CHEMUNG FINANCIAL CORP (CHMG) FY 2023 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, 2023 and 2022, and for the years ended December 31, 2023, and 2022. 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 Chemung Risk Management, Inc. (CRM) in 2016. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services. 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, was formed and began operations on May 31, 2016 as a Nevada-based captive insurance company. Effective December 6, 2023, the State of Nevada, Department of Business and Industry, and the Division of Insurance, acknowledged the dissolution of Chemung Risk Management, Inc.

Forward-looking Statements

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, inflation, cybersecurity risks, changes in FDIC assessments, bank failures, difficulties in managing the Corporation’s growth, competition, changes in law or the regulatory environment, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” of this annual report on Form 10-K. The Corporation's quarterly filings are available publicly on the SEC’s website at http://www.sec.gov, on the Corporation's website 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.

36

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 Credit Losses

Management considers the allowance for credit losses to be a critical accounting estimate, given the uncertainty in estimating lifetime credit losses attributable to its portfolios of assets exhibiting credit risk, particularly in its loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. Determining the amount requires significant judgement on the part of management, is multi-faceted, and can be imprecise. The level of the allowance for credit losses on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions, and expectations of the future based on reasonable and supportable forecasts.

The allowance is established through a provision for credit losses in the Consolidated Statements of Income, and evaluation of the adequacy of the allowance for credit losses is performed by management on a quarterly basis. While management uses available information to anticipate credit losses, future additions to the allowance may be necessary based on changes in economic conditions or the composition of its portfolios. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for credit losses.

Because the Corporation's methodology for maintaining its allowance for credit losses is based on historical experience and trends, current economic information, forecasted data, and management's judgement, a range of estimates for the estimate of the allowance for credit losses may be supportable. Deteriorating conditions may lead to further required increases to the allowance; conversely, improvements to conditions may warrant further reductions to the allowance. In estimating the allowance for credit losses, management considers the sensitivity of the model and significant judgments and assumptions that could result in an amount that is materially different from management’s estimate, including as it relates to qualitative considerations.

As of December 31, 2023, the allowance for credit losses totaled $22.5 million, compared to an allowance for loan losses of $19.7 million as of December 31, 2022. A significant portion of the allowance for credit losses is allocated to the commercial portfolio, both commercial real estate and commercial and industrial. As of December 31, 2023 and December 31, 2022, the allowance for credit losses (allowance for loan losses for December 31, 2022), allocated to the total commercial portfolio was $17.1 million and $14.9 million respectively, or 75.9% and 76.0%. Given the concentration of the allowance for credit losses allocated to the total commercial real estate and commercial and industrial portfolios, and the significant judgments made by management to derive qualitative factors, management closely analyzes the impact that changes in judgments relating to these portfolios could have on the allowance.

Changes in the FOMC's median forecasted year over year U.S. civilian unemployment rate and year over year change in U.S GDP could have a material impact on the model's estimation of the allowance. FOMC projections are sourced from a quarterly Summary of Projections, which accompanies select FOMC meetings. Each participant's projections represent the value to which selected variables would be expected to converge over time under appropriate monetary policy, and considering all currently available information. An immediate "shock" or increase of 100 bps in the FOMC's projected rate of U.S. civilian unemployment, and a decrease of 50 bps in the FOMC's projected rate of U.S. GDP growth would increase the model's total calculated allowance by $1.5 million, or 6.8%, to $24.0 million, assuming qualitative adjustment are kept at current levels.

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

Management’s methodology and policy in determining the allowance for credit losses can be found in Note 1 to the Consolidated Financial Statements included in Part IV, Item 15 of this Annual Report on Form 10-K. The activity in the allowance for credit losses is depicted in supporting tables in Note 4 to the Consolidated Financial Statements included Part IV, Item 15 of this Annual Report on Form 10-K.

37

38

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, 2023 and 2022. For a discussion of the Critical Accounting Estimates that affect the Consolidated Results of Operations, see page 37.

Net Income

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) The Corporation adopted CECL on January 1, 2023.

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

Net income for the year ended December 31, 2023 was $25.0 million, or $5.28 per share, compared with net income of $28.8 million, or $6.13 per share, for the prior year. Return on average equity for the year ended December 31, 2023 was 14.11%, compared with 15.93% for the prior year. The decrease in net income for the year ended December 31, 2023, compared to the prior year, was due to increases in the provision for credit losses and non-interest expenses, offset by increases in non-interest income and net interest income, and a decrease in income tax expense.

Net Interest Income

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

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

39

Net interest income for the year ended December 31, 2023 totaled $74.5 million, an increase of $0.3 million, or 0.4%, compared with $74.2 million for the prior year. Fully taxable equivalent net interest margin was 2.85% for the year ended December 31, 2023 compared with 3.05% for the prior year. The increase in net interest income was primarily due to increases of $29.2 million in interest income on loans, including fees, $2.2 million in interest and dividend income on taxable securities, and $0.3 million in interest income on interest-earning deposits, offset by increases of $29.3 million in interest expense on deposits, and $2.1 million in interest expense on borrowed funds.

The increase in interest income on loans, including fees was due primarily to a 99 basis points increase in the average yield on loans, primarily related to the commercial and consumer loan portfolios due to an increase in interest rates, and a $252.4 million increase in average loan balances. The increases in the average loan balances were primarily concentrated in the commercial loan portfolio, as well as the indirect auto segment of the consumer loan portfolio. The increase in interest and dividend income on taxable securities was due primarily to a 48 basis points increase in the average yield, due to an increase in interest rates on existing variable rate securities, despite a decrease in the average invested balances of $63.6 million, primarily due to paydowns on mortgage-backed and SBA pooled-loan securities. The increase in interest income on interest-earning deposits was due primarily to the increase in interest rates on overnight deposits with the average yield on interest-earning deposits increasing from 1.24% in 2022 to 5.07% in 2023.

The increase in interest expense on deposits was due primarily to a 167 basis points increase in average rates paid on interest-bearing deposits which included brokered deposits, due to the higher interest rate environment, and a shift in the mix of deposits towards higher cost interest-bearing accounts such as time deposits, when compared to the prior year. The increase in interest expense on borrowed funds was due primarily to a $29.1 million increase in the average balances and 266 basis points increase in interest rates of overnight FHLBNY borrowings, when compared to the prior year.

Average interest-earning assets increased $177.0 million in 2023 when compared to the prior year. The average yield on average interest-earning assets increased 98 basis points, and the average cost of interest-bearing liabilities increased 173 basis points, when compared to the prior year, both due to the rising interest rate environment over the past two years.

40

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, 2023, and 2022. It also reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the years ended December 31, 2023, and 2022. 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.

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

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

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

41

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 credit losses

Management performs an ongoing assessment of the adequacy of the allowance for credit losses based on its current expected credit losses (CECL) methodology, which includes loans individually analyzed, as well as loans analyzed on a pooled basis. The Corporation's methodology estimates the lifetime losses in its loan portfolio by utilizing an expected discounted cash flow approach. Based on FOMC forecasted data points, the model is supplemented by qualitative considerations including relevant economic influences, portfolio concentrations, and other external factors. The Corporation adopted the CECL accounting standard on January 1, 2023.

The provision for credit losses for the year ended December 31, 2023 was $3.3 million compared to a credit of $0.6 million for the prior year. The increase was primarily due to a $0.9 million specific allocation on a commercial real estate relationship during 2023, and the impact on the allowance for credit losses methodology of the adoption of CECL as of January 1, 2023.

42

Increased loan volume, and changes to model inputs, including a decline in the prepayment rates of many of the model's loan pools, drove the increase. Declining prepayments impact the application of discounted cash flows by increasing the principal subject to discounting in later periods. Additionally, management increased the qualitative adjustment rate applied to the consumer loan portfolio, considering changes in economic conditions that may not be reflected in the FOMC's forecasted data points, but may adversely impact consumers' financial strength. These increases were offset by relatively favorable changes in the FOMC's forecasted data points. Between December 2022 and December 2023, the FOMC's unemployment projection for year-end 2024 decreased from 4.6% to 4.1%, while the FOMC's projection for year-end U.S. GDP annual growth rate decreased from 1.6% to 1.4%. However, the year-end 2023 projected GDP growth rate, which impacted the model throughout the year, improved from 0.5% to 2.6% between December 2022 and December 2023.

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

Non-interest income

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

Non-interest income for the year ended December 31, 2023 was $24.5 million compared with $21.4 million for the prior year, an increase of $3.1 million, or 14.5%. The increase was due primarily to increases of $2.5 million in other non-interest income, $0.5 million in change in fair value of equity investments, $0.2 million in WMG fee income, and $0.1 million in service charges on deposit accounts.

Other non-interest income

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

Change in Fair Value of Equity Investments

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

Wealth Management Group Fee Income

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

Service Charges on Deposit Accounts

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

43

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 increased $5.0 million, or 8.4% in 2023. The increase was due primarily to increases of $2.5 million in total compensation expenses and $2.5 million in total non-compensation expenses.

Compensation expenses

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

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

Non-compensation expenses

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

The increase in data processing expense was primarily due to ongoing enhancements to our cybersecurity capabilities, outsourced debit card processing to a third-party vendor, and an increase in wealth management software expenses. FDIC insurance expense increased due to an increase in the assessment rate effective January 1, 2023. The increase in other non-interest expense was primarily due to the recapture of $0.2 million in accrued telecommunication expenses during the prior year, and an increase in non-loan charge-offs in the current year.

44

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 decreased to 20.6% for the year ended December 31, 2023 compared with 22.0% for the prior year. The decrease in income tax expense can be primarily attributed to a decrease in pre-tax income.

Financial Condition

The following table presents selected financial information at December 31, 2023 and 2022, 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 decrease in investment securities was primarily due to a decrease of $48.6 million in securities available for sale. Net paydowns on securities available for sale during the year totaled $59.8 million, primarily attributable to paydowns on mortgage-backed securities and SBA pooled-loan securities, partially offset by an increase in the market value of $11.5 million, due to favorable changes in fixed income market valuation during the year. Securities held to maturity decreased $1.6 million due to the sale of securities held by Chemung Risk Management, Inc. relating to its dissolution. In addition, FHLB stock decreased $2.7 million due to lower FHLBNY overnight advance borrowings as of the end of the current year, compared to the the prior year end.

45

Loans, net

The increase in total loans, net, was concentrated in the commercial loan portfolio, which increased $138.1 million, or 11.1%. Commercial demand for financing continues to be strong across the Corporation's footprint, led by commercial real estate activity in the Albany, NY metro area. Consumer loans increased $12.8 million, or 4.3%, primarily driven by strong origination activity in the indirect auto segment. These increases were offset by a decrease of $7.7 million, or 2.7%, in the residential mortgage loan portfolio, due to a decrease in demand, as well as an increase in new originations being sold into the secondary market.

Allowance for Credit Losses

The allowance for credit losses on loans was $22.5 million as of December 31, 2023, and the allowance for loan losses was $19.7 million as of December 31, 2022. The allowance for credit losses on unfunded commitments, a component of other liabilities, was $0.9 million as of December 31, 2023. The increase in the allowance for credit losses, including unfunded commitments, was driven by a $1.5 million adjustment recognized upon adoption of ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), the specific allocation of $0.9 million on a commercial real estate relationship, provisioning related to loan growth, changes in model variables, and qualitative considerations. The $1.5 million one-time implementation adjustment was comprised of $1.1 million reflecting the establishment of an allowance for credit losses on unfunded commitments, and a $0.4 million increase in the allowance for credit losses, reflecting the change in methodology.

During the fourth quarter of 2023, in addition to the $0.9 million specific allocation made in relation to a commercial real estate relationship, the Corporation allocated additional amounts to its allowance for credit losses in accordance with its CECL methodology. One of the inputs utilized by the model is an assumed prepayment rate, calculated at the pool level, and based on a three-year rolling historical average of the Corporation's own prepayment experience. During 2023, prepayment levels declined across most pools of loans, but was especially prevalent amongst residential mortgages. Prepayment speeds had a meaningful impact on the allowance during the fourth quarter. Prepayment assumptions and modeled present value of cash flows have a direct relationship. As prepayment assumptions decline, the modeled present value of cash flows declines, increasing the assumed allowance requirements. Additionally, loan growth, and to a lesser degree, changes in FOMC economic forecasted data points, increased reserve requirements during the fourth quarter.

Goodwill and other intangible assets, net

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

Other Assets

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

Deposits

The growth in deposits was attributable to an increase of $209.9 million in time deposits, or 52.2%, which includes customer time deposits and brokered deposits. Customer time deposits increased $140.6 million, while brokered deposits increased $69.3 million. Interest-bearing demand deposits increased $19.5 million. These increases were offset by decreases of $80.2 million in non-interest bearing demand deposits, $29.9 million in savings deposits, and $17.1 million in insured money market deposits. Non-interest bearing deposits comprised 26.9% and 31.4% of total deposits as of December 31, 2023 and December 31, 2022, respectively.

Capital Lease Obligations and FHLBNY Advances

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

Other Liabilities

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

46

Shareholders’ equity

The increase in shareholders' equity was due primarily to an increase of $18.1 million in retained earnings and a decrease of $9.2 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $25.0 million, offset by $5.9 million in dividends declared and a $1.1 million one-time adjustment due to the implementation of CECL. The improvement in accumulated other comprehensive loss was primarily due to an improvement in the fair value of the available for sale securities portfolio, when compared to the prior year. Treasury stock decreased $1.1 million primarily due to the impact of the issuance of shares related to the Corporation's employee benefit plans.

Assets under management or administration

The market value of total assets under management or administration in WMG was $2.242 billion, including $381.3 million of assets held under management or administration for the Corporation, at December 31, 2023 compared to $2.053 billion, including $346.5 million of assets held under management or administration for the Corporation at December 31, 2022, an increase of $189.4 million, or 9.2%. The increase in total assets under management or administration for the Corporation can be mostly attributed to broad improvements in the financial markets during the year.

Balance Sheet Comparisons

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

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

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

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

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

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

Cash and Cash Equivalents

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

47

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 generally classified as Available for Sale, while certain investments in local municipal obligations are classified as Held to Maturity. The available for sale segment of the securities portfolio totaled $584.0 million at December 31, 2023, a decrease of $48.6 million, or 7.7%, from $632.6 million at December 31, 2022. The decrease was primarily due to $59.6 million in paydowns, and sales of $1.2 million related to the dissolution of CRM, offset by an increase in the fair value of the portfolio of $11.5 million due to decreases in benchmark yields, and purchases of $3.2 million. The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas. These securities totaled $0.8 million at December 31, 2023, a decrease of $1.6 million or 67.6%, from $2.4 million at December 31, 2022, due primarily to maturities, and the dissolution of CRM in 2023.

Non-marketable equity securities at December 31, 2023 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.9 million and $3.6 million, respectively. 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, 2023 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security (in thousands):

The weighted-average yield on the Corporation's held to maturity debt securities at December 31, 2023 was 3.90%, related to obligations of states and political subdivisions. Management evaluates securities for credit loss exposure on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For the years ended December 31, 2023 and 2022, the Corporation had no credit loss charges relating to its investment securities.

48

Loans

The Corporation has reporting systems to monitor: (i) loan origination and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, certain loans made with modifications to borrowers experiencing financial difficulty, and other real estate owned, (iv) loans analyzed on an individual basis for credit risk, and (v) potential problem loans. Management reviews the adequacy of these systems on a regular basis.

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

Portfolio loans totaled $1.973 billion at December 31, 2023 and $1.829 billion at December 31, 2022, an increase of $143.2 million, or 7.8%. The increase was driven by increases of $126.0 million in commercial real estate loans, or 12.6%, $12.1 million, or 4.8% in commercial and industrial loans, and $8.3 million, or 4.1% in indirect auto loans, offset primarily by a decrease in residential mortgages of $7.7 million, or 2.7%.

The increase in total commercial real estate was the result of a $95.4 million increase in commercial mortgages, other, primarily driven by increases in multi-family properties, and a $30.6 million increase in construction loans. Commercial real estate lending continues to be the primary driver of asset growth for the Corporation, as demand for project financing remains robust across the Corporation's footprint, particularly in the Albany and Buffalo regions. At December 31, 2023, commercial real estate loans in the Albany and Buffalo regions have grown $91.5 million and $30.3 million from December 31, 2022, respectively. The increase in commercial and industrial loans was relatively evenly distributed across the Corporation's footprint.

The increase in indirect auto loans was attributable to a renewed focus in the program beginning in late 2021, following a pricing and dealer network restructuring, continuing through 2023, as well as continued robust demand for automobiles coupled with elevated auto pricing nationwide. A decrease in residential mortgage loans was due to weak demand for new originations in the current higher interest rate environment, and lower market mobility due to many borrowers "locking in" lower rates secured in previous years, as well as the Corporation selling a larger proportion of its residential mortgage originations into the secondary market. Mortgage originations held on the balance sheet totaled $20.8 million and mortgage loans originated and sold into the secondary market totaled $6.4 million for the year ended December 31, 2023.

49

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

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 Bank’s concentration policy limits consider the volume of commercial loans to any one specific industry, sponsor, collateral type and location. As of December 31, 2023 and 2022, total non-owner occupied commercial real estate loans divided by total Bank risk based capital was 403.6% and 397.7%, respectively.

The Corporation also monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At December 31, 2023 and 2022, commercial loans to borrowers involved in the real estate, and real estate rental and leasing businesses were 49.5% and 48.3% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of December 31, 2023 and 2022.

Commercial real estate lending represented the largest portion of the Corporation's loan portfolio as of December 31, 2023 and 2022. Commercial real estate lending is comprised of the Construction and Commercial mortgage, other segments of the loan portfolio, as presented in Note 4-Loans and Allowance for Credit Losses. As of December 31, 2023 and 2022, total commercial real estate loans totaled $1.123 billion and $0.997 billion respectively. Management evaluates the risk inherent in its portfolio of commercial real estate loans using a variety of metrics, including but not limited to type, geography, collateral, and borrower or sponsor industry.

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

____________________________________________________________________________________________________________________________________________________________

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

Commercial real estate loans are primarily made within the counties comprising the geographic footprint of the Corporation's physical branch network, as well as to borrowers whose business interests include projects that may be located in counties that are geographically contiguous with the Corporation's physical footprint. The location of collateral securing commercial real estate loans typically mirrors the location of the properties being financed. However, certain commercial real estate loans are secured by property other than the property being financed, and therefore the geographic location of collateral may differ from that of the financed property.

50

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

______________________________________________________________________________________________________

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

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

(3) Erie and Monroe counties of New York

(4) Bradford County, Pennsylvania.

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

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

The Corporation closely monitors economic and credit trends for the industries in which its commercial real estate borrowers are involved. Property types are designated based on the purpose of the collateral securing commercial real estate loans. The table below presents the amortized basis of commercial real estate loans by borrower industry and percentage at December 31, 2023 (in thousands, except percentages):

51

The table below shows the maturity of loans outstanding as of December 31, 2023. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

52

Non-Performing Assets

Non-performing assets consist of non-accrual loans and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure. Effective January 1, 2023, the Corporation adopted ASU 2022-02, which eliminated troubled debt restructuring accounting guidance. Prior to adoption, certain troubled debt restructurings were considered to be non-performing assets. The Corporation monitors loan modifications made to borrowers deemed to be experiencing financial difficulty. As of December 31, 2023, there were five loans being monitored under ASU 2022-02 guidance, three of which were accruing with a total amortized basis of $0.5 million, and two of which were non-accrual, with a total amortized basis of $2.8 million. The non-accrual modifications are included in non-performing loans.

Past due status on all loans is based on the contractual terms of the loan. It is generally the Corporation's policy that a loan 90 days past due be placed on non-accrual status unless factors exist that would eliminate the need to classify a loan as such. A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower. At the time loans are placed in non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its original principal and interest. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal balance has been recovered.

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

NON-PERFORMING ASSETS

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

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

Non-Performing Loans

Non-performing loans totaled $10.4 million at December 31, 2023, or 0.53% of total loans, compared with $8.2 million at December 31, 2022, or 0.45% of total loans. The increase in non-performing loans at December 31, 2023 as compared to December 31, 2022 can primarily be attributed to the addition of one commercial real estate relationship, totaling $3.1 million, comprised of a $2.2 million participation in a construction project, and a $0.9 million credit secured by a negative pledge. This increase was partially offset by the removal of a commercial and industrial loan from non-accrual status, and paydown activity on existing non-performing loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $10.7 million, or 0.40% of total assets, at December 31, 2023, compared with $8.4 million, or 0.32% of total assets, at December 31, 2022. The amortized basis of accruing loans past due 90 days or more was less than $0.1 million at December 31, 2023 and December 31, 2022.

53

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. Previously, the Corporation applied troubled debt restructuring (TDR) accounting guidance for loan modifications made to borrowers experiencing financial difficulty, where a concession was made by the Corporation. Effective January 1, 2023, the Corporation adopted ASU 2022-02, which supersedes TDR guidance. The Corporation monitors modifications made to borrowers experiencing financial difficulty in which the contractual cash flows were directly impacted. Modifications that are included under this guidance include principal reductions, reductions in the effective interest rate, term extensions greater than insignificant payment delays, or a combination thereof. ASU 2022-02 was implemented on a prospective basis, and as of December 31, 2023, the Corporation had five loans that were modified under the new accounting guidance, totaling $3.3 million. The modifications were term extensions on two commercial and industrial loans, one commercial mortgage and one home equity loan, as well as a four month payment delay deemed to be greater than insignificant on a commercial mortgage. As of December 31, 2023, all modifications with the exception of one term extension of six months on a commercial and industrial loan, were considered to be performing under their modified terms. The commercial and industrial loan that was granted a six month extension was not performing under its modified terms, is non-accrual, and totaled $0.9 million.

Individually Analyzed Loans

Effective January 1, 2023, the Corporation began analyzing loans on an individual basis when management determined that the individual loan no longer exhibited risk characteristics consistent with the risk characteristics existing in its designated pool of loans, under the Corporation's CECL methodology. This differs from the definition of loans considered to be impaired as of December 31, 2022. The amortized cost basis of individually analyzed loans at December 31, 2023 totaled $8.0 million, compared to impaired loans of $7.5 million at December 31, 2022. Included in this total were $2.0 million of loans for which specific allocations of $2.0 million were made to the allowance for credit losses. As of December 31, 2022, the impaired loan total included $2.8 million of loans for which specific impairment allowances of $1.1 million were allocated to the allowance for loan losses.

A majority of the Corporation's individually analyzed loans are secured and measured for credit loss based on collateral evaluations.  It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to require individual analysis. A measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. In determining the amount of any specific allocation or charge-off, the Corporation will make adjustments to reflect the estimated costs to sell the property. Upon receipt and review of updated appraisals, an additional measurement is performed to determine if any adjustments are necessary to reflect proper provisioning or charge-offs. Individually analyzed loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs. Real estate values in each of the Corporation's market areas have remained stable. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.

Allowance for Credit Losses

The allowance for credit losses is an amount that management believes will be adequate to absorb the estimated lifetime credit losses inherent in assets exhibiting credit risk as of the measurement date. The allowance is in conformity with the requirements established by ASC 326-Financial Instruments-Credit Losses. The new guidance was adopted effective January 1, 2023, and is a departure from the allowance for loan losses (ALLL) that the Corporation previously estimated using an incurred loss methodology. The allowance covers loans, unfunded commitments, and certain debt securities exhibiting credit risk potential, and incorporates both quantitative and qualitative components.

Loans are analyzed on either an individual basis or a pooled basis, determined by risk characteristics. Loans that no longer exhibit risk characteristics substantially consistent with those of loans analyzed within a given pool may necessitate being analyzed individually, based on management discretion. Individually analyzed loans are primarily valued based on the collateral method, however, select loans may be evaluated using a cash flow analysis. Pooled loans are segmented based on groups of assigned FFIEC call codes, in order to provide enough granularity to meaningfully capture the risk profile of each instrument, yet broad enough to accurately allow for the application of certain pool-level assumptions.

54

Quantitative analysis is based on an estimated discounted cash flow analysis (DCF) performed at the loan level. The modeled reserve requirement equals the difference between the book balance of the instrument at the measurement date and the present value of assumed cash flows for the life of the loan. The underlying assumptions of the DCF are based on the relationship between a projected value of an economic indicator, and the implied historical loss experience amongst a group of curated peers. The Corporation utilized a regression analysis to determine suitable loss drivers for each pool of loans. Based on these results, a probability of default (PD) and loss given default (LGD), is assigned to each potential value of an economic indicator for each pool of loans, and is then applied to the portfolio to derive the statistical loss implications thereof. A hypothetical loss for each period of the DCF, as well as implied recovery of past losses, is incorporated into the DCF. The Corporation relies on FOMC data, including its projections for U.S. civilian unemployment and U.S. GDP growth, as the source for its readily available and reasonable economic forecast. The forecasted values are applied over a rolling four quarter period, and revert to the historic mean of a look back period over an eight quarter period, on a straight-line basis.

Qualitative adjustments represent management's expectation of certain risks not being fully captured in the quantitative portion of the model. Qualitative adjustment rates are applied to each instrument within a pool on a consistent basis. Factors considered as part of the qualitative adjustment analysis include economic considerations not captured by the model, changes in conditions within the Bank such as lending standards, personnel, and concentrations of credit, among others, as well as external factors such as change in the regulatory and competitive landscape.

The allowance for credit losses is increased through a provision for credit losses, which is charged to operations. Separate provision accounts have been established for on-balance sheet credit exposures and off-balance sheet credit exposures, and are combined in the line item "provision for credit losses" on the Corporation's Consolidated Statements of Income. Loans are charged against the allowance for credit losses when management believes that the collectability of all or a portion of the principal is unlikely. Management's evaluation of the adequacy of the allowance for credit losses is performed on a periodic basis and takes into consideration such factors as the outcomes of the quantitative analysis, a review of specific individually analyzed loans, and determinations for qualitative adjustments. While management uses available information to recognize losses on credits, future additions to the allowance may be necessary based on changing economic conditions or portfolio composition. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for credit losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.

The allowance for credit losses was $22.5 million as of December 31, 2023, compared to an allowance for loan losses of $19.7 million as December 31, 2022. The allowance for credit losses was 216.28% of non-performing loans as of December 31, 2023 compared to 240.39% of the allowance for loan losses as of December 31, 2022. The ratio of allowance for credit losses to total loans was 1.14% as of December 31, 2023 and the ratio of allowance for loan losses to total loans was 1.07% as of December 31, 2022, respectively. Including the allowance allocated to unfunded commitments, the ratio of the allowances for credit losses was 1.19% as of December 31, 2023. The increase in the allowance for credit losses was attributable to the impact of the implementation of ASU 2016-13, increased loan volume, the impact of changes in the modeled economic forecasts, and increased qualitative provisioning. The quantitative portion of the ACL model was impacted by improvements in the FOMC forecasted unemployment rate and U.S. GDP growth rate for both year-end 2023 and 2024, which offset additional provisioning relating to lower prepayment assumptions, loan growth, additional qualitative provisioning in the consumer portfolio segment, and specific allocations made on individually analyzed loans.

Net charge-offs for the year ended December 31, 2023 were $0.9 million compared with net charge-offs of $0.8 million for the year ended December 31, 2022. The ratio of net charge-offs (recoveries) to average loans outstanding was 0.05% for 2023 and 2022. Net charge-offs for the year ended December 31, 2023 can primarily be attributed to the $0.3 million charge-off of a commercial and industrial loan, as well as increased consumer charge-offs due to increased loan volume in the Corporation's indirect auto lending portfolio. Net charge-offs for the year ended December 31, 2022 were primarily attributable to a $0.7 million charge off on a commercial real estate loan.

55

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

________________________________________________________________________________________________________________________________________

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

The decrease in the allowance to non-accrual loans was primarily due to a $2.2 million increase in non-accrual loans from year end 2022 to year end 2023, without an equivalent increase in the allowance allocated to non-accrual loans. This was primarily attributable to the addition of a $3.1 million commercial real estate relationship being placed on non-accrual, $2.2 million of which was well-collateralized, and required no specific allowance allocation. The increase in the allowance for credit losses to outstanding loans can be attributed to the $0.9 million specific allocation made to the allowance in relation to the aforementioned non-accruing commercial real estate relationship, a change in methodology to reflect the adoption of CECL, and changes in the CECL model during the year. Refer to Note 4 of the audited Consolidated Financial Statements appearing elsewhere in this report for components used in the credit ratios presented above.

56

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

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

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

Other Real Estate Owned

At December 31, 2023, OREO totaled $0.3 million compared to $0.2 million at December 31, 2022. There were three properties relating to residential mortgages and two properties relating to residential home equity loans added to OREO in 2023. Three residential properties were sold from OREO during 2023.

Deposits

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

57

Deposits totaled $2.429 billion at December 31, 2023, compared with $2.327 billion at December 31, 2022, an increase of $102.2 million, or 4.4%. At December 31, 2023, demand deposit and insured money market deposits comprised 64.5% of total deposits compared with 70.7% at December 31, 2022.

The growth in deposits was attributable to an increase of $209.9 million in time deposits, or 52.2%, which includes customer time deposits and brokered deposits. Customer time deposits increased $140.6 million, and brokered deposits increased $69.3 million. Interest-bearing demand deposits increased $19.5 million. These increases were offset by decreases of $80.2 million in non-interest bearing demand deposits, $29.9 million in savings deposits, and $17.1 million in insured money market deposits, primarily due to the higher interest rate environment, and a shift in the mix of deposits towards higher cost interest-bearing accounts such as time deposits, when compared to the prior year

At December 31, 2023, public funds deposits totaled $293.1 million compared to $298.9 million at December 31, 2022. 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 generally 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, except percentages) as of December 31, 2023 and 2022:

The aggregate amount of the Corporation's outstanding uninsured deposits was $655.7 million, or 27.0% of total deposits, and $700.9 million, or 30.1% of total deposits, as of December 31, 2023 and 2022, respectively. As of December 31, 2023, the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than $250,000 was $76.8 million. The table below presents the Corporation's scheduled maturity of those certificates as of December 31, 2023 (in thousands):

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

58

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 applies to the Corporation's participation in the CDARS and ICS programs. The CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. Deposits placed in the CDARS and ICS programs were $424.6 million and $441.6 million as of December 31, 2023 and 2022, 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) training branch employees to identify and meet client financial needs with Bank products and services, (iii) link business and consumer loans to a primary checking account at the Bank, (iv) aggressively promote direct deposit of client’s payroll checks or benefit checks and (v) constantly monitor the Corporation’s pricing strategies to ensure competitive products and services. The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates continued use of brokered deposits as a secondary source of funding to support asset growth.

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

Borrowings

FHLBNY overnight advances were $31.9 million and $95.8 million at December 31, 2023 and 2022, respectively, decreasing $63.9 million at December 31, 2023 when compared to December 31, 2022. For each year ended December 31, 2023, and 2022 respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity. There were no FHLBNY or FRB term advances as of and for the years ended December 31, 2023, and 2022.

Information regarding FHLBNY advances is included in Note 9 of the audited Consolidated Financial Statements appearing elsewhere in this report. There were no securities sold under agreements to repurchase as of and for the years ended December 31, 2023, or 2022.

Derivatives

The Corporation offers interest rate swap agreements to qualified commercial lending 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 Interest rate swap assets and Interest rate swap liabilities on the Consolidated Balance Sheets. Gains and losses are recorded as other non-interest income. The Corporation is exposed to credit loss equal to the fair value of the interest rate swaps, not the notional amount of the derivatives, in the event of nonperformance by the counterparty to the interest rate swap agreements. Additionally, the swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's Consolidated Balance Sheets, which typically involves a day one gain. Since the terms of the two interest rate swap agreements are identical, the income statement impact to the Corporation is limited to the day one gain and an allowance for credit loss exposure, in the event of nonperformance. The Corporation recognized $0.3 million in swap income for each of the years ended December 31, 2023 and 2022, respectively.

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

59

Shareholders’ Equity

Total shareholders’ equity was $195.2 million at December 31, 2023, compared with $166.4 million at December 31, 2022, an increase of $28.9 million, or 17.3%. The increase in shareholders' equity was due primarily to an increase of $18.1 million in retained earnings and a decrease of $9.2 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $25.0 million, offset by $5.9 million in dividends declared and a $1.1 million one-time adjustment due to the implementation of CECL. The improvement in accumulated other comprehensive loss was primarily due to improvements to the fair value of the available for sale securities portfolio, when compared to the prior year.

Treasury stock decreased $1.1 million primarily due to the Corporation's issuance of shares related to the Corporation's employee benefit plans. Total shareholders’ equity to total assets ratio was 7.20% at December 31, 2023 compared with 6.29% at December 31, 2022. Tangible equity to tangible assets ratio was 6.45% at December 31, 2023, compared with 5.51% at December 31, 2022.1

The Bank is subject to the 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, 2023, 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, 2023 and 2022, 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.”

Cash dividends declared during 2023 totaled $5.9 million, or $1.24 per share, compared to $5.8 million, or $1.24 per share in 2022. Dividends declared during 2023 amounted to 23.41% of net income compared to 20.15% of net income for 2022. 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 Act of 1934. As of December 31, 2023, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program at the weighted average cost of $40.42 per share. The remaining buyback authority under the share repurchase program was 200,816 shares as of December 31, 2023.

On June 22, 2023, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933. The Corporation's Board of Directors approved the filing with the SEC of a Shelf Registration Statement to register for sale from time to time up to $75 million of the following securities: (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 July 13, 2023.

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

60

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing, and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $250,000 or more, brokered deposits, securities sold under agreements to repurchase and other borrowings.

The Corporation is a member of the FHLBNY, which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. The Bank has pledged $254.6 million and $254.4 million of residential mortgage and home equity loans under a blanket lien arrangement at December 31, 2023 and 2022, respectively, as collateral for future borrowings. Based on this available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of $225.3 million, and $195.6 million at December 31, 2023 and 2022, respectively. FHLBNY overnight borrowing was $31.9 million and $95.8 million at December 31, 2023 and 2022, respectively. In addition, the Corporation had a total of $60.0 million of unsecured lines of credit with five different financial institutions, all of which were available at December 31, 2023.

On March 12, 2023, the Treasury Department, Federal Reserve, and FDIC jointly announced a new liquidity program, the Bank Term Funding Program (BTFP), in response to the failure of two banks earlier that week. Under the BTFP, institutions can pledge certain securities (i.e., securities eligible for purchase by the Federal Reserve Banks in open market operations) for the par value of the securities at a borrowing rate of ten basis points over the one-year overnight index swap rate. There will be no fees with the advance. Certain U.S. federally insured depository institutions are eligible to participate in the BTFP. The Bank is eligible to participate. Subsequent to December 31, 2023, the Corporation received approval for, and has pledged collateral at the Federal Reserve for the purpose of utilizing the BTFP. The BTFP expired on March 11, 2024. Also available to the Corporation is the Discount Window Lending provided by the Federal Reserve Bank.

The Corporation has a detailed Funds Management Policy that includes sections on liquidity measurement and management, and a Liquidity Contingency Plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. 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 on a direct basis, 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, 2023 and 2022 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

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

61

Financing activities

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

Off-balance Sheet Arrangements

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.

The table below shows the Corporation’s off-balance sheet arrangements as of December 31, 2023 (in thousands):

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

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, under capitalized, significantly under capitalized, and critically under capitalized, 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, 2023 and December 31, 2022 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.

62

As of December 31, 2023, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios. There have been no conditions or events since that notification that management believes have changed the Bank's capital category. Additionally, the Bank exceeded the capital conservation buffer above the adequately capitalized risk-based capital ratios, as of December 31, 2023.

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

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. At December 31, 2023, the Bank could, without prior approval, declare dividends of approximately $59.4 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-4 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.

63

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.

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.

64

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.

65

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.

66