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, 2022. 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, 2022. (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, 2022 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, 2022. Based on the assessment, we assert that the Corporation maintained effective internal control over financial reporting as of December 31, 2022 based on the specified criteria. (c) Changes in Internal Control over Financial Reporting During the fourth quarter of 2022, 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 22, 2023 March 22, 2023 This Annual Report does not include an attestation report of the independent required accounting firm because of an exception under SEC rules. Item 9B. OTHER INFORMATION None. Item 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS None. 68 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 2023 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2022 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 2023 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2022 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 2023 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2022 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 2023 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2022 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 2023 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2022 fiscal year end. 69 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, 2022 and 2021 Consolidated Statements of Income for the two years ended December 31, 2022 Consolidated Statements of Comprehensive Income (Loss) for the two years ended December 31, 2022 Consolidated Statements of Shareholders' Equity for the two years ended December 31, 2022 Consolidated Statements of Cash Flows for the two years ended December 31, 2022 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 August 17, 2022 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K and filed with the Commission on August 17, 2022). 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). 70 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 Form of Restricted Stock Award Agreement (filed as Exhibit 10.4 to Registrant's Registration Statement on Form S-8 (333-257227) filed with the Commission on June 21, 2021 and incorporated herein by reference). 10.13 Chemung Canal Trust Company Defined Contribution Supplemental Executive Retirement Plan, (as incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K for the year ended December 31, 2021 and filed with the Commission on March 23, 2022). 10.14 Chemung Canal Trust Company Defined Contribution Supplemental Executive Retirement Plan-Amendment Number One, as amended on November 16, 2022 (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on November 21, 2022 and incorporated herein by reference). 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. 71 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, 2022 and 2021 F- 3 Consolidated Statements of Income for the two years ended December 31, 2022 F- 4 Consolidated Statements of Comprehensive Income (Loss) for the two years ended December 31, 2022 F- 5 Consolidated Statements of Shareholders' Equity for the two years ended December 31, 2022 F- 6 Consolidated Statements of Cash Flows for the two years ended December 31, 2022 F- 7 Notes to Consolidated Financial Statements F- 9 72 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, 2022 and 2021, the related consolidated statements of income, comprehensive income (loss), 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, 2022 and 2021, 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 $19.7 million at December 31, 2022, which includes $18.5 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. Grand Rapids, Michigan March 22, 2023 F-2 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, (in thousands, except share and per share amounts) 2022 2021 ASSETS Cash and due from financial institutions $ 29,309 $ 17,365 Interest-earning deposits in other financial institutions 26,560 9,616 Total cash and cash equivalents 55,869 26,981 Equity investments, at fair value 2,830 2,964 Securities available for sale, at estimated fair value 632,589 792,026 Securities held to maturity, estimated fair value of $ 2,402 at December 31, 2022 and $ 3,796 at December 31, 2021 2,424 3,790 FHLBNY and FRBNY Stock, at cost 8,197 4,218 Loans, net of deferred loan fees 1,829,448 1,518,249 Allowance for loan losses ( 19,659 ) ( 21,025 ) Loans, net 1,809,789 1,497,224 Loans held for sale — 396 Premises and equipment, net 16,113 17,969 Operating lease right-of-use assets 6,449 7,234 Goodwill 21,824 21,824 Other intangible assets, net — 15 Bank owned life insurance 2,871 2,825 Interest rate swap assets 27,141 9,270 Accrued interest and other assets 59,457 31,739 Total assets $ 2,645,553 $ 2,418,475 LIABILITIES AND SHAREHOLDERS' EQUITY Deposits: Non-interest-bearing $ 733,329 $ 739,607 Interest-bearing 1,593,898 1,415,826 Total deposits 2,327,227 2,155,433 FHLBNY overnight advances 95,810 14,570 Capital lease obligation 3,327 3,594 Operating lease liabilities 6,620 7,378 Dividends payable 1,455 1,450 Interest rate swap liabilities 27,196 9,498 Accrued interest payable and other liabilities 17,530 15,097 Total liabilities 2,479,165 2,207,020 Shareholders' equity: Common stock, $ 0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at December 31, 2022 and December 31, 2021 53 53 Additional-paid-in capital 47,331 46,901 Retained earnings 211,859 188,877 Treasury stock, at cost ( 615,448 shares at December 31, 2022; 636,720 shares at December 31, 2021) ( 17,598 ) ( 17,846 ) Accumulated other comprehensive (loss) income ( 75,257 ) ( 6,530 ) Total shareholders' equity 166,388 211,455 Total liabilities and shareholders' equity $ 2,645,553 $ 2,418,475 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) 2022 2021 Interest and Dividend Income: Loans, including fees $ 68,051 $ 58,861 Taxable securities 12,096 8,935 Tax exempt securities 1,068 1,061 Interest-earning deposits 260 151 Total interest and dividend income 81,475 69,008 Interest Expense: Deposits 6,655 3,284 Borrowed funds 641 135 Total interest expense 7,296 3,419 Net interest income 74,179 65,589 Provision for loan losses ( 554 ) 17 Net interest income after provision for loan losses 74,733 65,572 Non-Interest Income: Wealth management group fee income 10,280 11,072 Service charges on deposit accounts 3,788 3,214 Interchange revenue from debit card transactions 4,603 4,844 Change in fair value of equity investments ( 349 ) 246 Net gain on sales of loans held for sale 107 1,073 Net gains (losses) on sales of other real estate owned 60 ( 16 ) Income from bank owned life insurance 46 52 Other 2,901 3,385 Total non-interest income 21,436 23,870 Non-Interest Expenses: Salaries and wages 25,054 24,413 Pension and other employee benefits 7,668 6,086 Other components of net periodic pension cost (benefit) ( 1,648 ) ( 1,583 ) Net occupancy expenses 5,539 5,873 Furniture and equipment expenses 1,906 1,669 Data processing expense 8,919 8,519 Professional services 2,171 1,932 Amortization of intangible assets 15 243 Marketing and advertising expense 941 792 Other real estate owned expenses ( 5 ) 40 FDIC insurance 1,356 1,408 Loan expense 1,001 1,037 Other 6,363 5,253 Total non-interest expenses 59,280 55,682 Income before income tax expense 36,889 33,760 Income tax expense 8,106 7,335 Net income $ 28,783 $ 26,425 Weighted average shares outstanding (in thousands) 4,693 4,683 Basic and diluted earnings per share $ 6.13 $ 5.64 See accompanying notes to consolidated financial statements. F-4 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) YEARS ENDED DECEMBER 31, (in thousands) 2022 2021 Net income $ 28,783 $ 26,425 Other comprehensive income (loss): Unrealized holding (losses) on securities available for sale ( 93,224 ) ( 15,632 ) Reclassification adjustment gains realized in net income — — Net unrealized (losses) ( 93,224 ) ( 15,632 ) Tax effect 24,423 4,010 Net of tax amount ( 68,801 ) ( 11,622 ) Change in funded status of defined benefit pension plan and other benefit plans: Net gain arising during the period 63 3,655 Reclassification adjustment for amortization of prior service benefit — ( 220 ) Reclassification adjustment for amortization of net actuarial losses 38 212 Total before tax effect 101 3,647 Tax effect ( 27 ) ( 956 ) Net of tax amount 74 2,691 Total other comprehensive (loss) ( 68,727 ) ( 8,931 ) Comprehensive income (loss) $ ( 39,944 ) $ 17,494 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, 2020 $ 53 $ 46,764 $ 168,006 $ ( 17,525 ) $ 2,401 $ 199,699 Net income — — 26,425 — — 26,425 Other comprehensive income — — — ( 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 Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Income (Loss) Total Balances at December 31, 2021 $ 53 $ 46,901 $ 188,877 $ ( 17,846 ) $ ( 6,530 ) $ 211,455 Net income — — 28,783 — — 28,783 Other comprehensive loss — — — ( 68,727 ) ( 68,727 ) Restricted stock awards — 795 — — — 795 Distribution of 25,011 shares of treasury stock granted for employee restricted stock awards, net — ( 712 ) — 712 — — Restricted stock units for directors' deferred compensation plan — 20 — — — 20 Cash dividends declared ($ 1.24 per share) — — ( 5,801 ) — ( 5,801 ) Distribution of 8,575 shares of treasury stock for directors' compensation — 131 — 244 — 375 Sale of 9,367 shares of treasury stock (a) — 158 — 266 — 424 Repurchase of 20,786 shares of common stock — — — ( 933 ) — ( 933 ) Forfeiture of 895 shares of restricted stock awards — 38 — ( 41 ) — ( 3 ) Balances at December 31, 2022 $ 53 $ 47,331 $ 211,859 $ ( 17,598 ) $ ( 75,257 ) $ 166,388 (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-6 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) YEARS ENDED DECEMBER 31, CASH FLOWS FROM OPERATING ACTIVITIES: 2022 2021 Net income $ 28,783 $ 26,425 Adjustments to reconcile net income to net cash provided by operating activities: Amortization of right-of-use assets 785 759 Amortization of intangible assets 15 243 Deferred income tax (benefit) expense 1,722 570 Provision for loan losses ( 554 ) 17 Loss on disposal of fixed assets 56 16 Depreciation and amortization of fixed assets 2,226 2,501 Amortization of premiums on securities, net 3,761 5,373 Gains on sales of loans held for sale, net ( 107 ) ( 1,073 ) Proceeds from sales of loans held for sale 5,819 38,157 Loans originated and held for sale ( 5,316 ) ( 37,310 ) Net (gains) losses on sale of other real estate owned ( 60 ) 16 Net change in fair value of equity investments 349 ( 246 ) Proceeds from sales of trading assets 142 161 Purchase of equity investments ( 357 ) ( 337 ) Net (gains) losses on interest rate swaps ( 173 ) ( 126 ) (Increase) in other assets ( 27,636 ) ( 7,386 ) Increase (decrease) in accrued interest payable 654 ( 53 ) Expense related to restricted stock units for directors' deferred compensation plan 290 19 Expense related to employee stock compensation — 132 Expense related to employee restricted stock awards 795 535 Payments on operating leases ( 1,195 ) ( 1,202 ) Increase (decrease) in other liabilities 25,094 8,322 Income from bank owned life insurance ( 46 ) ( 52 ) Net cash provided by operating activities 35,047 35,461 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from maturities, calls, and principal paydowns on securities available for sale 86,206 143,193 Proceeds from maturities and principal collected on securities held to maturity 2,335 937 Purchases of securities available for sale ( 23,743 ) ( 401,594 ) Purchases of securities held to maturity ( 980 ) ( 2,277 ) Purchase of FHLBNY and FRBNY stock ( 36,214 ) ( 3,467 ) Redemption of FHLBNY and FRBNY stock 32,235 2,399 Purchases of premises and equipment ( 426 ) ( 367 ) Proceeds from sale of other real estate owned 326 210 Proceeds from bank owned life insurance — 286 Net (increase) decrease in loans ( 312,359 ) 18,196 Net cash (used by) provided by investing activities ( 252,620 ) ( 242,484 ) CASH FLOWS FROM FINANCING ACTIVITIES: Net increase (decrease) in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts ( 34,233 ) 207,033 Net increase (decrease) in time deposits 206,027 ( 89,374 ) Net change in FHLBNY overnight advances 81,240 14,570 Principal payments made on capital lease ( 267 ) ( 255 ) Purchase of treasury stock ( 933 ) ( 1,616 ) Sale of treasury stock 424 426 Cash dividends paid ( 5,797 ) ( 5,318 ) Net cash (used in) provided by financing activities 246,461 125,466 Net increase (decrease) in cash and cash equivalents 28,888 ( 81,557 ) Cash and cash equivalents, beginning of period 26,981 108,538 Cash and cash equivalents, end of period $ 55,869 $ 26,981 F-7 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, 2022 2021 Supplemental disclosure of cash flow information: Cash paid during the year for: Interest $ 6,642 $ 3,472 Income Taxes $ 5,625 $ 5,675 Supplemental disclosure of non-cash activity: Transfer of loans to other real estate owned $ 348 $ 102 Dividends declared, not yet paid $ 1,455 $ 1,450 See accompanying notes to consolidated financial statements. F-8 CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2022 and 2021 (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-9 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. F-10 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 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. 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 non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. 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-11 LEASES Leases are classified as operating or finance leases on the lease commencement date. At inception, the Corporation determines the lease term by considering the minimum lease term and all optional renewal periods that the Corporation is reasonably certain to renew. The discount rate used in determining lease liability is based upon incremental borrowing rates the Corporation could obtain for similar loans as of the date of commencement or renewal. The Corporation records operating leases on the balance sheet as a lease liability equal to the present value of future minimum payments under the lease terms, and a right-of-use asset equal to the lease liability. The lease term is also used to calculate straight-line rent expense. The Corporation's leases do not contain residual value guarantees or material variable lease payments that may impact the Corporation's ability to pay dividends or cause the Corporation to incur additional expenses. Rent expense and variable lease expense are included in net occupancy expenses on the Corporation's Consolidated Statements of Income. Finance 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, a finance lease is recorded as a building asset, and is depreciated over the shorter of the term of the lease or the estimated life of the asset. A corresponding long term lease obligation, which amortizes as payments are made on the lease. Interest expense is incurred using the discount rate determined at the beginning of the lease term. Amortization of the right-of-use assets arising from finance leases is expensed through net occupancy expense, and the interest on the related lease liability is expensed through interest expense on borrowings on the Corporation Consolidated Statements of Income. 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 non-interest 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. F-12 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 $ 2.053 billion, including $ 346.5 million of assets held under management or administration for the Corporation, at December 31, 2022 and $ 2.325 billion, including $ 344.2 million of assets held under management or administration for the Corporation, at December 31, 2021. 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. See Note 13 for further details. 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. 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. F-13 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. See Note 13 for further details.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. 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. F-14 STOCK-BASED COMPENSATION 2021 Equity Incentive Plan The Corporation's 2021 Equity Incentive Plan (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. Please see Note 14 for further details. 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, 2022. The Corporation's intangible assets related to the purchase of the trust business of Partners Trust Bank in May of 2007, were fully amortized as of December 31, 2022. F-15 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. 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. F-16 RECENT ACCOUNTING PRONOUNCEMENTS 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. The ASU supersedes current GAAP by replacing the incurred loss impairment method with a methodology that reflects lifetime expected credit losses and requires the consideration of a broader range of reasonable and supportable information to form credit loss estimates. In November 2019, the FASB adopted an amendment to postpone 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 and elected delayed adoption. The Corporation has since contracted a vendor and developed a methodology under the guidance of management and complying with the requirements of the ASU. Updated policies and internal controls have been established accordingly. Additionally the Corporation has contracted an independent third party to validate the finalized model. The basis for the quantitative component of the estimation of expected credit losses is the historical loss experience amongst a curated group of peers. The Corporation utilized regression analyses of peer data, of which the Corporation was included, and where observed credit losses and selected economic factors were utilized to determine suitable loss drivers for modeling the lifetime rates of probability of default (PD). A loss given default rate (LGD) was assigned to each pool for each period based on the outcome. The chosen model utilizes a discounted cash flow (DCF) analysis for all loan portfolio segments as its foundation. Portfolio segments are the level at which loss assumptions are applied to a pool of loans based on the similarity of risk characteristics inherent in the included instruments, relying on FFIEC Call Report codes. The DCF analysis is run at the instrument-level and incorporates an array of loan-specific data points and segment-implied assumptions to determine the lifetime expected loss attributable to each instrument. The loss driver for each loan portfolio segment is derived from a readily available and reasonable economic forecast, which is applied over a four-quarter period, and incorporates an eight-quarter straight-line reversion to the historical mean value of the forecast for all periods beyond the forecast period. The selected model incorporates qualitative factors in order to appropriately adjust for risk in a given portfolio segment that may not be fully captured through quantitative analysis. Determinations regarding qualitative adjustments are made established by management’s expectation of loss conditions differing from those already captured in the quantitative component of the model. The Corporation expects to recognize a one-time cumulative-effect adjustment to retained earnings upon adoption of CECL, effective January 1, 2023, in order to bring our allowance for credit losses (ACL) into conformity with the ASU, consistent with regulatory expectations set forth in interagency guidance. The Corporation estimates that under the ACL framework, the allowance for credit losses will remain flat or increase by up to $ 2.0 million, or $ 1.4 million, after tax, when compared to the amount being carried on the consolidated balance sheet at December 31, 2022. The Corporation expects the impact of the creation of an allowance for unfunded commitments to be an increase of up to an additional $ 1.2 million, or $ 0.9 million, after tax, and no adjustment related to the securities portfolio. The Corporation is in the finalizing the assumptions built into its model, as well as the related internal controls thereon. This increase encompasses loans that the Corporation currently evaluates for impairment on an individual basis, loans evaluated collectively by pooled segment, and unfunded commitments made by the Corporation not currently carried on the balance sheet. Based on the composition and quality of the Corporation’s debt securities portfolio, management has determined there to be a zero loss estimate on securities that are backed by U.S. governmental agencies. In March 2022, the FASB issued ASU 2022-02, which eliminates creditor accounting guidance for TDRs for entities that have adopted ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and enhances Vintage Disclosures of Gross Writeoffs. This ASU eliminates Subtopic 310-40 guidance for TDRs, and requires creditors to apply the loan refinancing and restructuring guidance in Subtopic 310-20 when evaluating modifications granted to borrowers experiencing financial difficulty to determine whether the modification is considered a continuation of an existing loan or a new loan. The vintage disclosure component of the ASU requires entities to disclose current-period gross writeoffs by origination year for financing receivables and investment leases within the scope of Subtopic 326-20. The Corporation will adopt ASU 2022-02 concurrently with the adoption of ASU 2016-13. F-17 RISKS AND UNCERTAINTIES Current Banking Environment Industry events transpiring prior to the Corporation’s filing date, including the failures of Silicon Valley Bank (SVB) headquartered in Santa Clara, California and Signature Bank headquartered in New York, New York in March 2023, have led to uncertainty and concerns regarding the liquidity positions of the banking sector. SVB was placed into receivership on March 10, 2023, marking the second largest bank failure in U.S. history. Signature Bank was placed into receivership on March 12, 2023, marking the third largest bank failure in U.S. history. Both banks appear to have had high ratios of uninsured deposits to total deposits, when compared to industry average. These failures underscore the importance of maintaining access to diverse sources of funding. Market conditions and external factors may unpredictably impact the competitive landscape for deposits in the banking industry. Additionally, the rising interest rate environment has increased competition for liquidity and the premium at which liquidity is available to meet funding needs. The Corporation believes the sources of liquidity presented in the Audited Consolidated Financial Statements and the Notes to the Audited Consolidated Financial Statements are sufficient to meet its needs on the balance sheet date. An unexpected influx of withdrawals of deposits could adversely impact the Corporation's ability to rely on organic deposits to primarily fund its operations, potentially requiring greater reliance on secondary sources of liquidity to meet withdrawal demands or to fund continuing operations. These sources may include proceeds from Federal Home Loan Bank advances, sales of investment securities and loans, federal funds lines of credit from correspondent banks, and out-of-market time deposits. Important Accounting Policy ramifications of such events are outlined in the previous sections of Note 1, and subsequently in the relevant Notes to the Consolidated Financial Statements. In response to these events, the Treasury Department, Federal Reserve, and FDIC jointly announced the Bank Term Funding Program (BTFP) on March 12, 2023. This program aims to enhance liquidity by allowing institutions to pledge certain securities at the par value of the securities, and at a borrowing rate of ten basis points over the one-year overnight index swap rate. The BTFP is available to eligible U.S. federally insured depository institutions, with advances having a term of up to one year and no prepayment penalties. As of the date of the release of the Audited Consolidated Financial Statements, the Corporation has not accessed the BTFP. Such reliance on secondary funding sources could increase the Corporation's overall cost of funding and thereby reduce net income. While the Corporation believes its current sources of liquidity are adequate to fund operations, there is no guarantee they will suffice to meet future liquidity demands. This may necessitate slowing or discontinuing loan growth, capital expenditures, or other investments, or liquidating assets. For further discussion of the Corporation's liquidity practices, see pages 60-62 of this Form 10-K. F-18 (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 of March 15, 2020, the Federal Reserve Board reduced reserve requirement ratios to zero percent, effective March 26, 2020. Therefore, at December 31, 2022 and 2021, there were no reserve requirements with the Federal Reserve Bank of New York. The Corporation 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, 2022 and 2021. 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. No collateral was held at the financial institution as of December 31, 2022, and $ 7.6 million collateral was held at the financial institution as of December 31, 2021. (3) SECURITIES Amortized cost and estimated fair value of securities available for sale at December 31, 2022 and 2021 are as follows (in thousands): 2022 2021 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value U.S. treasury notes and bonds $ 61,800 $ 55,574 $ 61,084 $ 60,431 Mortgage-backed securities, residential $ 518,838 $ 435,131 $ 582,060 $ 577,361 Obligations of states and political subdivisions 39,828 38,892 40,299 42,303 Corporate bonds and notes 25,750 21,970 22,750 22,848 SBA loan pools 82,982 81,022 89,216 89,083 Total $ 729,198 $ 632,589 $ 795,409 $ 792,026 Gross unrealized gains and losses on securities available for sale at December 31, 2022 and 2021, were as follows (in thousands): 2022 2021 Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses U.S. treasury notes and bonds $ — $ 6,225 $ 27 $ 680 Mortgage-backed securities, residential $ — $ 83,707 $ 4,032 $ 8,731 Obligations of states and political subdivisions 2 938 2,004 — Corporate bonds and notes — 3,780 180 82 SBA loan pools 155 2,116 344 477 Total $ 157 $ 96,766 $ 6,587 $ 9,970 F-19 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, 2022 Amortized Cost Fair Value Within one year $ 2,576 $ 2,537 After one, but within five years 106,445 97,982 After five, but within ten years 17,887 15,481 After ten years 470 436 Mortgage-backed securities, residential 518,838 435,131 SBA loan pools 82,982 81,022 Total $ 729,198 $ 632,589 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, 2022 and 2021. Amortized cost and estimated fair value of securities held to maturity at December 31, 2022 and 2021 are as follows (in thousands): 2022 2021 Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Obligations of states and political subdivisions $ 952 $ 952 $ 2,157 $ 2,157 Time deposits with other financial institutions 1,472 1,450 1,633 1,639 $ 2,424 $ 2,402 $ 3,790 $ 3,796 Gross unrealized gains and losses on securities held to maturity at December 31, 2022 and 2021, were as follows (in thousands): 2022 2021 Unrealized Gains Unrealized Losses Unrealized Gains Unrealized Losses Time deposits with other financial institutions $ — $ 22 $ 6 $ — Total $ — $ 22 $ 6 $ — There were no sales of securities held to maturity in 2022 or 2021. The contractual maturity of securities held to maturity is as follows at December 31, 2022 (in thousands): December 31, 2022 Amortized Cost Fair Value Within one year $ 1,496 $ 1,493 After one, but within five years 928 909 Total $ 2,424 $ 2,402 F-20 The following table summarizes the investment securities available for sale with unrealized losses at December 31, 2022 and December 31, 2021 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 2022 U.S. treasury notes and bonds $ 1,011 $ 30 $ 54,563 $ 6,195 $ 55,574 $ 6,225 Mortgage-backed securities, residential 79,891 7,621 355,240 76,086 435,131 83,707 Obligations of states and political subdivisions 37,847 938 — — 37,847 938 Corporate bonds and notes 4,515 485 7,455 3,295 11,970 3,780 SBA loan pools 14,333 925 51,123 1,191 65,456 2,116 Total temporarily impaired securities $ 137,597 $ 9,999 $ 468,381 $ 86,767 $ 605,978 $ 96,766 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 Other-Than-Temporary-Impairment As of December 31, 2022, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage-backed securities. At December 31, 2022, the unrealized losses related to mortgage-backed were securities issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. 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, 2022. Pledged Securities The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $ 213.8 million at December 31, 2022 and $ 242.9 million at December 31, 2021. 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, 2022 or 2021. Equity Method Investments Prior to December 31, 2022, the Corporation had an equity investment in Cephas Capital Partners, L.P. This small business investment company was established to provide 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. During 2022, the Corporation received its final distribution. As of December 31, 2021, this investment totaled $ 0.1 million, was included in other assets, and was accounted for under the equity method of accounting. F-21 (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, 2022 December 31, 2021 Commercial and agricultural: Commercial and industrial $ 252,044 $ 256,893 Agricultural 249 394 Commercial mortgages: Construction 108,243 82,204 Commercial mortgages 888,670 720,358 Residential mortgages 285,672 259,334 Consumer loans: Home equity lines and loans 81,401 70,670 Indirect consumer loans 202,124 118,569 Direct consumer loans 11,045 9,827 Total loans, net of deferred loan fees 1,829,448 1,518,249 Interest receivable on loans 6,548 4,133 Total recorded investment in loans $ 1,835,996 $ 1,522,382 The Corporation had no residential mortgages held for sale as of December 31, 2022 and $ 0.4 million as of December 31, 2021, which are not included in the above table. Residential mortgages totaling $ 228.4 million at December 31, 2022 and $ 204.2 million at December 31, 2021 were pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLBNY. As of December 31, 2022, the Corporation had outstanding PPP loan balances of $ 0.7 million, which are included in commercial and industrial loans in the table above. These loans require no allowance for loan losses as of December 31, 2022 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, 2022 and 2021, respectively (in thousands): December 31, 2022 Allowance for loan losses Commercial, and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Beginning balance: $ 3,591 $ 13,556 $ 1,803 $ 2,075 $ 21,025 Charge Offs: ( 20 ) ( 687 ) ( 17 ) ( 770 ) ( 1,494 ) Recoveries: 42 3 40 597 682 Net (charge offs) recoveries 22 ( 684 ) 23 ( 173 ) ( 812 ) Provision ( 240 ) ( 1,296 ) 19 963 ( 554 ) Ending balance $ 3,373 $ 11,576 $ 1,845 $ 2,865 $ 19,659 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 recoveries (charge offs) 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-22 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, 2022 and December 31, 2021 (in thousands): December 31, 2022 Allowance for loan losses Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Ending allowance balance attributable to loans: Individually evaluated for impairment $ 1,078 $ 38 $ — $ 31 $ 1,147 Collectively evaluated for impairment 2,295 11,538 1,845 2,834 18,512 Total ending allowance balance $ 3,373 $ 11,576 $ 1,845 $ 2,865 $ 19,659 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, 2022 Loans: Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total Loans individually evaluated for impairment $ 2,113 $ 4,384 $ 760 $ 265 $ 7,522 Loans collectively evaluated for impairment 251,178 996,477 285,685 295,134 1,828,474 Total ending loans balance $ 253,291 $ 1,000,861 $ 286,445 $ 295,399 $ 1,835,996 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 F-23 The following tables present loans individually evaluated for impairment recognized by class of loans as of December 31, 2022 and December 31, 2021, the average recorded investment and interest income recognized by class of loan as of the years ended December 31, 2022 and 2021 (in thousands): December 31, 2022 December 31, 2021 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 $ 1,026 $ 1,025 $ — $ 954 $ 948 $ — Commercial mortgages: Construction 5 5 — 129 130 — Commercial mortgages 4,346 4,341 — 6,940 4,278 — Residential mortgages 767 760 — 951 938 — Consumer loans: Home equity lines and loans 154 138 — 185 169 — With an allowance recorded: Commercial and agricultural: Commercial and industrial 1,086 1,088 1,078 5,350 1,479 1,394 Commercial mortgages: Commercial mortgages 38 38 38 3,550 3,559 1,571 Consumer loans: Home equity lines and loans 126 127 31 146 146 65 Total $ 7,548 $ 7,522 $ 1,147 $ 18,205 $ 11,647 $ 3,030 December 31, 2022 December 31, 2021 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 $ 814 $ — $ 1,505 $ 6 Commercial mortgages: Construction 71 — 159 6 Commercial mortgages 4,211 14 4,650 30 Residential mortgages 864 37 1,015 40 Consumer loans: Home equity lines & loans 153 — 273 7 With an allowance recorded: Commercial and agricultural: Commercial and industrial 1,453 5 1,505 8 Commercial mortgages: Commercial mortgages 1,258 — 2,236 49 Consumer loans: Home equity lines and loans 137 — 157 — Total $ 8,961 $ 56 $ 11,500 $ 146 (1) Cash basis interest income approximates interest income recognized. F-24 The following table presents 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, 2022 and December 31, 2021 (in thousands): Non-accrual Loans Past Due 90 Days or More and Still Accruing 2022 2021 2022 2021 Commercial and agricultural: Commercial and industrial $ 1,946 $ 1,932 $ 1 $ 4 Commercial mortgages: Construction 5 34 — — Commercial mortgages 3,928 3,844 — — Residential mortgages 986 1,039 — — Consumer loans: Home equity lines and loans 760 790 — — Indirect consumer loans 540 462 — — Direct consumer loans 13 13 — — Total $ 8,178 $ 8,114 $ 1 $ 4 F-25 The following tables present the aging of the recorded investment in loans as of December 31, 2022 and December 31, 2021 (in thousands): December 31, 2022 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 $ 74 $ 3 $ 1 $ 78 $ 252,963 $ 253,041 Agricultural — — — — 250 250 Commercial mortgages: Construction — — — — 108,671 108,671 Commercial mortgages 1,066 — 486 1,552 890,638 892,190 Residential mortgages 1,386 715 294 2,395 284,050 286,445 Consumer loans: Home equity lines and loans 194 122 442 758 80,944 81,702 Indirect consumer loans 1,407 195 250 1,852 200,738 202,590 Direct consumer loans 2 19 1 22 11,085 11,107 Total $ 4,129 $ 1,054 $ 1,474 $ 6,657 $ 1,829,339 $ 1,835,996 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 F-26 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. As of December 31, 2022 and 2021, the Corporation has a recorded investment in TDRs of $ 5.4 million and $ 10.3 million, respectively. There were specific reserves of $ 0.2 million allocated for TDRs at December 31, 2022 and $ 1.9 million allocated at December 31, 2021. As of December 31, 2022, TDRs totaling $ 1.4 million were accruing interest under the modified terms and $ 4.0 million were on non-accrual status. 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. The Corporation has committed no additional amounts to customers with outstanding loans that are classified as TDRs as of December 31, 2022 and 2021. During the year ended December 31, 2022 there were no loans that were modified as TDRs. During the year ended December 31, 2021, the terms and conditions of two commercial and industrial loans 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. The following table presents loans by class modified as troubled debt restructurings that occurred during the year ended December 31, 2021 (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 in charge offs during the year ended December 31, 2021. 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 years ended December 31, 2022 and December 31, 2021, within twelve months following the modification. 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. F-27 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. 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, 2022 and 2021, the risk category of the recorded investment of loans by class of loans is as follows (in thousands): December 31, 2022 Not Rated Pass Special Mention Substandard Doubtful Total Commercial and agricultural: Commercial and industrial $ — $ 235,900 $ 13,349 $ 2,899 $ 893 $ 253,041 Agricultural — 250 — — — 250 Commercial mortgages: Construction — 108,488 178 5 — 108,671 Commercial mortgages — 860,389 23,938 7,825 38 892,190 Residential mortgages 285,459 — 986 — 286,445 Consumer loans Home equity lines and loans 80,942 — — 760 — 81,702 Indirect consumer loans 202,050 — — 540 — 202,590 Direct consumer loans 11,094 — — 13 — 11,107 Total $ 579,545 $ 1,205,027 $ 37,465 $ 13,028 $ 931 $ 1,835,996 F-28 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 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. The following table presents the recorded investment in residential and consumer loans based on payment activity as of December 31, 2022 and 2021 (in thousands): December 31, 2022 Consumer Loans Residential Mortgages Home Equity Lines and Loans Indirect Consumer Loans Other Direct Consumer Loans Performing $ 285,459 $ 80,942 $ 202,050 $ 11,094 Non-Performing 986 760 540 13 Total $ 286,445 $ 81,702 $ 202,590 $ 11,107 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 F-29 (5) PREMISES AND EQUIPMENT Premises and equipment at December 31, 2022 and 2021 are as follows (in thousands): 2022 2021 Land $ 4,674 $ 4,710 Buildings 40,419 40,726 Projects in progress 82 5 Equipment and furniture 36,964 37,183 Leasehold improvements 4,874 5,318 87,013 87,942 Less accumulated depreciation and amortization 70,900 69,973 Net book value $ 16,113 $ 17,969 Depreciation expense was $ 2.2 million and $ 2.5 million for 2022 and 2021, respectively. Capital Leases The Corporation leases certain buildings under capital leases. The lease arrangements require monthly payments through 2036. The Corporation has included these capital leases in premises and equipment as follows: 2022 2021 Buildings $ 5,572 $ 5,572 Accumulated depreciation ( 2,540 ) ( 2,208 ) Net book value $ 3,032 $ 3,364 F-30 (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, 2022, the weighted average remaining lease term was 8.6 years with a weighted average discount rate of 3.35 %. Rent expense was 1.0 million for each of the years ended December 31, 2022 and 2021, 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, 2022 and December 31, 2021 consist of the following (in thousands): December 31, 2022 December 31, 2021 Operating lease right-of-use asset $ 7,234 $ 7,145 Less: accumulated amortization ( 785 ) ( 759 ) Less: lease termination — ( 313 ) Add: new lease agreement and modifications $ — $ 1,161 Operating lease right-of-use-assets, net $ 6,449 $ 7,234 The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of December 31, 2022 (in thousands): Year Amount 2023 $ 992 2024 924 2025 841 2026 845 2027 854 2028 and thereafter 3,167 Total minimum lease payments 7,623 Less: amount representing interest ( 1,003 ) Present value of net minimum lease payments $ 6,620 As of December 31, 2022, 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, 2022, the weighted average remaining lease term was 10.2 years years with a weighted average discount rate of 3.39 %. The Corporation has included these leases in premises and equipment as of December 31, 2022 and December 31, 2021. F-31 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, 2022 (in thousands): Year Amount 2023 $ 391 2024 391 2025 409 2026 425 2027 428 2028 and thereafter 1,988 Total minimum lease payments 4,032 Less: amount representing interest ( 705 ) Present value of net minimum lease payments $ 3,327 As of December 31, 2022, 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, 2022 and 2021 were as follows (in thousands): 2022 2021 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, 2022 and 2021 (in thousands): At December 31, 2022 At December 31, 2021 Balance Acquired Accumulated Amortization Balance Acquired Accumulated Amortization Core deposit intangibles $ 5,975 $ 5,974 $ 5,975 $ 5,974 Other customer relationship intangibles 5,633 5,634 5,633 5,619 Total $ 11,608 $ 11,608 $ 11,608 $ 11,593 Aggregate amortization expense was $ 15 thousand and $ 0.2 million for 2022 and 2021, respectively. There is no remaining estimated aggregate amortization expense at December 31, 2022. F-32 (8) DEPOSITS A summary of deposits at December 31, 2022 and 2021 is as follows (in thousands): 2022 2021 Non-interest-bearing demand deposits $ 733,329 $ 739,607 Interest-bearing demand deposits 271,645 284,721 Money market accounts 640,840 654,553 Savings deposits 279,029 280,195 Certificates of deposits $250,000 or less 272,182 141,990 Certificates of deposits greater than $250,000 31,547 27,974 One-way brokered deposits 1 73,452 — Other time deposits 2 25,203 26,393 Total $ 2,327,227 $ 2,155,433 __________________________________________________________ 1 Brokered deposits which are individually $250,000 and under. 2 Includes Individual Retirement Accounts and Christmas Club Accounts. Total customer deposits include reciprocal balances from checking, money market deposits and CDs received from participating banks in nationwide deposit networks as a result of our customers electing to participate in Corporate offered ICS/CDARS programs allowing enhanced FDIC insurance protection. In general, the equivalent of the customers' original deposited funds comes back to the Corporation and are carried within the time deposits category. Scheduled maturities of time deposits at December 31, 2022, are summarized as follows (in thousands): Year Maturities 2023 1 303,719 2024 75,324 2025 10,702 2026 5,998 2027 2,784 2028 3,857 Total $ 402,384 __________________________________________________ 1 $ 73.5 million of 2023 maturities represent brokered deposits. Time deposits that meet or exceed the FDIC Insurance limit of $250 thousand at December 31, 2022 and 2021 were $ 36.4 million and $ 28.8 million, respectively. F-33 (9) FEDERAL HOME LOAN BANK TERM ADVANCES AND OVERNIGHT ADVANCES FHLBNY overnight advances totaled $ 95.8 million and $ 14.6 million as of December 31, 2022 and 2021, respectively. The Corporation held no fixed rate term advances as of December 31, 2022 and 2021, respectively. The following is a summary of FHLBNY overnight advances as of December 31, 2022 and 2021. The carrying amount includes the advance balance plus purchase accounting adjustments that are amortized over the term of the advance (in thousands): 2022 2021 Amount Rate Maturity Date Amount Rate Maturity Date $ 95,810 4.61 % January 3, 2023 $ 14,570 0.34 % January 3, 2022 The Bank has pledged $ 228.4 million and $ 204.2 million of first mortgage loans under a blanket lien arrangement at December 31, 2022 and 2021, respectively, as collateral for future borrowings. Based on this collateral and additional securities held, the Bank's unused borrowing capacity at the FHLBNY was $ 99.8 million at December 31, 2022. (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, 2022 and 2021 (in thousands). Items outside the scope of ASC 606 are noted as such. Year ended December 31, 2022 Revenue by Operating Segment: Core Banking WMG Holding Company, CFS, and CRM (b) Total Non-interest income Service charges on deposit accounts Overdraft fees 3,084 — — 3,084 Other 704 — — 704 Interchange revenue from debit card transactions 4,603 — — 4,603 WMG fee income — 10,280 — 10,280 CFS fee and commission income — — 1,079 1,079 Net gains (losses) on sales of OREO 60 — — 60 Net gains on sales of loans (a) 107 — — 107 Loan servicing fees (a) 153 — — 153 Change in fair value of equity securities (a) ( 353 ) — 4 ( 349 ) Income from bank-owned life insurance (a) 46 — — 46 Other (a) 1,821 — ( 152 ) 1,669 Total non-interest income $ 10,225 $ 10,280 $ 931 $ 21,436 (a) Not within scope of ASC 606. (b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments. F-34 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. 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. F-35 (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, 2022, the Corporation held derivatives not designated as hedging instruments with a total notional amount of $ 545.0 million. Derivatives not designated as hedging instruments included back-to-back interest rate swaps of $ 531.2 million, consisting of $ 265.6 million of interest rate swaps with commercial borrowers and an additional $ 265.6 million of offsetting interest rate swaps with third-party counter-parties on substantially the same terms, and risk participation agreements with dealer banks of $ 13.8 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. The following table presents information regarding our derivative financial instruments, at December 31: 2022 Number of Instruments Notional Amount Weighted Average Maturity (in years) Weighted Average Interest Rate Received Weighted Average Contract Pay Rate Fair Value Derivatives not designated as hedging instruments: Interest rate swap agreements on loans with commercial loan customers 42 $ 265,619 7.1 3.94 % 6.35 % $ ( 27,141 ) Interest rate swap agreements with third-party counter-parties 42 265,619 7.1 6.35 % 3.94 % 27,196 Risk participation agreements 3 13,764 9.6 — Total 87 $ 545,002 $ 55 2021 Number of Instruments Notional Amount Weighted Average Maturity (in years) Weighted Average Interest Rate Received Weighted Average Contract Pay Rate Fair Value 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 ) 74 $ 490,012 $ ( 228 ) There was no off-balance sheet exposure for the risk participation agreements as of December 31, 2022, and $ 0.5 million for December 31, 2021. F-36 Amounts included in the Consolidated Statements of Income related to derivatives not designated as hedging were as follows: Years Ended December 31, 2022 2021 Derivatives not designated as hedging instruments: Interest rate swap agreements with commercial loan customers: Unrealized (loss) recognized in non-interest income $ ( 17,430 ) $ 5,313 Interest rate swap agreements with third-party counter-parties: Unrealized gain recognized in non-interest income 17,698 ( 5,204 ) Risk participation agreements: Unrealized gain (loss) recognized in non-interest income 15 20 Unrealized gain (loss) recognized in non-interest income $ 283 $ 129 ( 12) INCOME TAXES For the years ended December 31, 2022 and 2021, income tax expense attributable to income from operations consisted of the following (in thousands): 2022 2021 Current expense: Federal $ 5,501 $ 5,732 State 883 1,033 Total current 6,384 6,765 Deferred expense/(benefit): Federal 1,365 527 State 357 43 Total deferred 1,722 570 Income tax expense $ 8,106 $ 7,335 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): 2022 2021 Statutory federal tax rate 21 % 21 % Tax computed at statutory rate $ 7,747 $ 7,090 Increase (reduction) resulting from: Tax-exempt income ( 434 ) ( 380 ) 831(b) premium adjustment ( 309 ) ( 291 ) Dividend exclusion ( 7 ) ( 8 ) State taxes, net of Federal impact 988 803 Nondeductible interest expense 8 4 Other items, net 113 117 Income tax expense $ 8,106 $ 7,335 Effective tax rate 22.0 % 21.7 % The higher tax expense in 2022 when compared to 2021 can be attributed to an increase in pretax income. F-37 The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2022 and 2021, are presented below (in thousands): 2022 2021 Deferred tax assets: Allowance for loan losses $ 5,147 $ 5,546 Depreciation 1,133 979 Deferred compensation and directors' fees 1,128 1,130 Operating lease liabilities 1,688 1,976 Purchase accounting adjustment – fixed assets 153 153 Net unrealized losses on securities available for sale 25,310 886 Defined benefit pension and other benefit plans 1,320 1,347 Nonaccrued interest 415 473 Accrued expense 117 139 Other items, net 112 127 Total gross deferred tax assets 36,523 12,756 Deferred tax liabilities: Deferred loan fees and costs 1,358 355 Prepaid pension 4,055 3,715 Discount accretion 108 78 Core deposit intangible 1,733 1,556 REIT dividend 561 608 Operating lease right-of-use assets 1,688 1,976 Accrual for employee benefit plans 5 3 Other 219 344 Total gross deferred tax liabilities 9,727 8,635 Net deferred tax asset $ 26,796 $ 4,121 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, 2022 and 2021, 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, 2022 and 2021, 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 2019 and for New York State taxing authorities for the year prior to 2019. New York State taxing authorities recently completed audits of the Corporation for the years 2018, 2019, and 2020. There were no adjustments as a result of the New York State audits. F-38 (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, 2022 and 2021 (in thousands): Change in projected benefit obligation: 2022 2021 Benefit obligation at beginning of year $ 40,404 $ 42,781 Service cost — — Interest cost 1,130 1,084 Actuarial (gain) loss ( 8,856 ) ( 1,300 ) Curtailments — — Settlements — — Benefits paid ( 2,172 ) ( 2,161 ) Benefit obligation at end of year $ 30,506 $ 40,404 Change in plan assets: 2022 2021 Fair value of plan assets at beginning of year $ 52,987 $ 50,134 Actual return on plan assets ( 6,159 ) 5,014 Employer contributions — — Settlements — — Benefits paid ( 2,172 ) ( 2,161 ) Fair value of plan assets at end of year $ 44,656 $ 52,987 Funded status $ 14,150 $ 12,583 Amount recognized in accumulated other comprehensive income (loss) at December 31, 2022 and 2021 consist of the following (in thousands): 2022 2021 Net actuarial loss $ 4,988 $ 4,833 Prior service cost — — Total before tax effects $ 4,988 $ 4,833 The accumulated benefit obligation at December 31, 2022 and 2021 was $ 30.5 million and $ 40.4 million, respectively. Actuarial losses in the Projected Benefit Obligation (PBO) in 2022 were primarily the result of the increase in discount rate. The increase in discount rate caused the PBO to decrease by $ 9.2 million. The update in mortality table caused the PBO to increase by $ 0.2 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-39 The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2022 and 2021 were as follows: 2022 2021 Discount rate 5.42 % 2.87 % 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 2022 and 2021 consist of the following (in thousands): Net periodic benefit cost 2022 2021 Service cost, benefits earned during the year $ — $ — Interest cost on projected benefit obligation 1,130 1,084 Expected return on plan assets ( 2,851 ) ( 2,696 ) Amortization of net loss 151 Amortization of prior service cost — — Recognized (gain) loss due to settlements — — Net periodic cost (benefit) $ ( 1,721 ) $ ( 1,461 ) Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): 2022 2021 Net actuarial (gain) loss $ 154 $ ( 3,618 ) Recognized loss — ( 151 ) Amortization of prior service cost — — Total recognized in other comprehensive income (loss) (before tax effect) $ 154 $ ( 3,769 ) Total recognized in net (benefit) cost and other comprehensive income (loss) (before tax effect) $ ( 1,567 ) $ ( 5,230 ) During 2022, the plan's total unrecognized net loss increased by $ 0.2 million. The variance between the actual and expected return on plan assets during 2022 increased the total unrecognized net loss by $ 9.0 million. Because the total unrecognized net gain or loss in the plan exceeds 10 % of the projected benefit obligation or 10 % of the plan assets, the excess will be amortized over the average future working lifetime of the plan participants. As of January 1, 2022, the average expected future working lifetime active plan participants was 22.55 years. Actual results for 2023 will depend on the 2023 actuarial valuation of the plan. The principal actuarial assumptions used in determining the net periodic benefit cost for the years ended December 31, 2022, 2021 were as follows: 2022 2021 Discount rate 2.87 % 2.61 % 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, 2022 the Corporation used IRS Static 2023 Mortality Table with Mortality Improvement Scale MP-2021 as a basis for the Plan's valuation. 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. 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-40 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 2023, 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 2022 Percentage of Plan Assets at December 31, Expected Long-Term Rate of Return 2022 2021 Large cap domestic equities 30 % - 60 % 39 % 42 % 9.3 % Mid-cap domestic equities 0 % - 8 % 2 % — % 9.7 % Small-cap domestic equities 0 % - 6 % 1 % 5 % 8.2 % International equities 0 % - 8 % 3 % 4 % 9.4 % Intermediate fixed income 33 % - 63 % 43 % 45 % 2.9 % Alternative assets 0 % - 15 % — % — % — % Cash 0 % - 20 % 12 % 4 % 0.9 % 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, 2022 and 2021, 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-41 The fair value of the plan assets at December 31, 2022 and 2021, by asset class are as follows (in thousands): Fair Value Measurement atDecember 31, 2022 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 $ 5,374 $ 5,374 $ — $ — Equity securities: U.S. companies 17,526 17,526 — — Mutual funds 19,619 19,619 — — Debt securities: U.S. Treasuries/Government bonds 1,891 1,891 — — U.S. Corporate bonds 246 246 — — Total plan assets $ 44,656 $ 44,656 $ — $ — 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 $ — $ — 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 2023 $ 2,357 2024 $ 2,363 2025 $ 2,346 2026 $ 2,352 2027 $ 2,339 2028-2032 $ 11,339 F-42 The Corporation does not expect to contribute to the plan during 2023. 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 $ 1.4 million and $ 1.3 million for the years ended December 31, 2022 and 2021, respectively. The plan's assets at December 31, 2022 and 2021 include 121,847 and 118,081 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, 2022 and 2021 (in thousands): Changes in accumulated postretirement benefit obligation: 2022 2021 Accumulated postretirement benefit obligation - beginning of year $ 194 $ 249 Service cost — — Interest cost 3 6 Participant contributions 18 20 Amendments — — Actuarial (gain) loss ( 71 ) ( 37 ) Benefits paid ( 49 ) ( 44 ) Accumulated postretirement benefit obligation at end of year $ 95 $ 194 Change in plan assets: 2022 2021 Fair value of plan assets at beginning of year $ — $ — Employer contribution 31 24 Plan participants’ contributions 18 20 Benefits paid ( 49 ) ( 44 ) Fair value of plan assets at end of year $ — $ — Unfunded status $ ( 95 ) $ ( 194 ) F-43 Amount recognized in accumulated other comprehensive income (loss) at December 31, 2022 and 2021 consist of the following (in thousands): 2022 2021 Net actuarial loss $ 118 $ 208 Prior service credit — — Total before tax effects $ 118 $ 208 Weighted-average assumption for disclosure as of December 31: 2022 2021 Discount rate 5.42 % 2.87 % Assumed rate of future compensation increase N/A N/A Health care cost trend: Initial (Pre-65/Post 65) 7.50 % / 6.50 % 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 2032 / 2030 2027 The components of net periodic postretirement benefit cost for the years ended December 31, 2022 and 2021 are as follows (in thousands): Net periodic cost (benefit) 2022 2021 Service cost $ — $ — Interest cost 3 6 Expected return on plan assets — — Amortization of prior service benefit ( 220 ) Recognized actuarial loss 18 42 Recognized prior service benefit due to curtailments — — Net periodic postretirement cost (benefit) $ 21 $ ( 172 ) Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): 2022 2021 Net actuarial (gain) loss $ ( 71 ) $ ( 37 ) Recognized actuarial loss ( 18 ) ( 42 ) Prior service credit — — Amortization of prior service benefit — 220 Total recognized in other comprehensive income (loss)(before tax effect) $ ( 89 ) $ 141 Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect) $ ( 68 ) $ ( 31 ) Actuarial gain for 2022 is primarily the net impact of an increase in discount rate, which decreased the Accumulated Postretirement Benefit Obligation (APBO) by $ 12 thousand, the updating of health care trend rates (HCTR), which increased the APBO by $ 4 thousand, and claims and data experience, which (combined) decreased the APBO by $ 64 thousand. During 2022 the plan's total unrecognized net loss decreased by $ 90 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, 2022, the average future life expectancy of all plan participants was 7.0 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 2023 will depend on the 2023 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 2022, the unrecognized net loss decreased by 46 % of the December 31, 2021 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-44 Weighted-average assumptions for net periodic cost as of December 31: 2022 2021 Discount rate 2.87 % 2.61 % 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 2027 2026 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 2023 $ 27 2024 $ 11 2025 $ 11 2026 $ 10 2027 $ 10 2028-2032 $ 36 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 2023 is $ 27 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, 2022 and 2021. 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, 2022 and 2021 (in thousands): Change in projected benefit obligation: 2022 2021 Benefit obligation at beginning of year $ 1,173 $ 1,251 Service cost — — Interest cost 32 31 Actuarial (gain) loss ( 148 ) — Benefits paid ( 109 ) ( 109 ) Projected benefit obligation at end of year $ 948 $ 1,173 Changes in plan assets: 2022 2021 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 $ ( 948 ) $ ( 1,173 ) F-45 Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2022 and 2021 consist of the following (in thousands): 2022 2021 Net actuarial loss $ 172 $ 339 Prior service cost — — Total before tax effects $ 172 $ 339 Accumulated benefit obligation at December 31, 2022 and 2021 was $ 0.9 million and $ 1.2 million, respectively. Weighted-average assumption for disclosure as of December 31: 2022 2021 Discount rate 5.42 % 2.87 % 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, 2022 and 2021 are as follows (in thousands): Net periodic benefit cost 2022 2021 Service cost $ — $ — Interest cost 32 31 Recognized actuarial loss 19 19 Net periodic postretirement benefit cost $ 51 $ 50 Other changes in plan assets and benefit obligation recognized in other comprehensive income (loss): 2022 2021 Net actuarial (gain) loss $ ( 148 ) $ — Recognized actuarial loss ( 20 ) ( 19 ) Total recognized in other comprehensive income (loss) (before tax effect) $ ( 168 ) $ ( 19 ) Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect) $ ( 117 ) $ 31 During 2022, there was a $ 182 thousand decrease in the projected benefit obligation as a result of the increase in discount rate. Offsetting this was a mortality increase of $ 7 thousand, due to the update in the mortality assumption. There was also a $ 27 thousand increase in PBO due to participant mortality (longevity) experience. There were no other significant sources of gain or loss during 2022. During 2022, the plan's total unrecognized net loss decreased by $ 167 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, 2023, the average future life expectancy of plan participants was 10.86 years. Weighted-average assumptions for net periodic cost as of December 31: 2022 2021 Discount rate 2.87 % 2.61 % 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 F-46 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. The change in unrecognized net gain or loss is one measure of the degree to which important assumptions have coincided with actual experience. During 2022 the unrecognized net loss decreased 14.3 % of the December 31, 2021 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 2023 $ 108 2024 $ 106 2025 $ 102 2026 $ 98 2027 $ 94 2028-2032 $ 390 The Corporation expects to contribute $ 110 thousand to the plan during 2023. 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 increase, 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, 2022 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, 2022 and 2021 was $ 2.9 million and $ 2.4 million, respectively. A total of $ 0.5 million and $ 0.4 million was expensed during the years ended December 31, 2022 and 2021, respectively. In addition to each participants account being credited with the annual company contribution, each account will receive a quarterly interest credit that will be calculated based upon 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. F-47 During 2022 and 2021, a total of 33,586 and 20,763 shares, respectively, were re-issued from treasury to fund stock compensation. The expense related to the grants was $ 1.2 million and $ 0.5 million for 2022 and 2021, respectively. During January 2023 and 2022, 13,069 and 12,560 shares, respectively, were granted and re-issued from treasury to fund the stock component of the Directors' and the Chief Executive Officer’s compensation. The Corporation recognized $ 0.5 million of expense related to these grants in 2022. Due to the transition to the new Plan, there was no expenses recognized for these grants in 2021. For 2023 grants, the expense related to this compensation will be recognized over the one year vesting period. A summary of restricted stock activity as of December 31, 2022, and changes during the year ended is presented below: Shares Weighted–Average Grant Date Fair Value Nonvested at December 31, 2021 37,837 $ 42.99 Granted 33,586 45.92 Vested ( 15,126 ) 43.83 Forfeited or Cancelled ( 895 ) 41.02 Nonvested at December 31, 2022 55,402 $ 44.57 As of December 31, 2022, there was $ 1.4 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 3.98 years. The total fair value of shares vested during the years ended December 31, 2022 and 2021 were $ 672 thousand and $ 620 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, 2022 and 2021 (in thousands): 2022 2021 Balance at beginning of year $ 51,192 $ 56,052 New loans or additional advances 990 2,642 Effect of changes in composition of related parties ( 22,607 ) ( 122 ) Repayments ( 1,513 ) ( 7,380 ) Balance at end of year $ 28,062 $ 51,192 Deposits from principal officers, directors, and their affiliates at December 31, 2022 and 2021 were $ 28.4 million and $ 46.7 million, respectively. The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through July 2024 from a former member of the Corporation's Board of Directors with monthly rent and CAM expenses totaling $ 4 thousand per month. This Board member retired from the Corporation's Board of Directors as of June 7, 2022. Rent and CAM paid to this Board member while serving on the Board totaled $ 25 thousand and $ 50 thousand for the years ended December 31, 2022 and 2021, respectively. The Bank leases 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 and CAM expense totaling $ 8 thousand per month. Rent and CAM paid to this Board member totaled $ 102 thousand and $ 101 thousand for the years ended December 2022 and 2021, 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 $ 0.6 million and $ 0.7 million for the years ended December 31, 2022 and 2021, respectively. F-48 (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): 2022 2021 Fixed Rate Variable Rate Fixed Rate Variable Rate Commitments to make loans $ 44,481 $ 75,028 $ 20,772 $ 46,558 Unused lines of credit $ 2,887 $ 326,188 $ 4,745 $ 288,368 Standby letters of credit $ — $ 17,211 $ — $ 7,974 Commitments to make real estate and home equity loans are generally made for periods of sixty days or less. As of December 31, 2022, the fixed rate real estate and home equity commitments to make loans have interest rates ranging from 5.00 % to 7.25 % 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, 2022, the fixed rate commercial draw commitments have interest rates ranging from 2.79 % to 6.91 %. 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 $ 17.2 million at December 31, 2022 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, 2022 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-49 (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 2022 2021 Assets: Cash on deposit with subsidiary bank $ 2,708 $ 2,473 Investment in subsidiary - Chemung Canal Trust Company 157,493 203,373 Investment in subsidiary - CFS Group, Inc. 1,294 1,074 Investment in subsidiary - Chemung Risk Management, Inc. 2,887 2,661 Dividends receivable from subsidiary bank 1,455 1,450 Securities available for sale, at estimated fair value 329 391 Other assets 1,728 1,517 Total assets $ 167,894 $ 212,939 Liabilities and shareholders' equity: Dividends payable $ 1,455 $ 1,450 Other liabilities 51 34 Total liabilities 1,506 1,484 Shareholders' equity: Total shareholders' equity 166,388 211,455 Total liabilities and shareholders' equity $ 167,894 $ 212,939 STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31 2022 2021 Dividends from subsidiary bank and non-bank $ 7,051 $ 6,854 Interest and dividend income 7 4 Non-interest income 10 85 Non-interest expenses 586 432 Income before impact of subsidiaries' undistributed earnings 6,482 6,511 Equity in undistributed earnings of Chemung Canal Trust Company 21,638 19,492 Equity in undistributed earnings of CFS Group, Inc. 220 198 Equity in undistributed earnings of Chemung Risk Management, Inc. 250 98 Income before income tax 28,590 26,299 Income tax benefit ( 193 ) ( 126 ) Net income $ 28,783 $ 26,425 F-50 STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31 2022 2021 Cash flows from operating activities: Net Income $ 28,783 $ 26,425 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings of Chemung Canal Trust Company ( 21,638 ) ( 19,492 ) Equity in undistributed earnings of CFS Group, Inc. ( 220 ) ( 198 ) Equity in undistributed earnings of Chemung Risk Management, Inc. ( 250 ) ( 98 ) Change in dividend receivable ( 5 ) ( 236 ) Change in other assets ( 211 ) ( 97 ) Change in other liabilities ( 733 ) ( 252 ) Expense related to employee stock compensation — 132 Expense related to restricted stock units directors' deferred compensation plan 20 19 Expense to employee restricted stock awards 795 535 Net cash provided by operating activities 6,541 6,738 Cash flow from financing activities: Cash dividends paid ( 5,797 ) ( 5,318 ) Purchase of treasury stock ( 933 ) ( 1,616 ) Sale of treasury stock 424 426 Net cash used in financing activities ( 6,306 ) ( 6,508 ) Increase (decrease) in cash and cash equivalents 235 230 Cash and cash equivalents at beginning of year 2,473 2,243 Cash and cash equivalents at end of year $ 2,708 $ 2,473 (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-51 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 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 participation are based on credit default rate assumptions (Level 3 inputs). F-52 Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands): Fair Value Measurement at December 31, 2022 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 $ 55,574 $ 55,574 $ — $ — Mortgage-backed securities, residential $ 435,131 $ — $ 435,131 $ — Obligations of states and political subdivisions 38,892 — 38,892 — Corporate bonds and notes 21,970 — 21,970 — SBA loan pools 81,022 — 81,022 — Total available for sale securities $ 632,589 $ 55,574 $ 577,015 $ — Equity Investments $ 2,246 $ 2,246 $ — $ — Derivative assets 27,141 — 27,141 — Financial Liabilities: Derivative liabilities $ 27,196 $ — $ 27,196 $ — 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 9,711 — 9,711 — Financial Liabilities: Derivative liabilities $ 9,498 $ — $ 9,498 $ — There were no transfers between Level 1 and Level 2 during the twelve month periods ending December 31, 2022 and 2021. F-53 FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying amounts and estimated fair values of other financial instruments, at December 31, 2022 and December 31, 2021, are as follows (in thousands): Fair Value Measurements at December 31, 2022 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 $ 29,309 $ 29,309 $ — $ — $ 29,309 Interest-bearing deposits in other financial institutions 26,560 26,560 — — 26,560 Equity investments 2,830 2,830 — — 2,830 Securities available for sale 632,589 55,574 577,015 — 632,589 Securities held to maturity 2,424 — 1,450 952 2,402 FHLBNY and FRBNY stock 8,197 — — — N/A Loans, net and loans held for sale 1,809,789 — — 1,757,171 1,757,171 Accrued interest receivable 8,682 132 2,002 6,548 8,682 Derivative assets 27,141 — 27,141 — 27,141 Financial liabilities: Deposits: Demand, savings, and insured money market accounts $ 1,924,843 $ 1,924,843 $ — $ — $ 1,924,843 Time deposits 402,384 — 403,572 — 403,572 Accrued interest payable 864 66 798 — 864 Derivative liabilities 27,196 — 27,196 — 27,196 (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, 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 9,711 — 9,711 — 9,711 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 9,498 — 9,498 — 9,498 (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 of 2.5 % 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, 2022, 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, 2022, 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, 2022, 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 2023, the Bank could, without prior approval, declare dividends of approximately $ 49.3 million plus any 2023 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, 2022 Amount Ratio Amount Ratio Amount Ratio Amount Ratio Total Capital (to Risk Weighted Assets): Consolidated $ 239,478 12.57 % N/A N/A N/A N/A N/A N/A Bank $ 230,560 12.10 % $ 152,414 8.00 % $ 200,044 10.50 % $ 190,518 10.00 % Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 219,820 11.54 % N/A N/A N/A N/A N/A N/A Bank $ 210,901 11.07 % $ 114,311 6.00 % $ 161,940 8.50 % $ 152,414 8.00 % Common Equity Tier 1 Capital (to Risk Weighted Assets): Consolidated $ 219,820 11.54 % N/A N/A N/A N/A N/A N/A Bank $ 210,901 11.07 % $ 85,733 4.50 % $ 133,363 7.00 % $ 123,837 6.50 % Tier 1 Capital (to Average Assets): Consolidated $ 219,820 8.23 % N/A N/A N/A N/A N/A N/A Bank $ 210,901 7.91 % $ 106,616 4.00 % N/A N/A $ 133,270 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, 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 % 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, 2022 $ ( 2,495 ) $ ( 4,035 ) $ ( 6,530 ) Other comprehensive income before reclassification ( 68,801 ) 47 ( 68,754 ) Amounts reclassified from accumulated other comprehensive income (loss) — 27 27 Net current period other comprehensive income (loss) ( 68,801 ) 74 ( 68,727 ) Balance at December 31, 2022 $ ( 71,296 ) $ ( 3,961 ) $ ( 75,257 ) 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 (loss) 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 ) 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 2022 2021 Amortization of defined pension plan and other benefit plan items: Prior service costs (a) — ( 220 ) Other components of net periodic pension and postretirement benefits Actuarial losses (a) 38 212 Other components of net periodic pension and postretirement benefits Tax effect ( 11 ) 1 Income tax expense Total reclassification for the period, net of tax $ 27 $ ( 7 ) (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, 2022 Core Banking WMG Holding Company, CFS and CRM Consolidated Totals Interest and dividend income $ 81,425 $ — $ 50 $ 81,475 Interest expense 7,296 — — 7,296 Net interest income 74,129 — 50 74,179 Provision for loan losses ( 554 ) — — ( 554 ) Net interest income after provision for loan losses 74,683 — 50 74,733 Non-interest income 10,225 10,280 931 21,436 Non-interest expenses 51,301 6,582 1,397 59,280 Income (loss) before income tax expense 33,607 3,698 ( 416 ) 36,889 Income tax expense (benefit) 7,361 851 ( 106 ) 8,106 Segment net income (loss) $ 26,246 $ 2,847 $ ( 310 ) $ 28,783 Segment assets $ 2,635,043 $ 2,559 $ 7,951 $ 2,645,553 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 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 22, 2023 By: /s/ Anders M. Tomson Anders M. Tomson, President and Chief Executive Officer (Principal Executive Officer) DATED: MARCH 22, 2023 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 22, 2023 Raimundo C. Archibold, Jr. /s/ Ronald M. Bentley Director March 22, 2023 Ronald M. Bentley /s/ David M. Buicko Director March 22, 2023 David M. Buicko /s/ David J. Dalrymple Director and Chairman of the Board of Directors March 22, 2023 David J. Dalrymple /s/ Robert H. Dalrymple Director March 22, 2023 Robert H. Dalrymple /s/ Richard E. Forrestel, Jr. Director March 22, 2023 Richard E. Forrestel, Jr. /s/ Denise V. Gonick Director March 22, 2023 Denise V. Gonick /s/ Stephen M. Lounsberry, III Director March 22, 2023 Stephen M. Lounsberry, III /s/ Joseph F. Meade, IV Director March 24, 2023 Joseph F. Meade, IV /s/ Jeffrey B. Streeter Director March 22, 2023 Jeffrey B. Streeter (Signatures, continued) F-59 Signature Title Date /s/ G. Thomas Tranter, Jr. Director March 22, 2023 G. Thomas Tranter, Jr. /s/ Thomas R. Tyrrell Director March 22, 2023 Thomas R. Tyrrell /s/ Anders M. Tomson Chief Executive Officer and President March 22, 2023 Anders M. Tomson /s/ Karl F. Krebs Chief Financial Officer and Treasurer March 22, 2023 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 August 17, 2022 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K and filed with the Commission on August 17, 2022). 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 Form of Restricted Stock Award Agreement (filed as Exhibit 10.4 to Registrant's Registration Statement on Form S-8 (333-257227) filed with the Commission on June 21, 2021 and incorporated herein by reference). 10.13 Chemung Canal Trust Company Defined Contribution Supplemental Executive Retirement Plan, (as incorporated by reference to Exhibit 10.12 to Registrant's Form 10-K for the year ended December 31, 2021 and filed with the Commission on March 23, 2022). 10.14 Chemung Canal Trust Company Defined Contribution Supplemental Executive Retirement Plan-Amendment Number One, as amended on November 16, 2022 (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on November 21, 2022 and incorporated herein by reference). 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.