was expensed during the years ended December 31, 2021 and 2020. In addition to each participants account being credited with the annual company contribution, each account will receive a quarterly interest credit that will equal the average yield on five year U.S. Treasury Notes. (14) STOCK COMPENSATION On June 8, 2021, the Corporation's shareholders approved the Corporation's 2021 Equity Incentive Plan (the "2021 Plan") which provides for the grant of stock-based awards to officers, employees and directors of the Corporation and the Bank. A Form S-8 Registration Statement was filed with the SEC on June 18, 2021 registering shares to be awarded under the 2021 Plan. The 2021 Plan provides officers, employees and directors of the Corporation and the Bank with additional incentives to promote the growth and performance of the Corporation. The prior plan shall remain in existence solely for the purpose of administering outstanding grants. Under the terms of the 2021 Plan, the Corporation may make discretionary grants of restricted shares of the Corporation’s common stock to or for the benefit of employees selected to participate in the 2021 Plan, the chief executive officer and members of the Board of Directors. Awards are based on the performance, responsibility and contributions of the individual and are targeted at an average of the peer group. The maximum number of shares of the Corporation’s common stock that may be awarded as restricted shares related to the 2021 Plan may not exceed 170,000 , upon which time a new plan will be filed. Awards under the 2021 Plans may be vested no earlier than the first anniversary of the date on which the award is granted. Compensation expense for shares granted will be recognized over the vesting period of the award based upon average closing price of the Corporation's stock for each of the prior 30 trading days ending on the grant date. During January 2022 and 2021, 9,190 and 9,291 shares, respectively, were granted and re-issued from treasury to fund the stock component of the Directors' and the Chief Executive Officer’s compensation. For 2022 grants, the expense related to this compensation will be recognized over the one year vesting period. An expense of $ 318 thousand related to this compensation was recognized during the year ended December 31, 2020 as this expense was accrued as shares were earned. F-46 A summary of restricted stock activity as of December 31, 2021, and changes during the year ended is presented below: Shares Weighted–Average Grant Date Fair Value Nonvested at December 31, 2020 31,830 $ 40.32 Granted 20,763 46.36 Vested ( 14,756 ) 41.98 Forfeited or Cancelled — — Nonvested at December 31, 2021 37,837 $ 42.99 As of December 31, 2021, there was $ 1.5 million of total unrecognized compensation cost related to nonvested shares granted under the prior Plan and the 2021 Plan. The cost is expected to be recognized over a weighted-average period of 4.23 years. The total fair value of shares vested during the years ended December 31, 2021 and 2020 were $ 620 thousand and $ 556 thousand, respectively. (15) RELATED PARTY TRANSACTIONS Members of the Board of Directors, certain Corporation officers, and their immediate families directly, or through entities in which they are principal owners (more than 10 % interest) or board members, were customers of, and had loans and other transactions with the Corporation. These loans are summarized as follows for the years ended December 31, 2021 and 2020 (in thousands): 2021 2020 Balance at beginning of year $ 56,052 $ 59,973 New loans or additional advances 2,642 7,461 Effect of changes in composition of related parties ( 122 ) — Repayments ( 7,380 ) ( 11,382 ) Balance at end of year $ 51,192 $ 56,052 Deposits from principal officers, directors, and their affiliates at December 31, 2021 and 2020 were $ 46.7 million and $ 39.5 million, respectively. The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through July 2022 from a member of the Corporation's Board of Directors with monthly rent expense totaling $ 4 thousand per month. Annual rent paid to this Board of Directors member totaled $ 50 thousand and $ 51 thousand for the years ended December 31, 2021 and 2020, respectively. The Bank entered into a lease agreement in 2018 related to its branch located at 2 Rush Street, Schenectady, New York, under a lease agreement through February 2033 from a member of the Corporation's Board of Directors with monthly rent expense totaling $ 8 thousand per month. Rent paid to this Board of Directors member totaled $ 101 thousand and $ 106 thousand for the years ended December 2021 and 2020, respectively. WMG provided trust services to members of the Board of Directors, certain Corporation officers, and their immediate families directly, or through entities in which they are principal owners or board members. WMG fee income for the trust services provided totaled $ 726 thousand and $ 614 thousand for the years ended December 31, 2021 and 2020, respectively. F-47 (16) COMMITMENTS AND CONTINGENCIES Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment. The contractual amounts of financial instruments with off-balance sheet risk at year-end were as follows (in thousands): 2021 2020 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to make loans $ 20,772 $ 46,558 $ 28,459 $ 39,056 Unused lines of credit $ 4,745 $ 288,368 $ 1,300 $ 268,075 Standby letters of credit $ — $ 7,974 $ — $ 16,094 Commitments to make real estate and home equity loans are generally made for periods of sixty days or less. As of December 31, 2021, the fixed rate real estate and home equity commitments to make loans have interest rates ranging from 2.63 % to 5.50 % and maturities ranging from three years to thirty years . Commitments to fund commercial draw notes are generally made for periods of three months to twenty-four months . As of December 31, 2021, the fixed rate commercial draw commitments have interest rates ranging from 1.00 % to 7.38 %. Because many commitments and almost all standby letters of credit expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. Loan commitments and unused lines of credit have off-balance sheet credit risk because only origination fees are recognized on the consolidated balance sheet until commitments are fulfilled or expire. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and collateral or other security is of no value. The Corporation does not anticipate losses as a result of these transactions. These commitments also have off-balance sheet interest rate risk in that the interest rate at which these commitments were made may not be at market rates on the date the commitments are fulfilled. The Corporation has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled $ 8.0 million at December 31, 2021 and represent the maximum potential future payments the Corporation could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Corporation policies governing loan collateral apply to standby letters of credit at the time of credit extension. The carrying amount and fair value of the Corporation's standby letters of credit at December 31, 2021 was not significant. In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. The Corporation believes that it is not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on its financial results or liquidity. F-48 (17) PARENT COMPANY FINANCIAL INFORMATION Condensed parent company only financial statement information of Chemung Financial Corporation is as follows (investment in subsidiaries is recorded using the equity method of accounting) (in thousands): BALANCE SHEETS - DECEMBER 31 2021 2020 Assets: Cash on deposit with subsidiary bank $ 2,473 $ 2,243 Investment in subsidiary - Chemung Canal Trust Company 203,373 192,364 Investment in subsidiary - CFS Group, Inc. 1,074 876 Investment in subsidiary - Chemung Risk Management, Inc. 2,661 2,563 Dividends receivable from subsidiary bank 1,450 1,214 Securities available for sale, at estimated fair value 391 377 Other assets 1,517 1,420 Total assets $ 212,939 $ 201,057 Liabilities and shareholders' equity: Dividends payable $ 1,450 $ 1,214 Other liabilities 34 144 Total liabilities 1,484 1,358 Shareholders' equity: Total shareholders' equity 211,455 199,699 Total liabilities and shareholders' equity $ 212,939 $ 201,057 STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31 2021 2020 Dividends from subsidiary bank and non-bank $ 6,854 $ 10,806 Interest and dividend income 4 5 Non-interest income 85 ( 50 ) Non-interest expenses 432 503 Income before impact of subsidiaries' undistributed earnings 6,511 10,258 Equity in undistributed earnings of Chemung Canal Trust Company 19,492 8,204 Equity in undistributed earnings of CFS Group, Inc. 198 8 Equity in undistributed earnings of Chemung Risk Management, Inc. 98 610 Income before income tax 26,299 19,080 Income tax benefit ( 126 ) ( 182 ) Net income $ 26,425 $ 19,262 F-49 STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31 2021 2020 Cash flows from operating activities: Net Income $ 26,425 $ 19,262 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of Chemung Canal Trust Company ( 19,492 ) ( 8,204 ) Equity in undistributed earnings of CFS Group, Inc. ( 198 ) ( 8 ) Equity in undistributed earnings of Chemung Risk Management, Inc. ( 98 ) ( 610 ) Change in dividend receivable ( 236 ) ( 1,214 ) Change in other assets ( 97 ) ( 154 ) Change in other liabilities ( 252 ) 8 Expense related to employee stock compensation 132 101 Expense related to restricted stock units for directors' deferred compensation plan 19 29 Expense to employee restricted stock awards 535 672 Net cash provided by operating activities 6,738 9,882 Cash flow from financing activities: Cash dividends paid ( 5,318 ) ( 5,006 ) Purchase of treasury stock ( 1,616 ) ( 7,589 ) Sale of treasury stock 426 1,018 Net cash used in financing activities ( 6,508 ) ( 11,577 ) Increase (decrease) in cash and cash equivalents 230 ( 1,695 ) Cash and cash equivalents at beginning of year 2,243 3,938 Cash and cash equivalents at end of year $ 2,473 $ 2,243 (18) FAIR VALUES Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value: Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability. The Corporation used the following methods and significant assumptions to estimate fair value: Available for Sale Securities: The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities, but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs). Equity Investments: Securities that are held to fund a non-qualified deferred compensation plan and securities that have a readily determinable fair market value, are recorded with changes in fair value included in earnings. The fair values of equity investments are determined by quoted market prices (Level 1 inputs). F-50 Impaired Loans : At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part of the allowance for loan loss accounting. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, typically resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly. OREO : Assets acquired through or instead of loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition. Derivatives : The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with credit risk participations are based on credit default rate assumptions (Level 3 inputs). F-51 Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): Fair Value Measurement at December 31, 2021 Using Financial Assets: Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) U.S. treasury notes and bonds $ 60,431 $ 60,431 $ — $ — Mortgage-backed securities, residential $ 577,361 $ — $ 577,361 $ — Obligations of states and political subdivisions 42,303 — 42,303 — Corporate bonds and notes 22,848 — 22,848 — SBA loan pools 89,083 — 89,083 — Total available for sale securities $ 792,026 $ 60,431 $ 731,595 $ — Equity Investments $ 2,404 $ 2,404 $ — $ — Derivative assets 9,498 — 9,498 — Financial Liabilities: Derivative liabilities $ 9,726 $ — $ 9,726 $ — Fair Value Measurement at December 31, 2020 Using Financial Assets: Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Mortgage-backed securities, residential $ 467,866 $ — $ 467,866 $ — Obligations of states and political subdivisions 43,405 — 43,405 — Corporate bonds and notes 9,035 — 9,035 — SBA loan pools 34,305 — 34,305 — Total available for sale securities $ 554,611 $ — $ 554,611 $ — Equity investments $ 1,880 $ 1,880 $ — $ — Derivative assets 14,702 — 14,702 — Financial Liabilities: Derivative liabilities $ 15,059 $ — $ 15,059 $ — There were no transfers between Level 1 and Level 2 during the twelve month periods ending December 31, 2021 and 2020. F-52 Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands): Fair Value Measurement at December 31, 2021 Using Financial Assets: Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Other real estate owned: Residential mortgages 143 — — 143 — Total other real estate owned, net $ 143 $ — $ — $ 143 $ — Fair Value Measurement at December 31, 2020 Using Financial Assets: Fair Value Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Gains (Losses) Other real estate owned: Commercial mortgages: Commercial mortgages $ 111 $ — $ — $ 111 $ — Residential mortgages 126 — — 126 — Total other real estate owned, net $ 237 $ — $ — $ 237 $ — The following table presents information related to Level 3 non-recurring fair value measurement at December 31, 2021 and 2020 (in thousands): Asset Fair Value at December 31, 2021 Valuation Technique Unobservable Inputs Range [Weighted Average] at December 31, 2021 OREO: Residential mortgages 143 Sales comparison Discount to appraised value 20.80 % - 20.80 % [ 20.80 %] $ 143 Asset Fair Value at December 31, 2020 Valuation Technique Unobservable Inputs Range [Weighted Average] at December 31, 2020 OREO: Commercial mortgages: Commercial mortgages $ 111 Sales comparison Discount to appraised value 20.80 % - 20.80 % [ 20.80 %] Residential mortgages 126 Sales comparison Discount to appraised value 20.80 % - 20.80 % [ 20.80 %] $ 237 F-53 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of other financial instruments, at December 31, 2021 and December 31, 2020, are as follows (in thousands): Fair Value Measurements at December 31, 2021 Using Financial assets: Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Estimated Fair Value (1) Cash and due from financial institutions $ 17,365 $ 17,365 $ — $ — $ 17,365 Interest-bearing deposits in other financial institutions 9,616 9,616 — — 9,616 Equity investments 2,964 2,964 — — 2,964 Securities available for sale 792,026 60,431 731,595 — 792,026 Securities held to maturity 3,790 — 1,639 2,157 3,796 FHLBNY and FRBNY stock 4,218 — — — N/A Loans, net and loans held for sale 1,497,620 — — 1,480,967 1,480,967 Accrued interest receivable 5,985 106 1,746 4,133 5,985 Derivative assets 9,498 — 9,498 — 9,498 Financial liabilities: Deposits: Demand, savings, and insured money market accounts $ 1,959,076 $ 1,959,076 $ — $ — $ 1,959,076 Time deposits 196,357 — 197,658 — 197,658 Accrued interest payable 210 10 200 — 210 Derivative liabilities 9,726 — 9,726 — 9,726 (1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. F-54 Fair Value Measurements at December 31, 2020 Using Financial Assets: Carrying Amount Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Estimated Fair Value (1) Cash and due from financial institutions $ 29,467 $ 29,467 $ — $ — $ 29,467 Interest-bearing deposits in other financial institutions 79,071 79,071 — — 79,071 Equity investments 2,542 2,542 — — 2,542 Securities available for sale 554,611 — 554,611 — 554,611 Securities held to maturity 2,469 — 2,175 326 2,501 FHLBNY and FRBNY stock 3,150 — — — N/A Loans, net and loans held for sale 1,515,709 — — 1,514,318 1,514,318 Accrued interest receivable 6,271 — 1,356 4,915 6,271 Derivative assets 14,702 — 14,702 — 14,702 Financial liabilities: Deposits: Demand, savings, and insured money market accounts $ 1,752,043 $ 1,752,043 $ — $ — $ 1,752,043 Time deposits 285,731 — 288,398 — 288,398 Accrued interest payable 262 11 251 — 262 Derivative liabilities 15,059 — 15,059 — 15,059 (1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (19) REGULATORY CAPITAL REQUIREMENTS The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan and other benefit plans are not included in computing regulatory capital. Management believes as of December 31, 2021, the Bank met all capital adequacy requirements to which they are subject. Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. At December 31, 2020, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. 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. There have been no conditions or events since that notification that management believes have changed the Bank's or the Corporation's capital category. F-55 The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net income of the preceding two years , subject to the capital requirements in the table below. During 2022, the Bank could, without prior approval, declare dividends of approximately $ 38.9 million plus any 2022 net income retained to the date of the dividend declaration. The actual capital amounts and ratios of the Corporation and the Bank are presented in the following tables (in thousands): Actual Minimal Capital Adequacy Minimal Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions As of December 31, 2021 Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets): Consolidated $ 215,091 14.21 % N/A N/A N/A N/A N/A N/A Bank $ 206,988 13.69 % $ 120,950 8.00 % $ 158,746 10.50 % $ 151,187 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 196,147 12.96 % N/A N/A N/A N/A N/A N/A Bank $ 188,063 12.44 % $ 90,712 6.00 % $ 128,509 8.50 % $ 120,950 8.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 196,147 12.96 % N/A N/A N/A N/A N/A N/A Bank $ 188,063 12.44 % $ 68,034 4.50 % $ 105,831 7.00 % $ 98,272 6.50 % Tier 1 Capital (to Average Assets): Consolidated $ 196,147 8.06 % N/A N/A N/A N/A N/A N/A Bank $ 188,063 7.74 % $ 97,151 4.00 % N/A N/A $ 121,439 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, 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 % F-56 (20) ACCUMULATED OTHER COMPREHENSIVE INCOME OR LOSS Accumulated other comprehensive income or loss represents the net unrealized holding gains or losses on securities available for sale and the funded status of the Corporation's defined benefit pension plan and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect. The following is a summary of the changes in accumulated other comprehensive income or loss by component, net of tax, for the periods indicated (in thousands): Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total Balance at January 1, 2021 $ 9,127 $ ( 6,726 ) $ 2,401 Other comprehensive income before reclassification ( 11,622 ) 2,698 ( 8,924 ) Amounts reclassified from accumulated other comprehensive income (loss) — ( 7 ) ( 7 ) Net current period other comprehensive income (loss) ( 11,622 ) 2,691 ( 8,931 ) Balance at December 31, 2021 $ ( 2,495 ) $ ( 4,035 ) $ ( 6,530 ) Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total Balance at January 1, 2020 $ 1,368 $ ( 7,167 ) $ ( 5,799 ) Other comprehensive income (loss) before reclassification 7,759 377 8,136 Amounts reclassified from accumulated other comprehensive income (loss) — 64 64 Net current period other comprehensive income (loss) 7,759 441 8,200 Balance at December 31, 2020 $ 9,127 $ ( 6,726 ) $ 2,401 The following is the reclassification out of accumulated other comprehensive income (loss) for the periods indicated (in thousands): Details about Accumulated Other Comprehensive Income (Loss) Components Year Ended December 31, Affected Line Item in the Statement Where Net Income is Presented 2021 2020 Amortization of defined pension plan and other benefit plan items: Prior service costs (a) ( 220 ) ( 220 ) Other components of net periodic pension and postretirement benefits Actuarial losses (a) 212 300 Other components of net periodic pension and postretirement benefits Tax effect 1 ( 15 ) Income tax expense Total reclassification for the period, net of tax $ ( 7 ) $ 65 (a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and other benefit plan costs (see Note 13 for additional information). F-57 (21) SEGMENT REPORTING The Corporation manages its operations through two primary business segments: core banking and WMG. The core banking segment provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential mortgage loans, primarily in the Corporation’s local markets and to invest in securities. The WMG services segment provides revenues by providing trust and investment advisory services to clients. Accounting policies for the segments are the same as those described in Note 1. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment. The Holding Company, CFS, and CRM column below includes amounts to eliminate transactions between segments as well as income and expenses related to insurance products, mutual funds, brokerage services, and captive insurance (in thousands). Year ended December 31, 2021 Core Banking WMG Holding Company, CFS and CRM Consolidated Totals Interest and dividend income $ 68,984 $ — $ 24 $ 69,008 Interest expense 3,419 — — 3,419 Net interest income 65,565 — 24 65,589 Provision for loan losses 17 — — 17 Net interest income after provision for loan losses 65,548 — 24 65,572 Non-interest income 11,740 11,072 1,058 23,870 Non-interest expenses 47,807 6,642 1,233 55,682 Income (loss) before income tax expense 29,481 4,430 ( 151 ) 33,760 Income tax expense (benefit) 6,408 979 ( 52 ) 7,335 Segment net income (loss) $ 23,073 $ 3,451 $ ( 99 ) $ 26,425 Segment assets $ 2,410,934 $ 3,125 $ 4,416 $ 2,418,475 Year ended December 31, 2020 Core Banking WMG Holding Company, CFS and CRM Consolidated Totals Interest and dividend income $ 66,849 $ — $ 58 $ 66,907 Interest expense 3,988 — — 3,988 Net interest income 62,861 — 58 62,919 Provision for loan losses 4,239 — — 4,239 Net interest income after provision for loan losses 58,622 — 58 58,680 Non-interest income 10,982 9,492 650 21,124 Non-interest expenses 48,479 6,283 1,173 55,935 Income (loss) before income tax expense 21,125 3,209 ( 465 ) 23,869 Income tax expense (benefit) 3,952 824 ( 169 ) 4,607 Segment net income (loss) $ 17,173 $ 2,385 $ ( 296 ) $ 19,262 Segment assets $ 2,271,923 $ 3,231 $ 4,297 $ 2,279,451 F-58 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. CHEMUNG FINANCIAL CORPORATION DATED: MARCH 23, 2022 By: /s/ Anders M. Tomson Anders M. Tomson, President and Chief Executive Officer (Principal Executive Officer) DATED: MARCH 23, 2022 By: /s/ Karl F. Krebs Karl F. Krebs, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/ Raimundo C. Archibold, Jr. Director March 23, 2022 Raimundo C. Archibold, Jr. /s/ Larry H. Becker Director March 23, 2022 Larry H. Becker /s/ Ronald M. Bentley Director March 23, 2022 Ronald M. Bentley /s/ David M. Buicko Director March 23, 2022 David M. Buicko /s/ David J. Dalrymple Director and Chairman of the Board of Directors March 23, 2022 David J. Dalrymple /s/ Robert H. Dalrymple Director March 23, 2022 Robert H. Dalrymple /s/ Richard E. Forrestel, Jr. Director March 23, 2022 Richard E. Forrestel, Jr. /s/ Denise V. Gonick Director March 23, 2022 Denise V. Gonick /s/ Stephen M. Lounsberry, III Director March 23, 2022 Stephen M. Lounsberry, III /s/ Jeffrey B. Streeter Director March 23, 2022 Jeffrey B. Streeter (Signatures, continued) F-59 Signature Title Date /s/ G. Thomas Tranter, Jr. Director March 23, 2022 G. Thomas Tranter, Jr. /s/ Thomas R. Tyrrell Director March 23, 2022 Thomas R. Tyrrell /s/ Anders M. Tomson Chief Executive Officer and President March 23, 2022 Anders M. Tomson /s/ Karl F. Krebs Chief Financial Officer and Treasurer March 23, 2022 Karl F. Krebs F-60 EXHIBIT INDEX Exhibit The following exhibits are either filed with this Form 10-K or are incorporated herein by reference. The Corporation’s Securities Exchange Act file number is 000-13888. 3.1 Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008). 3.2 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008). 3.3 Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006). 3.4 Amended and Restated Bylaws of Chemung Financial Corporation, as amended November 17 , 2021 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K and filed with the Commission on November 19 , 2021). 4.1 Specimen Stock Certificate (filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended December 31, 2002 and incorporated herein by reference). 4.2 Description of Common Stock Registered Under Section 12 of the Securities Exchange Act of 1934, filed herewith (as incorporated by reference to Exhibit 4.2 to Registrant's Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020). 10.1 Chemung Financial Corporation 2014 Omnibus Plan and Component Plans (Chemung Financial Corporation Restricted Stock Plan, Chemung Financial Corporation Incentive Compensation Plan, Chemung Financial Corporation Directors’ Compensation Plan and Chemung Financial Corporation/Chemung Canal Trust Company Directors’ Deferred Fee Plan) (filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to Registrant’s Form S-8 filed with the Commssion on January 27, 2015 and incorporated herein by reference). 10.2 Change of Control Agreement dated December 19, 2018 between Chemung Canal Trust Company and Anders M. Tomson, President and Chief Executive Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commission on December 19, 2018 and incorporated herein by reference). 10.3 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Karl F. Krebs, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference). 10.4 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Thomas W. Wirth, Executive Vice President (filed as Exhibit 10.4 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference). 10.5 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Daniel D. Fariello, President of Capital Bank Division (filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference). 10.6 Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Loren D. Cole, Executive Vice President and Chief Information Officer, (as incorporated by reference to Exhibit 10.8 to Registrant's Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020). 10.7 Change of Control Agreement dated January 4, 2021 between Chemung Canal Trust Company and Jeffrey P. Kenefick, Regional President (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on January 5, 2021 and incorporated herein by reference). 10.8 Chemung Financial Corporation 2021 Equity Incentive Plan (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on June 8, 2021 and incorporated herein by reference). 10.9 Consent Order between Chemung Canal Trust Company and the New York State Department of Financial Services dated June 24, 2021 (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on June 29, 2021 and incorporated herein by reference). 10.10 Form of Incentive Stock Option Award Agreement (filed as Exhibit 10.2 to Registrant's Registration Statement on Form S-8 (333-257227) filed with the Commission on June 21, 2021 and incorporated herein by reference). 10.11 Form of Non-Qualified Stock Option Award Agreement (filed as Exhibit 10.3 to Registrant's Registration Statement on Form S-8 (333-257227) filed with the Commission on June 21, 2021 and incorporated herein by reference). 10.12 Chemung Canal Trust Company Defined Contribution Supplemental Executive Retirement Plan * 21 Subsidiaries of the Registrant.* 23 Consent of Crowe LLP, Independent Registered Public Accounting Firm.* 31.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* 31.2 Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.* 32.1 Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.* 32.2 Ce rtification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.* 101.INS Instance Document 101.SCH XBRL Taxonomy Schema* 101.CAL XBRL Taxonomy Calculation Linkbase* 101.DEF XBRL Taxonomy Definition Linkbase* 101.LAB XBRL Taxonomy Label Linkbase* 101.PRE XBRL Taxonomy Presentation Linkbase* * Filed herewith.