# Chemung Financial Corp: Form 10-Q for the period ended Sep 30, 2023

- Company: [Chemung Financial Corp](/companies/chmg.md) (CIK 763563)
- Form: 10-Q
- Filed: 2023-11-09
- Accepted by EDGAR: Nov 9, 2023, 17:52 ET
- Period: 2023-09-30
- Accession: 0000763563-23-000079
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/763563/000076356323000079/chmg-20230930.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/763563/000076356323000079/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Interest expense | 3 months, 2023-07-01 to 2023-09-30 | $11.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2023-01-01 to 2023-09-30 | $26.5m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-07-01 to 2023-09-30 | $2.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2023-01-01 to 2023-09-30 | $5.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-07-01 to 2023-09-30 | $7.6m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2023-01-01 to 2023-09-30 | $21.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.61 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2023-01-01 to 2023-09-30 | $4.48 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-07-01 to 2023-09-30 | $1.61 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2023-01-01 to 2023-09-30 | $4.48 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-07-01 to 2023-09-30 | 4,736,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2023-01-01 to 2023-09-30 | 4,729,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2023-01-01 to 2023-09-30 | $27.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2023-01-01 to 2023-09-30 | $459.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2023-01-01 to 2023-09-30 | $4.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2023-01-01 to 2023-09-30 | $98.0k | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-09-30 | $75.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-09-30 | $2.71bn | us-gaap:Assets |
| Total liabilities | at 2023-09-30 | $2.54bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-09-30 | $170.1m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 124,298 characters.

### Introduction

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

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

The Corporation has been a financial holding company since 2000, the Bank was established in 1833, CFS in 2001, and CRM in 2016. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services. The Bank relies substantially on a foundation of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its income primarily from interest and fees on loans, interest income on investment securities, WMG fee income, and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans, and general operating expenses. CRM is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves.

### Forward-looking Statements

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, inflation, cyber security risks, difficulties in managing the Corporation’s growth, recent bank failures, changes in FDIC assessments, competition, changes in law or the regulatory environment, and changes in general business and economic trends.

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

### Critical Accounting Estimates

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

#### Allowance for Credit Losses

The allowance for credit losses (ACL) is management’s estimate of expected lifetime credit losses on financial instruments identified as possessing potential credit risk. The ACL on loans is established through a provision for credit losses recognized in the Corporation’s Consolidated Statements of Income. Additionally, the ACL on loans is reduced by charge-offs and increased by recoveries of amounts previously charged-off. The level of the ACL on loans is based on management’s ongoing review of all relevant information, from internal and external sources, relating to past events, current conditions, and expectations of the future based on reasonable and supportable forecasts.

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

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

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

Changes in the FOMC's median forecasted U.S. civilian unemployment rate and year-over-year change in U.S. GDP could have a material impact on the model's calculated allowance requirements. FOMC projections are sourced from a quarterly Summary of Projections, which accompanies select FOMC meetings. Each participant's projections represent the value to which selected variables would be expected to converge over time under appropriate monetary policy, and considering all information currently available. An immediate increase of 1.0% in the FOMC's projected rate of U.S. civilian unemployment, and a decrease in the FOMC's projected rate of U.S. GDP growth of 0.5% would increase the model's total allowance calculation by $1.7 million, or 8.4%, to $22.0 million, assuming that qualitative adjustments are held at current levels.

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

### Consolidated Financial Highlights

*(in thousands, except per share data)*

*RESULTS OF OPERATIONS*

|  | As of or for the Three Months Ended Sept. 30, 2023 | June 30, 2023 | Mar. 31 2023 | Dec. 31 2022 | Sept. 30, 2022 | As of or for the Nine Months Ended Sept. 30, 2023 | Sept. 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest income | $29,015 | $27,796 | $26,230 | $24,480 | $20,999 | $83,041 | $56,995 |
| Interest expense | 10,998 | 9,201 | 6,283 | 3,609 | 2,009 | 26,482 | 3,687 |
| Net interest income | 18,017 | 18,595 | 19,947 | 20,871 | 18,990 | 56,559 | 53,308 |
| Provision for credit losses | 449 | 236 | 277 | 1,080 | 1,255 | 962 | (1,634) |
| Net interest income after provision for credit losses | 17,568 | 18,359 | 19,670 | 19,791 | 17,735 | 55,597 | 54,942 |
| Non-interest income | 7,808 | 5,447 | 5,423 | 5,418 | 5,036 | 18,678 | 16,018 |
| Non-interest expense | 15,668 | 15,913 | 15,836 | 15,693 | 14,577 | 47,417 | 43,587 |
| Income before income tax expense | 9,708 | 7,893 | 9,257 | 9,516 | 8,194 | 26,858 | 27,373 |
| Income tax expense | 2,060 | 1,613 | 1,987 | 2,077 | 1,741 | 5,660 | 6,029 |
| Net income | $7,648 | $6,280 | $7,270 | $7,439 | $6,453 | $21,198 | $21,344 |
| Basic and diluted earnings per share | $1.61 | $1.33 | $1.54 | $1.58 | $1.37 | $4.48 | $4.55 |
| Average basic and diluted shares outstanding | 4,736 | 4,729 | 4,721 | 4,698 | 4,692 | 4,729 | 4,691 |
| **PERFORMANCE RATIOS - Annualized** |  |  |  |  |  |  |  |
| Return on average assets | 1.14% | 0.95% | 1.12% | 1.15% | 1.02% | 1.07% | 1.16% |
| Return on average equity | 16.89% | 13.97% | 16.97% | 18.36% | 14.17% | 15.93% | 15.23% |
| Return on average tangible equity (a) | 19.22% | 15.89% | 19.40% | 21.25% | 16.12% | 18.15% | 17.23% |
| Efficiency ratio (unadjusted) (a) (f) | 60.67% | 66.19% | 62.42% | 59.69% | 60.67% | 63.02% | 62.87% |
| Efficiency ratio (adjusted) (a) (b) | 66.55% | 65.94% | 62.18% | 59.44% | 60.40% | 64.83% | 62.57% |
| Non-interest expense to average assets | 2.33% | 2.41% | 2.44% | 2.42% | 2.30% | 2.39% | 2.36% |
| Loans to deposits | 78.05% | 79.24% | 80.33% | 78.61% | 74.71% | 78.05% | 74.71% |
| **YIELDS / RATES - Fully Taxable Equivalent** |  |  |  |  |  |  |  |
| Yield on loans | 5.21% | 5.09% | 4.90% | 4.57% | 4.19% | 5.07% | 3.98% |
| Yield on investments | 2.22% | 2.22% | 2.18% | 2.09% | 1.72% | 2.21% | 1.59% |
| Yield on interest-earning assets | 4.40% | 4.29% | 4.12% | 3.82% | 3.41% | 4.27% | 3.18% |
| Cost of interest-bearing deposits | 2.44% | 2.01% | 1.34% | 0.93% | 0.47% | 1.94% | 0.30% |
| Cost of borrowings | 5.25% | 5.13% | 4.91% | 4.30% | 2.56% | 5.04% | 2.17% |
| Cost of interest-bearing liabilities | 2.47% | 2.11% | 1.49% | 0.88% | 0.51% | 2.03% | 0.32% |
| Interest rate spread | 1.93% | 2.18% | 2.63% | 2.94% | 2.90% | 2.24% | 2.86% |
| Net interest margin, fully taxable equivalent (a) | 2.73% | 2.87% | 3.14% | 3.26% | 3.08% | 2.91% | 2.98% |
| **CAPITAL** |  |  |  |  |  |  |  |
| Total equity to total assets at end of period | 6.28% | 6.63% | 6.68% | 6.29% | 6.10% | 6.28% | 6.10% |
| Tangible equity to tangible assets at end of period (a) | 5.52% | 5.87% | 5.91% | 5.51% | 5.29% | 5.52% | 5.29% |
| Book value per share | $35.90 | $37.49 | $37.53 | $35.32 | $33.14 | $35.90 | $33.14 |
| Tangible book value per share (a) | 31.29 | 32.88 | 32.91 | 30.69 | 28.49 | 31.29 | 28.49 |
| Period-end market value per share | 39.61 | 38.41 | 41.50 | 45.87 | 41.87 | 39.61 | 41.87 |
| Dividends declared per share | 0.31 | 0.31 | 0.31 | 0.31 | 0.31 | 0.93 | 0.93 |
| **AVERAGE BALANCES** |  |  |  |  |  |  |  |
| Loans and loans held for sale (c) | $1,909,100 | $1,880,224 | $1,849,310 | $1,787,103 | $1,675,859 | $1,879,765 | $1,599,218 |
| Earning assets | 2,627,012 | 2,609,893 | 2,592,709 | 2,550,834 | 2,457,218 | 2,609,999 | 2,408,379 |
| Total assets | 2,664,570 | 2,649,399 | 2,627,088 | 2,574,639 | 2,511,301 | 2,650,908 | 2,469,631 |
| Deposits | 2,410,931 | 2,363,847 | 2,337,476 | 2,347,719 | 2,257,394 | 2,371,021 | 2,224,190 |
| Total equity | 179,700 | 180,357 | 173,786 | 160,740 | 180,644 | 177,969 | 187,409 |
| Tangible equity (a) | 157,876 | 158,533 | 151,962 | 138,916 | 158,820 | 156,145 | 165,581 |

49

*ASSET QUALITY*

|  | As of or for the Three Months Ended Sept. 30, 2023 | June 30, 2023 | Mar. 31 2023 | Dec. 31 2022 | Sept. 30, 2022 | As of or for the Nine Months Ended Sept. 30, 2023 | Sept. 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net charge-offs | $356 | $146 | $269 | $52 | $109 | $771 | $760 |
| Non-performing loans (d) | 6,826 | 7,304 | 7,731 | 8,178 | 8,310 | 6,826 | 8,310 |
| Non-performing assets (e) | 7,055 | 7,471 | 7,927 | 8,373 | 8,503 | 7,055 | 8,503 |
| Allowance for credit losses (g) | 20,252 | 20,172 | 20,075 | 19,659 | 18,631 | 20,252 | 18,631 |
| Annualized net charge-offs to average loans | 0.07% | 0.03% | 0.06% | 0.01% | 0.03% | 0.05% | 0.06% |
| Non-performing loans to total loans | 0.35% | 0.39% | 0.41% | 0.45% | 0.48% | 0.35% | 0.48% |
| Non-performing assets to total assets | 0.26% | 0.28% | 0.30% | 0.32% | 0.33% | 0.26% | 0.33% |
| Allowance for credit losses to total loans | 1.05% | 1.07% | 1.07% | 1.07% | 1.07% | 1.05% | 1.07% |
| Allowance for credit losses to non-performing loans | 296.69% | 276.17% | 259.66% | 240.39% | 224.21% | 296.69% | 224.21% |
| (a) See the GAAP to Non-GAAP reconciliations. |  |  |  |  |  |  |  |
| (b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less recognition of the employee retention tax credit. |  |  |  |  |  |  |  |
| (c) Loans and loans held for sale do not reflect the allowance for credit losses. |  |  |  |  |  |  |  |
| (d) Non-performing loans include non-accrual loans only. |  |  |  |  |  |  |  |
| (e) Non-performing assets include non-performing loans plus other real estate owned. |  |  |  |  |  |  |  |
| (f) Efficiency ratio (unadjusted) is non-interest expense divided by the total of net interest income plus non-interest income. |  |  |  |  |  |  |  |
| (g) Corporation adopted CECL as of January 1, 2023. |  |  |  |  |  |  |  |

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

### Consolidated Results of Operations

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

#### Net Income

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

|  | Three Months Ended September 30, 2023 | 2022 | Change | % Change | Nine Months Ended September 30, 2023 | 2022 | Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net interest income | $18,017 | $18,990 | $(973) | (5.1)% | $56,559 | $53,308 | $3,251 | 6.1% |
| Non-interest income | 7,808 | 5,036 | 2,772 | 55.0% | 18,678 | 16,018 | 2,660 | 16.6% |
| Non-interest expense | 15,668 | 14,577 | 1,091 | 7.5% | 47,417 | 43,587 | 3,830 | 8.8% |
| Pre-provision income | 10,157 | 9,449 | 708 | 7.5% | 27,820 | 25,739 | 2,081 | 8.1% |
| Provision (credit) for credit losses(1) | 449 | 1,255 | (806) | (64.2)% | 962 | (1,634) | 2,596 | 158.9% |
| Income tax expense | 2,060 | 1,741 | 319 | 18.3% | 5,660 | 6,029 | (369) | (6.1)% |
| Net income | $7,648 | $6,453 | $1,195 | 18.5% | $21,198 | $21,344 | $(146) | (0.7)% |
| Basic and diluted earnings per share | $1.61 | $1.37 | $0.24 | 17.5% | $4.48 | $4.55 | $(0.07) | (1.5)% |

*(1) Effective January 1, 2023, the allowance calculation is based upon the Current Expected Credit loss methodology.*

*Prior to January 1, 2023, the allowance calculation was based upon the incurred loss methodology.*

| Selected financial ratios: | Three Months Ended September 30, 2023 | 2022 | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: | ---: | ---: |
| Return on average assets | 1.14% | 1.02% | 1.07% | 1.16% |
| Return on average equity | 16.89% | 14.17% | 15.93% | 15.23% |
| Net interest margin, fully taxable equivalent (a) | 2.73% | 3.08% | 2.91% | 2.98% |
| Efficiency ratio (adjusted) (a) (b) | 66.55% | 60.40% | 64.83% | 62.57% |
| Non-interest expenses to average assets | 2.33% | 2.30% | 2.39% | 2.36% |
| (a) See the GAAP to Non-GAAP reconciliations. |  |  |  |  |
| (b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less recognition of employee retention tax credit. |  |  |  |  |

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

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

#### Net Interest Income

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

|  | Three Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Interest and dividend income | $29,015 | $20,999 | $8,016 | 38.2% |
| Interest expense | 10,998 | 2,009 | 8,989 | 447.4% |
| Net interest income | $18,017 | $18,990 | $(973) | (5.1)% |

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

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

The increase in interest expense on deposits was due primarily to a 197 basis points increase in average rates paid on interest-bearing deposits which included brokered deposits, due to the higher interest rate environment, and a shift in the mix of deposits towards higher cost interest-bearing accounts such as time deposits, when compared to the same period in the prior year. The average balance of interest-bearing deposits increased $214.1 million in the third quarter 2023, when compared to the same period in the prior year. The increase in interest expense on borrowed funds was due primarily to an increase in interest rates, offset by a $10.4 million decrease in the average balances of overnight FHLBNY borrowings in the current quarter, when compared to the same period in the prior year.

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

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

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

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

|  | Nine Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Interest and dividend income | $83,041 | $56,995 | $26,046 | 45.7% |
| Interest expense | 26,482 | 3,687 | 22,795 | 618.3% |
| Net interest income | $56,559 | $53,308 | $3,251 | 6.1% |

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

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

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

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

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

#### Average Consolidated Balance Sheets and Interest Analysis

The following tables present certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the three and nine months ended September 30, 2023 and 2022. For the purpose of the tables below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans, and dividends on equity investments. Loan fee income of $3 thousand and $0.1 million for the three month periods ended September 30, 2023, and 2022, respectively, related to the Paycheck Protection Program. Loan fee income of $4 thousand and $0.1 million for the nine month periods ended September 30, 2023 and 2022, respectively, related to the Paycheck Protection Program.

*AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS*

*($ in thousands)*

| Interest-earning assets: | Three Months Ended September 30, 2023 Average Balance | Interest | Yield/Rate (3) | Three Months Ended September 30, 2022 Average Balance | Interest | Yield/Rate (3) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial loans | $1,319,110 | $18,672 | 5.62% | $1,164,783 | $13,120 | 4.47% |
| Mortgage loans | 282,578 | 2,572 | 3.61% | 279,102 | 2,389 | 3.40% |
| Consumer loans | 307,412 | 3,843 | 4.96% | 231,974 | 2,211 | 3.78% |
| Taxable securities | 663,240 | 3,540 | 2.12% | 723,602 | 2,985 | 1.64% |
| Tax-exempt securities | 40,380 | 288 | 2.83% | 41,918 | 326 | 3.09% |
| Interest-earning deposits | 14,292 | 187 | 5.19% | 15,839 | 80 | 2.00% |
| Total interest-earning assets | 2,627,012 | 29,102 | 4.40% | 2,457,218 | 21,111 | 3.41% |
| Non-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 26,272 |  |  | 24,494 |  |  |
| Other assets | 31,496 |  |  | 47,256 |  |  |
| Allowance for credit losses (4) | (20,210) |  |  | (17,667) |  |  |
| Total assets | $2,664,570 |  |  | $2,511,301 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing demand deposits | $281,106 | $963 | 1.36% | $258,420 | $112 | 0.17% |
| Savings and insured money market deposits | 890,109 | 3,945 | 1.76% | 927,737 | 575 | 0.25% |
| Time deposits | 383,786 | 3,269 | 3.38% | 232,798 | 430 | 0.73% |
| Brokered deposits | 189,628 | 2,543 | 5.32% | 111,565 | 688 | 2.45% |
| FHLBNY overnight advances | 17,879 | 249 | 5.53% | 28,229 | 173 | 2.43% |
| Long-term capital leases | 3,144 | 29 | 3.66% | 3,417 | 31 | 3.60% |
| Total interest-bearing liabilities | 1,765,652 | 10,998 | 2.47% | 1,562,166 | 2,009 | 0.51% |
| Non-interest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 666,302 |  |  | 726,874 |  |  |
| Other liabilities | 52,916 |  |  | 41,617 |  |  |
| Total liabilities | 2,484,870 |  |  | 2,330,657 |  |  |
| Shareholders' equity | 179,700 |  |  | 180,644 |  |  |
| Total liabilities and shareholders’ equity | $2,664,570 |  |  | $2,511,301 |  |  |
| **Fully taxable equivalent net interest income** |  | 18,104 |  |  | 19,102 |  |
| **Net interest rate spread (1)** |  |  | 1.93% |  |  | 2.90% |
| **Net interest margin, fully taxable equivalent (2)** |  |  | 2.73% |  |  | 3.08% |
| **Taxable equivalent adjustment** |  | (87) |  |  | (112) |  |
| **Net interest income** |  | $18,017 |  |  | $18,990 |  |

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

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

#### (3) Annualized.

#### (4) Corporation adopted CECL as of January 1, 2023.

*AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS*

*($ in thousands)*

| Interest-earning assets: | Nine Months Ended September 30, 2023 Average Balance | Interest | Yield/ Rate (3) | Nine Months Ended September 30, 2022 Average Balance | Interest | Yield/ Rate (3) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial loans | $1,289,638 | $53,047 | 5.50% | $1,116,687 | $34,911 | 4.18% |
| Mortgage loans | 284,351 | 7,553 | 3.55% | 270,484 | 6,798 | 3.36% |
| Consumer loans | 305,776 | 10,673 | 4.67% | 212,047 | 5,953 | 3.75% |
| Taxable securities | 679,330 | 10,758 | 2.12% | 744,503 | 8,542 | 1.53% |
| Tax-exempt securities | 40,562 | 887 | 2.92% | 42,190 | 989 | 3.13% |
| Interest-earning deposits | 10,342 | 400 | 5.17% | 22,468 | 116 | 0.69% |
| Total interest-earning assets | 2,609,999 | 83,318 | 4.27% | 2,408,379 | 57,309 | 3.18% |
| Non-earning assets: |  |  |  |  |  |  |
| Cash and due from banks | 25,512 |  |  | 24,317 |  |  |
| Other assets | 35,547 |  |  | 56,592 |  |  |
| Allowance for credit losses (4) | (20,150) |  |  | (19,657) |  |  |
| Total assets | $2,650,908 |  |  | $2,469,631 |  |  |
| Interest-bearing liabilities: |  |  |  |  |  |  |
| Interest-bearing demand deposits | $286,220 | $1,959 | 0.92% | $275,062 | $219 | 0.11% |
| Savings and insured money market deposits | 899,871 | 8,645 | 1.28% | 948,411 | 1,029 | 0.15% |
| Time deposits | 350,846 | 8,041 | 3.06% | 238,568 | 1,378 | 0.77% |
| Brokered deposits | 153,774 | 5,932 | 5.16% | 38,149 | 697 | 2.44% |
| FHLBNY overnight advances | 47,321 | 1,819 | 5.14% | 18,931 | 271 | 1.91% |
| Long-term capital leases | 3,212 | 86 | 3.58% | 3,483 | 93 | 3.57% |
| Total interest-bearing liabilities | 1,741,244 | 26,482 | 2.03% | 1,522,604 | 3,687 | 0.32% |
| Non-interest-bearing liabilities: |  |  |  |  |  |  |
| Demand deposits | 680,310 |  |  | 724,000 |  |  |
| Other liabilities | 51,385 |  |  | 35,618 |  |  |
| Total liabilities | 2,472,939 |  |  | 2,282,222 |  |  |
| Shareholders' equity | 177,969 |  |  | 187,409 |  |  |
| Total liabilities and shareholders’ equity | $2,650,908 |  |  | $2,469,631 |  |  |
| **Fully taxable equivalent net interest income** |  | 56,836 |  |  | 53,622 |  |
| **Net interest rate spread (1)** |  |  | 2.24% |  |  | 2.86% |
| **Net interest margin, fully taxable equivalent (2)** |  |  | 2.91% |  |  | 2.98% |
| **Taxable equivalent adjustment** |  | (277) |  |  | (314) |  |
| **Net interest income** |  | $56,559 |  |  | $53,308 |  |

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

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

#### (3) Annualized.

#### (4) Corporation adopted CECL as of January 1, 2023.

#### Changes Due to Rate and Volume

Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The tables below illustrates the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three and nine months ended September 30, 2023 and 2022. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purpose of these tables, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.

*RATE/VOLUME ANALYSIS OF NET INTEREST INCOME*

*(in thousands)*

| Interest and dividend income on: | Three Months Ended Sept 30, 2023 vs. 2022 Increase/(Decrease) Total Change | Due to Volume | Due to Rate |
| --- | ---: | ---: | ---: |
| Commercial loans | $5,552 | $1,887 | $3,665 |
| Mortgage loans | 183 | 31 | 152 |
| Consumer loans | 1,632 | 833 | 799 |
| Taxable investment securities | 555 | (265) | 820 |
| Tax-exempt investment securities | (38) | (12) | (26) |
| Interest-earning deposits | 107 | (9) | 116 |
| **Total interest and dividend income, fully taxable equivalent** | 7,991 | 2,465 | 5,526 |
| **Interest expense on:** |  |  |  |
| Interest-bearing demand deposits | 851 | 11 | 840 |
| Savings and insured money market deposits | 3,370 | (25) | 3,395 |
| Time deposits | 2,839 | 430 | 2,409 |
| Brokered deposits | 1,855 | 694 | 1,161 |
| FHLBNY overnight advances | 76 | (81) | 157 |
| Long-term capital leases | (2) | (3) | 1 |
| **Total interest expense** | 8,989 | 1,026 | 7,963 |
| **Net interest income, fully taxable equivalent** | $(998) | $1,439 | $(2,437) |

56

*(in thousands)*

| Interest and dividend income on: | Nine Months Ended Sept. 30, 2023 vs. 2022 Increase/(Decrease) Total Change | Due to Volume | Due to Rate |
| --- | ---: | ---: | ---: |
| Commercial loans | $18,136 | $5,968 | $12,168 |
| Mortgage loans | 755 | 359 | 396 |
| Consumer loans | 4,720 | 3,035 | 1,685 |
| Taxable investment securities | 2,216 | (806) | 3,022 |
| Tax-exempt investment securities | (102) | (37) | (65) |
| Interest-earning deposits | 284 | (94) | 378 |
| **Total interest and dividend income, fully taxable equivalent** | 26,009 | 8,425 | 17,584 |
| **Interest expense on:** |  |  |  |
| Interest-bearing demand deposits | 1,740 | 10 | 1,730 |
| Savings and insured money market deposits | 7,616 | (57) | 7,673 |
| Time deposits | 6,663 | 910 | 5,752 |
| Brokered deposits | 5,235 | 3,828 | 1,408 |
| FHLBNY overnight advances | 1,548 | 728 | 820 |
| Long-term Capital leases | (7) | (7) | — |
| **Total interest expense** | 22,795 | 5,412 | 17,383 |
| **Net interest income, fully taxable equivalent** | $3,214 | $3,013 | $201 |

### Provision for credit losses

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

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

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

The provision for credit losses for the nine months ended September 30, 2023, was $1.0 million compared to a credit of $1.6 million, for the same period in the prior year. The $2.6 million increase in the provision for credit losses in the nine months ended September 30, 2023, when compared to the same period in the prior year, was primarily due to the $2.4 million release of the pandemic related portion of the allowance in 2022, the $1.5 million release of a specific reserve related to the settlement of a large commercial real estate credit, positive impacts of $0.8 million related to upgrades of two large commercial credits, and a $1.0 million decrease in the historical loss factor due to the roll-off of a commercial real estate owner occupied property previously charged off in the second quarter of 2020. These decreases in the provision during the first nine months of 2022 were offset by additional provisioning of $1.7 million related to increased loan growth, along with additional qualitative allocations. Provision in the current period was primarily attributable to increased loan volume, offset by favorable economic forecasts, particularly the FOMC's unemployment forecast in the current period, which improved from 4.5% to 3.8% for year-end-2023, as well as the FOMC's forecast for U.S. GDP growth, which improved from 0.5% to 2.1% for year-end 2023.

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

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

### Non-interest income

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

|  | Three Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| WMG fee income | $2,533 | $2,403 | $130 | 5.4% |
| Service charges on deposit accounts | 1,018 | 989 | 29 | 2.9% |
| Interchange revenue from debit card transactions | 1,141 | 1,126 | 15 | 1.3% |
| Net gains on securities transactions | — | — | — | N/A |
| Changes in fair value of equity investments | (68) | (93) | 25 | 26.9% |
| Net gains on sales of loans held for sale | 67 | 7 | 60 | N/M |
| Net gains (losses) on sales of other real estate owned | — | 22 | (22) | N/M |
| Income from bank owned life insurance | 11 | 12 | (1) | (8.3)% |
| CFS fee and commission income | 243 | 251 | (8) | (3.2)% |
| Other | 2,863 | 319 | 2,544 | 797.5% |
| Total non-interest income | $7,808 | $5,036 | $2,772 | 55.0% |

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

#### Other Non-Interest Income

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

#### WMG Fee Income

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

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

|  | Nine Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| WMG fee income | $7,716 | $7,788 | $(72) | (0.9)% |
| Service charges on deposit accounts | 2,918 | 2,789 | 129 | 4.6% |
| Interchange revenue from debit card transactions | 3,468 | 3,462 | 6 | 0.2% |
| Changes in fair value of equity investments | (99) | (448) | 349 | 77.9% |
| Net gains on sales of loans held for sale | 90 | 106 | (16) | (15.1)% |
| Net gains (losses) on sales of other real estate owned | 14 | 68 | (54) | (79.4)% |
| Income from bank owned life insurance | 32 | 34 | (2) | (5.9)% |
| CFS fee and commission income | 749 | 775 | (26) | (3.4)% |
| Other | 3,790 | 1,444 | 2,346 | 162.5% |
| Total non-interest income | $18,678 | $16,018 | $2,660 | 16.6% |

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

#### Change in Other Non-Interest Income

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

#### Change in Fair Value of Equity Investments

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

#### Change in Service Charges on Deposit Accounts

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

### Non-interest expense

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

| Compensation expense: | Three Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and wages | $6,542 | $6,550 | $(8) | (0.1)% |
| Pension and other employee benefits | 1,979 | 2,024 | (45) | (2.2)% |
| Other components of net periodic pension and postretirement benefits | (174) | (413) | 239 | 57.9% |
| Total compensation expense | 8,347 | 8,161 | 186 | 2.3% |
| **Non-compensation expense:** |  |  |  |  |
| Net occupancy | 1,337 | 1,269 | 68 | 5.4% |
| Furniture and equipment | 353 | 493 | (140) | (28.4)% |
| Data processing | 2,480 | 2,087 | 393 | 18.8% |
| Professional services | 554 | 442 | 112 | 25.3% |
| Marketing and advertising | 218 | 266 | (48) | (18.0)% |
| Other real estate owned expenses | 10 | 12 | (2) | (16.7)% |
| FDIC insurance | 525 | 389 | 136 | 35.0% |
| Loan expenses | 249 | (64) | 313 | 489.1% |
| Other | 1,595 | 1,522 | 73 | 4.8% |
| Total non-compensation expense | 7,321 | 6,416 | 905 | 14.1% |
| Total non-interest expense | $15,668 | $14,577 | $1,091 | 7.5% |

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

#### Compensation expense

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

#### Non-compensation expense

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

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

| Compensation expense: | Nine Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Salaries and wages | $20,029 | $18,829 | $1,200 | 6.4% |
| Pension and other employee benefits | 5,467 | 5,679 | (212) | (3.7)% |
| Other components of net periodic pension and postretirement benefits | (522) | (1,224) | 702 | 57.4% |
| Total compensation expense | 24,974 | 23,284 | 1,690 | 7.3% |
| **Non-compensation expense:** |  |  |  |  |
| Net occupancy | 4,242 | 4,065 | 177 | 4.4% |
| Furniture and equipment | 1,232 | 1,340 | (108) | (8.1)% |
| Data processing | 7,334 | 6,742 | 592 | 8.8% |
| Professional services | 1,596 | 1,627 | (31) | (1.9)% |
| Amortization of intangible assets | — | 15 | (15) | (100.0)% |
| Marketing and advertising | 720 | 726 | (6) | (0.8)% |
| Other real estate owned expenses | 49 | (17) | 66 | 388.2% |
| FDIC insurance | 1,608 | 987 | 621 | 62.9% |
| Loan expenses | 789 | 327 | 462 | 141.3% |
| Other | 4,873 | 4,491 | 382 | 8.5% |
| Total non-compensation expense | 22,443 | 20,303 | 2,140 | 10.5% |
| Total non-interest expense | $47,417 | $43,587 | $3,830 | 8.8% |

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

#### Compensation expense

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

#### Non-compensation expense

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

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

### Income tax expense

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

|  | Three Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Income before income tax expense | $9,708 | $8,194 | $1,514 | 18.5% |
| Income tax expense | 2,060 | 1,741 | 319 | 18.3% |
| Effective tax rate | 21.2% | 21.2% |  |  |

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

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

|  | Nine Months Ended September 30, 2023 | 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Income before income tax expense | $26,858 | $27,373 | $(515) | (1.9)% |
| Income tax expense | 5,660 | 6,029 | (369) | (6.1)% |
| Effective tax rate | 21.1% | 22.0% |  |  |

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

### Financial Condition

The following table presents selected financial information at the dates indicated, and the dollar and percent change (in thousands):

| ASSETS | September 30, 2023 | December 31, 2022 | Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Total cash and cash equivalents | $75,580 | $55,869 | $19,711 | 35.3% |
| Total investment securities, FHLB, and FRB stock | 577,672 | 646,040 | (68,368) | (10.6)% |
| Loans, net of deferred loan fees | 1,930,688 | 1,829,448 | 101,240 | 5.5% |
| Allowance for credit losses | (20,252) | (19,659) | (593) | 3.0% |
| Loans, net | 1,910,436 | 1,809,789 | 100,647 | 5.6% |
| Goodwill and other intangible assets, net | 21,824 | 21,824 | — | —% |
| Other assets | 122,322 | 112,031 | 10,291 | 9.2% |
| Total assets | $2,707,834 | $2,645,553 | $62,281 | 2.4% |
| **LIABILITIES AND SHAREHOLDERS' EQUITY** |  |  |  |  |
| Total deposits | $2,473,499 | $2,327,227 | $146,272 | 6.3% |
| Advances and other debt | 3,120 | 99,137 | (96,017) | (96.9)% |
| Other liabilities | 61,151 | 52,801 | 8,350 | 15.8% |
| Total liabilities | 2,537,770 | 2,479,165 | 58,605 | 2.4% |
| Total shareholders’ equity | 170,064 | 166,388 | 3,676 | 2.2% |
| Total liabilities and shareholders’ equity | $2,707,834 | $2,645,553 | $62,281 | 2.4% |

#### Cash and Cash Equivalents

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

#### Investment securities

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

#### Loans, net

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

#### Allowance for Credit Losses

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

#### Other Assets

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

#### Deposits

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

#### Advances and Other Debt

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

#### Other liabilities

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

#### Shareholders’ equity

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

#### Assets under management or administration

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

### Securities

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

The available for sale segment of the securities portfolio totaled $569.0 million at September 30, 2023, a decrease of $63.6 million, or 10.1%, from $632.6 million at December 31, 2022. The decrease can be mostly attributed to $46.7 million in paydowns, and a decrease in the fair value of the portfolio of $18.2 million. The held to maturity securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled $1.8 million at September 30, 2023 and $2.4 million at December 31, 2022.

Non-marketable equity securities at September 30, 2023 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $2.2 million, respectively. Non-marketable equity securities at December 31, 2022 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $6.4 million, respectively. The fair value of these securities is assumed to approximate their cost. The investment in these stocks is regulated by regulatory policies of the respective institutions.

### Loans

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

The table below presents the Corporation’s loan composition by segment at the dates indicated, and the dollar and percent change from December 31, 2022 to September 30, 2023 ($ in thousands):

*LOAN COMPOSITION*

| Commercial and agricultural: | September 30, 2023 | % of Total Loans | December 31, 2022 | % of Total Loans | Dollar Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $254,215 | 13.2% | $252,044 | 13.8% | $2,171 | 0.9% |
| Agricultural | 269 | —% | 249 | —% | 20 | 8.0% |
| Commercial mortgages: |  |  |  |  |  |  |
| Construction | 140,480 | 7.3% | 108,243 | 5.9% | 32,237 | 29.8% |
| Commercial mortgages | 946,053 | 49.0% | 888,670 | 48.7% | 57,383 | 6.5% |
| Residential mortgages | 281,361 | 14.6% | 285,672 | 15.6% | (4,311) | (1.5)% |
| Consumer loans: |  |  |  |  |  |  |
| Home equity lines and loans | 87,078 | 4.5% | 81,401 | 4.4% | 5,677 | 7.0% |
| Indirect consumer loans | 211,046 | 10.9% | 202,124 | 11.0% | 8,922 | 4.4% |
| Direct consumer loans | 10,186 | 0.5% | 11,045 | 0.6% | (859) | (7.8)% |
| Total | $1,930,688 | 100.0% | $1,829,448 | 100.0% | $101,240 | 5.5% |

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

Commercial real estate lending continues to be the primary driver of asset growth for the Corporation, as demand for project financing remains robust across the Corporation's footprint, particularly in the Albany and Buffalo regions. At September 30, 2023, commercial real estate loans in the Albany and Buffalo regions have grown $60.8 million and $17.0 million from December 31, 2022, respectively.

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

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

*LOANS BY DIVISION*

|  | September 30, 2023 | December 31, 2022 | December 31, 2021 | December 31, 2020 | December 31, 2019 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Chemung Canal Trust Company\*^ | $756,645 | $731,344 | $639,144 | $658,468 | $576,399 |
| Capital Bank Division | 1,174,043 | 1,098,104 | 879,105 | 877,995 | 732,820 |
| Total loans | $1,930,688 | $1,829,448 | $1,518,249 | $1,536,463 | $1,309,219 |

#### \* All loans, excluding those originated by the Capital Bank division.

*^ Includes $95.8 million and $79.8 million as of September 30, 2023 and December 31, 2022, respectively, in the Western New York market.*

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by economic or other conditions. Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At September 30, 2023 and December 31, 2022, commercial loans to borrowers involved in the real estate, and real estate rental and leasing businesses were 49.1% and 48.3% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of September 30, 2023 and December 31, 2022.

The table below shows the maturity of loans outstanding as of September 30, 2023. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

| Commercial and agricultural: | Within One Year | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and industrial | $78,173 | $106,526 | $65,834 | $3,682 | $254,215 |
| Agricultural | — | 84 | 185 | — | 269 |
| Commercial mortgages: |  |  |  |  |  |
| Construction | 34,775 | 33,415 | 71,012 | 1,278 | 140,480 |
| Commercial mortgages | 41,479 | 233,149 | 642,520 | 28,905 | 946,053 |
| Residential mortgages | 3,545 | 9,875 | 118,062 | 149,879 | 281,361 |
| Consumer loans: |  |  |  |  |  |
| Home equity lines and loans | 237 | 5,864 | 57,963 | 23,014 | 87,078 |
| Indirect consumer loans | 1,646 | 100,176 | 109,219 | 5 | 211,046 |
| Direct consumer loans | 340 | 6,479 | 1,940 | 1,427 | 10,186 |
| Total | $160,195 | $495,568 | $1,066,735 | $208,190 | $1,930,688 |

| Loans maturing with fixed interest rates: Commercial and agricultural: | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $65,775 | $31,803 | $434 | $98,012 |
| Agricultural | 16 | 185 | — | 201 |
| Commercial mortgages: |  |  |  |  |
| Construction | 5,205 | 16,887 | 650 | 22,742 |
| Commercial mortgages | 129,063 | 157,946 | 2,752 | 289,761 |
| Residential mortgages | 9,424 | 113,625 | 104,157 | 227,206 |
| Consumer loans: |  |  |  |  |
| Home equity lines and loans | 5,155 | 46,490 | 727 | 52,372 |
| Indirect consumer loans | 100,176 | 109,219 | 5 | 209,400 |
| Direct consumer loans | 6,391 | 981 | 201 | 7,573 |
| Total | $321,205 | $477,136 | $108,926 | $907,267 |

66

| Loans maturing with variable interest rates: Commercial and agricultural: | After One But Within Five Years | After Five But Within 15 Years | After 15 Years | Total |
| --- | ---: | ---: | ---: | ---: |
| Commercial and industrial | $40,429 | $34,348 | $3,248 | $78,025 |
| Agricultural | 68 | — | — | 68 |
| Commercial mortgages: |  |  |  | — |
| Construction | 28,272 | 54,033 | 628 | 82,933 |
| Commercial mortgages | 104,275 | 484,093 | 26,481 | 614,849 |
| Residential mortgages | 520 | 4,741 | 45,342 | 50,603 |
| Consumer loans: |  |  |  | — |
| Home equity lines and loans | 712 | 11,418 | 22,338 | 34,468 |
| Indirect consumer loans | — | — | — | — |
| Direct consumer loans | 87 | 966 | 1,227 | 2,280 |
| Total | $174,363 | $589,599 | $99,264 | $863,226 |

#### Non-Performing Assets

Non-performing assets consist of non-accrual loans and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure. Effective January 1, 2023, the Corporation adopted ASU 2022-02, which eliminated troubled debt restructuring accounting guidance. Prior to adoption, non-accrual troubled debt restructurings were considered to be non-performing assets. The Corporation monitors loan modifications made to borrowers deemed to be experiencing financial difficulty. As of September 30, 2023, there were four loans being monitored under ASU 2022-02 guidance, three of which were accruing, and one of which was non-accrual, and therefore included in non-performing loans.

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

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

*NON-PERFORMING ASSETS*

|  | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Non-accrual loans | $6,826 | $4,143 |
| Non-accrual troubled debt restructurings | — | 4,035 |
| Total non-performing loans | 6,826 | 8,178 |
| Other real estate owned | 229 | 195 |
| Total non-performing assets | $7,055 | $8,373 |
| Ratio of non-performing loans to total loans | 0.35% | 0.45% |
| Ratio of non-performing assets to total assets | 0.26% | 0.32% |
| Ratio of allowance for credit losses to non-performing loans | 296.69% | 240.39% |
| Accruing loans past due 90 days or more (1) | $— | $1 |
| Accruing troubled debt restructurings (1) | $— | $1,405 |

*(1) Not included in non-performing assets above.*

#### Non-Performing Loans

Non-performing loans totaled $6.8 million, or 0.35% of total loans at September 30, 2023, compared to $8.2 million, or 0.45% of total loans at December 31, 2022. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $7.1 million, or 0.26% of total assets, at September 30, 2023, compared to $8.4 million, or 0.32% of total assets, at December 31, 2022. The decrease in non-performing loans can mostly be attributed to paydown activity on non-performing commercial loans, the removal of a large commercial and industrial loan from non-accrual status, and the charge-off of one commercial and industrial loan, offset by the addition of a few smaller commercial loans to non-performing status. The decrease in non-performing assets can be attributed to the decrease in non-performing loans.

#### Loan Modifications to Borrowers Experiencing Financial Difficulty

The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. Previously, the Corporation applied troubled debt restructuring (TDR) accounting guidance for loan modifications made to borrowers experiencing financial difficulty, where a concession was made by the Corporation. Effective January 1, 2023, the Corporation adopted ASU 2022-02, which supersedes TDR guidance. The Corporation monitors modifications made to borrowers experiencing financial difficulty in which the contractual cash flows were directly impacted. Modifications that are included under this guidance include principal reductions, reductions in the effective interest rate, term extensions, or a combination thereof. ASU 2022-02 was implemented on a prospective basis, and as of September 30, 2023, the Corporation had four loans that were modified under the new accounting guidance, term extensions on two commercial mortgages and one home equity loan, as well as a four month payment delay deemed to be greater than insignificant on a commercial mortgage. As of September 30, 2023, the commercial mortgages and home equity loan that were given term extensions were all considered to be performing, while the commercial mortgage that was given a payment delay is currently non-accrual.

#### Individually Analyzed Loans

Effective January 1, 2023, the Corporation began analyzing loans on an individual basis when management determined that the loan no longer exhibited risk characteristics consistent with the risk characteristics existing in its designated pool of loans, under the Corporation's CECL methodology. This differs from the definition of loans considered to be impaired at December 31, 2022. The amortized cost basis of individually analyzed loans at September 30, 2023 totaled $5.0 million, compared to impaired loans of $7.5 million at December 31, 2022. Included in the amortized cost basis of individually analyzed loans at September 30, 2023, were loans totaling $1.2 million for which allowances of $1.1 million have been specifically allocated to the allowance for credit losses. As of December 31, 2022, the impaired loan total included $1.3 million of loans for which specific impairment allowances of $1.1 million were allocated to the allowance for loan losses.

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

#### Allowance for Credit Losses

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

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

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

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

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

The allowance for credit losses was $20.3 million at September 30, 2023, and the allowance for loan losses was $19.7 million at December 31, 2022. The allowance for credit losses was 296.69% of non-performing loans at September 30, 2023 compared to 240.39% of the allowance for loan losses at December 31, 2022. The ratio of allowance for credit losses to total loans was 1.05% at September 30, 2023, and the ratio of the allowance for loan losses to total loans was 1.07% at December 31, 2022. The increase in the allowance for credit losses was attributable to the impact of the implementation of ASU 2016-13, increased loan volume, and the impact of changes in the economic forecasts that the model relies on. The quantitative portion of the ACL model was impacted by improvements in the FOMC forecasted unemployment rate and U.S. GDP growth rate for both year-end 2023 and 2024, which offset additional provisioning relating to loan growth and additional qualitative provisioning in the consumer portfolio segment, in relation to economic headwinds that may adversely impact consumers in coming periods, but are not directly represented in the FOMC's forecasted data points. Net charge-offs for both the nine months ended September 30, 2023 and September 30, 2022 were $0.8 million.

The table below summarizes the Corporation’s allowance for credit losses and non-accrual loans outstanding by loan category at September 30, 2023, and the allowance for loan losses and non-accrual loans outstanding by loan category at December 31, 2022 (in thousands):

*ALLOWANCE BY LOAN CATEGORY*

| Balance at September 30, 2023 | Allowance for credit losses | Allowance to loans1 | Non-performing loans | Non-performing loans to loans1 | Allowance to non-performing loans |
| --- | ---: | ---: | ---: | ---: | ---: |
| Commercial and agricultural | $4,146 | 1.63% | $1,032 | 0.41% | 401.74% |
| Commercial mortgages | 11,025 | 1.01% | 3,824 | 0.35% | 288.31% |
| Residential mortgages | 1,868 | 0.66% | 776 | 0.28% | 240.72% |
| Consumer loans | 3,213 | 1.04% | 1,194 | 0.39% | 269.10% |
| Total | $20,252 | 1.05% | $6,826 | 0.35% | 296.69% |
| **Balance at December 31, 2022** | **Allowance for loan losses** | **Allowance to loans1** | **Non-performing loans** | **Non-performing loans to loans1** | **Allowance to non-performing loans** |
| Commercial and agricultural | $3,373 | 1.34% | $1,946 | 0.77% | 173.33% |
| Commercial mortgages | 11,576 | 1.16% | 3,933 | 0.39% | 294.33% |
| Residential mortgages | 1,845 | 0.65% | 986 | 0.35% | 187.12% |
| Consumer loans | 2,865 | 0.97% | 1,313 | 0.45% | 218.20% |
| Total | $19,659 | 1.07% | $8,178 | 0.45% | 240.39% |
| 1 Ratio is a percentage of loan category. |  |  |  |  |  |

The table below summarizes the Corporation’s consolidated credit ratios at September 30, 2023 and December 31, 2022:

| Consolidated Ratios | September 30, 2023 | December 31, 2022 |
| --- | ---: | ---: |
| Non-performing loans to total loans | 0.35% | 0.45% |
| Allowance for credit losses to total loans (1) | 1.05% | 1.07% |
| Allowance for credit losses, inclusive of unfunded commitments, to total loans (1) | 1.10% | 1.07% |
| Allowance for credit losses to non-performing loans (1) | 296.69% | 240.39% |

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

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

| Credit Ratios | September 30, 2023 | September 30, 2022 |
| --- | ---: | ---: |
| Commercial and agricultural | 0.11% | —% |
| Commercial mortgages | —% | —% |
| Residential mortgages | —% | (0.01)% |
| Consumer loans | 0.16% | 0.07% |
| Total | 0.06% | 0.01% |

70

The table below summarizes the Corporation’s credit loss experience for the nine months ended September 30, 2023 and 2022 (in thousands):

*SUMMARY OF CREDIT LOSS EXPERIENCE*

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Balance of allowance for credit losses at beginning of period | $19,659 | $21,025 |
| Impact of ASC 326 Adoption | 374 | — |
| Charge-offs: |  |  |
| Commercial and agricultural | 281 | 20 |
| Commercial mortgages | — | 687 |
| Residential mortgages | — | — |
| Consumer loans | 785 | 599 |
| Total charge-offs | $1,066 | $1,306 |
| Recoveries: |  |  |
| Commercial and agricultural | 13 | 37 |
| Commercial mortgages | 1 | 3 |
| Residential mortgages | — | 40 |
| Consumer loans | 281 | 466 |
| Total recoveries | $295 | $546 |
| Net charge-offs (recoveries) | 771 | 760 |
| Provision (credit) for credit losses on-balance sheet exposure1 | 990 | (1,634) |
| Balance of allowance for credit losses at end of period | $20,252 | $18,631 |

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

### Other Real Estate Owned

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

### Deposits

The table below summarizes the Corporation’s deposit composition by segment at September 30, 2023, and December 31, 2022, and the dollar and percent change from December 31, 2022 to September 30, 2023 (in thousands):

*DEPOSITS*

|  | September 30, 2023 Amount | % of Total | December 31, 2022 Amount | % of Total | September 30, 2023 v. December 31, 2022 $ Change | % Change |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Non-interest-bearing demand deposits | $683,348 | 27.5% | $733,329 | 31.4% | $(49,981) | (6.8)% |
| Interest-bearing demand deposits | 310,885 | 12.6% | 271,645 | 11.7% | 39,240 | 14.4% |
| Money market accounts | 626,256 | 25.3% | 640,840 | 27.5% | (14,584) | (2.3)% |
| Savings deposits | 261,822 | 10.6% | 279,029 | 12.0% | (17,207) | (6.2)% |
| Certificates of deposit $250,000 or less | 341,045 | 13.8% | 272,182 | 11.7% | 68,863 | 25.3% |
| Certificates of deposit greater than $250,000 | 48,390 | 2.0% | 31,547 | 1.4% | 16,843 | 53.4% |
| Brokered deposits | 175,000 | 7.1% | 73,452 | 3.2% | 101,548 | 138.3% |
| Other time deposits | 26,753 | 1.1% | 25,203 | 1.1% | 1,550 | 6.2% |
| Total | $2,473,499 | 100.0% | $2,327,227 | 100.0% | $146,272 | 6.3% |

71

Deposits totaled $2.473 billion at September 30, 2023 compared to $2.327 billion at December 31, 2022, an increase of $146.3 million, or 6.3%. The increase was primarily attributable to increases of $101.5 million in brokered deposits, $87.3 million in time deposits excluding brokered deposits, and $39.2 million in interest-bearing demand deposits, offset by decreases of $50.0 million in non-interest bearing demand deposits, $17.2 million in savings deposits, and $14.6 million in insured money market accounts. The growth in deposits was due primarily to increases of $101.5 million in brokered deposits, $49.3 million in ICS deposits, $16.5 million in public deposits, and $1.0 million in CDARS deposits, offset by decreases of $13.1 million in consumer deposits, and $9.7 million in commercial deposits. At September 30, 2023, demand deposit and money market accounts comprised 65.5% of total deposits compared to 70.7% at December 31, 2022. The aggregate amount of the Corporation's outstanding uninsured deposits, was 27.2% and 30.1% of total deposits, as of September 30, 2023 and December 31, 2022, respectively.

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

*DEPOSITS BY DIVISION*

|  | September 30, 2023 | December 31, 2022 | December 31, 2021 | December 31, 2020 | December 31, 2019 |
| --- | ---: | ---: | ---: | ---: | ---: |
| Chemung Canal Trust Company\* | $2,081,581 | $1,892,020 | $1,739,826 | $1,686,370 | $1,317,225 |
| Capital Bank Division | 391,918 | 435,207 | 415,607 | 351,404 | 254,913 |
| Total | $2,473,499 | $2,327,227 | $2,155,433 | $2,037,774 | $1,572,138 |

#### \*All deposits, excluding those originated by the Capital Bank division.

In addition to consumer, commercial, and public deposits, other sources of funds include reciprocal deposits. The Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC’s brokered-deposit regulations. This applies to the Corporation's participation in the CDARS and ICS programs. The CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. Brokered deposits include funds obtained through brokers. Deposits obtained through the CDARS and ICS programs were $418.5 million as of September 30, 2023, including $175.0 million of brokered deposits, and $368.2 million as of December 31, 2022, which included $73.5 million of brokered deposits.

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

### Borrowings

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

### Shareholders’ Equity

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

The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. As of September 30, 2023, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.

When shares of the Corporation become available in the market, the Corporation may purchase them after careful consideration of the Corporation’s liquidity and capital positions. Purchases may be made from time to time on the open market or in privately negotiated transactions at the discretion of management. On January 8, 2021, the Corporation's Board of Directors approved a new stock repurchase program. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. No shares were repurchased in the third quarter of 2023. As of September 30, 2023, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program, at the weighted average cost of $40.42 per share. Remaining buyback authority under the share repurchase program was 200,816 shares at September 30, 2023.

### Liquidity

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

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

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

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

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

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

The Corporation also had a total of $60.0 million of unsecured lines of credit with five different financial institutions, all of which was available at September 30, 2023, and $68.0 million of unsecured lines of credit with six different financial institutions, all of which was available at December 31, 2022.

On March 12, 2023, the Treasury Department, Federal Reserve, and FDIC jointly announced a new liquidity program, the Bank Term Funding Program (BTFP), in response to the failure of two banks earlier that week. Under the BTFP, institutions can pledge certain securities (i.e., securities eligible for purchase by the Federal Reserve Banks in open market operations) for the par value of the securities at a borrowing rate of ten basis points over the one-year overnight index swap rate. There will be no fees with the advance. Certain U.S. federally insured depository institutions are eligible to participate in the BTFP. The Bank is eligible to participate, but as of September 30, 2023, the Bank has not participated in the BTFP. The advances, which may have a term of up to one year, may be prepaid by the borrowing institution at any time (including for purposes of refinancing) without penalty. Also available to the Corporation is the Discount Window Lending provided by the Federal Reserve Bank. As of September 30, 2023, the Bank had no collateral held at the Federal Reserve Bank. The Corporation is continually reviewing the option to utilize these sources.

#### Consolidated Cash Flows Analysis

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

*CONSOLIDATED SUMMARY OF CASH FLOWS*

*(in thousands)*

|  | Nine Months Ended September 30, 2023 | 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $27,261 | $32,685 |
| Net cash used in investing activities | (53,842) | (175,576) |
| Net cash provided by financing activities | 46,292 | 158,333 |
| Net increase in cash and cash equivalents | $19,711 | $15,442 |

#### Operating activities

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

#### Investing activities

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

#### Financing activities

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

### Capital Resources

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

Pursuant to the Regulatory Relief Act, the FRB finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020. The Bank has not elected to use the community bank leverage ratio.

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

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

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

The Corporation and the Bank’s capital ratios as of September 30, 2023 were as follows (in thousands, except ratio data):

| As of September 30, 2023 Total Capital (to Risk Weighted Assets): | Actual Amount | Ratio | Minimum Capital Adequacy Amount | Ratio | Minimum Capital Adequacy with Capital Buffer Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | --- | --- | ---: | ---: |
| Consolidated | $258,225 | 13.02% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $248,131 | 12.51% | $158,663 | 8.00% | $208,246 | 10.50% | $198,329 | 10.00% |
| Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |
| Consolidated | $236,919 | 11.94% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $226,825 | 11.44% | $118,997 | 6.00% | $168,580 | 8.50% | $158,663 | 8.00% |
| Common Equity Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |
| Consolidated | $236,919 | 11.94% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $226,825 | 11.44% | $89,248 | 4.50% | $138,830 | 7.00% | $128,914 | 6.50% |
| Tier 1 Capital (to Average Assets): |  |  |  |  |  |  |  |  |
| Consolidated | $236,919 | 8.64% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $226,825 | 8.29% | $109,489 | 4.00% | N/A | N/A | $136,862 | 5.00% |

The Corporation and the Bank’s capital ratios as of December 31, 2022 were as follows (in thousands, except ratio data):

| As of December 31, 2022 Total Capital (to Risk Weighted Assets): | Actual Amount | Ratio | Minimum Capital Adequacy Amount | Ratio | Minimum Capital Adequacy with Capital Buffer Amount | Ratio | To Be Well Capitalized Under Prompt Corrective Action Provisions Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | --- | --- | ---: | ---: |
| Consolidated | $239,478 | 12.57% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $230,560 | 12.10% | $152,414 | 8.00% | $200,044 | 10.50% | $190,518 | 10.00% |
| Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |
| Consolidated | $219,820 | 11.54% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $210,901 | 11.07% | $114,311 | 6.00% | $161,940 | 8.50% | $152,414 | 8.00% |
| Common Equity Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |
| Consolidated | $219,820 | 11.54% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $210,901 | 11.07% | $85,733 | 4.50% | $133,363 | 7.00% | $123,837 | 6.50% |
| Tier 1 Capital (to Average Assets): |  |  |  |  |  |  |  |  |
| Consolidated | $219,820 | 8.23% | N/A | N/A | N/A | N/A | N/A | N/A |
| Bank | $210,901 | 7.91% | $106,616 | 4.00% | N/A | N/A | $133,270 | 5.00% |

76

### Dividend Restrictions

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

### Adoption of New Accounting Standards

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

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

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

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

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

#### 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.

*(in thousands, except ratio data)*

| NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT 2023 | As of the Three Months Ended Sept. 30, 2023 | June 30, 2023 | March 31, 2022 | Dec. 31, 2022 | Sept. 30, 2023 | As of the Nine Months Ended Sept. 30, 2022 | Sept. 30, |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net interest income (GAAP) | $18,017 | $18,595 | $19,947 | $20,871 | $18,990 | $56,559 | $53,308 |
| Fully taxable equivalent adjustment | 87 | 92 | 98 | 112 | 112 | 277 | 314 |
| Fully taxable equivalent net interest income (non-GAAP) | $18,104 | $18,687 | $20,045 | $20,983 | $19,102 | $56,836 | $53,622 |
| Average interest-earning assets (GAAP) | $2,627,012 | $2,609,893 | $2,592,709 | $2,550,834 | $2,457,218 | $2,609,999 | $2,408,379 |
| Net interest margin - fully taxable equivalent (non-GAAP) | 2.73% | 2.87% | 3.14% | 3.26% | 3.08% | 2.91% | 2.98% |

#### Efficiency Ratio

The unadjusted efficiency ratio is calculated as non-interest expense divided by total revenue (net interest income and non-interest income). The adjusted efficiency ratio is a non-GAAP financial measure which represents the Corporation’s ability to turn resources into revenue and is calculated as non-interest expense divided by total revenue (fully taxable equivalent net interest income and non-interest income), adjusted for one-time occurrences and amortization. This measure is meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s productivity measured by the amount of revenue generated for each dollar spent.

*(in thousands, except ratio data)*

| EFFICIENCY RATIO | As of the Three Months Ended Sept. 30, 2023 | June 30, 2023 | March 31, 2023 | Dec. 31, 2022 | Sept. 30, 2022 | As of the Nine Months Ended Sept. 30, 2023 | Sept. 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Net interest income (GAAP) | $18,017 | $18,595 | $19,947 | $20,871 | $18,990 | $56,559 | $53,308 |
| Fully taxable equivalent adjustment | 87 | 92 | 98 | 112 | 112 | 277 | 314 |
| Fully taxable equivalent net interest income (non-GAAP) | $18,104 | $18,687 | $20,045 | $20,983 | $19,102 | $56,836 | $53,622 |
| Non-interest income (GAAP) | $7,808 | $5,447 | $5,423 | $5,418 | $5,036 | $18,678 | $16,018 |
| Less: recognition of employee retention tax credit | (2,370) | — | — | — | — | (2,370) | — |
| Adjusted non-interest income (non-GAAP) | $5,438 | $5,447 | $5,423 | $5,418 | $5,036 | $16,308 | $16,018 |
| Non-interest expense (GAAP) | $15,668 | $15,913 | $15,836 | $15,693 | $14,577 | $47,417 | $43,587 |
| Less: amortization of intangible assets | — | — | — | — | — | — | (15) |
| Less: legal reserve | — | — | — | — | — | — | — |
| Adjusted non-interest expense (non-GAAP) | $15,668 | $15,913 | $15,836 | $15,693 | $14,577 | $47,417 | $43,572 |
| Efficiency ratio (unadjusted) | 60.67% | 66.19% | 62.42% | 59.69% | 60.67% | 63.02% | 62.87% |
| Efficiency ratio (adjusted) | 66.55% | 65.94% | 62.18% | 59.44% | 60.40% | 64.83% | 62.57% |

78

#### Tangible Equity and Tangible Assets (Period-End)

Tangible equity, tangible assets, and tangible book value per share are each non-GAAP financial measures. Tangible equity represents the Corporation’s stockholders’ equity, less goodwill and intangible assets. Tangible assets represents the Corporation’s total assets, less goodwill and other intangible assets. Tangible book value per share represents the Corporation’s tangible equity divided by common shares at period-end. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.

*(in thousands, except per share and ratio data)*

| TANGIBLE EQUITY AND TANGIBLE ASSETS (PERIOD END) 2023 | As of or for the Three Months Ended Sept. 30, 2023 | June 30, 2023 | March 31, 2022 | Dec. 31, 2022 | Sept. 30, 2023 | As of or for the Nine Months Ended Sept. 30, 2022 | Sept. 30, |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total shareholders' equity (GAAP) | $170,064 | $177,426 | $177,341 | $166,388 | $155,518 | $170,064 | $155,518 |
| Less: intangible assets | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) |
| Tangible equity (non-GAAP) | $148,240 | $155,602 | $155,517 | $144,564 | $133,694 | $148,240 | $133,694 |
| Total assets (GAAP) | $2,707,834 | $2,674,673 | $2,654,183 | $2,645,553 | $2,551,422 | $2,707,834 | $2,551,422 |
| Less: intangible assets | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) |
| Tangible assets (non-GAAP) | $2,686,010 | $2,652,849 | $2,632,359 | $2,623,729 | $2,529,598 | $2,686,010 | $2,529,598 |
| Total equity to total assets at end of period (GAAP) | 6.28% | 6.63% | 6.68% | 6.29% | 6.10% | 6.28% | 6.10% |
| Book value per share (GAAP) | $35.90 | $37.49 | $37.53 | $35.32 | $33.14 | $35.90 | $33.14 |
| Tangible equity to tangible assets at end of period (non-GAAP) | 5.52% | 5.87% | 5.91% | 5.51% | 5.29% | 5.52% | 5.29% |
| Tangible book value per share (non-GAAP) | $31.29 | $32.88 | $32.91 | $30.69 | $28.49 | $31.29 | $28.49 |

#### Tangible Equity (Average)

Average tangible equity and return on average tangible equity are each non-GAAP financial measures. Average tangible equity represents the Corporation’s average stockholders’ equity, less average goodwill and intangible assets for the period. Return on average tangible equity measures the Corporation’s earnings as a percentage of average tangible equity. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.

*(in thousands, except ratio data)*

| TANGIBLE EQUITY (AVERAGE) | As of or for the Three Months Ended Sept. 30, 2023 | June 30, 2023 | March 31, 2023 | Dec. 31, 2022 | Sept. 30, 2022 | As of or for the Nine Months Ended Sept. 30, 2023 | Sept. 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Total average shareholders' equity (GAAP) | $179,700 | $180,357 | $173,786 | $160,740 | $180,644 | $177,969 | $187,409 |
| Less: average intangible assets | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) | (21,824) | (21,828) |
| Average tangible equity (non-GAAP) | $157,876 | $158,533 | $151,962 | $138,916 | $158,820 | $156,145 | $165,581 |
| Return on average equity (GAAP) | 16.89% | 13.97% | 16.97% | 18.36% | 14.17% | 15.93% | 15.23% |
| Return on average tangible equity (non-GAAP) | 19.22% | 15.89% | 19.40% | 21.25% | 16.12% | 18.15% | 17.23% |

79

#### Adjustments for Certain Items of Income or Expense

In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular period by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the period, including certain nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative impact on the Corporation’s financial results during the particular period in question. In the Corporation’s presentation of any such non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the supplemental financial information and explanations required under Regulation G.

*(in thousands, except per share and ratio data)*

| NON-GAAP NET INCOME | As of or for the Three Months Ended Sept. 30, 2023 | June 30, 2023 | March 31, 2023 | Dec. 31, 2022 | Sept. 30, 2022 | As of or for the Nine Months Ended Sept. 30, 2023 | Sept. 30, 2022 |
| --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: |
| Reported net income (GAAP) | $7,648 | $6,280 | $7,270 | $7,439 | $6,453 | $21,198 | $21,344 |
| Recognition of employee retention tax credit | (1,873) | — | — | — | — | (1,873) | — |
| Non- GAAP net income | $5,775 | $6,280 | $7,270 | $7,439 | $6,453 | $19,325 | $21,344 |
| Average basic and diluted shares outstanding | 4,736 | 4,729 | 4,721 | 4,698 | 4,692 | 4,729 | 4,691 |
| Reported basic and diluted earnings per share (GAAP) | $1.61 | $1.33 | $1.54 | $1.58 | $1.37 | $4.48 | $4.55 |
| Reported return on average assets (GAAP) | 1.14% | 0.95% | 1.12% | 1.15% | 1.02% | 1.07% | 1.16% |
| Reported return on average equity (GAAP) | 16.89% | 13.97% | 16.97% | 18.36% | 14.17% | 15.93% | 15.23% |
| Non-GAAP basic and diluted earnings per share | $1.21 | $1.33 | $1.54 | $1.58 | $1.37 | $4.08 | $4.55 |
| Non-GAAP return on average assets | 0.86% | 0.95% | 1.12% | 1.15% | 1.02% | 0.97% | 1.16% |
| Non-GAAP return on average equity | 12.75% | 13.97% | 16.97% | 18.36% | 14.17% | 14.52% | 15.23% |

80

## Market risk

As filed, 5,019 characters.

### Interest Rate Risk

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

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

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

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

| Change in interest rates | Percentage Increase (Decrease) in Net Interest Income over 12 Months |
| --- | ---: |
| 100 basis points decrease | 3.78% |
| 200 basis points decrease | 6.16% |
| 100 basis points increase | 1.59% |
| 200 basis points increase | 3.16% |

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

| Change in interest rates | Percentage Increase (Decrease) in Present Value of Corporation's Equity |
| --- | ---: |
| 100 basis points decrease | 4.36% |
| 200 basis points decrease | 6.96% |
| 100 basis points increase | 0.50% |
| 200 basis points increase | 1.17% |

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

### Credit Risk

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

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

## Controls and procedures

As filed, 1,601 characters.

### Evaluation of Disclosure Controls and Procedures

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

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

## Risk factors

As filed, 4,232 characters.

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

***Recent events involving the failure of financial institutions may adversely affect our business, and the market price of our common stock.***

Recent developments and events in the financial services industry, including the large-scale deposit withdrawals over a short period of time at Silicon Valley Bank and First Republic Bank, and the liquidity management practices at Signature Bank, that resulted in the failure of those institutions have resulted in decreased confidence in banks among depositors, other counterparties and investors, as well as significant disruption, volatility and reduced valuations of equity and other securities of banks in the capital markets. These events have occurred against the backdrop of a rapidly rising interest rate environment which, among other things, resulted in unrealized losses in longer duration securities and loans held by banks, more competition for bank deposits and may increase the risk of a potential recession.

These events and developments could materially and adversely impact our business or financial condition, including through liquidity pressures, reduced net interest margins, and potential increased credit losses. These recent events and developments have, and could continue to, adversely impact the market price and volatility of our common stock. These recent events may also result in changes to laws or regulations governing banks and bank holding companies or result in the impositions of restrictions through supervisory or enforcement activities, including higher capital requirements, which could have a material impact on our businesses. The cost of resolving the recent failures may prompt the FDIC to increase its premiums above the recently increased levels or to issue additional special assessments.

An unexpected decrease in deposit balances due to withdrawal activity could adversely impact the Corporation's ability to rely on organic deposits to primarily fund its operations, requiring greater reliance on secondary sources of liquidity to meet withdrawal demands or to fund continuing operations. These sources include proceeds from Federal Home Loan Bank advances, sales of investment securities and loans, lines of credit from correspondent banks, and out-of-market time deposits.

In response to these events, the Treasury Department, Federal Reserve, and FDIC jointly announced the Bank Term Funding Program (BTFP) on March 12, 2023. This program aims to enhance liquidity, allowing institutions to pledge certain securities at par value, and at a borrowing rate of ten basis points over the one-year overnight index swap rate. The BTFP is available to eligible U.S. federally insured depository institutions, with advance terms of up to one year and no prepayment penalties. As of the date of the release of the Unaudited Consolidated Financial Statements, the Corporation has not accessed the BTFP.

Such reliance on secondary funding sources could increase the Corporation's overall cost of funding and thereby reduce net income. While the Corporation believes its current sources of liquidity are adequate to fund operations, there is no guarantee they will suffice to meet future liquidity demands. This may necessitate slowing or discontinuing loan growth, capital expenditures, other investments, or liquidating assets.

For further discussion of the Corporation's liquidity practices, see pages 73-75 of this Form 10-Q.

Filed Nov 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000763563-23-000079. Last ingested by Listed: Oct 24, 2026, 14:54 ET. No prices; not investment advice.