What changed in this filing

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Item 7. Management’s Discussion and Analysis

2024-03-13 compared with 2023-03-22 · 446 added, 322 removed, 588 unchanged (57% of the section changed)

8 unchanged sentences

For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below.

The Corporation has been a financial holding company since 2000, and the Bank was established in 1833, CFS in 2001, and CRM in 2016.

The Corporation has been a financial holding company since 2000, and the Bank was established in 1833, CFS in 2001, and Chemung Risk Management, Inc.

(CRM) in 2016.

Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services.

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The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans, and general operating expenses.

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 that 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.

CRM, a wholly-owned subsidiary of the Corporation, was formed and began operations on May 31, 2016 as a Nevada-based captive insurance company.

Effective December 6, 2023, the State of Nevada, Department of Business and Industry, and the Division of Insurance, acknowledged the dissolution of Chemung Risk Management, Inc.

Forward-looking Statements

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These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to be correct.

The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing the Corporation’s growth, competition, changes in law or the regulatory environment, and changes in general business and economic trends.

The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, inflation, cybersecurity risks, changes in FDIC assessments, bank failures, difficulties in managing the Corporation’s growth, competition, changes in law or the regulatory environment, and changes in general business and economic trends.

Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A.

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Actual results could be different from these estimates.

Allowance for Loan Losses

Management considers the allowance for loan losses to be a critical accounting estimate given the uncertainty in evaluating the level of allowance required to cover probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations.

Allowance for Credit Losses

Management considers the allowance for credit losses to be a critical accounting estimate, given the uncertainty in estimating lifetime credit losses attributable to its portfolios of assets exhibiting credit risk, particularly in its loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations.

Determining the amount requires significant judgement on the part of management, is multi-faceted, and can be imprecise.

Considerations include use of estimates related to the timing of expected cash flows on impaired loans, estimated losses on pools of homogenous loans based on historical loss experience, implications of current economic trends and conditions, and other qualitative factors, all of which may be susceptible to significant change.

The allowance is established through a provision for loan losses in the Consolidated Statements of Income, and evaluation of the adequacy of the allowance for loan losses is performed by management on a quarterly basis.

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

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

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

It is difficult to estimate how potential changes in any one economic factor may have, or input might affect, the overall allowance because a wide variety of factors and inputs are considered in estimating the allowance, and changes in those factors and inputs considered may not occur at the same rate or be consistent across all product types.

Additionally, changes in factors and inputs may be directionally inconsistent, such that improvement in one factor may offset deterioration in others.

Qualitative factors considered include lending practices & oversight, an array of local and national economic considerations, and other factors pertinent to the credit quality of the portfolio.

In estimating the allowance for loan and lease losses, management considers the sensitivity of the model to the significant judgements and assumptions built in, and the material impact that these assumptions could have on the allowance.

Given the concentration of ALLL allocation to the commercial portfolio, specifically in the area of commercial real estate, management has analyzed a series of economic scenarios to determine the hypothetical impact that changes in the underlying conditions of the commercial real estate portfolio may have on reserve requirements.

Management determined that these scenarios could materially impact ALLL requirements, either positively or adversely.

Real estate values in the Corporation’s market area have not changed dramatically in recent years, primarily appreciating, and, as a result, any declines in real estate values have been modest.

While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would require additional provisions for loan losses.

This analysis helps guide management in making determinations relating to adjustments in the qualitative portion of the allowance.

If the assumptions underlying the determination of the ALLL prove to be incorrect, the allowance may not be sufficient to cover actual loan losses and an increase in the allowance may be necessary to account for different assumptions or adverse developments.

In addition, problems with one or more specific loans could require a significant increase to the ALLL.

Management’s methodology and policy in determining the allowance for loan losses can be found in Note 1 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

The activity in the allowance for loan losses is depicted in supporting tables in Note 4 to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.

Consolidated Financial Highlights

The level of the allowance for credit losses on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions, and expectations of the future based on reasonable and supportable forecasts.

The allowance is established through a provision for credit losses in the Consolidated Statements of Income, and evaluation of the adequacy of the allowance for credit losses is performed by management on a quarterly basis.

While management uses available information to anticipate credit losses, future additions to the allowance may be necessary based on changes in economic conditions or the composition of its portfolios.

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

Because the Corporation's methodology for maintaining its allowance for credit losses is based on historical experience and trends, current economic information, forecasted data, and management's judgement, a range of estimates for the estimate of the allowance for credit losses may be supportable.

Deteriorating conditions may lead to further required increases to the allowance;

conversely, improvements to conditions may warrant further reductions to the allowance.

In estimating the allowance for credit losses, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate, including as it relates to qualitative considerations.

As of December 31, 2023, the allowance for credit losses totaled $22.5 million, compared to an allowance for loan losses of $19.7 million as of December 31, 2022.

A significant portion of the allowance for credit losses is allocated to the commercial portfolio, both commercial real estate and commercial and industrial.

As of December 31, 2023 and December 31, 2022, the allowance for credit losses (allowance for loan losses for December 31, 2022), allocated to the total commercial portfolio was $17.1 million and $14.9 million respectively, or 75.9% and 76.0%.

Given the concentration of the allowance for credit losses allocated to the total commercial real estate and commercial and industrial portfolios, and the significant judgments made by management to derive qualitative factors, management closely analyzes the impact that changes in judgments relating to these portfolios could have on the allowance.

Changes in the FOMC's median forecasted year over year U.S.

civilian unemployment rate and year over year change in U.S GDP could have a material impact on the model's estimation of the allowance.

FOMC projections are sourced from a quarterly Summary of Projections, which accompanies select FOMC meetings.

Each participant's projections represent the value to which selected variables would be expected to converge over time under appropriate monetary policy, and considering all currently available information.

An immediate "shock" or increase of 100 bps in the FOMC's projected rate of U.S.

civilian unemployment, and a decrease of 50 bps in the FOMC's projected rate of U.S.

GDP growth would increase the model's total calculated allowance by $1.5 million, or 6.8%, to $24.0 million, assuming qualitative adjustment are kept at current levels.

While management has concluded that its current evaluation is reasonable under the circumstances, and that sensitivity analysis is based on a series of hypothetical scenarios not intended to represent management’s assumptions or judgement of factors as of December 31, 2023, it has also concluded that differing assumptions could materially impact allowance calculations, either positively or adversely

Management’s methodology and policy in determining the allowance for credit losses can be found in Note 1 to the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K.

The activity in the allowance for credit losses is depicted in supporting tables in Note 4 to the Consolidated Financial Statements included Part IV, Item 15 of this Annual Report on Form 10-K.

Consolidated Financial Highlights (in thousands, except per share data)

As of or for the Years Ended

December 31, December 31,

(in thousands, except per share data) 2022 2021

RESULTS OF OPERATIONS 2023 2022

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Net interest income 74,457 74,179

Provision for loan losses (554) 17

Net interest income after provision for loan losses 74,733 65,572

Provision for credit losses (a) 3,262 (554)

Net interest income after provision for credit losses (a) 71,195 74,733

Non-interest income 24,549 21,436

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Return on average equity 14.11 % 15.93 %

Return on average tangible equity (a) 18.12 % 14.49 %

Efficiency ratio (unadjusted) (f) 62.00 % 62.24 %

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

Return on average tangible equity (b) 16.09 % 18.12 %

Efficiency ratio (unadjusted) (c) 64.89 % 62.00 %

Efficiency ratio (adjusted) (b) 66.20 % 61.71 %

Non-interest expense to average assets 2.41 % 2.37 %

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Total equity to total assets at end of year 7.20 % 6.29 %

Tangible equity to tangible assets at end of year (a) 5.51 % 7.91 %

Tangible equity to tangible assets at end of year (b) 6.45 % 5.51 %

Book value per share $ 41.07 $ 35.32

Tangible book value per share (a) 30.69 40.44

Tangible book value per share (b) 36.48 30.69

Year-end market value per share 49.80 45.87

Dividends declared per share 1.24 1.24

As of or for the Years Ended

December 31, December 31,

(in thousands, except per share data) 2022 2021

AVERAGE BALANCES

Loans (c) $ 1,646,576 $ 1,545,579

Loans (d) $ 1,898,986 $ 1,646,576

Interest-earning assets 2,621,251 2,444,287

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Total equity 177,187 180,684

Tangible equity (a) 158,857 182,314

Tangible equity (b) 155,363 158,857

ASSET QUALITY

Net charge-offs (recoveries) $ 941 $ 812

Non-performing loans (d) 8,178 8,114

Non-performing assets (e) 8,373 8,227

Allowance for loan losses 19,659 21,025

Non-performing loans (e) 10,411 8,178

Non-performing assets (f) 10,737 8,373

Allowance for credit losses (a) 22,517 19,659

Annualized net charge-offs (recoveries) to average loans 0.05 % 0.05 %

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Non-performing assets to total assets 0.40 % 0.32 %

Allowance for loan losses to total loans 1.07 % 1.38 %

Allowance for loan losses to non-performing loans 240.39 % 259.17 %

(a) See the GAAP to Non-GAAP reconciliations on pages 63-66.

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

Loans do not reflect the allowance for loan losses.

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

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

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

Allowance for credit losses to total loans (a) 1.14 % 1.07 %

Allowance for credit losses to non-performing loans (a) 216.28 % 240.39 %

(a) Corporation adopted CECL January 1, 2023.

(d) Includes loans held for sale and does not reflect the ACL.

(b) See the GAAP to Non-GAAP reconciliations Pages 63-66.

(e) Includes non-accrual loans only.

(c) Non-interest expense divided by total of net interest income plus (f) Includes non-performing loans plus other real estate owned.

non-interest income.

Consolidated Results of Operations

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

Years Ended December 31,

2022 2021 Change Percentage Change

Years Ended December 31, Percentage Change

2023 2022 Change

Net interest income $ 74,457 $ 74,179 $ 278 0.4 %

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Pre-provision income 34,763 36,335 (1,572) (4.3) %

Provision for loan losses ( 554 ) 17 (571) N/M

Provision for credit losses (a)

3,262 (554) 3,816 N/M

Income tax expense 6,501 8,106 (1,605) (19.8) %

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Net interest margin, fully taxable equivalent 2.85 % 3.05 %

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

Efficiency ratio (adjusted) (b) 66.20 % 61.71 %

Non-interest expense to average assets 2.41 % 2.37 %

(a) See the GAAP to Non-GAAP reconciliations on pages 63-66

(a) The Corporation adopted CECL on January 1, 2023.

(b) See the GAAP to Non-GAAP reconciliations on pages 63-66

Net income for the year ended December 31, 2023 was $25.0 million, or $5.28 per share, compared with net income of $28.8 million, or $6.13 per share, for the prior year.

Return on average equity for the year ended December 31, 2023 was 14.11%, compared with 15.93% for the prior year.

The increase in net income for the year ended December 31, 2022, compared to the prior year, was driven by an increase in net interest income and a decrease in the provision for loan losses, offset by a decrease in non-interest income and increases in non-interest expenses and income tax expense.

The decrease in net income for the year ended December 31, 2023, compared to the prior year, was due to increases in the provision for credit losses and non-interest expenses, offset by increases in non-interest income and net interest income, and a decrease in income tax expense.

Net Interest Income

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

Years Ended December 31,

2022 2021 Change Percentage Change

Years Ended December 31, Percentage Change

2023 2022 Change

Interest and dividend income $ 113,074 $ 81,475 $ 31,599 38.8 %

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Net interest income $ 74,457 $ 74,179 $ 278 0.4 %

Net interest income, which is the difference between the interest income earned on interest-earning assets such as loans and securities, and the interest expense accrued on interest-bearing liabilities such as deposits and borrowings, is the largest contributor to the Corporation’s earnings.

Net interest income, which is the difference between the interest income earned on interest-earning assets such as loans and securities, and the interest expense recognized on interest-bearing liabilities such as deposits and borrowings, is the largest contributor to the Corporation’s earnings.

Net interest income for the year ended December 31, 2023 totaled $74.5 million, an increase of $0.3 million, or 0.4%, compared with $74.2 million for the prior year.

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The increase in net interest income was primarily due to increases of $29.2 million in interest income on loans, including fees, $2.2 million in interest and dividend income on taxable securities, and $0.3 million in interest income on interest-earning deposits, offset by increases of $29.3 million in interest expense on deposits, and $2.1 million in interest expense on borrowed funds.

The increase in interest income on loans, including fees was due primarily to a 32 basis points increase in the average yield on loans, primarily related to the commercial and consumer loan portfolios due to an increase in interest rates, and a $101.0 million increase in average loan balances, representing increases across all loan categories.

The increase in interest and dividend income on taxable securities was due primarily to a 28 basis points increase in the average yield, due to an increase in interest rates, and an increase in the average invested balances of $83.9 million.

The increase in interest income on loans, including fees was due primarily to a 99 basis points increase in the average yield on loans, primarily related to the commercial and consumer loan portfolios due to an increase in interest rates, and a $252.4 million increase in average loan balances.

The increases in the average loan balances were primarily concentrated in the commercial loan portfolio, as well as the indirect auto segment of the consumer loan portfolio.

The increase in interest and dividend income on taxable securities was due primarily to a 48 basis points increase in the average yield, due to an increase in interest rates on existing variable rate securities, despite a decrease in the average invested balances of $63.6 million, primarily due to paydowns on mortgage-backed and SBA pooled-loan securities.

The increase in interest income on interest-earning deposits was due primarily to the increase in interest rates on overnight deposits with the average yield on interest-earning deposits increasing from 1.24% in 2022 to 5.07% in 2023.

The increase in interest expense on deposits was due primarily to a 22 basis points increase in average rates paid on interest-bearing deposits which included higher costing one-way brokered deposits, and an organic deposit campaign in the fourth quarter of 2022, when compared to the prior year.

The increase in interest expense on borrowed funds was due primarily to an increase in the average balances and interest rates of overnight FHLBNY borrowings, when compared to the prior year.

The increase in interest expense on deposits was due primarily to a 167 basis points increase in average rates paid on interest-bearing deposits which included brokered deposits, due to the higher interest rate environment, and a shift in the mix of deposits towards higher cost interest-bearing accounts such as time deposits, when compared to the prior year.

The increase in interest expense on borrowed funds was due primarily to a $29.1 million increase in the average balances and 266 basis points increase in interest rates of overnight FHLBNY borrowings, when compared to the prior year.

Average interest-earning assets increased $177.0 million in 2023 when compared to the prior year.

Average interest-bearing liabilities increased $70.0 million when compared to the prior year.

The average yield on average interest-earning assets increased 36 basis points, and the average cost of interest-bearing liabilities increased 24 basis points, when compared to the prior year.

The average yield on average interest-earning assets increased 98 basis points, and the average cost of interest-bearing liabilities increased 173 basis points, when compared to the prior year, both due to the rising interest rate environment over the past two years.

Average Consolidated Balance Sheet and Interest Analysis

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

Loan fee income was $1.2 million and $4.0 million for the years ended December 31, 2022 and 2021, respectively, and was comprised primarily of fees related to the Paycheck Protection Program.

AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS

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Other assets 115,954 90,879

Allowance for loan losses (19,453) (21,093)

Allowance for credit losses (1)

(20,212) (19,453)

AFS valuation allowance (97,597) (61,089)

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Time deposits 375,545 12,414 3.31 % 253,433 2,733 1.08 %

Capital leases and other debt 23,208 641 2.76 % 4,420 135 3.05 %

Brokered deposits 140,845 7,349 5.22 % 44,229 1,269 2.87 %

FHLBNY overnight advances 48,851 2,577 5.28 % 19,759 518 2.62 %

Long-term capital leases 3,177 114 3.59 % 3,449 123 3.57 %

Total interest-bearing liabilities 1,754,511 38,617 2.20 % 1,549,413 7,296 0.47 %

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Net interest rate spread (2)

2.13 % 2.88 %

Net interest margin, fully taxable equivalent (3)

2.85 % 3.05 %

Taxable equivalent adjustment (366) (425)

Net interest income $ 74,457 $ 74,179

(1) The Corporation adopted CECL January 1, 2023.

(2) Net interest rate spread is the difference in the average yield on interest-earning assets less the average cost of interest-bearing liabilities.

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Time deposits 9,681 1,832 7,849

Long-term advances and other debt 506 520 (14)

Brokered deposits 6,080 4,422 1,658

FHLBNY overnight advances 2,059 1,219 840

Long-term capital leases (9) (8) (1)

Total interest expense 31,321 7,351 23,970

Fully taxable equivalent net interest income $ 219 $ 2,968 $ (2,749)

Provision for loan losses

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

Management continued to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio in 2022.

As part of this analysis, the Corporation released the remaining $2.4 million of the pandemic related portion of the allowance in 2022.

In total, the Corporation released $4.3 million and utilized $0.5 million of the pandemic related allowance established in 2020.

The Corporation no longer holds a pandemic related reserve as part of the allowance for loan losses.

The provision for loan losses for the years ended December 31, 2022, and 2021 was credit of a $0.6 million and a provision of $17.0 thousand, respectively.

The decrease was primarily due to the $2.4 million release of the pandemic related portion of the allowance, the $1.5 million release of a specific reserve related to the sale of a large commercial real estate credit, positive impacts of $0.8 million related to the upgrade of two large commercial credits, and a $1.0 million decrease in the historical loss factor due to the roll-off of a commercial real estate owner occupied property previously charged off in 2020.

These decreases in the provision were offset by additional provision of $4.2 million related to increased loan growth, along with additional provisioning for loan concentrations and deteriorating national economic conditions.

Net charge-offs for the year ended December 31, 2022, were $0.8 million.

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

Provision for credit losses

Management performs an ongoing assessment of the adequacy of the allowance for credit losses based on its current expected credit losses (CECL) methodology, which includes loans individually analyzed, as well as loans analyzed on a pooled basis.

The Corporation's methodology estimates the lifetime losses in its loan portfolio by utilizing an expected discounted cash flow approach.

Based on FOMC forecasted data points, the model is supplemented by qualitative considerations including relevant economic influences, portfolio concentrations, and other external factors.

The Corporation adopted the CECL accounting standard on January 1, 2023.

The provision for credit losses for the year ended December 31, 2023 was $3.3 million compared to a credit of $0.6 million for the prior year.

The increase was primarily due to a $0.9 million specific allocation on a commercial real estate relationship during 2023, and the impact on the allowance for credit losses methodology of the adoption of CECL as of January 1, 2023.

Increased loan volume, and changes to model inputs, including a decline in the prepayment rates of many of the model's loan pools, drove the increase.

Declining prepayments impact the application of discounted cash flows by increasing the principal subject to discounting in later periods.

Additionally, management increased the qualitative adjustment rate applied to the consumer loan portfolio, considering changes in economic conditions that may not be reflected in the FOMC's forecasted data points, but may adversely impact consumers' financial strength.

These increases were offset by relatively favorable changes in the FOMC's forecasted data points.

Between December 2022 and December 2023, the FOMC's unemployment projection for year-end 2024 decreased from 4.6% to 4.1%, while the FOMC's projection for year-end U.S.

GDP annual growth rate decreased from 1.6% to 1.4%.

However, the year-end 2023 projected GDP growth rate, which impacted the model throughout the year, improved from 0.5% to 2.6% between December 2022 and December 2023.

Net charge-offs for the years ended December 31, 2023 and 2022 were $0.9 million and $0.8 million, respectively.

Non-interest income

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

Years Ended December 31,

2022 2021 Change Percentage Change

WMG fee income $ 10,280 $ 11,072 $ (792) (7.2) %

Years Ended December 31, Percentage Change

2023 2022 Change

Wealth management group fee income $ 10,460 $ 10,280 $ 180 1.8 %

Service charges on deposit accounts 3,919 3,788 131 3.5 %

Interchange revenue from debit card transactions 4,606 4,603 3 0.1 %

Change in fair value of equity investments (349) 246 (595) (241.9) %

Net (losses) on securities transactions (39) — (39) N/M

Change in fair value of equity investments 103 (349) 452 N/M

Net gains on sales of loans held for sale 144 107 37 34.6 %

4 unchanged sentences

Total non-interest income $ 24,549 $ 21,436 $ 3,113 14.5 %

Non-interest income for the year ended December 31, 2022 was $21.4 million compared with $23.9 million for the prior year, a decrease of $2.4 million, or 10.2%.

The decrease was due primarily to decreases of $1.0 million in net gains on sales of loans held for sale, $0.8 million in wealth management group fee income, $0.6 million in the change in fair value of equity investments, $0.5 million in other non-interest income, and $0.2 million in interchange revenue from debit card transactions, offset by an increase of $0.6 million in service charges on deposit accounts.

Net Gains on Sales of Loans Held for Sale

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

Wealth Management Group Fee Income

The decrease in wealth management group fee income was primarily attributed to a decrease in the market value of total assets under management or administration.

Change in Fair Value of Equity Investments

Change in fair value of equity investments decreased in 2022 compared to the prior year primarily due to a decrease in the assets held and the market value thereon.

Non-interest income for the year ended December 31, 2023 was $24.5 million compared with $21.4 million for the prior year, an increase of $3.1 million, or 14.5%.

The increase was due primarily to increases of $2.5 million in other non-interest income, $0.5 million in change in fair value of equity investments, $0.2 million in WMG fee income, and $0.1 million in service charges on deposit accounts.

Other non-interest income

Other non-interest income decreased compared to the prior year primarily due to the receipt of real estate and sales tax refunds received in the prior year.

Interchange Revenue from Debit Card Transactions

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

Other non-interest income increased compared to the prior year primarily due to the $2.4 million recognition of an employee retention tax credit in the third quarter of 2023.

Change in Fair Value of Equity Investments

Change in fair value of equity investments increased in 2023 compared to the prior year primarily due to an improvement in the market value of assets held for the Corporation's deferred compensation plan.

Wealth Management Group Fee Income

The increase in wealth management group fee income was primarily attributed to an increase in the market value of total assets under management or administration, due to improved conditions in equity markets in 2023, when compared to the prior year.

Service Charges on Deposit Accounts

The increase in service charges on deposit accounts was primarily due to an increase in non-sufficient fund and overdraft fees when compared to the prior year.

The increase in service charges on deposit accounts was primarily due to an increase in non-sufficient fund fees when compared to the prior year.

Non-interest expenses

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

Years Ended December 31,

2022 2021 Change Percentage Change

Years Ended December 31, Percentage Change

2023 2022 Change

Compensation expenses:

19 unchanged sentences

Compensation expenses

Compensation expenses increased $2.2 million, or 7.5% when compared to the prior year, primarily due to increases of $1.6 million in pension and other employee benefit expense and $0.6 million in salaries and wages, partially offset by a $0.1 million increase in the credit related to the net periodic pension and post-retirement benefits.

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

The increase in salaries and wages was primarily due to annual merit increases, increases in salary costs to fill open positions due to competitive market conditions, and a decrease in deferred salary costs related to PPP, offset by a decline in the market value of the Corporation's deferred compensation plan, when compared to the prior year.

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

Compensation expenses increased $2.5 million, or 7.9% when compared to the prior year, primarily due to increases of $1.8 million in salaries and wages and $1.0 million in other components of net periodic pension benefits, offset by a decrease of $0.3 million in pension and other employee benefits.

The increase in salaries and wages was primarily attributable to an increase in the market value of the Corporation's deferred compensation plans and base salary increases, while the increase in other components of net periodic pension benefits was primarily due to a change in factors used to prepare annual actuarial estimates.

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

Non-compensation expenses

Non-compensation expenses increased $1.4 million, or 5.4%, primarily due to increases of $1.1 million in other non-interest expense, $0.4 million in data processing expense, $0.2 million in professional services, and $0.2 million in furniture and equipment expenditures, offset by decreases of $0.3 million in net occupancy expense and $0.2 million in amortization of intangible assets.

The increase in other non-interest expense was due primarily to the $0.3 million recognition of directors' stock compensation expense due to the implementation of the Corporation's 2021 Equity Incentive Plan, a $0.1 million increase in CDARS fee expense, $0.1 million of additional restitution regarding previously disclosed consumer compliance matters, and a $0.2 million related reserve which was initially released in 2021.

The increase in data processing expense was primarily attributable to investment in the Corporation's Tap-to-Pay debit cards supporting contactless transactions, increased software maintenance expenses, and a credit received in the prior year.

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

Furniture and equipment expenditures increased primarily due to a an increase in building security enhancements and ATM maintenance expenses when compared to the prior year.

The decrease in net occupancy expense was primarily attributable to decreases in depreciation expense related to the sale of properties, when compared to the prior year.

The decrease in amortization of intangible assets was primarily attributable to an intangible asset reaching its fully amortized value.

Non-compensation expenses increased $2.5 million, or 8.9%, primarily due to increases of $0.9 million in data processing expense, $0.8 million in FDIC insurance expense, and $0.8 million in other non-interest expense.

The increase in data processing expense was primarily due to ongoing enhancements to our cybersecurity capabilities, outsourced debit card processing to a third-party vendor, and an increase in wealth management software expenses.

FDIC insurance expense increased due to an increase in the assessment rate effective January 1, 2023.

The increase in other non-interest expense was primarily due to the recapture of $0.2 million in accrued telecommunication expenses during the prior year, and an increase in non-loan charge-offs in the current year.

Income tax expense

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

Years Ended December 31,

2022 2021 Change Percentage Change

Years Ended December 31, Percentage Change

2023 2022 Change

Income before income tax expense $ 31,501 $ 36,889 $ (5,388) (14.6) %

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Effective tax rate 20.6 % 22.0 %

The effective tax rate increased to 22.0% for the year ended December 31, 2022 compared with 21.7% for the prior year.

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

The effective tax rate decreased to 20.6% for the year ended December 31, 2023 compared with 22.0% for the prior year.

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

Financial Condition

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Cash and cash equivalents

The increase in cash and cash equivalents can be mostly attributed to changes in securities, loans, deposits, and borrowings, offset by net income.

The decrease in cash and cash equivalents can be mostly attributed to changes in securities, loans, deposits, and borrowings, offset by net income.

Investment securities

The decrease was primarily due to $86.2 million in paydowns and a decrease in the fair value of the portfolio of $93.2 million due to increases in interest rates, offset by purchases of $23.7 million of the securities available for sale portfolio.

The increase in total loans, net, can be mostly attributed to increases of $189.4 million in commercial loans, $95.5 million in consumer loans, and $26.3 million in residential mortgage loans.

Allowance for Loan Losses

The decrease in the allowance for loan losses can mostly be attributed to the release of the aforementioned $2.4 million pandemic related portion of the allowance, the $1.5 million release of a specific reserve related to the sale of a large commercial real estate credit, positive impacts of $0.8 million related to upgrades of two large commercial credits, and a $1.0 million decrease in the historical loss factor due to the roll-off of a commercial real estate owner occupied property previously charged off in the second quarter of 2020.

These decreases in the allowance were offset by additional provision of $4.2 million related to increased loan growth, along with additional provision for loan concentrations and deteriorating national economic conditions.

The allowance for loan losses was 240.39% of non-performing loans at December 31, 2022 compared to 259.17% at December 31, 2021.

The ratio of the allowance for loan losses to total loans was 1.07% at December 31, 2022 compared to 1.38% at December 31, 2021.

Please refer to Note 1 - Summary of Significant Accounting Policies for discussion on transition to Current Expected Credit Losses.

The decrease in investment securities was primarily due to a decrease of $48.6 million in securities available for sale.

Net paydowns on securities available for sale during the year totaled $59.8 million, primarily attributable to paydowns on mortgage-backed securities and SBA pooled-loan securities, partially offset by an increase in the market value of $11.5 million, due to favorable changes in fixed income market valuation during the year.

Securities held to maturity decreased $1.6 million due to the sale of securities held by Chemung Risk Management, Inc.

relating to its dissolution.

In addition, FHLB stock decreased $2.7 million due to lower FHLBNY overnight advance borrowings as of the end of the current year, compared to the the prior year end.

The increase in total loans, net, was concentrated in the commercial loan portfolio, which increased $138.1 million, or 11.1%.

Commercial demand for financing continues to be strong across the Corporation's footprint, led by commercial real estate activity in the Albany, NY metro area.

Consumer loans increased $12.8 million, or 4.3%, primarily driven by strong origination activity in the indirect auto segment.

These increases were offset by a decrease of $7.7 million, or 2.7%, in the residential mortgage loan portfolio, due to a decrease in demand, as well as an increase in new originations being sold into the secondary market.

Allowance for Credit Losses

The allowance for credit losses on loans was $22.5 million as of December 31, 2023, and the allowance for loan losses was $19.7 million as of December 31, 2022.

The allowance for credit losses on unfunded commitments, a component of other liabilities, was $0.9 million as of December 31, 2023.

The increase in the allowance for credit losses, including unfunded commitments, was driven by a $1.5 million adjustment recognized upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), the specific allocation of $0.9 million on a commercial real estate relationship, provisioning related to loan growth, changes in model variables, and qualitative considerations.

The $1.5 million one-time implementation adjustment was comprised of $1.1 million reflecting the establishment of an allowance for credit losses on unfunded commitments, and a $0.4 million increase in the allowance for credit losses, reflecting the change in methodology.

During the fourth quarter of 2023, in addition to the $0.9 million specific allocation made in relation to a commercial real estate relationship, the Corporation allocated additional amounts to its allowance for credit losses in accordance with its CECL methodology.

One of the inputs utilized by the model is an assumed prepayment rate, calculated at the pool level, and based on a three-year rolling historical average of the Corporation's own prepayment experience.

During 2023, prepayment levels declined across most pools of loans, but was especially prevalent amongst residential mortgages.

Prepayment speeds had a meaningful impact on the allowance during the fourth quarter.

Prepayment assumptions and modeled present value of cash flows have a direct relationship.

As prepayment assumptions decline, the modeled present value of cash flows declines, increasing the assumed allowance requirements.

Additionally, loan growth, and to a lesser degree, changes in FOMC economic forecasted data points, increased reserve requirements during the fourth quarter.

Goodwill and other intangible assets, net

The decrease in goodwill and other intangible assets, net, can be attributed to amortization of other intangible assets.

There were no impairments of goodwill or other intangible assets during the years ended December 31, 2023 and 2022.

The increase in other assets can be mostly attributed to increases of $16.9 million in deferred tax asset related to the market value adjustment on the available for sale securities portfolio, and $17.9 million in interest rate swap assets, primarily due to changes in interest rates.

The growth in deposits was attributable to an increase of $206.0 million in time deposits, $73.5 million of which were one-way brokered deposits, offset by decreases of $13.7 million in insured money market accounts, $13.1 million in interest-bearing demand deposits, $6.3 million in non-interest bearing demand deposits, and $1.2 million in savings deposits.

The decrease in other assets can be mostly attributed to a decrease of $2.6 million in interest rate swap assets, primarily due to changes in interest rates.

The growth in deposits was attributable to an increase of $209.9 million in time deposits, or 52.2%, which includes customer time deposits and brokered deposits.

Customer time deposits increased $140.6 million, while brokered deposits increased $69.3 million.

Interest-bearing demand deposits increased $19.5 million.

These increases were offset by decreases of $80.2 million in non-interest bearing demand deposits, $29.9 million in savings deposits, and $17.1 million in insured money market deposits.

Non-interest bearing deposits comprised 26.9% and 31.4% of total deposits as of December 31, 2023 and December 31, 2022, respectively.

Capital Lease Obligations and FHLBNY Advances

The increase in capital lease obligations and FHLBNY advances can be mostly attributed to $81.2 million in FHLBNY overnight advances.

The decrease in capital lease obligations and FHLBNY advances can be mostly attributed to a decrease of $63.9 million in FHLBNY overnight advances.

Other Liabilities

The increase in other liabilities can be mostly attributed to a $17.7 million increase in interest rate swap liabilities, primarily due to changes in interest rates.

The decrease in other liabilities can be mostly attributed to a $2.6 million decrease in interest rate swap liabilities, primarily due to changes in interest rates.

Shareholders’ equity

The decrease in shareholders' equity was due primarily to a $68.7 million decrease in accumulated other income (loss), offset by an increase of $23.0 million in retained earnings.

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

The increase in retained earnings was primarily due to net income of $28.8 million, offset by $5.8 million in dividends declared during the current year.

Treasury stock increased $0.2 million primarily due to the Corporation's common stock repurchase program, offset by the impact of the issuance of shares related to the Corporation's employee benefit plans.

During 2022, a total of 14,263 shares of common stock at a total cost of $0.6 million were repurchased by the Corporation under its share repurchase program.

The weighted average cost was $45.00 per share repurchased.

Remaining buyback authority under the share repurchase program was 200,816 shares at December 31, 2022.

As of March 10, 2023, 49,184 shares have been repurchased, at an average cost of $40.42 per share.

The increase in shareholders' equity was due primarily to an increase of $18.1 million in retained earnings and a decrease of $9.2 million in accumulated other comprehensive loss.

The increase in retained earnings was due primarily to net income of $25.0 million, offset by $5.9 million in dividends declared and a $1.1 million one-time adjustment due to the implementation of CECL.

The improvement in accumulated other comprehensive loss was primarily due to an improvement in the fair value of the available for sale securities portfolio, when compared to the prior year.

Treasury stock decreased $1.1 million primarily due to the impact of the issuance of shares related to the Corporation's employee benefit plans.

Assets under management or administration

The market value of total assets under management or administration in WMG was $2.053 billion, including $346.5 million of assets held under management or administration for the Corporation, at December 31, 2022 compared with $2.325 billion, including $344.2 million of assets held under management or administration for the Corporation, at December 31, 2021, a decrease of $271.9 million, or 11.7%.

The decrease in total assets under management or administration for the Corporation can be mostly attributed to a general decline in the market value of the assets under management.

The market value of total assets under management or administration in WMG was $2.242 billion, including $381.3 million of assets held under management or administration for the Corporation, at December 31, 2023 compared to $2.053 billion, including $346.5 million of assets held under management or administration for the Corporation at December 31, 2022, an increase of $189.4 million, or 9.2%.

The increase in total assets under management or administration for the Corporation can be mostly attributed to broad improvements in the financial markets during the year.

Balance Sheet Comparisons

The table below contains selected year-end and average balance sheet information at and for the years December 31, 2022 and 2021 (in millions):

The table below contains selected year-end and average balance sheet information at and for the years ended December 31, 2023 and 2022 (in millions):

SELECTED BALANCE SHEET INFORMATION

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2023 2022 % Change 2023 2022 % Change

2021 to 2021 to

2022 2021 2022 2022 2021 2022

Total assets $ 2,710.5 $ 2,645.6 2.5 % $ 2,660.3 $ 2,496.1 6.6 %

Interest-earning assets (1)

Loans (2) 1,829.4 1,518.6 20.5 % 1,646.6 1,545.6 6.5 %

2,580.6 2,502.0 3.1 % 2,621.3 2,444.3 7.2 %

1,972.7 1,829.4 7.8 % 1,899.0 1,646.6 15.3 %

Investments (3)

607.9 672.6 (9.6) % 722.3 797.7 (9.5) %

Deposits 2,429.4 2,327.2 4.4 % 2,377.7 2,255.3 5.4 %

Borrowings (4)

Allowance for loan losses 19.7 21.0 (6.2) % 19.5 21.1 (7.6) %

35.0 99.1 (64.7) % 52.0 23.2 124.1 %

Allowance for credit losses (5)

22.5 19.7 14.2 % 20.2 19.5 3.6 %

Shareholders’ equity 195.2 166.4 17.3 % 177.2 180.7 (1.9) %

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

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

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

(4) Average borrowings include overnight advances, and capitalized lease obligations.

(1) Interest-earning assets include:

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

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

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

(4) Borrowings include overnight advances and capitalized lease obligations.

(5) The Corporation adopted CECL on January 1, 2023.

Cash and Cash Equivalents

Total cash and cash equivalents increased $28.9 million when compared to December 31, 2021, due to increases of $16.9 million in interest-earning deposits in other financial institutions, and $11.9 million in cash and due from financial institutions.

Total cash and cash equivalents decreased $19.0 million when compared to December 31, 2022, due to decreases of $12.0 million in interest-earning deposits at other financial institutions, and $7.1 million in cash and due from financial institutions.

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

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Fluctuations in the fair value of the Corporation’s securities relate primarily to changes in interest rates.

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

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

The available for sale segment of the securities portfolio totaled $584.0 million at December 31, 2023, a decrease of $48.6 million, or 7.7%, from $632.6 million at December 31, 2022.

The decrease was primarily due to $59.6 million in paydowns, and sales of $1.2 million related to the dissolution of CRM, offset by an increase in the fair value of the portfolio of $11.5 million due to decreases in benchmark yields, and purchases of $3.2 million.

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

These securities totaled $2.4 million at December 31, 2022, a decrease of $1.4 million or 36.0%, from $3.8 million at December 31, 2021, due primarily to maturities.

These securities totaled $0.8 million at December 31, 2023, a decrease of $1.6 million or 67.6%, from $2.4 million at December 31, 2022, due primarily to maturities, and the dissolution of CRM in 2023.

Non-marketable equity securities at December 31, 2023 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.9 million and $3.6 million, respectively.

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

The table below sets forth the carrying amounts and maturities of held to maturity debt securities at December 31, 2022 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security) (in thousands):

The table below sets forth the carrying amounts and maturities of held to maturity debt securities at December 31, 2023 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security (in thousands):

MATURITIES AND YIELDS OF HELD TO MATURITY SECURITIES

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Obligations of states and political subdivisions $ — N/A $ 145 3.79 % $ 640 3.92 % $ — N/A

Time deposits with other institutions 737 1.86 % 735 3.35 % — N/A — N/A

Total $ 1,496 2.92 % $ 928 3.44 % $ — N/A $ — N/A

The weighted-average yield on the Corporation's held to maturity debt securities at December 31, 2022 was 3.92% related to obligations of states and political subdivisions, and 2.62% related to time deposits with other institutions.

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

For the years ended December 31, 2022 and 2021, the Corporation had no OTTI charges.

Total $ — — % $ 145 3.79 % $ 640 3.92 % $ — N/A

The weighted-average yield on the Corporation's held to maturity debt securities at December 31, 2023 was 3.90%, related to obligations of states and political subdivisions.

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

For the years ended December 31, 2023 and 2022, the Corporation had no credit loss charges relating to its investment securities.

The Corporation has reporting systems to monitor:

(i) loan originations and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, troubled debt restructurings, other real estate owned, (iv) impaired loans, and (v) potential problem loans.

Management reviews these systems on a regular basis.

The table below presents the Corporation’s loan composition by type and percentage of total loans at the end of December 31, 2022 and December 31, 2021 (in thousands):

(i) loan origination and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, certain loans made with modifications to borrowers experiencing financial difficulty, and other real estate owned, (iv) loans analyzed on an individual basis for credit risk, and (v) potential problem loans.

Management reviews the adequacy of these systems on a regular basis.

The table below presents the Corporation’s loan composition by type and percentage of total loans for the years ended December 31, 2023 and December 31, 2022 (in thousands, except percentages):

LOAN COMPOSITION

December 31, 2021 to

2022 % 2021 % 2022

December 31, % Change

2023 % of Total 2022 % of Total 2022 to 2023

Commercial and agricultural:

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Construction 138,887 7.0 % 108,243 5.9 % 28.3 %

Commercial mortgages 888,670 48.7 % 720,358 47.5 % 23.4 %

Commercial mortgages, other 984,038 49.9 % 888,670 48.7 % 10.7 %

Residential mortgages 277,992 14.1 % 285,672 15.6 % (2.7) %

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Portfolio loans totaled $1.973 billion at December 31, 2023 and $1.829 billion at December 31, 2022, an increase of $143.2 million, or 7.8%.

The increase was driven by increases of $194.4 million in commercial real estate loans, or 24.2%, $83.6 million, or 70.5% in indirect automobile loans, and $26.3 million in residential mortgages, or 10.2%, offset by a decrease of $5.0 million, or 1.9% in commercial & agricultural loans.

The increase in total commercial real estate loans was a result of a $26.0 million increase in construction loans and a $168.3 million increase in commercial real estate loans, primarily driven by increases in loans secured by non-owner occupied and multi-family properties.

The increase in indirect automobile loans was attributable to a renewed focus in the program following a pricing restructuring, as well as increased demand for automobiles coupled with elevated vehicle prices nationwide.

Increases in residential mortgage loans was due to new originations being retained in the portfolio as opposed to being sold into the secondary market, and continued strong demand through the majority of the year, despite the rising interest rate environment.

The decrease in commercial and agricultural loans was primarily the result of a net decrease in PPP loans of $42.5 million during the year, related to SBA forgiveness.

PPP loan balances of $0.7 million remained at December 31, 2022, with $0.5 million and $0.2 million of Phase 1 and Phase 2 loans, respectively.

The increase was driven by increases of $126.0 million in commercial real estate loans, or 12.6%, $12.1 million, or 4.8% in commercial and industrial loans, and $8.3 million, or 4.1% in indirect auto loans, offset primarily by a decrease in residential mortgages of $7.7 million, or 2.7%.

The increase in total commercial real estate was the result of a $95.4 million increase in commercial mortgages, other, primarily driven by increases in multi-family properties, and a $30.6 million increase in construction loans.

Commercial real estate lending continues to be the primary driver of asset growth for the Corporation, as demand for project financing remains robust across the Corporation's footprint, particularly in the Albany and Buffalo regions.

At December 31, 2023, commercial real estate loans in the Albany and Buffalo regions have grown $91.5 million and $30.3 million from December 31, 2022, respectively.

The increase in commercial and industrial loans was relatively evenly distributed across the Corporation's footprint.

The increase in indirect auto loans was attributable to a renewed focus in the program beginning in late 2021, following a pricing and dealer network restructuring, continuing through 2023, as well as continued robust demand for automobiles coupled with elevated auto pricing nationwide.

A decrease in residential mortgage loans was due to weak demand for new originations in the current higher interest rate environment, and lower market mobility due to many borrowers "locking in" lower rates secured in previous years, as well as the Corporation selling a larger proportion of its residential mortgage originations into the secondary market.

Mortgage originations held on the balance sheet totaled $20.8 million and mortgage loans originated and sold into the secondary market totaled $6.4 million for the year ended December 31, 2023.

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

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2023 2022 2021 2020 2019

Chemung Canal Trust Company*^ $ 731,344 639,144 $ 658,468 $ 576,399 $ 603,133

Chemung Canal Trust Company*^

$ 766,103 $ 731,344 $ 658,468 $ 576,399 $ 603,133

Capital Bank Division 1,206,561 1,098,104 877,995 732,820 708,773

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

The Corporation’s concentration policy limits consider the volume of commercial loans to any one specific industry, sponsor, collateral type and location.

In addition, the Corporation’s policy limits the volume of non-owner occupied commercial mortgages to four times total risk based capital.

At December 31, 2022 and 2021, total non-owner occupied commercial real estate loans divided by total Bank risk based capital was 382.9% and 346.5%, respectively.

The Bank’s concentration policy limits consider the volume of commercial loans to any one specific industry, sponsor, collateral type and location.

As of December 31, 2023 and 2022, total non-owner occupied commercial real estate loans divided by total Bank risk based capital was 403.6% and 397.7%, respectively.

The Corporation also monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans.

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No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of December 31, 2023 and 2022.

Commercial real estate lending represented the largest portion of the Corporation's loan portfolio as of December 31, 2023 and 2022.

Commercial real estate lending is comprised of the Construction and Commercial mortgage, other segments of the loan portfolio, as presented in Note 4-Loans and Allowance for Credit Losses.

As of December 31, 2023 and 2022, total commercial real estate loans totaled $1.123 billion and $0.997 billion respectively.

Management evaluates the risk inherent in its portfolio of commercial real estate loans using a variety of metrics, including but not limited to type, geography, collateral, and borrower or sponsor industry.

The table below presents commercial real estate loans by type and percentage at December 31, 2023 and 2022 (in thousands, except percentages):

Commercial real estate loans by type:

2023 % of Total 2022 % of Total % Change 2022 to 2023

Construction $ 138,887 12.4 % $ 108,243 10.9 % 28.3 %

1-4 Family Residential (1)

45,792 4.1 % 38,736 3.9 % 18.2 %

Multifamily 349,327 31.1 % 305,103 30.6 % 14.5 %

Owner-Occupied 123,989 11.0 % 106,088 10.6 % 16.9 %

Non-Owner Occupied 464,930 41.4 % 438,743 44.0 % 6.0 %

Total $ 1,122,925 100.0 % $ 996,913 100.0 %

____________________________________________________________________________________________________________________________________________________________

(1) 1-4 Family residential loans included in the commercial real estate portfolio segment are comprised of properties whose primary purpose is to generate rental income for the borrower, but are not considered multifamily properties within the confines of the FFIEC's Call Report definition of a multifamily property.

This may include single family residences, duplexes, triplexes, and quadplexes.

Commercial real estate loans are primarily made within the counties comprising the geographic footprint of the Corporation's physical branch network, as well as to borrowers whose business interests include projects that may be located in counties that are geographically contiguous with the Corporation's physical footprint.

The location of collateral securing commercial real estate loans typically mirrors the location of the properties being financed.

However, certain commercial real estate loans are secured by property other than the property being financed, and therefore the geographic location of collateral may differ from that of the financed property.

The table below presents the amortized basis of commercial real estate loans by regional location of collateral and percentage at December 31, 2023 and 2022 (in thousands, except percentages):

Commercial real estate loans by re g ional location of collateral:

2023 % of Total 2022 % of Total % Change 2022 to 2023

Capital & Adirondacks (1)

$ 736,971 65.6 % $ 658,100 66.0 % 12.0 %

Southern Tier & Finger Lakes (2)

213,970 19.1 % 198,179 19.9 % 8.0 %

Western New York (3)

123,202 11.0 % 94,311 9.5 % 30.6 %

Other (4) (5)

48,782 4.3 % 46,323 4.6 % 5.3 %

Total $ 1,122,925 100.0 % $ 996,913 100.0 %

______________________________________________________________________________________________________

(1) Albany, Franklin, Montgomery, Rensselaer, Saratoga, Schenectady, and Warren counties of New York.

(2) Broome, Cayuga, Chemung, Onondaga, Steuben, and Tompkins counties of New York.

(3) Erie and Monroe counties of New York

(4) Bradford County, Pennsylvania.

(5) Other region comprises all locations outside of New York State and Downstate New York, which includes the lower Hudson Valley, New York City, and Long Island.

(6) Counties included in the footnotes above represent those counties which have at least a $5.0 million amortized basis in commercial real estate loans as of December 31, 2023.

Counties with less than $5.0 million are also included in the table above.

The Corporation closely monitors economic and credit trends for the industries in which its commercial real estate borrowers are involved.

Property types are designated based on the purpose of the collateral securing commercial real estate loans.

The table below presents the amortized basis of commercial real estate loans by borrower industry and percentage at December 31, 2023 (in thousands, except percentages):

Commercial real estate loans by borrower industry:

December 31, 2023 % of Total

Construction & Land Development $ 141,551 12.6 %

Industrial 41,784 3.8 %

Warehouse & Storage 65,379 5.8 %

Retail 195,561 17.4 %

Office 117,212 10.4 %

Hotel 55,533 4.9 %

1-4 Family Residential Rental 47,708 4.2 %

Multifamily (5+) 371,687 33.2 %

Medical 32,859 2.9 %

Educational 25,738 2.3 %

Other 27,913 2.5 %

Total $ 1,122,925 100.0 %

The table below shows the maturity of loans outstanding as of December 31, 2023.

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

LOAN AMOUNTS CONTRACTUALLY DUE AFTER DECEMBER 31, 2023

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

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

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Total $ 169,706 $ 521,646 $ 1,074,496 $ 206,816 $ 1,972,664

Loans maturing with:

LOAN AMOUNTS CONTRACTUALLY DUE AFTER DECEMBER 31, 2024

Loans maturing with fixed interest rates:

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

Fixed interest rates $ 280,677 $ 509,202 $ 98,150 $ 888,029

Variable interest rates 182,470 547,671 102,518 $ 832,659

Commercial and agricultural:

Commercial and industrial $ 64,976 $ 32,417 $ 421 $ 97,814

Agricultural 193 — — 193

Commercial mortgages:

Construction 6,606 22,360 — 28,966

Commercial mortgages 142,681 152,998 2,716 298,395

Residential mortgages 10,078 108,270 104,139 222,487

Consumer loans:

Home equity lines and loans 5,099 46,830 522 52,451

Indirect consumer loans 114,025 94,808 3 208,836

Direct consumer loans 6,289 1,138 213 7,640

Total $ 349,947 $ 458,821 $ 108,014 $ 916,782

Loans maturing with variable interest rates:

Commercial and agricultural:

Commercial and industrial $ 37,932 $ 39,585 $ 3,225 $ 80,742

Agricultural 63 — — 63

Commercial mortgages:

Construction 27,742 53,450 1,032 82,224

Commercial mortgages 104,584 506,372 24,147 635,103

Residential mortgages 584 4,625 46,575 51,784

Consumer loans:

Home equity lines and loans 794 10,985 22,592 34,371

Indirect consumer loans — — — —

Direct consumer loans — 658 1,231 1,889

Total $ 171,699 $ 615,675 $ 98,802 $ 886,176

Non-Performing Assets

Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings, and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure.

Non-performing assets consist of non-accrual loans and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure.

Effective January 1, 2023, the Corporation adopted ASU 2022-02, which eliminated troubled debt restructuring accounting guidance.

Prior to adoption, certain troubled debt restructurings were considered to be non-performing assets.

The Corporation monitors loan modifications made to borrowers deemed to be experiencing financial difficulty.

As of December 31, 2023, there were five loans being monitored under ASU 2022-02 guidance, three of which were accruing with a total amortized basis of $0.5 million, and two of which were non-accrual, with a total amortized basis of $2.8 million.

The non-accrual modifications are included in non-performing loans.

Past due status on all loans is based on the contractual terms of the loan.

It is generally the Corporation's policy that a loan 90 days past due be placed on non-accrual status unless factors exist that would eliminate the need to place a loan in this status.

It is generally the Corporation's policy that a loan 90 days past due be placed on non-accrual status unless factors exist that would eliminate the need to classify a loan as such.

A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower.

At the time loans are placed on non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed.

At the time loans are placed in non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed.

All payments received on non-accrual loans are applied to principal.

Loans are considered for return 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 contractual principal and interest.

In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal balance has been recovered.

The following table summarizes the Corporation's non-performing assets, (in thousands):

The following table summarizes the Corporation's non-performing assets as of December 31, (in thousands):

NON-PERFORMING ASSETS

December 31, 2022 2021 2020 2019 2018

2023 2022 2021 2020 2019

Non-accrual loans $ 10,411 $ 4,143 $ 3,469 $ 6,011 $ 9,938

5 unchanged sentences

Ratio of non-performing assets to total assets 0.40 % 0.32 % 0.34 % 0.45 % 1.04 %

Ratio of allowance for loan losses to non-performing loans 240.39 % 259.17 % 210.25 % 130.38 % 154.59 %

Ratio of allowance for credit losses to non-performing loans 216.28 % 240.39 % 259.17 % 210.25 % 130.38 %

Accruing loans past due 90 days or more (1)

$ 9 $ 1 $ 4 $ 2 $ 7

Accruing troubled debt restructurings (1)

$ — $ 1,405 $ 5,643 $ 2,790 $ 952

(1) These loans are not included in non-performing assets above.

Interest income recorded on non-accrual and troubled debt restructured loans was $56.0 thousand and $146.0 thousand, as of December 31, 2022, and 2021, respectively.

Interest income recorded on non-accrual loans was $163 thousand and $56 thousand, as of December 31, 2023, and 2022, respectively.

Non-Performing Loans

Non-performing loans totaled $10.4 million at December 31, 2023, or 0.53% of total loans, compared with $8.2 million at December 31, 2022, or 0.45% of total loans.

The increase in non-performing loans at December 31, 2022 as compared to December 31, 2021 was due to the additional classification of multiple commercial loans, offset by pay downs on existing non-performing loans.

The increase in non-performing loans at December 31, 2023 as compared to December 31, 2022 can primarily be attributed to the addition of one commercial real estate relationship, totaling $3.1 million, comprised of a $2.2 million participation in a construction project, and a $0.9 million credit secured by a negative pledge.

This increase was partially offset by the removal of a commercial and industrial loan from non-accrual status, and paydown activity on existing non-performing loans.

Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $10.7 million, or 0.40% of total assets, at December 31, 2023, compared with $8.4 million, or 0.32% of total assets, at December 31, 2022.

The recorded investment of accruing loans past due 90 days or more was less than $0.1 million at December 31, 2022 and December 31, 2021.

There were no PCI loans as of December 31, 2022 and December 31, 2021.

PCI loans are accounted for under separate accounting guidance, ASC Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality.”

Troubled Debt Restructurings

The amortized basis of accruing loans past due 90 days or more was less than $0.1 million at December 31, 2023 and December 31, 2022.

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss.

In that regard, the Corporation may modify the terms of select loans to maximize their collectability.

The modified loans are considered TDRs under current accounting guidance, applicable to the Corporation as of December, 31 2022.

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

As of December 31, 2022 and 2021, the Corporation had $4.0 million and $4.6 million of non-accrual TDRs, respectively.

As of December 31, 2022, the Corporation had $1.4 million of accruing TDRs compared with $5.6 million as of December 31, 2021.

No loans were modifed as troubled debt restructurings during the twelve months ended December 31, 2022.

Impaired Loans

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement.

The unpaid principal balance of impaired loans at December 31, 2022 totaled $7.5 million, including TDRs of $5.4 million, compared to $18.2 million at December 31, 2021, including TDRs of $10.3 million.

The recorded investment of impaired loans at December 31, 2022 totaled $7.5 million compared to $11.6 million at December 31, 2021.

Included in the recorded investment of impaired loans at December 31, 2022, were loans totaling $1.3 million for which impairment allowances of $1.1 million have been specifically allocated to the allowance for loan losses.

The decrease in the recorded investment in impaired loans was primarily due to the sale of a large commerical real estate loan, reducing the recorded investment in impaired loans by $3.5 million.

Previously, the Corporation applied troubled debt restructuring (TDR) accounting guidance for loan modifications made to borrowers experiencing financial difficulty, where a concession was made by the Corporation.

Effective January 1, 2023, the Corporation adopted ASU 2022-02, which supersedes TDR guidance.

The Corporation monitors modifications made to borrowers experiencing financial difficulty in which the contractual cash flows were directly impacted.

Modifications that are included under this guidance include principal reductions, reductions in the effective interest rate, term extensions greater than insignificant payment delays, or a combination thereof.

ASU 2022-02 was implemented on a prospective basis, and as of December 31, 2023, the Corporation had five loans that were modified under the new accounting guidance, totaling $3.3 million.

The modifications were term extensions on two commercial and industrial loans, one commercial mortgage and one home equity loan, as well as a four month payment delay deemed to be greater than insignificant on a commercial mortgage.

As of December 31, 2023, all modifications with the exception of one term extension of six months on a commercial and industrial loan, were considered to be performing under their modified terms.

The commercial and industrial loan that was granted a six month extension was not performing under its modified terms, is non-accrual, and totaled $0.9 million.

Individually Analyzed Loans

Effective January 1, 2023, the Corporation began analyzing loans on an individual basis when management determined that the individual loan no longer exhibited risk characteristics consistent with the risk characteristics existing in its designated pool of loans, under the Corporation's CECL methodology.

This differs from the definition of loans considered to be impaired as of December 31, 2022.

The amortized cost basis of individually analyzed loans at December 31, 2023 totaled $8.0 million, compared to impaired loans of $7.5 million at December 31, 2022.

Included in this total were $2.0 million of loans for which specific allocations of $2.0 million were made to the allowance for credit losses.

As of December 31, 2022, the impaired loan total included $2.8 million of loans for which specific impairment allowances of $1.1 million were allocated to the allowance for loan losses.

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

It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to be impaired.

An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off.

A majority of the Corporation's individually analyzed loans are secured and measured for credit loss based on collateral evaluations.

It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to require individual analysis.

A measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off.

In determining the amount of any specific allocation or charge-off, the Corporation will make adjustments to reflect the estimated costs to sell the property.

Upon receipt and review of an updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning or charge-off.

Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs.

Real estate values in the Corporation's market area have remained stable.

Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and the client’s business.

Upon receipt and review of updated appraisals, an additional measurement is performed to determine if any adjustments are necessary to reflect proper provisioning or charge-offs.

Individually analyzed loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs.

Real estate values in each of the Corporation's market areas have remained stable.

If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.

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 upon management’s evaluation of the probable inherent losses in the portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.

Specific valuation allowances are established based on management’s analyses 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 qualitative factors.

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

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 Corporation 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, and more recently the anticipated impact of COVID-19 on the various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues:

unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of changes & trends in 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 quarterly basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience, and review of specific impaired loans.

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

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

Allowance for Credit Losses

The allowance for credit losses is an amount that management believes will be adequate to absorb the estimated lifetime credit losses inherent in assets exhibiting credit risk as of the measurement date.

The allowance is in conformity with the requirements established by ASC 326 -Financial Instruments-Credit Losses .

The new guidance was adopted effective January 1, 2023, and is a departure from the allowance for loan losses (ALLL) that the Corporation previously estimated using an incurred loss methodology.

The allowance covers loans, unfunded commitments, and certain debt securities exhibiting credit risk potential, and incorporates both quantitative and qualitative components.

Loans are analyzed on either an individual basis or a pooled basis, determined by risk characteristics.

Loans that no longer exhibit risk characteristics substantially consistent with those of loans analyzed within a given pool may necessitate being analyzed individually, based on management discretion.

Individually analyzed loans are primarily valued based on the collateral method, however, select loans may be evaluated using a cash flow analysis.

Pooled loans are segmented based on groups of assigned FFIEC call codes, in order to provide enough granularity to meaningfully capture the risk profile of each instrument, yet broad enough to accurately allow for the application of certain pool-level assumptions.

Quantitative analysis is based on an estimated discounted cash flow analysis (DCF) performed at the loan level.

The modeled reserve requirement equals the difference between the book balance of the instrument at the measurement date and the present value of assumed cash flows for the life of the loan.

The underlying assumptions of the DCF are based on the relationship between a projected value of an economic indicator, and the implied historical loss experience amongst a group of curated peers.

The Corporation utilized a regression analysis to determine suitable loss drivers for each pool of loans.

Based on these results, a probability of default (PD) and loss given default (LGD), is assigned to each potential value of an economic indicator for each pool of loans, and is then applied to the portfolio to derive the statistical loss implications thereof.

A hypothetical loss for each period of the DCF, as well as implied recovery of past losses, is incorporated into the DCF.

The Corporation relies on FOMC data, including its projections for U.S.

civilian unemployment and U.S.

GDP growth, as the source for its readily available and reasonable economic forecast.

The forecasted values are applied over a rolling four quarter period, and revert to the historic mean of a look back period over an eight quarter period, on a straight-line basis.

Qualitative adjustments represent management's expectation of certain risks not being fully captured in the quantitative portion of the model.

Qualitative adjustment rates are applied to each instrument within a pool on a consistent basis.

Factors considered as part of the qualitative adjustment analysis include economic considerations not captured by the model, changes in conditions within the Bank such as lending standards, personnel, and concentrations of credit, among others, as well as external factors such as change in the regulatory and competitive landscape.

The allowance for credit losses is increased through a provision for credit losses, which is charged to operations.

Separate provision accounts have been established for on-balance sheet credit exposures and off-balance sheet credit exposures, and are combined in the line item "provision for credit losses" on the Corporation's Consolidated Statements of Income.

Loans are charged against the allowance for credit 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 credit losses is performed on a periodic basis and takes into consideration such factors as the outcomes of the quantitative analysis, a review of specific individually analyzed loans, and determinations for qualitative adjustments.

While management uses available information to recognize losses on credits, future additions to the allowance may be necessary based on changing economic conditions or portfolio composition.

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

Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The allowance for loan losses was $19.7 million at December 31, 2022, compared to $21.0 million at December 31, 2021.

The allowance for loan losses was 240.39% of non-performing loans at December 31, 2022 compared to 259.17% at December 31, 2021.

The ratio of allowance for loan losses to total loans was 1.07% at December 31, 2022 and 1.38% at December 31, 2021, respectively.

The Corporation continued to monitor the loan portfolio for lagging effects related to the COVID-19 pandemic throughout 2022.

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

Based upon management review of these factors, the remaining $2.4 million of the pandemic related provision was released in 2022.

Overall, the Corporation released $4.3 million and utilized $0.5 million of the pandemic related provision, and no provision remains at December 31, 2022.

Net charge-offs for the year ended December 31, 2022 were $0.8 million compared with net recoveries of $0.1 million for the year ended December 31, 2021.

The ratio of net charge-offs (recoveries) to average loans outstanding was 0.05% for 2022 compared to (0.01)% for 2021.

The increase in net charge-offs can primarily be attributed to the $0.7 million charge off on a large commercial real estate loan.

The table below summarizes the Corporation’s allowance for loan losses, non-accrual loans, and ratio of net charge-offs and recoveries to average loans outstanding by loan category for the years ended December 31, 2022 and December 31, 2021, by category (in thousands):

ALLOWANCE FOR LOAN LOSSES AND LOAN CREDIT RATIOS BY LOAN CATEGORY

Balance at December 31, 2022 Allowance for loan losses Allowance to loans 1

The allowance for credit losses was $22.5 million as of December 31, 2023, compared to an allowance for loan losses of $19.7 million as December 31, 2022.

The allowance for credit losses was 216.28% of non-performing loans as of December 31, 2023 compared to 240.39% of the allowance for loan losses as of December 31, 2022.

The ratio of allowance for credit losses to total loans was 1.14% as of December 31, 2023 and the ratio of allowance for loan losses to total loans was 1.07% as of December 31, 2022, respectively.

Including the allowance allocated to unfunded commitments, the ratio of the allowances for credit losses was 1.19% as of December 31, 2023.

The increase in the allowance for credit losses was attributable to the impact of the implementation of ASU 2016-13, increased loan volume, the impact of changes in the modeled economic forecasts, and increased qualitative provisioning.

The quantitative portion of the ACL model was impacted by improvements in the FOMC forecasted unemployment rate and U.S.

GDP growth rate for both year-end 2023 and 2024, which offset additional provisioning relating to lower prepayment assumptions, loan growth, additional qualitative provisioning in the consumer portfolio segment, and specific allocations made on individually analyzed loans.

Net charge-offs for the year ended December 31, 2023 were $0.9 million compared with net charge-offs of $0.8 million for the year ended December 31, 2022.

The ratio of net charge-offs (recoveries) to average loans outstanding was 0.05% for 2023 and 2022.

Net charge-offs for the year ended December 31, 2023 can primarily be attributed to the $0.3 million charge-off of a commercial and industrial loan, as well as increased consumer charge-offs due to increased loan volume in the Corporation's indirect auto lending portfolio.

Net charge-offs for the year ended December 31, 2022 were primarily attributable to a $0.7 million charge off on a commercial real estate loan.

The table below summarizes the Corporation’s allowance for credit losses, non-accrual loans, and ratio of net charge-offs and recoveries to average loans outstanding by loan category at or for the year ended December 31, 2023, and the allowance for loan losses, non-accrual loans, and ratio of net charge-offs and recoveries to average loans outstanding by loan category at or for the year ended December 31, 2022, by category (in thousands):

ALLOWANCE AND LOAN CREDIT RATIOS BY LOAN CATEGORY

Balance at December 31, 2023 Allowance for credit losses Allowance to loans 1

Non-performing loans Non-performing loans to loans 1

6 unchanged sentences

Total $ 22,517 1.14 % $ 10,411 0.53 % 216.28 % 0.05 %

(1) Ratio represents a percentage of loan category.

Balance at December 31, 2022 Allowance for loan losses Allowance to loans 1

7 unchanged sentences

Total $ 19,659 1.07 % $ 8,178 0.45 % 240.39 % 0.05 %

(1) Ratio represents a percentage of loan category.

Consolidated Ratios at December 31, 2023 2022

Non-performing loans to total loans 0.53 % 0.45 %

Allowance for loan losses to total loans 1.07 % 1.38 %

Allowance for loan losses to total loans, net of PPP 1.08 % 1.43 %

Allowance for loan losses to non-performing loans 240.39 % 259.17 %

1 Ratio is a percentage of loan category.

The decrease in the allowance to non-accrual loans was primarily due to a $0.1 million increase in non-accrual loans from 2021 to 2022, without an equivalent increase in the allowance allocated to non-accrual loans.

This was due to the sale of a large commercial real estate loan which carried a specifically allocated reserve of $1.5 million, resulting in the majority of non-accrual loans at December 31, 2022 being carried without a specific reserve allocation.

The decrease in the allowance for loan losses to outstanding loans can be attributed to the increase of $311.2.

million in outstanding loans, most of which were collectively evaluated for impairment at December 31, 2022, and therefore required lower allowance allocation rates to be applied.

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

The table below summarizes the Corporation's loan loss experience for the years ended December 31, 2022 and 2021 (in thousands, except ratio data):

SUMMARY OF LOAN LOSS EXPERIENCE

Years Ended December 31,

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

Allowance for credit losses to total loans (1)

1.14 % 1.07 %

Allowance for credit losses including unfunded commitments to total loans (1)

1.19 % 1.07 %

Allowance for credit losses to non-performing loans (1)

216.28 % 240.39 %

________________________________________________________________________________________________________________________________________

(1) December 31, 2022 ratios reflect the Corporations's allowance for loan losses.

The decrease in the allowance to non-accrual loans was primarily due to a $2.2 million increase in non-accrual loans from year end 2022 to year end 2023, without an equivalent increase in the allowance allocated to non-accrual loans.

This was primarily attributable to the addition of a $3.1 million commercial real estate relationship being placed on non-accrual, $2.2 million of which was well-collateralized, and required no specific allowance allocation.

The increase in the allowance for credit losses to outstanding loans can be attributed to the $0.9 million specific allocation made to the allowance in relation to the aforementioned non-accruing commercial real estate relationship, a change in methodology to reflect the adoption of CECL, and changes in the CECL model during the year.

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

The table below summarizes the Corporation's credit loss experience for the years ended December 31, 2023 and 2022 (in thousands, except ratio data):

SUMMARY OF CREDIT LOSS EXPERIENCE

2023 2022 (1)

Allowance for credit losses at beginning of year $ 19,659 $ 21,025

Impact of ASC 326 Adoption 374 —

Commercial and agricultural 281 20

2 unchanged sentences

Consumer loans 1,070 770

Total 1,494 739

Total Charge-Offs 1,383 1,494

Commercial and agricultural 22 42

2 unchanged sentences

Consumer loans 416 597

Total 682 823

Net charge-offs (recoveries) 812 (84)

Provision charged to operations (554) 17

Allowance for loan losses at end of year $ 19,659 $ 21,025

Total Recoveries 442 682

Net charge-offs 941 812

Provision (credit) for credit losses on-balance sheet exposure (2)

Allowance for credit losses at end of year $ 22,517 $ 19,659

(1) December 31, 2022 reflects the Corporations's allowance for loan losses.

(2) Additional provision related to off-balance sheet exposure was $163 thousand for the year ended December 31, 2023.

Other Real Estate Owned

At December 31, 2023, OREO totaled $0.3 million compared to $0.2 million at December 31, 2022.

There were four properties relating to residential mortgages and one property relating to a residential home equity loan added to OREO in 2022, and four residential properties were sold from OREO during 2022.

The table below summarizes the Corporation’s deposit composition by segment at December 31, 2022, and 2021, and the dollar and percent change from December 31, 2021 to December 31, 2022 (in thousands):

December 31, 2022 December 31, 2021 2022 v.

There were three properties relating to residential mortgages and two properties relating to residential home equity loans added to OREO in 2023.

Three residential properties were sold from OREO during 2023.

The table below summarizes the Corporation’s deposit composition by segment at December 31, 2023, and 2022, and the dollar and percent change from December 31, 2022 to December 31, 2023 (in thousands, except percentages):

2023 2022 2023 v.

Amount % of Total Amount % of Total $ Change % Change

1 unchanged sentence

Interest-bearing demand deposits 291,138 12.0 % 271,645 11.7 % 19,493 7.2 %

Money market accounts 640,840 27.5 % 654,553 30.4 % (13,713) (2.1) %

Insured money market deposits 623,714 25.7 % 640,840 27.5 % (17,126) (2.7) %

Savings deposits 249,144 10.3 % 279,029 12.0 % (29,885) (10.7) %

Certificates of deposits $250,000 or less 272,182 11.7 % 141,990 6.6 % 130,192 91.7 %

Certificates of deposits greater than $250,000 31,547 1.4 % 27,974 1.3 % 3,573 12.8 %

One-way brokered deposits 73,452 3.2 % — — % 73,452 N/A

Certificates of deposit $250,000 or less 365,058 15.0 % 272,182 11.7 % 92,876 34.1 %

Certificates of deposit greater than $250,000 76,804 3.1 % 31,547 1.4 % 45,257 143.5 %

Brokered deposits 142,776 5.9 % 73,452 3.2 % 69,324 94.4 %

Other time deposits 27,627 1.1 % 25,203 1.1 % 2,424 9.6 %

Total $ 2,327,227 100.0 % $ 2,155,433 100.0 % $ 171,794 8.0 %

Total deposits $ 2,429,427 100.0 % $ 2,327,227 100.0 % $ 102,200 4.4 %

Deposits totaled $2.429 billion at December 31, 2023, compared with $2.327 billion at December 31, 2022, an increase of $102.2 million, or 4.4%.

At December 31, 2022, demand deposit and money market accounts comprised 70.7% of total deposits compared with 77.9% at December 31, 2021.

The growth in deposits was attributable to an increase of $206.0 million in time deposits, $73.5 million of which were one-way brokered deposits, offset by decreases of $13.7 million in money market accounts, $13.1 million in interest-bearing demand deposits, $6.3 million in non-interest bearing demand deposits, and $1.2 million in savings deposits.

At December 31, 2023, demand deposit and insured money market deposits comprised 64.5% of total deposits compared with 70.7% at December 31, 2022.

The growth in deposits was attributable to an increase of $209.9 million in time deposits, or 52.2%, which includes customer time deposits and brokered deposits.

Customer time deposits increased $140.6 million, and brokered deposits increased $69.3 million.

Interest-bearing demand deposits increased $19.5 million.

These increases were offset by decreases of $80.2 million in non-interest bearing demand deposits, $29.9 million in savings deposits, and $17.1 million in insured money market deposits, primarily due to the higher interest rate environment, and a shift in the mix of deposits towards higher cost interest-bearing accounts such as time deposits, when compared to the prior year

At December 31, 2023, public funds deposits totaled $293.1 million compared to $298.9 million at December 31, 2022.

4 unchanged sentences

Public funds deposit accounts above the FDIC insured limit are collateralized by municipal bonds and eligible government and government agency securities such as those issued by the FHLB, Fannie Mae, and Freddie Mac.

The table below summarizes the Corporation’s public funds deposit composition by segment (in thousands):

The table below summarizes the Corporation’s public funds deposit composition by segment (in thousands, except percentages) as of December 31, 2023 and 2022:

Public Funds :

1 unchanged sentence

Interest-bearing demand deposits 63,370 62,219

Insured money market accounts 255,261 278,790

Insured money market deposits 186,192 205,112

Savings deposits 7,708 8,120

3 unchanged sentences

Percentage of public funds to total deposits 12.1 % 12.8 %

The aggregate amount of the Corporation's outstanding uninsured deposits was $548.0 million, or 24%, and $558.0 million, or 26%, as of December 31, 2022 and 2021, respectively.

As of December 31, 2022, the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than or equal to $250,000 was $31.5 million.

The aggregate amount of the Corporation's outstanding uninsured deposits was $655.7 million, or 27.0% of total deposits, and $700.9 million, or 30.1% of total deposits, as of December 31, 2023 and 2022, respectively.

As of December 31, 2023, the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than $250,000 was $76.8 million.

The table below presents the Corporation's scheduled maturity of those certificates as of December 31, 2023 (in thousands):

December 31, 2022

3 months or less $ 28,603

2 unchanged sentences

Over 12 months 1,128

Total $ 76,804

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

4 unchanged sentences

Total deposits $ 2,429,427 $ 2,327,227 $ 2,155,433 $ 2,037,774 $ 1,572,138

*All deposits, excluding those originated by the Capital Bank Division, and including one-way brokered deposits.

*All deposits, excluding those originated by the Capital Bank Division, and including brokered deposits.

In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits.

The Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC's brokered-deposit regulations.

This will apply to the Corporation's participation in the CDARS and ICS programs.

This applies to the Corporation's participation in the CDARS and ICS programs.

The CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit.

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(i) acquire deposits by entering new markets through denovo branching, (ii) training branch employees to identify and meet client financial needs with Bank products and services, (iii) link business and consumer loans to a primary checking account at the Bank, (iv) aggressively promote direct deposit of client’s payroll checks or benefit checks and (v) constantly monitor the Corporation’s pricing strategies to ensure competitive products and services.

The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates that it may use brokered deposits as a secondary source of funding to support asset growth.

The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates continued use of brokered deposits as a secondary source of funding to support asset growth.

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

FHLBNY overnight advances increased $81.2 million at December 31, 2022 when compared to 2021.

FHLBNY overnight advances were $31.9 million and $95.8 million at December 31, 2023 and 2022, respectively, decreasing $63.9 million at December 31, 2023 when compared to December 31, 2022.

For each year ended December 31, 2023, and 2022 respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity.

There were no FHLBNY term advances as of and for the years ended December 31, 2022, and 2021.

There were no FHLBNY or FRB term advances as of and for the years ended December 31, 2023, and 2022.

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

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The agreement with the third party is not designated as a hedge contract, therefore changes in fair value are recorded through other non-interest income.

Assets and liabilities associated with the agreements are recorded in other assets and other liabilities on the balance sheet.

Assets and liabilities associated with the agreements are recorded in Interest rate swap assets and Interest rate swap liabilities on the Consolidated Balance Sheets.

Gains and losses are recorded as other non-interest income.

The Corporation is exposed to credit loss equal to the fair value of the interest rate swaps, not the notional amount of the derivatives, in the event of nonperformance by the counterparty to the interest rate swap agreements.

Additionally, t he swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's consolidated balance sheets, which typically involves a day one gain.

Additionally, the swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's Consolidated Balance Sheets, which typically involves a day one gain.

Since the terms of the two interest rate swap agreements are identical, the income statement impact to the Corporation is limited to the day one gain and an allowance for credit loss exposure, in the event of nonperformance.

The Corporation recognized $0.3 million and $0.4 million in swap income for the years ended December 31, 2022 and 2021 , respectively.

The Corporation recognized $0.3 million in swap income for each of the years ended December 31, 2023 and 2022, respectively.

The Corporation also participates in the credit exposure of certain interest rate swaps in which it participates in the related commercial loan.

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Shareholders’ Equity

Total shareholders’ equity was $166.4 million at December 31, 2022, compared with $211.5 million at December 31, 2021, a decrease of $45.1 million, or 21.3%.

The decrease in shareholders' equity was due primarily to a $68.7 million decrease in accumulated other income (loss), offset by an increase of $23.0 million in retained earnings.

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

The increase in retained earnings was primarily due to net income of $28.8 million, offset by $5.8 million in dividends declared during the current year.

Total shareholders’ equity was $195.2 million at December 31, 2023, compared with $166.4 million at December 31, 2022, an increase of $28.9 million, or 17.3%.

The increase in shareholders' equity was due primarily to an increase of $18.1 million in retained earnings and a decrease of $9.2 million in accumulated other comprehensive loss.

The improvement in accumulated other comprehensive loss was primarily due to improvements to the fair value of the available for sale securities portfolio, when compared to the prior year.

Treasury stock decreased $1.1 million primarily due to the Corporation's issuance of shares related to the Corporation's employee benefit plans.

Total shareholders’ equity to total assets ratio was 7.20% at December 31, 2023 compared with 6.29% at December 31, 2022.

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The repurchase program permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Act of 1934.

As of March 10, 2023, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program at the weighted average cost of $40.42 per share.

The remaining buyback authority under the share repurchase program was 200,816 shares as of the March 10, 2023.

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

As of December 31, 2023, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program at the weighted average cost of $40.42 per share.

The remaining buyback authority under the share repurchase program was 200,816 shares as of December 31, 2023.

On June 22, 2023, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933.

The Corporation's Board of Directors approved the filing with the SEC of a Shelf Registration Statement to register for sale from time to time up to $75 million of the following securities:

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and (vi) subscription rights to purchase shares of common stock or debt securities.

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

The SEC declared the registration statement effective on July 13, 2023.

1 See the GAAP to Non-GAAP reconciliation on pages 63-65.

Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing, and financing activities of the Corporation.

The Corporation uses a variety of resources to meet its liquidity needs.

These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $250,000 or more, one-way brokered deposits, securities sold under agreements to repurchase and other borrowings.

These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $250,000 or more, brokered deposits, securities sold under agreements to repurchase and other borrowings.

The Corporation is a member of the FHLBNY, which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs.

Based on available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of $99.8 million and $161.0 million at December 31, 2022 and 2021, respectively.

The Corporation also had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which were available at December 31, 2022.

The Bank has pledged $254.6 million and $254.4 million of residential mortgage and home equity loans under a blanket lien arrangement at December 31, 2023 and 2022, respectively, as collateral for future borrowings.

Based on this available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of $225.3 million, and $195.6 million at December 31, 2023 and 2022, respectively.

FHLBNY overnight borrowing was $31.9 million and $95.8 million at December 31, 2023 and 2022, respectively.

In addition, the Corporation had a total of $60.0 million of unsecured lines of credit with five different financial institutions, all of which were available at December 31, 2023.

On March 12, 2023, the Treasury Department, Federal Reserve, and FDIC jointly announced a new liquidity program, the Bank Term Funding Program (BTFP), in response to the failure of two banks earlier that week.

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There will be no fees with the advance.

federally insured depository institution is eligible to participate in the BTFP.

The advances, which may have a term of up to one year, may be prepaid by the borrowing institution at any time (including for purposes of refinancing) without penalty.

federally insured depository institutions are eligible to participate in the BTFP.

The Bank is eligible to participate.

Subsequent to December 31, 2023, the Corporation received approval for, and has pledged collateral at the Federal Reserve for the purpose of utilizing the BTFP.

The BTFP expired on March 11, 2024.

Also available to the Corporation is the Discount Window Lending provided by the Federal Reserve Bank.

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

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Investing activities

Cash used in investing activities during the year ended December 31, 2022 predominantly resulted from a net increase in loans, offset by maturities, and principal collected on securities available for sale.

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

Cash used in investing activities during the years ended December 31, 2023 and 2022 predominantly resulted from a net increase in loans, offset by maturities, and principal collected on securities available for sale.

Financing activities

Cash provided by financing activities during the year ended December 31, 2022 resulted primarily from an increase in certificate of deposits, one-way brokered deposits, and FHLBNY overnight advances, offset by the payment of dividends to shareholders.

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

Cash provided by financing activities during the years ended December 31, 2023 and 2022 resulted primarily from an increase in certificate of deposits, brokered deposits, and FHLBNY overnight advances, offset by the payment of dividends to shareholders.

Off-balance Sheet Arrangements

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Unused portions of lines of credit (1)

251,777 251,777 — — —

Commitments to fund new loans 102,599 102,599 — — —

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Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized.

The new rule took effect on January 1, 2020.

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

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

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

As of December 31, 2023 the Bank has not elected to use the community bank leverage ratio.

Prompt corrective action regulations provide five classifications:

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

Additionally, the Bank exceeded the capital conservation buffer above the adequately capitalized risk-based capital ratios, as of December 31, 2023.

The regulatory capital ratios as of December 31, 2023 and 2022 were calculated under Basel III rules.

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The Corporation follows these practices.

As of or for the Years Ended

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

NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT

(in thousands, except ratio data) As of or for the Years Ended December 31,

Net Interest Mar g in - Fully Taxable Equivalent

Net interest income (GAAP) $ 74,457 $ 74,179

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This measure is meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s productivity measured by the amount of revenue generated for each dollar spent.

As of or for the Years Ended

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

(in thousands, except ratio data) As of or for the Years Ended December 31,

Efficiency Ratio 2023 2022

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net (gains) losses on security transactions 39 —

recognition of employee retention tax credit (2,370) —

Adjusted non-interest income (non-GAAP) $ 22,218 $ 21,436

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These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.

As of or for the Years Ended

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

(in thousands, except per share and ratio data) As of or for the Years Ended December 31,

TANGIBLE EQUITY AND TANGIBLE ASSETS (YEAR END) 2023 2022

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These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.

As of or for the Years Ended

December 31, December 31,

(in thousands, except ratio data) 2022 2021

(in thousands, except ratio data) As of or for the Years Ended December 31,

TANGIBLE EQUITY (AVERAGE) 2023 2022

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In the Corporation’s presentation of any such non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the supplemental financial information and explanations required under Regulation G.

As of or for the Years Ended

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

(in thousands, except per share and ratio data) As of or for the Years Ended December 31,

NON-GAAP NET INCOME 2023 2022

Reported net income (loss) (GAAP) $ 25,000 $ 28,783

Net changes in fair value of investments (net of tax) — —

Net (gains) losses on security transactions (net of tax) 29 —

Legal accruals and settlements (net of tax) — —

Remeasurement of net deferred tax asset — —

Recognition of employee retention tax credit (1,873) —

Net income (non-GAAP) $ 23,156 $ 28,783

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

What changed 10-K

Item 7. Management’s Discussion and Analysis