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Chemung Financial Corporation
CHMG
#7973
Rank
NZ$0.71 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
NZ$148.02
Share price
0.28%
Change (1 day)
N/A
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Chemung Financial Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2021 Q3

Chemung Financial Corporation - 10-Q quarterly report FY2021 Q3


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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, 2021
Or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
Commission File No. 001-35741
chmg-20210930_g1.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 5, 2021 was 4,664,078.


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES

INDEX

  PAGES
 
3
   
PART I.
 
   
Item 1:
 
   
 
7
 
8
 
9
 
10
 
12
   
 
14
   
Item 2:
42
   
Item 3:
77
   
Item 4:
78
   
PART II.
 
   
79
   
Item 1A:
79
   
Item 2:
79
   
79
   
Item 4:
79
   
Item 5:
79
   
Item 6:
80
   
 
81
   
 
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
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
CAMCommon area maintenance charges
CARES ActCoronavirus Aid, Relief, and Economic Security Act
CDARSCertificate of Deposit Account Registry Service
CDOCollateralized Debt Obligation
CECLCurrent expected credit loss
CFSCFS Group, Inc.
CorporationChemung Financial Corporation
COVID-19Coronavirus disease 2019
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
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
OTTIOther-than-temporary impairment
PCIPurchased credit impaired
3

PPPPaycheck Protection Program
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 loan losses to total loansRepresents period-end allowance for loan 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.
Capital BankDivision of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany and Saratoga.
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.
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).
4

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 enterprise obligationsObligations 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.
OTTIImpairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security.
PCI loansRepresents loans that were acquired in the Fort Orange Financial Corp. transaction and deemed to be credit-impaired on the acquisition date in accordance with the guidance of FASB.
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.
TDRA TDR is deemed to occur when the Corporation modifies the original terms of a loan agreement by granting a concession to a borrower that is 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,
2021		December 31,
2020
ASSETS
Cash and due from financial institutions$28,859 $29,467 
Interest-earning deposits in other financial institutions32,838 79,071 
Total cash and cash equivalents61,697 108,538 
Equity investments, at estimated fair value2,933 2,542 
Securities available for sale, at estimated fair value761,531 554,611 
Securities held to maturity, estimated fair value of $3,194 at September 30, 2021
  and $2,501 at December 31, 2020
3,183 2,469 
FHLBNY and FRBNY Stock, at cost3,562 3,150 
Loans, net of deferred loan fees1,516,668 1,536,463 
Allowance for loan losses(20,940)(20,924)
Loans, net1,495,728 1,515,539 
Loans held for sale224 170 
Premises and equipment, net18,370 20,119 
Operating lease right-of-use assets7,084 7,145 
Goodwill21,824 21,824 
Other intangible assets, net26 258 
Bank-owned life insurance2,812 3,059 
Accrued interest receivable and other assets38,682 40,027 
Total assets$2,417,656 $2,279,451 
LIABILITIES AND SHAREHOLDERS' EQUITY 
Deposits: 
Non-interest-bearing$725,181 $620,423 
Interest-bearing1,448,641 1,417,351 
Total deposits2,173,822 2,037,774 
Long term finance lease obligation3,659 3,849 
Operating lease liabilities7,227 7,264 
Dividends payable1,445 1,214 
Accrued interest payable and other liabilities25,364 29,651 
Total liabilities2,211,517 2,079,752 
Shareholders' equity: 
Common stock, $0.01 par value per share, 10,000,000 shares authorized;
  5,310,076 issued at September 30, 2021 and December 31, 2020
53 53 
Additional paid-in capital47,203 46,764 
Retained earnings183,873 168,006 
Treasury stock, at cost; 647,273 shares at September 30, 2021 and 642,239
  shares at December 31, 2020
(17,924)(17,525)
Accumulated other comprehensive income (loss)(7,066)2,401 
Total shareholders' equity206,139 199,699 
Total liabilities and shareholders' equity$2,417,656 $2,279,451 
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)2021202020212020
Interest and dividend income:
Loans, including fees$14,655 $14,876 $43,964 $43,770 
Taxable securities2,678 1,474 6,431 4,358 
Tax exempt securities265 263 792 799 
Interest-earning deposits35 101 131 643 
Total interest and dividend income17,633 16,714 51,318 49,570 
Interest expense:    
Deposits768 809 2,521 2,922 
Borrowed funds33 36 100 126 
Total interest expense801 845 2,621 3,048 
Net interest income16,832 15,869 48,697 46,522 
Provision (credit) for loan losses356 679 (53)3,989 
Net interest income after provision for loan losses16,476 15,190 48,750 42,533 
Non-interest income:    
WMG fee income2,765 2,416 8,246 6,968 
Service charges on deposit accounts856 740 2,305 2,294 
Interchange revenue from debit card transactions1,237 1,082 3,622 2,989 
Changes in fair value of equity investments15 57 203 (33)
Net gains on sales of loans held for sale242 553 884 916 
Net gains (losses) on sales of other real estate owned— 6 (18)(71)
Income from bank-owned life insurance13 14 39 147 
Other842 471 2,802 1,940 
Total non-interest income5,970 5,339 18,083 15,150 
Non-interest expenses:    
Salaries and wages6,259 6,088 18,058 17,678 
Pension and other employee benefits1,511 1,245 4,450 4,095 
Other components of net periodic pension and postretirement benefits(391)(254)(1,173)(762)
Net occupancy 1,432 1,454 4,446 4,406 
Furniture and equipment 409 538 1,185 1,573 
Data processing2,210 1,777 6,261 5,630 
Professional services542 453 1,531 1,313 
Amortization of intangible assets42 120 232 371 
Marketing and advertising 162 140 572 546 
Other real estate owned 7 53 24 87 
FDIC insurance356 247 1,075 726 
Loan expense196 301 720 798 
Other1,365 1,200 3,923 3,878 
Total non-interest expenses14,100 13,362 41,304 40,339 
Income before income tax expense8,346 7,167 25,529 17,344 
Income tax expense 1,700 1,456 5,558 3,315 
Net income $6,646 $5,711 $19,971 $14,029 
Weighted average shares outstanding4,684 4,773 4,687 4,836 
Basic and diluted earnings per share$1.42 $1.19 $4.26 $2.90 
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)2021202020212020
Net income$6,646 $5,711 $19,971 $14,029 
Other comprehensive income (loss):    
Net unrealized gains (losses)(4,348)(692)(12,715)9,919 
Tax effect(1,139)(176)(3,246)2,530 
Net of tax amount(3,209)(516)(9,469)7,389 
Change in funded status of defined benefit pension plan and other benefit plans:    
Reclassification adjustment for amortization of prior service costs(55)(55)(165)(165)
Reclassification adjustment for amortization of net actuarial loss57 77 169 231 
Total before tax effect2 22 4 66 
Tax effect1 6 2 14 
Net of tax amount1 16 2 52 
Total other comprehensive income (loss)(3,208)(500)(9,467)7,441 
Comprehensive income$3,438 $5,211 $10,504 $21,470 
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 Income (Loss)Total
Balances at June 30, 202053 46,758 159,505 (13,869)2,142 194,589 
Net income— — 5,711 — — 5,711 
Other comprehensive loss— — — — (500)(500)
Restricted stock awards— 125 — — — 125 
Restricted stock units for directors' deferred compensation plan— 5 — — — 5 
Cash dividends declared ($0.26 per share)
— — (1,229)— — (1,229)
Repurchase of 64,185 shares of common stock
— — — (1,816)— (1,816)
Sale of 18,202 shares of treasury stock (a)
— 4 — 116 — 120 
Balances at September 30, 2020$53 $46,892 $163,987 $(15,569)$1,642 $197,005 
Balances at June 30, 2021$53 $47,081 $178,673 $(17,972)$(3,858)$203,977 
Net income— — 6,646 — — 6,646 
Other comprehensive loss— — — — (3,208)(3,208)
Restricted stock awards— 84 — — — 84 
Restricted stock units for directors' deferred compensation plan— 5 — — — 5 
Cash dividends declared ($0.31 per share)
— — (1,446)— — (1,446)
Repurchase of 97 shares of common stock
— — — (4)— (4)
Sale of 1,887 shares of treasury stock (a)
— 33 — 52 — 85 
Balances at September 30, 2021$53 $47,203 $183,873 $(17,924)$(7,066)$206,139 
(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 Income (Loss)Total
Balances at January 1, 2020$53 $46,382 $153,701 $(11,710)$(5,799)$182,627 
Net income— — 14,029 — — 14,029 
Other comprehensive income— — — — 7,441 7,441 
Restricted stock awards— 431 — — — 431 
Restricted stock units for directors' deferred compensation plan— 25 — — — 25 
Distribution of 255 shares of treasury stock grants for employee restricted stock awards
— (7)— 7 — — 
Cash dividends declared ($0.78 per share)
— — (3,743)— — (3,743)
Distribution of 7,923 shares of treasury stock for directors' compensation
— 144 — 206 — 350 
Distribution of 2,274 shares of treasury stock for employee compensation
— 41 — 59 — 100 
Distribution of 6,426 shares of treasury stock for for deferred directors' compensation
— (180)— 168 — (12)
Repurchase of 186,206 shares of common stock
— — — (5,137)— (5,137)
Sale of 32,387 shares of treasury stock (a)
— 51 — 843 — 894 
Forfeiture of 112 shares of restricted stock awards
— 5 — (5)— — 
Balances at September 30, 2020$53 $46,892 $163,987 $(15,569)$1,642 $197,005 
Balances at January 1, 2021$53 $46,764 $168,006 $(17,525)$2,401 $199,699 
Net income— — 19,971 — — 19,971 
Other comprehensive loss— — — — (9,467)(9,467)
Restricted stock awards— 307 — — — 307 
Restricted stock units for directors' deferred compensation plan— 14 — — — 14 
Cash dividends declared ($0.88 per share)
— — (4,104)— — (4,104)
Distribution of 9,291 shares of treasury stock for directors' compensation
— 64 — 253 — 317 
Distribution of 3,860 shares of treasury stock for employee compensation
— 27 — 105 — 132 
Distribution of 2,707 shares of treasury stock for deferred directors’ compensation
— (72)— 75 — 3 
Repurchase of 28,803 shares of common stock
— — — (1,050)— (1,050)
Sale of 7,911 shares of treasury stock (a)
— 99 — 218 — 317 
Balances at September 30, 2021$53 $47,203 $183,873 $(17,924)$(7,066)$206,139 
(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.
11

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)Nine Months Ended 
 September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:20212020
Net income$19,971 $14,029 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of right-of-use assets559 527 
Amortization of intangible assets232 371 
Provision for loan losses(53)3,989 
(Gains) Loss on disposal of fixed assets(61)7 
Depreciation and amortization of fixed assets1,896 2,215 
Amortization of premiums on securities, net4,020 1,003 
Gain on sales of loans held for sale, net(884)(916)
Proceeds from sales of loans held for sale29,840 17,216 
Loans originated and held for sale(29,010)(17,174)
Net losses on sale of other real estate owned18 71 
Write-downs on other real estate owned— 38 
Net change in fair value of equity investments(203)33 
Proceeds from sales of trading assets41 24 
Purchase of equity investments(229)(174)
Decrease (Increase) in other assets and accrued interest receivable1,279 (10,264)
Increase (decrease) in accrued interest payable27 (38)
Expense related to restricted stock units for directors' deferred compensation plan14 25 
Expense related to employee stock compensation132 102 
Expense related to employee restricted stock awards307 431 
Payments on operating leases(37)(500)
(Decrease) increase in other liabilities(1,242)9,119 
Income from bank owned life insurance(39)(147)
Net cash provided by operating activities26,578 19,987 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities, calls, and principal paydowns on securities available for sale109,736 39,508 
Proceeds from maturities and principal collected on securities held to maturity558 1,349 
Purchases of securities available for sale(333,376)(142,797)
Purchases of securities held to maturity(1,287)(1,286)
Purchase of FHLBNY and FRBNY stock(412)(51)
Proceeds from sales of fixed assets451 — 
Purchases of premises and equipment(537)(696)
Proceeds from sale of other real estate owned128 253 
Proceeds from bank owned life insurance286 213 
Net (increase) decrease in loans19,784 (232,582)
Net cash used in investing activities(204,669)(336,089)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts191,360 307,723 
(Decrease) increase in time deposits(55,312)44,327 
Payments made on finance leases(190)(175)
Purchase of treasury stock(1,050)(5,137)
Sale of treasury stock315 894 
Cash dividends paid(3,873)(3,777)
Net cash provided by financing activities131,250 344,100 
Net (decrease) increase in cash and cash equivalents(46,841)27,998 
Cash and cash equivalents, beginning of period108,538 121,904 
Cash and cash equivalents, end of period$61,697 $149,902 
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:20212020
Cash paid for:
Interest$2,594 $3,086 
Income taxes4,375 3,785 
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned80 431 
Dividends declared, not yet paid1,445 1,229 
Repurchase of common stock in lieu of employee payroll taxes80 54 
Operating lease right-of-use assets(498)— 
Distribution of treasury stock for directors' compensation317 350 
Distribution of treasury stock for deferred directors' compensation4 (12)
Forfeiture of shares of restricted stock awards— (5)
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 2020 Annual Report on Form 10-K for the year ended December 31, 2020. 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

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal years beginning after December 15, 2018. In November 2019, the FASB adopted changes to delay the effective date of ASU 2016-13 to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay. The Corporation has established a committee to oversee the implementation of CECL and has selected a vendor to assist in the implementation process. The model chosen utilizes a loss driver analysis which includes reasonable and supportable forecasts to estimate future losses. This analysis includes different methods such as discounted cash flows, remaining life and vintage analysis, which are used depending on the nature of the portfolio segment. The Corporation is running its current incurred loss model and a CECL model concurrently. The Corporation is in the process of updating its policies and internal controls accordingly. The corporation expects to recognize a one-time cumulative-effect adjustment to our allowance for loan losses upon adoption of CECL, effective of January 1, 2023, consistent with regulatory expectations set forth in interagency guidance.
14

Section 4013 of the CARES Act gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under ASC 310-40, Receivables: Troubled Debt Restructurings by Creditors, in certain situations. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. All loan modifications made by the Corporation in response to the COVID-19 pandemic have been in accordance with Section 4013 of the CARES Act.

Adoption of New Accounting Standards

On January 1, 2020, the Corporation adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of the ASU is to simplify the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. The adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements.


Risks and Uncertainties - COVID-19

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. As of September 30, 2021 many restrictions have been removed or lessened and many non-essential businesses have been allowed to re-open in limited capacity adhering to social distancing and disinfection guidelines. However, these restrictions and other consequences have resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 pandemic began, millions of people have filed claims for unemployment and stock markets have remained volatile. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened.

The Corporation's unaudited consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses established. Management evaluated the potential impact of the COVID-19 pandemic as it related to the loan portfolio and as part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. Certain allowance qualitative factors were increased based on an assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.

Management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio. While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, Management has designated certain industries as most impacted by COVID-19. For a discussion of the effect of COVID-19 on our business, see pages 60-62 of this Form 10-Q.


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 units and directors’ stock compensation, 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 non-forfeitable 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 4,684 and 4,773 weighted average shares outstanding for the three month periods ended September 30, 2021 and 2020, respectively. Earnings per share were computed by dividing net income by 4,687 and 4,836 weighted average shares outstanding for the nine month periods ended September 30, 2021 and 2020, respectively. There were no common stock equivalents during the three and nine month periods ended September 30, 2021 or 2020.


15

NOTE 3        SECURITIES

Amortized cost and estimated fair value of securities available for sale are as follows (in thousands):
 September 30, 2021
 Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
U.S. Treasury notes and bonds$40,499 $— $162 $40,337 
Mortgage-backed securities, residential588,555 5,397 7,826 586,126 
Obligations of states and political subdivisions40,331 2,021 — 42,352 
Corporate bonds and notes17,000 116 55 17,061 
SBA loan pools75,612 398 355 75,655 
Total$761,997 $7,932 $8,398 $761,531 

 December 31, 2020
 Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
Mortgage-backed securities, residential$458,245 $9,822 $201 $467,866 
Obligations of states and political subdivisions40,662 2,743 — 43,405 
Corporate bonds and notes9,000 47 12 9,035 
SBA loan pools34,455 42 192 34,305 
Total$542,362 $12,654 $405 $554,611 

Amortized cost and estimated fair value of securities held to maturity are as follows (in thousands):
 September 30, 2021
 Amortized CostUnrecognized GainsUnrecognized LossesEstimated Fair Value
Obligations of states and political subdivisions$1,300 $— $— $1,300 
Time deposits with other financial institutions1,883 11 — 1,894 
Total$3,183 $11 $— $3,194 

 December 31, 2020
 Amortized CostUnrecognized GainsUnrecognized LossesEstimated Fair Value
Obligations of states and political subdivisions$326 $— $— $326 
Time deposits with other financial institutions2,143 32 — 2,175 
Total$2,469 $32 $— $2,501 

16

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, 2021
Available for SaleHeld to Maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
Within one year$686 $689 $1,523 $1,532 
After one, but within five years75,962 77,278 860 862 
After five, but within ten years20,712 21,285 800 800 
After ten years470 498 — — 
97,830 99,750 3,183 3,194 
Mortgage-backed securities, residential588,555 586,126 — — 
SBA loan pools75,612 75,655 — — 
Total$761,997 $761,531 $3,183 $3,194 

There were no proceeds from sales and calls of securities resulting in gains or losses for the three and nine month periods ended September 30, 2021 and 2020.

The following tables summarize the investment securities available for sale with unrealized losses at September 30, 2021 and December 31, 2020 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, 2021Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. Treasury notes and bonds$24,819 $162 $— $— $24,819 $162 
Mortgage-backed securities, residential383,380 7,707 4,146 119 387,526 7,826 
Corporate bonds and notes2,979 21 2,966 34 5,945 55 
SBA loan pools39,140 283 6,273 72 45,413 355 
Total temporarily impaired securities$450,318 $8,173 $13,385 $225 $463,703 $8,398 

 Less than 12 months12 months or longerTotal
December 31, 2020Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Mortgage-backed securities, residential$70,037 $200 $970 $1 $71,007 $201 
Corporate bonds and notes2,988 12 — — 2,988 12 
SBA loan pools15,245 156 3,636 36 18,881 192 
Total temporarily impaired securities$88,270 $368 $4,606 $37 $92,876 $405 

Other-Than-Temporary Impairment

As of September 30, 2021, the majority of the Corporation's unrealized losses in the investment securities portfolio related to mortgage-backed securities. At September 30, 2021, all of the unrealized losses related to mortgage-backed securities were issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell these securities and it is not likely that it will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at September 30, 2021.

17


NOTE 4        LOANS AND ALLOWANCE FOR LOAN LOSSES

The composition of the loan portfolio, net of deferred origination fees and costs, is summarized as follows (in thousands):
September 30, 2021December 31, 2020
Commercial and agricultural:
Commercial and industrial$270,656 $368,663 
Agricultural419 283 
Commercial mortgages:
Construction67,445 61,945 
Commercial mortgages, other721,709 654,663 
Residential mortgages253,991 239,401 
Consumer loans:
Home equity lines and loans72,471 78,547 
Indirect consumer loans119,772 120,538 
Direct consumer loans10,205 12,423 
Total loans, net of deferred loan fees and costs1,516,668 1,536,463 
Interest receivable on loans4,261 5,035 
Total recorded investment in loans$1,520,929 $1,541,498 

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. As of September 30, 2021 and December 31, 2020, the Corporation had outstanding PPP loan balances of $68.1 million and $150.9 million, respectively, which were included in commercial and industrial loans in the table above. These loans require no allowance for loan losses as of September 30, 2021 since they are government guaranteed loans.

The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, 2021 and 2020 (in thousands):
Three Months Ended September 30, 2021
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance$3,628 $12,963 $1,791 $2,294 $20,676 
Charge-offs— (44)— (190)(234)
Recoveries8 1 — 133 142 
Net recoveries (charge-offs)8 (43)— (57)(92)
Provision(15)361 80 (70)356 
Ending balance$3,621 $13,281 $1,871 $2,167 $20,940 
Three Months Ended September 30, 2020
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance$8,327 $10,549 $1,891 $3,363 $24,130 
Charge-offs(68)— (42)(216)(326)
Recoveries18 2 — 87 107 
Net recoveries (charge-offs)(50)2 (42)(129)(219)
Provision180 361 232 (94)679 
Ending balance$8,457 $10,912 $2,081 $3,140 $24,590 

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The following tables present the activity in the allowance for loan losses by portfolio segment for the nine month periods ended September 30, 2021 and 2020 (in thousands):

Nine Months Ended September 30, 2021
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance$4,493 $11,496 $2,079 $2,856 $20,924 
Charge-offs(25)(44)(71)(510)(650)
Recoveries283 2 10 424 719 
Net recoveries (charge-offs)258 (42)(61)(86)69 
Provision(1,130)1,827 (147)(603)(53)
Ending balance$3,621 $13,281 $1,871 $2,167 $20,940 
Nine Months Ended September 30, 2020
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance$10,227 $8,869 $1,252 $3,130 $23,478 
Charge-offs(134)(2,143)(56)(915)(3,248)
Recoveries27 2 49 293 371 
Net recoveries (charge-offs)(107)(2,141)(7)(622)(2,877)
Provision(1,663)4,184 836 632 3,989 
Ending balance$8,457 $10,912 $2,081 $3,140 $24,590 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of September 30, 2021 and December 31, 2020 (in thousands):
 September 30, 2021
Allowance for loan losses:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Ending allowance balance attributable to loans:
Individually evaluated for impairment$1,525 $1,800 $— $73 $3,398 
Collectively evaluated for impairment2,096 11,481 1,871 2,094 17,542 
   Total ending allowance balance$3,621 $13,281 $1,871 $2,167 $20,940 

 December 31, 2020
Allowance for loan losses:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Ending allowance balance attributable to loans:
Individually evaluated for impairment$1,401 $74 $— $52 $1,527 
Collectively evaluated for impairment3,092 11,422 2,079 2,804 19,397 
   Total ending allowance balance$4,493 $11,496 $2,079 $2,856 $20,924 


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 September 30, 2021
Loans:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Loans individually evaluated for impairment$2,582 $8,356 $946 $333 $12,217 
Loans collectively evaluated for  impairment269,290 783,120 253,695 202,607 1,508,712 
   Total ending loans balance$271,872 $791,476 $254,641 $202,940 $1,520,929 

 December 31, 2020
Loans:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Loans individually evaluated for impairment$3,400 $5,117 $1,271 $801 $10,589 
Loans collectively evaluated for  impairment366,852 714,028 238,742 211,287 1,530,909 
   Total ending loans balance$370,252 $719,145 $240,013 $212,088 $1,541,498 

The following table presents loans individually evaluated for impairment recognized by class of loans as of September 30, 2021 and December 31, 2020 (in thousands):
 September 30, 2021December 31, 2020
With no related allowance recorded:Unpaid Principal BalanceRecorded InvestmentAllowance for Loan Losses AllocatedUnpaid Principal BalanceRecorded InvestmentAllowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial$995 $970 $— $1,960 $1,963 $— 
Commercial mortgages:
Construction143 143 — 188 189 — 
Commercial mortgages, other7,312 4,651 — 6,814 4,760 — 
Residential mortgages960 946 — 1,283 1,271 — 
Consumer loans:
Home equity lines and loans195 179 — 645 631 — 
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial5,487 1,612 1,525 5,228 1,437 1,401 
Commercial mortgages:
Commercial mortgages, other3,554 3,562 1,800 258 168 74 
Consumer loans:
Home equity lines and loans154 154 73 170 170 52 
Total$18,800 $12,217 $3,398 $16,546 $10,589 $1,527 

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The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans for the three and nine month periods ended September 30, 2021 and 2020 (in thousands):
 Three Months Ended 
 September 30, 2021		Three Months Ended 
 September 30, 2020		Nine Months Ended 
 September 30, 2021		Nine Months Ended 
 September 30, 2020
With no related allowance recorded:Average Recorded InvestmentInterest Income Recognized
(1)		Average Recorded InvestmentInterest Income Recognized
(1)		Average Recorded InvestmentInterest Income Recognized
(1)		Average Recorded InvestmentInterest Income Recognized
(1)
Commercial and agricultural:
Commercial and industrial$1,378 $3 $1,239 $2 $1,645 $3 $679 $2 
Commercial mortgages:
Construction151 1 213 2 167 5 226 6 
Commercial mortgages, other4,665 8 4,515 — 4,743 23 3,938 — 
Residential mortgages950 12 1,224 7 1,034 29 873 17 
Consumer loans:
Home equity lines & loans184 2 650 2 299 5 399 5 
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial1,545 4 5,804 2 1,511 6 5,867 4 
Commercial mortgages:
Commercial mortgages, other3,644 25 2,229 8 1,905 25 3,645 16 
Consumer loans:
Home equity lines and loans155 — 175 — 160 — 88 — 
Total$12,672 $55 $16,049 $23 $11,464 $96 $15,715 $50 
(1)Cash basis interest income approximates interest income recognized.
The following table presents the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of September 30, 2021 and December 31, 2020 (in thousands):
Non-accrualLoans Past Due 90 Days or More and Still Accruing
September 30, 2021December 31, 2020September 30, 2021December 31, 2020
Commercial and agricultural:
Commercial and industrial$2,080 $2,167 $4 $2 
Commercial mortgages:
Construction36 55 — — 
Commercial mortgages, other4,212 4,415 — — 
Residential mortgages845 1,632 — — 
Consumer loans:
Home equity lines and loans819 1,159 — — 
Indirect consumer loans367 519 — — 
Direct consumer loans14 5 — — 
Total$8,373 $9,952 $4 $2 


21

The following tables present the aging of the recorded investment in loans as of September 30, 2021 and December 31, 2020 (in thousands):
September 30, 2021
 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$1,110 $1,375 $45 $2,530 $268,921 $271,451 
Agricultural— — — — 421 421 
Commercial mortgages: 
Construction— — — — 67,644 67,644 
Commercial mortgages, other2,056 2,615 217 4,888 718,944 723,832 
Residential mortgages1,226 131 436 1,793 252,848 254,641 
Consumer loans: 
Home equity lines and loans115 161 542 818 71,835 72,653 
Indirect consumer loans764 83 161 1,008 119,037 120,045 
Direct consumer loans13 7 8 28 10,214 10,242 
Total$5,284 $4,372 $1,409 $11,065 $1,509,864 $1,520,929 

December 31, 2020
 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$520 $14 $30 $564 $369,404 $369,968 
Agricultural— — — — 284 284 
Commercial mortgages: 
Construction— — — — 62,164 62,164 
Commercial mortgages, other1,438 3,696 308 5,442 651,539 656,981 
Residential mortgages817 406 461 1,684 238,329 240,013 
Consumer loans: 
Home equity lines and loans521 41 474 1,036 77,725 78,761 
Indirect consumer loans1,268 198 252 1,718 119,135 120,853 
Direct consumer loans34 2 — 36 12,438 12,474 
Total$4,598 $4,357 $1,525 $10,480 $1,531,018 $1,541,498 

Troubled Debt Restructurings:

A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession.  The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 related modifications and therefore will not be treated as TDRs. At its highest point as of May 31, 2020, in conformance with Section 4013 of the CARES Act, total loan forbearances represented 15.77% of the Corporation's total loan portfolio, or $242.5 million. As of September 30, 2021, 11 loans totaling $3.0 million remained in modified status, representing 0.20% of the Corporation's total loan portfolio, of which 5 loans totaling $2.9 million had been modified more than once.

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As of September 30, 2021 and December 31, 2020, the Corporation has a recorded investment in TDRs of $10.8 million and $6.7 million, respectively. There were specific reserves of $2.2 million and $0.4 million allocated for TDRs at September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, TDRs totaling $5.7 million were accruing interest under the modified terms and $5.1 million were on non-accrual status. As of December 31, 2020, TDRs totaling $2.8 million were accruing interest under the modified terms and $3.9 million were on non-accrual status. The Corporation has committed no additional amounts as of both September 30, 2021 and December 31, 2020, to customers with outstanding loans that are classified as TDRs.

During the three months ended September 30, 2021, the terms and conditions of two commercial and industrial loans were modified as TDRs. The modification of the terms of both of these loans included a postponement or reduction of the scheduled amortized payments for greater than a three month period. During the three month period ended September 30, 2020, the terms of certain loans were modified as TDRs. During the three months ended September 30, 2020, the modification of terms of one residential mortgage loan included the postponement of scheduled amortized payments for a period greater than three-months. Additionally, two commercial and industrial loans were modified with the maturity date extended on both loans and one with an extension at a stated rate lower than the current market rate for new debt with similar risk.

In addition to the modifications noted above, during the nine months ended September 30, 2021 the terms and conditions of two commercial and industrial loans and two commercial mortgage loans were modified as TDRs. The modification of the terms of all of these loans included a postponement or reduction of the scheduled amortized payments for greater than a three month period.

In addition to the modifications noted above, during the nine month period ended September 30, 2020 modifications included two commercial and industrial loans where deferral of payments were granted and both loans were risk rated Substandard while one loan was in non-accrual status prior to the modification. The modifications of four commercial mortgage loans included the deferral of payments with three of the the loans risk rated Substandard and in non-accrual status, three of the borrowers were over one year past due in real estate taxes and two of the loans were over 30 days past due in payments. The modifications of three residential mortgages included the deferral of payments while all three were in non-accrual status prior to the modifications, two were risk rated Substandard and one was over thirty days past due in payments. The modifications of three home equity lines and loans included the deferral of payments while all three loans were risk rated Substandard and in non-accrual status prior to the modifications.

The following table presents loans by class modified as TDRs that occurred during the three month period ended September 30, 2021 and September 30, 2020 (dollars in thousands):

September 30, 2021Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial2 $502 $502 
Total2 $502 $502 
September 30, 2020Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and industrial2 $1,138 $1,138 
Residential mortgages1 320 320 
Total3 $1,458 $1,458 
The TDRs described above increased the allowance for loan losses by $0.2 million and resulted in no charge-offs during the three month period ended September 30, 2021. The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the three month period ended September 30, 2020.
23


The following table presents loans by class modified as TDRs that occurred during the nine month period ended September 30, 2021 and September 30, 2020 (dollars in thousands):
September 30, 2021Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial2 $502 $502 
Agricultural
Commercial mortgages:
Commercial mortgages, other4 $6,094 $6,094 
Total6 $6,596 $6,596 
September 30, 2020Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial4 $2,068 $2,068 
Agricultural
Commercial mortgages:
Commercial mortgages, other4 1,297 1,297 
Residential mortgages4 997 997 
Consumer loans:
Home equity lines and loans3 738 738 
Total15 $5,100 $5,100 

The TDRs described above increased the allowance for loan losses by $1.9 million and resulted in no charge-offs during the nine month period ended September 30, 2021. The TDRs described above increased the allowance for loan losses by $0.1 million and resulted in no charge-offs during the nine month period ended September 30, 2020.

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three and nine month periods ended September 30, 2021 and 2020.

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 the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment.

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.
24


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.  Based on the analyses performed as of September 30, 2021 and December 31, 2020, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):
 September 30, 2021
 Not RatedPassSpecial MentionSubstandardDoubtfulTotal
Commercial and agricultural:
Commercial and industrial$— $264,526 $2,565 $3,166 $1,194 $271,451 
Agricultural— 421 — — — 421 
Commercial mortgages:
Construction— 67,607 — 37 — 67,644 
Commercial mortgages— 670,350 33,937 18,422 1,123 723,832 
Residential mortgages253,796 — — 845 — 254,641 
Consumer loans:
Home equity lines and loans71,834 — — 819 — 72,653 
Indirect consumer loans119,678 — — 367 — 120,045 
Direct consumer loans10,228 — — 14 — 10,242 
Total$455,536 $1,002,904 $36,502 $23,670 $2,317 $1,520,929 
 December 31, 2020
 Not RatedPassSpecial MentionSubstandardDoubtfulTotal
Commercial and agricultural:
Commercial and industrial$— $360,500 $2,999 $5,092 $1,377 $369,968 
Agricultural— 284 — — — 284 
Commercial mortgages:
Construction— 59,885 — 2,279 — 62,164 
Commercial mortgages— 616,090 23,631 16,128 1,132 656,981 
Residential mortgages238,381 — — 1,632 — 240,013 
Consumer loans:
Home equity lines and loans77,602 — — 1,159 — 78,761 
Indirect consumer loans120,334 — — 519 — 120,853 
Direct consumer loans12,470 — — 4 — 12,474 
Total$448,787 $1,036,759 $26,630 $26,813 $2,509 $1,541,498 

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following tables present the recorded investment in residential and consumer loans based on payment activity as of September 30, 2021 and December 31, 2020 (in thousands):
25

 September 30, 2021
 Consumer Loans
 Residential MortgagesHome Equity Lines and LoansIndirect Consumer LoansOther Direct Consumer Loans
Performing$253,796 $71,834 $119,678 $10,228 
Non-Performing845 819 367 14 
 $254,641 $72,653 $120,045 $10,242 

 December 31, 2020
 Consumer Loans
 Residential MortgagesHome Equity Lines and LoansIndirect Consumer LoansOther Direct Consumer Loans
Performing$238,381 $77,602 $120,334 $12,470 
Non-Performing1,632 1,159 519 4 
 $240,013 $78,761 $120,853 $12,474 


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).

26

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

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

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

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

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Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurement at September 30, 2021 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)
Obligations of U.S. Government and U.S. Government sponsored enterprises$40,337 $40,337 $— $— 
Mortgage-backed securities, residential586,126 — 586,126 — 
Obligations of states and political subdivisions42,352 — 42,352 — 
Corporate bonds and notes17,061 — 17,061 — 
SBA loan pools75,655 — 75,655 — 
Total available for sale securities$761,531 $40,337 $721,194 $— 
Equity investments, at fair value$2,290 $2,290 $— $— 
Derivative assets9,948 — 9,948 — 
Financial Liabilities:
Derivative liabilities$10,310 $— $10,310 $— 

There were no transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2021.
Fair Value Measurement at December 31, 2020 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)
Mortgage-backed securities, residential$467,866 $— $467,866 $— 
Obligations of states and political subdivisions43,405 — 43,405 — 
Corporate bonds and notes9,035 — 9,035 — 
SBA loan pools34,305 — 34,305 — 
Total available for sale securities$554,611 $— $554,611 $— 
Equity investments, at fair value$1,880 $1,880 $— $— 
Derivative assets14,345 — 14,345 — 
Financial Liabilities:
Derivative liabilities$14,702 $— $14,702 $— 

There were no transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2020.

28

Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):
 Fair Value Measurement at September 30, 2021 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)
Other real estate owned:    
Residential mortgages$124 $— $— $124 
Consumer loans:    
Home equity lines and loans47 — — 47 
Total other real estate owned, net$171 $— $— $171 

 Fair Value Measurement at December 31, 2020 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)
Other real estate owned:    
Commercial mortgages:    
Commercial mortgages$111 $— $— $111 
Residential mortgages126 — — 126 
Total other real estate owned, net$237 $— $— $237 


The following tables present information related to Level 3 non-recurring fair value measurement at September 30, 2021 and December 31, 2020 (in thousands):
DescriptionFair Value at September 30, 2021Valuation TechniqueUnobservable InputsRange [Weighted Average] at September 30, 2021
Impaired loans:
OREO:
Commercial mortgages:
Residential mortgages$124 Sales comparisonDiscount to appraised value
20.80% - 20.80%
[20.80%]
Consumer loans:
Home equity lines and loans47 Sales comparisonDiscount to appraised value
10.00% - 10.00%
[10.00%]
$171 

29

DescriptionFair Value at December 31, 2020Valuation TechniqueUnobservable InputsRange [Weighted Average] at December 31, 2020
Impaired loans:
OREO:
Commercial mortgages:
  Commercial mortgages$111 Sales comparisonDiscount to appraised value
20.80% - 20.80%
[20.80%]
Residential mortgages126 Sales comparisonDiscount to appraised value
20.80% - 20.80%
[20.80%]
$237 

FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amounts and estimated fair values of other financial instruments, at September 30, 2021 and December 31, 2020, are as follows (in thousands):
September 30, 2021
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$28,859 $28,859 $— $— $28,859 
Interest-earning deposits in other financial institutions32,838 32,838 — — 32,838 
Equity investments2,933 2,933 — — 2,933 
Securities available for sale761,531 40,337 721,194 — 761,531 
Securities held to maturity3,183 — 1,894 1,300 3,194 
FHLBNY and FRBNY stock3,562 — — — N/A
Loans, net and loans held for sale1,495,952 — — 1,483,417 1,483,417 
Accrued interest receivable6,040 73 1,706 4,261 6,040 
Derivative Assets9,948 — 9,948 — 9,948 
Financial liabilities:     
Deposits:     
Demand, savings, and insured money market accounts$1,943,403 $1,943,403 $— $— $1,943,403 
Time deposits230,419 — 232,107 — 232,107 
Accrued interest payable289 10 279 — 289 
Derivative Liabilities10,310 — 10,310 — 10,310 
(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.
30

 December 31, 2020
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$29,467 $29,467 $— $— $29,467 
Interest-earning deposits in other financial institutions79,071 79,071 — — 79,071 
Equity investments2,542 2,542 — — 2,542 
Securities available for sale554,611 — 554,611 — 554,611 
Securities held to maturity2,469 — 2,175 326 2,501 
FHLBNY and FRBNY stock3,150 — — — N/A
Loans, net and loans held for sale1,515,709 — — 1,514,318 1,514,318 
Accrued interest receivable6,271 — 1,356 4,915 6,271 
Derivative Asset14,345 — 14,345 — 14,345 
Financial liabilities:     
Deposits:     
Demand, savings, and insured money market accounts$1,752,043 $1,752,043 $— $— $1,752,043 
Time deposits285,731 — 288,398 — 288,398 
Accrued interest payable262 11 251 — 262 
Derivative Liabilities14,702 — 14,702 — 14,702 
(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.


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, 2021, the weighted average remaining lease term was 9.40 years with a weighted average discount rate of 3.33%. Rent expense was $0.2 million for the three months ended September 30, 2021. Rent expense was $0.7 million for the nine months ended September 30, 2021. 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, 2021 and December 31, 2020 consist of the following (in thousands):
September 30, 2021December 31, 2020
Operating lease right-of-use asset$7,145 $8,001 
Less: accumulated amortization(559)(705)
Change in lease agreements498 (151)
Operating lease right-of-use-assets, net$7,084 $7,145 

31

The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of September 30, 2021 (in thousands):
YearAmount
2021$241 
2022970 
2023990 
2024923 
2025841 
2026 and thereafter4,501 
Total minimum lease payments8,466 
Less: amount representing interest(1,239)
Present value of net minimum lease payments$7,227 

As of September 30, 2021, the Corporation had one operating lease that was signed, but had not yet commenced. The expected commencement date is October, 2021.

Finance Leases

The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of September 30, 2021, the weighted average remaining lease term was 11.36 years with a weighted average discount rate of 3.37%. The Corporation has included these leases in premises and equipment as of September 30, 2021 and December 31, 2020 as follows (in thousands):
September 30, 2021December 31, 2020
Buildings$5,572 $5,572 
Less: accumulated depreciation(2,125)(1,875)
Net book value$3,447 $3,697 

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, 2021 (in thousands):
YearAmount
2021$98 
2022391 
2023391 
2024391 
2025409 
2026 and thereafter2,840 
Total minimum lease payments4,520 
Less: amount representing interest(861)
Present value of net minimum lease payments$3,659 

As of September 30, 2021, 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, 2024 from a member of the Corporation's Board of Directors with monthly rent and CAM related expenses totaling $4 thousand per month. Rent paid to this Board member totaled $13 thousand for each of the three month periods ended September 30, 2021 and 2020, respectively. Rent and CAM related expenses paid to this Board of Directors member totaled $37 thousand and $40 thousand for the nine month periods ended September 30, 2021 and 2020, respectively.
32


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 $8 thousand per month. Rent and CAM related expenses paid to this Board member totaled $25 thousand and $26 thousand for the three month periods ended September 30, 2021 and 2020, respectively. Rent and CAM related expenses paid to this Board of Directors member totaled $76 thousand and $80 thousand for the nine month periods ended September 30, 2021 and 2020, 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, 2021 and 2020 were as follows (in thousands):
 20212020
Beginning of year$21,824 $21,824 
Acquired goodwill— — 
Ending balance September 30,$21,824 $21,824 

Acquired intangible assets were as follows at September 30, 2021 and December 31, 2020 (in thousands):
 At September 30, 2021At December 31, 2020
 Balance AcquiredAccumulated AmortizationBalance AcquiredAccumulated Amortization
Core deposit intangibles$5,975 $5,975 $5,975 $5,962 
Other customer relationship intangibles5,633 5,607 5,633 5,388 
Total$11,608 $11,582 $11,608 $11,350 

Aggregate amortization expense was $42 thousand and $120 thousand for the three month periods ended September 30, 2021 and 2020, respectively. Aggregate amortization expense was $0.2 million and $0.4 millions for the nine month periods ended September 30, 2021 and 2020, respectively.

The remaining estimated aggregate amortization expense at September 30, 2021 is listed below (in thousands):
YearEstimated Expense
2021$26 
Total$26 

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. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgement on the part of management and the use of estimates relate to the growth assumptions and market multiples used in the valuation model. 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.

33

The following table lists the contractual amounts of financial instruments with off-balance sheet risk at September 30, 2021 and December 31, 2020 (in thousands):
 September 30, 2021December 31, 2020
 Fixed RateVariable RateFixed RateVariable Rate
Commitments to make loans$21,334 $49,839 $28,459 $39,056 
Unused lines of credit2,137 274,554 1,300 268,075 
Standby letters of credit— 14,878 — 16,094 

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, 2021, 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, 2021$2,867 $(6,725)$(3,858)
Other comprehensive income before reclassification(3,209)— (3,209)
Amounts reclassified from accumulated other comprehensive income— 1 1 
Net current period other comprehensive income (loss)(3,209)1 (3,208)
Balance at September 30, 2021$(342)$(6,724)$(7,066)
 Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at July 1, 2020$9,273 $(7,131)2,142 
Other comprehensive income before reclassification(516)— (516)
Amounts reclassified from accumulated other comprehensive income— 16 16 
Net current period other comprehensive income (loss)(516)16 (500)
Balance at September 30, 2020$8,757 $(7,115)$1,642 
34

Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at January 1, 2021$9,127 $(6,726)$2,401 
Other comprehensive income before reclassification(9,469)— (9,469)
Amounts reclassified from accumulated other comprehensive income— 2 2 
Net current period other comprehensive income(9,469)2 (9,467)
Balance at September 30, 2021$(342)$(6,724)$(7,066)

Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at January 1, 2020$1,368 $(7,167)(5,799)
Other comprehensive income before reclassification7,389 — 7,389 
Amounts reclassified from accumulated other comprehensive income— 52 52 
Net current period other comprehensive income7,389 52 7,441 
Balance at September 30, 2020$8,757 $(7,115)$1,642 

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
 20212020 
Amortization of defined pension plan and other benefit plan items:       
Prior service costs (a)$(55)$(55)Other components of net periodic pension and postretirement benefits
Actuarial losses (a)57 77 Other components of net periodic pension and postretirement benefits
Tax effect(1)(6)Income tax expense
Net of tax1 16  
Total reclassification for the period, net of tax$1 $16  

(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).
35

Details about Accumulated Other Comprehensive Income (Loss) ComponentsNine Months Ended September 30,Affected Line Item
in the Statement Where
Net Income is Presented
 20212020 
Amortization of defined pension plan and other benefit plan items:       
Prior service costs (a)$(165)$(165)Other components of net periodic pension and postretirement benefits
Actuarial losses (a)169 231 Other components of net periodic pension and postretirement benefits
Tax effect(2)(14)Income tax expense
Net of tax2 52  
Total reclassification for the period, net of tax$2 $52  
(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).

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, 2021 and 2020 (in thousands). Items outside the scope of ASC 606 are noted as such.
Three Months Ended September 30, 2021
Revenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income
Service charges on deposit accounts
         Overdraft fees$623 $— $— $623 
         Other233 — — 233 
Interchange revenue from debit card transactions1,237 — — 1,237 
WMG fee income— 2,765 — 2,765 
CFS fee and commission income— — 346 346 
Net gains (losses) on sales of OREO— — — — 
Net gains on sales of loans(a)
242 — — 242 
Loan servicing fees(a)
38 — — 38 
Changes in fair value of equity investments(a)
(13)— 28 15 
Income from bank-owned life insurance(a)
13 — — 13 
Other(a)
464 — (6)458 
Total non-interest income (loss)$2,837 $2,765 $368 $5,970 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
36

Three Months Ended September 30, 2020
Revenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income
Service charges on deposit accounts
         Overdraft fees$668 $— $— $668 
         Other72 — — 72 
Interchange revenue from debit card transactions1,082 — — 1,082 
WMG fee income— 2,416 — 2,416 
CFS fee and commission income— — 172 172 
Net gains (losses) on sales of OREO6 — — 6 
Net gains on sales of loans(a)
553 — — 553 
Loan servicing fees(a)
32 — — 32 
Changes in fair value of equity investments(a)
71 — (14)57 
Income from bank-owned life insurance(a)
14 — — 14 
Other(a)
320 — (53)267 
Total non-interest income$2,818 $2,416 $105 $5,339 
(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, 2021
Revenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income
Service charges on deposit accounts
         Overdraft fees$1,561 $— $— $1,561 
         Other744 — — 744 
Interchange revenue from debit card transactions3,622 — — 3,622 
WMG fee income— 8,246 — 8,246 
CFS fee and commission income— — 796 796 
Net gains (losses) on sales of OREO(18)— — (18)
Net gains on sales of loans(a)
884 — — 884 
Loan servicing fees(a)
108 — — 108 
Changes in fair value of equity investments(a)
117 — 86 203 
Income from bank-owned life insurance(a)
39 — — 39 
Other(a)
1,930 — (32)1,898 
Total non-interest income$8,987 $8,246 $850 $18,083 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
37

Nine Months Ended September 30, 2020
Revenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income
Service charges on deposit accounts
         Overdraft fees$1,894 $— $— $1,894 
         Other400 — — 400 
Interchange revenue from debit card transactions2,989 — — 2,989 
WMG fee income— 6,968 — 6,968 
CFS fee and commission income— — 502 502 
Net gains on sales of OREO(71)— — (71)
Net gains on sales of loans(a)
916 — — 916 
Loan servicing fees(a)
88 — — 88 
Change in fair value of equity securities(a)
49 — (82)(33)
Income from bank-owned life insurance(a)
147 — — 147 
Other(a)
1,383 — (33)1,350 
Total non-interest income$7,795 $6,968 $387 $15,150 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.

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

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

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

WMG Fee Income (Gross): The Corporation earns wealth management fees from its contracts with 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.
38



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,
 2021202020212020
Qualified Pension Plan
Service cost, benefits earned during the period$— $— $— $— 
Interest cost on projected benefit obligation271 322 813 966 
Expected return on plan assets(673)(610)(2,019)(1,830)
Amortization of unrecognized transition obligation— — — — 
Amortization of unrecognized prior service cost— — — — 
Amortization of unrecognized net loss38 49 113 147 
Net periodic pension benefit$(364)$(239)$(1,093)$(717)
Supplemental Pension Plan    
Service cost, benefits earned during the period$— $— $— $— 
Interest cost on projected benefit obligation8 10 24 30 
Expected return on plan assets— — — — 
Amortization of unrecognized prior service cost— — — — 
Amortization of unrecognized net loss5 3 15 9 
Net periodic supplemental pension cost$13 $13 $39 $39 
Postretirement Plan, Medical and Life    
Service cost, benefits earned during the period$— $— $— $— 
Interest cost on projected benefit obligation1 2 5 6 
Expected return on plan assets— — — — 
Amortization of unrecognized prior service cost(55)(55)(165)(165)
Amortization of unrecognized net loss14 25 41 75 
Net periodic postretirement, medical and life benefit$(40)$(28)$(119)$(84)


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 2020 Annual Report on Form 10-K, which was filed with the SEC on March 24, 2021. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment.The Holding Company, CFS, and CRM column below includes amounts to eliminate transactions between segments (in thousands).

39

 Three months ended September 30, 2021
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$17,627 $— $6 $17,633 
Interest expense801 — — 801 
Net interest income16,826 — 6 16,832 
Provision for loan losses356 — — 356 
Net interest income after provision for loan losses16,470 — 6 16,476 
Other non-interest income2,837 2,765 368 5,970 
Other non-interest expenses12,124 1,651 325 14,100 
Income (loss) before income tax expense (benefit)7,183 1,114 49 8,346 
Income tax expense (benefit)1,534 156 10 1,700 
Segment net income (loss)$5,649 $958 $39 $6,646 

 Three months ended September 30, 2020
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$16,701 $— $13 $16,714 
Interest expense845 — — 845 
Net interest income15,856 — 13 15,869 
Provision for loan losses679 — — 679 
Net interest income after provision for loan losses15,177 — 13 15,190 
Other non-interest income2,818 2,416 105 5,339 
Other non-interest expenses11,528 1,565 269 13,362 
Income (loss) before income tax expense (benefit)6,467 851 (151)7,167 
Income tax expense (benefit)1,271 218 (33)1,456 
Segment net income (loss)$5,196 $633 $(118)$5,711 


 Nine months ended September 30, 2021
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$51,298 $— $20 $51,318 
Interest expense2,621 — — 2,621 
Net interest income48,677 — 20 48,697 
Provision for loan losses(53)— — (53)
Net interest income after provision for loan losses48,730 — 20 48,750 
Other non-interest income8,987 8,246 850 18,083 
Other non-interest expenses35,401 4,921 982 41,304 
Income (loss) before income tax expense (benefit)22,316 3,325 (112)25,529 
Income tax expense (benefit)4,865 735 (42)5,558 
Segment net income (loss)$17,451 $2,590 $(70)$19,971 
Segment assets$2,408,318 $3,216 $6,122 $2,417,656 

40

 Nine months ended September 30, 2020
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$49,527 $— $43 $49,570 
Interest expense3,048 — — $3,048 
Net interest income46,479 — 43 46,522 
Provision for loan losses3,989 — — 3,989 
Net interest income after provision for loan losses42,490 — 43 42,533 
Other non-interest income7,795 6,968 387 15,150 
Other non-interest expenses34,690 4,814 835 40,339 
Income (loss) before income tax expense (benefit)15,595 2,154 (405)17,344 
Income tax expense (benefit)2,884 552 (121)3,315 
Segment net income (loss)$12,711 $1,602 $(284)$14,029 
Segment assets$2,156,025 $3,153 $5,836 $2,165,014 


NOTE 13    STOCK COMPENSATION

On June 8, 2021, the Corporation's shareholders approved the Corporation's 2021 Equity Incentive Plan (the "2021 Plan") which provides for the grant of stock-based awards to officers, employees and directors of the Corporation and the Bank. A Form S-8 Registration Statement was filed with the SEC on June 18, 2021 registering shares to be awarded under the 2021 Plan. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date. No grants have been issued under the 2021 Plan during the nine months ended September 30, 2021. The Prior Plan shall remain in existence solely for the purpose of administering outstanding grants.

Board of Directors' Stock Compensation

During January 2021 and 2020, 9,291 and 7,923 shares, respectively, were re-issued from treasury to fund the stock component of directors' compensation for the respective prior year. An expense of $101 thousand and $67 thousand related to this compensation was recognized during the three month periods ended September 30, 2021 and 2020, respectively. An expense of $295 thousand and $232 thousand related to this compensation was recognized during the nine month periods ended September 30, 2021 and 2020, respectively. This expense is accrued as shares are earned.


Officers' and Employees' Restricted Stock

A summary of restricted stock activity for officers and employees for the three month period ended September 30, 2021 is presented below:
 SharesWeighted–Average Grant Date Fair Value
Nonvested at July 1, 202127,448 $40.18 
Granted— 
Vested(261)39.85 
Forfeited or cancelled— 
Nonvested at September 30, 202127,187 $40.23 

41

A summary of restricted stock activity for officers and employees for the nine month period ended September 30, 2021 is presented below:
 SharesWeighted–Average Grant Date Fair Value
Nonvested at January 1, 202131,830 $40.32 
Granted— 
Vested(4,643)41.15 
Forfeited or cancelled— 
Nonvested at September 30, 202127,187 $40.23 

As of September 30, 2021, there was $0.8 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.27 years. The total fair value of shares vested was $167 thousand and $159 thousand for the nine month periods ended September 30, 2021 and 2020, respectively.


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, 2021 and 2020. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s 2020 Annual Report on Form 10-K, which was filed with the SEC on March 24, 2021, 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 21–32 of the Corporation’s 2020 Form 10-K. For a discussion of the use of non-GAAP financial measures, see pages 75–78 of the Corporation's 2020 Form 10-K, and pages 73-76 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
42

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

As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Corporation could be subject to any of the following additional risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:

•government action in response to the COVID-19 pandemic and its effects on our business and operations, including vaccination mandates and their effects on our workforce, human capital resources and infrastructure;

•demand for our products and services may decline, making it difficult to grow assets and income;
•if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
•collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
•our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
•the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
•as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
•a material decrease in net income over several quarters could result in a decrease in the rate of our quarterly cash dividend;
•our wealth management revenues may decline with continuing market turmoil;
•our cyber security risks are increased as the result of an increase in the number of employees working remotely;
•we rely on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on us; and
•FDIC premiums may increase if the agency experiences additional resolution costs.

Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” in the Corporation’s 2020 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.


Critical Accounting Policies and Estimates

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

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Allowance for Loan Losses

Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real estate values in the Corporation’s market area did not increase dramatically in the prior several years, and, as a result, any declines in real estate values have been modest. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses. The determination of the allowance also includes an evaluation of non-impaired loans and is based on historical loss experience adjusted for current factors.

Goodwill

Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level, defined as the segment level, at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, the Corporation has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.

The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value.

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. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgement on the part of management and the use of estimates relate to the growth assumptions and market multiples used in the valuation model. Goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred.

For additional information on critical accounting policies and to gain a greater understanding of how the Corporation's financial performance is reported, refer to Note 1 - "Summary of Significant Accounting Policies" in Notes to Unaudited Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for a discussion of recent accounting updates, and the section captioned "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020.

Risks and Uncertainties

COVID-19

The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. As of September 30, 2021, many restrictions have been removed or lessened and many non-essential businesses have been allowed to re-open in limited capacity adhering to social distancing and disinfection guidelines. However, these restrictions and other consequences have resulted in an unprecedented slow-down in economic activity, disruption in the supply chain and a related increase in unemployment. Since the COVID-19 pandemic began, millions of people have filed claims for unemployment and stock markets have remained volatile. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including
44

employee travel, employee work locations, and cancellation of physical participation in certain meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be fully reopened.

The Corporation's consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses established. Management evaluated the potential impact of the COVID-19 pandemic as it related to the loan portfolio and as part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. Certain allowance qualitative factors were increased based on an assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.

Management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio. While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, Management has designated certain industries as most impacted by COVID-19. For a discussion of the effect of COVID-19 on our business, see pages 60-62 of this Form 10-Q.
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Consolidated Financial Highlights
As of or for the
 As of or for the Three Months EndedNine Months Ended
Sept. 30,June 30,Mar. 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
(in thousands, except per share data)2021202120212020202020212020
RESULTS OF OPERATIONS
Interest income$17,633 $16,945 $16,740 $17,337 $16,714 $51,318 $49,570 
Interest expense801 866 954 940 845 2,621 3,048 
Net interest income16,832 16,079 15,786 16,397 15,869 48,697 46,522 
Provision for loan losses356 (150)(259)250 679 (53)3,989 
Net interest income after provision for loan losses16,476 16,229 16,045 16,147 15,190 48,750 42,533 
Non-interest income5,970 6,492 5,621 5,975 5,339 18,083 15,150 
Non-interest expense14,100 13,851 13,353 15,597 13,362 41,304 40,339 
Income before income tax expense8,346 8,870 8,313 6,525 7,167 25,529 17,344 
Income tax expense1,700 2,075 1,783 1,292 1,456 5,558 3,315 
Net income$6,646 $6,795 $6,530 $5,233 $5,711 $19,971 $14,029 
Basic and diluted earnings per share$1.42 $1.45 $1.39 $1.11 $1.19 $4.26 $2.90 
Average basic and diluted shares outstanding4,684 4,683 4,691 4,702 4,773 4,687 4,836 
PERFORMANCE RATIOS - Annualized
Return on average assets1.09 %1.11 %1.12 %0.93 %1.08 %1.11 %0.95 %
Return on average equity12.68 %13.58 %13.24 %10.51 %11.56 %13.16 %9.74 %
Return on average tangible equity (a)14.16 %15.25 %14.88 %11.84 %13.03 %14.75 %11.03 %
Efficiency ratio (unadjusted) (f)61.84 %61.37 %62.38 %69.72 %63.00 %61.85 %65.41 %
Efficiency ratio (adjusted) (a) (b)61.40 %60.72 %61.64 %68.94 %62.19 %61.25 %64.54 %
Non-interest expense to average assets2.30 %2.27 %2.30 %2.76 %2.54 %2.29 %2.72 %
Loans to deposits69.77 %72.87 %71.52 %75.40 %79.96 %69.77 %79.96 %
 
YIELDS / RATES - Fully Taxable Equivalent
Yield on loans3.84 %3.72 %3.81 %3.96 %3.91 %3.79 %4.10 %
Yield on investments1.49 %1.21 %1.28 %1.37 %1.61 %1.33 %1.78 %
Yield on interest-earning assets3.02 %2.90 %3.03 %3.23 %3.37 %2.98 %3.54 %
Cost of interest-bearing deposits0.21 %0.22 %0.25 %0.26 %0.26 %0.23 %0.33 %
Cost of borrowings3.56 %3.64 %3.51 %3.52 %3.54 %3.57 %1.44 %
Cost of interest-bearing liabilities0.22 %0.23 %0.26 %0.27 %0.27 %0.24 %0.34 %
Interest rate spread2.80 %2.67 %2.77 %2.96 %3.10 %2.74 %3.20 %
Net interest margin, fully taxable equivalent (a)2.88 %2.76 %2.86 %3.06 %3.20 %2.83 %3.33 %
CAPITAL
Total equity to total assets at end of period8.53 %8.57 %7.97 %8.76 %9.10 %8.53 %9.10 %
Tangible equity to tangible assets at end of period (a)7.69 %7.72 %7.14 %7.87 %8.16 %7.69 %8.16 %
Book value per share$44.00 $43.57 $41.60 $42.53 $41.51 $44.00 $41.51 
Tangible book value per share (a)39.34 38.90 36.91 37.83 36.83 39.34 36.83 
Period-end market value per share45.30 44.31 41.82 33.95 28.87 45.30 28.87 
Dividends declared per share0.31 0.31 0.26 0.26 0.26 0.88 0.78 
AVERAGE BALANCES
Loans and loans held for sale (c)$1,519,264$1,585,902 $1,557,368 $1,540,618 $1,515,762 $1,554,039 $1,427,716 
Earning assets2,327,817 2,352,908 2,251,334 2,144,891 1,986,043 2,310,968 1,877,966 
Total assets2,427,107 2,447,587 2,357,646 2,249,949 2,094,114 2,411,007 1,978,570 
Deposits2,181,517 2,210,413 2,117,963 2,009,211 1,853,557 2,170,198 1,739,744 
Total equity208,023 200,627 200,035 198,036 196,569 202,923 192,299 
Tangible equity (a)186,155 178,681 177,992 175,894 174,302 180,971 169,909 
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As of or for the
As of or for the Three Months EndedNine Months Ended
Sept. 30,June 30,Mar. 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2021202120212020202020212020
ASSET QUALITY
Net charge-offs$92 $83 $(244)$3,915 $219 $(69)$2,877 
Non-performing loans (d)8,373 8,583 9,327 9,952 15,726 8,373 15,726 
Non-performing assets (e)8,544 8,707 9,418 10,189 16,311 8,544 16,311 
Allowance for loan losses20,940 20,676 20,909 20,924 24,590 20,940 24,590 
Annualized net charge-offs to average loans0.02 %0.02 %(0.06)%1.01 %0.06 %(0.01)%0.27 %
Non-performing loans to total loans0.56 %0.55 %0.59 %0.65 %1.02 %0.56 %1.02 %
Non-performing assets to total assets0.35 %0.37 %0.39 %0.45 %0.75 %0.35 %0.75 %
Allowance for loan losses to total loans1.38 %1.33 %1.32 %1.36 %1.60 %1.38 %1.60 %
Allowance for loan losses to total loans, net of PPP1.45 %1.46 %1.50 %1.51 %1.82 %1.45 %1.82 %
Allowance for loan losses to non-performing loans250.08 %240.89 %224.19 %210.25 %156.36 %250.08 %156.36 %
(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 net gains on securities transactions.
(c) Loans and loans held for sale do not reflect the allowance for loan losses.
(d) Non-performing loans include non-accrual loans only.
(e) Non-performing assets include non-performing loans plus other real estate owned.
(f) Efficiency ratio (unadjusted) is non-interest expense divided by the total of net interest income plus non-interest income.



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 its competitors. 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 73-76 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.
47

Executive Summary

This executive summary of the MD&A includes selected information and may not contain all of the information that is important to readers of this Form 10-Q. For a complete description of the trends and uncertainties, as well as the risks and critical accounting estimates affecting the Corporation, this Form 10-Q should be read in its entirety.

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,
 20212020ChangePercentage Change
Net interest income$16,832 $15,869 $963 6.1 %
Non-interest income5,970 5,339 631 11.8 %
Non-interest expense14,100 13,362 738 5.5 %
Pre-provision income8,702 7,846 856 10.9 %
Provision for loan losses356 679 (323)(47.6)%
Income tax expense1,700 1,456 244 16.8 %
Net income$6,646 $5,711 $935 16.4 %
Basic and diluted earnings per share$1.42 $1.19 $0.23 19.3 %
Selected financial ratios:    
Return on average assets1.09 %1.08 %  
Return on average equity12.68 %11.56 %  
Net interest margin, fully taxable equivalent (a)2.88 %3.20 %  
Efficiency ratio (adjusted) (b)61.40 %62.19 %  
Non-interest expenses to average assets2.30 %2.54 %  
(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 net gains on securities transactions.

Net income for the third quarter of 2021 was $6.6 million, or $1.42 per share, compared to $5.7 million, or $1.19 per share, for the same period in the prior year. Return on average equity for the current quarter was 12.68%, compared to 11.56% for the same period in the prior year. The increase in net income was due primarily to increases in net interest income and non-interest income, and a decrease in the provision for loan losses, partially offset by increases in income tax expense and non-interest expense.

Net interest income
Net interest income increased $1.0 million, or 6.1%, compared to the same period in the prior year. The increase was due primarily to an increase in interest and dividend income on taxable securities, offset by decreases in interest income on loans, including fees, and interest income on interest-earning deposits.

Non-interest income
Total non-interest income increased $0.6 million, or 11.8%, compared to the same period in the prior year. The increase can be mostly attributed to increases in WMG fee income, interchange revenue from debit card transactions, service charges on deposit accounts and other non-interest income, offset by a decrease in net gains on sales of loans held for sale, as compared to the same period in the prior year.

Non-interest expense
Non-interest expense increased $0.7 million, or 5.5%, compared to the same period in the prior year. The increase was due primarily to decreased spending in the prior year period due to the worldwide pandemic, resulting in increases in most non-interest expense categories in the current period. These increases were in part offset by a decrease in other components of net periodic pension cost (benefits), and decreases in furniture and equipment and loan expenses. For the three months ended
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September 30, 2021, non-interest expense to average assets was 2.30%, compared to 2.54% for the same period in the prior year.

Provision for loan losses
The provision for loan losses decreased $0.3 million, compared to the same period in the prior year. The decrease in the provision for loan losses was primarily due to a decrease of $0.5 million related to a decline in volume, and a $0.1 million decrease in net charge-offs, partially offset by a $0.3 million increased allocation for impaired loans and loan downgrades. Net charge-offs for the third quarter of 2021 were $0.1 million, compared to $0.2 million for the third quarter of 2020.

Income tax expense
Income tax expense was $1.7 million in the third quarter of 2021, an increase of $0.2 million when compared to the same period in the prior year. The increase was due primarily to an increase of $1.2 million in income before income tax expense for the third quarter of 2021 as compared to the same period in the prior year. The effective tax rate increased from 20.3% for the third quarter of 2020 to 20.4% for the third quarter of 2021.

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):
 Nine Months Ended 
 September 30,
 20212020ChangePercentage Change
Net interest income$48,697 $46,522 $2,175 4.7 %
Non-interest income18,083 15,150 2,933 19.4 %
Non-interest expense41,304 40,339 965 2.4 %
Pre-provision income25,476 21,333 4,143 19.4 %
Provision for loan losses(53)3,989 (4,042)(101.3)%
Income tax expense5,558 3,315 2,243 67.7 %
Net income$19,971 $14,029 $5,942 42.4 %
Basic and diluted earnings per share$4.26 $2.90 $1.36 46.9 %
Selected financial ratios:    
Return on average assets1.11 %0.95 %  
Return on average equity13.16 %9.74 %  
Net interest margin, fully taxable equivalent (a)2.83 %3.33 %  
Efficiency ratio (adjusted) (b)61.25 %64.54 %  
Non-interest expense to average assets2.29 %2.72 %  
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio 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 net gains on securities transactions.

Net income for the nine months ended September 30, 2021 was $20.0 million, or $4.26 per share, compared to $14.0 million, or $2.90 per share, for the same period in the prior year.  Return on average equity for the nine months ended September 30, 2021 was 13.16%, compared to 9.74% for the same period in the prior year. The increase in net income from the prior year period was attributable to increases in total net interest income and total non-interest income, and a decrease in provision for loan losses, partially offset by increases in income tax expense and non-interest expense.

Net interest income
Net interest income increased $2.2 million, or 4.7%, compared to the same period in the prior year. The increase can be mostly attributed to increases in interest income on taxable securities, interest income on loans, including fees, and a decrease in total interest expense on deposits, partially offset by a decrease in interest income on interest-earning deposits.



49

Non-interest income
Non-interest income increased $2.9 million, or 19.4%, compared to the same period in the prior year. The increase was due primarily to increases in WMG fee income, interchange revenue from debit card transactions, other non-interest income, and changes in fair value of equity investments. These increases were partially offset by a decrease in income from bank owned life insurance.

Non-interest expense
Non-interest expense increased $1.0 million, or 2.4%, compared to the same period in the prior year. The increase was due primarily to decreased spending in the prior year due to the worldwide pandemic, resulting in increases in most non-interest expense categories in the current year period. These increases were partially offset by decreases in other components of net periodic pension benefits, and furniture and equipment expenses. For the nine months ended September 30, 2021, non-interest expense to average assets was 2.29%, compared to 2.72% for the same period in the prior year.

Provision for loan losses
The provision for loan losses decreased $4.0 million, or 101.3%, compared to the same period in the prior year, primarily due to a $4.5 million pandemic related provision, offset by recoveries, decreases in specific allocations, and a net decrease in the historical loss factors due to a large 2018 loan charge-off which no longer impacted the calculation, recorded in the prior year period. During the nine months ended September 30, 2021, $1.9 million was released and $0.5 million was utilized of the pandemic related provision, partially offset by the $1.9 million impairment of a commercial real estate loan. Net charge-offs decreased $2.9 million for the nine months ended September 30, 2021, compared to the same period in the prior year, mostly due to the partial charge-off of a commercial loan in the same period in the prior year.

Income tax expense
Income tax expense increased $2.2 million, or 67.7%, compared to the same period in the prior year. The increase was due primarily to an increase in income before income tax expense. The effective income tax rate increased from 19.1% for the nine months ended September 30, 2020 to 21.8% for the nine months ended September 30, 2021.

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, 2021 and 2020. For a discussion of the Critical Accounting Policies and Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see pages 43-45 of this Form 10-Q and pages 42-43 of the Corporation’s 2020 Form 10-K.

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,
 20212020ChangePercentage Change
Interest and dividend income$17,633 $16,714 $919 5.5 %
Interest expense801 845 (44)(5.2)%
Net interest income$16,832 $15,869 $963 6.1 %

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.

50

Net interest income for the three months ended September 30, 2021 increased $1.0 million, or 6.1%, to $16.8 million compared to the same period in the prior year, due primarily to an increase of $1.2 million in interest and dividend income on taxable securities, offset by decreases of $0.2 million in interest income on loans, including fees, and $0.1 million in interest income on interest-earning deposits. The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $379.8 million, primarily attributable to purchases of new securities at lower rates, and the one-time recognition of $0.5 million related to a prepayment penalty on a mortgage-backed security investment. The decrease in interest income on loans, including fees was due primarily to a decrease in average balances on consumer and commercial loans and decreases in the consumer and mortgage portfolios average yield due to a decrease in interest rates. The decrease in interest income on interest-earning deposits was due primarily to the drop in interest rates on overnight deposits with the average yield on interest-earning deposits declining from 0.31% in the third quarter of 2020 to 0.17% in the third quarter of 2021, and a decrease of $41.9 million in the average balance of interest-earning deposits in the third quarter of 2021 when compared to the same period in the prior year.

Fully taxable equivalent net interest margin was 2.88% in the third quarter of 2021, compared to 3.20% for the same period in the prior year. Average interest-earning assets increased $341.8 million for the three months ended September 30, 2021 compared to the same period in the prior year. The average yield on interest-earning assets decreased 35 basis points, and the average cost of interest-bearing liabilities decreased five basis points in the third quarter of 2021, compared to the same period in the prior year.


The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20212020ChangePercentage Change
Interest and dividend income$51,318 $49,570 $1,748 3.5 %
Interest expense2,621 3,048 (427)(14.0)%
Net interest income$48,697 $46,522 $2,175 4.7 %

Net interest income for the nine months ended September 30, 2021 totaled $48.7 million compared to $46.5 million for the same period in the prior year, an increase of $2.2 million, or 4.7% due primarily to an increase of $1.7 million in total interest and dividend income and a decrease of $0.4 million in total interest expense.

The increase in interest and dividend income for the first nine months of 2021 was primarily attributed to increases of $2.1 million in interest and dividend income on taxable securities, and $0.2 million in interest income on loans, including fees, offset by a decrease of $0.5 million in interest income on interest-earning deposits.

The increase in interest income on taxable securities was mostly attributable to a $346.5 million increase in average balances of taxable securities, primarily attributable to purchases of new securities at lower rates and the one-time recognition of $0.5 million related to a prepayment penalty on a mortgage-backed security investment, when compared to the same period in the prior year. The increase in interest income on loans, including fees, was mostly attributable to an increase of $126.3 million in average loan balances, early payoff penalties, a $0.1 million recovery of non-accrued interest received, and the recognition of $3.3 million of PPP loan fees year to date, $1.8 million of which represents accelerated fees earned related to the SBA loan forgiveness program. The decrease in interest income on interest-earning deposits was mostly attributed to a decline in interest rates. The decrease in interest expense was primarily attributed to a decrease of $0.4 million in interest expense on deposits, primarily due to a decrease in interest rates.

The average yield on interest-earning assets decreased 56 basis points, and the average cost of interest-bearing liabilities decreased ten basis points for the nine months ended September 30, 2021, as compared to the same period in the prior year. Average interest-earning assets increased $433.0 million compared to the same period in the prior year. Fully taxable equivalent net interest margin was 2.83% for the nine months ended September 30, 2021 compared to 3.33% for the same period in the prior year.


51

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, 2021 and 2020. 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.
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)Three Months Ended 
 September 30, 2021		Three Months Ended 
 September 30, 2020
 Average BalanceInterest
Yield/Rate (3)
Average BalanceInterest
Yield/Rate (3)
Interest-earning assets:
Commercial loans$1,065,476 $10,656 3.97 %$1,075,029 $10,575 3.91 %
Mortgage loans249,651 2,086 3.32 %220,345 2,067 3.73 %
Consumer loans204,137 1,944 3.78 %220,388 2,256 4.07 %
Taxable securities681,160 2,678 1.56 %301,315 1,476 1.95 %
Tax-exempt securities41,654 327 3.11 %41,372 325 3.13 %
Interest-earning deposits85,739 36 0.17 %127,594 100 0.31 %
Total interest-earning assets2,327,817 17,727 3.02 %1,986,043 16,799 3.37 %
Non-earning assets:      
Cash and due from banks27,421 25,534   
Other assets92,719 106,907   
Allowance for loan losses(20,850)(24,370)  
Total assets$2,427,107   $2,094,114   
Interest-bearing liabilities:      
Interest-bearing demand deposits$272,236 $52 0.08 %$253,278 $55 0.09 %
Savings and insured money market deposits943,996 205 0.09 %791,004 231 0.12 %
Time deposits236,062 511 0.86 %188,889 524 1.10 %
Long-term advances and other debt3,681 33 3.56 %3,930 35 3.54 %
Total interest-bearing liabilities1,455,975 801 0.22 %1,237,101 845 0.27 %
Non-interest-bearing liabilities:      
Demand deposits729,223 620,386   
Other liabilities33,886 40,058   
Total liabilities2,219,084   1,897,545   
Shareholders' equity208,023 196,569   
Total liabilities and shareholders’ equity$2,427,107   $2,094,114   
Fully taxable equivalent net interest income 16,926   15,954  
Net interest rate spread (1)
  2.80 %  3.10 %
Net interest margin, fully taxable equivalent (2)
  2.88 %  3.20 %
Taxable equivalent adjustment (94)(85) 
Net interest income $16,832   $15,869  

(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.
52

AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)Nine Months Ended 
 September 30, 2021		Nine Months Ended 
 September 30, 2020
 Average BalanceInterest
Yield/ Rate (3)
Average BalanceInterest
Yield/ Rate (3)
Interest-earning assets:
Commercial loans$1,100,503 $31,741 3.86 %$996,136 $30,926 4.15 %
Mortgage loans246,179 6,342 3.44 %203,692 5,762 3.78 %
Consumer loans207,357 5,970 3.85 %227,888 7,150 4.19 %
Taxable securities616,862 6,435 1.39 %270,348 4,361 2.15 %
Tax-exempt securities41,401 976 3.15 %41,753 983 3.14 %
Interest-earning deposits98,666 131 0.18 %138,149 643 0.62 %
Total interest-earning assets2,310,968 51,595 2.98 %1,877,966 49,825 3.54 %
Non-earning assets:      
Cash and due from banks26,789   25,111   
Other assets94,323   100,276   
Allowance for loan losses(21,073)  (24,783)  
Total assets$2,411,007   $1,978,570   
Interest-bearing liabilities:      
Interest-bearing demand deposits$282,970 $174 0.08 %$231,085 $262 0.15 %
Savings and insured money market deposits928,137 714 0.10 %774,706 1,000 0.17 %
Time deposits267,475 1,633 0.82 %173,556 1,660 1.28 %
Long-term advances, securities sold under agreements to repurchase, and other debt3,745 100 3.57 %11,661 126 1.44 %
Total interest-bearing liabilities1,482,327 2,621 0.24 %1,191,008 3,048 0.34 %
Non-interest-bearing liabilities:      
Demand deposits691,616   560,397   
Other liabilities34,141   34,866   
Total liabilities2,208,084   1,786,271   
Shareholders' equity202,923   192,299   
Total liabilities and shareholders’ equity$2,411,007   $1,978,570   
Fully taxable equivalent net interest income 48,974   46,777  
Net interest rate spread (1)
  2.74 %  3.20 %
Net interest margin, fully taxable equivalent (2)
  2.83 %  3.33 %
Taxable equivalent adjustment (277)  (255) 
Net interest income $48,697   $46,522  

(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.

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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 illustrate 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, 2021 and 2020. 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
September 30, 2021 vs. 2020
 Increase/(Decrease)
 Total ChangeDue to VolumeDue to Rate
(in thousands)
Interest and dividend income on:
Commercial loans$81 $(87)$168 
Mortgage loans19 260 (241)
Consumer loans(312)(159)(153)
Taxable investment securities1,202 1,549 (347)
Tax-exempt investment securities2 3 (1)
Interest-earning deposits(64)(27)(37)
Total interest and dividend income, fully taxable equivalent928 1,539 (611)
Interest expense on:   
Interest-bearing demand deposits(3)4 (7)
Savings and insured money market deposits(26)41 (67)
Time deposits(13)115 (128)
Long-term advances and other debt(2)(2)— 
Total interest expense(44)158 (202)
Net interest income, fully taxable equivalent$972 $1,381 $(409)

54

 Nine Months Ended
September 30, 2021 vs. 2020
 Increase/(Decrease)
 Total ChangeDue to VolumeDue to Rate
(in thousands)
Interest and dividend income on:
Commercial loans$815 $3,081 $(2,266)
Mortgage loans580 1,129 (549)
Consumer loans(1,180)(621)(559)
Taxable investment securities2,074 4,035 (1,961)
Tax-exempt investment securities(7)(10)3 
Interest-earning deposits(512)(147)(365)
Total interest and dividend income, fully taxable equivalent1,770 7,467 (5,697)
 
Interest expense on:   
Interest-bearing demand deposits(88)50 (138)
Savings and insured money market deposits(286)171 (457)
Time deposits(27)701 (728)
Long-term advances and other debt(26)(125)99 
Total interest expense(427)797 (1,224)
Net interest income, fully taxable equivalent$2,197 $6,670 $(4,473)

Provision for loan losses

Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. Management continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio. As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. During 2020, management increased certain allowance qualitative factors based on its assessment of the impact of the current pandemic on local, national, and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.

Based upon management review of these factors, the pandemic related portion of the allowance decreased $0.2 million during the third quarter of 2021 to $2.4 million as of September 30, 2021. To date the Corporation has released $1.9 million and utilized $0.5 million of the pandemic related provision.

The provision for loan losses decreased $0.3 million, for the three months ended September 30, 2021 when compared to the same period in the prior year. The decrease in the provision for loan losses was primarily due to a decrease of $0.5 million related to a decline in volume, and a $0.1 million decrease in net charge-offs, partially offset by a $0.3 million increased allocation for impaired loans and loan downgrades. Net charge-offs for the third quarter of 2021 were $0.1 million, compared to $0.2 million for the third quarter of 2020.

The provision for loan losses for the nine months ended September 30, 2021 and 2020 was a credit of $53 thousand and a provision of $4.0 million, respectively. The $4.0 million decrease in the provision for loan losses when compared to the same period in the prior year was primarily due to the $4.5 million pandemic related provision, offset by recoveries, decreases in specific allocations, and a net decrease in the historical loss factors due to a large 2018 loan charge-off which no longer impacted the calculation, recorded in the prior year period. During the nine months ended September 30, 2021, $1.9 million was released and $0.5 million was utilized of the pandemic related provision, partially offset by the $1.9 million impairment of a commercial real estate loan.

Net charge-offs for the nine months ended September 30, 2021 and 2020 were a $0.1 million recovery and a $2.9 million charge-off, respectively. The $2.9 million charge-off for the nine months ended September 30, 2020, was mostly attributed to the partial charge-off of a commercial loan in the second quarter of 2020.

55

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,
 20212020ChangePercentage Change
WMG fee income$2,765 $2,416 $349 14.4 %
Service charges on deposit accounts856 740 116 15.7 %
Interchange revenue from debit card transactions1,237 1,082 155 14.3 %
Changes in fair value of equity investments15 57 (42)(73.7)%
Net gains on sales of loans held for sale242 553 (311)(56.2)%
Net gains (losses) on sales of other real estate owned— 6 (6)N/M
Income from bank owned life insurance13 14 (1)(7.1)%
CFS fee and commission income346 172 174 101.2 %
Other496 299 197 65.9 %
Total non-interest income$5,970 $5,339 $631 11.8 %

Total non-interest income for the third quarter of 2021 increased $0.6 million compared to the same period in the prior year primarily due to increases in WMG fee income, other non-interest income, CFS fee and commission income, interchange revenue from debit card transactions, and service charges on deposit accounts, primarily offset by a decrease in net gains on sales of loans held for sale.

Change in WMG Fee Income
The increase in WMG fee income was primarily due to new business relationships and a general increase in the equity markets when compared to the same period in the prior year.

Change in Other Non-Interest Income
The increase in other non-interest income was primarily due to a gain on the sale of real estate property associated with a branch closure in 2019 when compared to the same period in the prior year.

Change in CFS Fee and Commission Income
The increase in CFS fee and commission income was primarily due to new business relationships when compared to the same period in the prior year.

Change in Interchange Revenue from Debit Card Transactions
The increase in interchange revenue from debit card transactions was primarily due to an increase in debit card usage when compared to the same period in the prior year.

Change in Service Charges on Deposit Accounts
The increase in service charges on deposit accounts was primarily due to the recovery of non-sufficient fund and overdraft fees which declined due to the pandemic in the same period during the prior year.

Change in Net Gains on Sales of Loans Held for Sale
The decrease in net gains on sales of loans held for sale was primarily attributable to a decrease in residential mortgage loans originated and sold in the secondary market when compared to the same period in the prior year, primarily due to decreased home purchases and refinancings.
56

The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20212020ChangePercentage Change
WMG fee income$8,246 $6,968 $1,278 18.3 %
Service charges on deposit accounts2,305 2,294 11 0.5 %
Interchange revenue from debit card transactions3,622 2,989 633 21.2 %
Changes in fair value of equity investments203 (33)236 715.2 %
Net gains on sales of loans held for sale884 916 (32)(3.5)%
Net gains (losses) on sales of other real estate owned(18)(71)53 74.6 %
Income from bank owned life insurance39 147 (108)(73.5)%
CFS fee and commission income796 502 294 58.6 %
Other2,006 1,438 568 39.5 %
Total non-interest income$18,083 $15,150 $2,933 19.4 %

Total non-interest income for the nine months ended September 30, 2021 increased $2.9 million compared to the same period in the prior year. The increase was primarily due to increases in WMG fee income, interchange revenue from debit card transactions, other non-interest income, CFS fee and commission income, and changes in fair value of equity investments, primarily offset by a decrease in income from bank owned life insurance.

Change in WMG Fee Income
The increase in WMG fee income was primarily due to new business relationships and a general increase in the equity markets when compared to the same period in the prior year.

Change in Interchange Revenue from Debit Card Transactions
The increase in interchange revenue from debit card transactions was primarily due to an increase in debit card usage when compared to the same period in the prior year.

Change in Other Non-Interest Income
The increase in other non-interest income was primarily due to a one-time refund of real estate, sales tax and Mastercard incentives and a gain on the sale of real estate property associated with a branch closure in 2019 as compared to the same period in the prior year.

Change in CFS Fee and Commission Income
The increase in CFS fee and commission income was primarily due to new business relationships when compared to the same period in the prior year.

Change in Fair Value of Equity Investments
The increase in changes in fair value of equity investments was primarily due to a general increase in the equity markets when compared to the prior year period.

Change in Income from Bank Owned Life Insurance
The decrease in income from bank owned life insurance was due to proceeds received in the same period of the prior year related to a death benefit.


57

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,
 20212020ChangePercentage Change
Compensation expense:
Salaries and wages$6,259 $6,088 $171 2.8 %
Pension and other employee benefits1,511 1,245 266 21.4 %
Other components of net periodic pension and postretirement benefits(391)(254)(137)53.9 %
Total compensation expense7,379 7,079 300 4.2 %
Non-compensation expense:    
Net occupancy1,432 1,454 (22)(1.5)%
Furniture and equipment 409 538 (129)(24.0)%
Data processing 2,210 1,777 433 24.4 %
Professional services542 453 89 19.6 %
Amortization of intangible assets42 120 (78)(65.0)%
Marketing and advertising 162 140 22 15.7 %
Other real estate owned expenses7 53 (46)(86.8)%
FDIC insurance356 247 109 44.1 %
Loan expenses196 301 (105)(34.9)%
Other1,365 1,200 165 13.8 %
Total non-compensation expense6,721 6,283 438 7.0 %
Total non-interest expense$14,100 $13,362 $738 5.5 %

Total non-interest expense for the third quarter of 2021 increased $0.7 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.

Compensation expense
The increase in compensation expense, compared to the same period in the prior year, can be primarily attributed to increases in pension and other employee benefits and salaries and wages, partially offset by a decrease in other components of net periodic pension cost (benefits). The increase in pension and other employee benefits was mostly attributable to an increase in healthcare expenses as compared to the same period in the prior year. The increase in salaries and wages was primarily due to the hiring of seasonal employees as well as a decrease in deferred salaries related to PPP. The reduced credit in other components of net period pension cost (benefits) was due to revised actuarial estimates for the third quarter of 2021 related to the employee pension plan.

Non-compensation expense
The increase in non-compensation expense, compared to the same period in the prior year, can be primarily attributed to increases in data processing expense, FDIC insurance and other non-interest expense. Data processing expenses increased primarily due to investment in new initiatives and a credit received in the same quarter of the prior year. FDIC insurance increased primarily due to an increase in the assessment base due to increased average asset balances. Other non-interest expense increased primarily due to decreased spending in the prior year period due to the worldwide pandemic, resulting in increases in most other non-interest expense categories in the current year period.

58

The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20212020ChangePercentage Change
Compensation expense:
Salaries and wages$18,058 $17,678 $380 2.1 %
Pension and other employee benefits4,450 4,095 355 8.7 %
Other components of net periodic pension and postretirement benefits(1,173)(762)(411)53.9 %
Total compensation expense21,335 21,011 324 1.5 %
Non-compensation expense:    
Net occupancy4,446 4,406 40 0.9 %
Furniture and equipment1,185 1,573 (388)(24.7)%
Data processing6,261 5,630 631 11.2 %
Professional services1,531 1,313 218 16.6 %
Amortization of intangible assets232 371 (139)(37.5)%
Marketing and advertising572 546 26 4.8 %
Other real estate owned expenses24 87 (63)(72.4)%
FDIC insurance1,075 726 349 48.1 %
Loan expenses720 798 (78)(9.8)%
Other3,923 3,878 45 1.2 %
Total non-compensation expense19,969 19,328 641 3.3 %
Total non-interest expense$41,304 $40,339 $965 2.4 %

Total non-interest expense for the nine months ended September 30, 2021 increased $1.0 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.

Compensation expense
The increase in compensation expense, compared to the same period in the prior year, can be mostly attributable to increases in salaries and wages and pension and other employee benefits, offset by a decrease in other components of net periodic pension and postretirement benefits. The increase in salaries and wages was primarily due to an increase in commission and reward payments and an increase in award accruals, offset by a decrease in deferred salaries related to PPP, when compared to the same period in the prior year. The increase in pension and other employee benefits was primarily due to an increase in healthcare expenses as compared to the same period in the prior year. The reduced credit in other components of net periodic pension and postretirement benefits was due to a change in assumptions used to prepare annual actuarial expense estimates.


Non-compensation expense
The increase in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to increases in data processing expense and FDIC insurance, offset primarily by a decrease in furniture and equipment expense. The increase in data processing expense was primarily due to investment in new initiatives and a credit received in the prior year. The increase in FDIC insurance expense was primarily due to an increase in the assessment base due to increased average asset balances. The decrease in furniture and equipment expense can be mostly attributed to the timing of initiatives and projects.

59


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,
 20212020ChangePercentage Change
Income before income tax expense$8,346 $7,167 $1,179 16.5 %
Income tax expense1,700 1,456 244 16.8 %
Effective tax rate20.4 %20.3 %

Income tax expense for the current quarter was $1.7 million compared to $1.5 million for the same period in the prior year. The increase in income tax expense was due primarily to an increase of $1.2 million in income before income tax expense. The effective income tax rate increased from 20.3% for the third quarter of 2020 to 20.4% for the third quarter of 2021.

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,
 20212020ChangePercentage Change
Income before income tax expense$25,529 $17,344 $8,185 47.2 %
Income tax expense5,558 3,315 2,243 67.7 %
Effective tax rate21.8 %19.1 %  

Income tax expense for the nine months ended September 30, 2021 and 2020 were $5.6 million and $3.3 million, respectively. The increase in income tax expense was due primarily to an increase of $8.2 million in income before income tax expense. The effective income tax rate increased from 19.1% for the nine months ended September 30, 2020 to 21.8% for the nine months ended September 30, 2021.

COVID-19

The Effect of COVID-19 on Our Business
The Corporation continues to monitor the COVID-19 pandemic while following guidance from the Centers for Disease Control (CDC) and the New York Department of Health. With the increase in positivity rates due to the Delta variant during the last quarter, the Corporation quickly reinstituted several safety measures for our employees and customers, including mask-wearing, social distancing and sanitizing requirements. At this time, while all of our offices are open for business, two are operating through drive-up windows only, due to high positivity rates in the market (Bradford, PA). Additionally, we continue our efforts to assist our customer base through the Forgiveness phase of the Small Business Administration's (SBA's) Paycheck Protection Program (PPP).
Management did not experience any negative effects on our ability to maintain operations and financial reporting systems, and has not identified any impact on business continuity plans. Management does not anticipate additional risk with respect to its ability to maintain internal control over financial reporting and disclosure controls and procedures, nor does it expect any changes in such controls and procedures.
On June 17, 2020 the New York legislature passed, and Governor Cuomo signed, legislation which allows certain borrowers to extend the period of forbearance on a primary residence if financial hardship is demonstrated as a result of COVID-19. At its highest point as of May 31, 2020, total loan forbearances represented 15.77% of the Corporation's total loan portfolio. As of September 30, 2021, total loan forbearances represented 0.20% of the total loan portfolio.

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COVID-19 Loan Modifications Outstanding As Of
December 31, 2020March 31, 2021June 30, 2021September 30, 2021
# ClientsTotal Loan Balance# ClientsTotal Loan Balance# ClientsTotal Loan Balance# ClientsTotal Loan Balance
Commercial 13$19.8 million22$25.2 million19$20.3 million5$2.9 million
Retail and Residential18$1.0 million16$1.1 million5$0.2 million6$0.1 million
The above reflects the uncertain economic situation whereby the initial response by customers prompted a quick reaction to the unknown potential impact of COVID-19 on their business. Subsequently, customers may have reassessed their financial position prior to finalization of a modification, either modifying deferral requests or withdrawing the request altogether. In some cases, customers continued to make payments on modified loans.

Paycheck Protection Program Initiative

As part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Congress established the Paycheck Protection Program (PPP) under the direction of the United States Small Business Administration (SBA). Included in the legislation, and additional legislation approved by Congress on April 23, 2020 and June 5, 2020, was a total of $659 billion to assist small businesses by providing SBA guaranteed loans to help pay for payroll, in addition to other expenses such as interest expense on mortgages, rent or utility payments. PPP loans have an interest rate of 1.0% and two-year or five-year loan terms to maturity. The funds are an effort to encourage retention of employees and up to the entire loan balance and interest may be forgiven, if the borrower meets certain predetermined SBA criteria. Businesses with less than 500 employees are eligible, although certain corporate organizational structures were not included in the legislation. As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans. The PPP ended new loans in May, 2021.

The Corporation successfully navigated the processes set forth by the SBA and assisted customers and non-customers through Phase 1 of the PPP, originating a total of 1,260 loans. As of September 30, 2021, 173 loans totaling $5.9 million were outstanding related to Phase 1 of the PPP, a portion of which may not be forgiven. The Corporation then assisted the businesses who received PPP loans with the forgiveness application phase of the program. As of September 30, 2021, 1,105 loans totaling $184.6 million were forgiven by the SBA related to Phase 1 of the PPP.

A second phase of COVID-19 Relief totaling $248 billion to provide PPP loans to certain eligible small businesses was included in the Consolidated Appropriation Act of 2021, signed into law by the President on December 27, 2020. As of September 30, 2021, 695 loans totaling $62.2 million were outstanding related to Phase 2 of the PPP, a portion of which may not be forgiven. As of September 30, 2021, 185 loans totaling $16.3 million, were forgiven by the SBA.


Outlook

Management believes that the Corporation's liquidity position is strong. 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 $100,000 or more, FHLB borrowings, securities sold under agreements to repurchase and other borrowings. At September 30, 2021, the Corporation's cash and cash equivalents balance was $61.7 million. The Corporation also maintains an investment portfolio of securities available for sale, comprised primarily of mortgage-backed securities 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, 2021, the Corporation's investment in securities available for sale was $761.5 million, $553.1 million of which was not pledged as collateral. Additionally, the Bank's unused borrowing capacity at the Federal Home Loan Bank of New York was $187.3 million as of September 30, 2021. The Corporation did not experience excessive draws on available working capital lines of credit and home equity lines of credit during the first nine months of 2021 due to the COVID-19 pandemic, nor has the Corporation experienced any significant or unusual activity related to customer reaction to the COVID-19 pandemic that would create stress on the Corporation's liquidity position.
With respect to the Corporation's credit risk and lending activities, management has taken actions to identify and assess additional possible credit exposure due to the changing environment caused by the COVID-19 crisis based upon the industry types within our current loan portfolio. Lending risks, as mentioned, are being monitored by industry, based upon NAICS code, with specific attention being paid to those industries that may experience greater stress during this time.
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The COVID-19 pandemic is expected to continue to impact the Corporation's financial results, as well as demand for its services and products. The short and long-term implications of the COVID-19 pandemic, and related monetary and fiscal stimulus measures, on the Corporation's future revenues, earnings results, allowance for loan losses, capital reserves, and liquidity are uncertain at this time.

Financial Condition

The following table presents selected financial information at the dates indicated, and the dollar and percent change (in thousands):
 September 30, 2021December 31, 2020ChangePercentage Change
ASSETS
Total cash and cash equivalents$61,697 $108,538 $(46,841)(43.2)%
Total investment securities, FHLB, and FRB stock771,209 562,772 208,437 37.0 %
Loans, net of deferred loan fees1,516,668 1,536,463 (19,795)(1.3)%
Allowance for loan losses(20,940)(20,924)(16)0.1 %
Loans, net1,495,728 1,515,539 (19,811)(1.3)%
Goodwill and other intangible assets, net21,850 22,082 (232)(1.1)%
Other assets67,172 70,520 (3,348)(4.7)%
Total assets$2,417,656 $2,279,451 $138,205 6.1 %
LIABILITIES AND SHAREHOLDERS' EQUITY    
Total deposits$2,173,822 $2,037,774 $136,048 6.7 %
Long-term advances and other debt3,659 3,849 (190)(4.9)%
Other liabilities34,036 38,129 (4,093)(10.7)%
Total liabilities2,211,517 2,079,752 131,765 6.3 %
Total shareholders’ equity206,139 199,699 6,440 3.2 %
Total liabilities and shareholders’ equity$2,417,656 $2,279,451 $138,205 6.1 %

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

Investment securities
The increase in investment securities can be mostly attributed to purchases in the amount of $335.3 million, offset by a decrease of $110.3 million in paydowns and a decrease in the fair value of the portfolio of $16.5 million, due to increases in interest rates.

Loans, net
The decrease in loans, net of deferred loan fees, can be primarily attributed to decreases of $97.9 million in commercial and agricultural loans, $8.3 million in other consumer loans and $0.8 million in indirect consumer loans, offset by growth of $72.5 million in commercial mortgages, and $14.6 million in residential mortgages. The Paycheck Protection Program (PPP) accounted for a net decrease of $82.8 million in loan balances. The net decrease in PPP loans outstanding was comprised of $77.7 million of phase two loan originations and $160.5 million of loans forgiven.

Goodwill and other intangible assets, net
The decrease in goodwill and other intangible assets, net, can be attributed to the amortization of intangible assets.
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Deposits
The increase in deposits can be attributed to increases of $104.8 million in non-interest-bearing demand deposits, $57.5 million in money market accounts, and $29.3 million in savings deposits, partially offset by decreases of $55.3 million in time deposits, and $0.1 million in interest-bearing demand deposit accounts.

Other liabilities
The decrease in other liabilities can be mostly attributed to a decrease of $4.4 million in interest rate swap liabilities.

Shareholders’ equity
Shareholders’ equity was $206.1 million at September 30, 2021 compared to $199.7 million at December 31, 2020. The increase can be mostly attributed to earnings of $20.0 million, during the nine months ended September 30, 2021, partially offset by a decrease in accumulated other comprehensive income (loss) of $9.5 million and $4.1 million in dividends declared during the nine months ended September 30, 2021. The decrease in accumulated other comprehensive income (loss) can be mostly attributed to a decrease in the fair market value of the securities portfolio. Treasury stock increased $0.4 million, primarily due to the repurchase of the Corporation's common stock, offset by the impact of the issuance of shares related to the Corporation's employee benefit plans and directors' stock plans. As of September 30, 2021, 26,456 shares have been repurchased at an average cost of $36.52 per share, pursuant to the Corporation's stock repurchase plan.

Assets under management or administration
The market value of total assets under management or administration in WMG was $2.229 billion at September 30, 2021, including $322.5 million of assets held under management or administration for the Corporation, compared to $2.091 billion at December 31, 2020, including $305.5 million of assets held under management or administration for the Corporation, an increase of $138.0 million, or 6.60%.

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 composition of the available for sale segment of the securities portfolio is summarized in the table as follows (in thousands):
SECURITIES AVAILABLE FOR SALE
 September 30, 2021December 31, 2020
 Amortized CostEstimated Fair ValuePercent of Total Estimated Fair ValueAmortized CostEstimated Fair ValuePercent of Total Estimated Fair Value
Obligations of U.S. Government40,499 40,337 5.3 %$— $— — %
Mortgage-backed securities, residential and collateralized mortgage obligations588,555 586,126 77.0 %458,245 467,866 84.4 %
Obligations of states and political subdivisions40,331 42,352 5.6 %40,662 43,405 7.8 %
Other securities92,612 92,716 12.1 %43,455 43,340 7.8 %
Total$761,997 $761,531 100.0 %$542,362 $554,611 100.0 %

The available for sale segment of the securities portfolio totaled $761.5 million at September 30, 2021, an increase of $206.9 million, or 37.3%, from $554.6 million at December 31, 2020. The increase can be mostly attributed to purchases in the amount of $333.4 million, offset by a decrease of $109.7 million in paydowns, and a decrease in the fair value of the portfolio of $16.7 million due to increases in interest rates.

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The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled $3.2 million at September 30, 2021 and $2.5 million at December 31, 2020.

Loans

The Corporation has reporting systems to monitor: (i) loan origination and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, troubled debt restructurings, and other real estate owned, (iv) impaired loans, and (v) potential problem loans. Management reviews these systems on a regular basis.

The table below presents the Corporation’s loan composition by segment at the dates indicated, and the dollar and percent change from December 31, 2020 to September 30, 2021 (in thousands):
LOANS
 September 30, 2021December 31, 2020Dollar ChangePercentage Change
Commercial and agricultural$271,075 $368,946 $(97,871)(26.5)%
Commercial mortgages789,154 716,608 72,546 10.1 %
Residential mortgages253,991 239,401 14,590 6.1 %
Indirect consumer loans119,772 120,538 (766)(0.6)%
Other consumer loans82,676 90,970 (8,294)(9.1)%
Total loans, net of deferred loan fees$1,516,668 $1,536,463 $(19,795)(1.3)%

Portfolio loans totaled $1.517 billion at September 30, 2021, a decrease of $19.8 million, or 1.3%, from $1.536 billion at December 31, 2020. The decrease in loans can be attributed to decreases of $97.9 million in commercial and agricultural loans, $8.3 million in other consumer loans and $0.8 million in indirect consumer loans, offset by increases of $72.5 million in commercial mortgages and $14.6 million in residential mortgages.

The decrease in commercial and agricultural loans can be primarily attributed to a net decrease of $82.8 million of PPP loans due to a total of $160.5 million of paydowns received from the SBA as part of the forgiveness phase of the Paycheck Protection Program (PPP). The Corporation originated $77.7 million in commercial loans related to Phase 2 of the PPP. Residential mortgage loans totaled $254.0 million at September 30, 2021, an increase of $14.6 million, or 6.1%, from December 31, 2020. During the nine months ended September 30, 2021, $75.6 million of residential mortgages were originated, of which $29.0 million were sold in the secondary market to Freddie Mac.

The Corporation anticipates that future growth in portfolio loans will continue to be in commercial mortgages and commercial and industrial loans, particularly within the Corporation's new Western New York market. Recent growth in residential mortgages was driven by both home purchases and refinancings due to the low interest rate environment. The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):
LOANS BY DIVISION
 September 30, 2021December 31, 2020December 31, 2019December 31, 2018December 31, 2017
Chemung Canal Trust Company*^$642,176 $658,468 $576,399 $603,133 $630,732 
Capital Bank Division874,492 877,995 732,820 708,773 681,092 
Total loans$1,516,668 $1,536,463 $1,309,219 $1,311,906 $1,311,824 
* All loans, excluding those originated by the Capital Bank division.
^ Includes $40.0 million in the Western New York market

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, 2021 and December 31, 2020, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were 45.5% and 40.9% 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, 2021 and December 31, 2020.

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Non-Performing Assets

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

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 in non-accrual status unless factors exist that would eliminate the need to place a loan in this status. 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, 2021December 31, 2020
Non-accrual loans$3,225 $6,011 
Non-accrual troubled debt restructurings5,148 3,941 
Total non-performing loans8,373 9,952 
Other real estate owned171 237 
Total non-performing assets$8,544 $10,189 
Ratio of non-performing loans to total loans0.56 %0.65 %
Ratio of non-performing assets to total assets0.35 %0.45 %
Ratio of allowance for loan losses to non-performing loans250.08 %210.25 %
Accruing loans past due 90 days or more (1)$4 $2 
Accruing troubled debt restructurings (1)$5,679 $2,790 
(1) These loans are not included in non-performing assets above.

Non-Performing Loans

Non-performing loans totaled $8.4 million at September 30, 2021, or 0.56% of total loans, compared to $10.0 million at December 31, 2020, or 0.65% of total loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $8.5 million, or 0.35% of total assets, at September 30, 2021, compared to $10.2 million, or 0.45% of total assets, at December 31, 2020. The decrease in non-performing loans can mostly be attributed to payments received on non-performing residential mortgages and home equity lines and loans. The decrease in non-performing assets can be attributed to the decrease in non-performing loans.

Accruing Loans Past due 90 Days or More

The recorded investment in accruing loans past due 90 days or more increased from $2 thousand at December 31, 2020 to $4 thousand at September 30, 2021.

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Troubled Debt Restructurings

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation has modified the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 related modifications and therefore will not be treated as TDRs. As of September 30, 2021, the Corporation had $5.1 million of non-accrual TDRs compared to $3.9 million as of December 31, 2020. As of September 30, 2021 and December 31, 2020, the Corporation had $5.7 million and $2.8 million respectively, of accruing TDRs.

Impaired Loans

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. The unpaid principal balance of impaired loans at September 30, 2021 totaled $18.8 million, including TDRs of $10.8 million, compared to $16.5 million, including TDRs of $6.7 million, at December 31, 2020. Included in the recorded investment of impaired loans at September 30, 2021, were loans totaling $5.3 million for which impairment allowances of $3.4 million have been specifically allocated to the allowance for loan losses. As of December 31, 2020, the impaired loan total included $1.8 million of loans for which specific impairment allowances of $1.5 million were allocated to the allowance for loan losses.

The majority of the Corporation's impaired loans are secured and measured for impairment based on collateral evaluations.  It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. 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 the updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs. Real estate values in the Corporation's market area have been holding steady. 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 Loan Losses

The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans.  The allowance is established based on management’s evaluation of the probable incurred losses inherent in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.

Specific valuation allowances are established based on management’s analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, delinquent or unpaid property taxes, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

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The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five-year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, and more recently the expected impact of COVID-19 on the various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy, including the impact of COVID-19.

The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The allowance for loan losses was $20.9 million at September 30, 2021, and December 31, 2020. The ratio of allowance for loan losses to total loans was 1.38% at September 30, 2021, compared to 1.36% at December 31, 2020. Net recoveries for the nine months ended September 30, 2021 were $0.1 million, compared to net charge-offs for the nine months ended September 30, 2020 of $2.9 million.
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The table below summarizes the Corporation’s loan loss experience for the nine months ended September 30, 2021 and 2020 (in thousands, except ratio data):
SUMMARY OF LOAN LOSS EXPERIENCE
 Nine Months Ended 
 September 30,
 20212020
Balance of allowance for loan losses at beginning of period$20,924 $23,478 
Charge-offs:  
Commercial and agricultural25 134 
Commercial mortgages44 2,143 
Residential mortgages71 56 
Consumer loans510 915 
Total charge-offs650 3,248 
Recoveries:  
Commercial and agricultural283 27 
Commercial mortgages2 2 
Residential mortgages10 49 
Consumer loans424 293 
Total recoveries719 371 
Net charge-offs (recoveries)(69)2,877 
Provision (credit) for loan losses(53)3,989 
Balance of allowance for loan losses at end of period$20,940 $24,590 
Ratio of annualized net charge-offs (recoveries) to average loans outstanding(0.01)%0.27 %
Ratio of allowance for loan losses to total loans outstanding1.38 %1.60 %

Deposits

The table below summarizes the Corporation’s deposit composition by segment at the dates indicated, and the dollar and percent change from December 31, 2020 to September 30, 2021 (in thousands):
DEPOSITS
 September 30, 2021December 31, 2020Dollar ChangePercentage Change
Non-interest-bearing demand deposits$725,181 $620,423 $104,758 16.9 %
Interest-bearing demand deposits282,036 282,172 (136)— %
Insured money market accounts661,049 603,583 57,466 9.5 %
Savings deposits275,137 245,865 29,272 11.9 %
Time deposits230,419 285,731 (55,312)(19.4)%
Total$2,173,822 $2,037,774 $136,048 6.7 %

Deposits totaled $2.174 billion at September 30, 2021 compared to $2.038 billion at December 31, 2020, an increase of $136.0 million, or 6.7%. The increase was attributable to increases of $104.8 million in non-interest-bearing demand deposits, $57.5 million in money market accounts, and $29.3 million in savings deposits, partially offset by decreases of $55.3 million in time deposits and $0.1 million in interest-bearing demand deposits. The growth in deposits was due primarily to increases of $54.7 million in consumer funds, $48.5 million in commercial deposits, and $32.8 million in public deposits. The increase in deposits was partially due to the collection of stimulus funds and PPP loan disbursements. At September 30, 2021, demand deposit and money market accounts comprised 76.7% of total deposits compared to 73.9% at December 31, 2020.
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The table below presents the Corporation's deposits balance by bank division (in thousands):
DEPOSITS BY DIVISION
 September 30, 2021December 31, 2020December 31, 2019December 31, 2018December 31, 2017
Chemung Canal Trust Company*$1,782,737 $1,686,370 $1,317,225 $1,328,658 $1,264,883 
Capital Bank Division391,085 351,404 254,913 240,579 202,563 
Total $2,173,822 $2,037,774 $1,572,138 $1,569,237 $1,467,446 
*All deposits, excluding those originated by the Capital Bank division.

In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits. The Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations. This will apply to the Corporation's participation in the CDARS and ICS programs. Brokered deposits include funds obtained through brokers. There were no deposits obtained through brokers as of September 30, 2021 and December 31, 2020. Deposits obtained through the CDARS and ICS programs were $335.7 million and $318.3 million as of September 30, 2021 and December 31, 2020, respectively. The increase in CDARS and ICS deposits was due to the seasonal inflow of municipal client balances.

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) acquire 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) link business and consumer loans to the customer's primary checking account at the Bank, (v) aggressively promote direct deposit of client’s payroll checks or benefit checks and (vi) constantly monitor the Corporation’s pricing strategies to ensure competitive products and services.

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

Borrowings

Borrowings decreased $0.2 million to $3.7 million at September 30, 2021 from December 31, 2020, attributable to normal recurring finance lease payments.

Shareholders’ Equity

Total shareholders' equity increased $6.4 million from $199.7 million at December 31, 2020 to $206.1 million at September 30, 2021, due primarily to an increase in retained earnings, offset by a decrease in accumulated other comprehensive (loss) income. The increase in retained earnings of $15.9 million was due primarily to earnings of $20.0 million, offset by $4.1 million in dividends declared during the nine months ended September 30, 2021. The decrease in accumulated other comprehensive income (loss) of $9.5 million can be mostly attributed to the decrease in the fair market value of the securities portfolio.

Treasury stock increased $0.4 million, primarily due to the Corporation's common stock repurchase program, offset by the impact of the issuance of shares related to the Corporation's employee benefit plans and directors' stock plans. No shares were repurchased in the three month period ended September 30, 2021. For the nine month period ended September 30, 2021, the Corporation repurchased a total of 26,456 shares of common stock at a total cost of $1.0 million under the repurchase program at the weighted average cost of $36.52 per share. Remaining buyback authority under the share repurchase program was 223,544 shares at September 30, 2021.

The total shareholders’ equity to total assets ratio was 8.53% at September 30, 2021 compared to 8.76% at December 31, 2020.  The tangible equity to tangible assets ratio was 7.69% at September 30, 2021 compared to 7.87% at December 31, 2020. Book value per share increased to $44.00 at September 30, 2021 from $42.53 at December 31, 2020.

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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 and Exchange Commission.

On April 27, 2020, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933. The Corporation's Board of Directors approved the filing with the SEC of a Shelf Registration Statement to register for sale from time to time up to $50 million of the following securities: (i) shares of common stock; (ii) unsecured debt securities, which may consist of notes, debentures or other evidences of indebtedness; (iii) warrants; (iv) purchase contracts; (v) units consisting of any combination of the foregoing; and (vi) subscription rights to purchase shares of common stock or debt securities. The SEC declared the registration statement effective on May 7, 2020.

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

Pursuant to the Economic Growth, Regulatory Relief, and Consumer Protection Act (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. Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8.5% for 2021. Community banks will have until January 1, 2022, before the community bank leverage ratio requirement will return to 9%. The Bank has not elected to use the community bank leverage ratio.

Off-balance Sheet Arrangements

See Note 8 – Commitments and Contingencies in the Notes to Unaudited Consolidated Financial Statements for a discussion of off-balance sheet arrangements.

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 $100,000 or more, securities sold under agreements to repurchase and other borrowings.

The Corporation is a member of the FHLBNY which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. Based on available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of $187.3 million and $86.3 million at September 30, 2021 and December 31, 2020, respectively. The Corporation also had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which was available at September 30, 2021 and December 31, 2020, respectively. No funds were drawn with respect to any of these arrangements as of September 30, 2021 and December 31, 2020.

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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,
 20212020
Net cash provided by operating activities$26,578 $19,987 
Net cash used in investing activities(204,669)(336,089)
Net cash provided in financing activities131,250 344,100 
Net increase (decrease) in cash and cash equivalents$(46,841)$27,998 

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 2021 and 2020 predominantly resulted from net income after non-cash operating adjustments.

Investing activities
Cash used in investing activities during the first nine months of 2021 predominantly resulted from purchases of securities available for sale offset by a net decrease in loans and principal paydowns on securities available for sale. Cash used in investing activities during the first nine months of 2020 predominantly resulted from purchases of securities available for sale, and a net increase in loans, offset by maturities and principal paydowns on securities available for sale.

Financing activities
Cash provided by financing activities during the first nine months of 2021 predominantly resulted from a net increase in deposits. Cash provided by financing activities during the first nine months of 2020 predominantly resulted from a net increase in deposits.

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. Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8.5% for 2021. Community banks will have until January 1, 2022, before the community bank leverage ratio requirement will return to 9%. The Bank has not elected to use the community bank leverage ratio.

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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, 2021 and December 31, 2020, 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, 2021, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table below. There have been no conditions or events since that notification that management believes have changed the Bank's capital category.

The regulatory capital ratios as of September 30, 2021 and December 31, 2020 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.

The Corporation and the Bank’s capital ratios as of September 30, 2021 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, 2021AmountRatioAmountRatioAmountRatioAmountRatio
Total Capital (to Risk Weighted Assets):
Consolidated$210,023 14.08 %N/AN/AN/AN/A N/AN/A
Bank$201,814 13.55 %$119,176 8.00 %$156,418 10.50 %$148,970 10.00 %
Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$191,355 12.83 %N/AN/AN/AN/A N/AN/A
Bank$183,164 12.30 %$89,382 6.00 %$126,624 8.50 %$119,176 8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$191,355 12.83 %N/AN/AN/AN/A N/AN/A
Bank$183,164 12.30 %$67,036 4.50 %$104,279 7.00 %$96,830 6.50 %
Tier 1 Capital (to Average Assets):     
Consolidated$191,355 7.97 %N/AN/AN/AN/A N/AN/A
Bank$183,164 7.65 %$95,745 4.00 %N/AN/A$119,682 5.00 %



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The Corporation and the Bank’s capital ratios as of December 31, 2020 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, 2020AmountRatioAmountRatioAmountRatioAmountRatio
Total Capital (to Risk Weighted Assets):
Consolidated$192,960 13.62 %N/AN/AN/AN/A N/AN/A
Bank$185,606 13.12 %$113,182 8.00 %$148,551 10.50 %$141,478 10.00 %
Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$175,216 12.37 %N/AN/AN/AN/A N/AN/A
Bank$167,881 11.87 %$84,887 6.00 %$120,256 8.50 %$113,182 8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$175,216 12.37 %N/AN/AN/AN/A N/AN/A
Bank$167,881 11.87 %$63,665 4.50 %$99,034 7.00 %$91,960 6.50 %
Tier 1 Capital (to Average Assets):     
Consolidated$175,216 7.90 %N/AN/AN/AN/A N/AN/A
Bank$167,881 7.59 %$88,474 4.00 %N/AN/A$110,592 5.00 %


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, 2021, the Bank could, without prior approval, declare dividends of approximately $34.3 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 its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.

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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.

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
 As of the Three Months EndedNine Months Ended
(in thousands, except ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2021202120212020202020212020
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
Net interest income (GAAP)$16,832 $16,079 $15,786 $16,397 $15,869 $48,697 $46,522 
Fully taxable equivalent adjustment94 92 91 89 85 277 255 
Fully taxable equivalent net interest income (non-GAAP)$16,926 $16,171 $15,877 $16,486 $15,954 $48,974 $46,777 
Average interest-earning assets (GAAP)$2,327,817 $2,352,908 $2,251,334 $2,144,891 $1,986,043 $2,310,968 $1,877,966 
Net interest margin - fully taxable equivalent (non-GAAP)2.88 %2.76 %2.86 %3.06 %3.20 %2.83 %3.33 %

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.
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As of the
 As of the Three Months EndedNine Months Ended
(in thousands, except ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2021202120212020202020212020
EFFICIENCY RATIO
Net interest income (GAAP)$16,832 $16,079 $15,786 $16,397 $15,869 $48,697 $46,522 
Fully taxable equivalent adjustment94 92 91 89 85 277 255 
Fully taxable equivalent net interest income (non-GAAP)$16,926 $16,171 $15,877 $16,486 $15,954 $48,974 $46,777 
Non-interest income (GAAP)$5,970 $6,492 $5,621 $5,975 $5,339 $18,083 $15,150 
Less:  net (gains) losses on security transactions— — — — — — — 
Adjusted non-interest income (non-GAAP)$5,970 $6,492 $5,621 $5,975 $5,339 $18,083 $15,150 
Non-interest expense (GAAP)$14,100 $13,851 $13,353 $15,597 $13,362 $41,304 $40,339 
Less:  amortization of intangible assets(42)(89)(101)(113)(120)(232)(371)
Adjusted non-interest expense (non-GAAP)$14,058 $13,762 $13,252 $15,484 $13,242 $41,072 $39,968 
Efficiency ratio (unadjusted)61.84 %61.37 %62.38 %69.72 %63.00 %61.85 %65.41 %
Efficiency ratio (adjusted)61.40 %60.72 %61.64 %68.94 %62.19 %61.25 %64.54 %

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
 As of or for the Three Months EndedNine Months Ended
(in thousands, except per share and ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2021202120212020202020212020
TANGIBLE EQUITY AND TANGIBLE ASSETS
(PERIOD END)
Total shareholders' equity (GAAP)$206,139 $203,977 $194,784 $199,699 $197,005 $206,139 $197,005 
Less: intangible assets(21,850)(21,892)(21,981)(22,082)(22,195)(21,850)(22,195)
Tangible equity (non-GAAP)$184,289 $182,085 $172,803 $177,617 $174,810 $184,289 $174,810 
Total assets (GAAP)$2,417,656 $2,380,712 $2,442,495 $2,279,451 $2,165,014 $2,417,656 $2,165,014 
Less: intangible assets(21,850)(21,892)(21,981)(22,082)(22,195)(21,850)(22,195)
Tangible assets (non-GAAP)$2,395,806 $2,358,820 $2,420,514 $2,257,369 $2,142,819 $2,395,806 $2,142,819 
Total equity to total assets at end of period (GAAP)8.53 %8.57 %7.97 %8.76 %9.10 %8.53 %9.10 %
Book value per share (GAAP)$44.00 $43.57 $41.60 $42.53 $41.51 $44.00 $41.51 
Tangible equity to tangible assets at end of period (non-GAAP)7.69 %7.72 %7.14 %7.87 %8.16 %7.69 %8.16 %
Tangible book value per share (non-GAAP)$39.34 $38.90 $36.91 $37.83 $36.83 $39.34 $36.83 
 


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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
 As of or for the Three Months EndedNine Months Ended
 Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
(in thousands, except ratio data)2021202120212020202020212020
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP)$208,023 $200,627 $200,035 $198,036 $196,569 $202,923 $192,299 
Less: average intangible assets(21,868)(21,946)(22,043)(22,142)(22,267)(21,952)(22,390)
Average tangible equity (non-GAAP)$186,155 $178,681 $177,992 $175,894 $174,302 $180,971 $169,909 
Return on average equity (GAAP)12.68 %13.58 %13.24 %10.51 %11.56 %13.16 %9.74 %
Return on average tangible equity (non-GAAP)14.16 %15.25 %14.88 %11.84 %13.03 %14.75 %11.03 %

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
 As of or for the Three Months EndedNine Months Ended
(in thousands, except per share and ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2021202120212020202020212020
NON-GAAP NET INCOME
Reported net income (GAAP)$6,646 $6,795 $6,530 $5,233 $5,711 $19,971 $14,029 
Net (gains) losses on security transactions (net of tax)— — — — — — — 
Non- GAAP net income$6,646 $6,795 $6,530 $5,233 $5,711 $19,971 $14,029 
Average basic and diluted shares outstanding4,684 4,683 4,691 4,702 4,773 4,687 4,836 
Reported basic and diluted earnings per share (GAAP)$1.42 $1.45 $1.39 $1.11 $1.19 $4.26 $2.90 
Reported return on average assets (GAAP)1.09 %1.11 %1.12 %0.93 %1.08 %1.11 %0.95 %
Reported return on average equity (GAAP)12.68 %13.58 %13.24 %10.51 %11.56 %13.16 %9.74 %
Non-GAAP basic and diluted earnings per share$1.42 $1.45 $1.39 $1.11 $1.19 $4.26 $2.90 
Non-GAAP return on average assets1.09 %1.11 %1.12 %0.93 %1.08 %1.11 %0.95 %
Non-GAAP return on average equity12.68 %13.58 %13.24 %10.51 %11.56 %13.16 %9.74 %
 
 
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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, 2021, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 7.33% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by 7.52%. Both are within the Corporation's policy guidelines.

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, 2021, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 2.78%. An immediate 200-basis point increase in interest rates would negatively impact the market value by 4.18%. Both are within the Corporation's policy guidelines.

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.

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 loan 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 officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of September 30, 2021 pursuant to Rule 13a-15 of the Exchange Act, as amended. Based upon that evaluation, the principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures are effective as of September 30, 2021. 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.
78

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, 2021.

ITEM 1A.    RISK FACTORS

There have been no material changes in the risk factors set forth in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission on March 23, 2021.



ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds

    (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, 2021— $— — 223,544 
August 1 - August 31, 2021— — — 223,544 
September 1 - September 30, 2021— — — 223,544 
Quarter ended September 30, 2021— $— — 223,544 
(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. For the three months ended September 30, 2021, no shares had been purchased under this plan. Since the inception of the plan, a total of 26,456 shares have been purchased under the plan.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES

        Not applicable.

ITEM 4.    MINE SAFETY DISCLOSURES

        Not applicable.

ITEM 5.    OTHER INFORMATION

        Not applicable.

79

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 to June 16, 2021 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K filed with the Commission on June 16, 2021).
  
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.
80

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 10, 2021By:  /s/ Anders M. Tomson
 Anders M. Tomson
President and Chief Executive Officer
(Principal Executive Officer)

DATED: November 10, 2021By:  /s/ Karl F. Krebs
 Karl F. Krebs
Chief Financial Officer and Treasurer
(Principal Financial Officer)

81

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
Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).
  
3.2
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 filed with the Commission on March 13, 2008).
  
3.3
Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006).
  
3.4
Amended and Restated Bylaws of Chemung Financial Corporation, as amended to June 16, 2021 (as incorporated by reference to Exhibit 3.1 to Registrant’s Form 8-K filed with the Commission on June 16, 2021).
  
31.1
Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
  
31.2
Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
  
32.1
Certification 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.*
  
32.2
Certification 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.

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