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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 2023
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 001-35741
chemungfinanciallogoa05.jpg
CHEMUNG FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
 
New York16-1237038
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
 
One Chemung Canal Plaza, Elmira, NY
14901
(Address of principal executive offices)(Zip Code)
 
(607) 737-3711 or (800) 836-3711
(Registrant's telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading SymbolName of exchange on which registered
Common stock, par value $.01 per shareCHMGThe Nasdaq Stock Market LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes: ☒         No: ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes: ☒        No: ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Non-accelerated filer
☒
Accelerated filer
☐
Smaller reporting company
☒
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act):
Yes: ☐       No: ☒
The number of shares of the registrant's common stock, $.01 par value, outstanding on November 1, 2023 was 4,722,636.



CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX

  PAGES
 
   
 
   
 
   
 
 
 
 
 
   
 
   
   
   
   
 
   
   
   
   
   
   
   
   
 
   
 
2


GLOSSARY OF ABBREVIATIONS AND TERMS

To assist the reader the Corporation has provided the following list of commonly used abbreviations and terms included in the Notes to the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Abbreviations
ACLAllowance for Credit Losses
AFSAvailable for sale securities
ALCOAsset-Liability Committee
AOCIAccumulated Other Comprehensive Income
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankChemung Canal Trust Company
Basel IIIThe Third Basel Accord of the Basel Committee on Banking Supervision
Board of DirectorsBoard of Directors of Chemung Financial Corporation
BOLIBank Owned Life Insurance
BTFPBank Term Funding Program
CAMCommon Area Maintenance Charges
CDARSCertificate of Deposit Account Registry Service
CDOCollateralized Debt Obligation
CECLCurrent expected credit loss
CFSCFS Group, Inc.
CorporationChemung Financial Corporation
CRMChemung Risk Management, Inc.
Dodd-Frank ActThe Dodd-Frank Wall Street Reform and Consumer Protection Act
EPSEarnings per share
Exchange ActSecurities Exchange Act of 1934
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FHLBNYFederal Home Loan Bank of New York
FRBBoard of Governors of the Federal Reserve System
FRBNYFederal Reserve Bank of New York
Freddie MacFederal Home Loan Mortgage Corporation
GAAPU.S. Generally Accepted Accounting Principles
HTMHeld to maturity securities
ICSInsured Cash Sweep Service
IFRSInternational Financial Reporting Standards
LGDLoss given default
MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
NAICSNorth American Industry Classification System
N/MNot meaningful
OPEBOther postemployment benefits
OREOOther real estate owned
PDProbability of default
3


Regulatory Relief ActEconomic Growth, Regulatory Relief, and Consumer Protection Act
ROAReturn on average assets
ROEReturn on average equity
RWARisk-weighted assets
SBASmall Business Administration
SECSecurities and Exchange Commission
Securities ActSecurities Act of 1933
Tax ActTax Cuts and Jobs Act of 2017
TDRsTroubled debt restructurings
WMGWealth Management Group

Terms
Allowance for Credit Losses Replaces the Allowance for Loan and Lease Losses as the contra asset account used to represent the lifetime amount the Corporation anticipates will be unrecoverable from its assets. The ACL conforms to the CECL requirements as outlined in ASU 2016-13, and was implemented by the Corporation on January 1, 2023.
Allowance for credit losses to total loansRepresents period-end allowance for credit losses divided by retained loans.
Assets under administrationRepresents assets that are beneficially owned by clients and all investment decisions pertaining to these assets are also made by clients.
Assets under managementRepresents assets that are managed on behalf of clients.
Basel IA set of international banking regulations, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. The main focus was mainly on credit risk by creating a bank asset classification system.
Basel III
A comprehensive set of reform measures designed to improve the regulation, supervision, and risk management within the banking sector. The reforms require banks to maintain proper leverage ratios and meet certain capital requirements.
Benefit obligationRefers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.
Brokered depositsRefers to deposits obtained from or through the mediation or assistance of a deposit broker.
Capital BankDivision of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany, Saratoga, and Schenectady.
Captive insurance companyA company that provides risk-mitigation services for its parent company.
CDARSProduct involving a network of financial institutions that exchange certificates of deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Collateralized debt obligationA structured financial product that pools together cash flow-generating assets, such as mortgages, bonds, and loans.
Collateralized mortgage obligationsA type of mortgage-backed security with principal repayments organized according to their maturities and into different classes based on risk.  The mortgages serve as collateral and are organized into classes based on their risk profile.
Dodd-Frank ActThe Dodd-Frank Act was enacted on July 21, 2010 and significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading, and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress.
Employee Retention Tax CreditThe Employee Retention Tax Credit is a refundable payroll tax credit available to eligible employers as defined by the CARES Act of 2020, and amended by the Consolidated Appropriations Act of 2021 and American Rescue Plan Act of 2021.
4


Fully taxable equivalent basisIncome from tax-exempt loans and investment securities that have been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates; the corresponding income tax impact related to tax-exempt items is recorded within income tax expense.
GAAPAccounting principles generally accepted in the United States of America.
Holding companyConsists of the operations for Chemung Financial Corporation (parent only).
ICSProduct involving a network of financial institutions that exchange interest-bearing money market deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit.  Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Loans held for saleResidential real estate loans originated for sale on the secondary market with maturities from 15-30 years.
Long term lease obligationAn obligation extending beyond the current year, which is related to a long term finance lease that is considered to have the economic characteristics of asset ownership.
Mortgage-backed securitiesA type of asset-backed security that is secured by a collection of mortgages.
Municipal clientsA political unit, such as a city, town, or village, incorporated for local self-government.
N/AData is not applicable or available for the period presented.
N/MNot meaningful.
Non-GAAPA calculation not made according to GAAP.
Obligations of state and political subdivisionsAn obligation that is guaranteed by the full faith and credit of a state or political subdivision that has the power to tax.
Obligations of U.S. GovernmentA federally guaranteed obligation backed by the full power of the U.S. government, including Treasury bills, Treasury notes and Treasury bonds.
Obligations of U.S. Government sponsored enterprisesObligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
OREORepresents real property owned by the Corporation, which is not directly related to its business and is most frequently the result of a foreclosure on real property.
Political subdivisionA county, city, town, or other municipal corporation, a public authority, or a publicly-owned entity that is an instrumentality of a state or a municipal corporation.
Pre-provision profit/(loss)Represents total net revenue less non-interest expense, before income tax expense (benefit). The Corporation believes that this financial measure is useful in assessing the ability of a bank to generate income in excess of its provision for credit losses.
Regulatory Relief ActThe Economic Growth, Regulatory Relief and Consumer Protection Act was enacted on May 24, 2018 provides certain limited amendments to the Dodd-Frank Act, as well as certain targeted modifications to other post-financial crisis regulatory requirements. In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements.
RWARisk-weighted assets consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On-balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off-balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. Risk-weighted assets also incorporate a measure for market risk related to applicable trading assets-debt and equity instruments. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets.
SBA loan poolsBusiness loans partially guaranteed by the SBA.
Securities sold under agreements to repurchaseSale of securities together with an agreement for the seller to buy back the securities at a later date.
5


Tax ActThe Tax Act was enacted on December 22, 2017 and amended the Internal Revenue Code of 1986. The legislation reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, with some related business deductions and credits being either reduced or eliminated.
TDRPrior to the adoption of ASU 2022-02 on January 1, 2023, a TDR was deemed to occur when the Corporation modified the original terms of a loan agreement by granting a concession to a borrower that was experiencing financial difficulty.
Trust preferred securitiesA hybrid security with characteristics of both subordinated debt and preferred stock which allows for early redemption by the issuer, makes fixed or variable payments, and matures at face value.
UnauditedFinancial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.
WMGProvides services as executor and trustee under wills and agreements, and guardian, custodian, trustee and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, financial planning, pension, estate planning and employee benefit administration services.

6


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)September 30,
2023		December 31,
2022
ASSETS
Cash and due from financial institutions$52,563 $29,309 
Interest-earning deposits in other financial institutions23,017 26,560 
Total cash and cash equivalents75,580 55,869 
Equity investments, at estimated fair value2,811 2,830 
Securities available for sale, at estimated fair value (amortized cost of $683,837, net of allowance for credit losses of $0 at September 30, 2023; and amortized cost of $729,198, net of allowance for credit losses on securities of $0 at December 31, 2022)
569,004 632,589 
Securities held to maturity, estimated fair value of $1,779 at September 30, 2023 and $2,402 at December 31, 2022 (net of allowance for credit losses of $0 at September 30, 2023 and December 31, 2022, respectively)
1,804 2,424 
FHLBNY and FRBNY Stock, at cost4,053 8,197 
Loans, net of deferred loan fees1,930,688 1,829,448 
Allowance for credit losses (1)
(20,252)(19,659)
Loans, net1,910,436 1,809,789 
Premises and equipment, net15,036 16,113 
Operating lease right-of-use assets5,850 6,449 
Goodwill21,824 21,824 
Bank-owned life insurance2,903 2,871 
Interest rate swap assets32,923 27,141 
Accrued interest receivable and other assets65,610 59,457 
Total assets$2,707,834 $2,645,553 
LIABILITIES AND SHAREHOLDERS' EQUITY 
Deposits: 
Non-interest-bearing$683,348 $733,329 
Interest-bearing1,790,151 1,593,898 
Total deposits2,473,499 2,327,227 
FHLBNY overnight advances— 95,810 
Long term finance lease obligation3,120 3,327 
Operating lease liabilities6,028 6,620 
Dividends payable1,463 1,455 
Interest rate swap liabilities32,923 27,196 
Accrued interest payable and other liabilities20,737 17,530 
Total liabilities2,537,770 2,479,165 
Shareholders' equity: 
Common stock, $0.01 par value per share, 10,000,000 shares authorized;
  5,310,076 issued at September 30, 2023 and December 31, 2022
53 53 
Additional paid-in capital47,974 47,331 
Retained earnings227,596 211,859 
Treasury stock, at cost; 589,004 shares at September 30, 2023 and 615,448
  shares at December 31, 2022
(16,880)(17,598)
Accumulated other comprehensive loss(88,679)(75,257)
Total shareholders' equity170,064 166,388 
Total liabilities and shareholders' equity$2,707,834 $2,645,553 
(1)Effective January 1, 2023, the allowance calculation is based upon Current Expected Credit loss methodology. Prior to January 1, 2023, the allowance calculation was based upon incurred loss methodology. Refer to Note 1 for further discussion.
See accompanying notes to unaudited consolidated financial statements.
7


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months Ended 
 September 30,		Nine Months Ended 
 September 30,
(in thousands, except per share data)2023202220232022
Interest and dividend income:
Loans, including fees$25,033 $17,670 $71,113 $47,541 
Taxable securities3,537 2,982 10,750 8,533 
Tax exempt securities258 267 778 805 
Interest-earning deposits187 80 400 116 
Total interest and dividend income29,015 20,999 83,041 56,995 
Interest expense:    
Deposits10,721 1,805 24,577 3,322 
Borrowed funds277 204 1,905 365 
Total interest expense10,998 2,009 26,482 3,687 
Net interest income18,017 18,990 56,559 53,308 
Provision (credit) for credit losses (1)
449 1,255 962 (1,634)
Net interest income after provision for credit losses17,568 17,735 55,597 54,942 
Non-interest income:    
WMG fee income2,533 2,403 7,716 7,788 
Service charges on deposit accounts1,018 989 2,918 2,789 
Interchange revenue from debit card transactions1,141 1,126 3,468 3,462 
Changes in fair value of equity investments(68)(93)(99)(448)
Net gains (losses) on sales of loans held for sale67 7 90 106 
Net gains on sales of other real estate owned— 22 14 68 
Income from bank-owned life insurance11 12 32 34 
Other3,106 570 4,539 2,219 
Total non-interest income7,808 5,036 18,678 16,018 
Non-interest expenses:    
Salaries and wages6,542 6,550 20,029 18,829 
Pension and other employee benefits1,979 2,024 5,467 5,679 
Other components of net periodic pension and postretirement benefits(174)(413)(522)(1,224)
Net occupancy 1,337 1,269 4,242 4,065 
Furniture and equipment 353 493 1,232 1,340 
Data processing2,480 2,087 7,334 6,742 
Professional services554 442 1,596 1,627 
Amortization of intangible assets— — — 15 
Marketing and advertising 218 266 720 726 
Other real estate owned 10 12 49 (17)
FDIC insurance525 389 1,608 987 
Loan expense249 (64)789 327 
Other1,595 1,522 4,873 4,491 
Total non-interest expenses15,668 14,577 47,417 43,587 
Income before income tax expense9,708 8,194 26,858 27,373 
Income tax expense 2,060 1,741 5,660 6,029 
Net income $7,648 $6,453 $21,198 $21,344 
Weighted average shares outstanding4,736 4,692 4,729 4,691 
Basic and diluted earnings per share$1.61 $1.37 $4.48 $4.55 

(1)Effective January 1, 2023, the allowance calculation is based upon Current Expected Credit loss methodology. Prior to January 1, 2023, the allowance calculation was based upon incurred loss methodology. Refer to Note 1 for further discussion.
See accompanying notes to unaudited consolidated financial statements.
8


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 Three Months Ended 
 September 30,		Nine Months Ended 
 September 30,
(in thousands)2023202220232022
Net income$7,648 $6,453 $21,198 $21,344 
Other comprehensive loss    
Unrealized holding losses on securities available for sale(18,893)(33,266)(18,224)(99,431)
Tax effect(4,952)(8,719)(4,776)(26,050)
Net of tax amount(13,941)(24,547)(13,448)(73,381)
Change in funded status of defined benefit pension plan and other benefit plans:   
Reclassification adjustment for amortization of net actuarial loss12 16 36 41 
Total before tax effect12 16 36 41 
Tax effect4 5 10 11 
Net of tax amount8 11 26 30 
Total other comprehensive loss(13,933)(24,536)(13,422)(73,351)
Comprehensive income (loss)$(6,285)$(18,083)$7,776 $(52,007)
See accompanying notes to unaudited consolidated financial statements.
9



CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)

(in thousands, except share and per share data)Common StockAdditional Paid-in CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive LossTotal
Balances at June 30, 2022$53 $47,196 $200,870 $(18,084)$(55,345)$174,690 
Net income— — 6,453 — — 6,453 
Other comprehensive loss— — — — (24,536)(24,536)
Restricted stock awards— 153 — — — 153 
Restricted stock units for directors' deferred compensation plan— 95 — — — 95 
Cash dividends declared ($0.31 per share)
— — (1,449)— — (1,449)
Sale of 2,540 shares of treasury stock (a)
— 41 — 71 — 112 
Forfeiture of 48 shares of restricted stock awards
— 2 — (2)— — 
Balances at September 30, 2022$53 $47,487 $205,874 $(18,015)$(79,881)$155,518 
Balances at June 30, 2023$53 $47,740 $221,412 $(17,033)$(74,746)$177,426 
Net income— — 7,648 — — 7,648 
Other comprehensive loss— — — — (13,933)(13,933)
Restricted stock awards— 289 — — — 289 
Restricted stock units for directors' deferred compensation plan— 5 — — — 5 
Distribution of 2,981 shares of treasury stock grants for employee restricted stock awards
— (86)— 86 — — 
Cash dividends declared ($0.31 per share)
— — (1,464)— — (1,464)
Sale of 2,359 shares of treasury stock (a)
— 26 — 67 — 93 
Balances at September 30, 2023$53 $47,974 $227,596 $(16,880)$(88,679)$170,064 
(a) All treasury stock sales were completed at the prevailing market price with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan which is a defined contribution plan sponsored by the Bank.


See accompanying notes to unaudited consolidated financial statements.
10


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share and per share data)Common StockAdditional Paid-in CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive LossTotal
Balances at January 1, 2022$53 $46,901 $188,877 $(17,846)$(6,530)$211,455 
Net income— — 21,344 — — 21,344 
Other comprehensive loss— — — — (73,351)(73,351)
Restricted stock awards— 486 — — — 486 
Restricted stock units for directors' deferred compensation plan— 195 — — — 195 
Distribution of 3,985 shares of treasury stock grants for employee restricted stock awards
— (112)— 112 — — 
Cash dividends declared ($0.93 per share)
— — (4,347)— — (4,347)
Distribution of 8,575 shares of treasury stock for directors' compensation
— (139)— 244 — 105 
Repurchase of 15,388 shares of common stock
— — — (695)— (695)
Sale of 7,222 shares of treasury stock (a)
— 124 — 204 — 328 
Forfeiture of 729 shares of restricted stock awards
— 32 — (34)— (2)
Balances at September 30, 2022$53 $47,487 $205,874 $(18,015)$(79,881)$155,518 
Balances at January 1, 2023$53 $47,331 $211,859 $(17,598)$(75,257)$166,388 
Cumulative effect of accounting change (b)— — (1,076)— — (1,076)
Balances at January 1, 2023, as adjusted53 47,331 210,783 (17,598)(75,257)165,312 
Net income— — 21,198 — — 21,198 
Other comprehensive loss— — — — (13,422)(13,422)
Restricted stock awards— 837 — — — 837 
Restricted stock units for directors' deferred compensation plan— 15 — — — 15 
Distribution of 7,558 shares of treasury stock grants for employee restricted stock awards
— (217)— 217 — — 
Cash dividends declared ($0.93 per share)
— — (4,385)— — (4,385)
Distribution of 8,492 shares of treasury stock for directors' compensation
— (147)— 243 — 96 
Repurchase of 2,148 shares of common stock
— — — (98)— (98)
Sale of 12,868 shares of treasury stock (a)
— 144 — 368 — 512 
Forfeiture of 326 shares of restricted stock awards
— 11 — (12)— (1)
Balances at September 30, 2023$53 $47,974 $227,596 $(16,880)$(88,679)$170,064 

(a) All treasury stock sales were completed at the prevailing market price with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan which is a defined contribution plan sponsored by the Bank.
(b) Due to implementation of ASC 326. See "Adoption of New Accounting Standards" discussion in Note 1.
See accompanying notes to unaudited consolidated financial statements.
11


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)Nine Months Ended 
 September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:20232022
Net income$21,198 $21,344 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of right-of-use assets599 588 
Amortization of intangible assets— 15 
Provision (credit) for credit losses (1)
962 (1,634)
Loss on disposal of fixed assets3 20 
Depreciation and amortization of fixed assets1,533 1,691 
Amortization of premiums on securities, net1,880 3,143 
Gain on sales of loans held for sale, net(90)(106)
Proceeds from sales of loans held for sale3,064 342 
Loans originated and held for sale(2,974)160 
Net gains on sale of other real estate owned(14)(68)
Fair value adjustment on other real estate owned(3)— 
Net change in fair value of equity investments99 448 
Proceeds from sales of trading assets39 36 
Purchase of equity investments(119)(197)
Increase in other assets and accrued interest receivable(1,350)(19,518)
Increase in accrued interest payable3,225 133 
Expense related to restricted stock units for directors' deferred compensation plan15 195 
Expense related to employee restricted stock awards837 486 
Payments on operating leases(592)(568)
Net gain on interest rate swaps(55)(225)
(Decrease) increase in other liabilities(964)26,434 
Income from bank owned life insurance(32)(34)
  Net cash provided by operating activities27,261 32,685 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, calls, and principal paydowns on securities available for sale46,687 72,611 
Proceeds from maturities and principal collected on securities held to maturity619 1,306 
Purchases of securities available for sale(3,207)(23,502)
Purchases of securities held to maturity— (735)
Purchase of FHLBNY and FRBNY stock(42,878)(3,175)
Redemption of FHLBNY and FRBNY stock47,022 3,521 
Proceeds from sales of fixed assets— 125 
Purchases of premises and equipment(459)(448)
Proceeds from sale of other real estate owned154 279 
Net increase in loans(101,780)(225,558)
Net cash used in investing activities(53,842)(175,576)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts(42,532)23,600 
Increase in time deposits188,804 153,507 
Net change in FHLB overnight advances(95,810)(13,860)
Payments made on finance leases(207)(200)
Purchase of treasury stock(98)(695)
Sale of treasury stock512 328 
Cash dividends paid(4,377)(4,347)
Net cash provided by financing activities46,292 158,333 
Net increase in cash and cash equivalents19,711 15,442 
Cash and cash equivalents, beginning of period55,869 26,981 
Cash and cash equivalents, end of period$75,580 $42,423 

(1)Effective January 1, 2023, the allowance calculation is based upon Current Expected Credit loss methodology. Prior to January 1, 2023, the allowance calculation was based upon incurred loss methodology. Refer to Note 1 for further discussion.
See accompanying notes to unaudited consolidated financial statements.
12


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
(in thousands)Nine Months Ended 
 September 30,
Supplemental disclosure of cash flow information:20232022
Cash paid for:
Interest$23,257 $3,554 
Income taxes6,038 4,305 
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned171 292 
Dividends declared, not yet paid1,463 1,450 
See accompanying notes to unaudited consolidated financial statements.
13


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1        SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization

The Corporation, through its wholly-owned subsidiaries, the Bank and CFS, provides a wide range of banking, financing, fiduciary and other financial services to its clients.  The Corporation and the Bank are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.

CRM, a wholly-owned subsidiary of the Corporation, which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.

Basis of Presentation

The accompanying unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 8 of Regulation S-X of the Exchange Act.  These financial statements include the accounts of the Corporation and its subsidiaries, and all significant intercompany balances and transactions are eliminated in consolidation.  Amounts in the prior periods' consolidated financial statements are reclassified whenever necessary to conform to the current period's presentation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The unaudited consolidated financial statements should be read in conjunction with the Corporation's 2022 Annual Report on Form 10-K for the year ended December 31, 2022. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.


Reclassifications
Amounts in the prior year financial statements are reclassified whenever necessary to conform to the current year's presentation.

Recent Accounting Pronouncements

Accounting Standards Adopted in 2023:

Financial Instruments - Credit Losses - Topic 326
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The ASU supersedes prior GAAP by replacing the incurred loss impairment method with a methodology that reflects lifetime expected credit losses and requires the consideration of a broader range of reasonable and supportable information to form loss estimates. In November 2019, the FASB adopted an amendment to postpone the effective date of ASU 2016-13 to January 2023, for some entities, including certain Securities and Exchange Commission filers. As a smaller reporting company, the Corporation was eligible for and elected delayed adoption.
The Corporation adopted the standard on January 1, 2023, and recognized a one-time cumulative-effect adjustment to retained earnings, of $1.5 million, or $1.1 million, net of tax effects, of which $1.1 million reflected the establishment of an allowance for credit losses on unfunded commitments, and $0.4 million reflected additional allowance related to the loan portfolio. No adjustment was recognized related to the securities portfolio.
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The quantitative component of the estimate relies on the statistical relationship between the projected value of an economic indicator and the implied historical loss experience among a curated group of peers. The Corporation utilized regression analyses of peer data, in which the Corporation was included, and where observed credit losses and selected economic factors were used to determine suitable loss drivers for modeling the lifetime rates of probability of default (PD). A loss given default rate (LGD) is assigned to each pool for each period based on these PD outcomes. The model fundamentally utilizes an expected discounted cash flow (DCF) analysis for all loan portfolio segments. The DCF analysis is run at the instrument-level and incorporates an array of loan-specific data points and segment-implied assumptions to determine the lifetime expected loss attributable to each instrument. An implicit "hypothetical loss" is derived for each period of the DCF, and helps establish the present value of future cash flows for each period. The reserve applied to a specific instrument is the difference between the sum of the present value of future cash flows and the book balance of the loan at the measurement date.
Portfolio segments are the level at which loss assumptions are applied to a pool of loans based on the similarity of risk characteristics inherent in the included instruments, relying on FFIEC Call Report codes. The loss driver for each loan portfolio segment is derived from a readily available and reasonable economic forecast, chiefly the FOMC of the Federal Reserve's projections of civilian unemployment and year-over-year U.S. GDP growth. Forecasts are applied over a four-quarter period and revert to the lookback period's historical mean for the economic indicator over an eight-quarter horizon, on a straight-line basis.
The model incorporates qualitative factor adjustments in order to calibrate the model for risk in each portfolio segment that may not be captured through quantitative analysis. Determinations regarding qualitative adjustments are reflective of management's expectation of loss conditions differing from those already captured in the quantitative component of the model. The Corporation evaluates all assets exhibiting potential credit risk, including off-balance sheet exposures on unfunded commitments, and debt securities. Allowances on unfunded commitments utilize a calculated funding rate to estimate the Corporation's future obligations, and applies the overall loss rate assigned to each concurrent pool. Securities backed by U.S. government-related agencies are determined to be zero-credit loss securities. Potential losses on obligations of states, political subdivisions, and corporate bonds and notes are analyzed by management to determine whether any of the losses may be attributable to credit-related factors on an individual basis.
The adoption of ASU 2016-13 had an initial impact on the allowance for credit losses on loans of $0.4 million, reflecting changes in the methodology when compared to the allowance for loan losses on loans at December 31, 2022. The increase represents an increase of $0.2 million in the allowance relating to commercial loans, the combined effect of changes to commercial & agricultural and commercial real estate, and an increase of $0.2 million in consumer loans, mostly in relation to indirect auto lending. The remainder of the adoption impact, or $1.1 million, related to the establishment of an allowance for credit losses for unfunded commitments.

Troubled Debt Restructurings and Vintage Disclosures - Topic 326
In March 2022, the FASB issued ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. The ASU made certain targeted amendments specific to troubled debt restructurings (TDRs) by creditors and vintage disclosure related to gross write-offs. Upon adoption, the Corporation was required to apply the loan and refinancing restructuring guidance to determine whether a modification results in a new loan or a continuation of an existing loan, rather than applying the recognition and measurement guidance for TDRs. The ASU also requires companies to disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. The Corporation adopted the standard prospectively, beginning January 1, 2023, concurrently with the aforementioned ASU 2016-13, and its impact can be found within Note 4 to the consolidated financial statements. The Corporation established a methodology for identifying and reporting the financial impact of modifications made to borrowers who are deemed to be experiencing financial difficulty.

Reference Rate Reform - ASC 848
ASU No. 2022-06, Deferral of the Sunset Date of Topic 848, was issued in December 2022 and defers the date for which accounting relief can be applied under Topic 848. ASU 2022-06 applies to entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The objective of the guidance in Topic 848 is to ease the burden in accounting related to the recognition of the effects of reference rate reform on financial reporting. A sunset provision was included within Topic 848 based on expectations of when LIBOR would cease being published. The Corporation had adopted the accounting relief provisions of Topic 848 effective October 1, 2020. The amendments in ASU 2022-06 defer the sunset date of Topic 848 from December 31, 2022 to December 31, 2024, after which entities will no longer be able to apply the accounting relief in Topic 848. ASU 2022-06 was effective for all entities upon its issuance. The adoption of the provisions of Topic 848, as amended, did not have a material impact on the Corporation’s consolidated financial statements.

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Accounting Standards Pending Adoption
Disclosure Improvements - Codification Amendments in Response to the SEC's Disclosure Update and Simplification Initiative

ASU 2023-06, Disclosure Improvements, was issued in October 2023 and modifies the disclosure or presentation requirements of a variety of Topics in the Accounting Standards Codification, in response to SEC Release No. 33-10532, Disclosure Update and Simplifications, issued on August 17, 2018. The SEC identified several disclosure requirements that overlap with U.S. GAAP, but require incremental information to comply with disclosure standards in Regulations S-X and Regulation S-K. ASU 2023-06 codifies specific amendments to align the codification with SEC regulations. The effective date for each amendment is that date on which each disclosure requirement is removed from Regulation S-K and Regulation S-X. The Corporation anticipates that certain amendments will pertain to the Corporation's financial disclosures or presentation, but cannot determine with certainty which amendments are applicable until removal from Regulation S-K or Regulation S-X.

Use of Analogous Accounting Standards

Under U.S. GAAP, there is no specific guidance related to government assistance received by a for-profit entity that is not in the form of a loan, income tax credit, or revenue from a contract with a customer. Therefore, the Corporation must rely upon analogous accounting standards to determine appropriate treatment when such circumstances arise. The Corporation accounted for the recognition of the Employee Retention Tax Credit (ERTC) using ASC 958-605, Revenue Recognition for Not-for-Profit entities. ASC 958-10-15-1 specifies that certain Subtopics within ASC 958-605 also apply to business entities.

The Corporation considers the recognition of the ERTC to be analogous to the stipulations for "conditional contributions" under ASC 958-605-20. Conditional contributions have at least one barrier needing to be overcome before the recipient is entitled to the assets transferred or promised; there must be a right-of-return to the contributor; and barriers to the condition should be measurable. The Corporation recognized the gross amount of the ERTC through non-interest income during the period in which the barrier was overcome, identified as the period during which amended tax returns were filed. The Corporation incurred and recognized additional income tax expense during the period in relation to its amended tax returns.





NOTE 2        EARNINGS PER COMMON SHARE (shares in thousands)

Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Issuable shares, including those related to directors’ restricted stock shares, are considered outstanding and are included in the computation of basic earnings per share. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities and are considered outstanding at grant date. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur.

Earnings per share were computed by dividing net income by 4,736 and 4,692 weighted average shares outstanding for the three month periods ended September 30, 2023 and 2022, respectively. Earnings per share were computed by dividing net income by 4,729 and 4,691 weighted average shares outstanding for the nine month periods ended September 30, 2023 and 2022, respectively. There were no common stock equivalents during the three and nine month periods ended September 30, 2023 or 2022.


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NOTE 3        SECURITIES

Amortized cost and estimated fair value of securities available for sale are as follows (in thousands):
 September 30, 2023
 Amortized CostUnrealized GainsUnrealized LossesAllowance for Credit LossesEstimated Fair Value
U.S. Treasury notes and bonds$61,033 $— $6,033 $— $55,000 
Mortgage-backed securities, residential486,189 — 97,158 — 389,031 
Obligations of states and political subdivisions39,535 — 3,382 — 36,153 
Corporate bonds and notes25,750 — 5,405 — 20,345 
SBA loan pools71,330 96 2,951 — 68,475 
Total$683,837 $96 $114,929 $— $569,004 

 December 31, 2022
 Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
U.S. Treasury notes and bonds$61,800 $— $6,225 $55,574 
Mortgage-backed securities, residential518,838 — 83,707 435,131 
Obligations of states and political subdivisions39,828 2 938 38,892 
Corporate bonds and notes25,750 — 3,780 21,970 
SBA loan pools82,982 155 2,116 81,022 
Total$729,198 $157 $96,766 $632,589 


Amortized cost and estimated fair value of securities held to maturity are as follows (in thousands):
 September 30, 2023
 Amortized CostUnrecognized GainsUnrecognized LossesAllowance for Credit LossesEstimated Fair Value
Obligations of states and political subdivisions$824 $— $— $— $824 
Time deposits with other financial institutions980 — 25 — 955 
Total$1,804 $— $25 $— $1,779 

 December 31, 2022
 Amortized CostUnrecognized GainsUnrecognized LossesEstimated Fair Value
Obligations of states and political subdivisions$952 $— $— $952 
Time deposits with other financial institutions1,472 — 22 1,450 
Total$2,424 $— $22 $2,402 

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The amortized cost and estimated fair value of debt securities are shown below by expected maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands):
September 30, 2023
Available for SaleHeld to Maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Within one year$5,480 $5,243 $529 $523 
After one, but within five years101,840 91,028 635 616 
After five, but within ten years18,528 14,821 640 640 
After ten years470 406 — — 
126,318 111,498 1,804 1,779 
Mortgage-backed securities, residential486,189 389,031 — — 
SBA loan pools71,330 68,475 — — 
Total$683,837 $569,004 $1,804 $1,779 

There were no proceeds from sales and calls of securities resulting in gains or losses for the nine month periods ended September 30, 2023 and 2022.


The following tables summarize the investment securities available for sale with unrealized losses at September 30, 2023 and December 31, 2022 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):
 Less than 12 months12 months or longerTotal
September 30, 2023Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. Treasury notes and bonds$981 $14 $54,019 $6,019 $55,000 $6,033 
Mortgage-backed securities, residential— — 389,031 97,158 389,031 97,158 
Obligations of states and political subdivisions16,794 1,460 19,359 1,922 36,153 3,382 
Corporate bonds and notes7,269 2,732 13,076 2,673 20,345 5,405 
SBA loan pools6,474 15 54,094 2,936 60,568 2,951 
Total temporarily impaired securities$31,518 $4,221 $529,579 $110,708 $561,097 $114,929 

 Less than 12 months12 months or longerTotal
December 31, 2022Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. Treasury notes and bonds$1,011 $30 $54,563 $6,195 $55,574 $6,225 
Mortgage-backed securities, residential79,891 7,621 355,240 76,086 435,131 83,707 
Obligations of states and political subdivisions37,847 938 — — 37,847 938 
Corporate bonds and notes4,515 485 7,455 3,295 11,970 3,780 
SBA loan pools14,333 925 51,123 1,191 65,456 2,116 
Total temporarily impaired securities$137,597 $9,999 $468,381 $86,767 $605,978 $96,766 



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Assessment of Available for Sale Debt Securities for Credit Risk

Management assesses the decline in fair value of investment securities on a regular basis. Unrealized losses on debt securities may occur from current market conditions, increases in interest rates since the time of purchase, a structural change in an investment, volatility of earnings of a specific issuer, or deterioration in credit quality of the issuer. Management evaluates both qualitative and quantitative factors to assess whether an impairment exists. The following is a discussion of the credit quality characteristics of portfolio segments carrying material unrealized losses as of September 30, 2023.

Obligations of U.S. Governmental agencies and sponsored enterprises:
At September 30, 2023, the majority of the Corporation’s unrealized losses in available for sale investment securities related to mortgage-backed securities, issued by government-sponsored entities and agencies. Declines in fair value are attributable to changes in interest rates and illiquidity, not credit quality. The Corporation does not have the intent, and it is not likely to be required to, sell these securities prior to their anticipated recovery. Because the Corporation considers these obligations to carry zero loss estimates, no ACL has been recorded as of September 30, 2023.

Corporate bonds and notes:
The Corporation's corporate bonds and notes portfolio is comprised of subordinated debt issues of community and regional banks. Management considers the credit quality of these investments on an individual basis. Management reviewed the collectability of these securities, taking into consideration such factors as the financial condition of the issuers, reported regulatory capital ratios of the issuers, and credit ratings when available, among other pertinent factors. All corporate bond debt securities continue to accrue interest and make payments as expected with no defaults or deferrals on the part of the issuers. Therefore, the Corporation considers the potential credit risk of the issuers to be immaterial, and has not allocated an ACL on its corporate bonds and notes portfolio as of September 30, 2023.


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NOTE 4        LOANS AND ALLOWANCE FOR CREDIT LOSSES

The composition of the loan portfolio, net of deferred origination fees and costs, is summarized as follows (in thousands):
September 30, 2023December 31, 2022
Commercial and agricultural:
Commercial and industrial$254,215 $252,044 
Agricultural269 249 
Commercial mortgages:
Construction140,480 108,243 
Commercial mortgages, other946,053 888,670 
Residential mortgages281,361 285,672 
Consumer loans:
Home equity lines and loans87,078 81,401 
Indirect consumer loans211,046 202,124 
Direct consumer loans10,186 11,045 
Total loans, net of deferred loan fees and costs1,930,688 1,829,448 
Allowance for credit losses(20,252)(19,659)
Loans, net$1,910,436 $1,809,789 

The Corporation's concentrations of credit risk by loan type are reflected in the preceding table. The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above.

Accrued interest receivable on loans amounted to $7.2 million at September 30, 2023 and $6.5 million at December 31, 2022. Accrued interest receivable on loans is included in the "accrued interest receivable and other assets" line item on the Corporation's Consolidated Balance Sheets, and is excluded from the estimate of credit losses.

The following table presents the activity in the allowance for credit losses by portfolio segment for the three month period ended September 30, 2023 (in thousands):
Three Months Ended September 30, 2023
Allowance for credit lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance, July 1, 2023$4,121 $10,994 $1,905 $3,152 $20,172 
Charge-offs(81)— — (350)(431)
Recoveries4 1 — 70 75 
Net recoveries (charge-offs)(77)1 — (280)(356)
Provision (1)
102 30 (37)341 436 
Ending balance, September 30, 2023$4,146 $11,025 $1,868 $3,213 $20,252 
(1)Additional provision related to off-balance sheet exposure was $(13)thousand for the three months ended September 30, 2023.

Refer to Note 1-Summary of Significant Accounting Policies in our Annual report on Form 10-K for the fiscal year ended December 31, 2022, for the allowance for loan losses policy effective prior to the adoption of ASC 326-Financial Instruments-Credit Losses, as of December 31, 2022.




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The following table presents the activity in the allowance for loan losses by portfolio segment for the three month period ended September 30, 2022 (in thousands):
Three Months Ended September 30, 2022
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance, July 1, 2022$3,564 $10,314 $1,714 $1,893 $17,485 
Charge-offs— — — (277)(277)
Recoveries6 1 40 121 168 
Net recoveries (charge-offs)6 1 40 (156)(109)
Provision
(55)671 42 597 1,255 
Ending balance, September 30, 2022$3,515 $10,986 $1,796 $2,334 $18,631 


The following table presents the activity in the allowance for credit losses by portfolio segment for the nine month period ended September 30, 2023 (in thousands):
Nine Months Ended September 30, 2023
Allowance for credit lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance, January 1, 2023$3,373 $11,576 $1,845 $2,865 $19,659 
Cumulative effect adjustment for the adoption of ASC 326909 (695)(16)176 374 
Beginning balance after cumulative effect adjustment, January 1, 20234,282 10,881 1,829 3,041 20,033 
Charge-offs(281)— — (785)(1,066)
Recoveries13 1 — 281 295 
Net recoveries (charge-offs)(268)1 — (504)(771)
Provision (1)
132 143 39 676 990 
Ending balance, September 30, 2023$4,146 $11,025 $1,868 $3,213 $20,252 

(1)Additional provision related to off-balance sheet exposure was $(28) thousand for the nine months ended September 30, 2023.

The following table presents the activity in the allowance for loan losses by portfolio segment for the nine month period ended September 30, 2022 (in thousands):
Nine Months Ended September 30, 2022
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance, January 1, 2022$3,591 $13,556 $1,803 $2,075 $21,025 
Charge-offs(20)(687)— (599)(1,306)
Recoveries37 3 40 466 546 
Net recoveries (charge-offs)17 (684)40 (133)(760)
Provision(93)(1,886)(47)392 (1,634)
Ending balance, September 30, 2022$3,515 $10,986 $1,796 $2,334 $18,631 





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Unfunded Commitments
The allowance for credit losses on unfunded commitments is recognized as a liability (other liabilities in the Consolidated Balance Sheets), with adjustments to the reserve recognized in the provision for credit losses on the Consolidated Statements of Income. The Corporation established a reserve for unfunded commitments in conjunction with its adoption of ASC 326-Financial Instruments-Credit Losses.

The following table presents the activity in the allowance for credit losses on unfunded commitments for the three month periods ended September 30, 2023 and 2022:
For the Three Months Ended
Allowance for credit losses on unfunded commitments September 30, 2023September 30, 2022
Beginning balance $1,041 $— 
Impact of ASC 326 adoption— — 
Provision for unfunded commitments 13 — 
Ending balance $1,054 $— 

The following table presents the provision for credit losses on loans and unfunded commitments for the three month period ended September 30, 2023, based upon the current expected credit loss methodology, and the provision for loan losses on loans for the three month period ended September 30, 2022, based upon the incurred loss methodology:
For the Three Months Ended
Provision for credit lossesSeptember 30, 2023September 30, 2022
Provision for credit losses on loans $436 $1,255 
Provision for unfunded commitments 13 — 
Total provision (credit) for credit losses$449 $1,255 

The following table presents the activity in the allowance for credit losses on unfunded commitments for the nine month periods ended September 30, 2023 and 2022:
For the Nine Months Ended
Allowance for credit losses on unfunded commitments September 30, 2023September 30, 2022
Beginning balance $— $— 
Impact of ASC 326 adoption1,082 — 
Provision for unfunded commitments (28)— 
Ending balance $1,054 $— 
The following table presents the provision for credit losses on loans and unfunded commitments for the nine month period ended September 30, 2023, based upon the current expected credit loss methodology, and the provision for loan losses on loans for the nine month period ended September 30, 2022, based upon the incurred loss methodology:
For the Nine Months Ended
Provision for credit lossesSeptember 30, 2023September 30, 2022
Provision for credit losses on loans $990 $(1,634)
Provision for unfunded commitments (28)— 
Total provision (credit) for credit losses$962 $(1,634)
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The following tables present the balance in the allowance for credit losses and allowance for loan losses, and the amortized cost basis in loans by portfolio segment, as of September 30, 2023 and December 31, 2022 (in thousands):
 September 30, 2023
Allowance for credit lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Ending allowance balance attributable to loans:
Individually analyzed$1,089 $30 $— $— $1,119 
Collectively analyzed3,057 10,995 1,868 3,213 19,133 
   Total ending allowance balance$4,146 $11,025 $1,868 $3,213 $20,252 

 December 31, 2022
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Ending allowance balance attributable to loans:
Individually evaluated for impairment$1,078 $38 $— $31 $1,147 
Collectively evaluated for impairment2,295 11,538 1,845 2,834 18,512 
   Total ending allowance balance$3,373 $11,576 $1,845 $2,865 $19,659 


 September 30, 2023
Loans:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Loans individually analyzed $1,174 $3,825 $— $— $4,999 
Loans collectively analyzed253,310 1,082,708 281,361 308,310 1,925,689 
   Total ending loans balance$254,484 $1,086,533 $281,361 $308,310 $1,930,688 


 December 31, 2022
Loans:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Loans individually evaluated for impairment$2,112 $4,383 $723 $264 $7,482 
Loans collectively evaluated for impairment250,181 992,530 284,949 294,306 1,821,966 
   Total ending loans balance$252,293 $996,913 $285,672 $294,570 $1,829,448 












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Modifications to Loans Made to Borrowers Experiencing Financial Difficulty
Effective January 1, 2023, the Corporation adopted ASU 2022-02, Financial Instruments-Credit Losses (Topic 326)-Troubled Debt Restructurings and Vintage Disclosures. The Corporation may occasionally make modifications to loans where the borrower is considered to be experiencing financial difficulty. Types of modifications considered under ASU 2022-02 include principal reductions, interest rate reductions, term extensions, or a combination thereof.

The following tables summarize the amortized cost basis of loans modified during the three and nine month periods ended September 30, 2023:
Three Months Ended September 30, 2023
Loans modified under ASU 2022-02:Principal ReductionInterest Rate ReductionTerm ExtensionPayment DelayCombinationTotal
(%) of Loan Class (1)
Commercial mortgages, other$— $— $875 $— $— $875 0.09 %
Home equity lines and loans — — 117 — — 117 0.13 %
Total$— $— $992 $— $— $992 
(1) Represents the amortized cost basis of loans modified during the period as a percentage of the period-end loan balances by class.
Nine Months Ended September 30, 2023
Loans modified under ASU 2022-02:Principal ReductionInterest Rate ReductionTerm ExtensionPayment DelayCombinationTotal
(%) of Loan Class (1)
Commercial mortgages, other$— $— $1,150 $1,920 $— $3,070 0.32 %
Home equity lines and loans— — 117 — — 117 0.13 %
Total$— $— $1,267 $1,920 $— $3,187 
(1) Represents the amortized cost basis of loans modified during the period as a percentage of the period-end loan balances by class.

The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the three month period ended September 30, 2023:

Three Months Ended September 30, 2023
Effect of loan modifications under ASU 2022-02:Principal Reduction
(in thousands)		Weighted-average interest rate reduction (%)Weighted-average term extension
(in months)		Weighted-average payment delay
(in months)
Commercial mortgages, other$——%6—
Home equity lines and loans——%180—


The following table presents the financial effect of the loan modifications presented above to borrowers experiencing financial difficulty during the nine month period ended September 30, 2023:

Nine Months Ended September 30, 2023
Effect of loan modifications under ASU 2022-02:Principal Reduction
(in thousands)		Weighted-average interest rate reduction (%)Weighted-average term extension
(in months)		Weighted-average payment delay
(in months)
Commercial mortgages, other$——%194
Home equity lines and loans——%180—

There were no loans modified to borrowers experiencing financial difficulty during the prior twelve months that experienced payment default during the three and nine month periods ended September 30, 2023.


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Individually Analyzed Loans
Effective January 1, 2023, the Corporation began analyzing loans on an individual basis when management determined that the 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 at December 31, 2022. Loans individually analyzed include certain non-accrual commercial and consumer loans, as well as certain loans previously identified under prior troubled debt restructuring (TDR) guidance.
As of September 30, 2023, the amortized cost basis of individually analyzed loans amounted to $5.0 million, of which $4.1 million were considered collateral dependent. For collateral dependent loans where the borrower is experiencing financial difficulty and repayment is likely to be substantially provided through the sale or operation of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan, at measurement date. Certain assets held as collateral may be exposed to future deterioration in fair value, particularly due to changes in real estate markets or usage.

The following table presents the amortized cost basis and related allowance for credit loss of individually analyzed loans considered to be collateral dependent as of September 30, 2023 (in thousands):
September 30, 2023
Amortized Cost BasisRelated Allowance
Commercial and agricultural:
Commercial and industrial (1) (3)
$286 $211 
Commercial mortgages:
Commercial mortgages, other (1) (2)
3,847 30 
Total$4,133 $241 
(1) Secured by commercial real estate
(2) Secured by residential real estate
(3) Secured by business assets






























25


As of January 1, 2023, a loan is classified for individual analysis, when based on current information and events, management has determined that it no longer exhibits risk characteristics consistent with its designated pool. This differs from the definition of loans considered to be impaired as of December 31, 2022. The Corporation considered a loan to be impaired when, based on currently available information, it was deemed probable that the Corporation would not be able to collect on the loan's contractually determined principal and interest payments. The Corporation identified loss allocations for impaired loans on an individual basis, and in conformity with its methodology under the incurred loss framework.

The following is a summary of impaired loans as of December 31, 2022 (in thousands):
 December 31, 2022
With no related allowance recorded:Unpaid Principal BalanceRecorded InvestmentAllowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial$1,026 $1,025 $— 
Commercial mortgages:
Construction5 5 — 
Commercial mortgages, other4,346 4,341 — 
Residential mortgages767 760 — 
Consumer loans:
Home equity lines and loans154 138 — 
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial1,086 1,088 1,078 
Commercial mortgages:
Commercial mortgages, other38 38 38 
Consumer loans:
Home equity lines and loans126 127 31 
Total$7,548 $7,522 $1,147 




























26


The following tables present the average amortized cost basis and interest income recognized on loans individually evaluated, by class of loans, for the three and nine month periods ended September 30, 2023 and 2022 (in thousands):

 Three Months Ended 
 September 30, 2023		Three Months Ended 
 September 30, 2022
With no related allowance recorded:Average Amortized Cost Basis
Interest Income Recognized (1)
Average Amortized Cost Basis
Interest Income Recognized (1)
Commercial and agricultural:
   Commercial and industrial$163 $— $585 $— 
Agricultural— — — — 
Commercial mortgages:
Construction— — 55 — 
Commercial mortgages, other3,863 3 4,150 7 
Residential mortgages— — 846 9 
Consumer loans:
Home equity lines & loans51 — 149 — 
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial1,268 4 1,643 2 
Agricultural14 — — — 
Commercial mortgages:
Commercial mortgages, other31 — 42 — 
Consumer loans:
Home equity lines and loans78 — 134 — 
Total$5,468 $7 $7,604 $18 
(1)Cash basis interest income approximates interest income recognized.
 Nine Months Ended 
 September 30, 2023		Nine Months Ended 
 September 30, 2022
With no related allowance recorded:Average Amortized Cost Basis
Interest Income Recognized (1)
Average Amortized Cost Basis
Interest Income Recognized (1)
Commercial and agricultural:
   Commercial and industrial$520 $— $761 $— 
Agricultural— — — — 
Commercial mortgages:
Construction2 — 88 — 
Commercial mortgages, other4,052 12 4,171 14 
Residential mortgages359 — 890 19 
Consumer loans:
Home equity lines & loans123 — 157 — 
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial1,168 13 1,545 5 
Agricultural7 — — — 
Commercial mortgages:
Commercial mortgages, other34 — 1,563 — 
Consumer loans:
Home equity lines and loans42 — 139 — 
Total$6,307 $25 $9,314 $38 
(1)Cash basis interest income approximates interest income recognized.
27


The following table presents the amortized cost basis in non-accrual, loans past due 90 days or more and still accruing, and the amortized basis of non-accrual loans with no associated allocation in the allowance for credit losses related to non-accrual loans, by class of loan as of September 30, 2023 and December 31, 2022 (in thousands):

Non-accrual with no allowance for credit lossesNon-accrualLoans Past Due 90 Days or More and Still Accruing
September 30, 2023September 30, 2023December 31, 2022September 30, 2023December 31, 2022
Commercial and agricultural:
Commercial and industrial$22 $1,004 1,946 $— $1 
Agricultural— 28 — — — 
Commercial mortgages:
Construction— — 5 — — 
Commercial mortgages, other3,795 3,824 3,928 — — 
Residential mortgages776 776 986 — — 
Consumer loans:
Home equity lines and loans565 565 760 — — 
Indirect consumer loans621 621 540 — — 
Direct consumer loans8 8 13 — — 
Total$5,787 $6,826 $8,178 $— $1 



The following tables present the aging of the amortized cost basis of loans as of September 30, 2023 and December 31, 2022 (in thousands):
September 30, 2023
 30 - 59 Days Past Due60 - 89 Days Past Due90 Days or More Past DueTotal Past DueLoans Not Past DueTotal
Commercial and agricultural:
Commercial and industrial$195 $16 $— $211 $254,004 $254,215 
Agricultural— — — — 269 269 
Commercial mortgages: 
Construction2,206 — — 2,206 138,274 140,480 
Commercial mortgages, other1,073 4 261 1,338 944,715 946,053 
Residential mortgages1,217 63 255 1,535 279,826 281,361 
Consumer loans: 
Home equity lines and loans151 49 421 621 86,457 87,078 
Indirect consumer loans1,313 312 368 1,993 209,053 211,046 
Direct consumer loans9 — 6 15 10,171 10,186 
Total$6,164 $444 $1,311 $7,919 $1,922,769 $1,930,688 

28


December 31, 2022
 30 - 59 Days Past Due60 - 89 Days Past Due90 Days or More Past DueTotal Past DueLoans Not Past DueTotal
Commercial and agricultural:
Commercial and industrial$74 $3 $1 $78 $251,966 $252,044 
Agricultural— — — — 249 249 
Commercial mortgages: 
Construction— — — — 108,243 108,243 
Commercial mortgages, other1,058 — 486 1,544 887,126 888,670 
Residential mortgages1,360 709 294 2,363 283,309 285,672 
Consumer loans: 
Home equity lines and loans193 121 442 756 80,645 81,401 
Indirect consumer loans1,397 193 250 1,840 200,284 202,124 
Direct consumer loans2 19 1 22 11,023 11,045 
Total$4,084 $1,045 $1,474 $6,603 $1,822,845 $1,829,448 


Credit Quality Indicators

The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower’s ability to service its debt and affirm the risk ratings for the loans at least annually.

For retail loans, which include residential mortgages, indirect and direct consumer loans, and home equity lines and loans, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment. Retail loans are not rated until they become 90 days past due.

The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly.  The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines):

Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention.  If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position at some future date.

Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any.  Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Commercial loans not meeting the criteria above to be considered criticized or classified, are considered to be pass rated loans. Loans listed as not rated, are included in groups of homogeneous loans performing under terms of the loan notes.







29


Based on the analyses performed as of September 30, 2023, the risk category of the amortized cost basis of loans by class of loans and vintage, as well as the gross charge-offs by loan class and vintage for the period, are as follows (in thousands):
Term Loans Amortized Cost by Origination YearRevolving Loans Amortized CostRevolving Loans Converted to TermTotal
20232022202120202019Prior
Commercial & industrial
Pass$26,871 $39,555 $18,180 $11,240 $34,620 $8,896 $98,625 $— $237,987 
Special mention191 — 195 — — 442 4,142 8,765 13,735 
Substandard — 28 992 122 25 318 — 169 1,654 
Doubtful— — — — — 815 — 24 839 
Total27,062 39,583 19,367 11,362 34,645 10,471 102,767 8,958 254,215 
Gross charge-offs — — — — 9 272 — — 281 
Agricultural
Pass— 16 157 — — — 68 — 241 
Special mention— — — — — — — — — 
Substandard— — — — — — — 28 28 
Doubtful— — — — — — — — — 
Total— 16 157 — — — 68 28 269 
Gross charge-offs— — — — — — — — — 
Construction
Pass11,309 2,898 — — 104 1,187 122,838 — 138,336 
Special mention— — — — — — — — — 
Substandard— — — — 2,144 — — — 2,144 
Doubtful— — — — — — — — — 
Total11,309 2,898 — — 2,248 1,187 122,838 — 140,480 
Gross charge-offs— — — — — — — — — 
Commercial mortgages
Pass 76,617 213,196 124,125 94,752 39,742 170,439 199,582 — 918,453 
Special mention— 2,543 8,286 1,016 — 3,562 — 5,516 20,923 
Substandard273 1,133 350 — — 4,794 97 — 6,647 
Doubtful— — — — — 30 — — 30 
Total76,890 216,872 132,761 95,768 39,742 178,825 199,679 5,516 946,053 
Gross charge-offs— — — — — — — — — 
Residential mortgages
Not rated11,858 51,718 50,393 70,699 15,602 47,380 32,935 — 280,585 
Substandard — 107 63 — 173 433 — — 776 
Total 11,858 51,825 50,456 70,699 15,775 47,813 32,935 — 281,361 
Gross charge-offs— — — — — — — — — 
Home equity lines and loans
Not rated11,622 17,562 5,948 3,242 2,949 11,183 34,007 — 86,513 
Substandard — 76 — — — 290 199 — 565 
Total11,622 17,638 5,948 3,242 2,949 11,473 34,206 — 87,078 
Gross charge-offs— — — — — — 12 — 12 
Indirect consumer
Not rated58,871 105,980 25,749 10,666 4,903 4,256 — — 210,425 
Substandard 105 191 128 40 44 113 — — 621 
Total58,976 106,171 25,877 10,706 4,947 4,369 — — 211,046 
Gross charge-offs88 276 176 94 20 45 — — 699 
Direct consumer
Not rated2,599 3,125 945 390 108 379 2,631 — 10,177 
Substandard— 6 — 3 — — — — 9 
Total 2,599 3,131 945 393 108 379 2,631 — 10,186 
Gross charge-offs— 8 8 4 — 54 — — 74 
Total loans $200,316 $438,134 $235,511 $192,170 $100,414 $254,517 $495,124 $14,502 $1,930,688 
Total gross charge-offs$88 $284 $184 $98 $29 $371 $12 $— $1,066 
30


Prior to the adoption of ASC 326-Financial Instruments-Credit Losses, loans not meeting the criteria above that were analyzed individually as part of the above described process were considered pass rated loans as of December 31, 2022. Based upon the analyses performed as of December 31, 2022, the risk category of the recorded investment of loans by class of loans was as follows (in thousands):
 December 31, 2022
 Not RatedPassSpecial MentionSubstandardDoubtfulTotal
Commercial and agricultural:
Commercial and industrial$— $235,900 $13,349 $2,899 $893 $253,041 
Agricultural— 250 — — — 250 
Commercial mortgages:
Construction— 108,488 178 5 — 108,671 
Commercial mortgages— 860,389 23,938 7,825 38 892,190 
Residential mortgages285,459 — — 986 — 286,445 
Consumer loans:
Home equity lines and loans80,942 — — 760 — 81,702 
Indirect consumer loans202,050 — — 540 — 202,590 
Direct consumer loans11,094 — — 13 — 11,107 
Total$579,545 $1,205,027 $37,465 $13,028 $931 $1,835,996 

For residential and consumer loan classes, the Corporation also evaluated credit quality based on the aging status of the loan, which was presented by payment activity. The following table presents the amortized cost basis in residential and consumer loans based on payment activity as of September 30, 2023 (in thousands):
 Consumer Loans
September 30, 2023Residential MortgagesHome Equity Lines and LoansIndirect Consumer LoansOther Direct Consumer Loans
Performing$280,585 $86,513 $210,425 $10,178 
Non-Performing776 565 621 8 
 Total$281,361 $87,078 $211,046 $10,186 

Prior to the adoption of ASC 326-Financial Instruments-Credit Losses, the Corporation also evaluated credit quality based on the aging status of the loan, which was presented, by payment activity. The following table presents the recorded investment in residential and consumer loans based on payment activity as of December 31, 2022 (in thousands):
 Consumer Loans
December 31, 2022Residential MortgagesHome Equity Lines and LoansIndirect Consumer LoansOther Direct Consumer Loans
Performing$285,459 $80,942 $202,050 $11,094 
Non-Performing986 760 540 13 
 Total$286,445 $81,702 $202,590 $11,107 

31


NOTE 5        FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  There are three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.

Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Corporation used the following methods and significant assumptions to estimate fair value on a recurring basis:

Available for Sale Securities:  The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs).

Equity Investments: Securities that are held to fund a deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value included in earnings. The fair values of equity investments are determined by quoted market prices (Level 1 inputs).

Individually Analyzed Loans: At the time a loan is considered individually analyzed, it is valued at the lower of cost or fair value. Individually analyzed loans carried at fair value have been partially charged-off or receive specific allocations as part of the allowance for credit loss accounting. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, typically resulting in a Level 3 fair value classification. Impaired loans are analyzed on a quarterly basis for additional impairment and adjusted accordingly.

OREO: Assets acquired through or in lieu of loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral dependent loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition.

32


Derivatives: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize credit default rate assumptions (Level 3 inputs).

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurement at September 30, 2023 Using
Financial Assets:Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
U.S. Treasury notes and bonds$55,000 $55,000 $— $— 
Mortgage-backed securities, residential389,031 — 389,031 — 
Obligations of states and political subdivisions36,153 — 36,153 — 
Corporate bonds and notes20,345 — 12,885 7,460 
SBA loan pools68,475 — 68,475 — 
Total available for sale securities$569,004 $55,000 $506,544 $7,460 
Equity investments, at fair value$2,318 $2,318 $— $— 
Derivative assets$32,923 $— $32,923 $— 
Financial Liabilities:
Derivative liabilities$32,923 $— $32,923 $— 

There were no transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2023.
Fair Value Measurement at December 31, 2022 Using
Financial Assets:Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
U.S. Treasury notes and bonds$55,574 $55,574 $— $— 
Mortgage-backed securities, residential435,131 — 435,131 — 
Obligations of states and political subdivisions38,892 — 38,892 — 
Corporate bonds and notes21,970 — 21,970 — 
SBA loan pools81,022 — 81,022 — 
Total available for sale securities$632,589 $55,574 $577,015 $— 
Equity investments, at fair value$2,246 $2,246 $— $— 
Derivative assets$27,141 $— $27,141 $— 
Financial Liabilities:
Derivative liabilities$27,196 $— $27,196 $— 
There were no transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2022.
33


The Corporation transfers assets and liabilities between levels within the hierarchy when the methodology to obtain the fair value changes such that there are either more or fewer unobservable inputs as of the end of the reporting period. The Corporation transferred its investment in eight corporate sub-debt issuances from Level 2 to Level 3 in the nine month period ended September 30, 2023. Illiquidity in new issuances of comparable bonds and the size of issuances led to pricing difficulties, and the transfer to Level 3 within the period. The Corporation utilizes a "beginning of reporting period" timing assumption when recognizing transfers between hierarchy levels, consistent with ASC 820-10-50-2.

The table below presents a reconciliation of all assets measured at fair value on a recurring basis using unobservable inputs (Level 3) for the three months and nine months ended September 30, 2023 and September 30, 2022.
Corporate Bonds:For the Three Months Ended
Level 3 Financial Assets September 30, 2023September 30, 2022
Balance of recurring Level 3 assets at July 1, 2023$8,593 $— 
Total gains and losses for the period:— — 
Included in other comprehensive income190 — 
Transfers into Level 3— — 
Transfers out of Level 3(1,323)
Balance of recurring Level 3 assets at September 30, 2023$7,460 $— 

Corporate Bonds:For the Nine Months Ended
Level 3 Financial Assets September 30, 2023September 30, 2022
Balance of recurring Level 3 assets at January 1, 2023$— $— 
Total gains and losses for the period:— — 
Included in other comprehensive income(1,172)— 
Transfers into Level 39,955 — 
Transfers out of Level 3(1,323)
Balance of recurring Level 3 assets at September 30, 2023$7,460 $— 


September 30, 2023Fair ValueValuation TechniquesUnobservable InputRange [Weighted Average] at September 30, 2023
Corporate bonds and notes$7,460 Discounted cash flowMarket discount rate
12.00% -12.00% [12.00%]

There were two corporate bonds with a fair value of $1.3 million which were transferred out of Level 3 and into Level 2 during the three and nine month period ended September 30, 2023 based on the availability of observable market data for these investments.

There were no financial assets measured on a recurring basis that were considered to be Level 3 fair value by the Corporation at December 31, 2022. Assets and liabilities measured at fair value on a non-recurring basis at September 30, 2023 and December 31, 2022 were considered to be immaterial to the presentation of the consolidated financial statements.













34


FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of other financial instruments, at September 30, 2023 and December 31, 2022, are as follows (in thousands):
September 30, 2023
Financial assets:Carrying AmountQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)		Estimated Fair Value (1)
Cash and due from financial institutions$52,563 $52,563 $— $— $52,563 
Interest-earning deposits in other financial institutions23,017 23,017 — — 23,017 
Equity investments2,811 2,811 — — 2,811 
Securities available for sale569,004 55,000 506,544 7,460 569,004 
Securities held to maturity1,804 — 955 824 1,779 
FHLBNY and FRBNY stock4,053 — — — N/A
Loans, net and loans held for sale1,910,436 — — 1,830,014 1,830,014 
Accrued interest receivable9,422 233 1,957 7,232 9,422 
Derivative Assets32,923 — 32,923 — 32,923 
Financial liabilities:     
Deposits:     
Demand, savings, and insured money market accounts$1,882,311 $1,882,311 $— $— $1,882,311 
Time deposits591,188 — 593,637 — 593,637 
FHLBNY overnight advances— — — — — 
Accrued interest payable4,089 121 3,968 — 4,089 
Derivative Liabilities32,923 — 32,923 — 32,923 
(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
 December 31, 2022
Financial assets:Carrying AmountQuoted Prices in Active Markets for Identical Assets
(Level 1)		Significant Other Observable Inputs
(Level 2)		Significant Unobservable Inputs
(Level 3)
Estimated Fair Value (1)
Cash and due from financial institutions$29,309 $29,309 $— $— $29,309 
Interest-earning deposits in other financial institutions26,560 26,560 — — 26,560 
Equity investments2,830 2,830 — — 2,830 
Securities available for sale632,589 55,574 577,015 — 632,589 
Securities held to maturity2,424 — 1,450 952 2,402 
FHLBNY and FRBNY stock8,197 — — — N/A
Loans, net and loans held for sale1,809,789 — — 1,757,171 1,757,171 
Accrued interest receivable8,682 132 2,002 6,548 8,682 
Derivative Asset27,141 — 27,141 — 27,141 
Financial liabilities:     
Deposits:     
Demand, savings, and insured money market accounts$1,924,843 $1,924,843 $— $— $1,924,843 
Time deposits402,384 — 403,572 — 403,572 
FHLBNY overnight advances95,810 — 95,819 — 95,819 
Accrued interest payable864 66 798 — 864 
Derivative Liabilities27,196 — 27,196 — 27,196 
(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
35


NOTE 6        LEASES

Operating Leases

The Corporation leases certain branch properties under long-term, operating lease agreements. The leases expire at various dates through 2033 and generally include renewal options. As of September 30, 2023, the weighted average remaining lease term was 8.03 years with a weighted average discount rate of 3.38%. Rent expense was $0.2 million for the three months ended September 30, 2023. Rent expense was $0.7 million for the nine months ended September 30, 2023. Certain leases provide for increases in future minimum annual rent payments as defined in the lease agreements. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees.

Leased branch properties at September 30, 2023 and December 31, 2022 consist of the following (in thousands):
September 30, 2023December 31, 2022
Operating lease right-of-use asset$6,449 $7,234 
Less: accumulated amortization(599)(785)
Less: lease termination— — 
Add: new lease agreement and modifications— — 
Operating lease right-of-use-assets, net$5,850 $6,449 

The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of September 30, 2023 (in thousands):
YearAmount
2023$249 
2024924 
2025841 
2026845 
2027854 
2028 and thereafter3,168 
Total minimum lease payments6,881 
Less: amount representing interest(853)
Present value of net minimum lease payments$6,028 

The Corporation had one operating lease that was signed on October 19, 2023, but had not yet commenced.

Finance Leases

The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of September 30, 2023, the weighted average remaining lease term was 9.55 years with a weighted average discount rate of 3.41%. The Corporation has included these leases in premises and equipment as of September 30, 2023 and December 31, 2022 as follows (in thousands):
September 30, 2023December 31, 2022
Buildings$5,572 $5,572 
Less: accumulated depreciation(2,789)(2,540)
Net book value$2,783 $3,032 

36


The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value of net minimum lease payments as of September 30, 2023 (in thousands):
YearAmount
2023$98 
2024391 
2025409 
2026425 
2027428 
2028 and thereafter1,987 
Total minimum lease payments3,738 
Less: amount representing interest(618)
Present value of net minimum lease payments$3,120 

As of September 30, 2023, the Corporation had no finance leases that were signed, but had not yet commenced.

Related Party Transactions
The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through July, 2029 from a former member of the Corporation's Board of Directors with monthly rent and CAM related expenses totaling $4 thousand per month. This Board member retired from the Corporation's Board of Directors as of June 7, 2022. Rent and CAM paid to this Board member while serving on the Board totaled $25 thousand for the nine month period ended September 30, 2022.

The Bank leases its branch located at 2 Rush Street, Schenectady, New York, under a lease agreement through February, 2033 from a member of the Corporation's Board of Directors with monthly rent and CAM related expenses totaling $9 thousand per month. Rent and CAM related expenses paid to this Board member totaled $28 thousand and $25 thousand for the three month periods ended September 30, 2023 and 2022, respectively. Rent and CAM related expenses paid to this Board member totaled $81 thousand and $76 thousand for the nine month periods ended September 30, 2023 and 2022, respectively.


NOTE 7        GOODWILL AND INTANGIBLE ASSETS

The changes in goodwill included in the core banking segment during the nine month periods ended September 30, 2023 and 2022 were as follows (in thousands):
 20232022
Beginning of year$21,824 $21,824 
Acquired goodwill— — 
Ending balance September 30,$21,824 $21,824 

The Corporation had no aggregate amortization expense for the three month periods ended September 30, 2023 and 2022. The Corporation had no aggregate amortization expense for the nine month period ended September 30, 2023, and $15 thousand for the nine month period ended September 30, 2022.

The amount of goodwill reflected in the Corporation's Unaudited Consolidated Financial statements is required to be tested by management for impairment on at least an annual basis. Goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred.


NOTE 8        COMMITMENTS AND CONTINGENCIES

The Corporation is a party to certain financial instruments with off-balance sheet risk such as commitments under standby letters of credit, unused portions of lines of credit, overdraft protection and commitments to fund new loans. In accordance with GAAP, these financial instruments are not recorded in the financial statements. The Corporation's policy is to record such instruments when funded. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk.  Such transactions are generally used by the Corporation to manage clients' requests for funding and other client needs.
37



In conjunction with the Corporation's adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), an allowance for credit losses on unfunded commitments was established as of January 1, 2023, to comply with the accounting standard requirements. As of September 30, 2023, the allowance for credit losses on unfunded commitments was $1.1 million.

The following table lists the contractual amounts of financial instruments with off-balance sheet risk at September 30, 2023 and December 31, 2022 (in thousands):
 September 30, 2023December 31, 2022
 Fixed RateVariable RateFixed RateVariable Rate
Commitments to make loans$32,776 $84,198 $44,481 $75,028 
Unused lines of credit3,475 338,636 2,887 326,188 
Standby letters of credit— 17,987 — 17,211 

On February 4, 2020, the Corporation filed a lawsuit against Pioneer Bank, Albany, New York, in the Supreme Court of the State of New York in the County of Albany. As disclosed in the Corporation’s September 12, 2019 Current Report on Form 8-K, the Bank owns a participating interest totaling $4.2 million in an approximately $36.0 million commercial credit facility on which the borrower defaulted due to fraudulent activity. The Bank’s complaint alleges that Pioneer Bank, as lead bank, breached the participation agreement and engaged in fraud and negligent misrepresentation. The Corporation received a recovery of $0.5 million in April, 2020, and continues to pursue recovery of the remaining $3.7 million and accumulated expenses as a result of purchasing the participation interest.

In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of September 30, 2023, we believe that we are not a party to any additional pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.


NOTE 9        ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

Accumulated other comprehensive income (loss) represents the net unrealized holding gains or losses on securities available for sale and the funded status of the Corporation's defined benefit pension plan and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect.

The following is a summary of the changes in accumulated other comprehensive income (loss) by component, net of tax, for the periods indicated (in thousands):
 Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at July 1, 2023$(70,803)$(3,943)$(74,746)
Other comprehensive income before reclassification(13,941)— (13,941)
Amounts reclassified from accumulated other comprehensive income— 8 8 
Net current period other comprehensive income (loss)(13,941)8 (13,933)
Balance at September 30, 2023$(84,744)$(3,935)$(88,679)

 Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at July 1, 2022$(51,329)$(4,016)$(55,345)
Other comprehensive income before reclassification(24,547)— (24,547)
Amounts reclassified from accumulated other comprehensive income— 11 11 
Net current period other comprehensive income (loss)(24,547)11 (24,536)
Balance at September 30, 2022$(75,876)$(4,005)$(79,881)


38


Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at January 1, 2023$(71,296)$(3,961)$(75,257)
Other comprehensive income before reclassification(13,448)— (13,448)
Amounts reclassified from accumulated other comprehensive income— 26 26 
Net current period other comprehensive income(13,448)26 (13,422)
Balance at September 30, 2023$(84,744)$(3,935)$(88,679)
Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at January 1, 2022$(2,495)$(4,035)$(6,530)
Other comprehensive income before reclassification(73,381)— (73,381)
Amounts reclassified from accumulated other comprehensive income— 30 30 
Net current period other comprehensive income(73,381)30 (73,351)
Balance at September 30, 2022$(75,876)$(4,005)$(79,881)


The following is the reclassification out of accumulated other comprehensive income for the periods indicated (in thousands):
Details about Accumulated Other Comprehensive Income (Loss) ComponentsThree Months Ended 
 September 30,		Affected Line Item
in the Statement Where
Net Income is Presented
20232022
Amortization of defined pension plan and other benefit plan items:       
Prior service costs (a)$— $— Other components of net periodic pension and postretirement benefits
Actuarial losses (a)12 16 Other components of net periodic pension and postretirement benefits
Tax effect(4)(5)Income tax expense
Net of tax8 11  
Total reclassification for the period, net of tax$8 $11  
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).

Details about Accumulated Other Comprehensive Income (Loss) ComponentsNine Months Ended September 30,Affected Line Item
in the Statement Where
Net Income is Presented
20232022
Amortization of defined pension plan and other benefit plan items:       
Prior service costs (a)$— $— Other components of net periodic pension and postretirement benefits
Actuarial losses (a)36 41 Other components of net periodic pension and postretirement benefits
Tax effect(10)(11)Income tax expense
Net of tax26 30  
Total reclassification for the period, net of tax$26 $30  
(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).

39


NOTE 10    REVENUE FROM CONTRACTS WITH CUSTOMERS

All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following tables present the Corporation's non-interest income by revenue stream and reportable segment for the three and nine months ended September 30, 2023 and 2022 (in thousands). Items outside the scope of ASC 606 are noted as such.

Three Months Ended September 30, 2023
Revenue by Operating Segment: Non-interest incomeCore BankingWMG
Holding Company, CFS, and CRM(b)
Total
Service charges on deposit accounts
         Overdraft fees$817 $— $— $817 
         Other201 — — 201 
Interchange revenue from debit card transactions1,141 — — 1,141 
WMG fee income— 2,533 — 2,533 
CFS fee and commission income— — 243 243 
Net gains (losses) on sales of OREO— — — — 
Net gains on sales of loans(a)
67 — — 67 
Loan servicing fees(a)
35 — — 35 
Changes in fair value of equity investments(a)
(82)— 14 (68)
Income from bank-owned life insurance(a)
11 — — 11 
Other(a)
2,812 — 16 2,828 
Total non-interest income (loss)$5,002 $2,533 $273 $7,808 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
Three Months Ended September 30, 2022
Revenue by Operating Segment: Non-interest incomeCore BankingWMG
Holding Company, CFS, and CRM(b)
Total
Service charges on deposit accounts
         Overdraft fees$846 $— $— $846 
         Other143 — — 143 
Interchange revenue from debit card transactions1,126 — — 1,126 
WMG fee income— 2,403 — 2,403 
CFS fee and commission income— — 251 251 
Net gains (losses) on sales of OREO22 — — 22 
Net gains on sales of loans(a)
7 — — 7 
Loan servicing fees(a)
38 — — 38 
Changes in fair value of equity investments(a)
(96)— 3 (93)
Income from bank-owned life insurance(a)
12 — — 12 
Other(a)
319 — (38)281 
Total non-interest income$2,417 $2,403 $216 $5,036 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.

40


Nine Months Ended September 30, 2023
Revenue by Operating Segment: Non-interest incomeCore BankingWMG
Holding Company, CFS, and CRM(b)
Total
Service charges on deposit accounts
         Overdraft fees$2,308 $— $— $2,308 
         Other610 — — 610 
Interchange revenue from debit card transactions3,468 — — 3,468 
WMG fee income— 7,716 — 7,716 
CFS fee and commission income— — 749 749 
Net gains (losses) on sales of OREO14 — — 14 
Net gains on sales of loans(a)
90 — — 90 
Loan servicing fees(a)
107 — — 107 
Net gains on sales of securities(a)
— — — — 
Changes in fair value of equity investments(a)
67 — (166)(99)
Income from bank-owned life insurance(a)
32 — — 32 
Other(a)
3,658 — 25 3,683 
Total non-interest income$10,354 $7,716 $608 $18,678 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.

Nine Months Ended September 30, 2022
Revenue by Operating Segment: Non-interest incomeCore BankingWMG
Holding Company, CFS, and CRM(b)
Total
Service charges on deposit accounts
         Overdraft fees$2,246 $— $— $2,246 
         Other543 — — 543 
Interchange revenue from debit card transactions3,462 — — 3,462 
WMG fee income— 7,788 — 7,788 
CFS fee and commission income— — 775 775 
Net gains on sales of OREO68 — — 68 
Net gains on sales of loans(a)
106 — — 106 
Loan servicing fees(a)
115 — — 115 
Net gains on sales of securities(a)
— — — — 
Change in fair value of equity securities(a)
(446)— (2)(448)
Income from bank-owned life insurance(a)
34 — — 34 
Other(a)
1,424 — (95)1,329 
Total non-interest income$7,552 $7,788 $678 $16,018 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.


41


A description of the Corporation's revenue streams accounted for under ASC 606 follows:

Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which included services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are recognized at the time the maintenance occurs. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.

Interchange Income from Debit Card Transactions: The Corporation earns interchange fees from debit cardholder transactions conducted through the MasterCard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with transaction processing services provided to the cardholder.

WMG Fee Income (Gross): The Corporation earns wealth management fees from its contracts with customers to manage assets for investment, and/or to conduct transactions on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at quarter-end.

CFS Fee and Commission Income (Net): The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The Corporation (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers. Investment brokerage fees are presented net of related costs. The Corporation also earns fees from tax services provided to its customers.

Net Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.

42


NOTE 11    COMPONENTS OF QUARTERLY AND YEAR TO DATE NET PERIODIC BENEFIT COSTS

The components of net periodic expense for the Corporation’s pension and other benefit plans for the periods indicated are as follows (in thousands):
 Three Months Ended 
 September 30,		Nine Months Ended 
 September 30,
 2023202220232022
Qualified Pension Plan
Service cost, benefits earned during the period$— $— $— $— 
Interest cost on projected benefit obligation396 282 1,189 848 
Expected return on plan assets(596)(720)(1,786)(2,141)
Amortization of unrecognized transition obligation— — — — 
Amortization of unrecognized prior service cost— — — — 
Amortization of unrecognized net loss6 — 17 — 
Net periodic pension benefit$(194)$(438)$(580)$(1,293)
Supplemental Pension Plan    
Service cost, benefits earned during the period$— $— $— $— 
Interest cost on projected benefit obligation12 8 35 25 
Expected return on plan assets— — — — 
Amortization of unrecognized prior service cost— — — — 
Amortization of unrecognized net loss2 6 6 15 
Net periodic supplemental pension cost$14 $14 $41 $40 
Postretirement Plan, Medical and Life    
Service cost, benefits earned during the period$— $— $— $— 
Interest cost on projected benefit obligation1 1 3 3 
Expected return on plan assets— — — — 
Amortization of unrecognized prior service cost— — — — 
Amortization of unrecognized net loss5 10 14 26 
Net periodic postretirement, medical and life benefit$6 $11 $17 $29 


43


NOTE 12    SEGMENT REPORTING

The Corporation manages its operations through two primary business segments: core banking and WMG. The core banking segment provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential mortgage loans, primarily in the Corporation’s local markets, and to invest in securities. The WMG services segment provides revenues by providing trust and investment advisory services to clients.

Accounting policies for the segments are the same as those described in Note 1 of the Corporation’s 2022 Annual Report on Form 10-K, which was filed with the SEC on March 22, 2023. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment.

The Holding Company, CFS, and CRM columns below include amounts to eliminate transactions between segments (in thousands).

 Three months ended September 30, 2023
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$28,979 $— $36 $29,015 
Interest expense10,998 — — 10,998 
Net interest income17,981 — 36 18,017 
Provision for credit losses449 — — 449 
Net interest income after provision for credit losses17,532 — 36 17,568 
Other non-interest income5,002 2,533 273 7,808 
Other non-interest expenses13,597 1,796 275 15,668 
Income (loss) before income tax expense (benefit)8,937 737 34 9,708 
Income tax expense (benefit)1,908 161 (9)2,060 
Segment net income (loss)$7,029 $576 $43 $7,648 

 Three months ended September 30, 2022
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$20,983 $— $16 $20,999 
Interest expense2,009 — — 2,009 
Net interest income18,974 — 16 18,990 
Provision for credit losses1,255 — — 1,255 
Net interest income after provision for credit losses17,719 — 16 17,735 
Other non-interest income2,417 2,403 216 5,036 
Legal accruals and settlements— — — — 
Other non-interest expenses12,559 1,715 303 14,577 
Income (loss) before income tax expense (benefit)7,577 688 (71)8,194 
Income tax expense (benefit)1,590 167 (16)1,741 
Segment net income (loss)$5,987 $521 $(55)$6,453 

44


 Nine months ended September 30, 2023
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$82,939 $— $102 $83,041 
Interest expense26,482 — — 26,482 
Net interest income56,457 — 102 56,559 
Provision for credit losses962 — — 962 
Net interest income after provision for credit losses55,495 — 102 55,597 
Other non-interest income10,354 7,716 608 18,678 
Other non-interest expenses41,187 5,293 937 47,417 
Income (loss) before income tax expense (benefit)24,662 2,423 (227)26,858 
Income tax expense (benefit)5,215 536 (91)5,660 
Segment net income (loss)$19,447 $1,887 $(136)$21,198 
Segment assets$2,701,959 $2,596 $3,279 $2,707,834 

 Nine months ended September 30, 2022
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$56,965 $— $30 $56,995 
Interest expense3,687 — — 3,687 
Net interest income53,278 — 30 53,308 
Provision for credit losses(1,634)— — (1,634)
Net interest income after provision for credit losses54,912 — 30 54,942 
Other non-interest income7,552 7,788 678 16,018 
Legal accruals and settlements— — — — 
Other non-interest expenses37,316 5,180 1,091 43,587 
Income (loss) before income tax expense (benefit)25,148 2,608 (383)27,373 
Income tax expense (benefit)5,523 605 (99)6,029 
Segment net income (loss)$19,625 $2,003 $(284)$21,344 
Segment assets$2,544,528 $2,804 $4,090 $2,551,422 


45


NOTE 13    STOCK COMPENSATION

Pursuant to the Corporation's 2021 Equity Incentive Plan (the "2021 Plan") the Corporation may make discretionary grants of restricted shares of the Corporation’s common stock to or for the benefit of employees selected to participate in the 2021 Plan, the chief executive officer and members of the Board of Directors. Awards are based on the performance, responsibility and contributions of the individual and are targeted at an average of the peer group. The maximum number of shares of the Corporation’s common stock that may be awarded as restricted shares related to the 2021 Plan may not exceed 170,000, upon which time a new plan may be created. Compensation expense for shares granted will be recognized over the vesting period of the award based upon the closing price of the Corporation's stock on the grant date.

During the nine months ended September 30, 2023 and 2022, 16,050 and 12,560 shares, respectively, were re-issued from treasury to fund stock compensation. The expense related to these grants is recognized over a one year or a five year vesting period. Total expense related to the 2021 Plan of $0.3 million and $0.2 million was recognized during each of the three month periods ended September 30, 2023 and 2022, respectively. Total expense related to the 2021 Plan of $0.7 million and $0.8 million was recognized during each of the nine month periods ended September 30, 2023 and 2022, respectively.


A summary of restricted stock activity for the three and nine months ended September 30, 2023 is presented below:
 SharesWeighted–Average Grant Date Fair Value
Nonvested at July 1, 202354,002 $44.68
Granted2,981 $38.59
Vested(139)$43.34
Forfeited or cancelled— —
Nonvested at September 30, 202356,844 $44.40

 SharesWeighted–Average Grant Date Fair Value
Nonvested at January 1, 202355,402 $44.57
Granted16,050 $44.53
Vested(14,282)$45.36
Forfeited or cancelled(326)$43.73
Nonvested at September 30, 202356,844 $44.40

As of September 30, 2023, there was $1.7 million of total unrecognized compensation cost related to nonvested shares granted under the 2021 Plan. The cost is expected to be recognized over a weighted-average period of 3.50 years. The total fair value of shares vested was $0.6 million and $0.1 million for the nine month periods ended September 30, 2023 and 2022, respectively. Due to the adoption of the 2021 Plan, certain grants were transitioned to a one-year vesting period.


NOTE 14    SUBSEQUENT EVENTS

On October 18, 2023, the Corporation's Board of Directors approved the dissolution of Chemung Risk Management, Inc. The impact to the Corporation is not material in nature and is expected to be completed by March 31, 2023.


46


Item 2:        Management's Discussion and Analysis of Financial Condition and Results of Operations

Introduction

The following is the MD&A of the Corporation in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2023 and 2022. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s 2022 Annual Report on Form 10-K, which was filed with the SEC on March 22, 2023, for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 3–6.

The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. 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, in Part I, Item 1A, Risk Factors and on pages 20–31 of the Corporation’s 2022 Form 10-K. For a discussion of the use of non-GAAP financial measures, see pages 63-66 of the Corporation's 2022 Form 10-K, and pages 77-80 in this Form 10-Q.

The Corporation has been a financial holding company since 2000, the Bank was established in 1833, CFS in 2001, and 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. The Bank relies substantially on a foundation of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its income primarily from interest and fees on loans, interest income on investment securities, WMG fee income, and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans, and general operating expenses. CRM is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

Forward-looking Statements

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. 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, inflation, cyber security risks, difficulties in managing the Corporation’s growth, recent bank failures, changes in FDIC assessments, competition, changes in law or the regulatory environment, and changes in general business and economic trends.

Information concerning these and other factors, including Risk Factors, can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s 2022 Annual Report on Form 10-K. These filings are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com or upon request from the Corporate Secretary at (607) 737-3746. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events, or otherwise.

47


Critical Accounting Estimates
Critical accounting estimates include the areas where the Corporation has made what it considers to be particularly difficult, subjective, or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with GAAP. As a result, the Corporation is required to make certain estimates, judgments, and assumptions that it believes are reasonable based upon the information available at that time. These estimates, judgments, and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the periods presented. Actual results could be different from these estimates. Significant accounting policies followed by the Corporation are presented in Note 1–Summary of Significant Accounting Policies, to the Audited Consolidated Financial Statements included in its Annual Report on Form 10-K for the year ended December 31, 2022, and in Note 1-Summary of Significant Accounting Policies of this Form 10-Q.

Allowance for Credit Losses
The allowance for credit losses (ACL) is management’s estimate of expected lifetime credit losses on financial instruments identified as possessing potential credit risk. The ACL on loans is established through a provision for credit losses recognized in the Corporation’s Consolidated Statements of Income. Additionally, the ACL on loans is reduced by charge-offs and increased by recoveries of amounts previously charged-off. The level of the ACL 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.

Because the methodology is based upon historical experience and trends, current economic data, reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimations. Deteriorating conditions or assumptions could lead to further required increases in the ACL; conversely, improving conditions or assumptions could lead to further reductions in the ACL. In estimating the ACL, 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. Given the concentration of ACL allocation to the total commercial real estate and commercial and industrial portfolios, and the significant judgments made by management in deriving the qualitative loss factors, management analyzed the impact that changes in judgments could have.

At September 30, 2023 the allowance for credit losses totaled $20.3 million, compared to an allowance for loan losses of $19.7 million at December 31, 2022. A significant portion of the ACL is allocated to the commercial portfolio (both CRE and C&I). As of September 30, 2023 and December 31, 2022, the ACL (ALLL for December 31, 2022), allocated to the total commercial portfolio was $15.2 million and $14.9 million respectively, or 75.1% and 75.8%, respectively.

The range of impact was an ACL allocated to the total commercial loan portfolio between $11.8 million and $20.5 million at September 30, 2023. For residential mortgages and consumer loans, the range of impact was an ACL between $1.4 million and $2.9 million, and $2.6 million and $4.4 million, respectively. Overall, the range of impact was an ACL between $15.8 million and $27.8 million.

Changes in the FOMC's median forecasted U.S. civilian unemployment rate and year-over-year change in U.S. GDP could have a material impact on the model's calculated allowance requirements. 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 information currently available. An immediate increase of 1.0% in the FOMC's projected rate of U.S. civilian unemployment, and a decrease in the FOMC's projected rate of U.S. GDP growth of 0.5% would increase the model's total allowance calculation by $1.7 million, or 8.4%, to $22.0 million, assuming that qualitative adjustments are held at current levels.

The sensitivity and related range of impact is a hypothetical analysis based on a diverse set of potential scenarios, and is not intended to represent management’s judgments or assumptions of factors that were utilized at September 30, 2023 in the estimation of the ACL on loans recognized on the Consolidated Balance Sheets. Estimates nearing the higher end of the impact range imply adverse conditions where the underlying assumptions regarding anticipated default are significantly decoupled from changes in the economic indicators underlying the quantitative portion of the model. These conditions could arise from a variety of occurrences, including but not limited to bubbles in specific asset classes, changes in economic conditions that are highly localized or region specific, significant legislative or regulatory action, and systemic changes to the organization.
48


Consolidated Financial Highlights
As of or for the
 As of or for the Three Months EndedNine Months Ended
Sept. 30,June 30,Mar. 31Dec. 31Sept. 30,Sept. 30,Sept. 30,
(in thousands, except per share data)2023202320232022202220232022
RESULTS OF OPERATIONS
Interest income$29,015 $27,796 $26,230 $24,480 $20,999 $83,041 $56,995 
Interest expense10,998 9,201 6,283 3,609 2,009 26,482 3,687 
Net interest income18,017 18,595 19,947 20,871 18,990 56,559 53,308 
Provision for credit losses449 236 277 1,080 1,255 962 (1,634)
Net interest income after provision for credit losses17,568 18,359 19,670 19,791 17,735 55,597 54,942 
Non-interest income7,808 5,447 5,423 5,418 5,036 18,678 16,018 
Non-interest expense15,668 15,913 15,836 15,693 14,577 47,417 43,587 
Income before income tax expense9,708 7,893 9,257 9,516 8,194 26,858 27,373 
Income tax expense2,060 1,613 1,987 2,077 1,741 5,660 6,029 
Net income$7,648 $6,280 $7,270 $7,439 $6,453 $21,198 $21,344 
Basic and diluted earnings per share$1.61 $1.33 $1.54 $1.58 $1.37 $4.48 $4.55 
Average basic and diluted shares outstanding4,736 4,729 4,721 4,698 4,692 4,729 4,691 
PERFORMANCE RATIOS - Annualized
Return on average assets1.14 %0.95 %1.12 %1.15 %1.02 %1.07 %1.16 %
Return on average equity16.89 %13.97 %16.97 %18.36 %14.17 %15.93 %15.23 %
Return on average tangible equity (a)19.22 %15.89 %19.40 %21.25 %16.12 %18.15 %17.23 %
Efficiency ratio (unadjusted) (a) (f)60.67 %66.19 %62.42 %59.69 %60.67 %63.02 %62.87 %
Efficiency ratio (adjusted) (a) (b)66.55 %65.94 %62.18 %59.44 %60.40 %64.83 %62.57 %
Non-interest expense to average assets2.33 %2.41 %2.44 %2.42 %2.30 %2.39 %2.36 %
Loans to deposits78.05 %79.24 %80.33 %78.61 %74.71 %78.05 %74.71 %
 
YIELDS / RATES - Fully Taxable Equivalent
Yield on loans5.21 %5.09 %4.90 %4.57 %4.19 %5.07 %3.98 %
Yield on investments2.22 %2.22 %2.18 %2.09 %1.72 %2.21 %1.59 %
Yield on interest-earning assets4.40 %4.29 %4.12 %3.82 %3.41 %4.27 %3.18 %
Cost of interest-bearing deposits2.44 %2.01 %1.34 %0.93 %0.47 %1.94 %0.30 %
Cost of borrowings5.25 %5.13 %4.91 %4.30 %2.56 %5.04 %2.17 %
Cost of interest-bearing liabilities2.47 %2.11 %1.49 %0.88 %0.51 %2.03 %0.32 %
Interest rate spread1.93 %2.18 %2.63 %2.94 %2.90 %2.24 %2.86 %
Net interest margin, fully taxable equivalent (a)2.73 %2.87 %3.14 %3.26 %3.08 %2.91 %2.98 %
CAPITAL
Total equity to total assets at end of period6.28 %6.63 %6.68 %6.29 %6.10 %6.28 %6.10 %
Tangible equity to tangible assets at end of period (a)5.52 %5.87 %5.91 %5.51 %5.29 %5.52 %5.29 %
Book value per share$35.90 $37.49 $37.53 $35.32 $33.14 $35.90 $33.14 
Tangible book value per share (a)31.29 32.88 32.91 30.69 28.49 31.29 28.49 
Period-end market value per share39.61 38.41 41.50 45.87 41.87 39.61 41.87 
Dividends declared per share0.31 0.31 0.31 0.31 0.31 0.93 0.93 
AVERAGE BALANCES
Loans and loans held for sale (c)$1,909,100 $1,880,224 $1,849,310 $1,787,103 $1,675,859 $1,879,765 $1,599,218 
Earning assets2,627,012 2,609,893 2,592,709 2,550,834 2,457,218 2,609,999 2,408,379 
Total assets2,664,570 2,649,399 2,627,088 2,574,639 2,511,301 2,650,908 2,469,631 
Deposits2,410,931 2,363,847 2,337,476 2,347,719 2,257,394 2,371,021 2,224,190 
Total equity179,700 180,357 173,786 160,740 180,644 177,969 187,409 
Tangible equity (a)157,876 158,533 151,962 138,916 158,820 156,145 165,581 
49


As of or for the
As of or for the Three Months EndedNine Months Ended
Sept. 30,June 30,Mar. 31Dec. 31Sept. 30,Sept. 30,Sept. 30,
2023202320232022202220232022
ASSET QUALITY
Net charge-offs$356 $146 $269 $52 $109 $771 $760 
Non-performing loans (d)6,826 7,304 7,731 8,178 8,310 6,826 8,310 
Non-performing assets (e)7,055 7,471 7,927 8,373 8,503 7,055 8,503 
Allowance for credit losses (g)20,252 20,172 20,075 19,659 18,631 20,252 18,631 
Annualized net charge-offs to average loans0.07 %0.03 %0.06 %0.01 %0.03 %0.05 %0.06 %
Non-performing loans to total loans0.35 %0.39 %0.41 %0.45 %0.48 %0.35 %0.48 %
Non-performing assets to total assets0.26 %0.28 %0.30 %0.32 %0.33 %0.26 %0.33 %
Allowance for credit losses to total loans1.05 %1.07 %1.07 %1.07 %1.07 %1.05 %1.07 %
Allowance for credit losses to non-performing loans296.69 %276.17 %259.66 %240.39 %224.21 %296.69 %224.21 %
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less recognition of the employee retention tax credit.
(c) Loans and loans held for sale do not reflect the allowance for credit 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 expense divided by the total of net interest income plus non-interest income.
(g) Corporation adopted CECL as of January 1, 2023.



In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of other companies. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies. Refer to pages 77-80 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.
50


Consolidated Results of Operations

The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the three and nine months ended September 30, 2023 and 2022. For a discussion of the Critical Accounting Estimates that affect the Consolidated Results of Operations, see page 48 of this Form 10-Q and page 37 of the Corporation’s 2022 Form 10-K.

Net Income

The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):
 Three Months Ended 
 September 30,		Nine Months Ended 
 September 30,
 20232022Change% Change20232022Change% Change
Net interest income$18,017 $18,990 $(973)(5.1)%$56,559 $53,308 $3,251 6.1 %
Non-interest income7,808 5,036 2,772 55.0 %18,678 16,018 2,660 16.6 %
Non-interest expense15,668 14,577 1,091 7.5 %47,417 43,587 3,830 8.8 %
Pre-provision income10,157 9,449 708 7.5 %27,820 25,739 2,081 8.1 %
Provision (credit) for credit losses(1)
449 1,255 (806)(64.2)%962 (1,634)2,596 158.9 %
Income tax expense2,060 1,741 319 18.3 %5,660 6,029 (369)(6.1)%
Net income$7,648 $6,453 $1,195 18.5 %$21,198 $21,344 $(146)(0.7)%
Basic and diluted earnings per share$1.61 $1.37 $0.24 17.5 %$4.48 $4.55 $(0.07)(1.5)%
(1) Effective January 1, 2023, the allowance calculation is based upon the Current Expected Credit loss methodology.
Prior to January 1, 2023, the allowance calculation was based upon the incurred loss methodology.

 Three Months Ended 
 September 30,		Nine Months Ended 
 September 30,
Selected financial ratios:2023202220232022
Return on average assets1.14 %1.02 %1.07 %1.16 %
Return on average equity16.89 %14.17 %15.93 %15.23 %
Net interest margin, fully taxable equivalent (a)2.73 %3.08 %2.91 %2.98 %
Efficiency ratio (adjusted) (a) (b)66.55 %60.40 %64.83 %62.57 %
Non-interest expenses to average assets2.33 %2.30 %2.39 %2.36 %
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less recognition of employee retention tax credit.

Net income for the third quarter of 2023 was $7.6 million, or $1.61 per share, compared to $6.5 million, or $1.37 per share, for the same period in the prior year. Return on average equity for the current quarter was 16.89%, compared to 14.17% for the same period in the prior year. The increase in net income was due primarily to an increase in non-interest income and a decrease in the provision for credit losses, offset by a decrease in net interest income, an increase in non-interest expense, and an increase in income tax expense.

Net income for the nine months ended September 30, 2023 was $21.2 million, or $4.48 per share, compared to $21.3 million, or $4.55 per share, for the same period in the prior year. Return on average equity for the nine months ended September 30, 2023 was 15.93%, compared to 15.23% for the same period in the prior year. The decrease in net income was attributable to increases in non-interest expense and the provision for credit losses, offset by increases in net interest income and non-interest income, and a decrease in income tax expense.
51


Net Interest Income

The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20232022ChangePercentage Change
Interest and dividend income$29,015 $20,999 $8,016 38.2 %
Interest expense10,998 2,009 8,989 447.4 %
Net interest income$18,017 $18,990 $(973)(5.1)%

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 paid on interest-bearing liabilities such as deposits and borrowings, is the largest contributor to the Corporation’s earnings.

Net interest income for the third quarter ended September 30, 2023 decreased $1.0 million, or 5.1%, to $18.0 million compared to the same period in the prior year, due primarily to an increase of $8.9 million in interest expense on deposits, offset by increases of $7.4 million in interest income on loans, including fees, and $0.6 million in interest and dividend income on taxable securities. Interest expense paid on borrowed funds increased $0.1 million for the third quarter 2023, when compared to the same period in the prior year.

The increase in interest expense on deposits was due primarily to a 197 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 same period in the prior year. The average balance of interest-bearing deposits increased $214.1 million in the third quarter 2023, when compared to the same period in the prior year. The increase in interest expense on borrowed funds was due primarily to an increase in interest rates, offset by a $10.4 million decrease in the average balances of overnight FHLBNY borrowings in the current quarter, when compared to the same period in the prior year.

The increase in interest income on loans, including fees was due primarily to a $233.2 million increase in average loan balances in the current quarter, primarily in the commercial loan portfolio, when compared to the same period in the prior year. The average yield on loans increased 102 basis points in the current quarter, reflecting an increase in the average interest rates of the commercial and consumer loan portfolios of 115 basis points and 118 basis points, respectively, when compared to the same period in the prior year. The average yield on the residential mortgage loan portfolio increased 21 basis points in the current quarter, when compared to the same period in the prior year.

The increase in interest and dividend income on taxable securities in the current quarter, when compared to the same period in the prior year, was due primarily to a 48 basis points increase in the average yield on securities, due to an increase in average interest rates as a result of the higher interest rate environment. This increase was despite a decrease of $60.4 million in average balances of taxable securities when compared to the same period in the prior year, primarily due to paydowns on securities held in the portfolio between the third quarter of 2022 and the third quarter of 2023.

Fully taxable equivalent net interest margin was 2.73% in the third quarter of 2023, compared to 3.08% for the same period in the prior year. Average interest-earning assets increased $169.8 million for the three months ended September 30, 2023 compared to the same period in the prior year. The average yield on interest-earning assets increased 99 basis points to 4.40%, and the average cost of interest-bearing liabilities increased 196 basis points to 2.47%, for the three months ended September 30, 2023, when compared to the same period in the prior year, due to the rising rate environment, as well as a shift in the overall deposit mix to higher cost deposits, when compared to the same period in the prior year.

52


The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20232022ChangePercentage Change
Interest and dividend income$83,041 $56,995 $26,046 45.7 %
Interest expense26,482 3,687 22,795 618.3 %
Net interest income$56,559 $53,308 $3,251 6.1 %

Net interest income for the nine months ended September 30, 2023 totaled $56.6 million compared to $53.3 million for the same period in the prior year, an increase of $3.3 million, or 6.1% due primarily to an increase of $26.0 million in interest and dividend income, partially offset by an increase of $22.8 million in interest expense. The increase in interest and dividend income for the first nine months of 2023 was primarily attributed to increases of $23.6 million in interest income on loans, including fees, and $2.2 million in interest and dividend income on taxable securities. The increase in interest expense for the first nine months of 2023 was primarily attributed to increases of $21.3 million in interest expense on deposits and $1.5 million in interest expense on borrowed funds.

The increase in interest income on loans, including fees, was mostly attributable to increases of $173.0 million, $13.9 million, and $93.7 million in the average balances of the commercial, residential mortgage, and consumer loan portfolios, respectively, for the nine months ended September 30, 2023 when compared to the same period in the prior year. Average yields on the commercial, residential mortgage and consumer loan portfolios increased 132 basis points, 19 basis points, and 92 basis points, respectively, for the nine months ended September 30, 2023, when compared to the same period in the prior year, due to increases in average interest rates on new loan originations and increases on variable rate loans.

The increase in interest income on taxable securities was mostly attributable to a 59 basis points increase in the average yield, due to an increase in average interest rates, despite a $65.2 million decrease in average balances of taxable securities, for the nine months ended September 30, 2023, when compared to the same period in the prior year. The decrease in the average balances of taxable securities was mostly attributable to paydowns on securities within the portfolio, and a decrease in the market value of some of the available for sale securities held in the portfolio, due to the rising interest rate environment.

The increase in interest expense on deposits was due primarily to increases of 229 basis points and 272 basis points in the average interest rates paid on customer time deposits and brokered deposits, respectively, as well as increases of $112.3 million and $115.6 million in the average balances of customer time deposits and brokered deposits, respectively, for the first nine months of 2023, when compared to the same period in the prior year. The increases in average balances were primarily attributable to a need to fund loan growth, as well as a shift in deposit demand towards higher cost interest-bearing options. The increases in the average interest rates paid were due primarily to the increasing interest rate environment, as well as competitive pressures to attract and retain customer time deposits. Also contributing to the increase in interest expense on deposits was an increase of $7.6 million in interest expense on savings and money market accounts, due to an increase of 113 basis points in the average interest rates paid, despite a decrease of $48.5 million in the average balances on savings and money market accounts, for the nine months ended September 30, 2023, when compared to the same period in the prior year. The $1.5 million increase in interest expense on borrowed funds was due primarily to a 323 basis points increase in the average interest rate paid on overnight advances, and a $28.4 million increase in average balances of overnight advances for the current nine months, when compared to the same period in the prior year, in order to fund loan growth.

The average yield on interest-earning assets increased 109 basis points, to 4.27%, and the average cost of interest-bearing liabilities increased 171 basis points, to 2.03% for the nine months ended September 30, 2023 compared to the same period in the prior year. Average interest-earning assets increased $201.6 million for the nine months ended September 30, 2023 compared to the same period in the prior year. Fully taxable equivalent net interest margin was 2.91% for the nine months ended September 30, 2023 compared to 2.98% for the same period in the prior year.


53


Average Consolidated Balance Sheets and Interest Analysis

The following tables present certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the three and nine months ended September 30, 2023 and 2022. For the purpose of the tables below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. 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 of $3 thousand and $0.1 million for the three month periods ended September 30, 2023, and 2022, respectively, related to the Paycheck Protection Program. Loan fee income of $4 thousand and $0.1 million for the nine month periods ended September 30, 2023 and 2022, respectively, related to the Paycheck Protection Program.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Three Months Ended 
 September 30, 2023		Three Months Ended 
 September 30, 2022
($ in thousands)Average BalanceInterest
Yield/Rate (3)
Average BalanceInterest
Yield/Rate (3)
Interest-earning assets:
Commercial loans$1,319,110 $18,672 5.62 %$1,164,783 $13,120 4.47 %
Mortgage loans282,578 2,572 3.61 %279,102 2,389 3.40 %
Consumer loans307,412 3,843 4.96 %231,974 2,211 3.78 %
Taxable securities663,240 3,540 2.12 %723,602 2,985 1.64 %
Tax-exempt securities40,380 288 2.83 %41,918 326 3.09 %
Interest-earning deposits14,292 187 5.19 %15,839 80 2.00 %
Total interest-earning assets2,627,012 29,102 4.40 %2,457,218 21,111 3.41 %
Non-earning assets:      
Cash and due from banks26,272 24,494   
Other assets31,496 47,256   
Allowance for credit losses (4)
(20,210)(17,667)  
Total assets$2,664,570   $2,511,301   
Interest-bearing liabilities:      
Interest-bearing demand deposits$281,106 $963 1.36 %$258,420 $112 0.17 %
Savings and insured money market deposits890,109 3,945 1.76 %927,737 575 0.25 %
Time deposits383,786 3,269 3.38 %232,798 430 0.73 %
Brokered deposits189,628 2,543 5.32 %111,565 688 2.45 %
FHLBNY overnight advances17,879 249 5.53 %28,229 173 2.43 %
Long-term capital leases3,144 29 3.66 %3,417 31 3.60 %
Total interest-bearing liabilities1,765,652 10,998 2.47 %1,562,166 2,009 0.51 %
Non-interest-bearing liabilities:      
Demand deposits666,302 726,874   
Other liabilities52,916 41,617   
Total liabilities2,484,870   2,330,657   
Shareholders' equity179,700 180,644   
Total liabilities and shareholders’ equity$2,664,570   $2,511,301   
Fully taxable equivalent net interest income 18,104   19,102  
Net interest rate spread (1)
  1.93 %  2.90 %
Net interest margin, fully taxable equivalent (2)
  2.73 %  3.08 %
Taxable equivalent adjustment (87)(112) 
Net interest income $18,017   $18,990  
(1)  Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2)  Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
(3) Annualized.
(4) Corporation adopted CECL as of January 1, 2023.
54


AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Nine Months Ended 
 September 30, 2023		Nine Months Ended 
 September 30, 2022
($ in thousands)Average BalanceInterest
Yield/ Rate (3)
Average BalanceInterest
Yield/ Rate (3)
Interest-earning assets:
Commercial loans$1,289,638 $53,047 5.50 %$1,116,687 $34,911 4.18 %
Mortgage loans284,351 7,553 3.55 %270,484 6,798 3.36 %
Consumer loans305,776 10,673 4.67 %212,047 5,953 3.75 %
Taxable securities679,330 10,758 2.12 %744,503 8,542 1.53 %
Tax-exempt securities40,562 887 2.92 %42,190 989 3.13 %
Interest-earning deposits10,342 400 5.17 %22,468 116 0.69 %
Total interest-earning assets2,609,999 83,318 4.27 %2,408,379 57,309 3.18 %
Non-earning assets:      
Cash and due from banks25,512   24,317   
Other assets35,547   56,592   
Allowance for credit losses (4)
(20,150)  (19,657)  
Total assets$2,650,908   $2,469,631   
Interest-bearing liabilities:      
Interest-bearing demand deposits$286,220 $1,959 0.92 %$275,062 $219 0.11 %
Savings and insured money market deposits899,871 8,645 1.28 %948,411 1,029 0.15 %
Time deposits350,846 8,041 3.06 %238,568 1,378 0.77 %
Brokered deposits153,774 5,932 5.16 %38,149 697 2.44 %
FHLBNY overnight advances47,321 1,819 5.14 %18,931 271 1.91 %
Long-term capital leases3,212 86 3.58 %3,483 93 3.57 %
Total interest-bearing liabilities1,741,244 26,482 2.03 %1,522,604 3,687 0.32 %
Non-interest-bearing liabilities:      
Demand deposits680,310   724,000   
Other liabilities51,385   35,618   
Total liabilities2,472,939   2,282,222   
Shareholders' equity177,969   187,409   
Total liabilities and shareholders’ equity$2,650,908   $2,469,631   
Fully taxable equivalent net interest income 56,836   53,622  
Net interest rate spread (1)
  2.24 %  2.86 %
Net interest margin, fully taxable equivalent (2)
  2.91 %  2.98 %
Taxable equivalent adjustment (277)  (314) 
Net interest income $56,559   $53,308  


(1)  Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2)  Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
(3) Annualized.
(4) Corporation adopted CECL as of January 1, 2023.


55


Changes Due to Rate and Volume

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The tables below illustrates the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three and nine months ended September 30, 2023 and 2022. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purpose of these tables, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
 Three Months Ended
Sept 30, 2023 vs. 2022
 Increase/(Decrease)
 Total ChangeDue to VolumeDue to Rate
(in thousands)
Interest and dividend income on:
Commercial loans$5,552 $1,887 $3,665 
Mortgage loans183 31 152 
Consumer loans1,632 833 799 
Taxable investment securities555 (265)820 
Tax-exempt investment securities(38)(12)(26)
Interest-earning deposits107 (9)116 
Total interest and dividend income, fully taxable equivalent7,991 2,465 5,526 
Interest expense on:   
Interest-bearing demand deposits851 11 840 
Savings and insured money market deposits3,370 (25)3,395 
Time deposits2,839 430 2,409 
Brokered deposits1,855 694 1,161 
FHLBNY overnight advances76 (81)157 
Long-term capital leases(2)(3)1 
Total interest expense8,989 1,026 7,963 
Net interest income, fully taxable equivalent$(998)$1,439 $(2,437)


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 Nine Months Ended
Sept. 30, 2023 vs. 2022
 Increase/(Decrease)
 Total ChangeDue to VolumeDue to Rate
(in thousands)
Interest and dividend income on:
Commercial loans$18,136 $5,968 $12,168 
Mortgage loans755 359 396 
Consumer loans4,720 3,035 1,685 
Taxable investment securities2,216 (806)3,022 
Tax-exempt investment securities(102)(37)(65)
Interest-earning deposits284 (94)378 
Total interest and dividend income, fully taxable equivalent26,009 8,425 17,584 
 
Interest expense on:   
Interest-bearing demand deposits1,740 10 1,730 
Savings and insured money market deposits7,616 (57)7,673 
Time deposits6,663 910 5,752 
Brokered deposits5,235 3,828 1,408 
FHLBNY overnight advances1,548 728 820 
Long-term Capital leases(7)(7)— 
Total interest expense22,795 5,412 17,383 
Net interest income, fully taxable equivalent$3,214 $3,013 $201 

Provision for credit losses

Management has established and maintains a methodology for determining and adjusting its allowance for credit losses in conformity with the recently adopted accounting standard, commonly referred to as the “CECL methodology.” The allowance is based on a combination of quantitative and qualitative analysis and changes in the required allowance are recorded through income as a provision. The quantitative portion of the model is significantly influenced by changes in projected economic conditions, as well as changes in the composition of the numerous loan portfolio segments. Qualitative adjustments reflect the degree to which management anticipates future outcomes could differ from those projected by the quantitative model.

Upon adoption of ASU 2016-13, the Corporation’s provision for credit losses includes components for on-balance sheet exposures and off-balance sheet exposures. As of January 1, 2023, the Corporation recognized a $1.5 million one-time implementation adjustment, of which $1.1 million reflected the addition of an allowance for credit losses on off-balance sheet exposure related to unfunded commitments.

The provision for credit losses decreased $0.8 million for the third quarter of 2023, when compared to the third quarter of 2022. Significant provisioning related to loan growth occurred in the third quarter of 2022, as well as additional qualitative provisioning under the incurred loss methodology. In the third quarter of 2023, the provision was primarily the result of changes in net charge offs, as well as additional qualitative provisioning under the current expected credit loss (CECL) methodology in the consumer portfolio, due to economic considerations that may not be reflected in Federal Open Market Committee (FOMC) forecasted data points, but may adversely impact consumers financial strength. This build up can be attributable to observable headwinds, as well as management's judgement on their impact in relation to the loan portfolio. The model reflects a four quarter rolling forecast period, and in the third quarter of 2023, the 2024 year-end forecast became more influential, as the forecast for national unemployment improved from 4.5% in June, 2023 to 4.1% in September, 2023.

57


The provision for credit losses for the nine months ended September 30, 2023, was $1.0 million compared to a credit of $1.6 million, for the same period in the prior year. The $2.6 million increase in the provision for credit losses in the nine months ended September 30, 2023, when compared to the same period in the prior year, was primarily due to the $2.4 million release of the pandemic related portion of the allowance in 2022, the $1.5 million release of a specific reserve related to the settlement 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 provision during the first nine months of 2022 were offset by additional provisioning of $1.7 million related to increased loan growth, along with additional qualitative allocations. Provision in the current period was primarily attributable to increased loan volume, offset by favorable economic forecasts, particularly the FOMC's unemployment forecast in the current period, which improved from 4.5% to 3.8% for year-end-2023, as well as the FOMC's forecast for U.S. GDP growth, which improved from 0.5% to 2.1% for year-end 2023.

Net charge-offs for the three months ended September 30, 2023 were $0.4 million, compared to $0.1 million for the same period in the prior year. Net charge-offs in the three months ended September 30, 2023 were primarily in the consumer indirect auto portfolio. Net charge-offs in the three months ended September 30, 2022 were mostly attributable to consumer loans.

Net charge-offs for the nine months ended September 30, 2023 and 2022 were $0.8 million. The $0.8 million net charge-off for the nine months ended September 30, 2023, was mostly attributed to the charge off of a commercial and industrial loan, and charge-off activity in the indirect auto portfolio. The $0.8 million net charge-off for the nine month period ended September 30, 2022 was mostly attributed to the settlement of a large commercial real estate credit.

Non-interest income

The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20232022ChangePercentage Change
WMG fee income$2,533 $2,403 $130 5.4 %
Service charges on deposit accounts1,018 989 29 2.9 %
Interchange revenue from debit card transactions1,141 1,126 15 1.3 %
Net gains on securities transactions— — — N/A
Changes in fair value of equity investments(68)(93)25 26.9 %
Net gains on sales of loans held for sale67 7 60 N/M
Net gains (losses) on sales of other real estate owned— 22 (22)N/M
Income from bank owned life insurance11 12 (1)(8.3)%
CFS fee and commission income243 251 (8)(3.2)%
Other2,863 319 2,544 797.5 %
Total non-interest income$7,808 $5,036 $2,772 55.0 %


Total non-interest income for the third quarter of 2023 increased $2.8 million compared to the same period in the prior year primarily due to increases in other non-interest income and WMG fee income. The remaining components of non-interest income in the third quarter of 2023 were relatively consistent, when compared to the same period in the prior year.

Other Non-Interest Income
The increase in other non-interest income was primarily due to recognition of a $2.4 million employee retention tax credit in the third quarter of 2023 and a $0.1 million increase in interest rate swap fee income. The Corporation filed amended prior period tax returns reflecting the credit during the current period.

WMG Fee Income
The increase in WMG fee income can primarily be attributed to new customer relationships when compared to the same period in the prior year.



58



The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20232022ChangePercentage Change
WMG fee income$7,716 $7,788 $(72)(0.9)%
Service charges on deposit accounts2,918 2,789 129 4.6 %
Interchange revenue from debit card transactions3,468 3,462 6 0.2 %
Changes in fair value of equity investments(99)(448)349 77.9 %
Net gains on sales of loans held for sale90 106 (16)(15.1)%
Net gains (losses) on sales of other real estate owned14 68 (54)(79.4)%
Income from bank owned life insurance32 34 (2)(5.9)%
CFS fee and commission income749 775 (26)(3.4)%
Other3,790 1,444 2,346 162.5 %
Total non-interest income$18,678 $16,018 $2,660 16.6 %

Total non-interest income for the nine months ended September 30, 2023 increased $2.7 million compared to the same period in the prior year. The increase was primarily due to increases in other non-interest income, changes in fair value of equity investments, and service charges on deposit accounts.

Change in Other Non-Interest Income
The increase in other non-interest income was primarily due to recognition of a $2.4 million employee retention tax credit in the third quarter of 2023. The Corporation filed amended prior period tax returns reflecting the credit during the current period.

Change in Fair Value of Equity Investments
The increase in the change in fair value of equity investments was primarily due to an increase in the market value of assets held related to the Corporation's deferred compensation plan, relating to improvements in the financial markets when compared to the same period in the prior year. This increase was partially offset by a decrease in the fair value of a particular equity investment held by the Corporation.

Change in Service Charges on Deposit Accounts
The increase in service charges on deposit accounts was primarily due to an increase in non-sufficient fund fees when compared to the same period in the prior year.
59


Non-interest expense

The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20232022ChangePercentage Change
Compensation expense:
Salaries and wages$6,542 $6,550 $(8)(0.1)%
Pension and other employee benefits1,979 2,024 (45)(2.2)%
Other components of net periodic pension and postretirement benefits(174)(413)239 57.9 %
Total compensation expense8,347 8,161 186 2.3 %
Non-compensation expense:    
Net occupancy1,337 1,269 68 5.4 %
Furniture and equipment 353 493 (140)(28.4)%
Data processing 2,480 2,087 393 18.8 %
Professional services554 442 112 25.3 %
Marketing and advertising 218 266 (48)(18.0)%
Other real estate owned expenses10 12 (2)(16.7)%
FDIC insurance525 389 136 35.0 %
Loan expenses249 (64)313 489.1 %
Other1,595 1,522 73 4.8 %
Total non-compensation expense7,321 6,416 905 14.1 %
Total non-interest expense$15,668 $14,577 $1,091 7.5 %

Total non-interest expense for the third quarter of 2023 increased $1.1 million compared to the same period in the prior year. The increase was due to increases in total compensation expense and total non-compensation expense. For the three months ended September 30, 2023, non-interest expense to average assets was 2.33%, compared to 2.30% for the same period in the prior year.

Compensation expense
The increase in compensation expense for the current period, compared to the same period in the prior year, can be primarily attributed to an increase in other components of net periodic pension and postretirement benefits, primarily due to actuarial adjustments made to the Corporation's pension plans.

Non-compensation expense
The increase in non-compensation expense for the current period, compared to the same period in the prior year, can be primarily attributed to increases in data processing expense, loan expenses, FDIC insurance expense and professional services expenditures. The increase in data processing expense was primarily due to expenditures related to ongoing cybersecurity improvement initiatives and other increases in software expenses, when compared to the same period in the prior year. The increase in loan expenses was primarily due to the re-alignment of dealer flat fee payments in the third quarter of the prior year, resulting in lower expense recognition in that period, which normalized in the current period. The increase in FDIC insurance can be primarily attributed to an increase in the assessment rate effective January 1, 2023. The increase in professional services was primarily due to the timing of consulting engagements during the current period, when compared to the same period in the prior year.


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The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20232022ChangePercentage Change
Compensation expense:
Salaries and wages$20,029 $18,829 $1,200 6.4 %
Pension and other employee benefits5,467 5,679 (212)(3.7)%
Other components of net periodic pension and postretirement benefits(522)(1,224)702 57.4 %
Total compensation expense24,974 23,284 1,690 7.3 %
Non-compensation expense:    
Net occupancy4,242 4,065 177 4.4 %
Furniture and equipment1,232 1,340 (108)(8.1)%
Data processing7,334 6,742 592 8.8 %
Professional services1,596 1,627 (31)(1.9)%
Amortization of intangible assets— 15 (15)(100.0)%
Marketing and advertising720 726 (6)(0.8)%
Other real estate owned expenses49 (17)66 388.2 %
FDIC insurance1,608 987 621 62.9 %
Loan expenses789 327 462 141.3 %
Other4,873 4,491 382 8.5 %
Total non-compensation expense22,443 20,303 2,140 10.5 %
Total non-interest expense$47,417 $43,587 $3,830 8.8 %

Total non-interest expense for the nine months ended September 30, 2023 increased $3.8 million compared to the same period in the prior year. The increase was due to increases in total compensation expense and total non-compensation expense. For the nine months ended September 30, 2023, non-interest expense to average assets was 2.39%, compared to 2.36% for the same period in the prior year.

Compensation expense
The increase in compensation expense for the current period, compared to the same period in the prior year, can be mostly attributable to increases in salaries and wages and other components of net periodic pension and postretirement benefits, partially offset by a decrease in pension and other employee benefits. The increase in salaries and wages was primarily due to increases in base salaries and wages and restricted stock expense, as well as an increase in the market value of the Corporation's deferred compensation plan for the current period, when compared to the same period in the prior year. The increase in other components of net periodic pension and postretirement benefits was primarily due to actuarial adjustments related to the Corporation's pension plans. The decrease in pension and other employee benefits was attributable to a decrease in healthcare-related expenses for the current period, when compared to the same period in the prior year.

Non-compensation expense
The increase in non-compensation expense can mostly be attributable to increases in FDIC insurance expense, data processing expenses, loan expenses and other non-interest expense.

The increase in FDIC insurance expense was primarily attributable to an increase in the assessment rate effective January 1, 2023. The increase in data processing expense was attributable to additional expenditures related to cybersecurity improvement initiatives, and other increases in software expenses. The increase in loan expenses was primarily attributable to the re-alignment of dealer flat fee payments in the third quarter of the prior year. The increase in other-non interest expense was primarily attributable to the recapture of $0.2 million of accrued expenses related to a telecom contract dispute in the second quarter of 2022.





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Income tax expense

The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20232022ChangePercentage Change
Income before income tax expense$9,708 $8,194 $1,514 18.5 %
Income tax expense2,060 1,741 319 18.3 %
Effective tax rate21.2 %21.2 %

Income tax expense for the three months ended September 30, 2023 and 2022 were $2.1 million and $1.7 million, respectively. The increase in income tax expense was due primarily to an increase of $1.5 million in income before income tax expense. The effective income tax rate for both periods was 21.2%.


The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20232022ChangePercentage Change
Income before income tax expense$26,858 $27,373 $(515)(1.9)%
Income tax expense5,660 6,029 (369)(6.1)%
Effective tax rate21.1 %22.0 %  

Income tax expense for the nine months ended September 30, 2023 and 2022 were $5.7 million and $6.0 million, respectively. The decrease in income tax expense was due primarily to a decrease of $0.5 million in income before income tax expense. The effective income tax rate decreased from 22.0% for the nine months ended September 30, 2022 to 21.1% for the nine months ended September 30, 2023.

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Financial Condition

The following table presents selected financial information at the dates indicated, and the dollar and percent change (in thousands):
 September 30, 2023December 31, 2022ChangePercentage Change
ASSETS
Total cash and cash equivalents$75,580 $55,869 $19,711 35.3 %
Total investment securities, FHLB, and FRB stock577,672 646,040 (68,368)(10.6)%
Loans, net of deferred loan fees1,930,688 1,829,448 101,240 5.5 %
Allowance for credit losses(20,252)(19,659)(593)3.0 %
Loans, net1,910,436 1,809,789 100,647 5.6 %
Goodwill and other intangible assets, net21,824 21,824 — — %
Other assets122,322 112,031 10,291 9.2 %
Total assets$2,707,834 $2,645,553 $62,281 2.4 %
LIABILITIES AND SHAREHOLDERS' EQUITY    
Total deposits$2,473,499 $2,327,227 $146,272 6.3 %
Advances and other debt3,120 99,137 (96,017)(96.9)%
Other liabilities61,151 52,801 8,350 15.8 %
Total liabilities2,537,770 2,479,165 58,605 2.4 %
Total shareholders’ equity170,064 166,388 3,676 2.2 %
Total liabilities and shareholders’ equity$2,707,834 $2,645,553 $62,281 2.4 %



Cash and Cash Equivalents
The increase in cash and cash equivalents can be attributed to changes in loans, deposits, borrowings, and securities.

Investment securities
The decrease in investment securities can be mostly attributed to $46.7 million in paydowns and maturities in the securities available for sale portfolio, and a decrease in the fair value of the available for sale portfolio of $18.2 million.

Loans, net
The increase in loans, net of deferred loan fees, can be primarily attributed to increases of $89.6 million in commercial mortgages, $13.7 million in consumer loans, and $2.2 million in commercial and industrial loans, offset by a decrease of $4.3 million in residential mortgages.

Allowance for Credit Losses
The increase in the allowance for credit losses can be primarily attributed to the $0.4 million in adjustments made upon the adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), additional provisioning related to increased loan volume, and qualitative adjustments made during the period. Improvements in the underlying forecasted metrics on which the model is based offset these increases. During the period, the FOMC's forecasted U.S. civilian unemployment rate for year-end 2023 decreased from 4.6% as of December 2022 to 3.8% as of September 2023. Because the model utilizes a rolling four quarter forecast period, the FOMC's 2024 projections for year-end unemployment became increasingly impactful on the model during 2023. The FOMC's projection for year-end U.S. civilian unemployment improved from 4.5% in June, 2023 to 4.1% in September, 2023. Qualitative adjustments made during the period primarily reflected changing conditions in the consumer portfolio. Management qualitatively increased the allowance in the consumer portfolio due to economic headwinds that may adversely impact consumers, but are not entirely reflected in the improvements to the FOMC's data points.

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Other Assets
The increase in other assets can be primarily attributed to increases of $5.6 million in the deferred tax asset, primarily related to a decline in the fair value of the Corporation's available for sale portfolio of $18.2 million, and an increase of $5.8 million in interest rate swap assets.

Deposits
The increase in deposits can be attributed to increases of $101.5 million in brokered deposits, $87.3 million in time deposits, and $39.2 million in interest-bearing demand deposit accounts, offset by decreases of $50.0 million in non-interest bearing demand deposits, $14.6 million in insured money market accounts, and $17.2 million in savings deposits.

Advances and Other Debt
The decrease in advances and other debt can be primarily attributed to a decrease in overnight FHLBNY borrowing.

Other liabilities
The increase in other liabilities can be primarily attributed to an increase of $5.7 million in interest rate swap liabilities and the establishment of a $1.0 million allowance due to adoption of ASU 2016-13 on January 1, 2023 related to unfunded commitments, which was $1.1 million at September 30, 2023.

Shareholders’ equity
Shareholders’ equity was $170.1 million at September 30, 2023 compared to $166.4 million at December 31, 2022. The increase can be primarily attributed to an increase of $15.7 million in retained earnings, partially offset by an increase in accumulated other comprehensive loss of $13.4 million. The increase in retained earnings can be primarily attributed to net income of $21.2 million, offset by $4.4 million in dividends declared, and a $1.1 million one-time adjustment, net of tax, due to the implementation of CECL, during the nine months ended September 30, 2023. The increase in accumulated other comprehensive loss can be primarily attributed to a decrease in the fair market value of the available for sale securities portfolio.

Assets under management or administration
The market value of total assets under management or administration in WMG was $2.126 billion at September 30, 2023, including $379.8 million of assets held under management or administration for the Corporation, compared to $2.053 billion at December 31, 2022, including $346.5 million of assets held under management or administration for the Corporation, an increase of $73.2 million, or 3.6%, due to an increase in assets under management, due primarily to broad improvements in financial markets.

Securities

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. The Corporation intends to maintain a reasonable level of securities to provide adequate liquidity and in order to have securities available to pledge to secure public deposits, repurchase agreements, and other types of transactions. 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. 
The available for sale segment of the securities portfolio totaled $569.0 million at September 30, 2023, a decrease of $63.6 million, or 10.1%, from $632.6 million at December 31, 2022. The decrease can be mostly attributed to $46.7 million in paydowns, and a decrease in the fair value of the portfolio of $18.2 million. The held to maturity securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled $1.8 million at September 30, 2023 and $2.4 million at December 31, 2022.
Non-marketable equity securities at September 30, 2023 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $2.2 million, respectively. Non-marketable equity securities at December 31, 2022 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $6.4 million, respectively. The fair value of these securities is assumed to approximate their cost. The investment in these stocks is regulated by regulatory policies of the respective institutions.


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Loans

The Corporation has reporting systems to monitor: (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 these systems on a regular basis.

The table below presents the Corporation’s loan composition by segment at the dates indicated, and the dollar and percent change from December 31, 2022 to September 30, 2023 ($ in thousands):
LOAN COMPOSITION
 September 30, 2023% of Total LoansDecember 31, 2022% of Total LoansDollar ChangePercentage Change
Commercial and agricultural:
    Commercial and industrial$254,215 13.2 %$252,044 13.8 %$2,171 0.9 %
    Agricultural269 — %249 — %20 8.0 %
Commercial mortgages:
    Construction140,480 7.3 %108,243 5.9 %32,237 29.8 %
    Commercial mortgages946,053 49.0 %888,670 48.7 %57,383 6.5 %
Residential mortgages281,361 14.6 %285,672 15.6 %(4,311)(1.5)%
Consumer loans:
    Home equity lines and loans87,078 4.5 %81,401 4.4 %5,677 7.0 %
    Indirect consumer loans211,046 10.9 %202,124 11.0 %8,922 4.4 %
    Direct consumer loans10,186 0.5 %11,045 0.6 %(859)(7.8)%
Total$1,930,688 100.0 %$1,829,448 100.0 %$101,240 5.5 %

Portfolio loans totaled $1.931 billion at September 30, 2023, an increase of $101.2 million, or 5.5%, from $1.829 billion at December 31, 2022. The increase in loans can be attributed to increases of $89.6 million in commercial mortgage loans, $8.9 million in indirect consumer loans, $4.8 million in other consumer loans, and $2.2 million in commercial and industrial loans, offset by a decrease of $4.3 million in residential mortgages.

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 September 30, 2023, commercial real estate loans in the Albany and Buffalo regions have grown $60.8 million and $17.0 million from December 31, 2022, respectively.

Residential mortgage loans totaled $281.4 million at September 30, 2023, a decrease of $4.3 million, or 1.5%, from December 31, 2022. During the nine months ended September 30, 2023, $21.4 million of residential mortgages were originated, of which $4.3 million were sold in the secondary market to Freddie Mac. Indirect consumer loans totaled $211.0 million at September 30, 2023, an increase of $8.9 million, or 4.4%, from December 31, 2022, as consumer demand for automobiles remains strong, and prices remain elevated when compared to pre-pandemic levels.


The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):
LOANS BY DIVISION
 September 30, 2023December 31, 2022December 31, 2021December 31, 2020December 31, 2019
Chemung Canal Trust Company*^$756,645 $731,344 $639,144 $658,468 $576,399 
Capital Bank Division1,174,043 1,098,104 879,105 877,995 732,820 
Total loans$1,930,688 $1,829,448 $1,518,249 $1,536,463 $1,309,219 
* All loans, excluding those originated by the Capital Bank division.
^ Includes $95.8 million and $79.8 million as of September 30, 2023 and December 31, 2022, respectively, in the Western New York market.

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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 economic or other conditions. Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At September 30, 2023 and December 31, 2022, commercial loans to borrowers involved in the real estate, and real estate rental and leasing businesses were 49.1% and 48.3% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of September 30, 2023 and December 31, 2022.

The table below shows the maturity of loans outstanding as of September 30, 2023. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):
Within One YearAfter One But Within Five YearsAfter Five But Within 15 YearsAfter 15 YearsTotal
Commercial and agricultural:
Commercial and industrial$78,173 $106,526 $65,834 $3,682 $254,215 
Agricultural— 84 185 — 269 
Commercial mortgages:
Construction34,775 33,415 71,012 1,278 140,480 
Commercial mortgages41,479 233,149 642,520 28,905 946,053 
Residential mortgages3,545 9,875 118,062 149,879 281,361 
Consumer loans:
Home equity lines and loans237 5,864 57,963 23,014 87,078 
Indirect consumer loans1,646 100,176 109,219 5 211,046 
Direct consumer loans340 6,479 1,940 1,427 10,186 
Total$160,195 $495,568 $1,066,735 $208,190 $1,930,688 


Loans maturing with fixed interest rates:After One But Within Five YearsAfter Five But Within 15 YearsAfter 15 YearsTotal
Commercial and agricultural:
Commercial and industrial$65,775 $31,803 $434 $98,012 
Agricultural16 185 — 201 
Commercial mortgages:
Construction5,205 16,887 650 22,742 
Commercial mortgages129,063 157,946 2,752 289,761 
Residential mortgages9,424 113,625 104,157 227,206 
Consumer loans:
Home equity lines and loans5,155 46,490 727 52,372 
Indirect consumer loans100,176 109,219 5 209,400 
Direct consumer loans6,391 9812017,573 
Total$321,205 $477,136 $108,926 $907,267 

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Loans maturing with variable interest rates:After One But Within Five YearsAfter Five But Within 15 YearsAfter 15 YearsTotal
Commercial and agricultural:
Commercial and industrial$40,429 $34,348 $3,248 $78,025 
Agricultural68 — — 68 
Commercial mortgages:— 
Construction28,272 54,033 628 82,933 
Commercial mortgages104,275 484,093 26,481 614,849 
Residential mortgages520 4,741 45,342 50,603 
Consumer loans:— 
Home equity lines and loans712 11,418 22,338 34,468 
Indirect consumer loans— — — — 
Direct consumer loans87 9661,227 2,280 
Total$174,363 $589,599 $99,264 $863,226 

Non-Performing Assets
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, non-accrual 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 September 30, 2023, there were four loans being monitored under ASU 2022-02 guidance, three of which were accruing, and one of which was non-accrual, and therefore 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 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 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 original 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):

NON-PERFORMING ASSETS
 September 30, 2023December 31, 2022
Non-accrual loans$6,826 $4,143 
Non-accrual troubled debt restructurings— 4,035 
Total non-performing loans6,826 8,178 
Other real estate owned229 195 
Total non-performing assets$7,055 $8,373 
Ratio of non-performing loans to total loans0.35 %0.45 %
Ratio of non-performing assets to total assets0.26 %0.32 %
Ratio of allowance for credit losses to non-performing loans296.69 %240.39 %
Accruing loans past due 90 days or more (1)
$— $1 
Accruing troubled debt restructurings (1)
$— $1,405 
(1) Not included in non-performing assets above.
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Non-Performing Loans
Non-performing loans totaled $6.8 million, or 0.35% of total loans at September 30, 2023, compared to $8.2 million, or 0.45% of total loans at December 31, 2022. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $7.1 million, or 0.26% of total assets, at September 30, 2023, compared to $8.4 million, or 0.32% of total assets, at December 31, 2022. The decrease in non-performing loans can mostly be attributed to paydown activity on non-performing commercial loans, the removal of a large commercial and industrial loan from non-accrual status, and the charge-off of one commercial and industrial loan, offset by the addition of a few smaller commercial loans to non-performing status. The decrease in non-performing assets can be attributed to the decrease in non-performing loans.

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. 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, or a combination thereof. ASU 2022-02 was implemented on a prospective basis, and as of September 30, 2023, the Corporation had four loans that were modified under the new accounting guidance, term extensions on two commercial mortgages 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 September 30, 2023, the commercial mortgages and home equity loan that were given term extensions were all considered to be performing, while the commercial mortgage that was given a payment delay is currently non-accrual.

Individually Analyzed Loans
Effective January 1, 2023, the Corporation began analyzing loans on an individual basis when management determined that the 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 at December 31, 2022. The amortized cost basis of individually analyzed loans at September 30, 2023 totaled $5.0 million, compared to impaired loans of $7.5 million at December 31, 2022. Included in the amortized cost basis of individually analyzed loans at September 30, 2023, were loans totaling $1.2 million for which allowances of $1.1 million have been specifically allocated to the allowance for credit losses. As of December 31, 2022, the impaired loan total included $1.3 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 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 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. 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 client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.

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 ACL 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.
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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 evaluated individually, based on management discretion. Individually analyzed loans are primarily valuated 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 be granular enough 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 as the source for its readily available and reasonable economic forecast. The forecasted values are applied over a four quarter period, and revert back to the historic mean of a lookback period over an eight period horizon, on a straight-line basis.
Qualitative adjustments represent management's expectation of certain risks not being captured entirely 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 potentially not captured by the model, changes in conditions within the Bank such as lending standards, personnel, concentrations of credit, among others, as well as other 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 considerations 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 credit losses was $20.3 million at September 30, 2023, and the allowance for loan losses was $19.7 million at December 31, 2022. The allowance for credit losses was 296.69% of non-performing loans at September 30, 2023 compared to 240.39% of the allowance for loan losses at December 31, 2022. The ratio of allowance for credit losses to total loans was 1.05% at September 30, 2023, and the ratio of the allowance for loan losses to total loans was 1.07% at December 31, 2022. The increase in the allowance for credit losses was attributable to the impact of the implementation of ASU 2016-13, increased loan volume, and the impact of changes in the economic forecasts that the model relies on. 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 loan growth and additional qualitative provisioning in the consumer portfolio segment, in relation to economic headwinds that may adversely impact consumers in coming periods, but are not directly represented in the FOMC's forecasted data points. Net charge-offs for both the nine months ended September 30, 2023 and September 30, 2022 were $0.8 million.

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The table below summarizes the Corporation’s allowance for credit losses and non-accrual loans outstanding by loan category at September 30, 2023, and the allowance for loan losses and non-accrual loans outstanding by loan category at December 31, 2022 (in thousands):
ALLOWANCE BY LOAN CATEGORY
Balance at September 30, 2023
Allowance for credit losses
Allowance to loans1
Non-performing loans
Non-performing loans to loans1
Allowance to non-performing loans
Commercial and agricultural$4,146 1.63 %$1,032 0.41 %401.74 %
Commercial mortgages11,025 1.01 %3,824 0.35 %288.31 %
Residential mortgages1,868 0.66 %776 0.28 %240.72 %
Consumer loans3,213 1.04 %1,194 0.39 %269.10 %
Total$20,252 1.05 %$6,826 0.35 %296.69 %
Balance at December 31, 2022
Allowance for loan losses
Allowance to loans1
Non-performing loans
Non-performing loans to loans1
Allowance to non-performing loans
Commercial and agricultural$3,373 1.34 %$1,946 0.77 %173.33 %
Commercial mortgages11,576 1.16 %3,933 0.39 %294.33 %
Residential mortgages1,845 0.65 %986 0.35 %187.12 %
Consumer loans2,865 0.97 %1,313 0.45 %218.20 %
Total$19,659 1.07 %$8,178 0.45 %240.39 %
1 Ratio is a percentage of loan category.

The table below summarizes the Corporation’s consolidated credit ratios at September 30, 2023 and December 31, 2022:
Consolidated RatiosSeptember 30, 2023December 31, 2022
    Non-performing loans to total loans0.35 %0.45 %
    Allowance for credit losses to total loans (1)
1.05 %1.07 %
Allowance for credit losses, inclusive of unfunded commitments, to total loans (1)
1.10 %1.07 %
    Allowance for credit losses to non-performing loans (1)
296.69 %240.39 %
(1) December 31, 2022 ratios reflect the Corporations's allowance for loan losses

The table below summarizes the Corporation’s ratio of net charge-offs and recoveries to average loans outstanding by loan category for the nine months ended September 30, 2023 and September 30, 2022:

Credit RatiosSeptember 30, 2023September 30, 2022
Commercial and agricultural0.11 %— %
Commercial mortgages— %— %
Residential mortgages— %(0.01)%
Consumer loans0.16 %0.07 %
Total0.06 %0.01 %
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The table below summarizes the Corporation’s credit loss experience for the nine months ended September 30, 2023 and 2022 (in thousands):
SUMMARY OF CREDIT LOSS EXPERIENCE
 Nine Months Ended 
 September 30,
 20232022
Balance of allowance for credit losses at beginning of period$19,659 $21,025 
Impact of ASC 326 Adoption374 — 
Charge-offs:
  
   Commercial and agricultural281 20 
   Commercial mortgages— 687 
   Residential mortgages— — 
   Consumer loans785 599 
Total charge-offs$1,066 $1,306 
Recoveries:
  
   Commercial and agricultural13 37 
   Commercial mortgages1 3 
   Residential mortgages— 40 
   Consumer loans281 466 
Total recoveries$295 $546 
Net charge-offs (recoveries)771 760 
Provision (credit) for credit losses on-balance sheet exposure1
990 (1,634)
Balance of allowance for credit losses at end of period$20,252 $18,631 
1 Additional provision related to off-balance sheet exposure was ($28 thousand) for the nine months ended September 30, 2023.

Other Real Estate Owned

OREO totaled $0.2 million at September 30, 2023, and December 31, 2022, respectively. There were two residential mortgage properties added to, and two residential mortgages properties sold, from other real estate owned in the first nine months of 2023.

Deposits

The table below summarizes the Corporation’s deposit composition by segment at September 30, 2023, and December 31, 2022, and the dollar and percent change from December 31, 2022 to September 30, 2023 (in thousands):
DEPOSITS
September 30, 2023 v. December 31, 2022
September 30, 2023December 31, 2022
 Amount% of TotalAmount% of Total$ Change% Change
Non-interest-bearing demand deposits$683,348 27.5 %$733,329 31.4 %$(49,981)(6.8)%
Interest-bearing demand deposits310,885 12.6 %271,645 11.7 %39,240 14.4 %
Money market accounts626,256 25.3 %640,840 27.5 %(14,584)(2.3)%
Savings deposits261,822 10.6 %279,029 12.0 %(17,207)(6.2)%
Certificates of deposit $250,000 or less341,045 13.8 %272,182 11.7 %68,863 25.3 %
Certificates of deposit greater than $250,00048,390 2.0 %31,547 1.4 %16,843 53.4 %
Brokered deposits175,000 7.1 %73,452 3.2 %101,548 138.3 %
Other time deposits 26,753 1.1 %25,203 1.1 %1,550 6.2 %
Total$2,473,499 100.0 %$2,327,227 100.0 %$146,272 6.3 %
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Deposits totaled $2.473 billion at September 30, 2023 compared to $2.327 billion at December 31, 2022, an increase of $146.3 million, or 6.3%. The increase was primarily attributable to increases of $101.5 million in brokered deposits, $87.3 million in time deposits excluding brokered deposits, and $39.2 million in interest-bearing demand deposits, offset by decreases of $50.0 million in non-interest bearing demand deposits, $17.2 million in savings deposits, and $14.6 million in insured money market accounts. The growth in deposits was due primarily to increases of $101.5 million in brokered deposits, $49.3 million in ICS deposits, $16.5 million in public deposits, and $1.0 million in CDARS deposits, offset by decreases of $13.1 million in consumer deposits, and $9.7 million in commercial deposits. At September 30, 2023, demand deposit and money market accounts comprised 65.5% of total deposits compared to 70.7% at December 31, 2022. The aggregate amount of the Corporation's outstanding uninsured deposits, was 27.2% and 30.1% of total deposits, as of September 30, 2023 and December 31, 2022, respectively.

The table below presents the Corporation's deposits balance by bank division (in thousands):
DEPOSITS BY DIVISION
 September 30, 2023December 31, 2022December 31, 2021December 31, 2020December 31, 2019
Chemung Canal Trust Company*$2,081,581 $1,892,020 $1,739,826 $1,686,370 $1,317,225 
Capital Bank Division391,918 435,207 415,607 351,404 254,913 
Total $2,473,499 $2,327,227 $2,155,433 $2,037,774 $1,572,138 
*All deposits, excluding those originated by the Capital Bank division.

In addition to consumer, commercial, and public deposits, other sources of funds include reciprocal 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 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. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. Brokered deposits include funds obtained through brokers. Deposits obtained through the CDARS and ICS programs were $418.5 million as of September 30, 2023, including $175.0 million of brokered deposits, and $368.2 million as of December 31, 2022, which included $73.5 million of brokered deposits.

The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and other low interest-bearing deposit accounts. A checking account is the driver of a banking relationship and consumers consider the bank where they have their checking account as their primary bank. These customers will typically turn to their primary bank first when in need of other financial services. Strategies that have been developed and implemented to generate these deposits include: (i) acquiring deposits by entering new markets through branch acquisitions or de novo branching, (ii) an annual checking account marketing campaign, (iii) training branch employees to identify and meet client financial needs with Bank products and services, (iv) linking business and consumer loans to the customer's primary checking account at the Bank, (v) aggressively promoting direct deposit of client’s payroll checks or benefit checks and (vi) constantly monitoring 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 uses brokered deposits as a secondary source of funding to support growth.

Borrowings

Borrowings decreased $96.0 million to $3.1 million at September 30, 2023 from December 31, 2022, primarily attributable to a decrease in FHLBNY overnight advances of $95.8 million when compared to December 31, 2022. There were no outstanding FHLBNY term advances as of and for the nine months ended September 30, 2023, and as of and for the year ended December 31, 2022.


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Shareholders’ Equity

Total shareholders' equity increased $3.7 million from $166.4 million at December 31, 2022 to $170.1 million at September 30, 2023, primarily due to an increase in retained earnings, offset by an increase in accumulated other comprehensive loss. The increase in retained earnings of $15.7 million was due primarily to earnings of $21.2 million, offset by $4.4 million in dividends declared, and a $1.1 million one-time adjustment due to the implementation of CECL, net of deferred tax, during the nine months ended September 30, 2023. The increase in accumulated other comprehensive loss of $13.4 million can be mostly attributed to a decrease in the fair market value of the available for sale securities portfolio, due to the rising interest rate environment. Treasury stock decreased $0.7 million, primarily due to the issuance of shares related to the Corporation's employee benefit plans and grants issued under the Corporation's stock compensation plan. The total shareholders’ equity to total assets ratio was 6.28% at September 30, 2023 compared to 6.29% at December 31, 2022. The tangible equity to tangible assets ratio was 5.52% at September 30, 2023 compared to 5.51% at December 31, 2022. Book value per share increased to $35.90 at September 30, 2023 from $35.32 at December 31, 2022.

The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. As of September 30, 2023, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.
When shares of the Corporation become available in the market, the Corporation may purchase them after careful consideration of the Corporation’s liquidity and capital positions. Purchases may be made from time to time on the open market or in privately negotiated transactions at the discretion of management. On January 8, 2021, the Corporation's Board of Directors approved a new stock repurchase program. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares. 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 Exchange Act of 1934. No shares were repurchased in the third quarter of 2023. As of September 30, 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. Remaining buyback authority under the share repurchase program was 200,816 shares at September 30, 2023.

Liquidity

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, brokered deposits, securities sold under agreements to repurchase, and other borrowings.
The Corporation has a detailed Funds Management Policy that includes sections on liquidity measurement and management, and a Liquidity Contingency Plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. This policy and plan are established and revised as needed by the management and Board ALCO committees. The ALCO is responsible for measuring liquidity, establishing liquidity targets and implementing strategies to achieve selected targets. The ALCO is responsible for coordinating activities across the Corporation to ensure that prudent levels of contingent or standby liquidity are available at all times. Based on the ongoing assessment of the liquidity considerations, management believes the Corporation’s sources of funding meet anticipated funding needs.

At September 30, 2023, the Corporation's cash and cash equivalents balance was $75.6 million. The Corporation also maintains an investment portfolio of securities available for sale, comprised primarily of mortgage-backed securities, U.S. Gov't Treasury securities, Small Business Administration loan pools, and municipal bonds. Although this portfolio generates interest income for the Corporation, it also serves as an available source of liquidity and capital if the need should arise. As of September 30, 2023, the Corporation's investment in securities available for sale was $569.0 million, $296.3 million of which was not pledged as collateral.

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The Corporation is a member of the FHLBNY which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. The Bank has pledged $220.4 million and $228.4 million of first mortgage loans under a blanket lien arrangement at September 30, 2023 and December 31, 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 $231.3 million and $195.6 million at September 30, 2023 and December 31, 2022, respectively. The Corporation did not borrow with the FHLBNY as of September 30, 2023, and borrowed FHLBNY overnight advances of $95.8 million as of December 31, 2022. The Bank's unused borrowing capacity at the Federal Home Loan Bank of New York was $231.3 million as of September 30, 2023. Borrowings may be used on a short-terms basis for liquidity purposes or on a long-term basis to fund asset growth.

Uninsured deposits totaled $671.9 million as of September 30, 2023, and $700.9 million as of December 31, 2022, which included $174.5 million and $152.9 million of municipal deposits that were collateralized by pledged assets, respectively. The Corporation considers the level of uninsured deposits to be an important factor when considering liquidity management and strategic decisions due to their fluidity.

The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates that it will continue using brokered deposits as a secondary source of funding to support growth. Borrowings may be used on a short-term basis for liquidity purposes or on a long-term basis to fund asset growth. Brokered deposits were $175.0 million and $73.5 million, as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, all brokered deposits carried terms of three months with staggered maturities.

The Corporation also had a total of $60.0 million of unsecured lines of credit with five different financial institutions, all of which was available at September 30, 2023, and $68.0 million of unsecured lines of credit with six different financial institutions, all of which was available at December 31, 2022.
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. Under the BTFP, institutions can pledge certain securities (i.e., securities eligible for purchase by the Federal Reserve Banks in open market operations) for the par value of the securities at a borrowing rate of ten basis points over the one-year overnight index swap rate. There will be no fees with the advance. Certain U.S. federally insured depository institutions are eligible to participate in the BTFP. The Bank is eligible to participate, but as of September 30, 2023, the Bank has not participated 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. Also available to the Corporation is the Discount Window Lending provided by the Federal Reserve Bank. As of September 30, 2023, the Bank had no collateral held at the Federal Reserve Bank. The Corporation is continually reviewing the option to utilize these sources.

Consolidated Cash Flows Analysis

The table below summarizes the Corporation's cash flows for the periods indicated (in thousands):
CONSOLIDATED SUMMARY OF CASH FLOWS
(in thousands)Nine Months Ended 
 September 30,
 20232022
Net cash provided by operating activities$27,261 $32,685 
Net cash used in investing activities(53,842)(175,576)
Net cash provided by financing activities46,292 158,333 
Net increase in cash and cash equivalents$19,711 $15,442 

Operating activities
The Corporation believes cash flows from operations, available cash balances, and its ability to generate cash through short-term and long-term borrowings are sufficient to fund the Corporation’s operating liquidity needs. Cash provided by operating activities in the first nine months of 2023 and 2022 predominantly resulted from net income after non-cash operating adjustments.

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Investing activities
Cash used in investing activities during the first nine months of 2023 and 2022 predominantly resulted from a net increase in loans and purchases of securities available for sale, offset by maturities and principal paydowns on securities available for sale.

Financing activities
Cash provided by financing activities during the first nine months of 2023 predominantly resulted from an increase in deposits, including brokered deposits, offset by a net repayment of overnight advances held at the end of the prior quarter. Cash provided by financing activities during the first nine months of 2022 predominantly resulted from a net increase in deposits, including brokered deposits and overnight advances.


Capital Resources

The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the Regulatory Relief Act, the FRB amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant non-banking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, are not subject to regulatory capital requirements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is 2.50%. Organizations that fail to maintain the minimum capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan and other benefit plans are not included in computing regulatory capital.

Pursuant to the Regulatory Relief Act, the FRB finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. 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. The Bank has not elected to use the community bank leverage ratio.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. Management believes that, as of September 30, 2023 and December 31, 2022, the Bank met all capital adequacy requirements to which it was subject. As of December 31, 2018, the Corporation is no longer subject to FRB consolidated capital requirements applicable to bank holding companies, which are similar to those applicable to the Bank, until it reaches $3.0 billion in assets.

As of September 30, 2023, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank's capital category.

The regulatory capital ratios as of September 30, 2023 and December 31, 2022 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.

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The Corporation and the Bank’s capital ratios as of September 30, 2023 were as follows (in thousands, except ratio data):
 ActualMinimum Capital AdequacyMinimum Capital Adequacy with Capital BufferTo Be Well Capitalized Under Prompt Corrective Action Provisions
As of September 30, 2023AmountRatioAmountRatioAmountRatioAmountRatio
Total Capital (to Risk Weighted Assets):
Consolidated$258,225 13.02 %N/AN/AN/AN/A N/AN/A
Bank$248,131 12.51 %$158,663 8.00 %$208,246 10.50 %$198,329 10.00 %
Tier 1 Capital (to Risk Weighted Assets):     
Consolidated$236,919 11.94 %N/AN/AN/AN/A N/AN/A
Bank$226,825 11.44 %$118,997 6.00 %$168,580 8.50 %$158,663 8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):    
Consolidated$236,919 11.94 %N/AN/AN/AN/A N/AN/A
Bank$226,825 11.44 %$89,248 4.50 %$138,830 7.00 %$128,914 6.50 %
Tier 1 Capital (to Average Assets):     
Consolidated$236,919 8.64 %N/AN/AN/AN/A N/AN/A
Bank$226,825 8.29 %$109,489 4.00 %N/AN/A$136,862 5.00 %



The Corporation and the Bank’s capital ratios as of December 31, 2022 were as follows (in thousands, except ratio data):
 ActualMinimum Capital AdequacyMinimum Capital Adequacy with Capital BufferTo Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2022AmountRatioAmountRatioAmountRatioAmountRatio
Total Capital (to Risk Weighted Assets):
Consolidated$239,478 12.57 %N/AN/AN/AN/A N/AN/A
Bank$230,560 12.10 %$152,414 8.00 %$200,044 10.50 %$190,518 10.00 %
Tier 1 Capital (to Risk Weighted Assets):     
Consolidated$219,820 11.54 %N/AN/AN/AN/A N/AN/A
Bank$210,901 11.07 %$114,311 6.00 %$161,940 8.50 %$152,414 8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):    
Consolidated$219,820 11.54 %N/AN/AN/AN/A N/AN/A
Bank$210,901 11.07 %$85,733 4.50 %$133,363 7.00 %$123,837 6.50 %
Tier 1 Capital (to Average Assets):     
Consolidated$219,820 8.23 %N/AN/AN/AN/A N/AN/A
Bank$210,901 7.91 %$106,616 4.00 %N/AN/A$133,270 5.00 %


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Dividend Restrictions

The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At September 30, 2023, the Bank could, without prior approval, declare dividends of approximately $57.2 million.

Adoption of New Accounting Standards

Please refer to Note 1, Summary of Significant Accounting Policies - Recent Accounting Pronouncements for a discussion of new accounting standards.

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

The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on pages 7–13. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.

In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures, because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of other companies. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.

The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Corporation’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required.  The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although we are unable to state with certainty that the SEC would so regard them.









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Fully Taxable Equivalent Net Interest Income and Net Interest Margin

Net interest income is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of other institutions or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average interest-earning assets. For purposes of this measure as well, fully taxable equivalent net interest income is generally used by financial institutions, as opposed to actual net interest income, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time.  The Corporation follows these practices.
As of the
(in thousands, except ratio data)As of the Three Months EndedNine Months Ended
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENTSept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2023202320232022202220232022
Net interest income (GAAP)$18,017 $18,595 $19,947 $20,871 $18,990 $56,559 $53,308 
Fully taxable equivalent adjustment87 92 98 112 112 277 314 
Fully taxable equivalent net interest income (non-GAAP)$18,104 $18,687 $20,045 $20,983 $19,102 $56,836 $53,622 
Average interest-earning assets (GAAP)$2,627,012 $2,609,893 $2,592,709 $2,550,834 $2,457,218 $2,609,999 $2,408,379 
Net interest margin - fully taxable equivalent (non-GAAP)2.73 %2.87 %3.14 %3.26 %3.08 %2.91 %2.98 %


Efficiency Ratio

The unadjusted efficiency ratio is calculated as non-interest expense divided by total revenue (net interest income and non-interest income). The adjusted efficiency ratio is a non-GAAP financial measure which represents the Corporation’s ability to turn resources into revenue and is calculated as non-interest expense divided by total revenue (fully taxable equivalent net interest income and non-interest income), adjusted for one-time occurrences and amortization. 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 the
(in thousands, except ratio data)As of the Three Months EndedNine Months Ended
EFFICIENCY RATIOSept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2023202320232022202220232022
Net interest income (GAAP)$18,017 $18,595 $19,947 $20,871 $18,990 $56,559 $53,308 
Fully taxable equivalent adjustment87 92 98 112 112 277 314 
Fully taxable equivalent net interest income (non-GAAP)$18,104 $18,687 $20,045 $20,983 $19,102 $56,836 $53,622 
Non-interest income (GAAP)$7,808 $5,447 $5,423 $5,418 $5,036 $18,678 $16,018 
Less:  recognition of employee retention tax credit(2,370)— — — — (2,370)— 
Adjusted non-interest income (non-GAAP)$5,438 $5,447 $5,423 $5,418 $5,036 $16,308 $16,018 
Non-interest expense (GAAP)$15,668 $15,913 $15,836 $15,693 $14,577 $47,417 $43,587 
Less:  amortization of intangible assets— — — — — — (15)
Less: legal reserve— — — — — — — 
Adjusted non-interest expense (non-GAAP)$15,668 $15,913 $15,836 $15,693 $14,577 $47,417 $43,572 
Efficiency ratio (unadjusted)60.67 %66.19 %62.42 %59.69 %60.67 %63.02 %62.87 %
Efficiency ratio (adjusted)66.55 %65.94 %62.18 %59.44 %60.40 %64.83 %62.57 %
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Tangible Equity and Tangible Assets (Period-End)

Tangible equity, tangible assets, and tangible book value per share are each non-GAAP financial measures. Tangible equity represents the Corporation’s stockholders’ equity, less goodwill and intangible assets. Tangible assets represents the Corporation’s total assets, less goodwill and other intangible assets. Tangible book value per share represents the Corporation’s tangible equity divided by common shares at period-end. 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
(in thousands, except per share and ratio data)As of or for the Three Months EndedNine Months Ended
TANGIBLE EQUITY AND TANGIBLE ASSETS (PERIOD END)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2023202320232022202220232022
Total shareholders' equity (GAAP)$170,064 $177,426 $177,341 $166,388 $155,518 $170,064 $155,518 
Less: intangible assets(21,824)(21,824)(21,824)(21,824)(21,824)(21,824)(21,824)
Tangible equity (non-GAAP)$148,240 $155,602 $155,517 $144,564 $133,694 $148,240 $133,694 
Total assets (GAAP)$2,707,834 $2,674,673 $2,654,183 $2,645,553 $2,551,422 $2,707,834 $2,551,422 
Less: intangible assets(21,824)(21,824)(21,824)(21,824)(21,824)(21,824)(21,824)
Tangible assets (non-GAAP)$2,686,010 $2,652,849 $2,632,359 $2,623,729 $2,529,598 $2,686,010 $2,529,598 
Total equity to total assets at end of period (GAAP)6.28 %6.63 %6.68 %6.29 %6.10 %6.28 %6.10 %
Book value per share (GAAP)$35.90 $37.49 $37.53 $35.32 $33.14 $35.90 $33.14 
Tangible equity to tangible assets at end of period (non-GAAP)5.52 %5.87 %5.91 %5.51 %5.29 %5.52 %5.29 %
Tangible book value per share (non-GAAP)$31.29 $32.88 $32.91 $30.69 $28.49 $31.29 $28.49 
 


Tangible Equity (Average)

Average tangible equity and return on average tangible equity are each non-GAAP financial measures. Average tangible equity represents the Corporation’s average stockholders’ equity, less average goodwill and intangible assets for the period. Return on average tangible equity measures the Corporation’s earnings as a percentage of average tangible equity. 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
(in thousands, except ratio data)As of or for the Three Months EndedNine Months Ended
TANGIBLE EQUITY (AVERAGE)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2023202320232022202220232022
Total average shareholders' equity (GAAP)$179,700 $180,357 $173,786 $160,740 $180,644 $177,969 $187,409 
Less: average intangible assets(21,824)(21,824)(21,824)(21,824)(21,824)(21,824)(21,828)
Average tangible equity (non-GAAP)$157,876 $158,533 $151,962 $138,916 $158,820 $156,145 $165,581 
Return on average equity (GAAP)16.89 %13.97 %16.97 %18.36 %14.17 %15.93 %15.23 %
Return on average tangible equity (non-GAAP)19.22 %15.89 %19.40 %21.25 %16.12 %18.15 %17.23 %














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Adjustments for Certain Items of Income or Expense

In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular period by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the period, including certain nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative impact on the Corporation’s financial results during the particular period in question. 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
(in thousands, except per share and ratio data)As of or for the Three Months EndedNine Months Ended
NON-GAAP NET INCOMESept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2023202320232022202220232022
Reported net income (GAAP)$7,648 $6,280 $7,270 $7,439 $6,453 $21,198 $21,344 
Recognition of employee retention tax credit(1,873)— — — — (1,873)— 
Non- GAAP net income$5,775 $6,280 $7,270 $7,439 $6,453 $19,325 $21,344 
Average basic and diluted shares outstanding4,736 4,729 4,721 4,698 4,692 4,729 4,691 
Reported basic and diluted earnings per share (GAAP)$1.61 $1.33 $1.54 $1.58 $1.37 $4.48 $4.55 
Reported return on average assets (GAAP)1.14 %0.95 %1.12 %1.15 %1.02 %1.07 %1.16 %
Reported return on average equity (GAAP)16.89 %13.97 %16.97 %18.36 %14.17 %15.93 %15.23 %
Non-GAAP basic and diluted earnings per share$1.21 $1.33 $1.54 $1.58 $1.37 $4.08 $4.55 
Non-GAAP return on average assets0.86 %0.95 %1.12 %1.15 %1.02 %0.97 %1.16 %
Non-GAAP return on average equity12.75 %13.97 %16.97 %18.36 %14.17 %14.52 %15.23 %
 
 
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ITEM 3:    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

Management considers interest rate risk to be the most significant market risk for the Corporation. Market risk is the risk of loss from adverse changes in market prices and rates.  Interest rate risk is the exposure to adverse changes in the net income of the Corporation as a result of changes in interest rates.

The Corporation’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and credit quality of earning assets.

The Corporation’s objectives in its asset and liability management are to maintain a strong, stable net interest margin, to utilize its capital effectively without taking undue risks, to maintain adequate liquidity, and to reduce vulnerability of its operations to changes in interest rates. The Corporation's ALCO has the strategic responsibility for setting the policy guidelines on acceptable exposure to interest rate risk. These guidelines contain specific measures and limits regarding the risks, which are monitored on a regular basis. The ALCO is made up of the President and Chief Executive Officer, the Chief Financial Officer and Treasurer, the Asset Liability Management Officer, and other officers representing key functions.

Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. For that reason, the ALCO has established tolerance limits based upon various basis point changes in interest rates, with appropriate floors set for interest-bearing liabilities. At September 30, 2023, it is estimated that immediate decreases in interest rates of 100-basis points and 200-basis points would positively impact the next 12 months net interest income by 3.78% and 6.16%, respectively. Immediate increases in interest rates of 100-basis points and 200-basis points would positively impact the next 12 months net interest income by 1.59% and 3.16%, respectively. All scenarios are within the Corporation's policy guidelines.
Change in interest ratesPercentage Increase (Decrease) in Net Interest Income over 12 Months
100 basis points decrease3.78%
200 basis points decrease6.16%
100 basis points increase1.59%
200 basis points increase3.16%

A related component of interest rate risk is the expectation that the market value of the Corporation’s equity account will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact component: an institution exposed to earnings erosion is also exposed to a decline in market value. At September 30, 2023, it is estimated that immediate decreases in interest rates of 100-basis points and 200-basis points would positively impact the market value of the Corporation’s capital account by 4.36% and 6.96% respectively. Immediate increases in interest rates of 100-basis points and 200-basis points would positively impact the market value by 0.50% and 1.17% respectively. All scenarios are within the Corporation's policy guidelines.
Change in interest ratesPercentage Increase (Decrease) in Present Value of Corporation's Equity
100 basis points decrease4.36%
200 basis points decrease6.96%
100 basis points increase0.50%
200 basis points increase1.17%

Management does recognize the need for certain hedging strategies during periods of anticipated higher fluctuations in interest rates and the Funds Management Policy provides for limited use of certain derivatives in asset liability management.






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Credit Risk

The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for credit losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.

The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the President and Chief Executive Officer, Chief Financial Officer and Treasurer (non-voting), Chief Credit and Risk Officer, Business Client Division Manager, Retail Client Division Manager, Retail Loan Manager, Senior Commercial Real Estate Lender, and Commercial Loan Managers, implements the Board-approved loan policy.

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ITEM 4:    CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Corporation's management, with the participation of its Chief Executive Officer, who is the Corporation's principal executive officer, and its Chief Financial Officer and Treasurer, who is the Corporation's principal financial and accounting officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of September 30, 2023 pursuant to Rule 13a-15 of the Exchange Act, as amended. Based upon that evaluation, the principal executive officer and principal financial and accounting officer have concluded that the Corporation's disclosure controls and procedures are effective as of September 30, 2023. In addition, there have been no changes in the Corporation's internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting.

Disclosure controls and procedures are designed with the objective of ensuring that information required to be disclosed in reports filed by the Corporation under the Exchange Act, such as this Quarterly Report, is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC. Disclosure controls and procedures are also designed with the objective of ensuring that such information is accumulated and communicated to management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
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PART II.    OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

On February 4, 2020, the Corporation filed a lawsuit against Pioneer Bank, Albany, New York, in the Supreme Court of the State of New York in the County of Albany. As disclosed in the Corporation’s September 12, 2019 Current Report on Form 8-K, the Bank owns a participating interest totaling $4.2 million in an approximately $36.0 million commercial credit facility on which the borrower defaulted due to fraudulent activity. The Bank’s complaint alleges that Pioneer Bank, as lead bank, breached the participation agreement and engaged in fraud and negligent misrepresentation. The Corporation received a recovery of $0.5 million in April, 2020, and continues to pursue recovery of the remaining $3.7 million and accumulated expenses as a result of purchasing the participation interest.

Other than as noted above, the Corporation believes that it is not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity as of September 30, 2023.

ITEM 1A.    RISK FACTORS

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents a material update and addition to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Recent events involving the failure of financial institutions may adversely affect our business, and the market price of our common stock.
Recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank and First Republic Bank, and the liquidity management practices at Signature Bank, that resulted in the failure of those institutions have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession.
These events and developments could materially and adversely impact our business or financial condition, including through liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.
An unexpected decrease in deposit balances due to withdrawal activity could adversely impact the Corporation's ability to rely on organic deposits to primarily fund its operations, requiring greater reliance on secondary sources of liquidity to meet withdrawal demands or to fund continuing operations. These sources include proceeds from Federal Home Loan Bank advances, sales of investment securities and loans, lines of credit from correspondent banks, and out-of-market time deposits.
In response to these events, the Treasury Department, Federal Reserve, and FDIC jointly announced the Bank Term Funding Program (BTFP) on March 12, 2023. This program aims to enhance liquidity, allowing institutions to pledge certain securities at par value, and at a borrowing rate of ten basis points over the one-year overnight index swap rate. The BTFP is available to eligible U.S. federally insured depository institutions, with advance terms of up to one year and no prepayment penalties. As of the date of the release of the Unaudited Consolidated Financial Statements, the Corporation has not accessed the BTFP.
Such reliance on secondary funding sources could increase the Corporation's overall cost of funding and thereby reduce net income. While the Corporation believes its current sources of liquidity are adequate to fund operations, there is no guarantee they will suffice to meet future liquidity demands. This may necessitate slowing or discontinuing loan growth, capital expenditures, other investments, or liquidating assets.
For further discussion of the Corporation's liquidity practices, see pages 73-75 of this Form 10-Q.

84



ITEM 2.    Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities

    (c)    Issuer Purchases of Equity Securities (1)
PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum number of shares that may yet be purchased under the plans or programs
July 1 - July 31, 2023— — — 200,816 
August 1 - August 31, 2023— — — 200,816 
September 1 - September 30, 2023— — — 200,816 
Quarter ended September 30, 2023— $— — 200,816 
(1) On January 8, 2021, the Corporation’s Board of Directors approved a new stock repurchase plan. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its outstanding shares. Purchases may be made from time to time on the open market or in private negotiated transactions and will be at the discretion of management. As of September 30, 2023 the Corporation has repurchased a total of 49,184 shares at the weighted average cost of $40.42 per share.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

ITEM 5.    OTHER INFORMATION

        Not applicable.

85


ITEM 6.    EXHIBITS

    The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888.
3.1Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).
  
3.2Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).
  
3.3Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006).
  
3.4Amended and Restated Bylaws of Chemung Financial Corporation, as amended August 17, 2022 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K filed with the Commission on August 19, 2022).
  
31.1Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
  
31.2Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
  
32.1Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*
  
32.2Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*
  
101.INSInstance Document*
  
101.SCHXBRL Taxonomy Schema*
  
101.CALXBRL Taxonomy Calculation Linkbase*
  
101.DEFXBRL Taxonomy Definition Linkbase*
  
101.LABXBRL Taxonomy Label Linkbase*
  
101.PREXBRL Taxonomy Presentation Linkbase*
  
*Filed herewith.
86


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


CHEMUNG FINANCIAL CORPORATION
DATED: November 9, 2023By:  /s/ Anders M. Tomson
 Anders M. Tomson
President and Chief Executive Officer
(Principal Executive Officer)

DATED: November 9, 2023By:  /s/ Dale M. McKim, III
 Dale M. McKim, III
Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)

87


EXHIBIT INDEX

The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888
3.1
  
3.2
  
3.3
  
3.4
Amended and Restated Bylaws of Chemung Financial Corporation, as amended August 17, 2022 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K filed with the Commission on August 19, 2022).
  
31.1
  
31.2
  
32.1
  
32.2
  
101.INSInstance Document*
  
101.SCHXBRL Taxonomy Schema*
  
101.CALXBRL Taxonomy Calculation Linkbase*
  
101.DEFXBRL Taxonomy Definition Linkbase*
  
101.LABXBRL Taxonomy Label Linkbase*
  
101.PREXBRL Taxonomy Presentation Linkbase*
  
*Filed herewith.