CHEMUNG FINANCIAL CORP (CHMG) FY 2021 MD&A

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

The following is the MD&A of the Corporation in this Form 10-K at December 31, 2021 and 2020, and for the years ended December 31, 2021, and 2020. The purpose of this discussion is to focus on information about the financial condition and results of operations of the Corporation. Reference should be made to the accompanying audited consolidated financial statements and footnotes for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 2-5.

The MD&A included in this Form 10-K 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.

The Corporation has been a financial holding company since 2000, and 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 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, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company that insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.

Forward-looking Statements

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing the Corporation’s growth, competition, the impact of the COVID-19 pandemic, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” of this annual report on Form 10-K. The Corporation's quarterly 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 by written request to: Kathleen S. McKillip, Corporate Secretary, Chemung Financial Corporation, One Chemung Canal Plaza, Elmira, NY 14901. 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.

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Critical Accounting Estimates

Critical accounting estimates include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with GAAP. As a result, the Corporation is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available at that time. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the years presented. Actual results could be different from these estimates.

Allowance for Loan Losses

Management considers the allowance for loan losses to be a critical accounting estimate given the uncertainty in evaluating the level of 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. The allowance is established through a provision for loan losses in the Consolidated Statements of Income and is established based on management’s evaluation of the probable inherent losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances. Management's evaluation of the adequacy of the allowance for loan losses is performed on a quarterly basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses.

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.

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. Please refer to Note 1 in the Corporation's consolidated financial statements which begins on page F-10, for further discussion.

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Consolidated Financial Highlights

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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 annual report on Form 10-K. For a complete description of the trends and uncertainties, as well as the risks and critical accounting estimates affecting the Corporation, this annual report on Form 10-K should be read in its entirety.

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

(a) See the GAAP to Non-GAAP reconciliations on pages 64-67

Net income for the year ended December 31, 2021 was $26.4 million, or $5.64 per share, compared with net income of $19.3 million, or $4.01 per share, for the prior year. Return on average equity for the year ended December 31, 2021 was 12.94%, compared with 9.94% for the prior year. The increase in net income for the year ended December 31, 2021, compared to the prior year, was driven by increases in net interest income and non-interest income and decreases in the provision for loan losses and non-interest expenses, partially offset by an increase in income tax expense.

Net interest income

Net interest income increased $2.7 million, or 4.2% in 2021, compared with the prior year. The increase was due primarily to the impact of an increase of $379.4 million in average interest-earning assets, offset by the impact of a forty-one basis points decline in net interest margin.

Non-interest income

Non-interest income increased $2.7 million, or 13.0% in 2021, compared to the prior year. The increase was due primarily to increases of $1.6 million in wealth management group fee income, $0.8 million in interchange revenue from debit card transactions, $0.2 million in change in fair value of equity investments, and a $0.7 million one-time refund of real estate taxes, sales tax rebates and Mastercard incentives as compared to the prior year, offset by a $0.7 million decrease in net gains on sales of residential mortgage loans sold into the secondary market.

Non-interest expenses

Non-interest expenses decreased $0.3 million, or 0.5% in 2021, compared to the prior year. The decrease was due primarily to a decrease of $1.3 million in other non-interest expense, a $0.6 million increase in the credit related to the net periodic pension and post-retirement benefits, and a decrease of $0.4 million in furniture and equipment expenditures, offset by increases of $0.9 million in data processing expense, $0.5 million in pension and other employee benefits, $0.4 million in FDIC insurance, and $0.2 million in professional services. For the years ended December 31, 2021 and 2020, the ratio of non-interest expense to average assets was 2.30% and 2.73%, respectively.

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Provision for loan losses

The provision for loan losses decreased $4.2 million, or 99.6% in 2021, compared to the prior year. The general component of the allowance based on historical loss experience was reduced in total by $1.6 million, primarily a result of the decrease in the pandemic related reserve which included $1.4 million released and $0.2 million utilized for downgraded loans, with a remaining balance of $2.4 million at December 31, 2021. The December 31, 2021 provision included a $1.5 million increase in reserves for impaired loans, primarily due to the impairment of one commercial real estate loan. Net recoveries were $0.1 million in 2021, compared with net charge-offs of $6.8 million in 2020. The decrease in net charge-offs when compared to the prior year was due primarily to a charge-off of a large commercial participation loan for $3.8 million and a $2.1 million partial charge-off of a commercial loan in 2020. In 2020, net charge-offs of $6.8 million were offset by a decline in reserves for impaired loans of $6.6 million. Additionally, the general component of the allowance based on historical loss experience increased by $2.8 million with the establishment of a $4.0 million reserve at year-end 2020 related to the pandemic, partially offset by a decrease of $1.2 million due to a net decrease in the historical loss factors due to a large 2018 loan charge-off which no longer impacted the calculation. Reserves also increased by $0.9 million in 2020 on other classified loans.

Income tax expense

Income tax expense increased $2.7 million, or 59.2% in 2021, compared to the prior year. The effective tax rate for 2021 increased to 21.7% compared to 19.3% for the prior year. The increase in income tax expense was primarily due to an increase in pretax income.

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 years ended December 31, 2021 and 2020. For a discussion of the Critical Accounting Estimates that affect the Consolidated Results of Operations, see page 37.

Net Interest Income

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

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

Net interest income for the year ended December 31, 2021 totaled $65.6 million, an increase of $2.7 million, or 4.2%, compared with $62.9 million for the prior year. Fully taxable equivalent net interest margin was 2.84% for the year ended December 31, 2021 compared with 3.25% for the prior year. The increase in net interest income was primarily due to an increase of $2.9 million in interest and dividend income on taxable securities and a decrease of $0.6 million in total interest expense, offset by decreases of $0.6 million in interest income on interest-earning deposits, and $0.2 million in interest income on loans, including fees.

The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $343.0 million and the one-time recognition of $0.6 million related to prepayment penalties on a Fannie Mae Delegated Underwriting and Servicing (DUS) obligation. The increase in average invested balances was primarily due to the purchase of various mortgage-backed securities, SBA loan pools, U.S. Treasury securities and corporate subordinated debt issues during the year, with excess liquidity due to the increase in customer deposits related to the Corporation’s participation in the PPP and various stimulus program deposits received by customers. The decrease in interest expense on deposits was due primarily to the decreases in average rates paid on interest-bearing checking, and savings and money market products, due to the low interest rate environment. 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 0.54% in 2020 to 0.17% in 2021, and a decrease of $53.1 million in the average balance of interest-earning deposits in 2021 when compared to the prior year, due to

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lower average interest-earning deposit levels. The decrease in interest income on loans, including fees was due primarily to decreases in the commercial, consumer and mortgage loan portfolio average yields due to a decrease in interest rates, partially offset by increases in average invested balances in the commercial and mortgage loan portfolios. These increases were primarily due to increased originations of loans secured by non-owner occupied and multi-family commercial properties and residential mortgage loans.

Average interest-earning assets increased $379.4 million in 2021 when compared to the prior year. Average interest-bearing liabilities increased $236.2 million when compared to the prior year. The average yield on average interest-earning assets decreased 47 basis points, while the average cost of interest-bearing liabilities decreased nine basis points, as compared to the prior year.

Average Consolidated Balance Sheet and Interest Analysis

The following table presents certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the years ended December 31, 2021, and 2020. It also reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the years ended December 31, 2021, and 2020. For the purpose of the table below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments. Loan fee income was $4.0 million and $3.7 million for the years ended December 31, 2021 and 2020, respectively, and was comprised primarily of fees related to the Paycheck Protection Program.

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

(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.

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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 table below illustrates the extent to which changes in interest rates and in the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the years indicated. 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 purposes of this table, 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 years 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.

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 pandemic on local, national, and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics. During 2021, as conditions improved somewhat, management adjusted certain qualitative factors resulting in a total decrease in the pandemic related reserve of $1.6 million.

Based on this analysis, the provision for loan losses for the years ended December 31, 2021, and 2020 were $17.0 thousand and $4.2 million, respectively. The general component of the allowance based on historical loss experience was reduced in total by $1.6 million, primarily a result of the decrease in the pandemic related reserve which included $1.4 million released and $0.2 million utilized for downgraded loans, with a remaining balance of $2.4 million at December 31, 2021. The December 31, 2021 provision included a $1.5 million increase in reserves for impaired loans, primarily due to the impairment of one commercial real estate loan. In 2020, net charge-offs of $6.8 million were offset by a decline in reserves for impaired loans of $6.6 million. Additionally, the general component of the allowance based on historical loss experience increased by $2.8 million with the establishment of a $4.0 million reserve at year-end 2020 related to the pandemic, partially offset by a decrease of $1.2 million due to a net decrease in the historical loss factors due to a large 2018 loan charge-off which no longer impacted the calculation. Reserves also increased by $0.9 million in 2020 on other classified loans. Net recoveries for the year ended December 31, 2021, were $0.1 million. Net charge-offs for the year ended December 31, 2020 were $6.8 million.

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Non-interest income

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

Non-interest income for the year ended December 31, 2021 was $23.9 million compared with $21.1 million for the prior year, an increase of $2.7 million, or 13.0%. The increase was due primarily to increases of $1.6 million in wealth management group fee income, $0.8 million in interchange revenue from debit card transactions, $0.4 million in CFS fee and commission income, $0.2 million in change in fair value of equity investments, and $0.5 million in other non-interest income, when compared to the prior year, offset by a $0.7 million decrease in net gains on sales of loans held for sale.

Wealth Management Group Fee Income

The increase in wealth management group fee income was primarily attributed to new business relationships and an increase in the market value of total assets under management or administration, and represents record fee income for the segment.

Interchange Revenue from Debit Card Transactions

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

CFS Fee and Commission Income

CFS fee and commission income increased in 2021 compared to the prior year primarily due to new business relationships.

Change in Fair Value of Equity Investments

Change in fair value of equity investments increased in 2021 compared to the prior year primarily due to an increase in the assets held and the market value thereon.

Other non-interest income

Other non-interest income increased compared to the prior year primarily due to a $0.7 million one-time refund of real estate taxes, sales tax rebates and Mastercard incentives received in 2021.

Net Gains on Sales of Loans Held for Sale

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

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Non-interest expenses

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

Non-interest expense decreased $0.3 million, or 0.5% in 2021. The decrease was due primarily to a decrease of $0.4 million in total non-compensation expenses, offset by an increase of $0.1 million in total compensation expenses.

Compensation expenses

Compensation expenses increased $0.1 million, or 0.5% when compared to the prior year, primarily due to increases of $0.5 million in pension and other employee benefit expense and $0.2 million in salaries and wages, partially offset by a $0.6 million increase in the credit related to the net periodic pension and post-retirement benefits. Pension and other employee benefits increased primarily due to an increase in healthcare costs when compared to the prior year. The increase in salaries and wages was primarily due to annual merit increases offset by a decrease in salaries and wage expense during the year when compared to the prior year. The increase in the credit related to the net periodic pension and post-retirement benefits was primarily due to a change in factors used to prepare annual actuarial estimates.

Non-compensation expenses

Non-compensation expenses decreased $0.4 million, or 1.4%, primarily due to decreases of $1.3 million in other non-interest expense, and a decrease of $0.4 million in furniture and equipment expenditures, offset by increases of $0.9 million in data processing expense, $0.4 million in FDIC insurance, and $0.2 million in professional services.

The decrease in other non-interest expense was primarily due to a $0.7 million reserve established in 2020 related to a compliance matter with NYS Department of Financial Services, and the subsequent $0.3 million release of the remaining reserve upon resolution of the matter in 2021, as described in the Corporation's Form 8-K filed June 29, 2021. Also contributing to the decrease was $0.4 million in costs related to the closing of a branch location, including equipment and leasehold improvements and a $0.2 million lease buy-out in the prior year, and a $0.4 million decrease due to a change in restricted stock vesting requirements based upon the adoption of the Corporation's 2021 Equity Incentive Plan as approved by shareholders on June 8, 2021. Furniture and equipment expenditures decreased primarily due to a decrease in depreciable assets and an overall decrease in building furniture and equipment expenditures when compared to the prior year. Data processing expenses increased primarily due to investment in new initiatives in the current year and a $0.2 million credit received in the prior year. FDIC insurance increased primarily due to an increase in the assessment base due to increased average asset balances. Professional services increased primarily due to additional consulting services in the current year.

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Income tax expense

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

The effective tax rate increased to 21.7% for the year ended December 31, 2021 compared with 19.3% for the prior year. The increase in the effective tax rate can be attributed to an increase in state tax liability. The increase in income tax expense can be attributed to an increase in pre-tax income.

COVID-19

The Effect of COVID-19 on Our Business

The Corporation remained flexible with its COVID-19 response, adapting weekly to new micro-cluster zone restrictions and spiking positivity rates throughout our footprint. This flexibility allowed us to ensure a healthy and safe work environment for our colleagues, clients and the communities we assist. At all times, social distancing, sanitizing and facial coverings were required and at certain times, access to branches was limited or restricted. When the need arose to temporarily close a branch, impacted customers were directed to adjacent branches when possible, and offices were immediately deep-cleaned to ensure a safe work environment when employees and customers returned. At the date of this filing all of our 31 branches are open with normal business hours. The Corporation further assisted its customer base as the Paycheck Protection Program (PPP) moved forward with its Forgiveness phase, with the Small Business Administration (SBA).

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, new legislation which allowed 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 December 31, 2021, no loan forbearances due to COVID-19 remained.

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, June 5, 2020 and December 27, 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

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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 December 31, 2021, 100 loans totaling $4.0 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 December 31, 2021, 1,170 loans totaling $186.3 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 December 31, 2021, 510 loans totaling $39.1 million were outstanding related to Phase 2 of the PPP, a portion of which may not be forgiven. As of December 31, 2021, 365 loans totaling $38.4 million, were forgiven by the SBA.

As of March 11, 2022, 319 PPP loans totaling $22.6 million were outstanding related to Phases 1 and 2 of the PPP, a portion of which may not be forgiven. As of March 11, 2022, 1,810 loans totaling $244.3 million, representing Phases 1 and 2 of the PPP, were forgiven by the SBA.

Participation in Paycheck Protection Program Liquidity Facility ("PPPLF")

The PPPLF was created by the Board of Governors of the Federal Reserve System on April 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act. Under the facility, the Federal Reserve Banks lend to participating financial institutions on a non-recourse basis, taking PPP loans as collateral. The Bank participated in the PPPLF and received funding for 141 loans totaling $66.4 million. The Corporation fully repaid the funds on May 28, 2020.

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 December 31, 2021, the Corporation's cash and cash equivalents balance was $27.0 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 December 31, 2021, the Corporation's investment in securities available for sale was $792.0 million, $547.7 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 $161.0 million as of December 31, 2021. The Corporation did not experience excessive draws on available working capital lines of credit and home equity lines of credit during 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.

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.

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Financial Condition

The following table presents selected financial information at December 31, 2021 and 2020, and the dollar and percent change (in thousands):

Cash and cash equivalents

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

Investment securities

The increase in securities available for sale and held to maturity can be mostly attributed to purchases of investment securities exceeding sales, maturities and calls.

Loans, net

The decrease in total loans, net, can be mostly attributed to decreases of $25.7 million in commercial loans and $12.4 million in consumer loans, offset by an increase of $19.9 million in residential mortgage loans. During 2021, PPP loans contributed a net decrease of $107.8 million to the total loan portfolio as of December 31, 2021 due to a total of $185.5 million of paydowns received from the SBA for loan forgiveness, offset by $77.7 million in new Phase 2 loans.

Goodwill and other intangible assets, net

The decrease in goodwill and other intangible assets, net, can be attributed to amortization of other intangible assets. There were no impairments of goodwill or other intangible assets during the years ended December 31, 2021 and 2020.

Deposits

The increase in deposits can be attributed to increases of $119.2 million in non-interest bearing demand deposits, $2.5 million in interest-bearing demand deposits, $51.0 million in money market accounts and $34.3 million in savings accounts, offset by a decrease of $89.4 million in time deposits. The increase in non-interest-bearing demand deposits was mostly attributable to an increase in personal customer deposits. The increase in interest-bearing demand deposits was due primarily to an increase in commercial deposits. The increase in money market accounts can mostly be attributed to an increase in ICS deposits, and an increase in personal customer deposits. The decrease in time deposits was primarily due to a decrease in municipal certificates of deposit. Overall, customer deposits were impacted by the receipt of stimulus checks and PPP loan disbursements during the year.

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Capital Lease Obligations and FHLBNY Advances

The increase in capital lease obligations and FHLBNY advances can be mostly attributed to $14.6 million in FHLBNY overnight advances.

Other Liabilities

The decrease in other liabilities can be mostly attributed to a decrease of $5.6 million in interest rate swap liabilities, primarily due to changes in interest rates.

Shareholders’ equity

The increase in shareholders' equity was due primarily to an increase in retained earnings of $20.9 million, which was a result of earnings of $26.4 million, offset by $5.6 million in dividends declared during the current year. The decrease in accumulated other comprehensive income (loss) of $8.9 million can mostly be attributed to a decrease in the fair value of the securities portfolio. Also, treasury stock increased $0.3 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. As of December 31, 2021, a total of 34,921 shares of common stock at a total cost of $1.3 million were repurchased by the Corporation under its share repurchase program. The weighted average cost was $38.55 per share repurchased. Remaining buyback authority under the share repurchase program was 215,079 shares at December 31, 2021. As of March 11, 2022, 49,184 shares have been repurchased, at an average cost of $40.42 per share.

Assets under management or administration

The market value of total assets under management or administration in WMG was $2.325 billion, including $344.2 million of assets held under management or administration for the Corporation, at December 31, 2021 compared with $2.091 billion, including $305.5 million of assets held under management or administration for the Corporation, at December 31, 2020, an increase of $234.0 million, or 11.2%. The increase in total assets under management or administration for the Corporation can be mostly attributed to new business relationships and an increase in the market value of the assets under management.

Balance Sheet Comparisons

The table below contains selected year-end and average balance sheet information at and for the years December 31, 2021 and 2020 (in millions):

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

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

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

(4)    Average borrowings include overnight and PPPLF advances, securities sold under agreements to repurchase and capitalized lease obligations.

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Cash and Cash Equivalents

Total cash and cash equivalents decreased $81.6 million since December 31, 2020, due to decrease    s of $69.5 million in interest-earning deposits in other financial institutions, and $12.1 million in cash and due from financial institutions.

Securities

The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt securities purchased for the bond portfolio to carry a minimum agency rating of "Baa." After an independent credit analysis is performed, the policy also allows the Corporation to purchase local municipal obligations that are not rated. The Corporation intends to maintain a reasonable level of securities to provide adequate liquidity and in order to have securities available to pledge to secure public deposits, repurchase agreements and other types of transactions. Fluctuations in the fair value of the Corporation’s securities relate primarily to changes in interest rates.

Marketable securities are classified as Available for Sale, while investments in local municipal obligations are generally classified as Held to Maturity. The available for sale segment of the securities portfolio totaled $792.0 million at December 31, 2021, an increase of $237.4 million, or 42.8%, from $554.6 million at December 31, 2020. The increase resulted primarily from new purchases which exceeded maturities and calls. New purchases during the year were primarily in mortgage-backed securities, SBA loan pools, U.S. Treasury securities and corporate subordinated debt issues. The increase in purchased securities was primarily due to a significant increase in customer deposits related to the Corporation's participation in PPP and various stimulus program deposits received by customers, which resulted in excess cash levels. The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas. These securities totaled $3.8 million at December 31, 2021, an increase of $1.3 million or 53.5%, from $2.5 million at December 31, 2020, due primarily to new purchases.

Non-marketable equity securities at December 31, 2021 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $2.4 million, respectively. The fair value of these securities is assumed to approximate their cost. The investment in these stocks is regulated by regulatory policies of the respective institutions.

The table below sets forth the carrying amounts and maturities of held to maturity debt securities at December 31, 2021 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security) (in thousands):

The weighted-average yield on the Corporation's held to maturity debt securities at December 31, 2021 were 2.55% related to obligations of states and political subdivisions, and 1.91% related to time deposits with other institutions. Management evaluates securities for OTTI on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For the years ended December 31, 2021 and 2020, the Corporation had no OTTI charges.

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Loans

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

The table below presents the Corporation’s loan composition by type and percentage of total loans at the end of December 31, 2021 and December 31, 2020 (in thousands):

Portfolio loans totaled $1.518 billion at December 31, 2021 and $1.536 billion at December 31, 2020, a decrease of $18.2 million, or 1.2%. Changes included decreases of $111.7 million, or 30.3%, in commercial and agricultural loans, and $12.4 million, or 5.9%, in total consumer loans, partially offset by increases of $86.0 million, or 12.0%, in commercial real estate loans, and $19.9 million, or 8.3% in residential mortgage loans. The decrease in commercial and agricultural loans was primarily a result of the net decrease in PPP loans of $107.8 million during the year. During 2021, $147.1 million was received from the SBA for loan forgiveness of Phase 1 loans, while $77.7 million of Phase 2 loans were originated and $38.4 million was received from the SBA for loan forgiveness of Phase 2 loans. PPP loan balances of $43.2 million remained at December 31, 2021, with $4.0 million and $39.2 million of Phase 1 and Phase 2 loans respectively. The decrease in total consumer loans was primarily related to a $7.9 million decrease in total home equity lines and loans, along with smaller decreases in both direct and indirect consumer loans. The increase in total commercial real estate loans was a result of a $20.3 million increase in construction loans and a $65.7 million increase in commercial real estate loans, primarily driven by increases in loans secured by non-owner occupied and multi-family properties. The increase in residential mortgage loans was due to new originations retained in the portfolio driven by the continuing low interest rate environment, as increased volume continued throughout the pandemic.

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

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Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by changes in economic or other conditions. The Corporation’s concentration policy limits consider the volume of commercial loans to any one specific industry, sponsor, and by collateral type and location. In addition, the Corporation’s policy limits the volume of non-owner occupied commercial mortgages to four times total risk based capital. At December 31, 2021 and 2020, total non-owner occupied commercial real estate loans divided by total Bank risk based capital was 346.5% and 339.9%, respectively.

The Corporation also monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At December 31, 2021 and 2020, commercial loans to borrowers involved in the real estate, and real estate rental and leasing businesses were 45.1% 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 December 31, 2021 and 2020.

The table below shows the maturity of loans outstanding as of December 31, 2021. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

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 on 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 on non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its contractual principal and interest. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal balance has been recovered.

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The following table summarizes the Corporation's non-performing assets, excluding purchased credit impaired loans (in thousands):

NON-PERFORMING ASSETS

(1)These loans are not included in nonperforming assets above.

Interest income recorded on non-accrual and troubled debt restructured loans was $146.0 thousand, and $76.0 thousand, as of December 31, 2021, 2020, respectively.

Non-Performing Loans

Non-performing loans totaled $8.1 million at December 31, 2021, or 0.54% of total loans, compared with $10.0 million at December 31, 2020, or 0.65% of total loans. The decrease in non-performing loans at December 31, 2021 as compared to December 31, 2020 was primarily due to payments received on non-performing loans across all loan portfolios. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $8.2 million, or 0.34% of total assets, at December 31, 2021, compared with $10.2 million, or 0.45% of total assets, at December 31, 2020.

The recorded investment of accruing loans past due 90 days or more was less than $0.1 million at December 31, 2021 and December 31, 2020. There were no PCI loans as of December 31, 2021 and December 31, 2020. PCI loans are accounted for under separate accounting guidance, ASC Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality.”

Troubled Debt Restructurings

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation 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, until January 1, 2022. As of December 31, 2021 and 2020, the Corporation had $4.6 million and $3.9 million of non-accrual TDRs, respectively. As of December 31, 2021, the Corporation had $5.6 million of accruing TDRs compared with $2.8 million as of December 31, 2020.

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Impaired Loans

A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement.The unpaid principal balance of impaired loans at December 31, 2021 totaled $18.2 million, including TDRs of $10.3 million, compared to $16.5 million at December 31, 2020, including TDRs of $6.7 million. The recorded investment of impaired loans at December 31, 2021 totaled $11.6 million compared to $10.6 million at December 31, 2020. Included in the recorded investment of impaired loans at December 31, 2021, were loans totaling $5.2 million for which impairment allowances of $3.0 million have been specifically allocated to the allowance for loan losses. The increase in recorded investment in impaired loans was primarily due to a $2.9 million increase in commercial real estate impaired loans, partially offset by a $1.0 million decrease in commercial and industrial impaired loans, a $0.3 million decrease in residential mortgage impaired loans and a $0.5 million decrease in home equity impaired lines and loans. 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. 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 credit losses on existing loans. The allowance is established based on management’s evaluation of the probable inherent losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.

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

The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five-year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, and more recently the 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:

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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 quarterly basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. 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 $21.0 million at December 31, 2021, compared to $20.9 million at December 31, 2020. The allowance for loan losses was 259.17% of non-performing loans at December 31, 2021 compared to 210.25% at December 31, 2020. The ratio of allowance for loan losses to total loans was 1.38% at December 31, 2021 and 1.36% at December 31, 2020, respectively. The ratio of the allowance for loan losses to total loans excluding PPP loans was 1.43% at December 31, 2021, compared to 1.51% at December 31, 2020. The Corporation continues to closely monitor the loan portfolio for effects related to the COVID-19 pandemic. Changes in governmental policies and economic pressures during the pandemic placed stress on certain industries while other industries initially anticipated to be highly impacted by the pandemic demonstrated resilience. Based upon management review of these factors and the uncertainty that the pandemic continues to present, there was no change to the pandemic related portion of the allowance during the fourth quarter of 2021, with a balance of $2.4 million as of December 31, 2021. To date the Corporation has released $1.9 million and utilized $0.5 million of the pandemic related provision.

Net recoveries for the year ended December 31, 2021 were $0.1 million compared with net charge-offs of $6.8 million for the year ended December 31, 2020. The ratio of net charge-offs (recoveries) to average loans outstanding was (0.01)% for 2021 compared to 0.47% for 2020.

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The table below summarizes the Corporation’s allowance for loan losses, non-accrual loans, and ratio of net charge-offs and recoveries to average loans outstanding by loan category for the years ended December 31, 2021 and December 31, 2020, by category (in thousands):

The increase in the allowance to non-accrual loans is primarily due to a $1.8 million decrease in non-accrual loans from 2020 to 2021. The decrease in net charge-offs and recoveries to outstanding loans ratios was primarily due to the charge-off of a large commercial participation loan for $3.8 million and a $2.1 million partial charge-off of a commercial loan in 2020. Refer to Note 4 of the audited Consolidated Financial Statements appearing elsewhere in this report for components used in credit ratios presented above.

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The table below summarizes the Corporation's loan loss experience for the years ended December 31, 2021 and 2020 (in thousands, except ratio data):

Other Real Estate Owned

At December 31, 2021, OREO totaled $0.1 million compared to $0.2 million at December 31, 2020. The decrease in other real estate owned was due primarily to three residential properties and one commercial property sold during 2021.

Deposits

The table below summarizes the Corporation’s deposit composition by segment at December 31, 2021, and 2020, and the dollar and percent change from December 31, 2020 to December 31, 2021 (in thousands):

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Deposits totaled $2.155 billion at December 31, 2021, compared with $2.038 billion at December 31, 2020, an increase of $117.7 million, or 5.8%. At December 31, 2021, demand deposit and money market accounts comprised 77.9% of total deposits compared with 73.9% at December 31, 2020. The growth in deposits was attributable to increases of $119.2 million in non-interest-bearing demand deposits, $2.5 million in interest-bearing demand deposits, $51.0 million in insured money market accounts, and $34.3 million in savings deposits, offset by a decrease of $89.4 million in time deposits. The growth in deposits was due primarily to increases of $76.1 million in consumer funds, and $42.8 million in commercial deposits, offset by a decrease of $1.5 million in public deposits. The increase in deposits was partially due to the collection of stimulus funds and PPP loan disbursements.

At December 31, 2021, public funds deposits totaled $378.9 million compared to $308.9 million at December 31, 2020. The Corporation has developed a program for the retention and management of public funds deposits. These deposits are from public entities, such as school districts and municipalities. There is a seasonal component to public deposit levels associated with annual tax collections. Public funds deposits will increase at the end of the first and third quarters. Public funds deposit accounts above the FDIC insured limit are collateralized by municipal bonds and eligible government and government agency securities such as those issued by the FHLB, Fannie Mae, and Freddie Mac.

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

The aggregate amount of the Corporation's outstanding uninsured deposits was $366.5 million and $407.6 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than or equal to $250,000 was $29.3 million. The table below presents the Corporation's scheduled maturity of those certificates as of December 31, 2021 (in thousands):

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

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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. The CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. The Corporation had no deposits obtained through brokers as of December 31, 2021 and 2020. Deposits placed in the CDARS and ICS programs were $288.1 million and $318.3 million as of December 31, 2021 and 2020, respectively.

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 denovo 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 a 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.

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

Borrowings

FHLBNY overnight advances increased $14.6 million at December 31, 2021 when compared to 2020, for which there were no outstanding FHLBNY advances. For each year ended December 31, 2021, and 2020 respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity. There were no FHLBNY term advances as of and for the years ended December 31, 2021, and 2020.

Information regarding FHLBNY advances is included in Note 9 of the audited Consolidated Financial Statements appearing elsewhere in this report. There were no securities sold under agreements to repurchase as of and for the years ended December 31, 2021, or 2020.

Derivatives

The Corporation offers interest rate swap agreements to qualified commercial loan customers. These agreements allow the Corporation’s customers to effectively fix the interest rate on a variable rate loan by entering into a separate agreement. Simultaneous with the execution of such an agreement with a customer, the Corporation enters into a matching interest rate swap agreement with an unrelated third party provider, which allows the Corporation to continue to receive the variable rate under the loan agreement with the customer. The agreement with the third party is not designated as a hedge contract, therefore changes in fair value are recorded through other non-interest income. Assets and liabilities associated with the agreements are recorded in other assets and other liabilities on the balance sheet. Gains and losses are recorded as other non-interest income. The Corporation is exposed to credit loss equal to the fair value of the interest rate swaps, not the notional amount of the derivatives, in the event of nonperformance by the counterparty to the interest rate swap agreements. Additionally, the swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's consolidated balance sheets, which typically involves a day one gain. Since the terms of the two interest rate swap agreements are identical, the income statement impact to the Corporation is limited to the day one gain and an allowance for credit loss exposure, in the event of nonperformance. The Corporation recognized $0.4 million and $0.5 million for the years ended December 31, 2021 and 2020, respectively.

The Corporation also participates in the credit exposure of certain interest rate swaps in which it participates in the related commercial loan. The Corporation receives an upfront fee for participating in the credit exposure of the interest rate swap and recognizes the fee to other non-interest income immediately. The Corporation is exposed to its share of the credit loss equal to the fair value of the derivatives in the event of nonperformance by the counter-party of the interest rate swap. The Corporation determines the fair value of the credit loss exposure using historical losses of the loan category associated with the credit exposure.

Information regarding derivatives is included in Note 11 to the consolidated financial statements appearing elsewhere in this report.

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Shareholders’ Equity

Total shareholders’ equity was $211.5 million at December 31, 2021, compared with $199.7 million at December 31, 2020, an increase of $11.8 million, or 5.9%, primarily due to an increase in retained earnings. The increase in retained earnings of $20.9 million was due primarily to earnings of $26.4 million offset by $5.6 million in dividends declared during the year. The decrease in accumulated other comprehensive income (loss) of $8.9 million can primarily be attributed to a decrease in the fair market value of the securities portfolio. Treasury stock increased $0.3 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. Total shareholders’ equity to total assets ratio was 8.74% at December 31, 2021 compared with 8.76% at December 31, 2020. Tangible equity to tangible assets ratio increased to 7.91% at December 31, 2021, from 7.87% at December 31, 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, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2021, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines. A comparison of the Bank’s actual capital ratios to the ratios required to be adequately or well-capitalized at December 31, 2021 and 2020, is included in Footnote 20 of the audited Consolidated Financial Statements. For more information regarding current capital regulations see Part I-“Business-Supervision and Regulation-Regulatory Capital Requirements.”

Beginning second quarter of 2021, the Corporation increased quarterly dividends to shareholders 19.2% to $0.31 per share. Cash dividends declared during 2021 totaled $5.6 million, or $1.19 per share, compared to $5.0 million, or $1.04 per share in 2020. Dividends declared during 2021 amounted to 21.02% of net income compared to 25.73% of net income for 2020. Management seeks to continue generating sufficient capital internally, while continuing to pay dividends to the Corporation’s shareholders.

When shares of the Corporation become available in the market, the Corporation may purchase them after careful consideration of the Corporation’s liquidity and capital positions. Purchases may be made from time to time on the open market or in privately negotiated transactions at the discretion of management. On January 8, 2021, the Corporation announced that the Board of Directors approved a stock repurchase program. Under the 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. As of March 11, 2022, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program at the weighted average cost of $40.42 per share. The remaining buyback authority under the share repurchase program was 200,816 shares as of the March 11, 2022.

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.

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 $161.0 million and $89.6 million at December 31, 2021 and 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 were available at December 31, 2021. The Corporation had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which was available at December 31, 2020.

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The PPPLF was created by the Board of Governors of the Federal Reserve System on April 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act. Under the facility, the Federal Reserve Banks lend to participating financial institutions on a non-recourse basis, taking PPP loans as collateral. The Bank participated in the PPPLF and received funding for 141 loans totaling $66.4 million. The Corporation fully repaid the funds on May 28, 2020.

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

Consolidated Cash Flows Analysis

The table below summarizes the Corporation's cash flows for the years indicated (in thousands):

Operating activities

The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through borrowings are sufficient to fund the Corporation’s operating liquidity needs. Cash provided by operating activities in the years ended December 31, 2021 and 2020 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

Cash used in investing activities during the year ended December 31, 2021 predominantly resulted from purchases of securities available for sale, offset by maturities, and principal collected on securities available for sale. Cash used in investing activities during the year ended December 31, 2020 predominantly resulted from purchases of securities available for sale and a net increase in loans, offset by maturities, and principal collected on securities available for sale.

Financing activities

Cash provided by financing activities during the year ended December 31, 2021 resulted from an increase in deposits and FHLBNY overnight advances, offset by the payment of dividends to shareholders and the repurchase of treasury shares through the Corporation's common stock repurchase program. Cash provided by financing activities during the year ended December 31, 2020 predominantly resulted from an increase in deposits, offset by the payment of dividends to shareholders and the repurchase of treasury shares through the Corporation's common stock repurchase program.

Off-balance Sheet Arrangements

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with GAAP are not recorded in the financial statements. The Corporation is also 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, commitments to fund new loans, interest rate swaps, and risk participation agreements. 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.

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The table below shows the Corporation’s off-balance sheet arrangements as of December 31, 2021 (in thousands):

(1) Not included in this total are unused portions of home equity lines of credit, credit card lines and consumer overdraft protection lines of credit, since no contractual maturity dates exist for these types of loans. Commitments to outside parties under these lines of credit were $53.9 million, $6.1 million and $8.9 million, respectively, at December 31, 2021.

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. The community bank leverage ratio requirement returned to 9.0% on January 1, 2022. The Bank has not elected to use the community bank leverage ratio.

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 December 31, 2021 and December 31, 2020 the Corporation and Bank met all capital adequacy requirements to which they were 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 December 31, 2021, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios. 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 December 31, 2021 and 2020 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies. Refer to Note 19 of the audited Consolidated Financial Statements appearing elsewhere in this report for a table summarizing the Corporation's and the Bank's actual and required regulatory capital ratios. For more information regarding current capital regulations see Part I-“Business-Supervision and Regulation-Regulatory Capital Requirements.”

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Dividend Restrictions

The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At December 31, 2021, the Bank could, without prior approval, declare dividends of approximately $38.9 million.

Adoption of New Accounting Standards

For a discussion of the impact of recently issued accounting standards, please see Note 1 to the Corporation's audited Consolidated Financial Statements which begins on page F-10.

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 F-3 through F-9. 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.

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.

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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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Tangible Equity and Tangible Assets (Year-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 equity divided by common shares at year-end. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.

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 year. 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.

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Adjustments for Certain Items of Income or Expense

In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular year by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the year, 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 year 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.

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