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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K

☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2020 OR

☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _______________ to _____________
Commission File Number 0-13888
CHEMUNG FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)

New York |  | 16-1237038
(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)
One Chemung Canal Plaza, Elmira, New York |  | 14901
(Address of principal executive offices) |  | (Zip Code)

Registrant's telephone number, including area code: (607) 737-3711

Securities registered pursuant to Section 12(b) of the Act:
Title of each class |  | Trading Symbol |  | Name of each exchange on which registered
Common Stock, Par Value $0.01 Per Share |  | CHMG |  | Nasdaq Stock Market, LLC
Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer | ☐ | Accelerated filer | ☐ | Non-accelerated filer | ☒ | Smaller Reporting Company | ☒ | Emerging Growth Company | ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
I f an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Based upon the closing price of the registrant's Common Stock as of June 30, 2020, the aggregate market value of the voting stock held by non-affiliates of the registrant was $103,726,256.
As of March 12, 2021, there were 4,661,598 shares of Common Stock, $0.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on June 8, 2021 are incorporated by reference into Part III, Items 10, 11, 12, 13, and 14 of this Form 10-K.

CHEMUNG FINANCIAL CORPORATION
ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2020

Form 10-K Item Number: |  | Page No.
PART I |  |  | 6
Item 1. | Business |  | 6
Item 1A. | Risk Factors |  | 21
Item 1B. | Unresolved Staff Comments |  | 32
Item 2. | Properties |  | 32
Item 3. | Legal Proceedings |  | 34
Item 4. | Mine Safety Disclosures |  | 34
PART II |  |  | 35
Item 5. | Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 35
Item 6. | Selected Financial Data |  | 38
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |  | 41
Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |  | 79
Item 8. | Financial Statements and Supplementary Data |  | 79
Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |  | 80
Item 9A. | Controls and Procedures |  | 80
Item 9B. | Other Information |  | 80
PART III |  |  | 81
Item 10. | Directors, Executive Officers and Corporate Governance |  | 81
Item 11. | Executive Compensation |  | 81
Item 12. | Security Ownership of Certain Beneficial Owners and Management, and Related Stockholder Matters |  | 81
Item 13. | Certain Relationships and Related Transactions, and Director Independence |  | 81
Item 14. | Principal Accountant Fees and Services |  | 81
PART IV |  |  | 82
Item 15. | Exhibits and Financial Statement Schedules |  | 82
Item 16. | Form 10-K Summary |  | 83
| Index to Consolidated Financial Statements |  | 84
| Report of Independent Registered Public Accounting Firm-Crowe LLP |  | F-1
| SIGNATURES |  | F-66

Some of the information contained in this report concerning the markets and industry in which we operate is derived from publicly available information and from industry sources. Although we believe that this publicly available information and information provided by these industry sources are reliable, we have not independently verified the accuracy of any of this information.
To assist the reader, the Corporation has provided the following list of commonly used abbreviations and terms included in Parts I through IV.
Abbreviations

AFS | Available for sale securities
ALCO | Asset-Liability Committee
AOCI | Accumulated Other Comprehensive Income
ASC | Accounting Standards Codification
ASU | Accounting Standards Update
Bank | Chemung Canal Trust Company
Basel I | The First Basel Accord of the Basel Committee on Banking Supervision
Basel III | The Third Basel Accord of the Basel Committee on Banking Supervision
BHCA | Bank Holding Company Act of 1956
Board of Directors | Board of Directors of Chemung Financial Corporation
BOLI | Bank Owned Life Insurance
CAM | Common area maintenance charges
CARES Act | Coronavirus Aid, Relief, and Economic Security Act
CAPM | Capital Asset Pricing Model
CBLR | Community Bank Leverage Ratio
CDARS | Certificate of Deposit Account Registry Service
CDO | Collateralized Debt Obligation
CECL | Current expected credit loss
CFPB | Consumer Financial Protection Bureau
CFS | CFS Group, Inc.
Corporation | Chemung Financial Corporation
COVID-19 | Coronavirus disease 2019
CRA | Community Reinvestment Act
CRM | Chemung Risk Management, Inc.
DIF | Deposit Insurance Fund
Dodd-Frank Act | The Dodd-Frank Wall Street Reform and Consumer Protection Act
ECOA | Equal Credit Opportunity Act
EPS | Earnings per share
Exchange Act | Securities Exchange Act of 1934
FACT Act | Fair and Accurate Credit Transactions Act of 2003
FASB | Financial Accounting Standards Board
FCRA | Fair Credit Reporting Act
FDIA | Federal Deposit Insurance Act
FDIC | Federal Deposit Insurance Corporation
FFIEC | Federal Financial Institution Examination Council
FHLBNY | Federal Home Loan Bank of New York
FICO | Financing Corporation
FINRA | Financial Industry Regulatory Authority
FOFC | Fort Orange Financial Corporation
FRB | Board of Governors of the Federal Reserve System
FRBNY | Federal Reserve Bank of New York

2

Freddie Mac | Federal Home Loan Mortgage Corporation
FTC | Federal Trade Commission
GAAP | U.S. Generally Accepted Accounting Principles
GLB Act | Gramm-Leach-Bliley Act
HTM | Held to maturity securities
ICS | Insured Cash Sweep Service
IFRS | International Financial Reporting Standards
IPS | Investment Policy Statement
LIBOR | London Interbank Offered Rate
MD&A | Management’s Discussion and Analysis of Financial Condition and Results of Operations
NAICS | North American Industry Classification System
N/M | Not meaningful
NYSDFS | New York State Department of Financial Services
OCC | Office of the Comptroller of the Currency
OPEB | Other postemployment benefits
OREO | Other real estate owned
OTTI | Other-than-temporary impairment
PCI | Purchased credit impaired
PPP | Paycheck Protection Program
Regulatory Relief Act | The Economic Growth, Regulatory Relief and Consumer Protection Act of 2018
RESPA | Real Estate Settlement Procedures Act
Riegle-Neal Act | Riegle-Neal Interstate Banking and Branching Efficiency Act
ROA | Return on average assets
ROE | Return on average equity
RWA | Risk-weighted assets
SOFR | Secured Overnight Financing Rate
SBA | Small Business Administration
SEC | U.S. Securities and Exchange Commission
Security Guidelines | Interagency Guidelines Establishing Information Security Standards
Securities Act | Securities Act of 1933
Sarbanes-Oxley | Sarbanes-Oxley Act of 2002
Tax Act | Tax Cuts and Jobs Act of 2017
TDRs | Troubled debt restructurings
TILA | Truth in Lending Act
TRID Rule | TILA-RESPA Integrated Disclosure Rule
USA PATRIOT Act | Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001
WMG | Wealth Management Group

Terms

Accumulated benefit obligation | An approximate measure of the pension plan liability, which is based on the assumption that the pension plan is to be terminated immediately and does not consider any future salary increases.
Allowance for loan losses to total loans | Represents period-end allowance for loan losses divided by retained loans.
Assets under administration | Represents assets that are beneficially owned by clients and all investment decisions pertaining to these assets are also made by clients.
Assets under management | Represents assets that are managed on behalf of clients.

3

Basel I | A set of international banking regulations, which set out the minimum capital requirements of financial institutions with the goal of minimizing credit risk. The main focus was mainly on credit risk by creating a bank asset classification system.
Basel III | A comprehensive set of reform measures designed to improve the regulation, supervision, and risk management within the banking sector. The reforms require banks to maintain proper leverage ratios and meet certain capital requirements.
Benefit obligation | Refers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.
Capital Bank | Division of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany and Saratoga.
Captive insurance company | A company that provides risk-mitigation services for its parent company.
CDARS | Product involving a network of financial institutions that exchange certificates of deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Collateralized debt obligation | A structured financial product that pools together cash flow-generating assets, such as mortgages, bonds, and loans.
Collateralized mortgage obligations | A type of mortgage-backed security with principal repayments organized according to their maturities and into different classes based on risk. The mortgages serve as collateral and are organized into classes based on their risk profile.
Dodd-Frank Act | The Dodd-Frank Act was enacted on July 21, 2010 and significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires various federal agencies to adopt a broad range of new rules and regulations, and to prepare various studies and reports for Congress.
Economic Growth, Regulatory Relief, and Consumer Protection Act | The Economic Growth, Regulatory Relief, and Consumer Protection Act was signed on May, 24 2018 and repeals or modifies certain provisions to the Dodd-Frank Act and will ease certain regulations on all but the largest banks.
Fully taxable equivalent basis | Income from tax-exempt loans and investment securities that have been increased by an amount equivalent to the taxes that would have been paid if this income were taxable at statutory rates; the corresponding income tax impact related to tax-exempt items is recorded within income tax expense.
GAAP | Accounting principles generally accepted in the United States of America.
Holding company | Consists of the operations for Chemung Financial Corporation (parent only).
ICS | Product involving a network of financial institutions that exchange interest-bearing money market deposits among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution.
Loans held for sale | Residential real estate loans originated for sale on the secondary market with maturities from 15-30 years.
Long term lease obligation | An obligation extending beyond the current year, which is related to a long term capital lease that is considered to have the economic characteristics of asset ownership.
Mortgage-backed securities | A type of asset-backed security that is secured by a collection of mortgages.
Municipal clients | A political unit, such as a city, town, or village, incorporated for local self-government.
N/A | Data is not applicable or available for the period presented.
N/M | Data is not meaningful in context presented.
Non-GAAP | A calculation not made according to GAAP.
Obligations of state and political subdivisions | An obligation that is guaranteed by the full faith and credit of a state or political subdivision that has the power to tax.
Obligations of U.S. Government | A federally guaranteed obligation backed by the full power of the U.S. government, including Treasury bills, Treasury notes and Treasury bonds.

4

Obligations of U.S. Government sponsored enterprise obligations | Obligations of agencies originally established or chartered by the U.S. government to serve public purposes as specified by the U.S. Congress; these obligations are not explicitly guaranteed as to the timely payment of principal and interest by the full faith and credit of the U.S. government.
OREO | Represents real property owned by the Corporation, which is not directly related to its business and is most frequently the result of a foreclosure on real property.
OTTI | Impairment charge taken on a security whose fair value has fallen below the carrying value on the balance sheet and whose value is not expected to recover through the holding period of the security.
PCI loans | Represents loans that were acquired in the Fort Orange Financial Corp. transaction and deemed to be credit-impaired on the acquisition date in accordance with the guidance of FASB.
Political subdivision | A county, city, town, or other municipal corporation, a public authority, or a publicly-owned entity that is an instrumentality of a state or a municipal corporation.
Pre-provision profit/(loss) | Represents total net revenue less non-interest expense, before income tax expense (benefit). The Corporation believes that this financial measure is useful in assessing the ability of a bank to generate income in excess of its provision for credit losses.
Projected benefit obligation | An approximate measure of the pension plan liability, which is based on the assumption that the plan will not terminate in the near future and that employees will continue to work and receive future salary increases.
Regulatory Relief Act | The Regulatory Relief Act was signed on May, 24 2018 and repeals or modifies certain provisions to the Dodd-Frank Act and will ease certain regulations on all but the largest banks.
RWA | Risk-weighted assets, which is used to calculate regulatory capital ratios, consist of on- and off-balance sheet assets that are assigned to one of several broad risk categories and weighted by factors representing their risk and potential for default. On-balance sheet assets are risk-weighted based on the perceived credit risk associated with the obligor or counterparty, the nature of any collateral, and the guarantor, if any. Off-balance sheet assets such as lending-related commitments, guarantees, derivatives and other applicable off-balance sheet positions are risk-weighted by multiplying the contractual amount by the appropriate credit conversion factor to determine the on-balance sheet credit equivalent amount, which is then risk-weighted based on the same factors used for on-balance sheet assets. Risk-weighted assets also incorporate a measure for market risk related to applicable trading assets-debt and equity instruments. The resulting risk-weighted values for each of the risk categories are then aggregated to determine total risk-weighted assets.
SBA loan pools | Business loans partially guaranteed by the SBA.
Securities sold under agreements to repurchase | Sale of securities together with an agreement for the seller to buy back the securities at a later date.
Tax Act | The Tax Act was enacted on December 22, 2017 and amended the Internal Revenue Code of 1986. The legislation reduced the U.S. federal corporate income tax rate from 35 percent to 21 percent, with some related business deductions and credits being either reduced or eliminated.
TDR | A TDR is deemed to occur when the Corporation modifies the original terms of a loan agreement by granting a concession to a borrower that is experiencing financial difficulty.
Trust preferred securities | A hybrid security with characteristics of both subordinated debt and preferred stock which allows for early redemption by the issuer, makes fixed or variable payments, and matures at face value.
Unaudited | Financial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.
WMG | Provides services as executor and trustee under wills and agreements, and guardian, custodian, trustee and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, financial planning, pension, estate planning and employee benefit administration services.

5

PART I
ITEM 1. BUSINESS
General
The Corporation was incorporated on January 2, 1985 under the laws of the State of New York and is headquartered in Elmira, NY. The Corporation was organized for the purpose of acquiring the Bank. The Bank was established in 1833 under the name Chemung Canal Bank, and was subsequently granted a New York State bank charter in 1895. In 1902, the Bank was reorganized as a New York State trust company under the name Elmira Trust Company, and its name was changed to Chemung Canal Trust Company in 1903.
The Corporation became a financial holding company in June 2000. Financial holding company status provided the Corporation with the flexibility to offer an array of financial services, such as insurance products, mutual funds, and brokerage services, which provide additional sources of fee based income and allow the Corporation to better serve its customers. The Corporation established a financial services subsidiary, CFS, in September 2001 which offers non-banking financial services such as mutual funds, annuities, brokerage services, insurance and tax preparation services. The Corporation established a captive insurance subsidiary, CRM, based in the State of Nevada in May 2016, which insures gaps in commercial coverage and uninsured exposures in the Corporation's current insurance coverages and allows the Corporation to strengthen its overall risk management program.
The Corporation’s Board of Directors has concluded that the expansion of the franchise’s geographic footprint, an increase in the Bank’s interest earning assets, and the generation of new sources of non-interest income are important components of its strategic plan. Over the last 13 years, the Corporation and the Bank have completed the following transactions to grow the franchise:
•On March 14, 2008, the Bank acquired three branches from Manufacturers and Traders Trust Company in the New York counties of Broome and Tioga. At the time of the acquisition, the Bank assumed $64.4 million in deposits and acquired $12.6 million in loans.
•On May 29, 2009, the Corporation acquired Canton Bancorp, Inc., the holding company of Bank of Canton based in Canton, Pennsylvania. At the time of the merger, Canton Bancorp, Inc. had $81.1 million in assets, $58.8 million in loans and $72.9 million in deposits.
•On April 8, 2011, the Corporation acquired FOFC, the holding company of Capital Bank & Trust Company based in Albany, New York. At the time of the merger, Capital Bank had $254.4 million in assets, $170.7 million in loans and $199.2 million in deposits.
•On November 23, 2013, the Bank completed the acquisition of six branch offices from Bank of America located in Cayuga, Cortland, Seneca, and Tompkins counties in New York. As part of the transaction, the Corporation acquired $177.7 million in deposits and $1.2 million in loans.
•On October 21, 2020, the Corporation entered a new market, establishing a Loan Production Office in the Buffalo Metropolitan Area. The Corporation plans to open a full service branch at the same location pending final approval from the NYSDFS and FRBNY.
As a result of these transactions and organic growth, the Corporation had $2.279 billion in consolidated assets, $1.536 billion in loans, $2.038 billion in deposits, and $199.7 million in shareholders’ equity at December 31, 2020.
Growth Strate g y
The Corporation’s growth strategy is to leverage its branch and digital network in current or new markets to build client relationships and grow loans and deposits. Consistent with the Corporation’s community-banking model, emphasis is placed on acquiring stable, low-cost deposits, such as checking account deposits and other low interest-bearing deposits to fund high-quality loans. The Corporation evaluates acquisition targets based on the economic viability of their markets, the degree to which they can be effectively integrated into the Corporation’s current operations and the degree to which they are accretive to capital and earnings.
6

Description of Business
The Corporation, through the Bank and CFS, 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 derives its income primarily from interest and fees on loans, interest on investment securities, WMG fee income, and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans and general operating expenses.
CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
In order to compete with other financial services companies, the Corporation relies upon personal relationships established with clients by its officers, employees, and directors. The Corporation has maintained a strong community orientation by supporting the active participation of officers and employees in local charitable, civic, school, religious, and community development activities. The Corporation believes that its emphasis on local relationship banking together with a prudent approach to lending are important factors in its success and growth.
For additional information, including information concerning the results of operations of the Corporation and its subsidiaries, see Management's Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7. There were no material changes in the manner of doing business by the Corporation or its subsidiaries during the fiscal year ended December 31, 2020. For additional information concerning the effect of COVID-19 on our business, please refer to pages 57-58.
Lending Activities
Lending Strategy
The Corporation’s objective is to channel deposits gathered locally into high-quality, market-yielding loans without taking unacceptable credit and/or interest rate risk. The Corporation seeks to have a diversified loan portfolio consisting of commercial and agricultural loans, commercial mortgages, residential mortgages, home equity lines of credit and home equity term loans, consumer and indirect automobile loans. The Bank operates with a traditional community bank model where the relationship manager possesses credit skills and has significant influence over credit decisions. This creates value since clients and prospects know they are dealing with a decision maker.
Lending Authority
The Board of Directors establishes the lending policies, underwriting standards, and loan approval limits of the Bank. In accordance with those policies, the Board of Directors has designated certain officers to consider and approve loans within their designated authority. These officers exercise substantial authority over credit and pricing decisions, subject to loan committee approval for larger credits. The Bank recognizes that exceptions to the lending policies may occasionally occur and has established procedures for approving exceptions to these policies.
In underwriting loans, primary emphasis is placed on the borrower’s financial condition, including ability to generate cash flow to support the debt and other cash expenses. In addition, substantial consideration is given to collateral value and marketability as well as the borrower’s character, reputation and other relevant factors. Interest rates charged by the Bank vary with degree of risk, type, size, complexity, repricing frequency, and other relevant factors associated with the loans. Competition from other financial services companies also impacts interest rates charged on loans.
The Corporation has also implemented reporting systems to monitor loan originations, loan quality, concentration of credit, loan delinquencies, non-performing loans, and potential problem loans.
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Lending Segments
The Bank segments its loan portfolio into the following major lending categories: (i) commercial and agricultural, (ii) commercial mortgages, (iii) residential mortgages, and (iv) consumer loans.
Commercial and agricultural loans primarily consist of loans to small to mid-sized businesses in the Bank's market area in a diverse range of industries. These loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value. The credit risk related to commercial loans is largely influenced by general economic conditions and the resulting impact on a borrower’s operations or on the value of underlying collateral, if any.
Commercial mortgage loans generally have larger balances and involve a greater degree of risk than residential mortgage loans, and they, therefore, pose higher potential losses on an individual customer basis. Loan repayment is often dependent on the successful operation and management of the properties and/or the businesses occupying the properties, as well as on the collateral securing the loan. Economic events or conditions in the real estate market could have an adverse impact on the cash flows generated by properties securing the Bank’s commercial real estate loans and on the value of such properties.
The Bank offers interest rate swaps to certain larger commercial mortgage borrowers. These swaps allow the Bank to originate a mortgage based on short-term LIBOR rates and allow the borrower to swap into a longer term fixed rate. The Bank simultaneously sells an offsetting back-to-back swap to an investment grade national bank so that it does not retain this fixed-rate risk. The swap agreements are free-standing derivatives and are recorded at fair value in the Bank's consolidated balance sheets. In December 2020, the administrator of LIBOR announced its intention to (i) cease the publication of the one-week and two-month U.S. dollar LIBOR after December 31, 2021, and (ii) cease the publication of all other tenors of U.S. dollar LIBOR (one, three, six and 12 month LIBOR) after June 30, 2023. The Corporation is reviewing its loans to determine alternate reference rates.
The Bank offers fixed-rate and adjustable-rate residential mortgage loans to individuals with maturities of up to 30 years that are fully amortizing with monthly loan payments. Mortgages are generally underwritten according to U.S. government sponsored enterprise guidelines designated as "A" or "A-" and referred to as "conforming loans". The Bank also originates jumbo loans above conforming loan amounts which generally are consistent with secondary market guidelines for these loans; however, these are typically held for investment. The Bank does not offer a subprime mortgage lending program. The Bank's secondary market lending is sold on a servicing-retained basis. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and are secured by real property whose value tends to be more easily ascertainable. Credit risk for these types of loans is generally influenced by general economic conditions, the characteristics of individual borrowers and the nature of the loan collateral.
The consumer loan segment includes home equity lines of credit and home equity loans, which exhibit many of the same risk characteristics as residential mortgages. Indirect and other consumer loans may entail greater credit risk than residential mortgage and home equity loans, particularly in the case of other consumer loans which are unsecured or, in the case of indirect consumer loans, secured by depreciable assets, such as automobiles, recreational vehicles, or boats. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, thus are more likely to be affected by adverse personal circumstances such as job loss, illness, or personal bankruptcy. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.
Funding Activities
Funding Strategy
The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and 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. 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.
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Funding Sources
The Corporation’s primary sources of funds are deposits, principal and interest payments on loans and securities, borrowings and funds generated from operations of the Bank. The Bank also has access to advances from the FHLBNY, other financial institutions, and the FRBNY. Contractual loan payments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general market interest rates and economic conditions.
The Corporation considers core deposits, consisting of non-interest-bearing and interest-bearing checking accounts, savings accounts, and insured money market accounts, to be a significant component of its deposits. The Corporation monitors the activity on these core deposits and, based on historical experience and pricing strategy, believes it will continue to retain a large portion of such accounts. The Bank is currently not limited with respect to the rates that it may offer on deposit products. The Bank believes it is competitive in the types of accounts and interest rates it has offered on its deposit products. The Bank regularly evaluates the internal cost of funds, surveys rates offered by competitors, reviews cash flow requirements for lending and liquidity, and executes rate changes when necessary as part of its asset/liability management, profitability and growth strategies.
The flow of deposits is influenced significantly by general economic conditions, changes in prevailing interest rates and competition. The Bank’s deposits are obtained predominantly from the areas in which its retail offices are located. The Bank relies primarily on customer service, long-standing relationships and other banking services, including loans and wealth management services, to attract and retain these deposits. However, market interest rates and rates offered by competing financial institutions affect the Bank’s ability to attract and retain deposits. The Bank utilizes a combination of traditional media, including print, television, and radio, as well as digital advertising, such as social media, display, OTT (over-the-top) streaming and eBlasts, when advertising its deposit products.
Investment Activities
The general objective of the Bank's investment portfolio is to provide liquidity when loan demand is high, and to absorb excess funds when demand is low. The securities portfolio also provides a medium for certain interest risk measures intended to maintain an appropriate balance between interest income from loans and total interest income. The Bank only invests in high-quality investment-grade securities such as mortgage-backed securities and obligations of states and political subdivisions. Investment decisions are made in accordance with the Bank's investment policy and include consideration of risk, return, duration, and portfolio concentrations.
Derivative Financial Instruments
The Bank offers interest rate swaps to commercial loan customers who wish to fix the interest rates on their loans, and the Bank matches these swaps with offsetting swaps with national bank counterparties. These swaps are considered free standing derivatives and are carried at fair value on the consolidated balance sheet in other assets and other liabilities, with gains and losses recorded through other non-interest income. The swaps are not designated as hedging derivatives. Additionally, the Bank participates in risk participation agreements with dealer banks on commercial loans in which it participates. The Bank may receive an upfront fee for participating in the credit exposure of the interest rate swap associated with the commercial loan in which it is a participant and the fee received is recognized immediately in other non-interest income. The Bank is exposed to its share of the credit loss equal to the fair value of the interest rate swap in the event of nonperformance by the counterparty of the interest rate swap.
The Bank has a policy for managing its derivative financial instruments, and the policy and program activity are overseen by ALCO. Under the policy, derivative financial instruments with counterparties, who are not customers, are limited to a national financial institution. Cash and/or certain qualified securities are required to serve as collateral when exposures exceed $100 thousand, with a minimum collateral coverage of $150 thousand. The credit worthiness of the customer is reviewed internally by the Bank's credit department.
Wealth Management Strategy
With $2.091 billion of assets under management or administration at December 31, 2020, including $305.5 million of assets held under management or administration for the Corporation, WMG is responsible for the largest component of the Corporation's non-interest income. Wealth management services provided by the Bank include services as executor and trustee under wills and agreements, and guardian, custodian, trustee, and agent for pension, profit-sharing and other employee benefit trusts, as well as various investment, pension, estate planning, and employee benefit administrative services. The Corporation’s growth strategy also includes the acquisition of trust businesses to generate new sources of fee income.
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Market Area and Competition
The Bank operates 30 branch offices located in 12 counties in New York and Bradford County in Pennsylvania. Bank branch offices are located in the following New York counties: Chemung, where the Bank is headquartered, Broome, Cayuga, Cortland, Schuyler, Seneca, Steuben, Tioga and Tompkins. The Bank also operates under the name “Capital Bank, a division of Chemung Canal Trust Company,” with branch offices located in Albany, Saratoga, and Schenectady counties in New York.
Albany, Saratoga, and Schenectady counties rely heavily on business related to New York State government activities, the nanotechnology industry, and colleges located within these counties. Tompkins County is dominated by the presence of Cornell University and Ithaca College. The world headquarters of Corning Incorporated, the region’s largest employer, is located in Steuben County. The remaining New York counties have a combination of service, small manufacturing and tourism related businesses, with colleges located in Broome, Chemung, and Cortland counties. Bradford County's largest employers are a combination of service and small manufacturing businesses, along with the natural gas industry.
Within all these market areas, the Bank encounters intense competition in the lending and deposit gathering aspects of its business from local, regional and national commercial banks and thrift institutions, credit unions and other providers of financial services, such as brokerage firms, investment companies, insurance companies and internet banking entities. The Bank also competes with non-financial institutions, including retail stores and certain utilities that maintain their own credit programs, as well as governmental agencies that make loans to certain borrowers. Many of these competitors are not subject to regulation as extensive as that affecting the Bank and, as a result, may have a competitive advantage over the Bank in certain respects. This is particularly true of credit unions because their pricing structure is not encumbered by the payment of income taxes.
Similarly, the competition for the Bank's wealth management services is primarily from local offices of national brokerage firms, independent investment advisors, national and regional banks as well as internet based brokerage and advisory firms. The Bank operates full-service wealth management centers in Chemung, Broome, and Albany counties in New York.
As disclosed in the Corporation's Current Report on Form 8-K, dated October 21, 2020, the Corporation entered a new market, with the establishment of a Loan Production Office in the Buffalo Metropolitan Area. After New York City, this region is the second largest population center in New York State. Erie County has a diverse mix of industrial, light manufacturing, high technology and service-oriented private sector companies. The region also has reliance on higher education with the University of Buffalo, Buffalo State College as well as several private colleges. The region's largest employers are affiliated with the healthcare industry, primarily located in the medical corridor. The Corporation plans to open a full service branch at the same location pending final approval from the NYSDFS and FRBNY.
Human Capital Resources
In order to accomplish our mission to remain a strong, independent financial-services organization and create value for shareholders, clients, employees and the communities we serve, we must attract and retain the highest quality talent in each of our markets. We offer an inclusive, safe and healthy work environment, maintain the highest standards of business ethics and provide opportunities for career development and advancement, along with a competitive benefits package.
Employee Profile
As of December 31, 2020 we employed 341 full time equivalent employees in 31 locations in New York and Pennsylvania. This represents a decline of 17 full time equivalent employees over the past year. During much of the COVID-19 pandemic, a hiring freeze was instituted in an effort to improve our efficiency company-wide. As of December 31, 2020 our workforce was 70% female and 30% male, and our average tenure was 8.6 years. We continue to focus on diversity and inclusion among our workforce.
Total Rewards
We offer a competitive total rewards package for all employees, including competitive base pay, incentive plans for all employees, a 401(k) match, a non-discretionary company 401(k) contribution, health and dental insurance, life insurance, company contributions to a health savings account, paid time off, family leave, flexible work schedules, tuition reimbursement, and the opportunity to volunteer in the community during work hours.
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Health and Safety
The health, safety and well-being of our employees is paramount to the success of our business. In addition to our insurance offerings and leave programs, we offer an employee assistance program, along with welfare programs, fitness reimbursement, and an on-site flu-shot clinic. In response to the COVID-19 pandemic we made arrangements for many employees to work remotely, installed safety shields, provided on-going safety messaging, posted COVID-19 awareness literature in common areas, enhanced our cleaning protocol, set up screening stations in all locations, and worked closely with the Department of Health. In addition, we followed all state, local and CDC guidelines.
Talent
We believe investing in our employees not only helps with retention, but also keeps employees engaged and focused. We encourage all employees to join career circles, find a mentor, apply for our leadership program, job shadow, and attend our internal career fair. The success of our company depends on the success of our employees.
Available Information
The SEC maintains a web site at www.sec.gov that contains reports, proxy and information statements, and other information regarding the Corporation. In addition, the Corporation maintains a corporate web site at www.chemungcanal.com. The Corporation makes available free of charge through the Bank's web site its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any amendments to those reports filed with the SEC pursuant to Section 13(a) or 15(d) of the Exchange Act. These items are available as soon as reasonably practicable after we electronically file or furnish such material with the SEC. The contents of the Bank's web site are not a part of this report. These materials are also available free of charge by written request to: Kathleen S. McKillip, Corporate Secretary, Chemung Financial Corporation, One Chemung Canal Plaza, Elmira, NY 14901.
Supervision and Regulation
The Corporation and the Bank are subject to comprehensive regulation, supervision and examination by regulatory authorities. Numerous statutes and regulations apply to the Corporation’s and, to a greater extent, the Bank’s operations, including required reserves, investments, loans, deposits, issuances of securities, payments of dividends and establishment of branches. Set forth below is a brief description of some of these laws and regulations. The description does not purport to be complete, and is qualified in its entirety by reference to the text of the applicable laws and regulations.
The Corporation
Bank Holding Company Act
The Corporation is a bank holding company registered with, and subject to regulation and examination by, the FRB pursuant to the BHCA, as amended. The FRB regulates and requires the filing of reports describing the activities of bank holding companies, and conducts periodic examinations to test compliance with applicable regulatory requirements. The FRB has enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders, and to require a bank holding company to divest subsidiaries.
The Corporation generally may engage in the activities permissible for a bank holding company, which includes banking, managing or controlling banks, performing certain servicing activities for subsidiaries, and engaging in other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto, as set forth in the FRB's Regulation Y. As the Corporation has elected financial holding company status, it may also engage in a broader range of activities that are determined by the FRB and the Secretary of the Treasury to be financial in nature or incidental to financial activities or, with the prior approval of the FRB, activities that are determined by the FRB to be complementary to a financial activity and that do not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally.
The BHCA prohibits a bank holding company from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, or increasing such ownership or control of any bank, without the prior approval of the FRB.
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Interstate Banking and Branching
Under the Riegle-Neal Act, subject to certain concentration limits and other requirements, adequately capitalized bank holding companies, such as the Corporation, are permitted to acquire banks and bank holding companies located in any state. Any bank that is a subsidiary of a bank holding company is permitted to receive deposits, renew time deposits, close loans, service loans, and receive loan payments as an agent for any other bank subsidiary of that bank holding company. Subject to certain conditions, banks are permitted to acquire branch offices outside of their home states by merging with out-of-state banks, purchasing branches in other states, and establishing de novo branch offices in other states.
In April 2008, banking regulators in the states of New Jersey, New York, and Pennsylvania entered into a Memorandum of Understanding (the "Interstate MOU") to clarify their respective roles, as home and host state regulators, regarding interstate branching activity on a regional basis pursuant to the Riegle-Neal Amendments Act of 1997. The Interstate MOU established the regulatory responsibilities of the respective state banking regulators regarding bank regulatory examinations and is intended to reduce the regulatory burden on state-chartered banks branching within the region by elimination duplicative host state compliance exams.
Under the Interstate MOU, the activities of branches the Bank established in Pennsylvania would be governed by New York state law to the same extent that the Federal law governs the activities of the branch of an out-of-state national bank in such host states. Issues regarding whether a particular host state law is preempted are to be determined in the first instance by the NYSDFS. In the event that the NYSDFS and the applicable host state regulator disagree regarding whether a particular host state law is pre-empted, the NYSDFS and the applicable host state regulator would use their reasonable best efforts to consider all points of view to resolve the disagreement.
New York Law
The Corporation is organized under New York law and is subject to the New York Business Corporation Law, which governs the rights and obligations of directors and shareholders and other corporate matters.
The Corporation is also a bank holding company as defined in the New York Banking Law by virtue of its ownership and control of the Bank. Generally, this means that the NYSDFS must approve the Corporation’s acquisition of control of other banking institutions and similar transactions.
Federal Securities Law
The Corporation is subject to the information, reporting, proxy solicitation, insider trading, and other rules contained in the Exchange Act, the disclosure requirements of the Securities Act and the regulations of the SEC thereunder. In addition, the Corporation must comply with the corporate governance and listing standards of the Nasdaq Stock Market to maintain the listing of its common stock on the exchange. These standards include rules relating to a listed company's board of directors, audit committees and independent director oversight of executive compensation, the director nomination process, a code of conduct and shareholder meetings.
The SEC has adopted certain proxy disclosure rules regarding executive compensation and corporate governance, with which the Corporation must comply. They include: (i) disclosure of total compensation of key officers of the Corporation, including disclosure of restricted and unrestricted stock awards compensation; (ii) disclosure regarding any potential conflict of interest of any compensation consultants of the Corporation; (iii) disclosure regarding compensation committee independence and experience, qualifications, skills and diversity of its directors and any director nominees; (iv) “say-on-pay” disclosure; and (v) information relating to the leadership structure of the Corporation’s Board of Directors and the Board of Directors' role in the risk management process.
Sarbanes-Oxley
The Corporation is also subject to Sarbanes-Oxley. Sarbanes-Oxley established laws affecting public companies’ corporate governance, accounting obligations, and corporate reporting by: (i) creating a federal accounting oversight body; (ii) revamping auditor independence rules; (iii) enacting corporate responsibility and governance measures; (iv) enhancing disclosures by public companies, their directors, and their executive officers; (v) strengthening the powers and resources of the SEC; and (vi) imposing criminal and civil penalties for securities fraud and related wrongful conduct.
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The SEC has adopted regulations under Sarbanes-Oxley, including: (i) executive compensation disclosure rules; (ii) standards of independence for directors who serve on the Corporation’s audit committee; (iii) disclosure requirements as to whether at least one member of the Corporation’s audit committee qualifies as a “financial expert” as defined in SEC regulations; (iv) whether the Corporation has adopted a code of ethics applicable to its chief executive officer, chief financial officer, or those persons performing similar functions; (v) and disclosure requirements regarding the operations of Board of Directors' nominating committees and the means, if any, by which security holders may communicate with directors.
Support of Subsidiary Banks
The Dodd-Frank Act, discussed in the section of this document entitled “Additional Important Legislation and Regulation,” codifies the FRB’s long-standing policy of requiring bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Accordingly, the Corporation is expected to commit resources to support its banking subsidiaries, including at times when it may not be advantageous for the Corporation to do so.
Capital Distributions
A bank holding company is generally required to give the FRB prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The FRB may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, FRB order or directive, or any condition imposed by, or written agreement with, the FRB. There is an exception to this approval requirement for well-capitalized bank holding companies that meet certain other conditions.
The FRB has issued a policy statement regarding capital distributions, including dividends, by bank holding companies. In general, the FRB’s policies provide that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the bank holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition. Under applicable laws, the ability of a bank holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. In addition, the FRB has issued guidance which requires consultation with the agency prior to a bank holding company’s payment of dividends or repurchase or redemption of its stock under certain circumstances. These regulatory policies could affect the ability of the Corporation to pay dividends, repurchase its stock or otherwise engage in capital distributions.
The Bank
General
The Bank is a commercial bank chartered under the laws of New York State and is supervised by the NYSDFS. The Bank also is a member bank of the FRB and, therefore, the FRB serves as its primary federal regulator. The FDIC insures the Bank’s deposit accounts up to applicable limits. The Bank must file reports with the FFIEC, the FRB and the FDIC concerning its activities and financial condition and must obtain regulatory approval before commencing certain activities or engaging in transactions such as mergers and other business combinations or the establishment, closing, purchase or sale of branch offices. This regulatory structure gives the regulatory authorities extensive discretion in the enforcement of laws and regulations and the supervision of the Bank.
Loans to One Borrower
The Bank generally may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its unimpaired capital and surplus. Up to an additional 10% of unimpaired capital and surplus can be lent if the additional amount is fully secured by certain readily marketable collateral. At December 31, 2020, the Bank’s legal lending limit on loans to one borrower was $28.5 million for loans not fully secured by readily marketable collateral and $31.3 million for loans secured by readily marketable collateral. The Bank’s internal limit on loans is set at $15.0 million. At December 31, 2020, the Bank did not have any loans or agreements to extend credit to a single or related group of borrowers in excess of its legal lending limit.
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Branching
Subject to the approval of the NYSDFS and FRB, New York-chartered member commercial banks may establish branch offices anywhere within New York State, except in communities having populations of less than 50,000 inhabitants in which another New York-chartered commercial bank or a national bank has its principal office. Additionally, under the Dodd-Frank Act, state-chartered banks may generally branch into other states to the same extent as commercial banks chartered under the laws of that state may branch.
Payment of Dividends
The Bank is subject to substantial regulatory restrictions affecting its ability to pay dividends to the Corporation. Under FRB and NYSDFS regulations, the Bank may not pay a dividend without prior approval of the FRB and the NYSDFS if the total amount of all dividends declared during such calendar year, including the proposed dividend, exceeds the sum of its retained net income to date during the calendar year and its retained net income over the preceding two calendar years. As of December 31, 2020, approximately $36.1 million was available for the payment of dividends by the Bank to the Corporation without prior approval. The Bank's ability to pay dividends also is subject to the Bank being in compliance with regulatory capital requirements. The Bank is currently in compliance with these requirements.
Federal Reserve System
The FRB regulations required banks to maintain noninterest-earning reserves against their transaction accounts, such as negotiable order of withdrawal and regular checking accounts. In March 2020, due to a change in its approach to monetary policy, the FRB announced an interim rule to amend Regulation D requirements and reduce reserve requirement ratios to zero. The FRB finalized the interim rule in December 2020 and has indicated that it has no plans to re-impose reserve requirements, but may do so in the future if conditions warrant.
Standards for Safety and Soundness
The FRB has adopted guidelines prescribing safety and soundness standards. These guidelines establish general standards relating to capital adequacy, asset quality, management, earnings performance, liquidity and sensitivity to market risk. In evaluating these safety and soundness standards, the FRB considers internal controls and information systems, internal audit systems, loan documentation, credit underwriting, exposure to changes in interest rates, asset growth, compensation, fees, and benefits. In general, the guidelines require appropriate systems and practices to identify and manage the risks and exposures specified in the guidelines. The FRB may order an institution that has been given notice that it is not satisfying these safety and soundness standards to submit a compliance plan, and if an institution fails to do so, the FRB must issue an order directing action to correct the deficiency and may issue an order directing other action. If an institution fails to comply with such an order, the FRB may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Real Estate Lending Standards
The FRB has adopted guidelines that generally require each FRB state member bank to establish and maintain written internal real estate lending standards that are consistent with safe and sound banking practices and appropriate to the size of the bank and the nature and scope of its real estate lending activities. The standards also must be consistent with accompanying FRB guidelines, which include loan-to-value ratios for the different types of real estate loans.
Transactions with Related Parties
The Federal Reserve Act governs transactions between the Bank and its affiliates, specifically the Corporation, CFS, and CRM. In general, an affiliate of the Bank is any company that controls, is controlled by, or is under common control with the Bank. Generally, the Federal Reserve Act limits the extent to which the Bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of the Bank’s capital stock and surplus, and contains an aggregate limit of 20% of capital stock and surplus for covered transactions with all affiliates. Covered transactions include loans, asset purchases, the issuance of guarantees, and similar transactions. Certain transactions must be collateralized according to the requirements of the statute. In addition, all covered transactions and other transactions between the Bank and its affiliates must be on terms and conditions that are substantially the same as, or at least as favorable to, the Bank.
Section 22(h) of the Federal Reserve Act and its implementing Regulation O restricts a bank's loans to its directors, executive officers, and principal stockholders ("Insiders"). Loans to Insiders (and their related entities) may not exceed, together with all other outstanding loans to such persons and affiliated entities, the Bank's total capital and surplus. Loans to Insiders above
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specified amounts must receive the prior approval of the Bank's Board of Directors. The loans must be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, except that such Insiders may receive preferential loans made under a benefit or compensation program that is widely available to the Bank's employees and does not give preference to the Insider over the employees. Loans to executive officers are subject to additional restrictions on the types and amounts of permissible loans.
Deposit Insurance
The FDIC insures the deposits of the Bank up to regulatory limits and the deposits are subject to the deposit insurance premium assessments of the DIF. The FDIC currently maintains a risk-based assessment system under which assessment rates vary based on the level of risk posed by the institution to the DIF. Therefore, the assessment rate may change if any of these measurements change.
Assessments for institutions with less than $10 billion of assets, such as the Bank, are based on financial measures and supervisory ratings derived from statistical modeling estimating the probability of an institution’s failure within three years, with institutions deemed less risky paying lower assessments. The assessment range (inclusive of possible adjustments) for institutions of less than $10 billion in total assets is 1.5 basis points to 30 basis points. The Dodd-Frank Act increased the minimum target DIF ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC was required to seek to achieve the 1.35% ratio by September 30, 2020. The FDIC indicated that the 1.35% ratio was exceeded in November 2018. Insured institutions of less than $10 billion of assets received credits for the portion of their assessments that contributed to the reserve ratio between 1.15% and 1.35% in 2019. The Bank received credits totaling $439 thousand during 2019. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC, and the FDIC has exercised that discretion by establishing a long-range fund ratio of 2%.
The FDIC has authority to increase insurance assessments. Any material increases would likely have an adverse effect on the operating expenses and results of operations of the Bank and the Corporation. Future insurance assessments cannot be predicted.
Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed in writing. Management of the Bank does not know of any practice, condition, or violation that may lead to termination of the Bank’s deposit insurance.
Regulatory Capital Requirements
Federal regulations require banks to meet certain minimum capital standards. The minimum capital standards consist of a common equity Tier 1 (“CET1”) capital ratio of 4.5% of risk-weighted assets, a uniform leverage ratio of 4%, a Tier 1 capital to risk-weighted assets ratio of 6% of risk-weighted assets and a total capital ratio of at least 8% of risk-weighted assets. In order to be considered well-capitalized, the Bank must have a CET1 ratio of 6.5%, a Tier 1 ratio of 8%, a total risk-based capital ratio of 10% and a leverage ratio of 5%. The regulatory standards require unrealized gains and losses on certain “available for sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The Bank has exercised this one-time opt-out and therefore excluded unrealized gains and losses on certain “available-for-sale” securities holdings for purposes of calculating regulatory capital. Additional restraints are also imposed on the inclusion in regulatory capital of mortgage-servicing assets, deferred tax assets and minority interests.
Common equity Tier 1 capital is generally defined as common stockholders’ equity, including retained earnings but excluding accumulated other comprehensive income. Tier 1 capital is generally defined as Common equity Tier 1 capital and Additional Tier 1 capital. Additional Tier 1 capital generally includes certain noncumulative perpetual preferred stock and related surplus and minority interests in equity accounts of consolidated subsidiaries. Total capital includes Tier 1 capital and Tier 2 capital. Tier 2 capital is comprised of capital instruments and related surplus meeting specific requirements, and may include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock. Also included in Tier 2 capital is the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets and, for institutions like the Bank that have exercised an opt-out election regarding the treatment of Accumulated Other Comprehensive Income (“AOCI”), up to 45% of net unrealized gains on available-for-sale equity securities with readily determinable fair market values. Additionally, a bank that retains credit risk in connection with an asset sale may be required to maintain additional regulatory capital because of the recourse back to the bank. In assessing an institution’s capital adequacy, the federal regulators take into consideration not only these numeric factors but also qualitative factors as well and has the authority to establish higher capital requirements for individual associations where necessary.
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In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor assigned by federal regulations based on the risks believed inherent in the type of asset. The capital requirements assign a higher risk weight to asset categories believe to present a great risk. For example, a risk weight of 0% is assigned to cash and U.S. government securities, a risk weight of 50% is generally assigned to prudently underwritten first lien one to four family residential mortgages, a risk weight of 100% is assigned to commercial and consumer loans, a risk weight of 150% is assigned to certain past due loans and a risk weight of between 0% and 600% is assigned to permissible equity interests, depending on certain specified factors.
The regulations limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements.
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.
In assessing a state member bank’s capital adequacy, the FRB takes into consideration not only these numeric factors but also qualitative factors, and has the authority to establish higher capital requirements for individual banks where necessary. 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. The Bank, in accordance with its internal prudential standards, targets as its goal the maintenance of capital ratios which exceed these minimum requirements and that are consistent with its risk profile. As of December 31, 2020, the Bank exceeded all regulatory capital ratios necessary to be considered well capitalized.
On October 29, 2019, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporations (collectively, the "Federal Agencies") adopted a final rule (the "Final Rule") to simplify the regulatory capital requirements for eligible community banks and holding companies that opt into the Community Bank Leverage Ratio ("CBLR") framework, as required by Section 201 of the Economic Growth, Relief and Consumer Protection Act of 2018.
Under the Final Rule, a depository institution or holding company that satisfies certain qualifying criteria, including having less than $10 billion in average total consolidated assets and a leverage ratio of greater than 9%, would be considered a "qualifying community banking organization" and may elect (but is not required) to use the CBLR framework. If this election is made, the qualifying community banking organization would be considered to have satisfied the Federal Agencies' generally applicable risk-weighted and leverage capital requirements (the "Basel III capital framework") and would be considered to be well-capitalized under the Federal Agencies' prompt corrective action ("PCA") rules. Under the CBLR framework, a qualifying community banking organization would satisfy the regulatory capital requirements by calculating and reporting a single leverage ratio, i.e., the CBLR, which would require significantly less data than needed to calculate the capital ratios, under the Basel III capital framework and eliminate the time consuming need to risk-weight assets. The Final Rule took effect on January 1, 2020. Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the community bank leverage ratio will increase to 8.5% for the calendar year. Community banks will have until Jan. 1, 2022, before the community bank leverage ratio requirement will return to 9%. The Bank has not elected to use the community bank leverage ratio.
Prompt Corrective Action
The FDIA requires the federal banking agencies to resolve the problems of insured banks at the least possible loss to the DIF. The FRB has adopted prompt corrective action regulations to carry out this statutory mandate. The FRB’s regulations authorize, and in some situations, require, the FRB to take certain supervisory actions against undercapitalized state member banks, including the imposition of restrictions on asset growth and other forms of expansion. The prompt corrective action regulations place state member banks in one of the following five categories based on the bank’s capital:
•well-capitalized (at least 5% leverage capital, 6.5% common equity Tier 1 risk-based capital, 8% Tier 1 risk-based capital and 10% total risk-based capital);
•adequately capitalized (at least 4% leverage capital, 4.5% common equity Tier 1 risk-based capital, 6% Tier 1 risk-based capital and 8% total risk-based capital);
•undercapitalized (less than 4% leverage capital, 4.5% common equity Tier 1 risk-based capital, 6% Tier 1 risk-based capital or 8% total risk-based capital);
•significantly undercapitalized (less than 3% leverage capital, 3% common equity Tier 1 risk-based capital, 4% Tier 1 risk-based capital or 6% total risk-based capital); and
•critically undercapitalized (less than 2% tangible capital).
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As an institution’s capital decreases within the three undercapitalized categories listed above, the severity of the action that is authorized or required to be taken by the FRB for state member banks under the prompt corrective action regulations increases. All banks are prohibited from paying dividends or other capital distributions or paying management fees to any controlling person if, following such distribution, the bank would be undercapitalized. The FRB is required to monitor closely the condition of an undercapitalized institution and to restrict the growth of its assets.
An undercapitalized state member bank is required to file a capital restoration plan with the FRB within 45 days (or other timeframe prescribed by the FRB) of the date the bank receives notice that it is within any of the three undercapitalized categories, and the plan must be guaranteed by its parent holding company, subject to a cap on the guarantee that is the lesser of: (i) an amount equal to 5.0% of the bank’s total assets at the time it was notified that it became undercapitalized; and (ii) the amount that is necessary to restore the bank’s capital ratios to the levels required to be classified as “adequately classified,” as those ratios and levels are defined as of the time the bank failed to comply with the plan. If the bank fails to submit an acceptable plan, it is treated as if it were “significantly undercapitalized.” Banks that are significantly or critically undercapitalized are subject to a wider range of regulatory requirements and restrictions including, with respect to critically undercapitalized status, the appointment of a receiver or conservator within specified periods of time.
The NYSDFS possesses enforcement power over New York State-chartered banks pursuant to New York law. This includes authority to order a New York State bank to, among other things, cease an apparent violation of law, discontinue unauthorized or unsafe banking practices or maintain prescribed books and accounts. Such orders are enforceable by financial penalties. Upon a finding by the NYSDFS that a bank director or officer has violated any law or regulation or continued unauthorized or unsafe practices in conducting its business after having been notified by the NYSDFS to discontinue such violation or practices, such director or officer may be removed from office after notice and an opportunity to be heard. The NYSDFS also has authority to appoint a conservator or receiver (which may be the FDIC) for a bank under certain circumstances.
Under federal law, the FRB possesses authority to bring enforcement actions against member banks and their ‘‘institution-affiliated parties,’’ including directors, officers, employees and, under certain circumstances, a stockholder, attorney, appraiser or accountant. Such enforcement action can occur for matters such as failure to comply with applicable law or regulations or engaging in unsafe or unsound banking practices. Possible enforcement actions range from an informal measure, such as a memorandum of understanding, to formal actions, such as a written agreement, cease and desist order, civil money penalty, capital directive, removal of directors or officers or the appointment of a conservator or receiver. The FRB also possesses authority to bring enforcement actions against bank holding companies, their nonbanking subsidiaries and their “institution-affiliated parties.”
Federal Home Loan Bank
The Bank is also a member of the FHLBNY, which provides a central credit facility primarily for member institutions for home mortgage and neighborhood lending. The Bank is subject to the rules and requirements of the FHLBNY, including the requirement to acquire and hold shares of capital stock in the FHLBNY. The Bank was in compliance with the rules and requirements of the FHLBNY at December 31, 2020.
Community Reinvestment Act
Under the federal CRA, the Bank, consistent with its safe and sound operation, must help meet the credit needs of its entire community, including low and moderate income neighborhoods. The FRB periodically assesses the Bank's compliance with CRA requirements. The Bank received a “satisfactory” rating for CRA on its last performance evaluation conducted by the FRB as of October 7, 2019.
Fair Lending and Consumer Protection Laws
The Bank must also comply with the federal Equal Credit Opportunity Act and the New York Executive Law, which prohibit creditors from discrimination in their lending practices on bases specified in these statutes. In addition, the Bank is subject to a number of federal statutes and regulations implementing them, which are designed to protect the general public, borrowers, depositors, and other customers of depository institutions. These include the Bank Secrecy Act, the Truth in Lending Act, the Home Ownership and Equity Protection Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate Settlement Procedures Act, the Electronic Funds Transfers Act, the FCRA, the Right to Financial Privacy Act, the Expedited Funds Availability Act, the Flood Disaster Protection Act, the Fair Debt Collection Practices Act, Helping Families Save Their Homes Act, and the Consumer Protection for Depository Institutions Sales of Insurance regulation. The FRB and, in some instances, other regulators, including the U.S. Department of Justice, the FTC, the CFPB and state Attorneys General, may take enforcement action against institutions that fail to comply with these laws.
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Prohibitions against Tying Arrangements
Subject to some exceptions, regulations under the BHCA and the Federal Reserve Act prohibits banks from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the bank or its affiliates or not obtain services of a competitor of the bank.
Privacy Regulations
Regulations under the Federal Reserve Act generally require the Bank to disclose its privacy policy. The policy must identify with whom the Bank shares its customers’ “nonpublic personal information,” at the time of establishing the customer relationship and annually thereafter. In addition, the Bank must provide its customers with the ability to “opt out” of having their personal information shared with unaffiliated third parties and not to disclose account numbers or access codes to non-affiliated third parties for marketing purposes. The Bank’s privacy policy complies with Federal Reserve Act regulations.
The USA PATRIOT Act
The Bank is subject to the USA PATRIOT Act, which gives the federal government powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act imposes affirmative obligations on financial institutions, including the Bank, to establish anti-money laundering programs which require: (i) the establishment of internal policies, procedures, and controls; (ii) the designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; (iv) an independent audit function to test the anti-money laundering program; and (v) due diligence of customers using a risk-based approach. The FRB must consider the Bank’s effectiveness in combating money laundering when ruling on merger and other applications.
CFS
CFS is subject to supervision by other regulatory authorities as determined by the activities in which it is engaged. Insurance activities are supervised by the NYSDFS, and brokerage activities are subject to supervision by the SEC and FINRA.
CRM
CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
Additional Important Le g islation and Re g ulation
The Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”)
The CARES Act, which became law on March 27, 2020, provided over $2 trillion to combat the coronavirus (COVID-19) pandemic and stimulate the economy. The legislation included direct financial aid to American families and economic stimulus to significantly impacted industry sectors through programs like the Paycheck Protection Program (“PPP”) and Main Street Lending Program (“MSLP”). In addition to the general impact of COVID-19, certain provisions of the CARES Act as well as other recent legislative and regulatory relief efforts have had a material impact on the Corporation’s operations and could continue to impact operations going forward. Certain provisions of the CARES Act relevant to financial institutions, include:
•Allowing financial institutions to elect to suspend requirements under U.S. Generally Accepted Accounting Principles for loan modifications relating to COVID-19 pandemic and suspend the corresponding impairment determination for accounting purposes. This provision as extended by later legislation will last until the earlier of January 1, 2022 or no later than 60 days after the President declares that the coronavirus emergency is terminated;
•Temporarily reducing the CBLR to 8%. This law also states that if a qualifying community bank falls below the CBLR, it “shall have a reasonable grace period to satisfy” the CBLR; and
•The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic, to request forbearance from paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency. Such a forbearance could be granted for up to 180 days, subject to extension for an additional 180-day period upon the request of the borrower. During that time, no fees, penalties or interest beyond the amounts scheduled or calculated as if the borrower made all contractual payments on time and in full under the mortgage contract could accrue on the borrower’s account. Except for vacant or abandoned property, the servicer of a federally-backed mortgage was
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prohibited from taking any foreclosure action, including any eviction or sale action, for not less than the 60-day period beginning March 18, 2020, extended by federal mortgage-backing agencies to at least June 30, 2021.
New York State COVID-19 Emergency Eviction and Foreclosure Prevention Act of 2020
The Act prevents residential evictions, foreclosure proceedings, tax lien sales or foreclosures, credit discrimination and negative credit reporting related to the COVID-19 pandemic. The Act places these moratoriums until May 1, 2021.
The Regulatory Relief Act
On May 24, 2018, the Regulatory Relief Act was enacted, which repeals or modifies certain provisions of the Dodd-Frank Act and eases regulations on all but the largest banks. The Regulatory Relief Act’s provisions include, among other things: (i) exempting banks with less than $10 billion in assets from the ability-to-repay requirements for certain qualified residential mortgage loans held in portfolio; (ii) not requiring appraisals for certain transactions valued at less than $400,000 in rural areas; (iii) exempting banks that originate fewer than 500 open-end and 500 closed-end mortgages from HMDA’s expanded data disclosures; (iv) clarifying that, subject to various conditions, reciprocal deposits of another depository institution obtained using a deposit broker 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; (v) raising eligibility for the 18-month exam cycle from $1 billion to banks with $3 billion in assets; (vi) allowing qualifying federal savings banks to elect to operate with National Bank powers; and (vii) simplifying capital calculations by requiring regulators to establish for institutions under $10 billion in assets a community bank leverage ratio at a percentage not less than 8% and not greater than 10% that such institutions may elect to replace the general applicable risk-based capital requirements for determining well-capitalized status.
The Dodd-Frank Act
The Dodd-Frank Act, enacted on July 21, 2010, significantly changed the bank regulatory landscape and has impacted and will continue to impact the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. We have summarized below significant rules adopted by the federal agencies pursuant to the Dodd-Frank Act.
Consumer Financial Protection Bureau Rules
The Dodd-Frank Act created the CFPB, with wide-ranging powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Smaller institutions continue to be examined by their primary federal regulator as to compliance with consumer protection laws. The Dodd-Frank Act also weakened the federal preemption rules that had been applicable to national banks and federal savings associations, especially with respect to the applicability of state consumer protection laws, and gives state attorneys general certain powers to enforce federal consumer protection regulations.
The CFPB has issued several rules pursuant to the Dodd-Frank Act concerning the regulation of mortgage markets in the U.S. The rules amended several existing regulations, including Regulation Z, which implements the Truth in Lending Act, Regulation X, which implements the Real Estate Settlement Procedures Act and Regulation B, which implements the Equal Credit Opportunity Act. The CFPB has also issued amendments to Regulation P, which governs information privacy and Regulation E, which implements the Electronic Funds Transfers Act. The CFPB may from time to time issue additional amendments or new rules that will affect the Corporation's business practices.
In December 2013, the FRB and the SEC released final rules to implement certain provisions of the Dodd-Frank Act, commonly known as the “Volcker Rule.” The Volcker Rule, among other things, prohibits banking entities from engaging in proprietary trading and from sponsoring, having an ownership interest in or having certain relationships with a hedge fund or private equity fund, subject to certain exemptions. At December 31, 2020, the Corporation was not engaged in any activities and it did not have any ownership interests in any funds that are not permitted under the Volcker Rule.
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In 2013, the CFPB issued a final rule amending Regulation Z (which implements TILA) and Regulation X (which implements RESPA). In 2015, the CFPB issued a final rule, effective October 3, 2015, specifying mandatory new procedures for the making of these disclosures. The purpose of the new rule, known as the TRID Rule, is to integrate certain disclosures for closed-end credit extended against real property, the appraisal notice required under the ECOA, and the servicing notice required under RESPA in two new forms: a Loan Estimate that must be provided to a consumer within a specified time after receiving his or her application, and a Closing Disclosure that must be provided at least three days before the loan is closed. The TRID Rule generally applies to all lenders, including the Bank, that extended credit to consumers 25 or more times in the preceding or current year.
Securities and Exchange Commission Rules
As discussed above under “Federal Securities Law,” pursuant to the Dodd-Frank Act, the SEC issued regulations that provide the shareholders of public companies with an advisory vote on: (i) executive compensation ("say-on-pay"); (ii) the desired frequency of say-on-pay; and (iii) compensation arrangements and understandings in connection with merger transactions, known as "golden parachute" arrangements. Additionally, the SEC has issued regulations effective January 1, 2017 requiring certain companies subject to the reporting rules of the SEC to disclose to shareholders the ratio of compensation of the chief executive officer to the median compensation of employees. The SEC has also adopted corporate governance regulations that provide to shareholders of companies subject to the SEC’s proxy rules: (i) the opportunity to nominate directors at a shareholder meeting and to have their nominees included in the company proxy materials sent to all shareholders; and (ii) the ability to use the shareholder proposal process to establish procedures for the inclusion of shareholder director nominations in company proxy materials.
Banking Agency Rules
As discussed above under “Regulatory Capital Requirements,” pursuant to the Dodd-Frank Act, the FRB and the other federal banking agencies established minimum leverage and risk-based capital requirements for insured depository institutions and bank holding companies.
NYSDFS Cybersecurity Rule
Effective March 1, 2017, the NYSDFS requires New York chartered banks to establish and maintain a cybersecurity program designed to protect consumers and ensure the safety and soundness of the bank. NYSDFS requires regulated financial institutions to establish a cybersecurity program; designed to protect the confidentiality, integrity and availability of its Information Systems; implement and maintain a written policy or policies setting forth its policies and procedures for the protection of its systems and Nonpublic Information stored on those systems; designate a Chief Information Security Officer responsible for implementing, overseeing and enforcing its program and policy; and have policies and procedures designed to ensure the security of information systems and nonpublic information accessible to, or held by Third Party Service Providers.
Gramm-Leach-Bliley Act
Under the privacy and data security provisions of the Financial Modernization Act of 1999, also known as the GLB Act, and rules promulgated thereunder, all financial institutions, including the Corporation, the Bank and CFS are required to establish policies and procedures to restrict the sharing of nonpublic customer data with nonaffiliated parties at the customer's request and to protect customer data from unauthorized access. In addition, the FCRA, as amended by the FACT Act, includes many provisions affecting the Corporation, Bank, and/or CFS including provisions concerning obtaining consumer reports, furnishing information to consumer reporting agencies, maintaining a program to prevent identity theft, sharing of certain information among affiliated companies, and other provisions. For instance, the FCRA requires persons subject to the FCRA to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available. The FRB and the FTC have extensive rulemaking authority under the FACT Act, and the Corporation and the Bank are subject to the rules that have been promulgated by the FRB and FTC thereunder, including recent rules regarding limitations on affiliate marketing and implementation of programs to identify, detect and mitigate the risk of identity theft through red flags. The GLB Act and the FCRA also impose requirements regarding data security and the safeguarding of customer information. The Bank is subject to the Security Guidelines, which implement section 501(b) of the GLB Act and section 216 of the FACT Act. The Security Guidelines establish standards relating to administrative, technical, and physical safeguards to ensure the security, confidentiality, integrity and the proper disposal of customer information.
The Corporation has developed policies and procedures for itself and its subsidiaries to maintain compliance with all privacy, information sharing and notification provisions of the GLB Act and the FCRA.
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ITEM 1A. RISK FACTORS
The Corporation’s business is subject to many risks and uncertainties. Although the Corporation seeks ways to manage these risks and develop programs to control those that management can control, the Corporation ultimately cannot predict the extent to which these risks and uncertainties could affect the Corporation's results. Actual results may differ materially from management's expectations. The following discussion sets forth what the Corporation currently believes could be the most significant factors of which it is currently aware that could affect the Corporation's business, results of operations or financial condition. You should consider all of the following risks together with all of the other information in this Annual Report on Form 10-K.
Risks Related to the COVID-19 Pandemic
The economic impact of the COVID-19 outbreak could adversely affect the Corporation’s financial condition and results of
operations and its ability to execute on its growth strategies.
The COVID-19 pandemic has caused significant economic dislocation in the United States, including a slow-down in economic activity and a related increase in unemployment. Since the COVID-19 outbreak, millions of individuals have filed claims for unemployment. In response to the COVID-19 outbreak, the Federal Open Market Committee has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows. Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have encouraged financial institutions to prudently work with affected borrowers and recently passed legislation has provided relief from reporting loan classifications due to modifications related to the COVID-19 outbreak. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry.
The spread of the coronavirus has caused the Corporation to significantly modify its business practices, including business operating hours and delivery methods, as well as employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. These changes, as well as adverse economic conditions, could cause the Corporation not to be able to execute on its growth strategies.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on the Corporation’s business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, the Corporation could be subject to any of the following risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:
• demand for the Corporation’s products and services may decline, making it difficult to execute on its strategic initiatives related to growing assets and earnings;
• if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
• collateral for loans, especially real estate, may decline in value, which could cause loan losses to increase;
• the Corporation’s allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect its net income;
• the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to the Corporation;
• as the result of the decline in the target federal funds rate to near 0%, the yield on the Corporation’s assets may decline to a greater extent than the decline in its cost of interest-bearing liabilities, reducing its net interest margin and spread and reducing net income;
• a material decrease in net income or a net loss over several quarters could result in a decrease or elimination of the Corporation’s quarterly cash dividend;
• cyber security risks are increased as the result of an increase in the number of employees working remotely;
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• the Corporation relies on third party vendors for certain services and the unavailability of a critical service due to the COVID-19 outbreak could have an adverse effect on the Corporation;
• Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs; and
• internal controls as designed may not prove effective, to the extent procedures are modified as a result of remote work locations.
Any one or a combination of the factors identified above could negatively impact the Corporation’s business, financial condition and results of operations and prospects.
Customary means to collect non-performing assets may be prohibited or impractical during the COVID-19 pandemic, and there is a risk that collateral securing a non-performing asset may deteriorate if the Corporation chooses not to, or is unable to, foreclose on collateral in a timely manner.
Federal banking agencies and government entities, including New York State, have adopted regulations or put in place executive orders that restrict or limit our ability to take certain actions with respect to delinquent borrowers that we would otherwise have taken in the ordinary course of business, such as customary collection and foreclosure activities. For example, New York State has placed a “moratorium” on evictions and foreclosures and the moratorium has recently been extended through May 1, 2021 for people experiencing a hardship related to COVID-19. If the moratorium is extended further, or if the backlog of foreclosure cases are not processed efficiently, there is an increased risk that the collateral value may deteriorate, resulting in a loss to the Corporation.
Risks Related to Lending
Economic conditions may adversely affect the Corporation’s financial performance.
The Corporation's businesses and results of operation are affected by the financial markets and general economic conditions in the United States, and particularly to adverse conditions in New York and Pennsylvania. The COVID-19 pandemic has caused a severe economic downturn in the U.S. economy. Key economic factors affecting the Corporation include the level and volatility of short-term and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets and currencies, liquidity of the financial markets, the availability and the cost of capital and credit, investor sentiment, confidence in the financial markets, and the sustainability of economic growth. The deterioration of any of these conditions could adversely affect the Corporation's consumer and commercial businesses, its securities and derivatives portfolios, its level of charge-offs and provision for credit losses, the carrying value of the Corporation's deferred tax assets, its capital levels and liquidity, and the Corporation's results of operations.
A decline or prolonged weakness in business and economic conditions generally or specifically in the principal markets in which the Corporation does business could have one or more of the following adverse effects on the Corporation’s business:
i.a decrease in the demand for loans and other products and services;
ii.a decrease in the value of the Corporation’s loans or other assets secured by consumer or commercial real estate;
iii.an impairment of certain of the Corporation’s intangible assets, such as goodwill; and
iv.an increase in the number of borrowers and counter-parties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to the Corporation.
Additionally, in light of economic conditions, the Corporation’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches that it uses to select, manage and underwrite loans become less predictive of future behaviors. Further, competition in the Corporation’s industry may intensify as a result of consolidation of financial services companies in response to adverse market conditions and the Corporation may face increased regulatory scrutiny, which may increase its costs and limit its ability to pursue business opportunities.
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Commercial real estate and business loans increase the Corporation’s exposure to credit risks.
The FRB and the other federal bank regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations. The purpose of the guidance is to assist banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. Management employs heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing on commercial real estate loans and real estate concentrations.
At December 31, 2020, the Corporation’s portfolio of commercial real estate and business loans totaled $1,085.6 million or 70.6% of total loans. The Corporation plans to continue to emphasize the origination of these types of loans, which generally expose the Corporation to a greater risk of nonpayment and loss than residential real estate or consumer loans because repayment of commercial real estate and business loans often depends on the successful operation and income stream of the borrower’s business. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate and consumer loans. Also, some of the Corporation’s borrowers have more than one commercial loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose the Corporation to a significantly greater risk of loss compared to an adverse development with respect to residential real estate and consumer loans. In some instances, the Corporation has originated unsecured commercial loans with certain high net worth individuals who have personally guaranteed such loans. This type of commercial loan has an increased risk of loss if the Corporation is unable to collect repayment through legal action due to personal bankruptcy or other financial limitations of the borrower. The Corporation targets its business lending and marketing strategy towards small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, the Corporation’s results of operations and financial condition may be adversely affected.
Loan participations may have a higher risk of loss than loans the Bank originates because the Bank is not the lead lender and has limited control over credit monitoring.
The Corporation occasionally purchases commercial real estate and commercial and industrial loan participations secured by properties outside its market area in which the Bank is not the lead lender. The Corporation has purchased loan participations secured by various types of collateral such as real estate, equipment and other business assets located primarily in New York, and Pennsylvania. Loan participations may have a higher risk of loss than loans the Bank originates because we rely on the lead lender to monitor the performance of the loan. Moreover, our decisions regarding the classification of a loan participation and loan loss provisions associated with a loan participation are made in part based upon information provided by the lead lender. A lead lender also may not monitor a participation loan in the same manner as we would for loans that the Bank originates. At December 31, 2020, loan participation balances where the Bank is not the lead lender totaled $120.4 million, or 7.84% of our loan portfolio. At December 31, 2020, commercial and industrial loan participations outside our market area totaled $13.3 million, or 3.6% of the commercial and industrial loan portfolio and commercial real estate loan participations outside our market area totaled $0.4 million, or 0.1% of the commercial real estate loan portfolio. If the Bank’s underwriting of these participation loans is not sufficient, our non-performing loans may increase and our earnings may decrease.
We are subject to environmental liability risk associated with lending activities.
A significant portion of our loan portfolio is secured by real estate, and we could become subject to environmental liabilities with respect to one or more of these properties. During the ordinary course of business, we may foreclose on and take title to properties securing defaulted loans. In doing so, there is a risk that hazardous or toxic substances could be found on these properties. If hazardous conditions or toxic substances are found on these properties, we may be liable for remediation costs, as well as for personal injury and property damage, civil fines and criminal penalties regardless of when the hazardous conditions or toxic substances first affected any particular property. Environmental laws may require us to incur substantial expenses to address unknown liabilities and may materially reduce the affected property’s value or limit our ability to use or sell the affected property. In addition, future laws or more stringent interpretations or enforcement policies with respect to existing laws may increase our exposure to environmental liability. Although we have policies and procedures to perform an environmental review before initiating any foreclosure action on nonresidential real property, these reviews may not be sufficient to detect all potential environmental hazards. The remediation costs and any other financial liabilities associated with an environmental hazard could have a material adverse effect on us.
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The Corporation's portfolio of indirect automobile lending exposes it to increased credit risks.
At December 31, 2020, $120.5 million, or 7.9% of our total loan portfolio, consisted of automobile loans, primarily originated through automobile dealers for the purchase of new or used automobiles. The Corporation serves customers that cover a range of creditworthiness and the required terms and rates are reflective of those risk profiles. Automobile loans are inherently risky as they are often secured by assets that may be difficult to locate and can depreciate rapidly. In some cases, repossessed collateral for a defaulted automobile loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency may not warrant further substantial collection efforts against the borrower. Automobile loan collections depend on the borrower's continuing financial stability, and therefore, are more likely to be adversely affected by job loss, divorce, illness, or personal bankruptcy. Additional risk elements associated with indirect lending include the limited personal contact with the borrower as a result of indirect lending through non-bank channels, namely automobile dealers.
The allowance for loan losses may prove to be insufficient to absorb losses in the loan portfolio.
The Corporation’s customers may not repay their loans according to the original terms, and the collateral securing the payment of those loans may be insufficient to pay any remaining loan balance. Hence, the Corporation may experience significant loan losses, which could have a material adverse effect on the Corporation's operating results. Management makes various assumptions and judgments about the collectability of its loan portfolio, including the creditworthiness of its borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, management relies on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If these assumptions prove to be incorrect, the allowance for loan losses may not be sufficient to cover losses inherent in the Corporation’s loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease net income.
The Corporation’s emphasis on the origination of commercial loans is one of the more significant factors in evaluating its allowance for loan losses. As the Corporation continues to increase the amount of these loans, additional or increased provisions for loan losses may be necessary, which could result in a decrease in earnings.
The Financial Accounting Standards Board has adopted a new accounting standard that will be effective for the Bank beginning on January 1, 2023. This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses. This will change the current method of establishing allowances for loan losses that are probable, which may require us to increase our allowance for loan losses, and increase the data we would need to collect and review to determine the appropriate level of our allowance for loan losses.
Bank regulators periodically review the Corporation’s allowance for loan losses and may require the Corporation to increase its provision for loan losses or loan charge-offs. Any increase in the allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a material adverse effect on the Corporation's results of operations and/or financial condition. In addition, any future credit deterioration, including as a result of COVID-19, could require us to increase our allowance for loan losses in the future.
The Bank is subject to regulatory enforcement risk, reputation risk and litigation risk regarding its participation in the PPP, and it is subject to the risk that the SBA may not fund some or all PPP loan guarantees.
The CARES Act included the PPP as a loan program administered through the SBA. Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to detailed qualifications and eligibility criteria.
Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also, there was and continues to be uncertainty in the laws, rules and guidance relating to the PPP. Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications, and several banks have been subject to litigation regarding the payment of fees to agents that assisted borrowers in obtaining PPP loans. In addition, some banks and borrowers have received negative media attention associated with PPP loans. Although the Bank believes that it has administered the PPP in accordance with all applicable laws, regulations and guidance, the Bank may be exposed to litigation risk and negative media attention related to its participation in the PPP. If any such litigation is not resolved in in its favor, it may result in significant financial liability to the Bank or adversely affect its reputation. In addition, litigation can be costly, regardless of outcome. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on the Bank’s business, financial condition, and results of operations.
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The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators, and U.S. Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling the Bank to rely on borrower certifications, and take more aggressive action against the Bank for alleged violations of the provisions governing the PPP. Federal and state regulators can impose or request that the Bank consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which could adversely affect the Bank’s business, reputation, results of operation and financial condition, and thereby adversely affect your investment.
The Bank also has credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which it originated, funded or serviced loans, including any issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the Bank originated, funded or serviced a PPP loan, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.
The foreclosure process may adversely impact the Bank’s recoveries on non-performing loans.
The Judicial foreclosure process is protracted, which delays our ability to resolve non-performing loans through the sale of the underlying collateral. The longer timelines were the result of the economic crisis, additional consumer protection initiatives related to the foreclosure process, increased documentary requirements and judicial scrutiny, and, both voluntary and mandatory programs under which lenders may consider loan modifications or other alternatives to foreclosure. These reasons, historical issues at the largest mortgage loan servicers, and the legal and regulatory responses have impacted the foreclosure process and completion time of foreclosures for residential mortgage lenders. This may result in a material adverse effect on collateral values and the Corporation’s ability to minimize its losses.
The Corporation is subject to risks and losses resulting from fraudulent activities that could adversely impact its financial performance and results of operations.
As a bank, we are susceptible to fraudulent activity that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. We are subject to fraud and compliance risk, including but not limited to, in connection with the origination of loans, ACH transactions, wire transactions, ATM transactions, checking transactions, and debit cards that we have issued to our customers and through our online banking portals. We have experienced losses due to apparent fraud.
The Bank owns a participating interest totaling $4.2 million in an approximately $36.0 million commercial credit facility on which the borrower defaulted due to fraudulent activity. On April 23, 2020 the Corporation received payment of $461,309 from the lead bank related to its obligation under the participation agreements. The Bank continues to pursue recovery of the remaining $3.7 million and accumulated expenses as a result of purchasing the participation interest. While the Corporation believes this recent incident was an isolated occurrence, there can be no assurance that such losses will not occur again or that such acts will be detected in a timely manner. We maintain a system of internal controls and insurance coverage to mitigate against such risks, including data processing system failures and errors, and customer fraud. If our internal controls fail to prevent or detect any such occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could have a material adverse effect on our business, financial condition and results of operations.
Risks Related to Liquidity
Our funding sources may prove insufficient to replace deposits at maturity and support our future growth.
We must maintain sufficient funds to respond to the needs of depositors and borrowers. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which include Federal Home Loan Bank advances, proceeds from the sale of loans, federal funds purchased and brokered certificates of deposit. Adverse operating results or changes in industry conditions could lead to difficulty or an inability to access these additional funding sources. Our financial flexibility will be severely constrained if we are unable to maintain our access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In this case, our operating margins and profitability would be adversely affected.
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Risks Related to Changes in Interest Rates
Changes in interest rates could adversely affect the Corporation’s results of operations and financial condition.
The Corporation’s results of operations and financial condition are significantly affected by changes in interest rates. The Corporation's financial results depend substantially on net interest income, which is the difference between the interest income that it earns on interest-earning assets and the interest expense paid on interest-bearing liabilities. If the Corporation’s interest- bearing liabilities mature or reprice more quickly than its interest-earning assets in a given period as a result of increasing interest rates, net interest income may decrease. Likewise, net interest income may decrease if interest-earning assets mature or reprice more quickly than interest-bearing liabilities in a given period as a result of decreasing interest rates. The Corporation has taken steps to mitigate this risk, such as holding fewer longer-term residential mortgages, as well as investing excess funds in shorter-term investments.
Changes in interest rates also affect the fair value of the Corporation’s interest-earning assets and, in particular, its investment securities available for sale. Generally, the fair value of investment securities fluctuates inversely with changes in interest rates. Decreases in the fair value of investment securities available for sale, therefore, could have an adverse effect on its shareholders’ equity or earnings if the decrease in fair value is deemed to be other than temporary.
Changes in interest rates may also affect the average life of loans and mortgage-related securities. Increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans. Additionally, decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, the Corporation is subject to reinvestment risk to the extent that it is unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on its existing loans and securities.
Municipal deposits are generally more sensitive to interest rates and may require competitive rates at placement and subsequent rollover dates, which may make it more difficult for the Bank to attract and retain public and municipal deposits. Additionally, when municipal deposits exceed FDIC coverage, any amounts not insured under the FDIC must be properly secured through a pledge of eligible securities. The requirement that the Bank collateralize municipal deposits above FDIC insurance may have an adverse effect on the Corporation's liquidity.
A continuation of the historically low interest rate environment and the possibility that the Corporation may access higher-cost funds to support its loan growth and operations may adversely affect its net interest income and profitability.
In recent years the FRB’s policy has been to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. The Corporation’s ability to reduce its interest expense may be limited at current interest rate levels while the average yield on its interest-earning assets may continue to decrease, and its interest expense may increase as the Corporation seeks access to non-core funding sources or increases deposit rates to fund operations. A continuation of a low interest rate environment or an increase in cost of funds may adversely affect the Corporation’s net interest margin and net interest income, which would have an adverse effect on profitability.
Risks Related to Competition
Strong competition within the Corporation's industry and market area could limit its growth and profitability.
The Corporation faces substantial competition in all phases of its operations from a variety of different competitors. Future growth and success will depend on the ability to compete effectively in this highly competitive environment. The Corporation competes for deposits, loans and other financial services with a variety of banks, thrifts, credit unions and other financial institutions as well as other entities, which provide financial services. Some of the financial institutions and financial services organizations with which the Corporation competes with are not subject to the same degree of regulation as the Corporation. Many competitors have been in business for many years, have established customer bases, are larger, and have substantially higher lending limits. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services. These technological advances may diminish the importance of depository institutions and other financial intermediaries in the transfer of funds between parties.
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The Corporation may not be able to attract and retain skilled people.
The Corporation's success depends, in large part, on its ability to attract and retain key people. Competition for the best people in most activities in which the Corporation engages can be intense and it may not be able to hire people or to retain them. A key component of employee retention is providing a fair compensation base combined with the opportunity for additional compensation for above average performance. In this regard, the Corporation uses a stock-based compensation program that aligns the interest of the Corporation's executives and senior managers with the interests of the Corporation, and its shareholders.
The Corporation's compensation practices are designed to be competitive and comparable to those of its peers, however, the unexpected loss of services of one or more of the Corporation's key personnel could have a material adverse impact on the business because it would lose the employees’ skills, knowledge of the market, and years of industry experience and may have difficulty promptly finding qualified replacement personnel.
Risks Related to Business Strategy
The Corporation’s growth strategy may not prove to be successful and its market value and profitability may suffer.
As part of the Corporation's strategy for continued growth, it may open additional branches. New branches do not initially contribute to operating profits due to the impact of overhead expenses and the start-up phase of generating loans and deposits. To the extent that additional branches are opened, the Corporation may experience the effects of higher operating expenses relative to operating income from the new operations, which may have an adverse effect on the Corporation's levels of net income, return on average equity and return on average assets.
In addition, the Corporation may acquire banks and related businesses that it believes provide a strategic fit with its business, such as the 2011 acquisition of FOFC and the 2013 acquisition of six branches from Bank of America. To the extent that the Corporation grows through acquisitions, it cannot provide assurance that such strategic decisions will be accretive to earnings.
The risks presented by acquisitions could adversely affect the Corporation's financial condition and results of operations.
The business strategy of the Corporation has included and may continue to include growth through acquisition from time to time. Any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks may include, among other things: its ability to realize anticipated cost savings, the difficulty of integrating operations and personnel, the loss of key employees, the potential disruption of its or the acquired company’s ongoing business in such a way that could result in decreased revenues, the inability of its management to maximize its financial and strategic position, the inability to maintain uniform standards, controls, procedures and policies, and the impairment of relationships with the acquired company’s employees and customers as a result of changes in ownership and management.
Risks Related to Laws and Regulations
The Corporation operates in a highly regulated environment and may be adversely affected by changes in laws and regulations.
Currently, the Corporation and its subsidiaries are subject to extensive regulation, supervision, and examination by regulatory authorities. For example, the FRB regulates the Corporation, the FRB, the FDIC and the NYSDFS regulate the Bank, and CRM is regulated by the Nevada Division of Insurance. Such regulators govern the activities in which the Corporation and its subsidiaries may engage. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a bank’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on the Corporation and its operations. The Corporation believes that it is in substantial compliance with applicable federal, state and local laws, rules and regulations. As the Corporation's business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. There can be no assurance that proposed laws, rules and regulations, or any other law, rule or regulation, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect the Corporation's business, financial condition or prospects.
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Monetary policies and regulations of the Federal Reserve Board could adversely affect our business, financial condition and results of operations.
In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the FRB. An important function of the FRB is to regulate the money supply and credit conditions. Among the instruments used by the FRB to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.
The monetary policies and regulations of the FRB have had a significant effect on the operating results of financial institutions in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.
Uncertainty surrounding the future of LIBOR (London Interbank Offer Rate) may affect the fair value and return on the Corporation's financial instruments that use LIBOR as a reference rate.
The Corporation holds assets, liabilities, and derivatives that are indexed to the various tenors of LIBOR including but not limited to the one-month LIBOR, three-month LIBOR, one-year LIBOR, and the ten-year constant maturing swap rate. The LIBOR yield curve is also utilized in the fair value calculation of many of these instruments. The reform of major interest benchmarks led to the announcement of the United Kingdom’s Financial Conduct Authority, the regulator of the LIBOR index, that LIBOR would not be supported in its current form after the end of 2021. The Corporation believes the U.S. financial sector will maintain an orderly and smooth transition to new interest rate benchmarks of which the Corporation will evaluate and adopt if appropriate. While in the U.S., the Alternative Rates Committee of the FRB and Federal Reserve Bank of New York have identified the SOFR as an alternative U.S. dollar reference interest rate, it is too early to predict the financial impact this rate index replacement may have, if at all.
We are subject to the Community Reinvestment Act and fair lending laws, and failure to comply with these laws could lead to material penalties.
The Community Reinvestment Act (“CRA”), the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including the required payment of damages and civil money penalties, injunctive relief, imposition of restrictions on mergers and acquisitions activity and restrictions on expansion. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition and results of operations.
Non-compliance with the USA PATRIOT Act, Bank Secrecy Act, or other laws and regulations could result in fines or sanctions.
The USA PATRIOT and Bank Secrecy Acts require financial institutions to develop programs to prevent financial institutions from being used for money laundering and terrorist activities. If such activities are detected, financial institutions are obligated to file suspicious activity reports with the U.S. Treasury’s Office of Financial Crimes Enforcement Network. These rules require financial institutions to establish procedures for identifying and verifying the identity of customers seeking to open new financial accounts. Failure to comply with these regulations could result in fines or sanctions. In recent years, several banking institutions have received large fines for non-compliance with these laws and regulations. While we have developed policies and procedures designed to assist in compliance with these laws and regulations, these policies and procedures may not be effective in preventing violations of these laws and regulations.
The Corporation may be required to raise additional capital in the future, but that capital may not be available when it is needed, or it may only be available on unacceptable terms, which could adversely affect its financial condition and results of operations.
The Bank is required by federal and state regulatory authorities to maintain adequate levels of capital to support its operations. The Corporation may at some point need to raise additional capital to support the Bank’s continued growth or be required by regulators to increase its capital resources. The Corporation’s ability to raise additional capital, if needed, will depend on conditions in the capital markets at that time, which are outside of its control, and on its financial performance. Accordingly, the Corporation may not be able to raise additional capital, if needed, on terms acceptable to it. If the Corporation cannot raise additional capital when needed, its ability to further expand the Bank’s operations and pursue its growth strategy could be
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materially impaired and its financial condition and liquidity could be materially and adversely affected. In addition, if the Corporation is unable to raise additional capital when required by bank regulators, it may be subject to adverse regulatory action.
Changes in tax rates could adversely affect the Corporation's results of operations and financial condition.
The Corporation is subject to the income tax laws of the United States, its states, and municipalities. The income tax laws of the jurisdictions in which the Corporation operates are complex and subject to different interpretations by the taxpayer and the relevant government taxing authorities. In establishing a provision for income tax expense, the Corporation must make judgments and interpretations about the application of these inherently complex tax laws to its business activities, as well as the timing of when certain items may affect taxable income.
The provision for income taxes is composed of current and deferred taxes. Deferred taxes arise from differences between assets and liabilities measured for financial reporting versus income tax return purposes. Deferred tax assets are recognized if, in the Corporation's judgment, their realizability is determined to be more likely than not. The Corporation performs regular reviews to ascertain the realizability of its deferred tax assets. These reviews include the Corporation's estimates and assumptions regarding future taxable income, which incorporates various tax planning strategies.
Risks Related to Operational Matters
The Corporation's controls and procedures may fail or be circumvented, which may result in a material adverse effect on its business.
Management regularly reviews and updates its internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met.
Our risk management framework may not be effective in mitigating risk and reducing the potential for significant losses.
Our risk management framework is designed to minimize risk and loss to us. We seek to identify, measure, monitor, report and control our exposure to risk, including strategic, market, liquidity, compliance and operational risks. While we use a broad and diversified set of risk monitoring and mitigation techniques, these techniques are inherently limited because they cannot anticipate the existence or future development of currently unanticipated or unknown risks. Recent economic conditions and heightened legislative and regulatory scrutiny of the financial services industry, among other developments, have increased our level of risk. Accordingly, we could suffer losses as a result of our failure to properly anticipate and manage these risks.
We face significant operational risks because the financial services business involves a high volume of transactions.
We operate in diverse markets and rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud by employees or persons outside our company, the execution of unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control systems and compliance requirements, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions that could arise as a result of operational deficiencies or as a result of non-compliance with applicable regulatory standards or customer attrition due to potential negative publicity. In the event of a breakdown in our internal control systems, improper operation of systems or improper employee actions, we could suffer financial loss, face regulatory action, and/or suffer damage to our reputation.
The Corporation continually encounters technological change and the failure to understand and adapt to these changes could adversely affect its business.
The banking industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. Technology has lowered barriers to entry and made it possible for "non-banks" to offer traditional bank products and services using innovative technological platforms such as Fintech and Blockchain. These "digital banks" may be able to achieve economies of scale and offer better pricing for banking products and services than the Corporation can. The Corporation's future success will depend, in part, on the ability to address the needs of customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. There can be no assurance that the Corporation will be able to effectively implement new technology-driven products and services or be
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successful in marketing such products and services to customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Corporation's business and, in turn, its financial condition and results of operations.
Systems failures or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities.
Our operations depend upon our ability to protect our computer systems and network infrastructure against damage from physical theft, fire, power loss, telecommunications failure or a similar catastrophic event, as well as from security breaches, denial of service attacks, viruses, worms and other disruptive problems caused by hackers. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. Computer break-ins, phishing and other disruptions could also jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and may cause existing and potential customers to refrain from doing business with us. Although we, with the help of third-party service providers, intend to continue to implement security technology and establish operational procedures designed to prevent such damage, our security measures may not be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third-party service providers use to encrypt and protect customer transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations.
It is possible that we could incur significant costs associated with a breach of our computer systems. While we have cyber liability insurance, there are limitations on coverage. Furthermore, cyber incidents carry a greater risk of injury to our reputation. Finally, depending on the type of incident, banking regulators can impose restrictions on our business and consumer laws may require reimbursement of customer losses.
Risks Related to Accounting Matters
The Corporation's accounting policies and estimates are critical to how the Corporation reports its financial condition and results of operations, and any changes to such accounting policies and estimates could materially affect how the Corporation reports its financial condition and results of operations.
Management has identified certain accounting policies as being critical because they require management’s judgment to ascertain the valuations of assets, liabilities, commitments and contingencies. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset, valuing an asset or liability or reducing a liability. The Corporation has established detailed policies and control procedures that are intended to ensure that these critical accounting estimates and judgments are well controlled and applied consistently. In addition, these policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. Because of the uncertainty surrounding its judgments and the estimates pertaining to these matters, actual outcomes may be materially different from amounts previously estimated. For example, because of the inherent uncertainty of estimates, management cannot provide any assurance that the Bank will not significantly increase its allowance for loan losses if actual losses are more than the amount reserved. Any increase in its allowance for loan losses or loan charge-offs could have a material adverse effect on the Corporation's financial condition and results of operations. In addition, the Corporation cannot guarantee that it will not be required to adjust accounting policies or restate prior financial statements.
Further, from time to time, the FASB and SEC change the financial accounting and reporting standards that govern the preparation of the Corporation's financial statements. These changes can be hard to predict and can materially impact how the Corporation records and reports its financial condition and results of operations. In some cases, the Corporation could be required to apply a new or revised standard retroactively, resulting in its restating prior period financial statements or otherwise adversely affecting its financial condition or results of operations.
Specifically, in June of 2016, FASB issued a new accounting standard, ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) that will substantially change the accounting for credit losses under GAAP. Under GAAP's current standards, credit losses are not reflected in the Corporation's financial statements until it is probable that the credit losses has been incurred. This methodology has the effect of delaying the recognition of credit losses on loans. Under the new credit loss standard, the allowance for credit losses will be an estimate of the "expected" credit losses on loans. The new credit loss standard may have a negative impact on the reporting of results of operations and financial condition of the Corporation. The amendments in this ASU are effective for the Corporation beginning on January 1, 2023.
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The Corporation holds certain intangible assets that could be classified as impaired in the future. If these assets are considered to be either partially or fully impaired in the future, its earnings and the book values of these assets would decrease.
The Corporation is required to test its goodwill for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of its common stock, the estimated net present value of its assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository institutions. If an impairment determination is made in a future reporting period, its earnings and the book value of goodwill would be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of the Corporation's common shares or its regulatory capital levels, but such an impairment loss could significantly restrict the Bank from paying a dividend to the Corporation.
Financial counterparties expose the Corporation to risks.
The Corporation has increased its use of derivative financial instruments, primarily interest rate swaps, which exposes it to financial and contractual risks with counterparty banks. The Corporation maintains correspondent bank relationships, manages certain loan participations, engages in securities transactions, and engages in other activities with financial counterparties that are customary to its industry. Financial risks are inherent in these counterparty relationships.
Risks Related to Wealth Management
Involvement in wealth management creates risks associated with the industry.
The Corporation’s wealth management operations present special risks not borne by institutions that focus exclusively on other traditional retail and commercial banking products. For example, the investment advisory industry is subject to fluctuations in the stock market that may have a significant adverse effect on transaction fees, client activity and client investment portfolio gains and losses. Also, additional or modified regulations may adversely affect our wealth management operations. In addition, our wealth management operations are dependent on a small number of established financial advisors, whose departure could result in the loss of a significant number of client accounts. A significant decline in fees and commissions or trading losses suffered in the investment portfolio could adversely affect our income and potentially require the contribution of additional capital to support our operations.
There may be claims and litigation pertaining to fiduciary responsibility.
From time to time as part of the Corporation’s normal course of business, customers make claims and take legal action against the Corporation based on its actions or inactions related to the fiduciary responsibilities of the Wealth Management Group segment. If such claims and legal actions are not resolved in a manner favorable to the Corporation, they may result in financial liability and/or adversely affect the market perception of the Corporation and its products and services. This may also impact customer demand for the Corporation’s products and services. Any financial liability or reputation damage could have a material adverse effect on the Corporation’s business, which, in turn, could have a material adverse effect on its financial condition and results of operations.
General Business Risk Factors
Severe weather and other natural disasters can affect the Corporation’s business.
The Corporation's main office and its branch offices can be affected by natural disasters such as severe storms and flooding. These kinds of events could interrupt the Corporation's operations, particularly its ability to deliver deposit and other retail banking services to its customers and as a result, the Corporation's business could suffer serious harm. While the Corporation maintains adequate insurance against property and casualty losses arising from most natural disasters, and it has successfully overcome the challenges caused by past flooding in Central New York, there can be no assurance that it will be as successful if and when disasters occur.
Additionally, global markets may be adversely affected by natural disasters, the emergence of widespread health emergencies or pandemics, cyber-attacks or campaigns, military conflict, terrorism or other geopolitical events. Global market disruptions may affect our business liquidity. Also, any sudden or prolonged market downturn in the U.S. or abroad, as a result of the above factors or otherwise could result in a decline in revenue and adversely affect our results of operations and financial condition, including capital and liquidity levels.
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Risks Relating to Ownership of Our Common Stock
The Corporation’s common stock is not heavily traded, and the stock price may fluctuate significantly.
The Corporation’s common stock is traded on the NASDAQ under the symbol “CHMG.” Certain brokers currently make a market in the common stock, but such transactions are infrequent and the volume of shares traded is relatively small. Management cannot predict whether these or other brokers will continue to make a market in our common stock. Prices on stock that is not heavily traded, such as our common stock, can be more volatile than heavily traded stock. Factors such as our financial results, the introduction of new products and services by us or our competitors, publicity regarding the banking industry, and various other factors affecting the banking industry may have a significant impact on the market price of the shares of the common stock. Management also cannot predict the extent to which an active public market for our common stock will develop or be sustained in the future. Accordingly, shareholders may not be able to sell their shares of our common stock at the volumes, prices, or times that they desire.
The Corporation is a holding company and depends on its subsidiaries for dividends, distributions and other payments.
The Corporation is a legal entity separate and distinct from the Bank and other subsidiaries. Its principal source of cash flow, including cash flow to pay dividends to its shareholders, is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank to the Corporation, as well as by the Corporation to its shareholders. FRB regulations affect the ability of the Bank to pay dividends and other distributions and to make loans to the Corporation. If the Bank is unable to make dividend payments to the Corporation and sufficient capital is not otherwise available, the Corporation may not be able to make dividend payments to its common shareholders.
Provisions of the Corporation's certificate of incorporation, bylaws, as well as New York law and certain banking laws, could delay or prevent a takeover of the Corporation by a third party.
Provisions of the Corporation’s certificate of incorporation and bylaws, New York law, and state and federal banking laws, including regulatory approval requirements, could delay, defer or prevent a third party from acquiring the Corporation, despite the possible benefit to the Corporation’s shareholders, or otherwise adversely affect the market price of the Corporation’s common stock. These provisions include: a two-thirds affirmative vote of all outstanding shares of Corporation stock for certain business combinations; a supermajority shareholder vote of 75% of outstanding stock for business combinations involving 10% shareholders; the election of directors to staggered terms of three years; and advance notice requirements for nominations for election to the Corporation’s Board of Directors and for proposing matters that shareholders may act on at a shareholder meeting. In addition, the Corporation is subject to New York law, which among other things prohibits the Corporation from engaging in a business combination with any interested shareholder for a period of five years from the date the person became an interested shareholder unless certain conditions are met. These provisions may discourage potential takeover attempts, discouraging bids for the Corporation’s common stock at a premium over market price or adversely affect the market price of, and the voting and other rights of the holders of the Corporation’s common stock. These provisions could also discourage proxy contests and make it more difficult for shareholders to elect directors other than candidates nominated by the Board of Directors.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
All properties owned or leased by the Bank are considered to be in good condition. For additional information about the Corporation’s facilities, including rental expenses, see "Note 5 Premises and Equipment" in Notes to Consolidated Financial Statements in Part IV, Item 15. Exhibits and Financial Statement Schedules of this report. The Corporation holds no real estate in its own name.
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Corporate Headquarters Executive and Administrative Offices
One Chemung Canal Plaza, Elmira, NY 14901
New York
Albany County | Saratoga County
*132 State St., Albany, NY 12207 | *25 Park Ave., Clifton Park, NY 12065
*65 Wolf Rd., Albany, NY 12205 | *3057 Route 50, Saratoga Springs, NY 12866
*581 Loudon Rd., Latham, NY 12110 |
*1365 New Scotland Rd., Slingerlands, NY 12159 | Schenectady County
| *2 Rush St., Schenectady, NY 12305
Broome County |
*127 Court St., Binghamton, NY 13901 | Schuyler County
*100 Rano Blvd., Vestal, NY 13850 | 318 N. Franklin St., Watkins Glen, NY 14891
| 303 W. Main St., Montour Falls, NY 14865
Cayuga County |
*110 Genesee St., Auburn, NY 13021 | Seneca County
185 Grant Ave., Auburn, NY 13021 | 54 Fall St., Seneca Falls, NY 13148
Chemung County | Steuben County
One Chemung Canal Plaza, Elmira, NY 14901 | *410 West Morris St., Bath, NY 14810
628 W. Church St., Elmira, NY 14905 | 149 West Market St., Corning, NY 14830
951 Pennsylvania Ave., Elmira, NY 14904 |
100 W. McCann's Blvd., Elmira Heights, NY 14903 | Tioga County
29 Arnot Rd., Horseheads, NY 14845 | 203 Main St., Owego, NY 13827
602 S. Main St., Horseheads, NY 14845 | 405 Chemung St., Waverly, NY 14892
305 E. Water St., Elmira, NY 14901 |
| Tompkins County
Cortland County | 806 W. Buffalo St., Ithaca, NY 14850
*1094 State Rte. 222, Cortland, NY 13045 | 304 Elmira Rd., Ithaca, NY 14850
| *909 Hanshaw Rd., Ithaca, NY 14850
Erie County |
*^9159 Main Street, Clarence, NY 14031 |
Pennsylvania
Bradford County
5 West Main St., Canton, PA 17724
159 Canton St., Troy, PA 16947
Wealth Management Group
Regional Offices
305 E. Water St., Elmira, NY 14901
127 Court St., Binghamton, NY 13901
132 State St., Albany, NY 12207
CFS Group
One Chemung Canal Plaza, Elmira, NY 14901
Available by appointment at all bank locations
* Leased facilities and/or property |
^ New Loan Production Office

33

Leased Off-Site ATM Locations
Albany Capital Center | Albany, NY
E-Z Food Mart | Elmira, NY
Ithaca College | Ithaca, NY

ITEM 3. LEGAL PROCEEDINGS
In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. On February 4, 2020, the Corporation filed a lawsuit against Pioneer Bank, Albany, New York, in the Supreme Court of the State of New York in the County of Albany. The Corporation owns a participating interest totaling $4.2 million in an approximately $36.0 million commercial credit facility on which the borrower defaulted due to fraudulent activity. The Corporation's complaint alleges that Pioneer Bank, as lead bank, breached the participation agreement and engaged in fraud and negligent misrepresentation. The Corporation received a recovery of $0.5 million in April, 2020, and continues to pursue recovery of the remaining $3.7 million and accumulated expenses as a result of purchasing the participation interest.
Other than as noted above, the Corporation believes that it is not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on its financial results or liquidity as of December 31, 2020.
ITEM 4. MINE SAFETY DISCLOSURES
None.
34

PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation's common stock is traded on the Nasdaq Global Select Market under the symbol "CHMG."
The table below shows the price ranges for the Corporation’s common stock during each of the indicated quarters. The information is based upon the high and low closing sales prices reported by the Nasdaq Global Select Market.
Common Stock Market Prices and Dividends Paid
During the Past Two Years

December 31, 2020 |  | High |  | Low |  | Dividends
4th Quarter |  | $ | 39.41 |  |  | $ | 28.57 |  |  | $ | 0.26 |
3rd Quarter |  | 31.83 |  |  | 24.68 |  |  | 0.26 |
2nd Quarter |  | 30.99 |  |  | 23.85 |  |  | 0.26 |
1st Quarter |  | 42.38 |  |  | 23.27 |  |  | 0.26 |
December 31, 2019 |  | High |  | Low |  | Dividends
4th Quarter |  | $ | 46.04 |  |  | $ | 41.60 |  |  | $ | 0.26 |
3rd Quarter |  | 49.00 |  |  | 39.00 |  |  | 0.26 |
2nd Quarter |  | 49.96 |  |  | 44.80 |  |  | 0.26 |
1st Quarter |  | 48.36 |  |  | 39.69 |  |  | 0.26 |

Under New York law, the Corporation may pay dividends on its common stock either: (i) out of surplus, so that the Corporation’s net assets remaining after such payment equal the amount of its stated capital, or (ii) if there is no surplus, out of its net profits for the fiscal year in which the dividend is declared and/or the preceding fiscal year. The payment of dividends on the Corporation's common stock is dependent, in large part, upon receipt of dividends from the Bank, which is subject to certain restrictions which may limit its ability to pay the Corporation dividends. See Item 1, “Business – Supervision and Regulation-The Bank-Payment of Dividends” for an explanation of legal limitations on the Bank’s ability to pay dividends.
As of March 12, 2021, there were 473 registered holders of record of the Corporation's stock.
35

The table below sets forth the information with respect to purchases made by the Corporation of our common stock during the quarter ended December 31, 2020:

Period |  | Total number of shares purchased |  | Average price paid per share |  | Total number of shares purchased as part of publicly announced plans or programs |  | Maximum number of shares that may yet be purchased under the plans or programs
10/01/20 | - | 10/31/20 |  | 65,640 |  |  | $ | 34.68 |  |  | 65,640 |  |  | — |
11/01/20 | - | 11/30/20 |  | — |  |  | $ | — |  |  | — |  |  | — |
12/01/20 | - | 12/31/20 |  | — |  |  | $ | — |  |  | — |  |  | — |
Quarter ended 12/31/2020 |  | 65,640 |  |  | $ | 34.68 |  |  | 65,640 |  |  | — |

On March 18, 2020, the Corporation’s Board of Directors approved a stock repurchase plan which replaced the previously authorized repurchase program. Under this repurchase program, the Corporation repurchased 250,000 shares of its common stock, or approximately 5% of its outstanding shares. On October 30, 2020 the stock repurchase plan was completed. A total of 250,000 shares were repurchased at an average cost of $29.40 per share.
On January 8, 2021 the Corporation announced that the Board of Directors approved a new stock repurchase program whereby the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its outstanding shares. Purchases may be made from time to time on the open market or in private negotiated transactions and will be at the discretion of management. As March 12, 2021, a total of 20,625 shares were repurchased at an average cost of $34.98 per share.
36

STOCK PERFORMANCE GRAPH
The following graph compares the yearly change in the cumulative total shareholder return on the Corporation’s common stock against the cumulative total return of the NASDAQ Stock Market (U.S. Companies), NASDAQ Bank Stocks Index, SNL U.S. Bank NASDAQ, and SNL $1B - $5B Bank Index for the period of five years commencing December 31, 2015.

|  |  |  | Period Ending |  |
Index |  | 12/31/2015 |  | 12/31/2016 |  | 12/31/2017 |  | 12/31/2018 |  | 12/31/2019 |  | 12/31/2020
Chemung Financial Corporation |  | 100.00 |  |  | 136.82 |  |  | 185.58 |  |  | 163.11 |  |  | 171.68 |  |  | 142.04 |
NASDAQ Composite |  | 100.00 |  |  | 108.87 |  |  | 141.13 |  |  | 137.12 |  |  | 187.44 |  |  | 271.64 |
SNL U.S. Bank NASDAQ |  | 100.00 |  |  | 138.65 |  |  | 145.97 |  |  | 123.04 |  |  | 154.47 |  |  | 132.56 |
SNL Bank $1B-$5B |  | 100.00 |  |  | 143.87 |  |  | 153.37 |  |  | 134.37 |  |  | 163.35 |  |  | 138.81 |

The cumulative total return includes (1) dividends paid and (2) changes in the share price of the Corporation’s common stock and assumes that all dividends were reinvested. The above graph assumes that the value of the investment in Chemung Financial Corporation and each index was $100 on December 31, 2015.
The Total Returns Index for NASDAQ Composite and SNL bank stocks indices were obtained from S&P Global Market Intelligence, New York, NY.
37

ITEM 6. SELECTED FINANCIAL DATA
The following tables present selected financial data as of and for the years ended December 31, 2020, 2019, 2018, 2017 and 2016. The selected financial data at December 31, 2020, and 2019 and for the three year period ended December 31, 2020 is derived from our audited consolidated financial statements that appear in this annual report on Form 10-K. The other years presented in these tables are derived from audited consolidated financial statements that do not appear in this annual report on Form 10-K. The selected financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and our audited consolidated financial statements and related notes.

|  | SUMMARIZED BALANCE SHEET DATA AT DECEMBER 31,
(in thousands) |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Total assets |  | $ | 2,279,451 |  |  | $ | 1,787,827 |  |  | $ | 1,755,343 |  |  | $ | 1,707,620 |  |  | $ | 1,657,179 |
Loans, net of deferred fees |  | 1,536,463 |  |  | 1,309,219 |  |  | 1,311,906 |  |  | 1,311,824 |  |  | 1,200,290 |
AFS and HTM securities |  | 557,080 |  |  | 287,205 |  |  | 247,133 |  |  | 296,872 |  |  | 308,107 |
Operating lease right-of-use assets |  | 7,145 |  |  | 8,001 |  | — |  |  | — |  |  | — |
FHLBNY and FRBNY stock |  | 3,150 |  |  | 3,099 |  |  | 3,138 |  |  | 5,784 |  |  | 4,041 |
Deposits |  | 2,037,774 |  |  | 1,572,138 |  |  | 1,569,237 |  |  | 1,467,446 |  |  | 1,456,343 |
Securities sold under agreements to repurchase |  | — |  |  | — |  |  | — |  |  | 10,000 |  |  | 27,606 |
FHLBNY advances |  | — |  |  | — |  |  | — |  |  | 59,700 |  |  | 9,093 |
Operating lease liabilities |  | 7,264 |  |  | 8,084 |  |  | — |  |  | — |  |  | — |
Long term finance lease obligation |  | 3,849 |  |  | 4,085 |  |  | 4,304 |  |  | 4,517 |  |  | 4,722 |
Shareholders' equity |  | 199,699 |  |  | 182,627 |  |  | 165,029 |  |  | 149,813 |  |  | 143,748 |

|  | SUMMARIZED EARNINGS DATA FOR THE YEARS ENDED DECEMBER 31,
(in thousands) |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Net interest income |  | $ | 62,919 |  |  | $ | 60,611 |  |  | $ | 60,480 |  |  | $ | 56,987 |  |  | $ | 52,329 |
Provision for loan losses |  | 4,239 |  |  | 5,945 |  |  | 3,153 |  |  | 9,022 |  |  | 2,437 |
Net interest income after provision for loan losses |  | 58,680 |  |  | 54,666 |  |  | 57,327 |  |  | 47,965 |  |  | 49,892 |
Wealth management group fee income |  | 9,492 |  |  | 9,503 |  |  | 9,317 |  |  | 8,804 |  |  | 8,316 |
Service charges on deposit accounts |  | 3,134 |  |  | 4,460 |  |  | 4,727 |  |  | 4,961 |  |  | 5,089 |
Interchange revenue from debit card transactions |  | 4,068 |  |  | 4,104 |  |  | 4,040 |  |  | 3,761 |  |  | 4,027 |
Securities gains, net |  | — |  |  | 19 |  |  | — |  |  | 109 |  |  | 987 |
Change in fair value of equity investments |  | 89 |  |  | 81 |  |  | 2,004 |  |  | 80 |  |  | 43 |
Other non-interest income |  | 4,341 |  |  | 1,906 |  |  | 2,986 |  |  | 2,776 |  |  | 2,687 |
Total non-interest income |  | 21,124 |  |  | 20,073 |  |  | 23,074 |  |  | 20,491 |  |  | 21,149 |
Legal accruals and settlements |  | — |  |  | — |  |  | 989 |  |  | 850 |  |  | 1,200 |
Other non-interest expenses |  | 55,935 |  |  | 55,696 |  |  | 55,777 |  |  | 52,914 |  |  | 55,410 |
Total non-interest expenses |  | 55,935 |  |  | 55,696 |  |  | 56,766 |  |  | 53,764 |  |  | 56,610 |
Income before income tax expense |  | 23,869 |  |  | 19,043 |  |  | 23,635 |  |  | 14,692 |  |  | 14,431 |
Income tax expense |  | 4,607 |  |  | 3,434 |  |  | 4,009 |  |  | 7,262 |  |  | 4,404 |
Net income |  | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |  |  | $ | 7,430 |  |  | $ | 10,027 |

38

|  | SELECTED PER SHARE DATA ON SHARES OF COMMON STOCK AT OR FOR THE YEARS ENDED DECEMBER 31,
|  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | % Change 2019 To 2020 |  | Compounded Annual Growth 5 Years
Earnings per share (1) |  | $ | 4.01 |  |  | $ | 3.21 |  |  | $ | 4.06 |  |  | $ | 1.55 |  |  | $ | 2.11 |  |  | 24.9 | % |  | 14.9 | %
Dividends declared |  | 1.04 |  |  | 1.04 |  |  | 1.04 |  |  | 1.04 |  |  | 1.04 |  |  | — | % |  | — | %
Tangible book value (2) (4) |  | 37.83 |  |  | 32.74 |  |  | 29.22 |  |  | 26.14 |  |  | 24.89 |  |  | 15.5 | % |  | 10.0 | %
Book Value |  | 42.53 |  |  | 37.35 |  |  | 33.99 |  |  | 31.10 |  |  | 30.07 |  |  | 13.9 | % |  | 8.0 | %
Market price at December 31, |  | 33.95 |  |  | 42.50 |  |  | 41.31 |  |  | 48.10 |  |  | 36.35 |  |  | (20.1) | % |  | 4.3 | %
Common shares outstanding at year end (in thousands) (3) |  | 4,695 |  | 4,889 |  |  | 4,855 |  |  | 4,817 |  |  | 4,781 |  |  | (4.0) | % |  | (0.2) | %
Weighted average shares outstanding (in thousands) |  | 4,802 |  |  | 4,869 |  |  | 4,832 |  |  | 4,800 |  |  | 4,762 |  |  | (1.4) | % |  | 0.3 | %

(1) Earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. There is no difference between basic and diluted earnings per share.
(2) Tangible book value is total shareholders’ equity less goodwill and other intangible assets divided by common shares outstanding.
(3) All issuable shares including those related to directors’ restricted stock units and directors’ stock compensation.
(4) See the GAAP to Non-GAAP reconciliations starting at pages 75-78.

|  | SELECTED RATIOS AT OR FOR THE YEARS ENDED DECEMBER 31,
|  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Return on average assets |  | 0.94 | % |  | 0.88 | % |  | 1.14 | % |  | 0.43 | % |  | 0.60 | %
Return on average equity |  | 9.94 | % |  | 8.86 | % |  | 12.76 | % |  | 4.91 | % |  | 7.02 | %
Dividend yield at year end |  | 3.06 | % |  | 2.45 | % |  | 2.52 | % |  | 2.16 | % |  | 2.86 | %
Dividend payout ratio |  | 25.73 | % |  | 32.28 | % |  | 25.42 | % |  | 66.30 | % |  | 48.76 | %
Total capital to risk adjusted assets (4) |  | 13.62 | % |  | 13.98 | % |  | 13.14 | % |  | 11.82 | % |  | 12.14 | %
Tier I capital to risk adjusted assets (4) |  | 12.37 | % |  | 12.73 | % |  | 11.89 | % |  | 10.56 | % |  | 10.94 | %
Common equity tier I capital (4) |  | 12.37 | % |  | 12.73 | % |  | 11.89 | % |  | 10.56 | % |  | 10.94 | %
Tier I leverage ratio (4) |  | 7.90 | % |  | 9.35 | % |  | 8.79 | % |  | 8.02 | % |  | 7.81 | %
Average equity to average assets |  | 9.47 | % |  | 9.98 | % |  | 8.96 | % |  | 8.83 | % |  | 8.57 | %
Year-end equity to year-end assets ratio |  | 8.76 | % |  | 10.22 | % |  | 9.40 | % |  | 8.77 | % |  | 8.67 | %
Loans to deposits |  | 75.40 | % |  | 83.28 | % |  | 83.60 | % |  | 89.40 | % |  | 82.42 | %
Allowance for loan losses to total loans |  | 1.36 | % |  | 1.79 | % |  | 1.44 | % |  | 1.61 | % |  | 1.19 | %
Allowance for loan losses to non-performing loans |  | 210.25 | % |  | 130.38 | % |  | 154.59 | % |  | 122.14 | % |  | 118.35 | %
Non-performing loans to total loans |  | 0.65 | % |  | 1.38 | % |  | 0.93 | % |  | 1.32 | % |  | 1.00 | %
Non-performing assets to total assets |  | 0.45 | % |  | 1.04 | % |  | 0.73 | % |  | 1.13 | % |  | 0.75 | %
Net interest rate spread |  | 3.14 | % |  | 3.45 | % |  | 3.59 | % |  | 3.47 | % |  | 3.26 | %
Net interest margin |  | 3.25 | % |  | 3.64 | % |  | 3.72 | % |  | 3.56 | % |  | 3.37 | %
Efficiency ratio (unadjusted) (1) |  | 66.56 | % |  | 69.03 | % |  | 67.94 | % |  | 69.39 | % |  | 77.04 | %
Efficiency ratio (adjusted) (2) (3) |  | 65.71 | % |  | 67.95 | % |  | 67.22 | % |  | 66.60 | % |  | 74.43 | %

(1) Efficiency ratio (unadjusted) is non-interest bearing expense divided by the total of net interest income plus non-interest income.
(2) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal settlement divided by the total of fully taxable equivalent net interest income plus non-interest income less net gain on securities transactions.
(3) See the GAAP to Non-GAAP reconciliations starting at page 75-78.
(4) Consolidated capital ratios. Please see Note 20 for Bank only ratios.
39

The following tables summarize the Corporation’s unaudited net income and basic earnings per share at each quarter end for the years 2020 and 2019:

|  | 2020
(in thousands, except per share data) |  | Quarter Ended
UNAUDITED QUARTERLY DATA |  | Mar. 31 |  | June 30 |  | Sept. 30 |  | Dec. 31
Interest and dividend income |  | $ | 16,384 |  |  | $ | 16,472 |  |  | $ | 16,714 |  |  | $ | 17,337 |
Interest expense |  | 1,322 |  |  | 881 |  |  | 845 |  |  | 940 |
Net interest income |  | 15,062 |  |  | 15,591 |  |  | 15,869 |  |  | 16,397 |
Provision for loan losses (1) |  | 3,050 |  |  | 260 |  |  | 679 |  |  | 250 |
Net interest income after provision for loan losses |  | 12,012 |  |  | 15,331 |  |  | 15,190 |  |  | 16,147 |
Total non-interest income |  | 4,730 |  |  | 5,080 |  |  | 5,339 |  |  | 5,975 |
Total non-interest expenses |  | 13,749 |  |  | 13,227 |  |  | 13,362 |  |  | 15,597 |
Income before income tax expense |  | 2,993 |  |  | 7,184 |  |  | 7,167 |  |  | 6,525 |
Income tax expense |  | 502 |  |  | 1,357 |  |  | 1,456 |  |  | 1,292 |
Net income |  | $ | 2,491 |  |  | $ | 5,827 |  |  | $ | 5,711 |  |  | $ | 5,233 |
Basic and diluted earnings per share |  | $ | 0.51 |  |  | $ | 1.20 |  |  | $ | 1.19 |  |  | $ | 1.11 |

(1) The quarter ended March 31, 2020 included a $2.7 million provision for probable incurred credit losses related to the COVID-19 pandemic.

|  | 2019
(in thousands, except per share data) |  | Quarter Ended
UNAUDITED QUARTERLY DATA |  | Mar. 31 |  | June 30 |  | Sept. 30 |  | Dec. 31
Interest and dividend income |  | $ | 16,665 |  |  | $ | 16,682 |  |  | $ | 16,808 |  |  | $ | 16,777 |
Interest expense |  | 1,498 |  |  | 1,581 |  |  | 1,666 |  |  | 1,576 |
Net interest income |  | 15,167 |  |  | 15,101 |  |  | 15,142 |  |  | 15,201 |
Provision for loan losses (1) |  | 1,093 |  |  | 150 |  |  | 4,441 |  |  | 261 |
Net interest income after provision for loan losses |  | 14,074 |  |  | 14,951 |  |  | 10,701 |  |  | 14,940 |
Total non-interest income |  | 4,925 |  |  | 5,086 |  |  | 4,956 |  |  | 5,106 |
Total non-interest expenses |  | 13,497 |  |  | 13,823 |  |  | 13,525 |  |  | 14,851 |
Income before income tax expense |  | 5,502 |  |  | 6,214 |  |  | 2,132 |  |  | 5,195 |
Income tax expense |  | 1,034 |  |  | 1,233 |  |  | 176 |  |  | 991 |
Net income |  | $ | 4,468 |  |  | $ | 4,981 |  |  | $ | 1,956 |  |  | $ | 4,204 |
Basic and diluted earnings per share |  | $ | 0.92 |  |  | $ | 1.02 |  |  | $ | 0.40 |  |  | $ | 0.87 |

(1) The quarter ended September 30, 2019 included a $4.2 million specific impairment related to a participating interest in a commercial credit.
40

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The following is the MD&A of the Corporation in this Form 10-K at December 31, 2020 and 2019, and for the years ended December 31, 2020, 2019, and 2018. The purpose of this discussion is to focus on information about the financial condition and results of operations of the Corporation. Reference should be made to the accompanying audited consolidated financial statements and footnotes for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 2-5.
The MD&A included in this Form 10-K contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below.
The Corporation has been a financial holding company since 2000, and the Bank was established in 1833, CFS in 2001, and CRM in 2016. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential and consumer loans, interest rate swaps, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services. The Bank relies substantially on a foundation of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its income primarily from interest and fees on loans, interest on investment securities, WMG fee income and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans and general operating expenses.
CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company that insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
Forward-looking Statements
This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, difficulties in managing the Corporation’s growth, competition, the impact of the COVID-19 pandemic, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” of this annual report on Form 10-K. The Corporation's quarterly filings are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com or by written request to: Kathleen S. McKillip, Corporate Secretary, Chemung Financial Corporation, One Chemung Canal Plaza, Elmira, NY 14901. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.
41

Critical Accounting Policies and Estimates
Critical accounting policies include the areas where the Corporation has made what it considers to be particularly difficult, subjective or complex judgments concerning estimates, and where these estimates can significantly affect the Corporation's financial results under different assumptions and conditions. The Corporation prepares its financial statements in conformity with GAAP. As a result, the Corporation is required to make certain estimates, judgments and assumptions that it believes are reasonable based upon the information available at that time. These estimates, judgments and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the years presented. Actual results could be different from these estimates.
Allowance for Loan Losses
Management considers the accounting policy relating to the allowance for loan losses to be a critical accounting policy given the uncertainty in evaluating the level of the allowance required to cover probable incurred credit losses inherent in the loan portfolio, and the material effect that such judgments can have on the Corporation's results of operations. While management's current evaluation of the allowance for loan losses indicates that the allowance is adequate, under adversely different conditions or assumptions the allowance would need to be increased. For example, if historical loan loss experience significantly worsened or if current economic conditions significantly deteriorated, additional provisions for loan losses would be required to increase the allowance. In addition, the assumptions and estimates used in the internal reviews of the Corporation's non-performing loans and potential problem loans, and the associated evaluation of the related collateral coverage for these loans, has a significant impact on the overall analysis of the adequacy of the allowance for loan losses. Real estate values in the Corporation’s market area did not increase dramatically in the prior several years, and, as a result, any declines in real estate values have been modest. While management has concluded that the current evaluation of collateral values is reasonable under the circumstances, if collateral evaluations were significantly lowered, the Corporation's allowance for loan losses policy would also require additional provisions for loan losses. The determination of the allowance also includes an evaluation of non-impaired loans and is based on historical loss experience adjusted for current factors. Please see Note 1 to the Corporation's consolidated financial statements which begins on page F-10, for further discussion.
Goodwill
Goodwill represents the excess of the purchase price over the net fair value of the acquired businesses. Goodwill is not amortized, but is tested for impairment at the reporting unit level, defined as the segment level, at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. In assessing impairment, the Corporation has the option to perform a qualitative analysis to determine whether the existence of events or circumstances leads to a determination that it is more-likely-than-not that the fair value of the reporting unit is less than its carrying amount. If, after assessing the totality of such events or circumstances, we determine it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, then we would not be required to perform an impairment test.
The quantitative impairment analysis requires a comparison of each reporting unit’s fair value to its carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes, but may not be limited to, the selection of appropriate discount rates, the identification of relevant market comparables and the development of cash flow projections. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value.
Goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred. As of December 31, 2020, the Corporation elected to proceed to a quantitative calculation to compare the reporting unit's fair value with its' carrying value. We continue to evaluate our qualitative assessment assumptions, which are subject to risks and uncertainties, including: (1) forecasted revenues, expenses, and cash flows; (2) current discount rates; (3) our market capitalization; (4) observable market transactions and multiples; (5) changes to the regulatory environment; and (6) the nature and amount of government support that has been and is expected to be provided in the future. Please see Note 1 to the Corporation's consolidated financial statements which begins on page F-10, for further discussion.
42

Risks and Uncertainties
COVID-19
The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. This has resulted in an unprecedented slow-down in economic activity and a related increase in unemployment. Since the COVID-19 pandemic, millions of people have filed claims for unemployment, and stock markets have remained volatile and in particular bank stocks have significantly declined in value. Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.
Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and when and how the economy may be reopened.
The Corporation's consolidated financial statements reflect estimates and assumptions that affect the reported amounts of assets and liabilities, including the amount of the allowance for loan losses established. Management evaluated the potential impact of the COVID-19 pandemic as it related to the loan portfolio and as part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. Certain allowance qualitative factors were increased based on an assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.
Management has taken actions to identify and assess additional possible credit exposure due to the COVID-19 pandemic based upon the industry types within the current loan portfolio. While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, Management has designated certain industries as most impacted by COVID-19. For a discussion of the effect of COVID-19 on our business, see pages 57-58 of this Form 10-K.
43

Consolidated Financial Highlights

| As of or for the Years Ended
| December 31, |  | December 31, |  | December 31,
(in thousands, except per share data) | 2020 |  | 2019 |  | 2018
RESULTS OF OPERATIONS
Interest and dividend income | $ | 66,907 |  |  | $ | 66,932 |  |  | $ | 64,553 |
Interest expense | 3,988 |  |  | 6,321 |  |  | 4,073 |
Net interest income | 62,919 |  |  | 60,611 |  |  | 60,480 |
Provision for loan losses | 4,239 |  |  | 5,945 |  |  | 3,153 |
Net interest income after provision for loan losses | 58,680 |  |  | 54,666 |  |  | 57,327 |
Non-interest income | 21,124 |  |  | 20,073 |  |  | 23,074 |
Non-interest expenses | 55,935 |  |  | 55,696 |  |  | 56,766 |
Income before income tax expense | 23,869 |  |  | 19,043 |  |  | 23,635 |
Income tax expense | 4,607 |  |  | 3,434 |  |  | 4,009 |
Net income | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |
Basic and diluted earnings per share | $ | 4.01 |  |  | $ | 3.21 |  |  | $ | 4.06 |
Average basic and diluted shares outstanding | 4,802 |  |  | 4,869 |  |  | 4,832 |
PERFORMANCE RATIOS
Return on average assets | 0.94 | % |  | 0.88 | % |  | 1.14 | %
Return on average equity | 9.94 | % |  | 8.86 | % |  | 12.76 | %
Return on average tangible equity (a) | 11.24 | % |  | 10.18 | % |  | 15.07 | %
Efficiency ratio (unadjusted) (g) | 66.56 | % |  | 69.03 | % |  | 67.94 | %
Efficiency ratio (adjusted) (a) (b) | 65.71 | % |  | 67.95 | % |  | 67.22 | %
Non-interest expense to average assets (a) (c) | 2.73 | % |  | 3.16 | % |  | 3.31 | %
Loans to deposits | 75.40 | % |  | 83.28 | % |  | 83.60 | %
AVERAGE YIELDS / RATES - Fully Taxable Equivalent
Yield on loans | 4.06 | % |  | 4.50 | % |  | 4.39 | %
Yield on investments | 1.65 | % |  | 2.37 | % |  | 2.19 | %
Yield on interest-earning assets | 3.46 | % |  | 4.02 | % |  | 3.96 | %
Cost of interest-bearing deposits | 0.31 | % |  | 0.56 | % |  | 0.31 | %
Cost of borrowings | 1.65 | % |  | 3.53 | % |  | 2.37 | %
Cost of interest-bearing liabilities | 0.32 | % |  | 0.57 | % |  | 0.37 | %
Interest rate spread | 3.14 | % |  | 3.45 | % |  | 3.59 | %
Net interest margin, fully taxable equivalent | 3.25 | % |  | 3.64 | % |  | 3.72 | %
CAPITAL
Total equity to total assets at end of year | 8.76 | % |  | 10.22 | % |  | 9.40 | %
Tangible equity to tangible assets at end of year (a) | 7.87 | % |  | 9.07 | % |  | 8.19 | %
Book value per share | $ | 42.53 |  |  | $ | 37.35 |  |  | $ | 33.99 |
Tangible book value per share (a) | 37.83 |  |  | 32.74 |  |  | 29.22 |
Year-end market value per share | 33.95 |  |  | 42.50 |  |  | 41.31 |
Dividends declared per share | 1.04 |  |  | 1.04 |  |  | 1.04 |

44

| As of or for the Years Ended
| December 31, |  | December 31, |  | December 31,
(in thousands, except per share data) | 2020 |  | 2019 |  | 2018
AVERAGE BALANCES
Loans (d) | $ | 1,456,096 |  |  | $ | 1,296,426 |  |  | $ | 1,320,059 |
Interest-earning assets | 1,945,062 |  |  | 1,674,668 |  |  | 1,638,803 |
Total assets | 2,046,786 |  |  | 1,764,401 |  |  | 1,716,992 |
Deposits | 1,807,478 |  |  | 1,558,164 |  |  | 1,515,658 |
Total equity | 193,741 |  |  | 176,138 |  |  | 153,793 |
Tangible equity (a) | 171,413 |  |  | 153,278 |  |  | 130,256 |
ASSET QUALITY
Net charge-offs | $ | 6,792 |  |  | $ | 1,411 |  |  | $ | 5,369 |
Non-performing loans (e) | 9,952 |  |  | 18,008 |  |  | 12,254 |
Non-performing assets (f) | 10,189 |  |  | 18,525 |  |  | 12,828 |
Allowance for loan losses | 20,924 |  |  | 23,478 |  |  | 18,944 |
Annualized net charge-offs to average loans | 0.47 | % |  | 0.11 | % |  | 0.41 | %
Non-performing loans to total loans | 0.65 | % |  | 1.38 | % |  | 0.93 | %
Non-performing assets to total assets | 0.45 | % |  | 1.04 | % |  | 0.73 | %
Allowance for loan losses to total loans | 1.36 | % |  | 1.79 | % |  | 1.44 | %
Allowance for loan losses to non-performing loans | 210.25 | % |  | 130.38 | % |  | 154.59 | %
(a) See the GAAP to Non-GAAP reconciliations on pages 75-78.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal accruals and settlements divided by the total of fully taxable equivalent net interest income plus non-interest income less net gains on securities transactions.
(c) For the non-interest expense to average assets ratio, non-interest expense does not include legal accruals and settlements. See Note 17 of the audited consolidated financial statements for further discussion.
(d) Loans include loans held for sale. Loans do not reflect the allowance for loan losses.
(e) Non-performing loans include non-accrual loans only.
(f) Non-performing assets include non-performing loans plus other real estate owned.
(g) Efficiency ratio (unadjusted) is non-interest bearing expense divided by the total of net interest income plus non-interest income.

45

Executive Summary
This executive summary of the MD&A includes selected information and may not contain all of the information that is important to readers of this annual report on Form 10-K. For a complete description of the trends and uncertainties, as well as the risks and critical accounting estimates affecting the Corporation, this annual report on Form 10-K should be read in its entirety.
The following table presents selected financial information for the years indicated, and the dollar and percent change (in thousands, except per share and ratio data):

| Years Ended December 31, |  |  |  |
| 2020 |  | 2019 |  | Change |  | Percentage Change
Net interest income | $ | 62,919 |  |  | $ | 60,611 |  |  | $ | 2,308 |  |  | 3.8 | %
Non-interest income | 21,124 |  |  | 20,073 |  |  | 1,051 |  |  | 5.2 | %
Non-interest expenses | 55,935 |  |  | 55,696 |  |  | 239 |  |  | 0.4 | %
Pre-provision income | 28,108 |  |  | 24,988 |  |  | 3,120 |  |  | 12.5 | %
Provision for loan losses | 4,239 |  |  | 5,945 |  |  | (1,706) |  |  | (28.7) | %
Income tax expense | 4,607 |  |  | 3,434 |  |  | 1,173 |  |  | 34.2 | %
Net income | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 3,653 |  |  | 23.4 | %
Basic and diluted earnings per share | $ | 4.01 |  |  | $ | 3.21 |  |  | $ | 0.80 |  |  | 24.9 | %
Selected financial ratios |  |  |  |  |  |  |
Return on average assets | 0.94 | % |  | 0.88 | % |  |  |  |
Return on average equity | 9.94 | % |  | 8.86 | % |  |  |  |
Net interest margin, fully taxable equivalent | 3.25 | % |  | 3.64 | % |  |  |  |
Efficiency ratio (adjusted) (a) | 65.71 | % |  | 67.95 | % |  |  |  |
Non-interest expense to average assets (a) | 2.73 | % |  | 3.16 | % |  |  |  |

(a) See the GAAP to Non-GAAP reconciliations on pages 75-78.
Net income for the year ended December 31, 2020 was $19.3 million, or $4.01 per share, compared with net income of $15.6 million, or $3.21 per share, for the prior year. Return on average equity for the year ended December 31, 2020 was 9.94%, compared with 8.86% for the prior year. The increase in net income for the year ended December 31, 2020, compared to the prior year, was driven by increases in net interest income and non-interest income and a decrease in the provision for loan losses, partially offset by an increase in non-interest expenses and income tax expense.
Net interest income
Net interest income increased $2.3 million, or 3.8% in 2020, compared with the prior year. The increase was due primarily to the impact of an increase of $270.4 million in average interest-earning assets, offset by the impact of a thirty-nine basis points decline in net interest margin.
Non-interest income
Non-interest income increased $1.1 million, or 5.2% in 2020, compared to the prior year. The increase was due primarily to increases of $1.3 million in net gains on sales of residential mortgage loans sold into the secondary market, $0.2 million in net gains on the sale of four commercial loans, three of which were non-performing, $0.4 million in interest rate swap fees earned, and a $0.6 million credit adjustment to Chemung Risk Management loss reserves, offset by a decrease of $1.3 million in service charges on deposit accounts primarily attributable to a decrease in NSF and overdraft fees as compared to the prior year.
Non-interest expenses
Non-interest expenses increased $0.2 million, or 0.4% in 2020, compared to the prior year. The increase was due primarily to increases of $0.8 million in salaries and wage expense, $0.5 million in FDIC insurance expense, and $0.4 million in loan expenses, offset by decreased spending across most other categories, including $0.4 million in furniture and equipment expenses, $0.3 million in marketing and advertising expenses, and $0.3 million in pension and other employee benefits, and a $0.5 million increase in the credit related to the net periodic pension and post-retirement benefits.
46

The increase in salaries and wage expense was primarily attributed to annual merit increases and an increase in commission and reward expenses. The increase in FDIC insurance expense was primarily attributed to the receipt of a $0.4 million credit in 2019 related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment. The increase in loan expenses was primarily attributed to legal fees associated with a legal action taken by the Corporation related to the $4.2 million impairment of a commercial credit disclosed in the Corporation's Current Report on Form 8-K, dated September 12, 2019, and an increase in loan volume during 2020 when compared to the prior year. The decrease in furniture and equipment expenses was primarily attributed to normal depreciation and a reduction in one-time service contract expenditures. The decrease in marketing and advertising expenses was primarily attributed to the cancellation of directed marketing initiatives due to the COVID-19 pandemic. The decrease in pension and other employee benefits in 2020 was primarily attributed to a decrease in healthcare expenses when compared to the prior year. The increase in the credit related to the net periodic pension and post-retirement benefits was primarily due to a change in factors used to prepare annual actuarial estimates. For the years ended December 31, 2020 and 2019, the ratio of non-interest expense to average assets was 2.73% and 3.16%, respectively.
Provision for loan losses
The provision for loan losses decreased $1.7 million, or 28.7% in 2020, compared to the prior year. The decrease in provision for loan losses in 2020 was primarily due to a specific impairment of $4.2 million related to a participation interest in a commercial credit in the prior year. The Corporation is closely monitoring the loan portfolio for effects related to COVID-19. In 2020, the Company increased the allowance by $4.5 million for probable incurred credit losses related to the COVID-19 pandemic, of which $4.0 million remains part of the allowance at year end. Net charge-offs were $6.8 million in 2020, compared with $1.4 million for the prior year. The increase in net charge-offs was due primarily to a charge-off of a large commercial participation loan for $3.8 million and a $2.1 million partial charge-off of a commercial loan.
Income tax expense
Income tax expense increased $1.2 million, or 34.2% in 2020, compared to the prior year. The effective tax rate for 2020 increased to 19.3% compared to 18.0% for the prior year. The increase in income tax expense was primarily due to an increase in pretax income.
The following table presents selected financial information for the years indicated, and the dollar and percent change (in thousands, except per share and ratio data):

| Years Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | Change |  | Percentage Change
Net interest income | $ | 60,611 |  |  | $ | 60,480 |  |  | $ | 131 |  |  | 0.2 | %
Non-interest income | 20,073 |  |  | 23,074 |  |  | (3,001) |  |  | (13.0) | %
Non-interest expenses | 55,696 |  |  | 56,766 |  |  | (1,070) |  |  | (1.9) | %
Pre-provision income | 24,988 |  |  | 26,788 |  |  | (1,800) |  |  | (6.7) | %
Provision for loan losses | 5,945 |  |  | 3,153 |  |  | 2,792 |  |  | 88.6 | %
Income tax expense | 3,434 |  |  | 4,009 |  |  | (575) |  |  | (14.3) | %
Net income | $ | 15,609 |  |  | $ | 19,626 |  |  | $ | (4,017) |  |  | (20.5) | %
Basic and diluted earnings per share | $ | 3.21 |  |  | $ | 4.06 |  |  | $ | (0.85) |  |  | (20.9) | %
Selected financial ratios |  |  |  |  |  |  |
Return on average assets | 0.88 | % |  | 1.14 | % |  |  |  |
Return on average equity | 8.86 | % |  | 12.76 | % |  |  |  |
Net interest margin, fully taxable equivalent | 3.64 | % |  | 3.72 | % |  |  |  |
Efficiency ratio (adjusted) (a) | 67.95 | % |  | 67.22 | % |  |  |  |
Non-interest expense to average assets (a) | 3.16 | % |  | 3.31 | % |  |  |  |

(a) See the GAAP to Non-GAAP reconciliations on pages 75-78.
Net income for the year ended December 31, 2019 was $15.6 million, or $3.21 per share, compared to net income of $19.6 million, or $4.06 per share, for the prior year. Return on average equity for the year ended December 31, 2019 was 8.86%, compared with 12.76% for the prior year. The decrease in net income for the year ended December 31, 2019, compared with the prior year, was driven by a decrease in non-interest income and an increase in the provision for loan losses, partially offset by an increase in net interest income and decreases in non-interest expenses and income tax expense.
47

Net interest income
Net interest income increased $0.1 million, or 0.2% in 2019, compared with the prior year. The increase was due primarily to the impact of an increase of $35.9 million in average interest-earning assets, offset by the impact of an eight basis points decline in net interest margin.
Non-interest income
Non-interest income decreased $3.0 million, or 13.0% in 2019, compared to the prior year. The decrease was due primarily to decreases of $1.9 million in the change in fair value of equity investments, $0.9 million in other non-interest income, $0.2 million in net gains (losses) on sales of other real estate owned, and $0.3 million in service charges on deposit accounts, offset by an increase of $0.2 million in WMG fee income and an increase of $0.2 million in CFS fee and commission income. The decrease in the change in fair value of equity investments was due primarily to the $2.1 million increase in the fair value of Visa Class B shares in the prior year, and a $0.1 million loss related to an investment in a limited partnership in the current year. Subsequent to the change in fair value, the Visa Class B shares were sold during the third quarter of 2018. The decrease in other non-interest income was due to a $0.4 million state sales tax refund in the prior year, a decrease of $0.1 million in rental income from other property owned in the prior year, and a decrease of $0.1 million in interest rate swap income primarily due to changes in market value in the current year. The increase in WMG fee income can be mostly attributed to an increase in the market value of assets under management and additional fee income from terminating trusts. CFS fee and commission income increased in 2019 compared to the prior year due to an increase in transaction activity.
Non-interest expense
Non-interest expense decreased $1.1 million, or 1.9% in 2019, compared to the prior year. The decrease was due primarily to decreases of $1.0 million in legal accruals and settlements, $0.6 million in net occupancy expenses, $0.6 million in FDIC insurance expense, $0.3 million in professional services, $0.3 million in other real estate owned expenses, and $0.2 in marketing and advertising expenses. These items were partially offset by increases of $1.1 million in salaries and wages, $0.4 million in pension and other employee benefits, $0.4 million in data processing expenses, and $0.1 million in other non-interest expenses. The decrease in legal accruals and settlements was due to the resolution by way of a settlement agreement in the matter of Fane v. Chemung Canal Trust Company. This matter was settled in March 2018. Additional information can be found in Note 17 of the audited Consolidated Financial Statements. The decrease in net occupancy and furniture and equipment expenses was mostly attributable to a reduction in depreciation expense related to mechanical equipment, the closing of two branches in 2019, and the reduction in non-capitalizable fixed asset purchases as compared to the prior year due to the opening of two new branches in 2018. The decrease in FDIC insurance expense was primarily due to the receipt of a $0.4 million credit related to the Deposit Insurance Fund’s (DIF) minimum reserve ratio assessment. The decrease in professional services was due to consulting fees incurred in the prior year associated with a sales tax refund in the prior year. The decrease in other real estate owned expenses can be attributed to a reduction in the number of OREO properties in 2019 as compared to 2018. The decrease in marketing and advertising expenses was due to an increased marketing effort in 2018 to support the opening of two denovo branches during the year. The increase in salaries and wages can be attributed to annual merit increases and a lower vacancy rate in 2019. The increase in pension and other employee benefits can be attributed to full vesting of stock awards related to an executive retirement and an increase in payroll tax and health insurance expenses. The increase in other non-interest expense can be attributed to a $0.3 million charge taken to recognize the impairment of a fixed asset. For the years ended December 31, 2019 and 2018, non-interest expense to average assets was 3.16% and 3.31%, respectively.
Provision for loan losses
The provision for loan losses increased $2.8 million, or 88.6% in 2019, compared to the prior year. The increase was primarily the result of specific impairments in loans identified as impaired, including $1.8 million in specific reserves related to a commercial real estate loan and $4.2 million in specific reserves related to a participating interest in a commercial and industrial credit, offset by a decline in volume and loss factors on commercial and consumer unclassified pooled loans. Net charge-offs were $1.4 million in 2019, compared with $5.4 million for the prior year. The decrease in net charge-offs was due primarily to the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018.
Income tax expense
Income tax expense decreased $0.6 million, or 14.3% in 2019, compared to the prior year. The effective tax rate for 2019 increased to 18.0% compared with 17.0% for the prior year. The decrease in income tax expense was primarily due to a decrease in pretax income.
48

Consolidated Results of Operations
The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the years ended December 31, 2020 and 2019 and for the years ended December 31, 2019 and 2018. For a discussion of the Critical Accounting Policies and Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see pages 42 and 43.
Net Interest Income
The following table presents net interest income for the years indicated, and the dollar and percent change (in thousands):

| Years Ended December 31, |  |  |  |
| 2020 |  | 2019 |  | Change |  | Percentage Change
Interest and dividend income | $ | 66,907 |  |  | $ | 66,932 |  |  | $ | (25) |  |  | — | %
Interest expense | 3,988 |  |  | 6,321 |  |  | (2,333) |  |  | (36.9) | %
Net interest income | $ | 62,919 |  |  | $ | 60,611 |  |  | $ | 2,308 |  |  | 3.8 | %

Net interest income, which is the difference between the interest income earned on interest-earning assets, such as loans and securities and the interest expense accrued on interest-bearing liabilities, such as deposits and borrowings, is the largest contributor to the Corporation’s earnings.
Net interest income for the year ended December 31, 2020 totaled $62.9 million, an increase of $2.3 million, or 3.8%, compared with $60.6 million for the prior year. Fully taxable equivalent net interest margin was 3.25% for the year ended December 31, 2020 compared with 3.64% for the prior year. The increase in net interest income was primarily due to increases of $0.8 million in interest income on loans, including fees, and $0.7 million in interest and dividend income on taxable securities, and a decrease of $2.3 million in total interest expense, offset by a decrease of $1.5 million in interest income on interest-earning deposits.
The increase in interest income on loans was due primarily to an increase of $1.7 million in interest income on commercial loans primarily attributable to a $157.8 million increase in the average balance of commercial loans and the recognition of $3.8 million of PPP loan fees, partially offset by a decrease in the average commercial portfolio yield of 56 basis points due to a decrease in interest rates. Interest income on mortgage loans increased $0.9 million primarily due to an increase of $28.2 million in the average balance of mortgage loans, partially offset by a decrease in average mortgage portfolio yield of nine basis points due to a decrease in interest rates. These increases were offset by a decrease of $1.8 million in interest income on consumer loans which can be attributed to both decreases in the average balances and average portfolio yield on consumer loans. The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $77.7 million, partially offset by a decrease in average interest rates. The decrease in interest on interest-earning deposits was due primarily to the sharp drop in interest rates on overnight deposits with the average yield on interest-earning deposits declining from 2.26% in 2019 to 0.54% in 2020, offset by a $38.9 million increase in the average balance of interest-earning deposits. The decrease in interest expense on deposits was due primarily to the decreases in average rates paid on interest-bearing checking, savings and money market products in response to the Federal Reserve's 50 and 100 basis points drop on overnight rates in March, 2020. Average interest-earning assets increased $270.4 million in 2020 when compared to the prior year. The average yield on average interest-earning assets decreased 56 basis points, while the average cost of interest-bearing liabilities decreased 25 basis points, as compared to the prior year.
The following table presents net interest income for the years indicated, and the dollar and percent change (in thousands):

| Years Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | Change |  | Percentage Change
Interest and dividend income | $ | 66,932 |  |  | $ | 64,553 |  |  | $ | 2,379 |  |  | 3.7 | %
Interest expense | 6,321 |  |  | 4,073 |  |  | 2,248 |  |  | 55.2 | %
Net interest income | $ | 60,611 |  |  | $ | 60,480 |  |  | $ | 131 |  |  | 0.2 | %

49

Net interest income for the year ended December 31, 2019 totaled $60.6 million, an increase of $0.1 million, or 0.2%, compared with $60.5 million for the prior year. Fully taxable equivalent net interest margin was 3.64% for the year ended December 31, 2019 compared with 3.72% for the prior year. The increase in total interest and dividend income in 2019 was due primarily to increases in interest income on interest-earning deposits of $1.5 million, interest and fees from loans of $0.4 million, and interest income from taxable securities of $0.5 million, compared to the prior year. The increase in total interest expense in 2019 was due primarily to an increase in interest expense on deposits of $2.9 million, offset by decreases in interest expense on securities sold under agreements to repurchase of $0.1 million, and interest expense on borrowed funds of $0.5 million, compared to the prior year. Average interest-earning assets increased $35.9 million in 2019 when compared to the prior year. The average yield on average interest-earning assets increased 6 basis points, while the average cost of interest-bearing liabilities increased 20 basis points, as compared to the prior year.
As compared to 2018, total interest income increased by $2.4 million. Interest income on interest-earning deposits was up $1.5 million due to a $67 million increase in average balances, and income on taxable securities increased by $0.5 million mainly due to an increase in average yield of 24 basis points. The increase in average interest-earning deposits was primarily driven by decreases in average total loan balances and increases in average total deposits. Additionally, interest on Commercial loans increased by $1.1 million due to an increase in average balances as well as an increase in average rates. This was offset by a decline of $0.5 million in consumer loan income, which declined mainly due to a decrease in average volume, and a decline of $0.2 million in mortgage loan income. Total interest expense increased by $2.2 million. This was mostly driven by interest on savings and money market deposits, time deposits, and interest-bearing demand deposits, which increased by $1.0 million, $1.4 million, and $0.4 million respectively, mainly due to increases in average rates due to competitive factors. This increase in expense was offset by a decrease in borrowing expense of $0.6 million, which was driven mainly due to a decrease in average volume due to a decline in average overnight FHLBNY advances.
Average Consolidated Balance Sheet and Interest Analysis
The following table presents certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the years ended December 31, 2020, 2019 and 2018. It also reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the years ended December 31, 2020, 2019 and 2018. For the purpose of the table below, non-accruing loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments.
50

AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
| Year Ended December 31,
| 2020 |  | 2019 |  | 2018
(in thousands) | Average Balance |  | Interest |  | Yield/ Rate |  | Average Balance |  | Interest |  | Yield/ Rate |  | Average Balance |  | Interest |  | Yield/ Rate
Interest-earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial loans | $ | 1,020,292 |  |  | $ | 41,936 |  |  | 4.11 | % |  | $ | 862,479 |  |  | $ | 40,250 |  |  | 4.67 | % |  | $ | 853,240 |  |  | $ | 39,166 |  |  | 4.59 | %
Mortgage loans | 211,929 |  |  | 7,885 |  |  | 3.72 | % |  | 183,696 |  |  | 6,998 |  |  | 3.81 | % |  | 191,668 |  |  | 7,197 |  |  | 3.75 | %
Consumer loans | 223,875 |  |  | 9,358 |  |  | 4.18 | % |  | 250,251 |  |  | 11,133 |  |  | 4.45 | % |  | 275,151 |  |  | 11,625 |  |  | 4.22 | %
Taxable securities | 307,933 |  |  | 6,012 |  |  | 1.95 | % |  | 230,263 |  |  | 5,276 |  |  | 2.29 | % |  | 234,407 |  |  | 4,815 |  |  | 2.05 | %
Tax-exempt securities | 41,582 |  |  | 1,306 |  |  | 3.14 | % |  | 47,464 |  |  | 1,408 |  |  | 2.97 | % |  | 51,036 |  |  | 1,414 |  |  | 2.77 | %
Interest-earning deposits | 139,451 |  |  | 755 |  |  | 0.54 | % |  | 100,515 |  |  | 2,270 |  |  | 2.26 | % |  | 33,301 |  |  | 756 |  |  | 2.27 | %
Total interest-earning assets | 1,945,062 |  |  | 67,252 |  |  | 3.46 | % |  | 1,674,668 |  |  | 67,335 |  |  | 4.02 | % |  | 1,638,803 |  |  | 64,973 |  |  | 3.96 | %
Non-interest earning assets: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and due from banks | 25,040 |  |  |  |  |  |  | 25,976 |  |  |  |  |  |  | 27,122 |  |  |  |  |
Premises and equipment, net | 21,462 |  |  |  |  |  |  | 25,911 |  |  |  |  |  |  | 26,024 |  |  |  |  |
Other assets | 69,774 |  |  |  |  |  |  | 59,306 |  |  |  |  |  |  | 54,831 |  |  |  |  |
Allowance for loan losses | (24,695) |  |  |  |  |  |  | (20,886) |  |  |  |  |  |  | (20,534) |  |  |  |  |
AFS valuation allowance | 10,143 |  |  |  |  |  |  | (574) |  |  |  |  |  |  | (9,254) |  |  |  |  |
Total assets | $ | 2,046,786 |  |  |  |  |  |  | $ | 1,764,401 |  |  |  |  |  |  | $ | 1,716,992 |  |  |  |  |
Interest-bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits | $ | 246,133 |  |  | 334 |  |  | 0.14 | % |  | $ | 191,759 |  |  | 767 |  |  | 0.40 | % |  | $ | 156,432 |  |  | 365 |  |  | 0.23 | %
Savings and insured money market deposits | 797,287 |  |  | 1,282 |  |  | 0.16 | % |  | 739,417 |  |  | 3,073 |  |  | 0.42 | % |  | 764,420 |  |  | 2,044 |  |  | 0.27 | %
Time deposits | 190,072 |  |  | 2,211 |  |  | 1.16 | % |  | 164,604 |  |  | 2,333 |  |  | 1.42 | % |  | 134,837 |  |  | 914 |  |  | 0.68 | %
Long-term advances, and other debt | 9,729 |  |  | 161 |  |  | 1.65 | % |  | 4,187 |  |  | 148 |  |  | 3.53 | % |  | 31,590 |  |  | 750 |  |  | 2.37 | %
Total interest-bearing liabilities | 1,243,221 |  |  | 3,988 |  |  | 0.32 | % |  | 1,099,967 |  |  | 6,321 |  |  | 0.57 | % |  | 1,087,279 |  |  | 4,073 |  |  | 0.37 | %
Non-interest bearing liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Demand deposits | 573,986 |  |  |  |  |  |  | 462,384 |  |  |  |  |  |  | 459,969 |  |  |  |  |
Other liabilities | 35,838 |  |  |  |  |  |  | 25,912 |  |  |  |  |  |  | 15,951 |  |  |  |  |
Total liabilities | 1,853,045 |  |  |  |  |  |  | 1,588,263 |  |  |  |  |  |  | 1,563,199 |  |  |  |  |
Shareholders' equity | 193,741 |  |  |  |  |  |  | 176,138 |  |  |  |  |  |  | 153,793 |  |  |  |  |
Total liabilities and shareholders’ equity | $ | 2,046,786 |  |  |  |  |  |  | $ | 1,764,401 |  |  |  |  |  |  | $ | 1,716,992 |  |  |  |  |
Fully taxable equivalent net interest income |  |  | 63,264 |  |  |  |  |  |  | 61,014 |  |  |  |  |  |  | 60,900 |  |  |
Net interest rate spread (1) |  |  |  |  | 3.14 | % |  |  |  |  |  | 3.45 | % |  |  |  |  |  | 3.59 | %
Net interest margin, fully taxable equivalent (2) |  |  |  |  | 3.25 | % |  |  |  |  |  | 3.64 | % |  |  |  |  |  | 3.72 | %
Taxable equivalent adjustment |  |  | (345) |  |  |  |  |  |  | (403) |  |  |  |  |  |  | (420) |  |  |
Net interest income |  |  | $ | 62,919 |  |  |  |  |  |  | $ | 60,611 |  |  |  |  |  |  | $ | 60,480 |  |  |

(1) Net interest rate spread is the difference in the average yield on interest-earning assets less the average cost of interest-bearing liabilities.
(2) Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
Changes Due to Rate and Volume
Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The table below illustrates the extent to which changes in interest rates and in the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the years indicated. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purposes of this table, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the years analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.
51

RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
| 2020 vs. 2019 |  | 2019 vs. 2018
| Increase/(Decrease) |  | Increase/(Decrease)
(in thousands) | Total Change |  | Due to Volume |  | Due to Rate |  | Total Change |  | Due to Volume |  | Due to Rate
Interest income |  |  |  |  |  |  |  |  |  |  |
Commercial loans | $ | 1,686 |  |  | $ | 6,870 |  |  | $ | (5,184) |  |  | $ | 1,084 |  |  | $ | 415 |  |  | $ | 669 |
Mortgage loans | 887 |  |  | 1,056 |  |  | (169) |  |  | (199) |  |  | (310) |  |  | 111 |
Consumer loans | (1,775) |  |  | (1,127) |  |  | (648) |  |  | (492) |  |  | (1,097) |  |  | 605 |
Taxable securities | 736 |  |  | 1,601 |  |  | (865) |  |  | 461 |  |  | (87) |  |  | 548 |
Tax-exempt securities | (102) |  |  | (180) |  |  | 78 |  |  | (6) |  |  | (103) |  |  | 97 |
Interest-earning deposits | (1,515) |  |  | 658 |  |  | (2,173) |  |  | 1,514 |  |  | 1,517 |  |  | (3) |
Total interest income | (83) |  |  | 8,878 |  |  | (8,961) |  |  | 2,362 |  |  | 335 |  |  | 2,027 |

Interest expense |  |  |  |  |  |  |  |  |  |  |
Interest-bearing demand deposits | (433) |  |  | 172 |  |  | (605) |  |  | 402 |  |  | 94 |  |  | 308 |
Savings and insured money market deposits | (1,791) |  |  | 232 |  |  | (2,023) |  |  | 1,029 |  |  | (71) |  |  | 1,100 |
Time deposits | (122) |  |  | 337 |  |  | (459) |  |  | 1,419 |  |  | 239 |  |  | 1,180 |
Long-term advances and other debt | 13 |  |  | 122 |  |  | (109) |  |  | (602) |  |  | (853) |  |  | 251 |
Total interest expense | (2,333) |  |  | 863 |  |  | (3,196) |  |  | 2,248 |  |  | (591) |  |  | 2,839 |
Fully taxable equivalent net interest income | $ | 2,250 |  |  | $ | 8,015 |  |  | $ | (5,765) |  |  | $ | 114 |  |  | $ | 926 |  |  | $ | (812) |

Provision for loan losses
Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. M anagement continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio. As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. During 2020, management increased certain allowance qualitative factors based on its assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.
Based on this analysis, the provision for loan losses for the years ended December 31, 2020, 2019 and 2018 were $4.2 million, $5.9 million and $3.2 million, respectively. The decrease in provision for loan losses in 2020 was primarily due to a specific impairment of $4.2 million related to a participation interest in a commercial credit in the prior year. The Corporation is closely monitoring the loan portfolio for effects related to COVID-19. In 2020, the Company increased the allowance by $4.5 million for probable incurred credit losses related to the COVID-19 pandemic, of which $4.0 million remains part of the allowance at year end. The increase in provision for loan losses in 2019, as compared to 2018, was primarily the result of specific impairments in loans identified as impaired, including $1.8 million in specific reserves related to a commercial real estate loan and $4.2 million in specific reserves related to a participating interest in a commercial and industrial credit, offset by a decline in volume and loss factors on commercial and consumer unclassified pooled loans. Net charge-offs for the years ended December 31, 2020, 2019 and 2018 were $6.8 million, $1.4 million and $5.4 million, respectively.
52

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

| Years Ended December 31, |  |  |  |
| 2020 |  | 2019 |  | Change |  | Percentage Change
WMG fee income | $ | 9,492 |  |  | $ | 9,503 |  |  | $ | (11) |  |  | (0.1) | %
Service charges on deposit accounts | 3,134 |  |  | 4,460 |  |  | (1,326) |  |  | (29.7) | %
Interchange revenue from debit card transactions | 4,068 |  |  | 4,104 |  |  | (36) |  |  | (0.9) | %
Net gains on securities transactions | — |  |  | 19 |  |  | (19) |  |  | N/M
Change in fair value of equity investments | 89 |  |  | 81 |  |  | 8 |  |  | 9.9 | %
Net gains on sales of loans held for sale | 1,730 |  |  | 248 |  |  | 1,482 |  |  | 597.6 | %
Net gains (losses) on sales of other real estate owned | (79) |  |  | (99) |  |  | 20 |  |  | (20.2) | %
Income from bank owned life insurance | 161 |  |  | 63 |  |  | 98 |  |  | 155.6 | %
CFS fee and commission income | 657 |  |  | 673 |  |  | (16) |  |  | (2.4) | %
Other | 1,872 |  |  | 1,021 |  |  | 851 |  |  | 83.3 | %
Total non-interest income | $ | 21,124 |  |  | $ | 20,073 |  |  | $ | 1,051 |  |  | 5.2 | %

Non-interest income for the year ended December 31, 2020 was $21.1 million compared with $20.1 million for the prior year, an increase of $1.1 million, or 5.2%. The increase was due primarily to increases of $1.5 million in net gains on sales of loans held for sale and $0.9 million in other non-interest income, offset by a decrease of $1.3 million in service charges on deposit accounts.
Net gains on sales of loans held for sale
Net gains on sales of loans held for sale increased in 2020 compared to the prior year primarily due to net gains on sales of residential mortgage loans sold into the secondary market and net gains on the sale of four commercial loans, three of which were non-performing.
Other non-interest income
Other non-interest income increased in 2020 compared to the prior year primarily due to an increase in interest rate swap fees earned and a credit adjustment to Chemung Risk Management loss reserves.
Service charges on deposit accounts
Service charges on deposit accounts decreased in 2020 compared to the prior year due to a decrease in NSF and overdraft fee income.
The following table presents non-interest income for the years indicated, and the dollar and percent change (in thousands):

| Years Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | Change |  | Percentage Change
WMG fee income | $ | 9,503 |  |  | $ | 9,317 |  |  | $ | 186 |  |  | 2.0 | %
Service charges on deposit accounts | 4,460 |  |  | 4,727 |  |  | (267) |  |  | (5.6) | %
Interchange revenue from debit card transactions | 4,104 |  |  | 4,040 |  |  | 64 |  |  | 1.6 | %
Net gains on securities transactions | 19 |  |  | — |  |  | 19 |  |  | N/M
Change in fair value of equity investments | 81 |  |  | 2,004 |  |  | (1,923) |  |  | (96.0) | %
Net gains on sales of loans held for sale | 248 |  |  | 351 |  |  | (103) |  |  | (29.3) | %
Net gains (losses) on sales of other real estate owned | (99) |  |  | 90 |  |  | (189) |  |  | (210.0) | %
Income from bank owned life insurance | 63 |  |  | 66 |  |  | (3) |  |  | (4.5) | %
CFS fee and commission income | 673 |  |  | 510 |  |  | 163 |  |  | 32.0 | %
Other | 1,021 |  |  | 1,969 |  |  | (948) |  |  | (48.1) | %
Total non-interest income | $ | 20,073 |  |  | $ | 23,074 |  |  | $ | (3,001) |  |  | (13.0) | %

53

Total non-interest income for year ended December 31, 2019 decreased $3.0 million compared to the prior year. The decrease was due primarily to decreases of $1.9 million in the change in fair value of equity investments, $0.9 million in other non-interest income, $0.2 million in net gains (losses) on sales of other real estate owned, and $0.3 million in service charges on deposit accounts, offset by an increase of $0.2 million in WMG fee income and an increase of $0.2 million in CFS fee and commission income.
WMG fee income
WMG fee income increased in 2019 compared to the prior year primarily due to an increase in average assets under management and additional fee income from terminating trusts.
Service charges on deposit accounts
Service charges on deposit accounts decreased in 2019 compared to the prior year due to a decrease in overdraft fee income.
Net gains (losses) on sales of other real estate owned
Net losses on sales of other real estate owned was due to losses on properties sold.
Change in fair value of equity investments
Change in fair value of equity investments decreased in 2019 compared to the prior year due primarily to the increase in the fair value of Visa Class B shares in the prior year. Subsequent to the change in fair value, the Visa Class B shares were sold during the third quarter of 2018.
CFS fee and commission income
CFS fee and commission income increased in 2019 compared to the prior year due to an increase in transaction activity.
Other non-interest income
Other non-interest income decreased in 2019 compared to the prior year due primarily to a one time refund in sales tax in 2018, a decrease in swap fees and a decline in rental income on OREO properties.
Non-interest expenses
The following table presents non-interest expenses for the years indicated, and the dollar and percent change (in thousands):

| Years Ended December 31, |  |  |  |
| 2020 |  | 2019 |  | Change |  | Percentage Change
Compensation expenses: |  |  |  |  |  |  |
Salaries and wages | $ | 24,250 |  |  | $ | 23,420 |  |  | $ | 830 |  |  | 3.5 | %
Pension and other employee benefits | 5,553 |  |  | 5,902 |  |  | (349) |  |  | (5.9) | %
Other components of net periodic pension cost (benefits) | (1,017) |  |  | (541) |  |  | (476) |  |  | (88.0) | %
Total compensation expenses | 28,786 |  |  | 28,781 |  |  | 5 |  |  | — | %
Non-compensation expenses: |  |  |  |  |  |  |
Net occupancy | 5,885 |  |  | 5,969 |  |  | (84) |  |  | (1.4) | %
Furniture and equipment | 2,078 |  |  | 2,497 |  |  | (419) |  |  | (16.8) | %
Data processing | 7,576 |  |  | 7,386 |  |  | 190 |  |  | 2.6 | %
Professional services | 1,725 |  |  | 1,885 |  |  | (160) |  |  | (8.5) | %
Amortization of intangible assets | 484 |  |  | 609 |  |  | (125) |  |  | (20.5) | %
Marketing and advertising | 631 |  |  | 932 |  |  | (301) |  |  | (32.3) | %
Other real estate owned expense | 102 |  |  | 115 |  |  | (13) |  |  | (11.3) | %
FDIC insurance | 987 |  |  | 537 |  |  | 450 |  |  | 83.8 | %
Loan expense | 1,173 |  |  | 787 |  |  | 386 |  |  | 49.0 | %
Other | 6,508 |  |  | 6,198 |  |  | 310 |  |  | 5.0 | %
Total non-compensation expenses | 27,149 |  |  | 26,915 |  |  | 234 |  |  | 0.9 | %
Total non-interest expenses | $ | 55,935 |  |  | $ | 55,696 |  |  | $ | 239 |  |  | 0.4 | %

54

Non-interest expense increased $0.2 million, or 0.4% in 2020. The increase was due primarily to increases of $0.8 million in salaries and wage expense, $0.5 million in FDIC insurance expense, and $0.4 million in loan expenses, offset by decreased spending across most other categories, including $0.4 million in furniture and equipment expenses, $0.3 million in marketing and advertising expenses, and $0.3 million in pension and other employee benefits, and a $0.5 million increase in the credit related to the net periodic pension and post-retirement benefits.
Compensation expenses
Compensation expenses remained flat in 2020 compared to the prior year. Salaries and wage expense increased due to annual merit increases and an increase in commission and reward expense related to facilitating nearly 1,300 PPP loans. This increase was offset by a decrease in pension and other employee benefits primarily attributed to a decrease in healthcare expenses when compared to the prior year. The increase in the credit related to the net periodic pension and post-retirement benefits was primarily due to a change in factors used to prepare annual actuarial estimates.
Non-compensation expenses
The increase in FDIC insurance expense was primarily attributed to the receipt of a $0.4 million credit in 2019 related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment. The increase in loan expenses was primarily attributed to legal fees associated with a legal action taken by the Corporation related to the $4.2 million impairment of a commercial credit disclosed in the Corporations' Current Report on Form 8-K, dated September 12, 2019, and an increase in loan volume during 2020 when compared to the prior year. The decrease in furniture and equipment expenses was primarily attributed to normal depreciation and a reduction in one-time service contract expenditures. The decrease in marketing and advertising expenses was primarily attributed to the cancellation of directed marketing initiatives due to the COVID-19 pandemic.
The following table presents non-interest expense for the years indicated, and the dollar and percent change (in thousands):

| Years Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | Change |  | Percentage Change
Compensation expenses: |  |  |  |  |  |  |
Salaries and wages | $ | 23,420 |  |  | $ | 22,322 |  |  | $ | 1,098 |  |  | 4.9 | %
Pension and other employee benefits | 5,902 |  |  | 5,524 |  |  | 378 |  |  | 6.8 | %
Other components of net periodic pension cost (benefits) | (541) |  |  | (770) |  |  | 229 |  |  | 29.7 | %
Total compensation expenses | 28,781 |  |  | 27,076 |  |  | 1,705 |  |  | 6.3 | %
Non-compensation expenses: |  |  |  |  |  |  |
Net occupancy | 5,969 |  |  | 6,550 |  |  | (581) |  |  | (8.9) | %
Furniture and equipment | 2,497 |  |  | 2,550 |  |  | (53) |  |  | (2.1) | %
Data processing | 7,386 |  |  | 6,997 |  |  | 389 |  |  | 5.6 | %
Professional services | 1,885 |  |  | 2,169 |  |  | (284) |  |  | (13.1) | %
Legal settlements | — |  |  | 989 |  |  | (989) |  |  | (100.0) | %
Amortization of intangible assets | 609 |  |  | 734 |  |  | (125) |  |  | (17.0) | %
Marketing and advertising | 932 |  |  | 1,181 |  |  | (249) |  |  | (21.1) | %
Other real estate owned expense | 115 |  |  | 422 |  |  | (307) |  |  | (72.7) | %
FDIC insurance | 537 |  |  | 1,142 |  |  | (605) |  |  | (53.0) | %
Loan expense | 787 |  |  | 863 |  |  | (76) |  |  | (8.8) | %
Other | 6,198 |  |  | 6,093 |  |  | 105 |  |  | 1.7 | %
Total non-compensation expenses | 26,915 |  |  | 29,690 |  |  | (2,775) |  |  | (9.3) | %
Total non-interest expenses | $ | 55,696 |  |  | $ | 56,766 |  |  | $ | (1,070) |  |  | (1.9) | %

Non-interest expense decreased $1.1 million, or 1.9% in 2019. The decrease was due primarily to decreases of $1.0 million in legal accruals and settlements, $0.6 million in net occupancy expenses, $0.6 million in FDIC insurance expense, $0.3 million in professional services, $0.3 million in other real estate owned expenses, and $0.2 million in marketing and advertising expenses. These items were partially offset by increases of $1.1 million in salaries and wages, $0.4 million in pension and other employee benefits, $0.4 million in data processing expenses, and $0.1 million in other non-interest expenses.
55

Compensation expenses
Compensation expenses increased in 2019 compared to the prior year due to increases in salaries and wages, and pension and other employee benefit expense. The increase in salaries and wages can be attributed to annual merit increases and a lower vacancy rate in 2019. The increase in pension and other employee benefits can be partially attributed to full vesting of stock awards related to an executive retirement and increases in payroll tax and health insurance expenses.
Non-compensation expenses
The decrease in legal accruals and settlements was due to the resolution by way of a settlement agreement in the matter of Fane v. Chemung Canal Trust Company. This matter was settled in March 2018. Additional information can be found in Note 17 of the audited Consolidated Financial Statements. The decrease in net occupancy and furniture and equipment expenses was mostly attributable to a reduction in depreciation expense related to mechanical equipment, the closing of two branches in 2019, and the reduction in non-capitalizable fixed asset purchases as compared to the prior year due to the opening of two new branches in 2018. The decrease in FDIC insurance expense was primarily due to the receipt of a $0.4 million credit related to the Deposit Insurance Fund’s (DIF) minimum reserve ratio assessment. The decrease in professional services was due to consulting fees incurred in the prior year associated with a sales tax refund in the prior year. The decrease in other real estate owned expenses can be attributed to a reduction in the number of OREO properties in 2019 as compared to 2018. The decrease in marketing and advertising expenses was due to an increased marketing effort in 2018 to support the opening of two denovo branches during the year. The increase in other non-interest expense can be attributed to a $0.3 million charge taken to recognize the impairment of a fixed asset.
Income tax expense
The following table presents income tax expense and the effective tax rate for the years indicated, and the dollar and percent change (in thousands):

| Years Ended December 31, |  |  |  |
| 2020 |  | 2019 |  | Change |  | Percentage Change
Income before income tax expense | $ | 23,869 |  |  | $ | 19,043 |  |  | $ | 4,826 |  |  | 25.3 | %
Income tax expense | $ | 4,607 |  |  | $ | 3,434 |  |  | $ | 1,173 |  |  | 34.2 | %
Effective tax rate | 19.3 | % |  | 18.0 | % |  |  |  |

The effective tax rate increased to 19.3% for the year ended December 31, 2020 compared with 18.0% for the prior year. The increase in the effective tax rate can be attributed to an increase in state tax liability. The increase in income tax expense can be attributed to an increase in pre-tax income.
The following table presents income tax expense and the effective tax rate for the years indicated, and the dollar and percent change (in thousands):

| Years Ended December 31, |  |  |  |
| 2019 |  | 2018 |  | Change |  | Percentage Change
Income before income tax expense | $ | 19,043 |  |  | $ | 23,635 |  |  | $ | (4,592) |  |  | (19.4) | %
Income tax expense | $ | 3,434 |  |  | $ | 4,009 |  |  | $ | (575) |  |  | (14.3) | %
Effective tax rate | 18.0 | % |  | 17.0 | % |  |  |  |

The effective tax rate increased to 18.0% for the year ended December 31, 2019 compared with 17.0% for the prior year. The increase in the effective tax rate can be attributed to a tax benefit of $0.4 million recorded in December 2018 due to the enactment of the Tax Act. The decrease in income tax expense can be attributed to a decrease in pre-tax income.
56

COVID-19
The Effect of COVID-19 on Our Business
The Corporation remained flexible with its COVID-19 response, adapting weekly to new micro-cluster zone restrictions and spiking positivity rates throughout our footprint. This flexibility allowed us to ensure a healthy and safe work environment for our colleagues, clients and the communities we assist. At all times, social distancing, sanitizing and facial coverings were required and at certain times, access to branches was limited or restricted. When the need arose to temporarily close a branch, impacted customers were directed to adjacent branches when possible, and offices were immediately deep-cleaned to ensure a safe work environment when employees and customers returned. At the date of this filing all of our 30 branches are open with normal business hours. The Corporation further assisted its customer base as the initial Paycheck Protection Program (PPP) moved forward with its Forgiveness phase, with the Small Business Administration (SBA) beginning to approve forgiveness applications on October 2, 2020. The Corporation is also participating in the latest round of PPP, and began accepting applications on January 19, 2021.
Management did not experience any negative effects on our ability to maintain operations and financial reporting systems, and has not identified any impact on business continuity plans. Management does not anticipate additional risk with respect to its ability to maintain internal control over financial reporting and disclosure controls and procedures, nor does it expect any changes in such controls and procedures.
On June 17, 2020 the New York legislature passed, and Governor Cuomo signed, new legislation which allows certain borrowers to extend the period of forbearance on a primary residence if financial hardship is demonstrated as a result of COVID-19. At its highest point as of May 31, 2020, total loan forbearances represented 15.77% of the Corporation's total loan portfolio. As of December 31, 2020, total loan forbearances decreased to 1.35% of the total loan portfolio. As of December 31, 2020, 76.2% of total loan forbearances related to accommodation and food services, 19.0% to entertainment and recreation, and 4.8% to other industries.

COVID-19 Loan Modifications Outstanding As Of |
| June 30, 2020 |  | September 30, 2020 |  | December 31, 2020 |
| # Clients |  | Total Loan Balance |  | # Clients |  | Total Loan Balance |  | # Clients |  | Total Loan Balance |
Commercial | 172 |  | $167.7 million |  | 31 |  | $43.3 million |  | 13 |  | $19.8 million |
Retail and Residential | 457 |  | $18.0 million |  | 43 |  | $2.5 million |  | 18 |  | $1.0 million |
The above reflects the uncertain economic situation whereby the initial response by customers prompted a quick reaction to the unknown potential impact of COVID-19 on their business. Subsequently, customers may have reassessed their financial position prior to finalization of a modification, either modifying deferral requests or withdrawing the request altogether. In some cases, customers continued to make payments on modified loans. Of these modifications, 100% were considered current prior to the forbearance and primarily reflect deferrals for 90 days.

Paycheck Protection Program Initiative
As part of the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), Congress established the Paycheck Protection Program (PPP) under the direction of the United States Small Business Administration (SBA). Included in the legislation, and additional legislation approved by Congress on April 23, 2020, June 5, 2020 and December 27, 2020, was a total of $659 billion to assist small businesses by providing SBA guaranteed loans to help pay for payroll, in addition to other expenses such as interest expense on mortgages, rent or utility payments. PPP loans have an interest rate of 1.0% and two-year or five-year loan terms to maturity. The funds are an effort to encourage retention of employees and up to the entire loan balance and interest may be forgiven, if the borrower meets certain predetermined SBA criteria. Businesses with less than 500 employees are eligible, although certain corporate organizational structures were not included in the legislation. As a qualified SBA lender, the Corporation was automatically authorized to originate PPP loans.
The Corporation successfully navigated the processes set forth by the SBA and assisted customers and non-customers through Phase 1 of the PPP, originating a total of 1,260 loans. The Corporation then assisted the businesses who received PPP loans with the forgiveness application phase of the program. As of December 31, 2020, the Corporation submitted 157 loans, a total of $49.0 million, to the SBA for forgiveness of which $39.0 million, 141 loans, was forgiven by the SBA.
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A second round of COVID-19 Relief totaling $248 billion to provide PPP loans to certain eligible small businesses was included in the Consolidated Appropriation Act of 2021, signed into law by the President on December 27, 2020. A total of 589 applications have been funded for a total of $64.2 million, as of the date of this filing.
Participation in Paycheck Protection Program Liquidity Facility ("PPPLF")
The PPPLF was created by the Board of Governors of the Federal Reserve System on April 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act. Under the facility, the Federal Reserve Banks lend to participating financial institutions on a non-recourse basis, taking PPP loans as collateral. The Bank participated in the PPPLF and received funding for 141 loans totaling $66.4 million. The Corporation fully repaid the funds on May 28, 2020.
Outlook
Management believes that the Corporation's liquidity position is strong. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, FHLB borrowings, securities sold under agreements to repurchase and other borrowings. At December 31, 2020, the Corporation's cash and cash equivalents balance was $108.5 million. The Corporation also maintains an investment portfolio of securities available for sale, comprised primarily of mortgage-backed securities and municipal bonds. Although this portfolio generates interest income for the Corporation, it also serves as an available source of liquidity and capital if the need should arise. As of December 31, 2020, the Corporation's investment in securities available for sale was $554.6 million, $373.8 million of which was not pledged as collateral. Additionally, the Bank's unused borrowing capacity at the Federal Home Loan Bank of New York was $89.6 million as of December 31, 2020. The Corporation did not experience excessive draws on available working capital lines of credit and home equity lines of credit during 2020 due to the COVID-19 pandemic. Nor has the Corporation experienced any significant or unusual activity related to customer reaction to the COVID-19 pandemic that would create stress on the Corporation's liquidity position.
With respect to the Corporation's credit risk and lending activities, management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. Management continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio. As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. During 2020, management increased certain allowance qualitative factors based on its assessment of the impact of the current pandemic on local, national and global economic conditions as well as the perceived risks inherent in specific industries and credit characteristics.
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Financial Condition
The following table presents selected financial information at December 31, 2020 and 2019, and the dollar and percent change (in thousands):

| December 31, 2020 |  | December 31, 2019 |  | Change |  | Percentage Change
Assets |  |  |  |  |  |  |
Total cash and cash equivalents | $ | 108,538 |  |  | $ | 121,904 |  |  | $ | (13,366) |  |  | (11.0) | %
Total investment securities, FHLB, and FRB stock | 562,772 |  |  | 292,478 |  |  | 270,294 |  |  | 92.4 | %
Loans, net of deferred loan fees | 1,536,463 |  |  | 1,309,219 |  |  | 227,244 |  |  | 17.4 | %
Allowance for loan losses | (20,924) |  |  | (23,478) |  |  | 2,554 |  |  | (10.9) | %
Loans, net | 1,515,539 |  |  | 1,285,741 |  |  | 229,798 |  |  | 17.9 | %
Goodwill and other intangible assets, net | 22,082 |  |  | 22,566 |  |  | (484) |  |  | (2.1) | %
Other assets | 70,520 |  |  | 65,138 |  |  | 5,382 |  |  | 8.3 | %
Total assets | $ | 2,279,451 |  |  | $ | 1,787,827 |  |  | $ | 491,624 |  |  | 27.5 | %
Liabilities and Shareholders’ Equity |  |  |  |  |  |  |
Total deposits | $ | 2,037,774 |  |  | $ | 1,572,138 |  |  | $ | 465,636 |  |  | 29.6 | %
Capital lease obligation | 3,849 |  |  | 4,085 |  |  | (236) |  |  | (5.8) | %
Other liabilities | 38,129 |  |  | 28,977 |  |  | 9,152 |  |  | 31.6 | %
Total liabilities | 2,079,752 |  |  | 1,605,200 |  |  | 474,552 |  |  | 29.6 | %
Total shareholders’ equity | 199,699 |  |  | 182,627 |  |  | 17,072 |  |  | 9.3 | %
Total liabilities and shareholders’ equity | $ | 2,279,451 |  |  | $ | 1,787,827 |  |  | $ | 491,624 |  |  | 27.5 | %

Cash and cash equivalents
The decrease in cash and cash equivalents can be mostly attributed to changes in securities, loans, deposits, and borrowings, offset by net income.
Investment securities
The increase in securities available for sale and held to maturity can be mostly attributed to purchases of investment securities exceeding sales, maturities and calls.
Loans, net
The increase in total loans, net, can be mostly attributed to the growth of $206.5 million in commercial loans and $51.1 million in residential mortgages, offset by a decrease of $14.4 million in indirect consumer and $15.9 million in other consumer loans. $150.9 million of the increase in loans related to the PPP.
Goodwill and other intangible assets, net
The decrease in goodwill and other intangible assets, net, can be attributed to amortization of other intangible assets. There were no impairments of goodwill or other intangible assets during the years ended December 31, 2020 and 2019.
Other assets
The increase in other assets can be mostly attributed to an increase of $8.2 million in interest rate swap assets, offset by a decrease in fixed assets of $3.2 million primarily due to normal depreciation.
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Deposits
The increase in deposits can be attributed to increases of $152.2 million in non-interest bearing demand deposits, $124.6 million in time deposits, $82.1 million in interest-bearing demand deposits, $73.3 million in money market accounts and $33.5 million in savings accounts. The increase in non-interest-bearing demand deposits was mostly attributable to an increase in personal customer deposits. The increase in interest-bearing demand deposits was due primarily to an increase in commercial deposits and the increase in time deposits was primarily due to an increase in municipal certificates of deposit. The increase in money market accounts can mostly be attributed to an increase in ICS deposits, and an increase in personal customer deposits. Overall, customer deposits were impacted by the receipt of stimulus checks and PPP loan disbursements during the year.
Other Liabilities
The increase in other liabilities can be mostly attributed to an increase of $8.2 million in interest rate swap liabilities.
Shareholders’ equity
The increase in shareholders' equity was due primarily to an increase in retained earnings of $14.3 million, which was a result of earnings of $19.3 million, offset by $5.0 million in dividends declared during the current year. The increase in accumulated other comprehensive income of $8.2 million can mostly be attributed to an increase in the fair value of the securities portfolio. Also, treasury stock increased $5.8 million primarily due to the Corporation's common stock repurchase program. As of December 31, 2020, all 250,000 shares were repurchased at an average cost of $29.40 per share. As previously announced on January 8, 2021, the Corporation announced 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. As of March 12, 2021 20,625 shares have been repurchased, at an average cost of $34.98 per share.
Assets under management or administration
The market value of total assets under management or administration in WMG was $2.091 billion, including $305.5 million of assets held under management or administration for the Corporation, at December 31, 2020 compared with $1.915 billion, including $289.7 million of assets held under management or administration for the Corporation, at December 31, 2019, an increase of $175.5 million, or 9.2%.
Balance Sheet Comparisons
The table below contains selected average balance sheet information for each year in the five-year period ended December 31, 2020 (in millions):

SELECTED AVERAGE BALANCE SHEET INFORMATION
|  |  |  |  |  |  |  |  |  |  |  | % Change |  | Compounded Annual
|  |  |  |  |  |  |  |  |  |  |  | 2019 to |  | Growth 5
Average Balance Sheet |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2020 |  | Years
Total assets |  | $ | 2,046.8 |  |  | $ | 1,764.4 |  |  | $ | 1,717.0 |  |  | $ | 1,713.2 |  |  | $ | 1,667.2 |  |  | 16.0 | % |  | 5.3 | %
Interest-earning assets (1) |  | 1,945.1 |  |  | 1,674.7 |  |  | 1,638.8 |  |  | 1,623.9 |  |  | 1,571.5 |  |  | 16.1 | % |  | 5.7 | %
Loans (2) |  | 1,456.1 |  |  | 1,296.4 |  |  | 1,320.1 |  |  | 1,251.2 |  |  | 1,194.6 |  |  | 12.3 | % |  | 5.0 | %
Investments (3) |  | 489.0 |  |  | 378.2 |  |  | 318.7 |  |  | 372.7 |  |  | 376.9 |  |  | 29.3 | % |  | 7.8 | %
Deposits |  | 1,807.5 |  |  | 1,558.2 |  |  | 1,515.7 |  |  | 1,514.5 |  |  | 1,450.5 |  |  | 16.0 | % |  | 5.7 | %
Borrowings (4) |  | 9.7 |  |  | 4.2 |  |  | 31.6 |  |  | 32.4 |  |  | 55.5 |  |  | 131.0 | % |  | (29.6) | %
Shareholders’ equity |  | 193.7 |  |  | 176.1 |  |  | 153.8 |  |  | 151.2 |  |  | 142.9 |  |  | 10.0 | % |  | 7.0 | %

(1) Average interest-earning assets include securities available for sale at estimated fair value and securities held to maturity based on amortized cost, loans and loans held for sale net of deferred loan fees, interest-earning deposits, FHLBNY stock, FRBNY stock and federal funds sold. For 2017-2020, average interest-earning assets also include equity investments.
(2) Average loans and loans held for sale, net of deferred loan fees.
(3) Average balances for investments include securities available for sale at estimated fair value and securities held to maturity, based on amortized cost, FHLBNY stock, FRBNY stock, federal funds sold and interest-earning deposits. For 2017-2020, average balances for investments securities also include equity investments.
(4) Average borrowings include overnight and PPPLF advances, securities sold under agreements to repurchase and capitalized lease obligations.
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The table below contains selected year-end balance sheet information for each year in the five-year period ended December 31, 2020 (in millions):

SELECTED YEAR-END BALANCE SHEET INFORMATION
|  |  |  |  |  |  |  |  |  |  |  | % Change |  | Compounded Annual
|  |  |  |  |  |  |  |  |  |  |  | 2019 to |  | Growth 5
Ending Balance Sheet |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016 |  | 2020 |  | Years
Total assets |  | $ | 2,279.5 |  |  | $ | 1,787.8 |  |  | $ | 1,755.3 |  |  | $ | 1,707.6 |  |  | $ | 1,657.2 |  |  | 27.5 | % |  | 7.1 | %
Interest-earning assets (1) |  | 2,178.5 |  |  | 1,699.6 |  |  | 1,661.5 |  |  | 1,620.1 |  |  | 1,560.0 |  |  | 28.2 | % |  | 7.4 | %
Loans (2) |  | 1,536.6 |  |  | 1,310.4 |  |  | 1,312.4 |  |  | 1,312.4 |  |  | 1,200.7 |  |  | 17.3 | % |  | 5.6 | %
Allowance for loan losses |  | 20.9 |  |  | 23.5 |  |  | 18.9 |  |  | 21.2 |  |  | 14.3 |  |  | (11.1) | % |  | 7.9 | %
Investments (3) |  | 641.8 |  |  | 389.2 |  |  | 349.1 |  |  | 307.8 |  |  | 359.3 |  |  | 64.9 | % |  | 12.5 | %
Deposits |  | 2,037.8 |  |  | 1,572.1 |  |  | 1,569.2 |  |  | 1,467.4 |  |  | 1,456.3 |  |  | 29.6 | % |  | 7.8 | %
Borrowings (4) |  | 3.8 |  |  | 4.1 |  |  | 4.3 |  |  | 74.2 |  |  | 41.4 |  |  | (7.3) | % |  | (43.2) | %
Shareholders’ equity |  | 199.7 |  |  | 182.6 |  |  | 165.0 |  |  | 149.8 |  |  | 143.7 |  |  | 9.4 | % |  | 7.8 | %

(1) Interest-earning assets include securities available for sale, at estimated fair value and securities held to maturity based on amortized cost, equity investments, loans and loans held for sale net of deferred loan fees, interest-earning deposits, FHLBNY stock, FRBNY stock and federal funds sold.
(2) Loans and loans held for sale, net of deferred loan fees.
(3) Investments include securities available for sale, at estimated fair value, securities held to maturity, at amortized cost, equity investments, FHLBNY stock, FRBNY stock, federal funds sold and interest-earning deposits.
(4) Borrowings include FHLBNY overnight and term advances, securities sold under agreements to repurchase and capitalized lease obligations.
Cash and Cash Equivalents
Total cash and cash equivalents decreased $13.4 million since December 31, 2019, due to a decrease of $17.6 million in interest-earning deposits in other financial institutions, offset by an increase of $4.3 million in cash and due from financial institutions.
Securities
The Corporation’s Funds Management Policy includes an investment policy that in general, requires debt securities purchased for the bond portfolio to carry a minimum agency rating of "Baa." After an independent credit analysis is performed, the policy also allows the Corporation to purchase local municipal obligations that are not rated. The Corporation intends to maintain a reasonable level of securities to provide adequate liquidity and in order to have securities available to pledge to secure public deposits, repurchase agreements and other types of transactions. Fluctuations in the fair value of the Corporation’s securities relate primarily to changes in interest rates.
Marketable securities are classified as Available for Sale, while investments in local municipal obligations are generally classified as Held to Maturity. The composition of the available for sale and held to maturity securities portfolios are summarized in the tables below (in thousands):

SECURITIES AVAILABLE FOR SALE
|  | December 31, 2020 |  | December 31, 2019 |  | December 31, 2018
|  | Amortized Cost |  |  |  | Estimated Fair Value |  |  |  | Amortized Cost |  |  |  | Estimated Fair Value |  |  |  | Amortized Cost |  | Estimated Fair Value
Obligations of U.S. Government sponsored enterprises |  | $ | — |  |  |  |  | $ | — |  |  |  |  | $ | — |  |  |  |  | $ | — |  |  |  |  | $ | 5,489 |  |  | $ | 5,472 |
Mortgage-backed securities, residential |  | 458,245 |  |  |  |  | 467,866 |  |  |  |  | 225,029 |  |  |  |  | 225,234 |  |  |  |  | 189,111 |  |  | 183,192 |
Obligations of states and political subdivisions |  | 40,662 |  |  |  |  | 43,405 |  |  |  |  | 41,265 |  |  |  |  | 42,845 |  |  |  |  | 44,390 |  |  | 44,152 |
Other securities (a) |  | 43,455 |  |  |  |  | 43,340 |  |  |  |  | 15,962 |  |  |  |  | 16,011 |  |  |  |  | 9,506 |  |  | 9,442 |
Totals |  | $ | 542,362 |  |  |  |  | $ | 554,611 |  |  |  |  | $ | 282,256 |  |  |  |  | $ | 284,090 |  |  |  |  | $ | 248,496 |  |  | $ | 242,258 |

(a) Other securities consists of corporate bonds and SBA loan pools.
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The available for sale segment of the securities portfolio totaled $554.6 million at December 31, 2020, an increase of $270.5 million, or 95.2%, from $284.1 million at December 31, 2019. The increase resulted primarily from new purchases which exceeded maturities and calls. The increase in purchased securities is primarily due to a significant increase in customer deposits related to the Corporation's participation in PPP and various stimulus program deposits received by customers, which resulted in excess cash levels.

HELD TO MATURITY SECURITIES
|  | December 31, 2020 |  | December 31, 2019 |  | December 31, 2018
|  | Amortized Cost |  |  |  | Estimated Fair Value |  |  |  | Amortized Cost |  |  |  | Estimated Fair Value |  |  |  | Amortized Cost |  | Estimated Fair Value
Obligations of states and political subdivisions |  | $ | 326 |  |  |  |  | $ | 326 |  |  |  |  | $ | 1,045 |  |  |  |  | $ | 1,045 |  |  |  |  | $ | 3,020 |  |  | $ | 3,020 |
Time deposits with other financial institutions |  | 2,143 |  |  |  |  | 2,175 |  |  |  |  | 2,070 |  |  |  |  | 2,094 |  |  |  |  | 1,855 |  |  | 1,838 |
Totals |  | $ | 2,469 |  |  |  |  | $ | 2,501 |  |  |  |  | $ | 3,115 |  |  |  |  | $ | 3,139 |  |  |  |  | $ | 4,875 |  |  | $ | 4,858 |

The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas. These securities totaled $2.5 million at December 31, 2020, a decrease of $0.6 million or 20.7%, from $3.1 million at December 31, 2019, due primarily to maturities.
Non-marketable equity securities at December 31, 2020 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.8 million and $1.4 million, respectively. The fair value of these securities is assumed to approximate their cost. The investment in these stocks is regulated by regulatory policies of the respective institutions.
The table below sets forth the carrying amounts and maturities of available for sale and held to maturity debt securities at December 31, 2020 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security, except mortgage-backed securities which are based on the average life at the projected prepayment speed of each security) (in thousands):

MATURITIES AND YIELDS OF AVAILABLE FOR SALE AND HELD TO MATURITY SECURITIES
| Within One Year |  | After One, But Within Five Years |  | After Five, But Within Ten Years |  | After Ten Years
| Amount |  | Yield |  | Amount |  | Yield |  | Amount |  | Yield |  | Amount |  | Yield
Obligations of U.S. Government and U.S. Government sponsored enterprises | $ | — |  |  | N/A |  | $ | — |  |  | N/A |  | $ | — |  |  | N/A |  | $ | — |  |  | N/A
Mortgage-backed securities, residential | 3,089 |  |  | 3.58 | % |  | 327,054 |  |  | 1.38 | % |  | 115,937 |  |  | 1.85 | % |  | 21,786 |  |  | 2.66 | %
Obligations of states and political subdivisions | 114 |  |  | 2.26 | % |  | 24,934 |  |  | 2.54 | % |  | 17,876 |  |  | 2.57 | % |  | 808 |  |  | 2.52 | %
Time deposits with other institutions | 742 |  |  | 3.08 | % |  | 1,401 |  |  | 2.21 | % |  | — |  |  | N/A |  | — |  |  | N/A
Corporate bonds and notes | — |  |  | N/A |  | 4,036 |  |  | 4.82 | % |  | 4,998 |  |  | 4.45 | % |  | — |  |  | N/A
SBA loan pools | — |  |  | N/A |  | 58 |  |  | 1.75 | % |  | 16,568 |  |  | 1.67 | % |  | 17,679 |  |  | 1.59 | %
Total | $ | 3,945 |  |  | 3.45 | % |  | $ | 357,483 |  |  | 1.50 | % |  | $ | 155,379 |  |  | 2.00 | % |  | $ | 40,273 |  |  | 2.19 | %

Management evaluates securities for OTTI on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For the years ended December 31, 2020 and 2019, the Corporation had no OTTI charges.
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Loans
The Corporation has reporting systems to monitor: (i) loan originations and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, troubled debt restructurings, other real estate owned, (iv) impaired loans, and (v) potential problem loans. Management reviews these systems on a regular basis.
The table below presents the Corporation’s loan composition by type and percentage of total loans at the end of each of the last five years (in thousands):

| LOANS
| December 31,
| 2020 |  | % |  | 2019 |  | % |  | 2018 |  | % |  | 2017 |  | % |  | 2016 |  | %
Commercial and agricultural | $ | 368,946 |  |  | 24.0 |  |  | $ | 230,292 |  |  | 17.6 |  |  | $ | 202,854 |  |  | 15.5 |  |  | $ | 199,007 |  |  | 15.2 |  |  | $ | 176,561 |  |  | 14.7 |
Commercial mortgages | 716,608 |  |  | 46.6 |  |  | 648,794 |  |  | 49.5 |  |  | 661,170 |  |  | 50.4 |  |  | 644,330 |  |  | 49.1 |  |  | 568,656 |  |  | 47.4 |
Residential mortgages | 239,401 |  |  | 15.6 |  |  | 188,338 |  |  | 14.4 |  |  | 182,724 |  |  | 13.9 |  |  | 194,440 |  |  | 14.8 |  |  | 198,493 |  |  | 16.6 |
Indirect consumer loans | 120,538 |  |  | 7.9 |  |  | 134,973 |  |  | 10.3 |  |  | 149,380 |  |  | 11.4 |  |  | 153,060 |  |  | 11.7 |  |  | 139,572 |  |  | 11.6 |
Consumer loans | 90,970 |  |  | 5.9 |  |  | 106,822 |  |  | 8.2 |  |  | 115,778 |  |  | 8.8 |  |  | 120,987 |  |  | 9.2 |  |  | 117,008 |  |  | 9.7 |
Total | $ | 1,536,463 |  |  | 100.0 |  |  | $ | 1,309,219 |  |  | 100.0 |  |  | $ | 1,311,906 |  |  | 100.0 |  |  | $ | 1,311,824 |  |  | 100.0 |  |  | $ | 1,200,290 |  |  | 100.0 |

Portfolio loans totaled $1.536 billion at December 31, 2020 and $1.309 billion at December 31, 2019. Changes included an increase of $206.5 million, or 23.5%, in total commercial loans (comprised of commercial mortgages and commercial and agricultural loans), and an increase in residential mortgages of $51.1 million or 27.1%, offset by decreases in indirect consumer loans of $14.4 million or 10.7%, and consumer loans of $15.9 million or 14.8%. $150.9 million of the increase in commercial loans related to the PPP. The decreases in indirect consumer loans, primarily automobile loans, and consumer loans, primarily home equity lines and loans, were primarily due to overall economic conditions related to the pandemic, resulting in decreased demand.
Residential mortgage loans totaled $239.4 million at December 31, 2020, an increase of $51.1 million, or 27.1%, from December 31, 2019. The increase in residential mortgages was mainly due to new originations retained in the portfolio, primarily driven by lower interest rates.
The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):

LOANS BY DIVISION
| December 31,
| 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Chemung Canal Trust Company* | $ | 658,468 |  |  | $ | 576,399 |  |  | $ | 603,133 |  |  | $ | 630,732 |  |  | $ | 636,836 |
Capital Bank Division | 877,995 |  |  | 732,820 |  |  | 708,773 |  |  | 681,092 |  |  | 563,454 |
Total loans | $ | 1,536,463 |  |  | $ | 1,309,219 |  |  | $ | 1,311,906 |  |  | $ | 1,311,824 |  |  | $ | 1,200,290 |
*All loans, excluding those originated by the Capital Bank Division. |  |  |  |

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities which would cause them to be similarly impacted by changes in economic or other conditions. The Corporation’s concentration policy limits consider the volume of commercial loans to any one specific industry, sponsor, and by collateral type and location. In addition, the Corporation’s policy limits the volume of non-owner occupied commercial mortgages to four times total risk based capital. At December 31, 2020 and 2019, total non-owner occupied commercial real estate loans divided by total Bank risk based capital was 339.9% and 330.5%, respectively.
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The Corporation also monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At December 31, 2020 and 2019, commercial loans to borrowers involved in the real estate, and real estate rental and leasing businesses were 40.9% and 45.0% of total loans, respectively. No other concentration of loans existed in the commercial loan portfolio in excess of 10.0% of total loans as of December 31, 2020 and 2019.
The table below shows the maturity of only commercial and agricultural loans and commercial mortgages outstanding as of December 31, 2020. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

| LOAN AMOUNTS CONTRACTUALLY DUE AFTER DECEMBER 31, 2020
| Within One Year |  | After One But Within Five Years |  | After Five Years |  | Total
Commercial and agricultural and commercial mortgages | $ | 89,270 |  |  | $ | 509,245 |  |  | $ | 487,039 |  |  | $ | 1,085,554 |
Loans maturing with: |  |  |  |  |  |  |
Fixed interest rates | $ | 12,548 |  |  | $ | 318,451 |  |  | $ | 106,352 |  |  | $ | 437,351 |
Variable interest rates | 76,722 |  |  | 190,794 |  |  | 380,687 |  |  | 648,203 |
Total | $ | 89,270 |  |  | $ | 509,245 |  |  | $ | 487,039 |  |  | $ | 1,085,554 |

Non-Performing Assets
Non-performing assets consist of non-accrual loans, non-accrual troubled debt restructurings and other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure.
Past due status on all loans is based on the contractual terms of the loan. It is generally the Corporation's policy that a loan 90 days past due be placed on non-accrual status unless factors exist that would eliminate the need to place a loan in this status. A loan may also be designated as non-accrual at any time if payment of principal or interest in full is not expected due to deterioration in the financial condition of the borrower. At the time loans are placed on non-accrual status, the accrual of interest is discontinued and previously accrued interest is reversed. All payments received on non-accrual loans are applied to principal. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its contractual principal and interest. In the case of non-accrual loans where a portion of the loan has been charged off, the remaining balance is kept in non-accrual status until the entire principal balance has been recovered.
The following table summarizes the Corporation's non-performing assets, excluding purchased credit impaired loans (in thousands):
NON-PERFORMING ASSETS

December 31, |  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Non-accrual loans |  | $ | 6,011 |  |  | $ | 9,938 |  |  | $ | 6,305 |  |  | $ | 11,389 |  |  | $ | 7,649 |
Non-accrual troubled debt restructurings |  | 3,941 |  |  | 8,070 |  |  | 5,949 |  |  | 5,935 |  |  | 4,394 |
Total non-performing loans |  | 9,952 |  |  | 18,008 |  |  | 12,254 |  |  | 17,324 |  |  | 12,043 |
Other real estate owned |  | 237 |  |  | 517 |  |  | 574 |  |  | 1,940 |  |  | 388 |
Total non-performing assets |  | $ | 10,189 |  |  | $ | 18,525 |  |  | $ | 12,828 |  |  | $ | 19,264 |  |  | $ | 12,431 |
Ratio of non-performing loans to total loans |  | 0.65 | % |  | 1.38 | % |  | 0.93 | % |  | 1.32 | % |  | 1.00 | %
Ratio of non-performing assets to total assets |  | 0.45 | % |  | 1.04 | % |  | 0.73 | % |  | 1.13 | % |  | 0.75 | %
Ratio of allowance for loan losses to non-performing loans |  | 210.25 | % |  | 130.38 | % |  | 154.59 | % |  | 122.14 | % |  | 118.35 | %
Accruing loans past due 90 days or more (1) |  | $ | 2 |  |  | $ | 7 |  |  | $ | 19 |  |  | $ | 29 |  |  | $ | 13 |
Accruing troubled debt restructurings (1) |  | $ | 2,790 |  |  | $ | 952 |  |  | $ | 816 |  |  | $ | 1,728 |  |  | $ | 5,839 |

(1)These loans are not included in nonperforming assets above.
Interest income recorded on non-accrual and troubled debt restructured loans was $76.0 thousand, $72.0 thousand, and $61.0 thousand as of December 31, 2020, 2019 and 2018, respectively.
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Non-Performing Loans
Non-performing loans totaled $10.0 million at December 31, 2020, or 0.65% of total loans, compared with $18.0 million at December 31, 2019, or 1.38% of total loans. The decrease in non-performing loans at December 31, 2020 as compared to December 31, 2019 was primarily due to the charge off of one large commercial mortgage in the second quarter of 2020, and one participating interest in a commercial credit in the fourth quarter of 2020. In the fourth quarter of 2020, the Corporation sold four commercial loans with total balances of $4.9 million, three of which were non-performing with total balances of $3.8 million. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $10.2 million, or 0.45% of total assets, at December 31, 2020, compared with $18.5 million, or 1.04% of total assets, at December 31, 2019.
The recorded investment in accruing loans past due 90 days or more totaled less than $0.1 million at December 31, 2020, consistent with the prior year. There were no PCI loans as of December 31, 2020 and December 31, 2019. PCI loans are accounted for under separate accounting guidance, ASC Subtopic 310-30, “Receivables - Loans and Debt Securities Acquired with Deteriorated Credit Quality.”
Troubled Debt Restructurings
The Corporation works closely with borrowers that have financial difficulties to identify viable solutions that minimize the potential for loss. In that regard, the Corporation modified the terms of select loans to maximize their collectability. The modified loans are considered TDRs under current accounting guidance. Modifications generally involve short-term deferrals of principal and/or interest payments, reductions of scheduled payment amounts, interest rates or principal of the loan, and forgiveness of accrued interest. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 related modifications and therefore will not be treated as TDRs through the earlier of January 1, 2022 or 60 days after the national emergency of COVID-19 ends. As of December 31, 2020 and 2019, the Corporation had $3.9 million and $8.1 million of non-accrual TDRs, respectively. As of December 31, 2020, the Corporation had $2.8 million of accruing TDRs compared with $0.9 million as of December 31, 2019.
Impaired Loans
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. The unpaid principal balance of impaired loans at December 31, 2020 totaled $16.5 million, including TDRs of $6.7 million, compared to $15.7 million at December 31, 2019, including TDRs of $9.0 million. Included in the recorded investment of impaired loans at December 31, 2020, were loans totaling $1.8 million for which impairment allowances of $1.5 million have been specifically allocated to the allowance for loan losses. The decrease in recorded investment in impaired loans was primarily due to decreases in the commercial mortgage and commercial and industrial portfolios, offset by an increase in the residential mortgage portfolio. The decrease in the commercial mortgage loan segment of the portfolio related to the sale of three loans amounting to $4.1 million and a $2.1 million charge off of a loan, offset by the recognition of impairment for two loans amounting to $2.8 million. The decrease in the impaired commercial and industrial loan segment of the portfolio was due to a $3.8 million charge off of a participating interest in a loan offset by a $1.9 million increase related to the impairment of three loans. The increase in the residential mortgage loan segment of the portfolio related to the recognition of impairment for three loans amounting to $0.8 million. As of December 31, 2019, the impaired loan total included $11.1 million of loans for which specific impairment allowances of $8.1 million were allocated to the allowance for loan losses. The increase in impaired loans was primarily in the commercial loan segment of the loan portfolio related to the recognition of impairment for a commercial real estate loan to one borrower in the amount of $1.9 million in the first quarter and the recognition of impairment for a commercial and industrial participation loan to one borrower for $4.2 million during the third quarter of 2019.
The majority of the Corporation's impaired loans are secured and measured for impairment based on collateral evaluations. It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to be impaired. An impairment measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation or charge-off. In determining the amount of any specific allocation or charge-off, the Corporation will make adjustments to reflect the estimated costs to sell the property. Upon receipt and review of the updated appraisal, an additional measurement is performed to determine if any adjustments are necessary to reflect the proper provisioning or charge-off. Impaired loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require any additional allocation or recognition of additional charge-offs. Real estate values in the Corporation's market area have been holding steady. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral.
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Allowance for Loan Losses
The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses on existing loans. The allowance is established based on management’s evaluation of the probable inherent losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.
A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are established based on management’s analyses of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments and more recently the expected impact of COVID-19 on various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy, including the impact of COVID-19.
The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management's evaluation of the adequacy of the allowance for loan losses is performed on a quarterly basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation's allowance for loan losses. Such agencies may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination.
The allowance for loan losses was $20.9 million at December 31, 2020, compared to $23.5 million at December 31, 2019. The Corporation continues to closely monitor the loan portfolio for effects related to the COVID-19 pandemic. Changes in governmental policies during the pandemic placed stress on certain industries while other industries initially anticipated to be highly impacted by the pandemic demonstrated resilience. As a result, the Corporation re-evaluated various qualitative factors used to calculate the provision. In addition the Corporation charged off one large commercial mortgage and one participating interest in a commercial credit. In 2020, the Corporation increased the allowance by $4.5 million for probable incurred credit losses related to the COVID-19 pandemic, of which $4.0 million remains part of the allowance at year end. In the fourth quarter of 2020, the Corporation sold and released reserves for three non-performing commercial loans. The ratio of allowance for loan losses to total loans was 1.36% at December 31, 2020 and 1.79% at December 31, 2019, respectively. Net charge-offs for the years ended December 31, 2020 and 2019 were $6.8 million and $1.4 million, respectively.
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The table below summarizes the Corporation’s allocation of the allowance for loan losses and percent of loans by category to total loans for each year in the five-year period ended December 31, 2020 (in thousands):

ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Balance at end of year applicable to: | 2020 |  | % |  | 2019 |  | % |  | 2018 |  | % |  | 2017 |  | % |  | 2016 |  | %
Commercial and agricultural | $ | 4,493 |  |  | 24.0 |  |  | $ | 10,227 |  |  | 17.6 |  |  | $ | 5,383 |  |  | 15.5 |  |  | $ | 6,976 |  |  | 15.2 |  |  | $ | 1,589 |  |  | 14.7 |
Commercial mortgages | 11,496 |  |  | 46.6 |  |  | 8,869 |  |  | 49.5 |  |  | 8,184 |  |  | 50.4 |  |  | 8,514 |  |  | 49.1 |  |  | 7,270 |  |  | 47.4 |
Residential mortgages | 2,079 |  |  | 15.6 |  |  | 1,252 |  |  | 14.4 |  |  | 1,226 |  |  | 13.9 |  |  | 1,316 |  |  | 14.8 |  |  | 1,523 |  |  | 16.6 |
Consumer loans | 2,856 |  |  | 13.8 |  |  | 3,130 |  |  | 18.5 |  |  | 4,151 |  |  | 20.2 |  |  | 4,355 |  |  | 20.9 |  |  | 3,871 |  |  | 21.3 |
| $ | 20,924 |  |  | 100.0 |  |  | $ | 23,478 |  |  | 100.0 |  |  | $ | 18,944 |  |  | 100.0 |  |  | $ | 21,161 |  |  | 100.0 |  |  | $ | 14,253 |  |  | 100.0 |

The table below summarizes the Corporation's loan loss experience for each year in the five-year period ended December 31, 2020 (in thousands, except ratio data):

SUMMARY OF LOAN LOSS EXPERIENCE
|  | Years Ended December 31,
|  | 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Allowance for loan losses at beginning of year |  | $ | 23,478 |  |  | $ | 18,944 |  |  | $ | 21,161 |  |  | $ | 14,253 |  |  | $ | 14,260 |
Charge-offs: |  |  |  |  |  |  |  |  |  |
Commercial and agricultural |  | 4,068 |  |  | 312 |  |  | 3,644 |  |  | 96 |  |  | 217 |
Commercial mortgages |  | 2,143 |  |  | 1 |  |  | 213 |  |  | 419 |  |  | 911 |
Residential mortgages |  | 56 |  |  | 151 |  |  | 226 |  |  | 225 |  |  | 65 |
Consumer loans |  | 1,113 |  |  | 1,511 |  |  | 1,836 |  |  | 1,831 |  |  | 1,637 |
Total |  | 7,380 |  |  | 1,975 |  |  | 5,919 |  |  | 2,571 |  |  | 2,830 |
Recoveries: |  |  |  |  |  |  |  |  |  |
Commercial and agricultural |  | 89 |  |  | 59 |  |  | 47 |  |  | 109 |  |  | 92 |
Commercial mortgages |  | 14 |  |  | 4 |  |  | 3 |  |  | 5 |  |  | 10 |
Residential mortgages |  | 86 |  |  | 45 |  |  | 5 |  |  | 30 |  |  | — |
Consumer loans |  | 398 |  |  | 456 |  |  | 494 |  |  | 313 |  |  | 284 |
Total |  | 587 |  |  | 564 |  |  | 549 |  |  | 457 |  |  | 386 |
Net charge-offs |  | 6,793 |  |  | 1,411 |  |  | 5,370 |  |  | 2,114 |  |  | 2,444 |
Provision charged to operations |  | 4,239 |  |  | 5,945 |  |  | 3,153 |  |  | 9,022 |  |  | 2,437 |
Allowance for loan losses at end of year |  | $ | 20,924 |  |  | $ | 23,478 |  |  | $ | 18,944 |  |  | $ | 21,161 |  |  | $ | 14,253 |
Ratio of net charge-offs during year to average loans outstanding |  | 0.47 | % |  | 0.11 | % |  | 0.41 | % |  | 0.17 | % |  | 0.20 | %
Ratio of allowance for loan losses to total loans outstanding |  | 1.36 | % |  | 1.79 | % |  | 1.44 | % |  | 1.61 | % |  | 1.19 | %

Net charge-offs for the year ended December 31, 2020 were $6.8 million compared with $1.4 million for the year ended December 31, 2019. The ratio of net charge-offs to average loans outstanding was 0.47% for 2020 compared to 0.11% for 2019. The increase in net charge-offs in 2020 can be attributed to the charge-offs of a $3.8 million participating interest in a commercial credit and a $2.1 million commercial mortgage.
Other Real Estate Owned
At December 31, 2020, OREO totaled $0.2 million compared to $0.5 million at December 31, 2019. The decrease in other real estate owned was due primarily to seven residential properties and one commercial property sold during 2020 in the amount of $0.7 million.
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Deposits
The table below summarizes the Corporation’s deposit composition by segment at December 31, 2020, 2019, and 2018, and the dollar and percent change from December 31, 2019 to December 31, 2020 and December 31, 2018 to December 31, 2019 (in thousands):

DEPOSITS
|  |  |  |  |  | Percentage Change from Prior Year
| December 31, |  |  |  |  |
| 2020 |  | 2019 |  | 2018 |  |  |  |  |  | 2020 |  | 2019
Non-interest-bearing demand deposits | $ | 620,423 |  |  | $ | 468,238 |  |  | $ | 484,433 |  |  |  |  |  |  | 32.5 | % |  | (3.3) | %
Interest-bearing demand deposits | 282,172 |  |  | 200,089 |  |  | 179,603 |  |  |  |  |  |  | 41.0 | % |  | 11.4 | %
Insured money market accounts | 603,583 |  |  | 530,242 |  |  | 537,948 |  |  |  |  |  |  | 13.8 | % |  | (1.4) | %
Savings deposits | 245,865 |  |  | 212,393 |  |  | 217,027 |  |  |  |  |  |  | 15.8 | % |  | (2.1) | %
Time deposits | 285,731 |  |  | 161,176 |  |  | 150,226 |  |  |  |  |  |  | 77.3 | % |  | 7.3 | %
Total | $ | 2,037,774 |  |  | $ | 1,572,138 |  |  | $ | 1,569,237 |  |  |  |  |  |  | 29.6 | % |  | 0.2 | %

Deposits totaled $2.038 billion at December 31, 2020, compared with $1.572 billion at December 31, 2019, an increase of $465.6 million, or 29.6%. At December 31, 2020, demand deposit and money market accounts comprised 73.9% of total deposits compared with 76.2% at December 31, 2019. The growth in deposits was attributable to increases of $152.2 million in non-interest-bearing demand deposits, $124.6 million in time deposits, $82.1 million in interest-bearing demand deposits, $73.3 million in insured money market accounts, and $33.5 million in savings deposits.
The increase in non-interest-bearing demand deposits was mainly attributable to an increase in personal customer deposits. The increase in time deposits was primarily due to an increase in municipal certificates of deposit, and the increase in interest-bearing demand deposits was due primarily to commercial deposits. The increase in money market accounts can be mostly attributed to increases in ICS deposits personal customer deposits and personal customer deposits. The overall increase in deposits was partially attributed to the receipt of stimulus checks and PPP loan disbursements.
At December 31, 2020, public funds deposits totaled $308.9 million compared to $299.2 million at December 31, 2019. The Corporation has developed a program for the retention and management of public funds deposits. These deposits are from public entities, such as school districts and municipalities. There is a seasonal component to public deposit levels associated with annual tax collections. Public funds deposits will increase at the end of the first and third quarters. Public funds deposit accounts above the FDIC insured limit are collateralized by municipal bonds and eligible government and government agency securities such as those issued by the FHLB, Fannie Mae, and Freddie Mac.
The table below summarizes the Corporation’s public funds deposit composition by segment (in thousands):

|  | December 31,
Public Funds: |  | 2020 |  | 2019 |  | 2018
Non-interest-bearing demand deposits |  | $ | 7,738 |  |  | $ | 10,615 |  |  | $ | 12,070 |
Interest-bearing demand deposits |  | 50,535 |  |  | 48,292 |  |  | 52,767 |
Insured money market accounts |  | 237,975 |  |  | 226,834 |  |  | 225,630 |
Savings deposits |  | 9,428 |  |  | 10,518 |  |  | 11,598 |
Time deposits |  | 3,223 |  |  | 2,899 |  |  | 4,408 |
Total public funds |  | $ | 308,899 |  |  | $ | 299,158 |  |  | $ | 306,473 |
Total deposits |  | $ | 2,037,774 |  |  | $ | 1,572,138 |  |  | $ | 1,569,237 |
Percentage of public funds to total deposits |  | 15.2 | % |  | 19.0 | % |  | 19.5 | %

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As of December 31, 2020, the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than or equal to $100,000 was $199.5 million. The table below presents the Corporation's scheduled maturity of those certificates as of December 31, 2020 (in thousands):

|  | December 31, 2020
3 months or less |  | $ | 54,518 |
Over 3 through 6 months |  | 41,533 |
Over 6 through 12 months |  | 55,285 |
Over 1 year to 3 years |  | 43,656 |
Over 3 years |  | 4,477 |
|  | $ | 199,469 |

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

DEPOSITS BY DIVISION
| December 31,
| 2020 |  | 2019 |  | 2018 |  | 2017 |  | 2016
Chemung Canal Trust Company* | $ | 1,686,370 |  |  | $ | 1,317,225 |  |  | $ | 1,328,658 |  |  | $ | 1,264,883 |  |  | $ | 1,249,870 |
Capital Bank Division | 351,404 |  |  | 254,913 |  |  | 240,579 |  |  | 202,563 |  |  | 206,473 |
Total deposits | $ | 2,037,774 |  |  | $ | 1,572,138 |  |  | $ | 1,569,237 |  |  | $ | 1,467,446 |  |  | $ | 1,456,343 |
*All deposits, excluding those originated by the Capital Bank Division.

In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits. The Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC's brokered-deposit regulations. This will apply to the Corporation's participation in the CDARS and ICS programs. The CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. Using a sophisticated matching system, funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. The Corporation had no deposits obtained through brokers as of December 31, 2020 and 2019. Deposits placed in the CDARS and ICS programs were $318.3 million and $180.4 million as of December 31, 2020 and 2019, respectively.
The Corporation’s deposit strategy is to fund the Bank with stable, low-cost deposits, primarily checking account deposits and other low interest-bearing deposit accounts. A checking account is the driver of a banking relationship and consumers consider the bank where they have their checking account as their primary bank. These customers will typically turn to their primary bank first when in need of other financial services. Strategies that have been developed and implemented to generate these deposits include: (i) acquire deposits by entering new markets through denovo branching, (ii) an annual checking account marketing campaign, (iii) training branch employees to identify and meet client financial needs with Bank products and services, (iv) link business and consumer loans to a primary checking account at the Bank, (v) aggressively promote direct deposit of client’s payroll checks or benefit checks and (vi) constantly monitor the Corporation’s pricing strategies to ensure competitive products and services.
The Corporation also considers brokered deposits to be an element of its deposit strategy and anticipates that it may use brokered deposits as a secondary source of funding to support growth.
Information regarding deposits is included in Note 8 to the consolidated financial statements appearing elsewhere in this report.
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Borrowings
There were no outstanding FHLBNY advances at December 31, 2020 and 2019 respectively. For each of the three years ended December 31, 2020, 2019 and 2018, respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity.
Information regarding securities sold under agreements to repurchase and FHLBNY advances is included in Notes 9 and 10 of the audited Consolidated Financial Statements appearing elsewhere in this report. The following is a summary of securities sold under agreements to repurchase as of and for the years ended December 31, 2020, 2019 and 2018 (in thousands):

| 2020 |  | 2019 |  | 2018
Balance at December 31 | $ | — |  |  | $ | — |  |  | $ | — |
Maximum month-end balance | $ | — |  |  | $ | — |  |  | $ | 10,000 |
Average balance during year | $ | — |  |  | $ | — |  |  | $ | 3,644 |

The following is a summary of FHLBNY overnight advances as of and for the years ended December 31, 2020, 2019, and 2018 (in thousands):

| 2020 |  | 2019 |  | 2018
Balance at December 31 | $ | — |  |  | $ | — |  |  | $ | — |
Maximum month-end balance | $ | — |  |  | $ | — |  |  | $ | 76,500 |
Average balance during year | $ | — |  |  | $ | — |  |  | $ | 23,539 |

The following is a summary of FHLBNY term advances as of and for the years ended December 31, 2020, 2019, and 2018. The carrying amount includes the advance plus purchase accounting adjustments that are amortized over the term of the advance (in thousands):

| 2020 |  | 2019 |  | 2018
Balance at December 31 | $ | — |  |  | $ | — |  |  | $ | — |
Maximum month-end balance | $ | — |  |  | $ | — |  |  | $ | — |
Average balance during year | $ | — |  |  | $ | — |  |  | $ | 5 |

Derivatives
The Corporation offers interest rate swap agreements to qualified commercial loan customers. These agreements allow the Corporation’s customers to effectively fix the interest rate on a variable rate loan by entering into a separate agreement. Simultaneous with the execution of such an agreement with a customer, the Corporation enters into a matching interest rate swap agreement with an unrelated third party provider, which allows the Corporation to continue to receive the variable rate under the loan agreement with the customer. The agreement with the third party is not designated as a hedge contract, therefore changes in fair value are recorded through other non-interest income. Assets and liabilities associated with the agreements are recorded in other assets and other liabilities on the balance sheet. Gains and losses are recorded as other non-interest income. The Corporation is exposed to credit loss equal to the fair value of the interest rate swaps, not the notional amount of the derivatives, in the event of nonperformance by the counterparty to the interest rate swap agreements. Additionally, t he swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's consolidated balance sheets, which typically involves a day one gain. Since the terms of the two interest rate swap agreements are identical, the income statement impact to the Corporation is limited to the day one gain and an allowance for credit loss exposure, in the event of nonperformance. The Corporation recognized $0.5 million and $0.1 million for the years ended December 31, 2020 and 2019, respectively.
The Corporation also participates in the credit exposure of certain interest rate swaps in which it participates in the related commercial loan. The Corporation receives an upfront fee for participating in the credit exposure of the interest rate swap and recognizes the fee to other non-interest income immediately. The Corporation is exposed to its share of the credit loss equal to the fair value of the derivatives in the event of nonperformance by the counter-party of the interest rate swap. The Corporation determines the fair value of the credit loss exposure using historical losses of the loan category associated with the credit exposure.
Information regarding derivatives is included in Note 12 to the consolidated financial statements appearing elsewhere in this report.
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Shareholders’ Equity
Total shareholders’ equity was $199.7 million at December 31, 2020, compared with $182.6 million at December 31, 2019, an increase of $17.1 million, or 9.3%. The increase in retained earnings of $14.3 million was due primarily to earnings of $19.3 million offset by $5.0 million in dividends declared during the year. The increase in accumulated other comprehensive income of $8.2 million can be attributed to an increase in the fair market value of the securities portfolio as a result of a decrease in interest rates. Treasury stock increased $5.8 million, due to the Corporation's common stock repurchase program. Total shareholders’ equity to total assets ratio was 8.76% at December 31, 2020 compared with 10.22% at December 31, 2019. Tangible equity to tangible assets ratio decreased to 7.87% at December 31, 2020, from 9.07% at December 31, 2019.
The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2020, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines. A comparison of the Bank’s actual capital ratios to the ratios required to be adequately or well-capitalized at December 31, 2020 and 2019, is included in Footnote 20 of the audited Consolidated Financial. For more information regarding current capital regulations see Part I-“Business-Supervision and Regulation-Regulatory Capital Requirements.”
Cash dividends declared during 2020, 2019 and 2018 each totaled $5.0 million respectively, or $1.04 per share. Dividends declared during 2020 amounted to 25.73% of net income compared to 32.28%, and 25.42% of net income for 2019 and 2018, respectively. Management seeks to continue generating sufficient capital internally, while continuing to pay dividends to the Corporation’s shareholders.
When shares of the Corporation become available in the market, the Corporation may purchase them after careful consideration of the Corporation’s liquidity and capital positions. Purchases may be made from time to time on the open market or in privately negotiated transactions at the discretion of management. On March 18, 2020, the Corporation's Board of Directors approved a stock repurchase program which replaced the previously authorized repurchase program. As of December 31, 2020, all 250,000 shares have been repurchased at an average cost of $29.40 per share.
On April 27, 2020, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933. The Corporation's Board of Directors approved the filing with the SEC of a Shelf Registration Statement to register for sale from time to time up to $50 million of the following securities: (i) shares of common stock; (ii) unsecured debt securities, which may consist of notes, debentures or other evidences of indebtedness; (iii) warrants; (iv) purchase contracts; (v) units consisting of any combination of the foregoing; and (vi) subscription rights to purchase shares of common stock or debt securities. The SEC declared the registration statement effective on May 7, 2020.
On January 8, 2021, the Corporation announced that the Board of Directors approved a new stock repurchase program. Under the new repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. As of March 12, 2021, the Corporation repurchased a total of 20,265 shares of common stock at a total cost of $721,410.82 under the repurchase program at the weighted average cost of $34.98 per share. The remaining buyback authority under the share repurchase program was 229,375 shares as of the March 12, 2021.
Off-balance Sheet Arrangements
In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with GAAP are not recorded in the financial statements. The Corporation is also a party to certain financial instruments with off balance sheet risk such as commitments under standby letters of credit, unused portions of lines of credit, commitments to fund new loans, interest rate swaps, and risk participation agreements. The Corporation's policy is to record such instruments when funded. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are generally used by the Corporation to manage clients' requests for funding and other client needs.
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The table below shows the Corporation’s off-balance sheet arrangements as of December 31, 2020 (in thousands):

COMMITMENT MATURITY BY PERIOD
| Total |  | 2021 |  | 2022-2023 |  | 2024-2025 |  | 2026 and thereafter
Standby letters of credit | $ | 16,094 |  |  | $ | 15,152 |  |  | $ | 480 |  |  | $ | 207 |  |  | $ | 255 |
Unused portions of lines of credit (1) | 199,311 |  |  | 199,311 |  |  | — |  |  | — |  |  | — |
Commitments to fund new loans | 67,515 |  |  | 67,515 |  |  | — |  |  | — |  |  | — |
Total | $ | 282,920 |  |  | $ | 281,978 |  |  | $ | 480 |  |  | $ | 207 |  |  | $ | 255 |

(1) Not included in this total are unused portions of home equity lines of credit, credit card lines and consumer overdraft protection lines of credit, since no contractual maturity dates exist for these types of loans. Commitments to outside parties under these lines of credit were $54.8 million, $6.4 million and $8.8 million, respectively, at December 31, 2020.
Contractual Obligations
The table below shows the Corporation’s contractual obligations under long-term agreements as of December 31, 2020 (in thousands). Note references are to the Notes of the Consolidated Financial Statements:

CONTRACTUAL OBLIGATIONS
|  | Payments Due by Period
| Total |  | 2021 |  | 2022 - 2023 |  | 2024 - 2025 |  | 2026 and thereafter
Time Deposits (Note 8) | $ | 285,731 |  |  | $ | 193,113 |  |  | $ | 88,674 |  |  | $ | 1,084 |  |  | $ | 2,860 |
Operating leases (Note 6) | 8,666 |  |  | 907 |  |  | 1,712 |  |  | 1,698 |  |  | 4,349 |
Capital leases (Note 6) | 4,809 |  |  | 388 |  |  | 782 |  |  | 800 |  |  | 2,839 |
Data processing services and other | 604 |  |  | 480 |  |  | 124 |  |  | — |  |  | — |
Total (1) | $ | 299,810 |  |  | $ | 194,888 |  |  | $ | 91,292 |  |  | $ | 3,582 |  |  | $ | 10,048 |

(1) Not included in the above total is the Corporation's obligation regarding the Pension Plan and Other Benefit Plans. Please refer to Part IV Item 15 Note 14 for information regarding these obligations at December 31, 2020.
Liquidity
Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, securities sold under agreements to repurchase and other borrowings.
The Corporation is a member of the FHLBNY which allows it to access borrowings which enhance management's ability to satisfy future liquidity needs. Based on available collateral and current advances outstanding, the Corporation was eligible to borrow up to a total of $86.3 million and $141.8 million at December 31, 2020 and 2019, respectively. The Corporation also had a total of $68.0 million of unsecured lines of credit with six different financial institutions, all of which were available at December 31, 2020. The Corporation had a total of $58.0 million of unsecured lines of credit with five different financial institutions, all of which was available at December 31, 2019.
The PPPLF was created by the Board of Governors of the Federal Reserve System on April 9, 2020 to facilitate lending by participating financial institutions to small businesses under the PPP of the CARES Act. Under the facility, the Federal Reserve Banks lend to participating financial institutions on a non-recourse basis, taking PPP loans as collateral. The Bank participated in the PPPLF and received funding for 141 loans totaling $66.4 million. The Corporation fully repaid the funds on May 28, 2020.
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Consolidated Cash Flows Analysis
The table below summarizes the Corporation's cash flows for the years indicated (in thousands):

CONSOLIDATED SUMMARY OF CASH FLOWS
|  | Years Ended December 31,
(in thousands) |  | 2020 |  | 2019
Net cash provided by operating activities |  | $ | 28,659 |  |  | $ | 26,405 |
Net cash provided (used) by investing activities |  | (495,848) |  |  | (32,711) |
Net cash provided (used) by financing activities |  | 453,823 |  |  | (1,762) |
Net increase (decrease) in cash and cash equivalents |  | $ | (13,366) |  |  | $ | (8,068) |

Operating activities
The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through borrowings are sufficient to fund the Corporation’s operating liquidity needs. Cash provided by operating activities in the years ended December 31, 2020 and 2019 predominantly resulted from net income after non-cash operating adjustments.
Investing activities
Cash used in investing activities during the year ended December 31, 2020 predominantly resulted from purchases of securities available for sale and a net increase in loans, offset by maturities, and principal collected on securities available for sale. Cash used in investing activities during the year ended December 31, 2019 predominantly resulted from purchases of securities available for sale, offset by sales, maturities and principal collected on securities available for sale.
Financing activities
Cash provided by financing activities during the year ended December 31, 2020 resulted from an increase in deposits, offset by the payment of dividends to shareholders and the repurchase of treasury shares through the Corporation's common stock repurchase program. Cash used in financing activities during the year ended December 31, 2019 predominantly resulted from payment of dividends to shareholders, offset by an increase in deposits.
Capital Resources
The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the Regulatory Relief Act, the FRB amended its small bank holding company and savings and loan holding company policy statement to provide that holding companies with consolidated assets of less than $3 billion that are (i) not engaged in significant non-banking activities, (ii) do not conduct significant off-balance sheet activities, and (iii) do not have a material amount of SEC-registered debt or equity securities, other than trust preferred securities, that contribute to an organization’s complexity, are not subject to regulatory capital requirements. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Under Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. The capital conservation buffer is 2.50%. Organizations that fail to maintain the minimum capital conservation buffer could face restrictions on capital distributions or discretionary bonus payments to executive officers. The net unrealized gain or loss on available for sale securities and changes in the funded status of the defined benefit pension plan and other benefit plans are not included in computing regulatory capital.
Pursuant to the Regulatory Relief Act, the FRB finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. The new rule took effect on January 1, 2020. Pursuant to the CARES Act, the federal banking regulators issued final rules to set the community bank leverage ratio at 8% beginning in the second quarter of 2020 through the end of 2020. Beginning in 2021, the community bank leverage ratio will increase to 8.5% for the calendar year. Community banks will have until Jan. 1, 2022, before the community bank leverage ratio requirement will return to 9%. The Bank has not elected to use the community bank leverage ratio.
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,
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as of December 31, 2020 and December 31, 2019, the Corporation and Bank met all capital adequacy requirements to which they were subject. As of December 31, 2018, the Corporation is no longer subject to FRB consolidated capital requirements applicable to bank holding companies, which are similar to those applicable to the Bank, until it reaches $3.0 billion in assets.
As of December 31, 2020, 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 December 31, 2020 and 2019 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.
The Corporation’s and the Bank’s actual and required regulatory capital ratios were as follows (in thousands, except ratio data):

|  | Actual |  | Minimal Capital Adequacy |  | Minimal Capital Adequacy with Capital Buffer |  | To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2020 |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
Total Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 192,960 |  |  | 13.62 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 185,606 |  |  | 13.12 | % |  | $ | 113,182 |  |  | 8.00 | % |  | $ | 148,551 |  |  | 10.50 | % |  | $ | 141,478 |  |  | 10.00 | %
Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,216 |  |  | 12.37 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 167,881 |  |  | 11.87 | % |  | $ | 84,887 |  |  | 6.00 | % |  | $ | 120,256 |  |  | 8.50 | % |  | $ | 113,182 |  |  | 8.00 | %
Common Equity Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,216 |  |  | 12.37 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 167,881 |  |  | 11.87 | % |  | $ | 63,665 |  |  | 4.50 | % |  | $ | 99,034 |  |  | 7.00 | % |  | $ | 91,960 |  |  | 6.50 | %
Tier 1 Capital (to Average Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,216 |  |  | 7.90 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 167,881 |  |  | 7.59 | % |  | $ | 88,474 |  |  | 4.00 | % |  | N/A |  | N/A |  | $ | 110,592 |  |  | 5.00 | %

|  | Actual |  | Minimum Capital Adequacy |  | Minimal Capital Adequacy with Capital Buffer |  | To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2019 |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
Total Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 182,239 |  |  | 13.98 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 175,062 |  |  | 13.45 | % |  | $ | 104,136 |  |  | 8.00 | % |  | $ | 136,679 |  |  | 10.50 | % |  | $ | 130,170 |  |  | 10.00 | %
Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 165,859 |  |  | 12.73 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 158,702 |  |  | 12.19 | % |  | $ | 78,102 |  |  | 6.00 | % |  | $ | 110,645 |  |  | 8.50 | % |  | $ | 104,136 |  |  | 8.00 | %
Common Equity Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 165,859 |  |  | 12.73 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 158,702 |  |  | 12.19 | % |  | $ | 58,577 |  |  | 4.50 | % |  | $ | 91,119 |  |  | 7.00 | % |  | $ | 84,611 |  |  | 6.50 | %
Tier 1 Capital (to Average Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 165,859 |  |  | 9.35 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 158,702 |  |  | 8.98 | % |  | $ | 70,719 |  |  | 4.00 | % |  | N/A |  | N/A |  | $ | 88,399 |  |  | 5.00 | %

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Dividend Restrictions
The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At December 31, 2020, the Bank could, without prior approval, declare dividends of approximately $36.1 million.
Adoption of New Accounting Standards
For a discussion of the impact of recently issued accounting standards, please see Note 1 to the Corporation's consolidated financial statements which begins on page F-10.
Explanation and Reconciliation of the Corporation’s Use of Non-GAAP Measures
The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on pages F-3 through F-9. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.
In addition to analyzing the Corporation’s results on a reported basis, management uses certain non-GAAP financial measures, because it believes these non-GAAP financial measures provide information to investors about the underlying operational performance and trends of the Corporation and, therefore, facilitate a comparison of the Corporation with the performance of its competitors. Non-GAAP financial measures used by the Corporation may not be comparable to similarly named non-GAAP financial measures used by other companies.
The SEC has adopted Regulation G, which applies to all public disclosures, including earnings releases, made by registered companies that contain “non-GAAP financial measures.” Under Regulation G, companies making public disclosures containing non-GAAP financial measures must also disclose, along with each non-GAAP financial measure, certain additional information, including a reconciliation of the non-GAAP financial measure to the closest comparable GAAP financial measure and a statement of the Corporation’s reasons for utilizing the non-GAAP financial measure as part of its financial disclosures. The SEC has exempted from the definition of “non-GAAP financial measures” certain commonly used financial measures that are not based on GAAP. When these exempted measures are included in public disclosures, supplemental information is not required. The following measures used in this Report, which are commonly utilized by financial institutions, have not been specifically exempted by the SEC and may constitute "non-GAAP financial measures" within the meaning of the SEC's rules, although we are unable to state with certainty that the SEC would so regard them.
Fully Taxable Equivalent Net Interest Income and Net Interest Margin
Net interest income is commonly presented on a tax-equivalent basis. That is, to the extent that some component of the institution's net interest income, which is presented on a before-tax basis, is exempt from taxation (e.g., is received by the institution as a result of its holdings of state or municipal obligations), an amount equal to the tax benefit derived from that component is added to the actual before-tax net interest income total. This adjustment is considered helpful in comparing one financial institution's net interest income to that of other institutions or in analyzing any institution’s net interest income trend line over time, to correct any analytical distortion that might otherwise arise from the fact that financial institutions vary widely in the proportions of their portfolios that are invested in tax-exempt securities, and that even a single institution may significantly alter over time the proportion of its own portfolio that is invested in tax-exempt obligations. Moreover, net interest income is itself a component of a second financial measure commonly used by financial institutions, net interest margin, which is the ratio of net interest income to average interest-earning assets. For purposes of this measure as well, fully taxable equivalent net interest income is generally used by financial institutions, as opposed to actual net interest income, again to provide a better basis of comparison from institution to institution and to better demonstrate a single institution’s performance over time. The Corporation follows these practices.
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| As of or for the Years Ended
(in thousands, except ratio data) | December 31, |  | December 31, |  | December 31,
2020 |  | 2019 |  | 2018
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT |  |  |  |  |
Net interest income (GAAP) | $ | 62,919 |  |  | $ | 60,611 |  |  | $ | 60,480 |
Fully taxable equivalent adjustment | 345 |  |  | 403 |  |  | 420 |
Fully taxable equivalent net interest income (non-GAAP) | $ | 63,264 |  |  | $ | 61,014 |  |  | $ | 60,900 |
Average interest-earning assets (GAAP) | $ | 1,945,062 |  |  | $ | 1,674,668 |  |  | $ | 1,638,803 |
Net interest margin - fully taxable equivalent (non-GAAP) | 3.25 | % |  | 3.64 | % |  | 3.72 | %

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

| As of or for the Years Ended
(in thousands, except ratio data) | December 31, |  | December 31, |  | December 31,
2020 |  | 2019 |  | 2018
EFFICIENCY RATIO |  |  |  |  |
Net interest income (GAAP) | $ | 62,919 |  |  | $ | 60,611 |  |  | $ | 60,480 |
Fully taxable equivalent adjustment | 345 |  |  | 403 |  |  | 420 |
Fully taxable equivalent net interest income (non-GAAP) | $ | 63,264 |  |  | $ | 61,014 |  |  | $ | 60,900 |
Non-interest income (GAAP) | $ | 21,124 |  |  | $ | 20,073 |  |  | $ | 23,074 |
Less: changes in fair value of equity investments | — |  |  | — |  |  | (2,093) |
Less: net (gains) losses on security transactions | — |  |  | (19) |  |  | — |
Adjusted non-interest income (non-GAAP) | $ | 21,124 |  |  | $ | 20,054 |  |  | $ | 20,981 |
Non-interest expense (GAAP) | $ | 55,935 |  |  | $ | 55,696 |  |  | $ | 56,766 |
Less: amortization of intangible assets | (484) |  |  | (609) |  |  | (734) |
Less: legal accruals and settlements | — |  |  | — |  |  | (989) |
Adjusted non-interest expense (non-GAAP) | $ | 55,451 |  |  | $ | 55,087 |  |  | $ | 55,043 |
Efficiency ratio (unadjusted) | 66.56 | % |  | 69.03 | % |  | 67.94 | %
Efficiency ratio (adjusted) | 65.71 | % |  | 67.95 | % |  | 67.22 | %

Tangible Equity and Tangible Assets (Year-End)
Tangible equity, tangible assets, and tangible book value per share are each non-GAAP financial measures. Tangible equity represents the Corporation’s stockholders’ equity, less goodwill and intangible assets. Tangible assets represents the Corporation’s total assets, less goodwill and other intangible assets. Tangible book value per share represents the Corporation’s equity divided by common shares at year-end. These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.
76

| As of or for the Years Ended
(in thousands, except per share and ratio data) | December 31, |  | December 31, |  | December 31,
2020 |  | 2019 |  | 2018
TANGIBLE EQUITY AND TANGIBLE ASSETS (YEAR END) |  |  |  |  |
Total shareholders' equity (GAAP) | $ | 199,699 |  |  | $ | 182,627 |  |  | $ | 165,029 |
Less: intangible assets | (22,082) |  |  | (22,566) |  |  | (23,175) |
Tangible equity (non-GAAP) | $ | 177,617 |  |  | $ | 160,061 |  |  | $ | 141,854 |
Total assets (GAAP) | $ | 2,279,451 |  |  | $ | 1,787,827 |  |  | $ | 1,755,343 |
Less: intangible assets | (22,082) |  |  | (22,566) |  |  | (23,175) |
Tangible assets (non-GAAP) | $ | 2,257,369 |  |  | $ | 1,765,261 |  |  | $ | 1,732,168 |
Total equity to total assets at end of year (GAAP) | 8.76 | % |  | 10.22 | % |  | 9.40 | %
Book value per share (GAAP) | $ | 42.53 |  |  | $ | 37.35 |  |  | $ | 33.99 |
Tangible equity to tangible assets at end of year (non-GAAP) | 7.87 | % |  | 9.07 | % |  | 8.19 | %
Tangible book value per share (non-GAAP) | $ | 37.83 |  |  | $ | 32.74 |  |  | $ | 29.22 |

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

| As of or for the Years Ended
| December 31, |  | December 31, |  | December 31,
(in thousands, except ratio data) | 2020 |  | 2019 |  | 2018
TANGIBLE EQUITY (AVERAGE) |  |  |  |  |
Total average shareholders' equity (GAAP) | $ | 193,741 |  |  | $ | 176,138 |  |  | $ | 153,793 |
Less: average intangible assets | (22,328) |  |  | (22,860) |  |  | (23,537) |
Average tangible equity (non-GAAP) | $ | 171,413 |  |  | $ | 153,278 |  |  | $ | 130,256 |
Return on average equity (GAAP) | 9.94 | % |  | 8.86 | % |  | 12.76 | %
Return on average tangible equity (non-GAAP) | 11.24 | % |  | 10.18 | % |  | 15.07 | %

Adjustments for Certain Items of Income or Expense
In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular year by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the year, including certain nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative impact on the Corporation’s financial results during the particular year in question. In the Corporation’s presentation of any such non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the supplemental financial information and explanations required under Regulation G.
77

| As of or for the Years Ended
(in thousands, except per share and ratio data) | December 31, |  | December 31, |  | December 31,
2020 |  | 2019 |  | 2018
NON-GAAP NET INCOME |  |  |  |  |
Reported net income (loss) (GAAP) | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |
Net changes in fair value of investments (net of tax) | — |  |  | — |  |  | (1,559) |
Net (gains) losses on security transactions (net of tax) | — |  |  | (14) |  |  | — |
Legal accruals and settlements (net of tax) | — |  |  | — |  |  | 737 |
Remeasurement of net deferred tax asset | — |  |  | — |  |  | (445) |
Net income (non-GAAP) | $ | 19,262 |  |  | $ | 15,595 |  |  | $ | 18,359 |
Average basic and diluted shares outstanding | 4,802 |  |  | 4,869 |  |  | 4,832 |
Reported basic and diluted earnings (loss) per share (GAAP) | $ | 4.01 |  |  | $ | 3.21 |  |  | $ | 4.06 |
Reported return on average assets (GAAP) | 0.94 | % |  | 0.88 | % |  | 1.14 | %
Reported return on average equity (GAAP) | 9.94 | % |  | 8.86 | % |  | 12.76 | %
Basic and diluted earnings per share (non-GAAP) | $ | 4.01 |  |  | $ | 3.20 |  |  | $ | 3.80 |
Return on average assets (non-GAAP) | 0.94 | % |  | 0.88 | % |  | 1.07 | %
Return on average equity (non-GAAP) | 9.94 | % |  | 8.85 | % |  | 11.94 | %

78

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Risk
Management considers interest rate risk to be the most significant market risk for the Corporation. Market risk is the risk of loss from adverse changes in market prices and rates. Interest rate risk is the exposure to adverse changes in the net income of the Corporation as a result of changes in interest rates.
The Corporation’s primary earnings source is net interest income, which is affected by changes in the level of interest rates, the relationship between rates, the impact of interest rate fluctuations on asset prepayments, the level and composition of deposits and liabilities, and credit quality of interest-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 Chief Executive Officer, the Chief Financial Officer, 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 December 31, 2020, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 5.18% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by 9.20%. Both are within the Corporation's policy guidelines.
A related component of interest rate risk is the expectation that the market value of the Corporation’s capital 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 shrinkage in market value. At December 31, 2020, it is estimated that an immediate 100-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 3.19%. An immediate 200-basis point increase in interest rates would positively impact the market value by 2.46%, which is within the Corporation’s policy guidelines.
Management does recognize the need for certain hedging strategies during periods of anticipated higher fluctuations in interest rates and the Funds Management Policy provides for limited use of certain derivatives in asset liability management.
Credit Risk
The Corporation manages credit risk consistent with state and federal laws governing the making of loans through written policies and procedures; loan review to identify loan problems at the earliest possible time; collection procedures (continued even after a loan is charged off); an adequate allowance for loan losses; and continuing education and training to ensure lending expertise. Diversification by loan product is maintained through offering commercial loans, 1-4 family mortgages, and a full range of consumer loans.
The Corporation monitors its loan portfolio carefully. The Loan Committee of the Corporation's Board of Directors is designated to receive required loan reports, oversee loan policy, and approve loans above authorized individual and Senior Loan Committee lending limits. The Senior Loan Committee, consisting of the President and Chief Executive Officer, Chief Financial Officer and Treasurer (non-voting member), Chief Credit and Risk Officer, Business Client Division Manager, Divisional President, and Commercial Loan Manager, implements the Board-approved loan policy.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements listed in Part IV, Item 15 are filed as part of this report and appear on pages F-1 through F-65.
79

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
Item 9A. CONTROLS AND PROCEDURES
(a) Evaluation of Disclosure Controls and Procedures
The Corporation's management, with the participation of our Chief Executive Officer, who is the Corporation's principal executive officer, and our Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, evaluated the effectiveness of the Corporation's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of December 31, 2020. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer and Treasurer have concluded that the Corporation's disclosure controls and procedures are effective as of December 31, 2020.
(b) Management's Report on Internal Control over Financial Reporting
We, as members of management of the Corporation, are responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Corporation's internal control over financial reporting is a process designed to provide reasonable assurance to the Corporation's management and Board of Directors regarding the reliability of financial reporting and the preparation of the Corporation's financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Corporation, (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of management and directors of the Corporation, and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Corporation's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.
As of December 31, 2020 management assessed the effectiveness of the Corporation's internal control over financial reporting based on criteria established in the 2013 Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The objective of this assessment was to determine whether the Corporation's internal control over financial reporting was effective as of December 31, 2020. Based on the assessment, we assert that the Corporation maintained effective internal control over financial reporting as of December 31, 2020 based on the specified criteria.
(c) Changes in Internal Control over Financial Reporting
During the fourth quarter of 2020, there have been no changes in the Corporation’s internal control over financial reporting that have materially affected, or that are reasonably likely to material affect, the Corporation’s internal control over financial reporting.

/s/ Anders M. Tomson |  | /s/ Karl F. Krebs
Anders M. Tomson |  | Karl F. Krebs
President and Chief Executive Officer |  | Chief Financial Officer and Treasurer
March 24, 2021 |  | March 24, 2021

Item 9B. OTHER INFORMATION
None.
80

PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information responsive to this Item 10 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2021 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2020 fiscal year end.
ITEM 11. EXECUTIVE COMPENSATION
Information responsive to this Item 11 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2021 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2020 fiscal year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT, AND RELATED STOCKHOLDER MATTERS
Information responsive to this Item 12 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2021 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2020 fiscal year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information responsive to this Item 13 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2021 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2020 fiscal year end.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information responsive to this Item 14 is incorporated herein by reference to the Corporation's definitive proxy statement for its 2021 Annual Meeting of Shareholders, which will be filed with the SEC within 120 days after the Corporation’s 2020 fiscal year end.
81

PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) (1) The following consolidated financial statements of the Corporation appear on pages F-1 through F-65 of this report and are incorporated in Part II, Item 8:

Report of Independent Registered Public Accounting Firm-Crowe LLP
Consolidated Financial Statements
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Income for the three years ended December 31, 2020
Consolidated Statements of Comprehensive Income for the three years ended December 31, 2020
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2020
Consolidated Statements of Cash Flows for the three years ended December 31, 2020
Notes to Consolidated Financial Statements

(2)Financial statement schedules have been omitted because they are not applicable or the required information is shown in the Consolidated Financial Statements or the Notes thereto under Item 8, "Financial Statements and Supplementary Data".
(b) The following exhibits are either filed with this Form 10-K or are incorporated herein by reference.
The Corporation's Securities Exchange Act file number is 000-13888.

| Exhibit | The following exhibits are either filed with this Form 10-K or are incorporated herein by reference. The Corporation’s Securities Exchange Act file number is 000-13888.
| 3.1 | Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008).
| 3.2 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008).
| 3.3 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006).
| 3.4 | Amended and Restated Bylaws of Chemung Financial Corporation, as amended to January 20, 2021 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K and filed with the Commission on January 25, 2021).
| 4.1 | Specimen Stock Certificate (filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).
| 4.2 | Description of Common Stock Registered Under Section 12 of the Securities Exchange Act of 1934, filed herewith (as incorporated by reference to Exhibit 4.2 to Registrant's Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020).

82

| 10.1 | Chemung Financial Corporation 2014 Omnibus Plan and Component Plans (Chemung Financial Corporation Restricted Stock Plan, Chemung Financial Corporation Incentive Compensation Plan, Chemung Financial Corporation Directors’ Compensation Plan and Chemung Financial Corporation/Chemung Canal Trust Company Directors’ Deferred Fee Plan) (filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to Registrant’s Form S-8 filed with the Commssion on January 27, 2015 and incorporated herein by reference).
| 10.2 | Change of Control Agreement dated December 19, 2018 between Chemung Canal Trust Company and Anders M. Tomson, President and Chief Executive Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commission on December 19, 2018 and incorporated herein by reference).
| 10.3 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Karl F. Krebs, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference).
| 10.4 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Louis C. DiFabio, Executive Vice President, (as incorporated by reference to Exhibit 10.4 to Registrant’s Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020).
| 10.5 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Karen R. Makowski, Executive Vice President and Chief Administration and Risk Officer (filed as Exhibit 10.3 to Registrant’s Form 8-K on December 23, 2019 and incorporated herein by reference).
| 10.6 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Thomas W. Wirth, Executive Vice President (filed as Exhibit 10.4 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference).
| 10.7 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Daniel D. Fariello, President of Capital Bank Division (filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference).
| 10.8 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Loren D. Cole, Executive Vice President and Chief Information Officer, (as incorporated by reference to Exhibit 10.8 to Registrant’s Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020).
| 10.9 | Change of Control Agreement dated January 4, 2021 between Chemung Canal Trust Company and Jeffrey P. Kenefick, Regional President (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on January 5, 2021 and incorporated herein by reference).
| 21 | Subsidiaries of the Registrant.*
| 23.0 | Consent of Crowe LLP, Independent Registered Public Accounting Firm.*
| 31.1 | Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
| 31.2 | Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
| 32.1 | Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
| 32.2 | Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
| 101.INS | Instance Document
| 101.SCH | XBRL Taxonomy Schema*
| 101.CAL | XBRL Taxonomy Calculation Linkbase*
| 101.DEF | XBRL Taxonomy Definition Linkbase*
| 101.LAB | XBRL Taxonomy Label Linkbase*
| 101.PRE | XBRL Taxonomy Presentation Linkbase*
| * | Filed herewith.

ITEM 16. 10-K SUMMARY
None.
83

CHEMUNG FINANCIAL CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages F-1 to F-65

| Page
Report of Independent Registered Public Accounting Firm-Crowe LLP | F-1
Consolidated Financial Statements |
Consolidated Balance Sheets as of December 31, 2020 and 2019 | F-3
Consolidated Statements of Income for the three years ended December 31, 2020 | F-4
Consolidated Statements of Comprehensive Income (Loss) for the three years ended December 31, 2020 | F-5
Consolidated Statements of Shareholders' Equity for the three years ended December 31, 2020 | F-6
Consolidated Statements of Cash Flows for the three years ended December 31, 2020 | F-8
Notes to Consolidated Financial Statements | F-10

84

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors and Shareholders
Chemung Financial Corporation and Subsidiaries
Elmira, New York
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Chemung Financial Corporation and Subsidiaries (the "Company") as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing a separate opinion on the critical audit matters or on the accounts or disclosures to which they relate.
Allowance for Loan Losses – Loans Collectively Evaluated for Impairment.
As described in Note 1 and Note 4 to the consolidated financial statements, the Company’s allowance for loan losses is the amount that management believes will be adequate to absorb probable incurred losses on existing loans. The allowance for loan losses was $20.9 million at December 31, 2020, which consists of two components: specific valuation allowances related to loans individually evaluated for impairment, representing $1.5 million and general valuation allowances related to loans collectively evaluated for impairment, representing $19.4 million.
The general valuation covers non-impaired loans and is based on historical loss experience adjusted for current factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five-year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include considerations of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic business conditions and developments, including the condition of various market segments and more recently the expected impact of COVID-19 on various portfolio segments, (3) loan volume, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory
F-1

requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy, including the impact of COVID 19.
We identified the allowance for loan losses for loans collectively evaluated for impairment as a critical audit matter because of the necessary judgment applied by us to evaluate management’s significant estimates and subjective assumptions relating to: 1) the classification of loans subject to an adjusted loss history, and 2) the determination of the aggregate effect of the qualitative factors on the allowance for loan losses.
The primary procedures we performed to address this critical audit matter included:
•Testing the effectiveness of controls over the evaluation of the allowance related to loans collectively evaluated for impairment, including addressing:
◦Grading of loans from independent loan review and management’s annual credit reviews.
◦Management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative factors and the resulting allocation to the allowance
•Substantively testing management’s process, including evaluating their judgments and assumptions, for developing the allowance related to loans collectively evaluated for impairment, which included:
◦Evaluation of loan grades of the commercial portfolio to ensure proper inclusion in pass categories or criticized and classified categories.
◦Evaluation of the data used as a basis for the adjustments relating to qualitative factors.
◦Evaluation of the reasonableness of management’s judgments related to the qualitative and quantitative assessment of the data used in the determination of qualitative factors and the resulting allocation to the allowance
◦Evaluation of the reasonableness of general allocation component, including its directional consistency from year to year.
Goodwill Impairment Evaluation
As described in Notes 1 and 7 to the consolidated financial statements, goodwill is the excess of the purchase price over the fair value of the net assets of the business acquired and is periodically evaluated for impairment. The Company’s goodwill balance was $21.8 million at December 31, 2020, which is allocated to the Company’s core banking segment.
Goodwill is tested for impairment at the reporting unit level, defined by management as the segment level, at least annually in the fourth quarter or more frequently whenever events or circumstances occur that indicate that it is more-likely-than-not that an impairment loss has occurred. The quantitative impairment analysis requires a comparison of a reporting unit’s fair value to its’ carrying value to identify potential impairment. Goodwill impairment exists when a reporting unit’s carrying value exceeds its fair value. Management engaged a third-party valuation specialist and significant judgement is applied in determining the fair value of a reporting unit. This judgment includes the selection of appropriate discount rates, the identification of relevant market comparable transactions and control premium, and the development of prospective financial information about the Company. The selection and weighting of the various fair value methodologies may result in a higher or lower fair value. Judgement is also applied in determining the weightings applied to the different methodologies that are most representative of fair value.
We identified the goodwill impairment assessment of the Company as a critical audit matter. The principal considerations for this determination was the need for usage of a auditor employed specialist, combined with the degree of auditor judgment in performing procedures over the key assumptions, which include discounted cash flows, discount rate, prospective financial information, and weighting allocation to valuation methodologies.
The primary procedures we performed to address this critical audit matter included:
•Substantively testing management’s estimate, including evaluating their judgements and assumptions, for estimating fair value the Company which included:
◦Testing of management’s methodology, including the reasonableness and accuracy of data supporting cash flow projections and the weighting of each valuation methodology.
◦Utilization of an auditor employed valuation specialist to evaluate appropriateness of valuation methodologies, discount rate, control premium, and to conduct a shadow calculation.
We have served as the Company's auditor since 2006.
Livingston, New Jersey
March 24, 2021
F-2

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS

| DECEMBER 31,
(in thousands, except share and per share amounts) | 2020 |  | 2019
ASSETS |  |  |
Cash and due from financial institutions | $ | 29,467 |  |  | $ | 25,203 |
Interest-earning deposits in other financial institutions | 79,071 |  |  | 96,701 |
Total cash and cash equivalents | 108,538 |  |  | 121,904 |
Equity investments, at fair value | 2,542 |  |  | 2,174 |
Securities available for sale, at estimated fair value | 554,611 |  |  | 284,090 |
Securities held to maturity, estimated fair value of $2,501 at December 31, 2020 and $3,139 at December 31, 2019 | 2,469 |  |  | 3,115 |
FHLBNY and FRBNY Stock, at cost | 3,150 |  |  | 3,099 |
Loans, net of deferred loan fees | 1,536,463 |  |  | 1,309,219 |
Allowance for loan losses | (20,924) |  |  | (23,478) |
Loans, net | 1,515,539 |  |  | 1,285,741 |
Loans held for sale | 170 |  |  | 1,185 |
Premises and equipment, net | 20,119 |  |  | 22,417 |
Operating lease right-of-use assets | 7,145 |  |  | 8,001 |
Goodwill | 21,824 |  |  | 21,824 |
Other intangible assets, net | 258 |  |  | 742 |
Bank owned life insurance | 3,059 |  |  | 3,111 |
Accrued interest and other assets | 40,027 |  |  | 30,424 |
Total assets | $ | 2,279,451 |  |  | $ | 1,787,827 |
LIABILITIES AND SHAREHOLDERS' EQUITY |  |  |
Deposits: |  |  |
Non-interest-bearing | $ | 620,423 |  |  | $ | 468,238 |
Interest-bearing | 1,417,351 |  |  | 1,103,900 |
Total deposits | 2,037,774 |  |  | 1,572,138 |
Capital lease obligation | 3,849 |  |  | 4,085 |
Operating lease liabilities | 7,264 |  |  | 8,084 |
Dividends payable | 1,214 |  |  | 1,263 |
Accrued interest payable and other liabilities | 29,651 |  |  | 19,630 |
Total liabilities | 2,079,752 |  |  | 1,605,200 |
Shareholders' equity: |  |  |
Common stock, $0.01 par value per share, 10,000,000 shares authorized; 5,310,076 issued at December 31, 2020 and December 31, 2019 | 53 |  |  | 53 |
Additional-paid-in capital | 46,764 |  |  | 46,382 |
Retained earnings | 168,006 |  |  | 153,701 |
Treasury stock, at cost (642,239 shares at December 31, 2020; 452,641 shares at December 31, 2019) | (17,525) |  |  | (11,710) |
Accumulated other comprehensive loss | 2,401 |  |  | (5,799) |
Total shareholders' equity | 199,699 |  |  | 182,627 |
Total liabilities and shareholders' equity | $ | 2,279,451 |  |  | $ | 1,787,827 |

See accompanying notes to consolidated financial statements.
F-3

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME

| YEARS ENDED DECEMBER 31,
(in thousands, except per share amounts) | 2020 |  | 2019 |  | 2018
Interest and Dividend Income: |  |  |  |  |
Loans, including fees | $ | 59,089 |  |  | $ | 58,245 |  |  | $ | 57,840 |
Taxable securities | 6,004 |  |  | 5,265 |  |  | 4,804 |
Tax exempt securities | 1,060 |  |  | 1,152 |  |  | 1,153 |
Interest-earning deposits | 754 |  |  | 2,270 |  |  | 756 |
Total interest and dividend income | 66,907 |  |  | 66,932 |  |  | 64,553 |
Interest Expense: |  |  |  |  |
Deposits | 3,827 |  |  | 6,173 |  |  | 3,323 |
Securities sold under agreements to repurchase | — |  |  | — |  |  | 137 |
Borrowed funds | 161 |  |  | 148 |  |  | 613 |
Total interest expense | 3,988 |  |  | 6,321 |  |  | 4,073 |
Net interest income | 62,919 |  |  | 60,611 |  |  | 60,480 |
Provision for loan losses | 4,239 |  |  | 5,945 |  |  | 3,153 |
Net interest income after provision for loan losses | 58,680 |  |  | 54,666 |  |  | 57,327 |
Non-Interest Income: |  |  |  |  |
Wealth management group fee income | 9,492 |  |  | 9,503 |  |  | 9,317 |
Service charges on deposit accounts | 3,134 |  |  | 4,460 |  |  | 4,727 |
Interchange revenue from debit card transactions | 4,068 |  |  | 4,104 |  |  | 4,040 |
Net gains on securities transactions | — |  |  | 19 |  |  | — |
Change in fair value of equity investments | 89 |  |  | 81 |  |  | 2,004 |
Net gain on sales of loans held for sale | 1,730 |  |  | 248 |  |  | 351 |
Net gains (losses) on sales of other real estate owned | (79) |  |  | (99) |  |  | 90 |
Income from bank owned life insurance | 161 |  |  | 63 |  |  | 66 |
Other | 2,529 |  |  | 1,694 |  |  | 2,479 |
Total non-interest income | 21,124 |  |  | 20,073 |  |  | 23,074 |
Non-Interest Expenses: |  |  |  |  |
Salaries and wages | 24,250 |  |  | 23,420 |  |  | 22,322 |
Pension and other employee benefits | 5,553 |  |  | 5,902 |  |  | 5,524 |
Other components of net periodic pension cost (benefit) | (1,017) |  |  | (541) |  |  | (770) |
Net occupancy expenses | 5,885 |  |  | 5,969 |  |  | 6,550 |
Furniture and equipment expenses | 2,078 |  |  | 2,497 |  |  | 2,550 |
Data processing expense | 7,576 |  |  | 7,386 |  |  | 6,997 |
Professional services | 1,725 |  |  | 1,885 |  |  | 2,169 |
Legal accruals and settlements | — |  |  | — |  |  | 989 |
Amortization of intangible assets | 484 |  |  | 609 |  |  | 734 |
Marketing and advertising expense | 631 |  |  | 932 |  |  | 1,181 |
Other real estate owned expenses | 102 |  |  | 115 |  |  | 422 |
FDIC insurance | 987 |  |  | 537 |  |  | 1,142 |
Loan expense | 1,173 |  |  | 787 |  |  | 863 |
Other | 6,508 |  |  | 6,198 |  |  | 6,093 |
Total non-interest expenses | 55,935 |  |  | 55,696 |  |  | 56,766 |
Income before income tax expense | 23,869 |  |  | 19,043 |  |  | 23,635 |
Income tax expense | 4,607 |  |  | 3,434 |  |  | 4,009 |
Net income | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |
Weighted average shares outstanding | 4,802 |  |  | 4,869 |  |  | 4,832 |
Basic and diluted earnings per share | $ | 4.01 |  |  | $ | 3.21 |  |  | $ | 4.06 |

See accompanying notes to consolidated financial statements.
F-4

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

| YEARS ENDED DECEMBER 31,
(in thousands) | 2020 |  | 2019 |  | 2018
Net income | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |
Other comprehensive income (loss): |  |  |  |  |
Unrealized holding gains (losses) on securities available for sale | 10,415 |  |  | 8,053 |  |  | (1,382) |
Reclassification adjustment gains realized in net income | — |  |  | 19 |  |  | — |
Net unrealized gains (losses) | 10,415 |  |  | 8,072 |  |  | (1,382) |
Tax effect | (2,656) |  |  | (2,058) |  |  | 353 |
Net of tax amount | 7,759 |  |  | 6,014 |  |  | (1,029) |
Change in funded status of defined benefit pension plan and other benefit plans: |  |  |  |  |
Net gain (loss) arising during the period | 506 |  |  | (626) |  |  | (711) |
Reclassification adjustment for amortization of prior service benefit | (220) |  |  | (220) |  |  | (220) |
Prior service credit | — |  |  | — |  |  | — |
Reclassification adjustment for partial pension settlement loss included in pension expense | — |  |  | — |  |  | 828 |
Reclassification adjustment for amortization of net actuarial losses | 300 |  |  | 312 |  |  | 318 |
Total before tax effect | 586 |  |  | (534) |  |  | 215 |
Tax effect | (145) |  |  | 132 |  |  | (55) |
Net of tax amount | 441 |  |  | (402) |  |  | 160 |
Total other comprehensive income (loss) | 8,200 |  |  | 5,612 |  |  | (869) |
Comprehensive income | $ | 27,462 |  |  | $ | 21,221 |  |  | $ | 18,757 |

See accompanying notes to consolidated financial statements.
F-5

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

| Common Stock |  | Additional Paid-in Capital |  | Retained Earnings |  | Treasury Stock |  | Accumulated Other Comprehensive Income (Loss) |  | Total
Balances at December 31, 2017 | $ | 53 |  |  | $ | 45,967 |  |  | $ | 128,453 |  |  | $ | (14,320) |  |  | $ | (10,340) |  |  | $ | 149,813 |
Cumulative effect of accounting change (b) | — |  |  | — |  |  | 40 |  |  | — |  |  | (202) |  |  | (162) |
Balances as of January 1, 2018, as adjusted | 53 |  |  | 45,967 |  |  | 128,493 |  |  | (14,320) |  |  | (10,542) |  |  | 149,651 |
Net income | — |  |  | — |  |  | 19,626 |  |  | — |  |  | — |  |  | 19,626 |
Other comprehensive loss | — |  |  | — |  |  | — |  |  | — |  |  | (869) |  |  | (869) |
Restricted stock awards | — |  |  | 405 |  |  | — |  |  | — |  |  | — |  |  | 405 |
Distribution of 36,681 shares of treasury stock granted for directors’ deferred compensation plan | — |  |  | (722) |  |  | — |  |  | 940 |  |  | — |  |  | 218 |
Distribution of 14,425 shares of treasury stock granted for employee restricted stock awards, net | — |  |  | (370) |  |  | — |  |  | 370 |  |  | — |  |  | — |
Restricted stock units for directors' deferred compensation plan | — |  |  | 67 |  |  | — |  |  | — |  |  | — |  |  | 67 |
Cash dividends declared ($1.04 per share) | — |  |  | — |  |  | (4,990) |  |  | — |  |  | — |  |  | (4,990) |
Distribution of 6,015 shares of treasury stock for directors' compensation | — |  |  | 147 |  |  | — |  |  | 154 |  |  | — |  |  | 301 |
Distribution of 1,784 shares of treasury stock for employee compensation | — |  |  | 44 |  |  | — |  |  | 45 |  |  | — |  |  | 89 |
Sale of 14,081 shares of treasury stock (b) | — |  |  | 282 |  |  | — |  |  | 361 |  |  | — |  |  | 643 |
Repurchase of 2,736 shares of common stock | — |  |  | — |  |  | — |  |  | (112) |  |  | — |  |  | (112) |
Balances at December 31, 2018 | $ | 53 |  |  | $ | 45,820 |  |  | $ | 143,129 |  |  | $ | (12,562) |  |  | $ | (11,411) |  |  | $ | 165,029 |
Net income | — |  |  | — |  |  | 15,609 |  |  | — |  |  | — |  |  | 15,609 |
Other comprehensive income | — |  |  | — |  |  |  |  | — |  |  | 5,612 |  |  | 5,612 |
Restricted stock awards | — |  |  | 503 |  |  | — |  |  | — |  |  | — |  |  | 503 |
Distribution of 2,551 shares of treasury stock granted for directors’ deferred compensation plan | — |  |  | (52) |  |  | — |  |  | 65 |  |  | — |  |  | 13 |
Distribution of 13,692 shares of treasury stock granted for employee restricted stock awards, net | — |  |  | (353) |  |  | — |  |  | 353 |  |  | — |  |  | — |
Restricted stock units for directors' deferred compensation plan | — |  |  | 42 |  |  | — |  |  | — |  |  | — |  |  | 42 |
Cash dividends declared ($1.04 per share) | — |  |  | — |  |  | (5,037) |  |  | — |  |  | — |  |  | (5,037) |
Distribution of 8,465 shares of treasury stock for directors' compensation | — |  |  | 139 |  |  | — |  |  | 217 |  |  | — |  |  | 356 |
Distribution of 2,373 shares of treasury stock for employee compensation | — |  |  | 39 |  |  | — |  |  | 61 |  |  | — |  |  | 100 |
Sale of 13,270 shares of treasury stock (a) | — |  |  | 244 |  |  | — |  |  | 341 |  |  | — |  |  | 585 |
Repurchase of 4,148 shares of common stock | — |  |  | — |  |  | — |  |  | (185) |  |  | — |  |  | (185) |
Balances at December 31, 2019 | $ | 53 |  |  | $ | 46,382 |  |  | $ | 153,701 |  |  | $ | (11,710) |  |  | $ | (5,799) |  |  | $ | 182,627 |

(continued)
F-6

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY

| Common Stock |  | Additional Paid-in Capital |  | Retained Earnings |  | Treasury Stock |  | Accumulated Other Comprehensive Income (Loss) |  | Total
Balances at December 31, 2019 | $ | 53 |  |  | $ | 46,382 |  |  | $ | 153,701 |  |  | $ | (11,710) |  |  | $ | (5,799) |  |  | $ | 182,627 |
Net income | — |  |  | — |  |  | 19,262 |  |  | — |  |  | — |  |  | 19,262 |
Other comprehensive income | — |  |  | — |  |  |  |  | — |  |  | 8,200 |  |  | 8,200 |
Restricted stock awards | — |  |  | 672 |  |  | — |  |  | — |  |  | — |  |  | 672 |
Distribution of 6,426 shares of treasury stock granted for directors’ deferred compensation plan | — |  |  | (182) |  |  | — |  |  | 168 |  |  | — |  |  | (14) |
Distribution of 14,805 shares of treasury stock granted for employee restricted stock awards, net | — |  |  | (403) |  |  | — |  |  | 403 |  |  | — |  |  | — |
Restricted stock units for directors' deferred compensation plan | — |  |  | 29 |  |  | — |  |  | — |  |  | — |  |  | 29 |
Cash dividends declared ($1.04 per share) | — |  |  | — |  |  | (4,957) |  |  | — |  |  |  |  | (4,957) |
Distribution of 7,923 shares of treasury stock for directors' compensation | — |  |  | 145 |  |  | — |  |  | 205 |  |  | — |  |  | 350 |
Distribution of 2,274 shares of treasury stock for employee compensation | — |  |  | 42 |  |  | — |  |  | 59 |  |  | — |  |  | 101 |
Sale of 36,104 shares of treasury stock (a) | — |  |  | 74 |  |  | — |  |  | 944 |  |  | — |  |  | 1,018 |
Repurchase of 257,018 shares of common stock | — |  |  | — |  |  | — |  |  | (7,589) |  |  | — |  |  | (7,589) |
Forfeiture of 112 shares of restricted stock awards | — |  |  | 5 |  |  | — |  |  | (5) |  |  | — |  |  | — |
Balances at December 31, 2020 | $ | 53 |  |  | $ | 46,764 |  |  | $ | 168,006 |  |  | $ | (17,525) |  |  | $ | 2,401 |  |  | $ | 199,699 |

(a) All treasury stock sales were completed at the prevailing market price with the Chemung Canal Trust Company Profit Sharing, Savings, and Investment Plan which is a defined contribution plan sponsored by the Bank.
(b) Due to implementation of ASC 2016-01. See "Adoption of New Accounting Standards" discussion in Note 1.
See accompanying notes to consolidated financial statements.
F-7

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands) | YEARS ENDED DECEMBER 31,
CASH FLOWS FROM OPERATING ACTIVITIES: | 2020 |  | 2019 |  | 2018
Net income | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |
Amortization of right-of-use assets | 856 |  |  | 712 |  |  | — |
Amortization of intangible assets | 484 |  |  | 609 |  |  | 734 |
Deferred income tax (benefit) expense | (86) |  |  | (1,564) |  |  | 2,153 |
Provision for loan losses | 4,239 |  |  | 5,945 |  |  | 3,153 |
Loss on disposal of fixed assets | 247 |  |  | 334 |  |  | 10 |
Depreciation and amortization of fixed assets | 2,918 |  |  | 3,112 |  |  | 3,437 |
Amortization of premiums on securities, net | 1,842 |  |  | 1,055 |  |  | 1,304 |
Gains on sales of loans held for sale, net | (1,730) |  |  | (248) |  |  | (351) |
Proceeds from sales of loans held for sale | 47,996 |  |  | 12,488 |  |  | 18,262 |
Loans originated and held for sale | (45,251) |  |  | (12,923) |  |  | (17,871) |
Net (gains) losses on sale of other real estate owned | 46 |  |  | 99 |  |  | (90) |
Write-downs on OREO | 38 |  |  | 53 |  |  | 14 |
Net change in fair value of equity investments | (89) |  |  | (81) |  |  | (2,004) |
Net gains on securities transactions | — |  |  | (19) |  |  | — |
Proceeds from sales of trading assets | 91 |  |  | 22 |  |  | 2,288 |
Purchase of trading assets | (370) |  |  | (206) |  |  | (167) |
(Increase) decrease in other assets | (9,883) |  |  | (1,945) |  |  | (2,651) |
Increase (decrease) in accrued interest payable | (37) |  |  | 67 |  |  | 84 |
Expense related to restricted stock units for directors' deferred compensation plan | 29 |  |  | 42 |  |  | 67 |
Expense related to employee stock compensation | 101 |  |  | 100 |  |  | 89 |
Expense related to employee restricted stock awards | 672 |  |  | 503 |  |  | 405 |
Payments on operating leases | (820) |  |  | (629) |  |  | — |
Increase (decrease) in other liabilities | 8,265 |  |  | 3,333 |  |  | (654) |
Income from bank owned life insurance | (161) |  |  | (63) |  |  | (66) |
Net cash provided by operating activities | 28,659 |  |  | 26,405 |  |  | 27,772 |
CASH FLOWS FROM INVESTING ACTIVITIES: |  |  |  |  |
Proceeds from sales of securities available for sale | — |  |  | 33,690 |  |  | — |
Proceeds from maturities, calls, and principal paydowns on securities available for sale | 67,888 |  |  | 49,665 |  |  | 64,180 |
Proceeds from maturities and principal collected on securities held to maturity | 2,007 |  |  | 2,903 |  |  | 1,316 |
Purchases of securities available for sale | (329,836) |  |  | (118,151) |  |  | (16,033) |
Purchases of securities held to maturity | (1,361) |  |  | (1,143) |  |  | (2,410) |
Purchase of FHLBNY and FRBNY stock | (51) |  |  | (14) |  |  | (22,003) |
Redemption of FHLBNY and FRBNY stock | — |  |  | 53 |  |  | 24,649 |
Purchases of premises and equipment | (867) |  |  | (883) |  |  | (1,770) |
Proceeds from sale of other real estate owned | 627 |  |  | 458 |  |  | 1,709 |
Proceeds from sale of loans | 5,227 |  |  | — |  |  | — |
Proceeds from bank owned life insurance | 213 |  |  | — |  |  | — |
Net (increase) decrease in loans | (239,695) |  |  | 711 |  |  | (5,719) |
Net cash (used by) provided by investing activities | (495,848) |  |  | (32,711) |  |  | 43,919 |
CASH FLOWS FROM FINANCING ACTIVITIES: |  |  |  |  |
Net increase (decrease) in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts | 341,081 |  |  | (8,050) |  |  | 69,927 |
Net increase in time deposits | 124,555 |  |  | 10,951 |  |  | 31,864 |
Net decrease in securities sold under agreements to repurchase | — |  |  | — |  |  | (10,000) |
Net change in FHLBNY overnight advances | — |  |  | — |  |  | (57,700) |
Repayments of FHLBNY long term advances | — |  |  | — |  |  | (2,000) |
Principal payments made on capital lease | (236) |  |  | (219) |  |  | (213) |
Purchase of treasury stock | (7,589) |  |  | — |  |  | — |
Sale of treasury stock | 1,018 |  |  | 585 |  |  | 643 |
Cash dividends paid | (5,006) |  |  | (5,029) |  |  | (4,969) |
Net cash (used in) provided by financing activities | 453,823 |  |  | (1,762) |  |  | 27,552 |
Net increase (decrease) in cash and cash equivalents | (13,366) |  |  | (8,068) |  |  | 99,243 |
Cash and cash equivalents, beginning of period | 121,904 |  |  | 129,972 |  |  | 30,729 |
Cash and cash equivalents, end of period | $ | 108,538 |  |  | $ | 121,904 |  |  | $ | 129,972 |

(Continued)
F-8

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS

| Years Ended December 31,
| 2020 |  | 2019 |  | 2018
Supplemental disclosure of cash flow information: |  |  |  |  |
Cash paid during the year for: |  |  |  |  |
Interest | $ | 4,025 |  |  | $ | 6,254 |  |  | $ | 3,989 |
Income Taxes | $ | 6,005 |  |  | $ | 4,455 |  |  | $ | 1,730 |
Supplemental disclosure of non-cash activity: |  |  |  |  |
Transfer of loans to other real estate owned | $ | 431 |  |  | $ | 517 |  |  | $ | 267 |
Dividends declared, not yet paid | $ | 1,214 |  |  | $ | 1,263 |  |  | $ | 1,254 |
Repurchase of common stock in lieu of employee payroll taxes | $ | (238) |  |  | $ | (185) |  |  | $ | (112) |
Distribution of treasury stock for directors' deferred compensation plan | $ | (14) |  |  | $ | 13 |  |  | $ | 218 |
Distribution of treasury stock for directors' compensation | $ | 350 |  |  | $ | 356 |  |  | $ | 301 |
Forfeiture of shares of restricted stock awards | $ | (5) |  |  | $ | — |  |  | $ | — |

See accompanying notes to consolidated financial statements.
F-9

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020, 2019 and 2018
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
The Corporation, through its wholly owned subsidiaries, the Bank and CFS Group, Inc., provides a wide range of banking, financing, fiduciary and other financial services to its clients. The Corporation is subject to the regulations of certain federal and state agencies and undergoes periodic examinations by those regulatory agencies.
CRM, a wholly-owned subsidiary of the Corporation which was formed and began operations on May 31, 2016, is a Nevada-based captive insurance company which insures against certain risks unique to the operations of the Corporation and its subsidiaries and for which insurance may not be currently available or economically feasible in today's insurance marketplace. CRM pools resources with several other similar insurance company subsidiaries of financial institutions to spread a limited amount of risk among themselves. CRM is subject to regulations of the State of Nevada and undergoes periodic examinations by the Nevada Division of Insurance.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in conformity with GAAP and include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and disclosures provided, and actual results could differ.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash and amounts due from banks and demand interest-bearing deposits with other financial institutions.
Time deposits with other financial institutions are classified as held-to-maturity securities and are not included in cash and cash equivalents.
EQUITY INVESTMENTS
On January 1, 2018, the Corporation adopted ASU 2016-01, an amendment to Recognition and Measurement of Financial Assets and Financial Liabilities (Subtopic 825-10), which requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. The adoption of this guidance resulted in a $40 thousand increase to beginning retained earnings and a $202 thousand decrease to beginning accumulated other comprehensive income (loss).
Securities that are held to fund a non-qualified deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value and interest and dividend income included in earnings.
SECURITIES
Management determines the appropriate classification of securities at the time of purchase. If management has the intent and the Corporation has the ability at the time of purchase to hold securities until maturity, they are classified as held to maturity and carried at amortized cost. Securities to be held for indefinite periods of time or not intended to be held to maturity are classified as available for sale and carried at fair value. Unrealized holding gains and losses on securities classified as available for sale are excluded from earnings and are reported as accumulated other comprehensive income (loss) in shareholders' equity, net of the related tax effects, until realized. Realized gains and losses are determined using the specific identification method.
F-10

Management evaluates securities for OTTI on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is split into two components as follows: 1) OTTI related to credit loss, which must be recognized in the income statement and 2) OTTI related to other factors, which is recognized in other comprehensive income. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For equity securities, the entire amount of impairment is recognized through earnings.
In order to determine OTTI for purchased beneficial interests that, on the purchase date, were not highly rated, the Corporation compares the present value of the remaining cash flows as estimated at the preceding evaluation date to the current expected remaining cash flows. OTTI is deemed to have occurred if there has been an adverse change in the remaining expected future cash flows.
Premiums and discounts are amortized or accreted over the life of the related security as an adjustment of yield using the interest method. Dividend and interest income is recognized when collected.
FEDERAL HOME LOAN BANK AND FEDERAL RESERVE BANK STOCK
The Bank is a member of both the FHLBNY and the FRBNY. FHLBNY members are required to own a certain amount of stock based on the level of borrowings and other factors, while FRBNY members are required to own a certain amount of stock based on a percentage of the Bank’s capital stock and surplus. FHLBNY and FRBNY stock are carried at cost and classified as non-marketable equities and periodically evaluated for impairment based on ultimate recovery of par value. Cash dividends are reported as income.
LOANS
Loans are stated at the amount of unpaid principal balance net of deferred loan fees. Additionally, recorded investment in loans includes interest receivable on loans. The Corporation has the ability and intent to hold its loans for the foreseeable future. The Corporation’s loan portfolio is comprised of the following segments: (i) commercial and agricultural, (ii) commercial mortgages, (iii) residential mortgages, and (iv) consumer loans.
Commercial and agricultural loans primarily consist of loans to small to mid-sized businesses in the Corporation’s market area in a diverse range of industries. These loans are typically made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. Commercial mortgage loans are generally non-owner occupied commercial properties or owner occupied commercial real estate with larger balances. Repayment of these loans is often dependent upon the successful operation and management of the properties and the businesses occupying the properties, as well as on the collateral securing the loan. Residential mortgage loans are generally made on the basis of the borrower’s ability to make repayment from their employment and other income, but are secured by real property. Consumer loans include home equity lines of credit and home equity loans, which exhibit many of the same characteristics as residential mortgages. Indirect and other consumer loans are typically secured by depreciable assets, such as automobiles or boats, and are dependent on the borrower’s continuing financial stability.
Interest on loans is accrued and credited to operations using the interest method. Past due status is based on the contractual terms of the loan. The accrual of interest is generally discontinued and previously accrued interest is reversed when loans become 90 days delinquent. Loans may also be placed on non-accrual status if management believes such classification is otherwise warranted. All payments received on non-accrual loans are applied to principal. Loans are returned 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. Loan origination fees and certain direct loan origination costs are deferred and amortized over the life of the loan as an adjustment to yield, using the interest method.
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TROUBLED DEBT RESTRUCTURINGS
A TDR is a formally renegotiated loan in which the Bank, for economic or legal reasons related to a borrower’s financial difficulties, grants a concession to the borrower that would not have been granted to the borrower otherwise. Not all loans that are restructured as a TDR are classified as non-accrual before the restructuring occurs. Restructured loans can convert from non-accrual to accrual status when said loans have demonstrated performance, generally evidenced by six months of payment performance in accordance with the restructured terms and when, in the opinion of management, the Bank expects to receive all of its contractual principal and interest due under the restructured terms.
TDRs are individually evaluated for impairment and included in the separately identified impairment disclosures. TDRs are measured at the present value of estimated future cash flows using the loan's effective rate at inception. If a TDR is considered to be a collateral dependent loan, the loan is reported, net, at the fair value of the collateral. For TDRs that subsequently default, the Bank determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually identified as impaired. The Bank incorporates recent historical experience related to TDRs, including the performance of TDRs that subsequently default, into the calculation of the allowance by loan portfolio segment.
Section 4013 of the CARES Act, signed into law of March 27, 2020, gives entities temporary relief from the accounting and disclosure requirements for troubled debt restructurings (TDRs) under ASC 310-40, Receivables: Troubled Debt Restructurings by Creditors, in certain situations. Section 4013 of the CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. All loan modifications made by the Corporation in response to the COVID-19 pandemic have been in accordance with Section 4013 of the CARES Act.
ALLOWANCE FOR LOAN LOSSES
The allowance is an amount that management believes will be adequate to absorb probable incurred credit losses on existing loans. The allowance is established based on management’s evaluation of the probable incurred credit losses in our portfolio in accordance with GAAP, and is comprised of both specific valuation allowances and general valuation allowances.
A loan is classified as impaired when, based on current information and events, it is probable that the Bank will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Specific valuation allowances are established based on management’s analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on nonaccrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.
The general component covers non-impaired loans and is based on historical loss experience adjusted for current factors. Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Bank over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: secured vs. unsecured, type, declining valuation environment and trend of other related factors, (8) the existence and effect of any concentrations of credit, and changes in the level of such concentrations, (9) the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated credit losses in the Bank’s current portfolio and (10) the impact of the global economy.
The allowance for loan losses is increased through a provision for loan losses charged to operations. Loans are charged against the allowance for loan losses when management believes that the collectability of all or a portion of the principal is unlikely. Management's evaluation of the adequacy of the allowance for loan losses is performed on a periodic basis and takes into consideration such factors as the credit risk grade assigned to the loan, historical loan loss experience and review of specific
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impaired loans. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions.
LOANS HELD FOR SALE
Certain mortgage loans are originated with the intent to sell. The Bank typically retains the right to service the mortgages upon sale. Loans held for sale are recorded at the lower of cost or fair value in the aggregate and are regularly evaluated for changes in fair value. Commitments to sell the loans that are originated for sale are recorded at fair value. If necessary, a valuation allowance is established with a charge to income for unrealized losses attributable to a change in market rates.
CAPITAL LEASES
Capital leases are recorded at the lesser of the present value of future cash outlays using a discounted cash flow, or fair value at the beginning of the lease term. Initially, the capital lease is recorded as a building asset, which is depreciated over the shorter of the term of the lease or the estimated life of the asset, and a corresponding long term lease obligation, which amortizes as payments are made toward the lease. Interest expense is also incurred using the discount rate determined at the beginning of the lease term.
PREMISES AND EQUIPMENT
Land is carried at cost, while buildings, equipment, leasehold improvements and furniture are stated at cost less accumulated depreciation and amortization. Depreciation is charged to current operations under the straight-line method over the estimated useful lives of the assets, which range from 15 to 50 years for buildings and from 3 to 10 years for equipment and furniture. Amortization of leasehold improvements and leased equipment is recognized on the straight-line method over the shorter of the lease term or the estimated life of the asset. Leases of branch offices, which have been capitalized, are included within buildings and depreciated on the straight-line method over the shorter of the lease term or the estimated life of the asset.
BANK OWNED LIFE INSURANCE
BOLI is recorded at the amount that can be realized under the insurance contracts at the balance sheet date, which is the cash surrender value adjusted for other charges or other amounts due that are probable at settlement. Changes in the cash surrender value are recorded in other income.
OTHER REAL ESTATE
Real estate acquired through foreclosure or deed in lieu of foreclosure is recorded at estimated fair value of the property less estimated costs to dispose at the time of acquisition to establish a new carrying value. Write downs from the carrying value of the loan to estimated fair value which are required at the time of foreclosure are charged to the allowance for loan losses. Subsequent adjustments to the carrying values of such properties resulting from declines in fair value are charged to operations in the period in which the declines occur.
INCOME TAXES
The Corporation files a consolidated tax return. Deferred tax assets and liabilities are recognized for future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and for unused tax loss carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates to apply to taxable income in the years in which temporary differences are expected to be recovered or settled, or the tax loss carry forwards are expected to be utilized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized.
A tax position is recognized as a benefit only if it is "more likely than not" that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the "more likely than not" test, no tax benefit is recorded.
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WEALTH MANAGEMENT GROUP FEE INCOME
Assets held in a fiduciary or agency capacity for customers are not included in the accompanying consolidated balance sheets, since such assets are not assets of the Corporation. Wealth Management Group income is recognized on the accrual method as earned based on contractual rates applied to the balances of individual trust accounts. The unaudited market value of trust assets under administration total $2.091 billion, including $305.5 million of assets held under management or administration for the Corporation, at December 31, 2020 and $1.915 billion, including $289.7 million of assets held under management or administration for the Corporation, at December 31, 2019.
POSTRETIREMENT BENEFITS
Pension Plan:
The Chemung Canal Trust Company Pension Plan is a non-contributory defined benefit pension plan. The Pension Plan is a “qualified plan” under the IRS Code and therefore must be funded. Contributions are deposited to the Plan and held in trust. The Plan assets may only be used to pay retirement benefits and eligible plan expenses. The plan was amended such that new employees hired on or after July 1, 2010 would not be eligible to participate in the plan, however, existing participants at that time would continue to accrue benefits.
Under the Plan, pension benefits are based upon final average annual compensation where the annual compensation is total base earnings paid plus 401(k) salary deferrals. Bonuses, overtime, commissions and dividends are excluded. The normal retirement benefit equals 1.2% of final average compensation (highest consecutive five years of annual compensation in the prior ten years) times years of service (up to a maximum of 25 years), plus 1% of average monthly compensation for each additional year of service (up to a maximum of 10 years), plus 0.65% of average monthly compensation in excess of covered compensation for each year of credited service up to 35 years. Covered compensation is the average of the social security taxable wage base in effect for the 35 year period prior to normal social security retirement age. Compensation for purposes of determining benefits under the Plan is reviewed annually.
On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-based and service-based component of the formula used to determine retirement benefits in the pension plan were frozen so that participants will no longer earn further retirement benefits. During the fourth quarter of 2018, the Corporation offered terminated, vested employees the option to receive lump sum settlement payments. The effects of these changes are reflected in the pension plan disclosures as of December 31, 2018. See Note 14 for further details.
Defined Contribution Profit Sharing, Savings and Investment Plan:
The Corporation also sponsors a 401(K) defined contribution profit sharing, savings and investment plan which covers all eligible employees. The Corporation contributes a non-discretionary 3% of gross annual wages (as defined by the 401(k) plan) for each participant, regardless of the participant’s deferral, in addition to a 50% match up to 6% of gross annual wages. All contributions made on or after January 1, 2017 will vest immediately, while all previous contributions continue vesting on a five-year vesting schedule. The plan's assets consist of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds. The plan’s expense is the amount of non-discretionary and matching contributions and is charged to non-interest expenses in the consolidated statements of income.
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Defined Benefit Health Care Plan:
The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to employees who meet minimum age and service requirements. This plan was amended effective July 1, 2006. Prior to this amendment, all retirees age 55 or older were eligible for coverage under the Corporation's self-insured health care plan, contributing 40% of the cost of the coverage. Under the amended plan, coverage for Medicare eligible retirees who reside in the Central New York geographic area is provided under a group sponsored plan with Excellus BlueCross BlueShield called Medicare Blue PPO, with the retiree paying 100% of the premium. Excellus BlueCross BlueShield assumes full liability for the payment of health care benefits incurred after July 1, 2006. Current Medicare eligible retirees who reside outside of the Central New York geographic area were eligible for coverage under the Corporation's self-insurance plan through December 31, 2009, contributing 50% of the cost of coverage. Effective January 1, 2010, these out of area retirees were eligible for coverage under a Medicare Supplement Plan C administered by Excellus BlueCross BlueShield, contributing 50% of the premium. Current retirees between the ages of 55 and 65, will continue to be eligible for coverage under the Corporation's self-insured plan, contributing 50% of the cost of the coverage. Employees who retired after July 1, 2006, and become Medicare eligible will only have access to the Medicare Blue PPO plan. Additionally, effective July 1, 2006, dental benefits were eliminated for all retirees. The cost of the plan is based on actuarial computations of current and future benefits for employees, and is charged to non-interest expenses in the consolidated statements of income.
On October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan, effective January 1, 2017. The effects of this freeze are reflected in the pension plan disclosures as of December 31, 2019 and 2018. See Note 14.
Executive Supplemental Pension Plan:
U.S. laws place limitations on compensation amounts that may be included under the Pension Plan. The Executive Supplemental Pension Plan was provided to executives in order to produce total retirement benefits, as a percentage of compensation that is comparable to employees whose compensation is not restricted by the annual compensation limit. Pension amounts, which exceed the applicable Internal Revenue Service code limitations, will be paid under the Executive Supplemental Pension Plan.
The Executive Supplemental Pension Plan is a “non-qualified plan” under the Internal Revenue Service Code. Contributions to the Plan are not held in trust; therefore, they may be subject to the claims of creditors in the event of bankruptcy or insolvency. When payments come due under the Plan, cash is distributed from general assets. The cost of the plan is based on actuarial computations of current and future benefits for executives, and is charged to non-interest expense in the consolidated statements of income.
Defined Contribution Supplemental Executive Retirement Plan:
The Defined Contribution Supplemental Executive Retirement Plan is provided to certain executives to motivate and retain key management employees by providing a nonqualified retirement benefit that is payable at retirement, disability, death and certain other events.
The Supplemental Executive Retirement Plan is intended to be an unfunded plan maintained primarily for the purpose of providing deferred compensation benefits for a select group of management or highly compensated employees under Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974. The plan’s expense is the Corporation’s annual contribution plus interest credits.
F-15

STOCK-BASED COMPENSATION
Restricted Stock Plan:
The Restricted Stock Plan is designed to align the interests of the Corporation’s executives and senior managers with the interests of the Corporation and its shareholders, to ensure the Corporation’s compensation practices are competitive and comparable with those of its peers, and to promote the retention of select management-level employees. Under the terms of the Plan, the Corporation may make discretionary grants of restricted shares of the Corporation’s common stock to or for the benefit of employees selected to participate in the Plan. Each officer of the Corporation, other than the Corporation’s chief executive officer, is eligible to participate in the Plan. Awards are based on the performance, responsibility and contributions of the employee and are targeted at an average of the peer group. The maximum number of shares of the Corporation’s common stock that may be awarded as restricted shares to Plan participants may not exceed 15,000 per calendar year. Twenty percent of the restricted stock awarded to a participant vests each year commencing with the first anniversary date of the award and is 100 percent vested on the fifth anniversary date. Except in the case of the participant’s death, disability, or in the event of a change in control, the participant’s unvested shares of unrestricted stock will be forfeited if the participant leaves the employment of the Bank, or if the participant retires prior to attainment of age 65, unless otherwise waived by the Compensation and Personnel Committee of the Board of Directors. The plan’s expense is recognized as compensation expense ratably over the vesting period for the fair value of the award, measured at the grant date. See Note 15 for more information regarding this Plan.
Deferred Directors Fee Plan:
A Deferred Directors Fee Plan for non-employee directors provides that directors may elect to defer receipt of all or any part of their fees. Deferrals are either credited with interest compounded quarterly at the Applicable Federal Rate for short-term debt instruments or converted to units, which appreciate or depreciate, as would an actual share of the Corporation’s common stock purchased on the deferral date. Cash deferrals will be paid into an interest bearing account and paid in cash. Units will be paid in shares of common stock. All directors’ fees are charged to non-interest expenses in the consolidated statements of income.
Directors’ Compensation Plan:
The purpose of the Directors’ Compensation Plan is to enable the Corporation to attract and retain persons of exceptional ability to serve as directors and stockholders in enhancing the value of the common stock of the Corporation. The Plan was originally established to provide for the cash payment of an annual retainer and fees to non-employee directors serving on the Board of Directors of the Corporation and the Bank. The Plan was subsequently amended to provide: (i) payment of additional compensation to each non-employee director in shares of the Corporation’s common stock in an amount equal to the total cash compensation earned by each non-employee director during the year for service on the Board of Directors of each of the Corporation and the Bank, and for each year of service thereafter, to be distributed from treasury shares in January of the following calendar year; and (ii) payment to the President and CEO of the Corporation and the Bank for his service on the Boards of Directors of the Corporation and the Bank in an amount equal in value to the average cash compensation awarded to non-employee directors who have served twelve (12) months of the previous year. The maximum number of shares of Corporation’s common stock that may be granted under the Plan may not exceed 20,000 per year. The Plan provides that the value of a share of common stock granted under the Plan shall be determined as the average of the closing prices of a share of common stock as quoted on the applicable established securities market for each of the prior 30 trading days ending on December 31 st of the calendar year. The cost of all cash and stock compensation is charged to non-interest expenses in the consolidated statements of income. In 2019, the annual cash retainer paid to each non-employee director of the Corporation was increased by $6,000 to $11,500 and $19,250 for the Chairman of the Board. The retainer for the Chairman of the Audit Committee was also increased by an additional $2,875 to $14,375. The directors waived their right to stock compensation for the additional retainer fees paid.
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Incentive Compensation Plan:
The purpose of the Incentive Compensation Plan is to attract and retain highly qualified officers and key employees, and to motivate such persons to serve the Corporation and the Bank and to expend maximum effort to improve the business results and earnings of the Corporation by providing to such persons an opportunity to acquire or increase a direct proprietary interest in the operations and future success of the Corporation. To this end, the Incentive Compensation Plan provides for the discretionary grant of cash and/or unrestricted stock, i.e., common stock of the Corporation that is free of any restrictions, such as restrictions on transferability, to select officers and key employees as designated by the Board of Directors in its sole discretion. The maximum number of shares that can be awarded as unrestricted stock under the Incentive Compensation Plan to any individual is 10,000 per calendar year; and the maximum amount that may be earned in cash as an Incentive Award in any calendar year by any individual is $300,000. The right of any eligible employee to receive a grant of an incentive award, whether in the form of cash or unrestricted stock, is subject to performance standards that are specified by either the Compensation Committee or the Board of Directors. The cost of all cash and unrestricted stock compensation is charged to non-interest expenses in the consolidated statements of income.
Non-qualified Deferred Compensation Plan:
The Deferred Compensation Plan allows a select group of management and employees to defer all or a portion of their annual compensation to a future date. Eligible employees are generally highly compensated employees and are designated by the Board of Directors from time to time. Investments in the plan are recorded as equity investments and deferred amounts are an unfunded liability of the Corporation. The plan requires deferral elections be made before the beginning of the calendar year during which the participant will perform the services to which the compensation relates. Participants in the Plan are required to elect a form of distribution, either lump sum payment or annual installments not to exceed ten years, and a time of distribution, either a specified age or a specified date. The terms and conditions for the deferral of compensation are subject to the provisions of 409A of the IRS Code. The income from investments is recorded in dividend income and non-interest income in the consolidated statements of income. The cost of the plan is recorded in non-interest expenses in the consolidated statements of income.
GOODWILL AND INTANGIBLE ASSETS
Goodwill resulting from business combinations prior to January 1, 2009 represents the excess of the purchase price over the fair value of the net assets of businesses acquired. Goodwill resulting from business combinations after January 1, 2009, is generally determined as the excess of the fair value of the consideration transferred, plus the fair value of any noncontrolling interests in the acquiree, over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill and intangible assets acquired in a purchase business combination and determined to have an indefinite useful life are not amortized, but tested for impairment at least annually. The Corporation has selected December 31 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on our balance sheet. Intangible assets with definite useful lives are amortized over their estimated useful lives to their estimated residual values. The balances are reviewed for impairment on an ongoing basis or whenever events or changes in business circumstances warrant a review of the carrying value. If impairment is determined to exist, the related write-down of the intangible asset's carrying value is charged to operations. Based on these impairment reviews, the Corporation determined that goodwill and other intangible assets were not impaired at December 31, 2020.
The Corporation's intangible assets with definite useful lives resulted from the purchase of the trust business of Partners Trust Bank in May of 2007 and the acquisition of FOFC in April 2011 with balances of $0.2 million and $12 thousand, respectively, at December 31, 2020. The intangible assets related to the acquisition of Canton Bancorp, Inc. in May 2009 were fully amortized at December 31, 2016. The intangible assets related to the acquisition of three former M&T Bank branch offices in March 2008 were fully amortized at December 31, 2015. The intangible assets related to the acquisition of six branches of Bank of America in November of 2013, were fully amortized at December 31, 2020. The trust business intangible is being amortized to expense over the expected useful life of 15 years. The identifiable core deposit intangible related to the FOFC acquisition is being amortized using a 10 year accelerated method.
SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
The Corporation enters into sales of securities under agreements to repurchase. The agreements are treated as financings, and the obligations to repurchase securities sold are reflected as liabilities in the consolidated balance sheets. The amount of the securities underlying the agreements continues to be carried in the Corporation's securities portfolio. The Corporation has agreed to repurchase securities identical to those sold. The securities underlying the agreements are under the Corporation's control.
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DERIVATIVES
The Corporation utilizes interest rate swaps with commercial borrowers and third-party counterparties as well as agreements with lead banks in participation loan relationships wherein the Corporation guarantees a portion of the fair value of an interest rate swap entered into by the lead bank. These transactions are accounted for as derivatives. The Company’s derivatives are entered into in connection with its asset and liability management activities and not for trading purposes.
The Company does not have any derivatives that are designated as hedges and therefore all derivatives are considered free standing and are recorded at fair value as derivative assets or liabilities on the consolidated balance sheets, with changes in fair value recognized in the consolidated statements of income as non-interest income.
Premiums received when entering into derivative contracts are recognized as part of the fair value of the derivative asset or liability and are carried at fair value with any gain/loss at inception and any changes in fair value reflected in income.
The Corporation does not typically require its commercial customers to post cash or securities as collateral on its program of back-to-back interest rate swap program. The Corporation may need to post collateral, either cash or certain qualified securities, in proportion to potential increases in unrealized loss positions.
OTHER FINANCIAL INSTRUMENTS
The Corporation is a party to certain other financial instruments with off-balance sheet risk such as unused portions of lines of credit and commitments to fund new loans. The Corporation's policy is to record such instruments when funded.
ADVERTISING COSTS
Costs for advertising products and services or for promoting our corporate image are expensed as incurred.
EARNINGS PER COMMON SHARE
Basic earnings per share is net income divided by the weighted average number of common shares outstanding during the period. Issuable shares including those related to directors’ restricted stock units and directors’ stock compensation are considered outstanding and are included in the computation of basic earnings per share as they are earned. All outstanding unvested share based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. Restricted stock awards are grants of participating securities. The impact of the participating securities on earnings per share is not material. Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur.
COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of net income and other comprehensive income (loss). Other comprehensive income (loss) includes unrealized gains and losses on securities available for sale and changes in the funded status of the Corporation’s defined benefit pension plan and other benefit plans, net of the related tax effect, which are also recognized as separate components of equity.
SEGMENT REPORTING
The Corporation has identified separate operating segments and internal financial information is primarily reported and aggregated in two lines of business, banking and wealth management services.
RECLASSIFICATION
Amounts in the prior years' consolidated financial statements are reclassified whenever necessary to conform to the current year's presentation. Reclassification adjustments had no impact on prior year net income or shareholders' equity.
F-18

RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2020, the Corporation adopted ASU 2018-14, Compensation – Retirement Benefits (Topic 715-20). This ASU amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year, and also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. The adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements.
On January 1, 2020, the Corporation adopted ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The objective of the ASU is to simplify the manner in which an entity is required to test goodwill for impairment by eliminating Step 2 from the goodwill impairment test. Additionally, the ASU removes the requirement for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails such qualitative test, to perform Step 2 of the goodwill impairment test. The adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements.
On January 1, 2019, the Corporation adopted ASU 2016-02, Leases (Topic 842). ASU 2016-02 requires companies that lease valuable assets to recognize on their balance sheets the assets and liabilities generated by contracts longer than a year. The Corporation adopted the new lease guidance using the modified retrospective approach and elected the transition option issued under ASU 2018-11, Leases (Topic 842) Targeted Improvements, allowing entities to continue to apply the legacy guidance in ASC 840, Leases, to prior periods, including disclosure requirements. Accordingly, prior period financial results and disclosures have not been adjusted. In addition, the Corporation elected the package of practical expedients permitted under the transition guidance within the new standard, which among other things, allowed the Corporation to carry forward the historical lease classification. Adoption of the new standard resulted in the recording of operating lease right-of-use assets and operating lease liabilities of approximately $8.6 million as of January 1, 2019. The standard did not materially impact our consolidated net earnings and had no impact on cash flows.
On January 1, 2019, the Corporation adopted ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The objective of the ASU is to align the amortization period of premiums and discounts to expectations incorporated in market pricing on the underlying securities. The amendment requires that the premium be amortized to the earliest call date, but does not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The adoption of the ASU did not have a significant impact on the Corporation's consolidated financial statements.
On January 1, 2018, the Corporation adopted ASU 2014-09 Revenue from Contracts with Customers (Topic 606) and all subsequent amendments to the ASU (collectively, "ASU 606"), which creates a single framework for recognizing revenue from contracts with customers that fall within its scope and revises when it is appropriate to recognize a gain (loss) from the transfer of nonfinancial assets, such as OREO. The majority of the Corporation's revenues come from interest income and other sources, including loans, securities, and derivatives that are outside the scope of ASC 606. The Corporation's services that fall within the scope of ASC 606 are presented within non-interest income and are recognized as revenue as the Corporation satisfies its obligation to the customer. Services within the scope of ASC 606 include service charges on deposits, interchange income, wealth management fees, and the sale of OREO. The amendments allow for one of two transition methods: full retrospective or modified retrospective. The full retrospective approach requires application to all periods presented. The modified retrospective transition requires application to uncompleted contracts at the date of adoption. Periods prior to the date of adoption are not retrospectively revised, but a cumulative effect is recognized at the date of initial application on uncompleted contracts. The Corporation adopted the new revenue guidance using the modified retrospective approach. There was no significant change upon adoption of the standard, as the new standard did not materially change the way the Corporation currently records revenue for its WMG and deposit related fees at the Bank; as such, no cumulative effect adjustment was recorded. Refer to Note 11 - Revenue from Contracts with Customers for further discussion on the Corporation's accounting policies for revenue sources within the scope of ASC 606.
In June, 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date by replacing the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to form credit loss estimates. The amendments in this ASU are effective for public companies for fiscal years
F-19

beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal years beginning after December 15, 2018. In November 2019, the FASB adopted changes to delay the effective date of ASU 2016-13 to January 2023 for certain entities, including certain Securities and Exchange Commission filers, public business entities, and private companies. As a smaller reporting company, the Corporation is eligible for the delay. The Corporation anticipates that the adoption of the CECL model will result in an increase to the Corporation's allowance for loan losses. The Corporation has established a committee to oversee the implementation of CECL and has selected a vendor to assist in the implementation process. In 2018, the committee began establishing parameters which will be used in the CECL model with the selected vendor. The Corporation is running its current incurred loss model and a CECL model concurrently. The Corporation will adopt CECL effective January 1, 2023.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The update simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. The adoption of this guidance, effective January 1, 2020, did not have a material impact on the Company's consolidated financial statements.
In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715) - Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost. The objective of the ASU was to improve guidance related to the presentation of defined benefit costs in the income statement. Specifically, the ASU required that an employer report the service cost component in the same line item(s) as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. Additionally, the ASU allows only the service cost component to be eligible for capitalization, when applicable. Results for reporting periods beginning after January 1, 2018 are presented under ASC 715, while prior period amounts continue to be reported in accordance with legacy GAAP, with comparable periods presented retrospectively for the presentation of the service cost and net periodic postretirement benefit cost in the income statement. The Corporation adopted ASU 2017-07 as of January 1, 2018 and elected the practical expedient, which permits employers to use the amounts disclosed in its pension and other postretirement benefit plan note for the prior comparative periods as the estimation for applying retrospective presentation requirements.
(2) RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS
The Corporation was in compliance with the reserve requirement with the Federal Reserve Bank of New York as of December 31, 2020.
The Corporation also maintains a pre-funded settlement account with a financial institution in the amount of $1.6 million for electronic funds transaction settlement purposes at December 31, 2020 and 2019.
The Corporation also maintains a collateral restricted account with a financial institution related to the Corporation's interest rate swap program. The account serves as collateral in the event of default on the interest rate swaps with the counterparties. The collateral held at the financial institution was $19.1 million as of December 31, 2020, and $9.4 million collateral held at the financial institution as of December 31, 2019.
(3) SECURITIES
Amortized cost and estimated fair value of securities available for sale at December 31, 2020 and 2019 are as follows (in thousands):

|  | 2020 |  | 2019
|  | Amortized Cost |  | Estimated Fair Value |  | Amortized Cost |  | Estimated Fair Value
Mortgage-backed securities, residential |  | $ | 458,245 |  |  | $ | 467,866 |  |  | $ | 225,029 |  |  | $ | 225,234 |
Obligations of states and political subdivisions |  | 40,662 |  |  | 43,405 |  |  | 41,265 |  |  | 42,845 |
Corporate bonds and notes |  | 9,000 |  |  | 9,035 |  |  | 250 |  |  | 250 |
SBA loan pools |  | 34,455 |  |  | 34,305 |  |  | 15,712 |  |  | 15,761 |
Total |  | $ | 542,362 |  |  | $ | 554,611 |  |  | $ | 282,256 |  |  | $ | 284,090 |

F-20

Gross unrealized gains and losses on securities available for sale at December 31, 2020 and 2019, were as follows (in thousands):

|  | 2020 |  | 2019
|  | Unrealized Gains |  | Unrealized Losses |  | Unrealized Gains |  | Unrealized Losses
Mortgage-backed securities, residential |  | $ | 9,822 |  |  | $ | 201 |  |  | $ | 1,471 |  |  | $ | 1,266 |
Obligations of states and political subdivisions |  | 2,743 |  |  | — |  |  | 1,580 |  |  | — |
Corporate bonds and notes |  | 47 |  |  | 12 |  |  | — |  |  | — |
SBA loan pools |  | 42 |  |  | 192 |  |  | 95 |  |  | 46 |
Total |  | $ | 12,654 |  |  | $ | 405 |  |  | $ | 3,146 |  |  | $ | 1,312 |

The amortized cost and estimated fair value of debt securities available for sale are shown below by contractual maturity. Expected maturities may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Securities not due at a single maturity date are shown separately (in thousands):

|  | December 31, 2020
|  | Amortized Cost |  | Fair Value
Within one year |  |  |  |
After one, but within five years |  | 27,215 |  |  | 28,757 |
After five, but within ten years |  | 21,688 |  |  | 22,875 |
After ten years |  | 759 |  |  | 808 |
Mortgage-backed securities, residential |  | 458,245 |  |  | 467,866 |
SBA loan pools |  | 34,455 |  |  | 34,305 |
Total |  | $ | 542,362 |  |  | $ | 554,611 |

Actual maturities may differ from contractual maturities above because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
The proceeds from sales and calls of securities resulting in gains or losses are listed below (in thousands):

|  | 2020 |  | 2019 |  | 2018
Proceeds |  | $ | — |  |  | $ | 8,513 |  |  | $ | — |
Gross gains |  | $ | — |  |  | $ | 159 |  |  | $ | — |
Gross losses |  | $ | — |  |  | $ | (140) |  |  | $ | — |
Tax expense |  | $ | — |  |  | $ | 5 |  |  | $ | — |

Amortized cost and estimated fair value of securities held to maturity at December 31, 2020 and 2019 are as follows (in thousands):

|  | 2020 |  | 2019
|  | Amortized Cost |  | Estimated Fair Value |  | Amortized Cost |  | Estimated Fair Value
Obligations of states and political subdivisions |  | $ | 326 |  |  | $ | 326 |  |  | $ | 1,045 |  |  | $ | 1,045 |
Time deposits with other financial institutions |  | 2,143 |  |  | 2,175 |  |  | 2,070 |  |  | 2,094 |
|  | $ | 2,469 |  |  | $ | 2,501 |  |  | $ | 3,115 |  |  | $ | 3,139 |

F-21

Gross unrealized gains and losses on securities held to maturity at December 31, 2020 and 2019, were as follows (in thousands):

|  | 2020 |  | 2019
|  | Unrealized Gains |  | Unrealized Losses |  | Unrealized Gains |  | Unrealized Losses
Obligations of states and political subdivisions |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Time deposits with other financial institutions |  | 32 |  |  | — |  |  | 24 |  |  | — |
Total |  | $ | 32 |  |  | $ | — |  |  | $ | 24 |  |  | $ | — |

There were no sales of securities held to maturity in 2020 or 2019.
The contractual maturity of securities held to maturity is as follows at December 31, 2020 (in thousands):

|  | December 31, 2020
|  | Amortized Cost |  | Fair Value
Within one year |  | $ | 856 |  |  | $ | 863 |
After one, but within five years |  | 1,613 |  |  | 1,638 |
After five, but within ten years |  | — |  |  | — |
After ten years |  | — |  |  | — |
Total |  | $ | 2,469 |  |  | $ | 2,501 |

The following table summarizes the investment securities available for sale with unrealized losses at December 31, 2020 and December 31, 2019 by aggregated major security type and length of time in a continuous unrealized position (in thousands):

|  | Less than 12 months |  | 12 months or longer |  | Total
|  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
2020 |
Obligations of U.S. Government and U.S. Government sponsored enterprises |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Mortgage-backed securities, residential |  | 70,037 |  |  | 200 |  |  | 970 |  |  | 1 |  |  | 71,007 |  |  | 201 |
Obligations of states and political subdivisions |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Corporate bonds and notes |  | 2,988 |  |  | 12 |  |  | — |  |  | — |  |  | 2,988 |  |  | 12 |
SBA loan pools |  | 15,245 |  |  | 156 |  |  | 3,636 |  |  | 36 |  |  | 18,881 |  |  | 192 |
Total temporarily impaired securities |  | $ | 88,270 |  |  | $ | 368 |  |  | $ | 4,606 |  |  | $ | 37 |  |  | $ | 92,876 |  |  | $ | 405 |

|  | Less than 12 months |  | 12 months or longer |  | Total
|  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses |  | Fair Value |  | Unrealized Losses
2019 |
Obligations of U.S. Government and U.S. Government sponsored enterprises |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Mortgage-backed securities, residential |  | 71,506 |  |  | 791 |  |  | 54,343 |  |  | $ | 475 |  |  | 125,849 |  |  | 1,266 |
Obligations of states and political subdivisions |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Corporate bonds and notes |  | — |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
SBA loan pools |  | 3,014 |  |  | 9 |  |  | 1,405 |  |  | 37 |  |  | 4,419 |  |  | 46 |
Total temporarily impaired securities |  | $ | 74,520 |  |  | $ | 800 |  |  | $ | 55,748 |  |  | $ | 512 |  |  | $ | 130,268 |  |  | $ | 1,312 |

F-22

Other-Than-Temporary-Impairment
As of December 31, 2020, the majority of the Corporation’s unrealized losses in the investment securities portfolio related to mortgage-backed securities. At December 31, 2020, all of the unrealized losses related to mortgage-backed securities were issued by U.S. government sponsored entities, Fannie Mae and Freddie Mac. Because the decline in fair value is attributable to changes in interest rates and not credit quality, and because the Corporation does not have the intent to sell these securities and it is not likely that it will be required to sell these securities before their anticipated recovery, the Corporation does not consider these securities to be other-than-temporarily impaired at December 31, 2020.
Pledged Securities
The fair value of securities pledged to secure public funds on deposit or for other purposes as required by law was $180.8 million at December 31, 2020 and $205.9 million at December 31, 2019.
There are no securities pledged to secure securities sold under agreements to repurchase at December 31, 2020 and 2019, respectively.
Concentrations
There are no securities of a single issuer (other than securities of U.S. Government sponsored enterprises) that exceed 10% of shareholders' equity at December 31, 2020 or 2019.
Equity Method Investments
The Corporation has an equity investment in Cephas Capital Partners, L.P. This small business investment company was established for the purpose of providing financing to small businesses in market areas served by the Corporation, including minority-owned small businesses and those that are anticipated to create jobs for the low to moderate income levels in the targeted areas. As of December 31, 2020 and 2019, this investment totaled $0.2 million and $0.3 million respectively, is included in other assets, and is accounted for under the equity method of accounting.
(4) LOANS AND ALLOWANCE FOR LOAN LOSSES
The composition of the loan portfolio, net of deferred loan fees is summarized as follows (in thousands):

| December 31, 2020 |  | December 31, 2019
Commercial and agricultural: |  |  |
Commercial and industrial | $ | 368,663 |  |  | $ | 230,018 |
Agricultural | 283 |  |  | 274 |
Commercial mortgages: |  |  |
Construction | 61,945 |  |  | 43,962 |
Commercial mortgages | 654,663 |  |  | 604,832 |
Residential mortgages | 239,401 |  |  | 188,338 |
Consumer loans: |  |  |
Home equity lines and loans | 78,547 |  |  | 91,784 |
Indirect consumer loans | 120,538 |  |  | 134,973 |
Direct consumer loans | 12,423 |  |  | 15,038 |
Total loans, net of deferred loan fees | 1,536,463 |  |  | 1,309,219 |
Interest receivable on loans | 5,035 |  |  | 3,684 |
Total recorded investment in loans | $ | 1,541,498 |  |  | $ | 1,312,903 |

Residential mortgages held for sale as of December 31, 2020 and 2019 totaling $0.2 million and $1.2 million, respectively, are not included in the above table.
Residential mortgages totaling $101.9 million at December 31, 2020 and $170.0 million at December 31, 2019 were pledged under a blanket collateral agreement for the Corporation's line of credit with the FHLBNY.
F-23

As of December 31, 2020, the Corporation had outstanding loan balances of $150.9 million for PPP loans which are included in commercial and industrial loans in the table above. These loans require no allowance for loan losses as of December 31, 2020 since they are government guaranteed loans.
The following tables present the activity in the allowance for loan losses by portfolio segment for the years ended December 31, 2020, 2019 and 2018, respectively (in thousands):

| December 31, 2020
Allowance for loan losses | Commercial, and Agricultural |  | Commercial Mortgages |  | Residential Mortgages |  | Consumer Loans |  |  |  | Total
Beginning balance: | $ | 10,227 |  |  | $ | 8,869 |  |  | $ | 1,252 |  |  | $ | 3,130 |  |  |  |  | $ | 23,478 |
Charge Offs: | (4,068) |  |  | (2,143) |  |  | (56) |  |  | (1,113) |  |  |  |  | (7,380) |
Recoveries: | 89 |  |  | 14 |  |  | 86 |  |  | 398 |  |  |  |  | 587 |
Net (charge offs) recoveries | (3,979) |  |  | (2,129) |  |  | 30 |  |  | (715) |  |  |  |  | (6,793) |
Provision | (1,755) |  |  | 4,756 |  |  | 797 |  |  | 441 |  |  |  |  | 4,239 |
Ending balance | $ | 4,493 |  |  | $ | 11,496 |  |  | $ | 2,079 |  |  | $ | 2,856 |  |  |  |  | $ | 20,924 |

| December 31, 2019
Allowance for loan losses | Commercial, and Agricultural |  | Commercial Mortgages |  | Residential Mortgages |  | Consumer Loans |  |  |  | Total
Beginning balance: | $ | 5,383 |  |  | $ | 8,184 |  |  | $ | 1,226 |  |  | $ | 4,151 |  |  |  |  | $ | 18,944 |
Charge Offs: | (312) |  |  | (1) |  |  | (151) |  |  | (1,511) |  |  |  |  | (1,975) |
Recoveries: | 59 |  |  | 4 |  |  | 45 |  |  | 456 |  |  |  |  | 564 |
Net recoveries (charge offs) | (253) |  |  | 3 |  |  | (106) |  |  | (1,055) |  |  |  |  | (1,411) |
Provision | 5,097 |  |  | 682 |  |  | 132 |  |  | 34 |  |  |  |  | 5,945 |
Ending balance | $ | 10,227 |  |  | $ | 8,869 |  |  | $ | 1,252 |  |  | $ | 3,130 |  |  |  |  | $ | 23,478 |

| December 31, 2018
Allowance for loan losses | Commercial, and Agricultural |  | Commercial Mortgages |  | Residential Mortgages |  | Consumer Loans |  |  |  | Total
Beginning balance: | $ | 6,976 |  |  | $ | 8,514 |  |  | $ | 1,316 |  |  | $ | 4,355 |  |  |  |  | $ | 21,161 |
Charge Offs: | (3,644) |  |  | (213) |  |  | (226) |  |  | (1,836) |  |  |  |  | (5,919) |
Recoveries: | 47 |  |  | 3 |  |  | 5 |  |  | 494 |  |  |  |  | 549 |
Net recoveries (charge offs) | (3,597) |  |  | (210) |  |  | (221) |  |  | (1,342) |  |  |  |  | (5,370) |
Provision | 2,004 |  |  | (120) |  |  | 131 |  |  | 1,138 |  |  |  |  | 3,153 |
Ending balance | $ | 5,383 |  |  | $ | 8,184 |  |  | $ | 1,226 |  |  | $ | 4,151 |  |  |  |  | $ | 18,944 |

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2020 and December 31, 2019 (in thousands):

| December 31, 2020
Allowance for loan losses | Commercial and Agricultural |  | Commercial Mortgages |  | Residential Mortgages |  | Consumer Loans |  | Total
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 1,401 |  |  | $ | 74 |  |  | $ | — |  |  | $ | 52 |  |  | $ | 1,527 |
Collectively evaluated for impairment | 3,092 |  |  | 11,422 |  |  | 2,079 |  |  | 2,804 |  |  | 19,397 |
Total ending allowance balance | $ | 4,493 |  |  | $ | 11,496 |  |  | $ | 2,079 |  |  | $ | 2,856 |  |  | $ | 20,924 |

F-24

| December 31, 2019
Allowance for loan losses | Commercial and Agricultural |  | Commercial Mortgages |  | Residential Mortgages |  | Consumer Loans |  | Total
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |
Individually evaluated for impairment | $ | 6,000 |  |  | $ | 2,097 |  |  | $ | — |  |  | $ | — |  |  | $ | 8,097 |
Collectively evaluated for impairment | 4,227 |  |  | 6,772 |  |  | 1,252 |  |  | 3,130 |  |  | 15,381 |
Total ending allowance balance | $ | 10,227 |  |  | $ | 8,869 |  |  | $ | 1,252 |  |  | $ | 3,130 |  |  | $ | 23,478 |

| December 31, 2020
Loans: | Commercial and Agricultural |  | Commercial Mortgages |  | Residential Mortgages |  | Consumer Loans |  | Total
Loans individually evaluated for impairment | $ | 3,400 |  |  | $ | 5,117 |  |  | $ | 1,271 |  |  | $ | 801 |  |  | $ | 10,589 |
Loans collectively evaluated for impairment | 366,852 |  |  | 714,028 |  |  | 238,742 |  |  | 211,287 |  |  | 1,530,909 |
Total ending loans balance | $ | 370,252 |  |  | $ | 719,145 |  |  | $ | 240,013 |  |  | $ | 212,088 |  |  | $ | 1,541,498 |

| December 31, 2019
Loans: | Commercial and Agricultural |  | Commercial Mortgages |  | Residential Mortgages |  | Consumer Loans |  | Total
Loans individually evaluated for impairment | $ | 6,147 |  |  | $ | 8,844 |  |  | $ | 525 |  |  | $ | 149 |  |  | $ | 15,665 |
Loans collectively evaluated for impairment | 224,775 |  |  | 641,726 |  |  | 188,349 |  |  | 242,388 |  |  | 1,297,238 |
Total ending loans balance | $ | 230,922 |  |  | $ | 650,570 |  |  | $ | 188,874 |  |  | $ | 242,537 |  |  | $ | 1,312,903 |

The following tables present loans individually evaluated for impairment recognized by class of loans as of December 31, 2020 and December 31, 2019, the average recorded investment and interest income recognized by class of loans as of the years ended December 31, 2020, 2019 and 2018 (in thousands):

| December 31, 2020 |  | December 31, 2019
| Unpaid Principal Balance |  | Recorded Investment |  | Allowance for Loan Losses Allocated |  | Unpaid Principal Balance |  | Recorded Investment |  | Allowance for Loan Losses Allocated
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 1,960 |  |  | $ | 1,963 |  |  | $ | — |  |  | $ | 133 |  |  | $ | 133 |  |  | $ | — |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |
Construction | 188 |  |  | 189 |  |  | — |  |  | 247 |  |  | 247 |  |  | — |
Commercial mortgages | 6,814 |  |  | 4,760 |  |  | — |  |  | 3,501 |  |  | 3,503 |  |  | — |
Residential mortgages | 1,283 |  |  | 1,271 |  |  | — |  |  | 554 |  |  | 525 |  |  | — |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |
Home equity lines and loans | 645 |  |  | 631 |  |  | — |  |  | 171 |  |  | 149 |  |  | — |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | 5,228 |  |  | 1,437 |  |  | 1,401 |  |  | 6,013 |  |  | 6,014 |  |  | 6,000 |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |
Commercial mortgages | 258 |  |  | 168 |  |  | 74 |  |  | 5,093 |  |  | 5,094 |  |  | 2,097 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |
Home equity lines and loans | 170 |  |  | 170 |  |  | 52 |  |  | — |  |  | — |  |  | — |
Total | $ | 16,546 |  |  | $ | 10,589 |  |  | $ | 1,527 |  |  | $ | 15,712 |  |  | $ | 15,665 |  |  | $ | 8,097 |

F-25

| December 31, 2020 |  | December 31, 2019 |  | December 31, 2018
| Average Recorded Investment |  | Interest Income Recognized (1) |  | Average Recorded Investment |  | Interest Income Recognized (1) |  | Average Recorded Investment |  | Interest Income Recognized (1)
With no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 936 |  |  | $ | 16 |  |  | $ | 248 |  |  | $ | — |  |  | $ | 608 |  |  | $ | 12 |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |
Construction | 219 |  |  | 8 |  |  | 278 |  |  | 10 |  |  | 337 |  |  | 11 |
Commercial mortgages | 4,103 |  |  | 16 |  |  | 3,605 |  |  | 12 |  |  | 4,193 |  |  | 21 |
Residential mortgages | 952 |  |  | 25 |  |  | 422 |  |  | 44 |  |  | 416 |  |  | 7 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |
Home equity lines & loans | 446 |  |  | 7 |  |  | 137 |  |  | 6 |  |  | 60 |  |  | 3 |
With an allowance recorded: |  |  |  |  |  |  |  |  |  |  |
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | 4,981 |  |  | 4 |  |  | 3,209 |  |  | — |  |  | 3,043 |  |  | 3 |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |
Commercial mortgages | 2,949 |  |  | — |  |  | 6,524 |  |  | — |  |  | 2,315 |  |  | 4 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |
Home equity lines and loans | 104 |  |  | — |  |  | — |  |  | — |  |  | — |  |  | — |
Total | $ | 14,690 |  |  | $ | 76 |  |  | $ | 14,423 |  |  | $ | 72 |  |  | $ | 10,972 |  |  | $ | 61 |

(1) Cash basis interest income approximates interest income recognized.
The following tables present the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of December 31, 2020 and December 31, 2019 (in thousands):

| Non-accrual |  | Loans Past Due 90 Days or More and Still Accruing
| 2020 |  | 2019 |  | 2020 |  | 2019
Commercial and agricultural: |  |  |  |  |  |  |
Commercial and industrial | $ | 2,167 |  |  | $ | 6,147 |  |  | $ | 2 |  |  | $ | 7 |
Commercial mortgages: |  |  |  |  |  |  |
Construction | 55 |  |  | 80 |  |  | — |  |  | — |
Commercial mortgages | 4,415 |  |  | 8,407 |  |  | — |  |  | — |
Residential mortgages | 1,632 |  |  | 2,155 |  |  | — |  |  | — |
Consumer loans: |  |  |  |  |  |  |
Home equity lines and loans | 1,159 |  |  | 641 |  |  | — |  |  | — |
Indirect consumer loans | 519 |  |  | 571 |  |  | — |  |  | — |
Direct consumer loans | 5 |  |  | 7 |  |  | — |  |  | — |
Total | $ | 9,952 |  |  | $ | 18,008 |  |  | $ | 2 |  |  | $ | 7 |

F-26

The following tables present the aging of the recorded investment in loans as of December 31, 2020 and December 31, 2019 (in thousands):

| December 31, 2020
| 30 - 59 Days Past Due |  | 60 - 89 Days Past Due |  | 90 Days or More Past Due |  | Total Past Due |  |  |  | Loans Not Past Due |  | Total
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 520 |  |  | $ | 14 |  |  | $ | 30 |  |  | $ | 564 |  |  |  |  | $ | 369,404 |  |  | $ | 369,968 |
Agricultural | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 284 |  |  | 284 |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 62,164 |  |  | 62,164 |
Commercial mortgages | 1,438 |  |  | 3,696 |  |  | 308 |  |  | 5,442 |  |  |  |  | 651,539 |  |  | 656,981 |
Residential mortgages | 817 |  |  | 406 |  |  | 461 |  |  | 1,684 |  |  |  |  | 238,329 |  |  | 240,013 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity lines and loans | 521 |  |  | 41 |  |  | 474 |  |  | 1,036 |  |  |  |  | 77,725 |  |  | 78,761 |
Indirect consumer loans | 1,268 |  |  | 198 |  |  | 252 |  |  | 1,718 |  |  |  |  | 119,135 |  |  | 120,853 |
Direct consumer loans | 34 |  |  | 2 |  |  | — |  |  | 36 |  |  |  |  | 12,438 |  |  | 12,474 |
Total | $ | 4,598 |  |  | $ | 4,357 |  |  | $ | 1,525 |  |  | $ | 10,480 |  |  |  |  | $ | 1,531,018 |  |  | $ | 1,541,498 |

| December 31, 2019
| 30 - 59 Days Past Due |  | 60 - 89 Days Past Due |  | 90 Days or More Past Due |  | Total Past Due |  |  |  | Loans Not Past Due |  | Total
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | 1,285 |  |  | $ | 49 |  |  | $ | 4,398 |  |  | $ | 5,732 |  |  |  |  | $ | 224,916 |  |  | $ | 230,648 |
Agricultural | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 274 |  |  | 274 |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | — |  |  | — |  |  | — |  |  |  |  | 44,082 |  |  | 44,082 |
Commercial mortgages | 440 |  |  | 277 |  |  | 2,165 |  |  | 2,883 |  |  |  |  | 603,605 |  |  | 606,488 |
Residential mortgages | 1,016 |  |  | 803 |  |  | 956 |  |  | 2,775 |  |  |  |  | 186,099 |  |  | 188,874 |
Consumer loans: |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity lines and loans | 353 |  |  | 151 |  |  | 149 |  |  | 653 |  |  |  |  | 91,412 |  |  | 92,065 |
Indirect consumer loans | 1,546 |  |  | 377 |  |  | 355 |  |  | 2,278 |  |  |  |  | 133,088 |  |  | 135,366 |
Direct consumer loans | 32 |  |  | 11 |  |  | 6 |  |  | 49 |  |  |  |  | 15,057 |  |  | 15,106 |
Total | $ | 4,672 |  |  | $ | 1,668 |  |  | $ | 8,029 |  |  | $ | 14,370 |  |  |  |  | $ | 1,298,533 |  |  | $ | 1,312,903 |

F-27

Troubled Debt Restructurings:
A modification of a loan may result in classification as a TDR when a borrower is experiencing financial difficulty and the modification constitutes a concession. The Corporation offers various types of modifications which may involve a change in the schedule of payments, a reduction in the interest rate, an extension of the maturity date, extending the maturity date at an interest rate lower than the current market rate for new debt with similar risk, requesting additional collateral, releasing collateral for consideration, substituting or adding a new borrower or guarantor, a permanent reduction of the recorded investment in the loan or a permanent reduction of the interest on the loan. Under Section 4013 of the CARES Act, loans less than 30 days past due as of December 31, 2019 will be considered current for COVID-19 related modifications and therefore will not be treated as TDRs. As of December 31, 2020, in conformance with Section 4013 of the CARES Act, the Corporation modified a total of 1,064 commercial and consumer loans represented by a total loan balance of $211.2 million. As of December 31, 2020, 31 loans totaling $20.8 million remained in modified status, of which 18 loans totaling $20.1 million had been modified more than once.
As of December 31, 2020, 2019 and 2018, the Corporation has a recorded investment in TDRs of $6.7 million, $9.0 million, and $6.8 million, respectively. There were specific reserves of $0.4 million allocated for TDRs at December 31, 2020, and $2.3 million and $0.9 million allocated for December 31, 2019 and 2018, respectively. As of December 31, 2020, TDRs totaling $2.8 million were accruing interest under the modified terms and $3.9 million were on non-accrual status. As of December 31, 2019, TDRs totaling $0.9 million were accruing interest under the modified terms and $8.1 million were on non-accrual status. As of December 31, 2018, TDRs totaling $0.8 million were accruing interest under the modified terms and $6.0 million were on non-accrual status. The Corporation has committed no additional amounts to customers with outstanding loans that are classified as TDRs as of December 31, 2020, $17 thousand to customers with outstanding loans that are classified as TDRs as of December 31, 2019 and no additional amounts as of December 31, 2018.
During the years ended December 31, 2020, 2019 and 2018, the terms of certain loans were modified as TDRs. During the year ended December 31, 2020, the modification of the terms of one residential mortgage loan included the postponement of scheduled amortized payments for a period of greater than three-months. Additionally, two commercial and industrial loans were modified with the maturity date extended on both loans and one with an extension at a stated rate lower than the current market rate for new debt with similar risk. Additionally, two commercial and industrial loans had payments deferred and both loans were risk rated Substandard while one loan was in non-accrual status prior to the modification. The modifications of four commercial mortgage loans included the deferral of payments with three of the loans risk rated Substandard and in non-accrual status, three of the borrowers were over one year past due in real estate taxes and two of the loans were over 30 days past due in payments. The modifications of three residential mortgages included the deferral of payments while all three were in non-accrual status prior to the modifications, two were risk rated Substandard and one was over 30 days past due in payments. The modifications of three home equity lines and loans included the deferral of payments while all three loans were risk rated Substandard and in non-accrual status prior to the modifications.
During the year ended December 31, 2019, the modification of the terms of one commercial real estate term loan included a reduction of the scheduled amortized payments for greater than a three month period, and modification of the terms of one home equity loan included a reduction in the stated interest rate for the remaining life of the loan, an extension of the maturity date for approximately three years and a reduction of the scheduled amortized payment of the loan for greater than a three month period. Additionally, one residential mortgage loan modification included a reduction in the stated interest rate for the remaining life of the loan, a deferral of the principal balance decreasing the effective borrowing rate, an extension of the maturity date by thirteen years at a stated rate lower than the current market rate for new debt with similar risk and a postponement of the scheduled amortized payments of the loan for greater than a three month period
During the year ended December 31, 2018, the modification of the terms of two commercial and industrial term loans included extensions of the maturity dates at stated rates of interest lower than current market rates for new debt with similar risks.
F-28

The following table presents loans by class modified as troubled debt restructurings that occurred during the years ended December 31, 2020, 2019 and 2018 (in thousands):

December 31, 2020 |  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Troubled debt restructurings: |  |  |  |  |  |
Commercial and agricultural: |  |  |  |  |  |
Commercial and industrial |  | 4 |  | $ | 2,068 |  |  | $ | 2,068 |
Commercial mortgages: |  |  |  |  |  |
Commercial mortgages |  | 4 |  | 1,297 |  |  | 1,297 |
Residential mortgages |  | 4 |  | 997 |  |  | 997 |
Consumer loans: |  |  |  |  |  |
Home equity lines and loans |  | 3 |  | 738 |  |  | 738 |
Total |  | 15 |  | $ | 5,100 |  |  | $ | 5,100 |

The TDRs described above increased the allowance for loan losses by $0.2 million and resulted in no charge offs during the year ended December 31, 2020.

December 31, 2019 |  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Troubled debt restructurings: |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |
Commercial mortgages |  | 1 |  | 4,223 |  |  | 4,223 |
Residential mortgages |  | 1 |  | 123 |  |  | 123 |
Consumer loans: |  |  |  |  |  |
Home equity lines and loans |  | 1 |  | 137 |  |  | 137 |
Total |  | 3 |  | $ | 4,483 |  |  | $ | 4,483 |

The TDRs described above increased the allowance for loan losses by $1.7 million and resulted in no charge offs during the year ended December 31, 2019.

December 31, 2018 |  | Number of Loans |  | Pre-Modification Outstanding Recorded Investment |  | Post-Modification Outstanding Recorded Investment
Troubled debt restructurings: |  |  |  |  |  |
Commercial and agricultural: |  |  |  |  |  |
Commercial and industrial |  | 2 |  | $ | 491 |  |  | $ | 491 |
Total |  | 2 |  | $ | 491 |  |  | $ | 491 |

The TDRs described above increased the allowance for loan losses by $0.4 million and resulted in no charge offs during the year ended December 31, 2018.
F-29

A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms.
The following table presents loans by class modified as TDRs for which there was a payment default within twelve months following the modification during the year ended December 31, 2020:

December 31, 2020 |  | Number of Loans |  | Recorded Investment
Consumer loans: |  |  |  |
Home equity lines and loans |  | 1 |  | $ | 170 |
Total |  | 1 |  | $ | 170 |

There were no payment defaults on any loans previously modified as troubled debt restructurings during the years ended December 31, 2019 and 2018, within twelve months following the modification.
Credit Quality Indicators
The Corporation establishes a risk rating at origination for all commercial loans. The main factors considered in assigning risk ratings include, but are not limited to: historic and future debt service coverage, collateral position, operating performance, liquidity, leverage, payment history, management ability, and the customer’s industry. Commercial relationship managers monitor all loans in their respective portfolios for any changes in the borrower’s ability to service their debt and affirm the risk ratings for the loans at least annually.
For the retail loans, which include residential mortgages, indirect and direct consumer loans, home equity lines and loans, and credit cards, once a loan is properly approved and closed, the Corporation evaluates credit quality based upon loan repayment. Retail loans are not rated until they become 90 days past due.
The Corporation uses the risk rating system to identify criticized and classified loans. Commercial relationships within the criticized and classified risk ratings are analyzed quarterly. The Corporation uses the following definitions for criticized and classified loans (which are consistent with regulatory guidelines):
Special Mention – Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’s credit position as some future date.
Substandard – Loans classified as substandard are inadequately protected by the current net worth and paying capability of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.
Doubtful – Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.
F-30

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. Loans listed as not rated are included in groups of homogeneous loans. Based on the analyses performed as of December 31, 2020 and 2019, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):

| December 31, 2020
| Not Rated |  | Pass |  |  |  | Special Mention |  | Substandard |  | Doubtful |  | Total
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | — |  |  | $ | 360,500 |  |  |  |  | $ | 2,999 |  |  | $ | 5,092 |  |  | $ | 1,377 |  |  | $ | 369,968 |
Agricultural | — |  |  | 284 |  |  |  |  | — |  |  | — |  |  | — |  |  | 284 |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | 59,885 |  |  |  |  | — |  |  | 2,279 |  |  | — |  |  | 62,164 |
Commercial mortgages | — |  |  | 616,090 |  |  |  |  | 23,631 |  |  | 16,128 |  |  | 1,132 |  |  | 656,981 |
Residential mortgages | 238,381 |  |  |  |  |  |  | — |  |  | 1,632 |  |  | — |  |  | 240,013 |
Consumer loans |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity lines and loans | 77,602 |  |  | — |  |  |  |  | — |  |  | 1,159 |  |  | — |  |  | 78,761 |
Indirect consumer loans | 120,334 |  |  | — |  |  |  |  | — |  |  | 519 |  |  | — |  |  | 120,853 |
Direct consumer loans | 12,470 |  |  | — |  |  |  |  | — |  |  | 4 |  |  | — |  |  | 12,474 |
Total | $ | 448,787 |  |  | $ | 1,036,759 |  |  |  |  | $ | 26,630 |  |  | $ | 26,813 |  |  | $ | 2,509 |  |  | $ | 1,541,498 |

| December 31, 2019
| Not Rated |  | Pass |  |  |  | Special Mention |  | Substandard |  | Doubtful |  | Total
Commercial and agricultural: |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial and industrial | $ | — |  |  | $ | 208,552 |  |  |  |  | $ | 5,915 |  |  | $ | 10,361 |  |  | $ | 5,820 |  |  | $ | 230,648 |
Agricultural | — |  |  | 274 |  |  |  |  | — |  |  | — |  |  | — |  |  | 274 |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |  |  |  |
Construction | — |  |  | 40,304 |  |  |  |  | 168 |  |  | 3,610 |  |  | — |  |  | 44,082 |
Commercial mortgages | — |  |  | 577,266 |  |  |  |  | 12,451 |  |  | 12,356 |  |  | 4,415 |  |  | 606,488 |
Residential mortgages | 186,719 |  |  | — |  |  |  |  | — |  |  | 2,155 |  |  | — |  |  | 188,874 |
Consumer loans |  |  |  |  |  |  |  |  |  |  |  |  |
Home equity lines and loans | 91,424 |  |  | — |  |  |  |  | — |  |  | 641 |  |  | — |  |  | 92,065 |
Indirect consumer loans | 134,795 |  |  | — |  |  |  |  | — |  |  | 571 |  |  | — |  |  | 135,366 |
Direct consumer loans | 15,099 |  |  | — |  |  |  |  | — |  |  | 7 |  |  | — |  |  | 15,106 |
Total | $ | 428,037 |  |  | $ | 826,396 |  |  |  |  | $ | 18,534 |  |  | $ | 29,701 |  |  | $ | 10,235 |  |  | $ | 1,312,903 |

F-31

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses. For residential and consumer loan classes, the Corporation also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. Non-performing loans include non-accrual loans and non-accrual troubled debt restructurings.
The following table presents the recorded investment in residential and consumer loans based on payment activity as of December 31, 2020 and 2019 (in thousands):

| December 31, 2020
|  |  |  |  | Consumer Loans
| Residential Mortgages |  |  |  | Home Equity Lines and Loans |  | Indirect Consumer Loans |  | Other Direct Consumer Loans
Performing | $ | 238,381 |  |  |  |  | $ | 77,602 |  |  | $ | 120,334 |  |  | $ | 12,470 |
Non-Performing | 1,632 |  |  |  |  | 1,159 |  |  | 519 |  |  | 4 |
Total | $ | 240,013 |  |  |  |  | $ | 78,761 |  |  | $ | 120,853 |  |  | $ | 12,474 |

| December 31, 2019
|  |  |  |  | Consumer Loans
| Residential Mortgages |  |  |  | Home Equity Lines and Loans |  | Indirect Consumer Loans |  | Other Direct Consumer Loans
Performing | $ | 186,719 |  |  |  |  | $ | 91,424 |  |  | $ | 134,795 |  |  | $ | 15,099 |
Non-Performing | 2,155 |  |  |  |  | 641 |  |  | 571 |  |  | 7 |
Total | $ | 188,874 |  |  |  |  | $ | 92,065 |  |  | $ | 135,366 |  |  | $ | 15,106 |

(5) PREMISES AND EQUIPMENT
Premises and equipment at December 31, 2020 and 2019 are as follows (in thousands):

|  | 2020 |  | 2019
Land |  | $ | 4,803 |  |  | $ | 4,803 |
Buildings |  | 41,957 |  |  | 41,408 |
Projects in progress |  | 65 |  |  | 113 |
Equipment and furniture |  | 37,183 |  |  | 37,007 |
Leasehold improvements |  | 5,285 |  |  | 5,757 |
|  | 89,293 |  |  | 89,088 |
Less accumulated depreciation and amortization |  | 69,174 |  |  | 66,671 |
Net book value |  | $ | 20,119 |  |  | $ | 22,417 |

Depreciation expense was $2.9 million, $3.1 million and $3.4 million for 2020, 2019, and 2018, respectively.
Capital Leases
The Corporation leases certain buildings under capital leases. The lease arrangements require monthly payments through 2036.
The Corporation has included these leases in premises and equipment as follows:

|  | 2020 |  | 2019
Buildings |  | $ | 5,572 |  |  | $ | 5,572 |
Accumulated depreciation |  | (1,875) |  |  | (1,541) |
Net book value |  | $ | 3,697 |  |  | $ | 4,031 |

F-32

(6) LEASES
Operating Leases
The Corporation leases certain branch properties under long-term, operating lease agreements. The leases expire at various dates through 2033 and generally include renewal options. As of December 31, 2020, the weighted average remaining lease term was 10.3 years with a weighted average discount rate of 3.39%. Rent expense was $1.0 million, $1.0 million, and $1.1 million for the years ended December 31, 2020, 2019 and 2018, respectively. Certain leases provide for increases in future minimum annual rent payments as defined in the lease agreements. The Corporation’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Corporation’s lease agreements do not contain any residual value guarantees. As a result of branch consolidation in November, 2020, the Corporation terminated its lease at 1054 State Route 17C, Owego, New York, releasing $0.2 million in future lease obligation.
Leased branch properties at December 31, 2020 and December 31, 2019 consist of the following (in thousands):

|  | December 31, 2020 |  | December 31, 2019
Operating lease right-of-use asset |  | $ | 8,001 |  |  | $ | 8,713 |
Less: accumulated amortization |  | (705) |  |  | (712) |
Less: Lease termination |  | (151) |  |  | — |
Operating lease right-of-use-assets, net |  | $ | 7,145 |  |  | $ | 8,001 |

The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of December 31, 2020 (in thousands):

Year |  | Amount
2021 |  | $ | 907 |
2022 |  | 846 |
2023 |  | 866 |
2024 |  | 857 |
2025 |  | 841 |
2026 and thereafter |  | 4,349 |
Total minimum lease payments |  | 8,666 |
Less: amount representing interest |  | (1,402) |
Present value of net minimum lease payments |  | $ | 7,264 |

As of December 31, 2020, the Corporation had no operating leases that were signed, but had not yet commenced. As of January 28, 2021, the Corporation entered into a three year lease agreement related to its new Western New York location, for which a $0.1 million future obligation and lease asset was recorded, effective March 1, 2021.
Finance Leases
The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of December 31, 2020, the weighted average remaining lease term was 12.1 years with a weighted average discount rate of 3.36%. The Corporation has included these leases in premises and equipment as of December 31, 2020 and December 31, 2019.
F-33

The following is a schedule by year of future minimum lease payments under the capitalized lease, together with the present value of net minimum lease payments as of December 31, 2020 (in thousands):

Year |  | Amount
2021 |  | $ | 388 |
2022 |  | 391 |
2023 |  | 391 |
2024 |  | 391 |
2025 |  | 409 |
2026 and thereafter |  | 2,839 |
Total minimum lease payments |  | 4,809 |
Less: amount representing interest |  | (960) |
Present value of net minimum lease payments |  | $ | 3,849 |

As of December 31, 2020, the Corporation had no finance leases that were signed, but had not yet commenced.
(7) GOODWILL AND INTANGIBLE ASSETS
The changes in goodwill included in the core banking segment during the years ended December 31, 2020 and 2019 were as follows (in thousands):

|  | 2020 |  | 2019
Beginning of year |  | $ | 21,824 |  |  | $ | 21,824 |
Acquired goodwill |  | — |  |  | — |
End of year |  | $ | 21,824 |  |  | $ | 21,824 |

Acquired intangible assets were as follows at December 31, 2020 and 2019 (in thousands):

|  | At December 31, 2020 |  | At December 31, 2019
|  | Balance Acquired |  | Accumulated Amortization |  | Balance Acquired |  | Accumulated Amortization
Core deposit intangibles |  | $ | 5,975 |  |  | $ | 5,962 |  |  | $ | 5,975 |  |  | $ | 5,832 |
Other customer relationship intangibles |  | 5,633 |  |  | 5,388 |  |  | 5,633 |  |  | 5,034 |
Total |  | $ | 11,608 |  |  | $ | 11,350 |  |  | $ | 11,608 |  |  | $ | 10,866 |

Aggregate amortization expense was $0.5 million, $0.6 million, and $0.7 million for 2020, 2019 and 2018, respectively.
The remaining estimated aggregate amortization expense at December 31, 2020 is listed below (in thousands):

Year |  | Estimated Expense
2021 |  | $ | 258 |
Total |  | $ | 258 |

F-34

(8) DEPOSITS
A summary of deposits at December 31, 2020 and 2019 is as follows (in thousands):

|  | 2020 |  | 2019
Non-interest-bearing demand deposits |  | $ | 620,423 |  |  | $ | 468,238 |
Interest-bearing demand deposits |  | 282,172 |  |  | 200,089 |
Insured money market accounts |  | 603,583 |  |  | 530,242 |
Savings deposits |  | 245,865 |  |  | 212,393 |
Time deposits |  | 285,731 |  |  | 161,176 |
Total |  | $ | 2,037,774 |  |  | $ | 1,572,138 |

Scheduled maturities of time deposits at December 31, 2020, are summarized as follows (in thousands):

Year |  | Maturities
2021 |  | $ | 193,113 |
2022 |  | 75,890 |
2023 |  | 12,784 |
2024 |  | — |
2025 |  | 1,084 |
2026 |  | 2,860 |
Total |  | $ | 285,731 |

Time deposits that meet or exceed the FDIC Insurance limit of $250 thousand at December 31, 2020 and 2019 were $31.2 million and $27.7 million, respectively.
(9) SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Repurchase agreements are secured borrowings. The Corporation pledges investment securities to secure these borrowings. A summary of securities sold under agreements to repurchase as of and for the years ended December 31, 2020, 2019 and 2018 is as follows (in thousands):

|  | 2020 |  | 2019 |  | 2018
Balance at December 31 |  | $ | — |  |  | $ | — |  |  | $ | — |
Maximum month-end balance |  | $ | — |  |  | $ | — |  |  | $ | 10,000 |
Average balance during year |  | $ | — |  |  | $ | — |  |  | $ | 3,644 |
Weighted-average interest rate at December 31 |  | — | % |  | — | % |  | — | %
Average interest rate paid during year |  | — | % |  | — | % |  | 3.77 | %

There were no securities sold under agreements to repurchase as of December 31, 2020, 2019 and 2018.
The Corporation enters into sales of securities under agreements to repurchase and the amounts received under these agreements represent borrowings and are reflected as a liability in the consolidated balance sheets. The securities underlying these agreements are included in investment securities in the consolidated balance sheets. See Note 3 for additional information regarding securities pledged as collateral for securities sold under the repurchase agreements.
The Corporation has no control over the market value of the securities which fluctuate due to market conditions, however, the Corporation is obligated to promptly transfer additional securities if the market value of the securities falls below the repurchase agreement price. The Corporation manages this risk by utilizing highly marketable and easily priced securities, monitoring these securities for significant changes in market valuation routinely, and maintaining an unpledged securities portfolio believed to be sufficient to cover a decline in the market value of the securities sold under agreements to repurchase.
F-35

(10) FEDERAL HOME LOAN BANK TERM ADVANCES AND OVERNIGHT ADVANCES
There were no FHLBNY fixed rate term advances and overnight advances as of December 31, 2020 and December 31, 2019.
The Corporation has pledged $101.9 million and $170.0 million of first mortgage loans under a blanket lien arrangement at December 31, 2020 and 2019, respectively, as collateral for future borrowings. Based on this collateral and the Corporation’s holdings of FHLBNY stock, the Corporation is eligible to borrow up to a total of $86.3 million at December 31, 2020.
(11) REVENUE FROM CONTRACTS WITH CUSTOMERS
All of the Corporation's revenue from contracts with customers in the scope of ASC 606 is recognized within non-interest income. The following tables present the Corporation's non-interest income by revenue stream and reportable segment for the years ended December 31, 2020, 2019 and 2018 (in thousands). Items outside the scope of ASC 606 are noted as such.

|  | Year ended December 31, 2020
Revenue by Operating Segment: |  | Core Banking |  | WMG |  | Holding Company, CFS, and CRM(b) |  | Total
Non-interest income |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  |  |  |  |  |  |
Overdraft fees |  | $ | 2,304 |  |  | $ | — |  |  | $ | — |  |  | $ | 2,304 |
Other |  | 830 |  |  | — |  |  | — |  |  | 830 |
Interchange revenue from debit card transactions |  | 4,068 |  |  | — |  |  | — |  |  | 4,068 |
WMG fee income |  | — |  |  | 9,492 |  |  | — |  |  | 9,492 |
CFS fee and commission income |  | — |  |  | — |  |  | 657 |  |  | 657 |
Net gains (losses) on sales of OREO |  | (79) |  |  | — |  |  | — |  |  | (79) |
Net gains on sales of loans(a) |  | 1,730 |  |  | — |  |  | — |  |  | 1,730 |
Loan servicing fees(a) |  | 121 |  |  | — |  |  | — |  |  | 121 |
Change in fair value of equity securities(a) |  | 139 |  |  | — |  |  | (50) |  |  | 89 |
Income from bank-owned life insurance(a) |  | 161 |  |  |  |  | — |  |  | 161 |
Other(a) |  | 1,708 |  |  | — |  |  | 43 |  |  | 1,751 |
Total non-interest income |  | $ | 10,982 |  |  | $ | 9,492 |  |  | $ | 650 |  |  | $ | 21,124 |

(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
F-36

|  | Year ended December 31, 2019
Revenue by Operating Segment: |  | Core Banking |  | WMG |  | Holding Company, CFS, and CRM(b) |  | Total
Non-interest income |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  |  |  |  |  |  |
Overdraft fees |  | $ | 3,653 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,653 |
Other |  | 807 |  |  | — |  |  | — |  |  | 807 |
Interchange revenue from debit card transactions |  | 4,104 |  |  | — |  |  | — |  |  | 4,104 |
WMG fee income |  | — |  |  | 9,503 |  |  | — |  |  | 9,503 |
CFS fee and commission income |  | — |  |  | — |  |  | 673 |  |  | 673 |
Net gains (losses) on sales of OREO |  | (99) |  |  | — |  |  | — |  |  | (99) |
Net gains on sales of loans(a) |  | 248 |  |  | — |  |  | — |  |  | 248 |
Loan servicing fees(a) |  | 103 |  |  | — |  |  | — |  |  | 103 |
Net gains on sales of securities(a) |  | 19 |  |  | — |  |  | — |  |  | 19 |
Change in fair value of equity securities(a) |  | 143 |  |  | — |  |  | (62) |  |  | 81 |
Other(a) |  | 1,378 |  |  | — |  |  | (397) |  |  | 981 |
Total non-interest income |  | $ | 10,356 |  |  | $ | 9,503 |  |  | $ | 214 |  |  | $ | 20,073 |

(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.

|  | Year ended December 31, 2018
Revenue by Operating Segment: |  | Core Banking |  | WMG |  | Holding Company, CFS, and CRM(b) |  | Total
Non-interest income |  |  |  |  |  |  |  |
Service charges on deposit accounts |  |  |  |  |  |  |  |
Overdraft fees |  | $ | 3,934 |  |  | $ | — |  |  | $ | — |  |  | $ | 3,934 |
Other |  | 793 |  |  | — |  |  | — |  |  | 793 |
Interchange revenue from debit card transactions |  | 4,040 |  |  | — |  |  | — |  |  | 4,040 |
WMG fee income |  | — |  |  | 9,317 |  |  | — |  |  | 9,317 |
CFS fee and commission income |  | — |  |  | — |  |  | 510 |  |  | 510 |
Net gains (losses) on sales of OREO |  | 90 |  |  | — |  |  | — |  |  | 90 |
Net gains on sales of loans(a) |  | 351 |  |  | — |  |  | — |  |  | 351 |
Loan servicing fees(a) |  | 92 |  |  | — |  |  | — |  |  | 92 |
Change in fair value of equity securities(a) |  | 2,024 |  |  | — |  |  | (20) |  |  | 2,004 |
Other(a) |  | 2,272 |  |  | — |  |  | (329) |  |  | 1,943 |
Total non-interest income |  | $ | 13,596 |  |  | $ | 9,317 |  |  | $ | 161 |  |  | $ | 23,074 |

(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.
A description of the Corporation's revenue streams accounted for under ASC 606 follows:
Service Charges on Deposit Accounts: The Corporation earns fees from its deposit customers for transaction-based, account maintenance, and overdraft services. Transaction-based fees, which included services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed as that is the point in time the Corporation fulfills the customer's request. Account maintenance fees, which relate primarily to monthly maintenance, are recognized at the time the maintenance occurs. Overdraft fees are recognized at the point in time that the overdraft occurs. Service charges on deposits are withdrawn from the customer's account balance.
F-37

Interchange Income from Debit Card Transactions: The Corporation earns interchange fees from debit cardholder transactions conducted through the Mastercard payment network. Interchange fees from cardholder transactions represent a percentage of the underlying transaction value and are recognized daily, concurrently with the transaction processing services provided to cardholder.
WMG Fee Income (Gross): The Corporation earns wealth management fees from its contracts with trust customers to manage assets for investment, and/or to conduct transactions on their accounts. These fees are primarily earned over time as the Corporation provides the contracted monthly or quarterly services and are generally assessed based on a tiered scale of the market value of assets under management (AUM) at quarter-end.
CFS Fee and Commission Income (Net): The Corporation earns fees from investment brokerage services provided to its customers by a third-party service provider. The Corporation receives commissions from the third-party service provider on a monthly basis based upon customer activity for the month. The Corporation (i) acts as an agent in arranging the relationship between the customer and the third-party service provider and (ii) does not control the services rendered to the customers. Investment brokerage fees are presented net of related costs. The Corporation also earns fees from tax services provided to its customers.
Net Gains/Losses on Sales of OREO: The Corporation records a gain or loss from the sale of OREO when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. When the Corporation finances the sale of OREO to the buyer, the Corporation assesses whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction price is probable. Once these criteria are met, the OREO asset is derecognized and the gain or loss on sale is recorded upon the transfer of control of the property to the buyer. In determining the gain or loss on the sale, the Corporation adjusts the transaction price and related gain (loss) on sale if a significant financing component is present.
(12) DERIVATIVES
As part of the Corporation's product offerings, the Corporation acts as an interest rate swap counterparty for certain commercial borrowers in the normal course of servicing our customers. The interest rate swap agreements are free-standing derivatives and are recorded at fair value in the Corporation's consolidated balance sheets. The Corporation manages its exposure to such interest rate swaps by entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps it has with the commercial borrowers. These positions directly offset each other and the Corporation's exposure is the fair value of the derivatives due to potential changes in credit risk of our commercial borrowers and third parties. The Corporation also enters into risk participation agreements with dealer banks on commercial loans in which it participates. The Corporation receives an upfront fee for participating in the credit exposure of the interest rate swap associated with the commercial loan in which it is a participant and the fee received is recognized immediately in other non-interest income. The Corporation is exposed to its share of the credit loss equal to the fair value of the interest rate swap in the event of nonperformance by the counterparty of the interest rate swap. The Corporation determines the fair value of the credit loss exposure using an estimated credit default rate based on the historical performance of similar assets.
The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. At December 31, 2020, the Corporation held derivatives not designated as hedging instruments with a total notional amount of $377.0 million. Derivatives not designated as hedging instruments included back-to-back interest rate swaps of $358.2 million, consisting of $179.1 million of interest rate swaps with commercial borrowers and an additional $179.1 million of offsetting interest rate swaps with third-party counter-parties on substantially the same terms, and risk participation agreements with dealer banks of $18.8 million. Free-standing derivatives are not designated as hedges for accounting purposes and are therefore recorded at fair value with changes in fair value recorded in other non-interest income.
F-38

The following table presents information regarding our derivative financial instruments, at December 31:

2020 |  | Number of Instruments |  | Notional Amount |  | Weighted Average Maturity (in years) |  | Weighted Average Interest Rate Received |  | Weighted Average Contract Pay Rate |  | Fair Value Other Assets/ (Other Liabilities)
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap agreements on loans with commercial loan customers |  | 26 |  |  | $ | 179,085 |  |  | 7.7 |  | 3.95 | % |  | 2.20 | % |  | $ | (15,024) |
Interest rate swap agreements with third-party counter-parties |  | 26 |  |  | 179,085 |  |  | 7.7 |  | 2.20 | % |  | 3.95 | % |  | 14,702 |
Risk participation agreements |  | 4 |  |  | 18,840 |  |  | 2.8 |  |  |  |  |  | (35) |
Total |  | 56 |  |  | $ | 377,010 |  |  |  |  |  |  |  |  | $ | (357) |

2019 |  | Number of Instruments |  | Notional Amount |  | Weighted Average Maturity (in years) |  | Weighted Average Interest Rate Received |  | Weighted Average Contract Pay Rate |  | Fair Value Other Assets/ (Other Liabilities)
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap agreements on loans with commercial loan customers |  | 15 |  |  | $ | 113,204 |  |  | 7.9 |  | 4.44 | % |  | 4.03 | % |  | $ | (6,800) |
Interest rate swap agreements with third-party counter-parties |  | 15 |  |  | 113,204 |  |  | 7.9 |  | 4.03 | % |  | 4.44 | % |  | 6,466 |
Risk participation agreements |  | 3 |  |  | 11,819 |  |  | 5.6 |  |  |  |  |  | (31) |
|  | 33 |  |  | $ | 238,227 |  |  |  |  |  |  |  |  | $ | (365) |

2018 |  | Number of Instruments |  | Notional Amount |  | Weighted Average Maturity (in years) |  | Weighted Average Interest Rate Received |  | Weighted Average Contract Pay Rate |  | Fair Value Other Assets/ (Other Liabilities)
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |  |
Interest rate swap agreements on loans with commercial loan customers |  | 11 |  |  | $ | 76,395 |  |  | 7.1 |  | 4.69 | % |  | 4.61 | % |  | $ | (3,255) |
Interest rate swap agreements with third-party counter-parties |  | 11 |  |  | 76,395 |  |  | 7.1 |  | 4.61 | % |  | 4.69 | % |  | 3,142 |
Risk participation agreements |  | 6 |  |  | 20,142 |  |  | 15.0 |  |  |  |  |  | (27) |
|  | 28 |  |  | $ | 172,932 |  |  |  |  |  |  |  |  | $ | (140) |

Off-balance sheet exposure for the risk participation agreements was $0.4 million for December 31, 2020 and December 31, 2019.
F-39

Amounts included in the Consolidated Statements of Income related to derivatives not designated as hedging were as follows:

|  | Years Ended December 31,
|  | 2020 |  | 2019 |  | 2018
Derivatives not designated as hedging instruments: |  |  |  |  |  |
Interest rate swap agreements with commercial loan customers: |  |  |  |  |  |
Unrealized (loss) recognized in non-interest income |  | $ | (8,224) |  |  | $ | (3,544) |  |  | $ | (2,281) |
Interest rate swap agreements with third-party counter-parties: |  |  |  |  |  |
Unrealized gain recognized in non-interest income |  | 8,236 |  |  | 3,324 |  |  | 2,168 |
Risk participation agreements: |  |  |  |  |  |
Unrealized gain (loss) recognized in non-interest income |  | (4) |  |  | (4) |  |  | 48 |
Unrealized gain (loss) recognized in non-interest income |  | $ | 8 |  |  | $ | (224) |  |  | $ | (65) |

(13) INCOME TAXES
For the years ended December 31, 2020, 2019 and 2018, income tax expense attributable to income from operations consisted of the following (in thousands):

|  | 2020 |  | 2019 |  | 2018
Current expense: |  |  |  |  |  |
Federal |  | $ | 4,413 |  |  | $ | 4,603 |  |  | $ | 1,732 |
State |  | 280 |  |  | 395 |  |  | 124 |
Total current |  | 4,693 |  |  | 4,998 |  |  | 1,856 |
Deferred expense/(benefit): |  |  |  |  |  |
Federal |  | (136) |  |  | (1,126) |  |  | 2,253 |
State |  | 50 |  |  | (438) |  |  | 345 |
Remeasurement of deferred tax assets |  | — |  |  | — |  |  | (445) |
Total deferred |  | (86) |  |  | (1,564) |  |  | 2,153 |
Income tax expense |  | $ | 4,607 |  |  | $ | 3,434 |  |  | $ | 4,009 |

Income tax expense differed from the amounts computed by applying the U.S. Federal statutory income tax rate to income before income tax expense as follows (in thousands):

|  | 2020 |  | 2019 |  | 2018
Statutory federal tax rate |  | 21 | % |  | 21 | % |  | 21 | %
Tax computed at statutory rate |  | $ | 5,013 |  |  | $ | 3,999 |  |  | $ | 4,963 |
Increase (reduction) resulting from: |  |  |  |  |  |
Tax-exempt income |  | (395) |  |  | (424) |  |  | (430) |
831(b) premium adjustment |  | (296) |  |  | (189) |  |  | (167) |
Dividend exclusion |  | (5) |  |  | (7) |  |  | (7) |
State taxes, net of Federal impact |  | 118 |  |  | (86) |  |  | 262 |
Nondeductible interest expense |  | 5 |  |  | 9 |  |  | 7 |
Remeasurement of deferred tax assets |  | — |  |  | — |  |  | (445) |
Other items, net |  | 167 |  |  | 132 |  |  | (174) |
Income tax expense |  | $ | 4,607 |  |  | $ | 3,434 |  |  | $ | 4,009 |
Effective tax rate |  | 19.3 | % |  | 18.0 | % |  | 17.0 | %

F-40

The higher tax expense in 2020 when compared to 2019 can be attributed to an increase in pretax income. The lower tax expense in 2019 when compared to 2018 can be attributed to a decrease in pretax income.
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2020 and 2019, are presented below (in thousands):

|  | 2020 |  | 2019
Deferred tax assets: |  |  |  |
Allowance for loan losses |  | $ | 5,393 |  |  | $ | 6,046 |
Accrual for employee benefit plans |  | 47 |  |  | 92 |
Depreciation |  | 681 |  |  | 379 |
Deferred compensation and directors' fees |  | 1,045 |  |  | 765 |
Operating lease liabilities |  | 1,831 |  |  | 2,050 |
Purchase accounting adjustment – loans |  | 1 |  |  | 1 |
Purchase accounting adjustment – fixed assets |  | 149 |  |  | 149 |
Gain on deemed sale of securities |  | 54 |  |  | 71 |
Accounting for defined benefit pension and other benefit plans |  | 2,302 |  |  | 2,448 |
Nonaccrued interest |  | 687 |  |  | 695 |
Accrued expense |  | 158 |  |  | 179 |
Other items, net |  | 48 |  |  | 38 |
Total gross deferred tax assets |  | 12,396 |  |  | 12,913 |
Deferred tax liabilities: |  |  |  |
Deferred loan fees and costs |  | 274 |  |  | 592 |
Prepaid pension |  | 3,344 |  |  | 3,189 |
Net unrealized gains on securities available for sale |  | 3,124 |  |  | 468 |
Discount accretion |  | 50 |  |  | 24 |
Core deposit intangible |  | 1,353 |  |  | 1,213 |
REIT dividend |  | 616 |  |  | 922 |
Operating lease right-of-use assets |  | 1,831 |  |  | 2,050 |
Other |  | 168 |  |  | 103 |
Total gross deferred tax liabilities |  | 10,760 |  |  | 8,561 |
Net deferred tax asset |  | $ | 1,636 |  |  | $ | 4,352 |

Realization of deferred tax assets is dependent upon the generation of future taxable income. A valuation allowance is recognized when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax assets, the level of historical taxable income and projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance is necessary.
As of December 31, 2020, 2019 and 2018, the Corporation did not have any unrecognized tax benefits.
The Corporation accounts for interest and penalties related to uncertain tax positions as part of its provision for Federal and State income taxes. As of December 31, 2020, 2019 and 2018, the Corporation did not accrue any interest or penalties related to its uncertain tax positions.
The Corporation is not currently subject to examinations by Federal taxing authorities for the years prior to 2017 and for New York State taxing authorities for the year prior to 2017.
F-41

(14) PENSION PLAN AND OTHER BENEFIT PLANS
Pension Plan
The Corporation has a noncontributory defined benefit pension plan covering a majority of employees. The plan's defined benefit formula generally based payments to retired employees upon their length of service multiplied by a percentage of the average monthly pay over the last five years of employment.
New employees hired on or after the July 10, 2010 were not eligible to participate in the plan, however, existing participants at that time continued to accrue benefits. On October 20, 2016, the Corporation amended its noncontributory defined benefit pension plan (“pension plan”) to freeze future retirement benefits after December 31, 2016. Beginning on January 1, 2017, both the pay-based and service-based component of the formula used to determine retirement benefits in the pension plan were frozen so that participants will no longer earn further retirement benefits. During the fourth quarter of 2018, the Corporation offered terminated, vested employees the option to receive lump sum settlement payments. A payout to participants of $3.3 million during the year ended December 31, 2018 is reflected in the projected benefit obligation and fair value of assets tables presented below. A settlement charge of $828 thousand has been recognized during the year ended December 31, 2018 in order to accelerate the recognition of a portion of the plan's unrecognized net loss.
The Corporation uses a December 31 measurement date for its pension plan.
The following table presents (1) changes in the plan's projected benefit obligation and plan assets, and (2) the plan's funded status at December 31, 2020 and 2019 (in thousands):

Change in projected benefit obligation: |  | 2020 |  | 2019
Benefit obligation at beginning of year |  | $ | 39,886 |  |  | $ | 36,022 |
Service cost |  | — |  |  | — |
Interest cost |  | 1,300 |  |  | 1,522 |
Actuarial (gain) loss |  | 3,735 |  |  | 4,474 |
Curtailments |  | — |  |  | — |
Settlements |  | — |  |  | — |
Benefits paid |  | (2,140) |  |  | (2,132) |
Benefit obligation at end of year |  | $ | 42,781 |  |  | $ | 39,886 |

Change in plan assets: |  | 2020 |  | 2019
Fair value of plan assets at beginning of year |  | $ | 45,557 |  |  | $ | 41,476 |
Actual return on plan assets |  | 6,717 |  |  | 6,213 |
Employer contributions |  | — |  |  | — |
Settlements |  | — |  |  | — |
Benefits paid |  | (2,140) |  |  | (2,132) |
Fair value of plan assets at end of year |  | $ | 50,134 |  |  | $ | 45,557 |
Funded status |  | $ | 7,353 |  |  | $ | 5,671 |

Amount recognized in accumulated other comprehensive income (loss) at December 31, 2020 and 2019 consist of the following (in thousands):

|  | 2020 |  | 2019
Net actuarial loss |  | $ | 8,602 |  |  | $ | 9,352 |
Prior service cost |  | — |  |  | — |
Total before tax effects |  | $ | 8,602 |  |  | $ | 9,352 |

The accumulated benefit obligation at December 31, 2020 and 2019 was $42.8 million and $39.9 million, respectively.
F-42

Actuarial losses in the Projected Benefit Obligation (PBO) in 2020 were primarily the result of the decrease in discount rate. The decrease in discount rate caused the PBO to increase by $3.5 million. Other sources of gain/loss such as plan experience, updated census data and minor adjustments to actuarial assumptions generated a combined loss of less than 1% of expected year end obligations.
The principal actuarial assumptions used in determining the projected benefit obligation as of December 31, 2020, 2019 and 2018 were as follows:

|  | 2020 |  | 2019 |  | 2018
Discount rate |  | 2.61 | % |  | 3.33 | % |  | 4.35 | %
Assumed rate of future compensation increase |  | N/A |  | N/A |  | N/A
Weighted-average interest crediting rate |  | N/A |  | N/A |  | N/A

Components of net periodic benefit cost and other amounts recognized in other comprehensive income (loss) in 2020, 2019 and 2018 consist of the following (in thousands):

Net periodic benefit cost |  | 2020 |  | 2019 |  | 2018
Service cost, benefits earned during the year |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest cost on projected benefit obligation |  | 1,300 |  |  | 1,522 |  |  | 1,551 |
Expected return on plan assets |  | (2,444) |  |  | (2,221) |  |  | (3,309) |
Amortization of net loss |  | 213 |  |  | 204 |  |  | 188 |
Amortization of prior service cost |  | — |  |  | — |  |  | — |
Recognized (gain) loss due to settlements |  | — |  |  | — |  |  | 828 |
Net periodic cost (benefit) |  | $ | (931) |  |  | $ | (495) |  |  | $ | (742) |

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): |  | 2020 |  | 2019 |  | 2018
Net actuarial (gain) loss |  | $ | (538) |  |  | $ | 481 |  |  | $ | 736 |
Recognized loss |  | (213) |  |  | (204) |  |  | (1,016) |
Amortization of prior service cost |  | — |  |  | — |  |  | — |
Total recognized in other comprehensive income (loss) (before tax effect) |  | $ | (751) |  |  | $ | 277 |  |  | $ | (280) |
Total recognized in net (benefit) cost and other comprehensive income (loss) (before tax effect) |  | $ | (1,682) |  |  | $ | (218) |  |  | $ | (1,022) |

During 2020, the plan's total unrecognized net gain increased by $0.8 million. The variance between the actual and expected return on plan assets during 2020 decreased the total unrecognized net loss by $4.3 million. Because the total unrecognized net gain or loss in the plan exceeds 10% of the projected benefit obligation or 10% of the plan assets, and the plan is frozen, the excess will be amortized over the average future life expectancy of all plan participants. Prior to the plan freeze on December 31, 2016, the excess had been amortized over the average future working lifetime of all plan participants. As of January 1, 2020, the average expected future life expectancy of all participants which was 23.78 years. Actual results for 2021 will depend on the 2021 actuarial valuation of the plan.
The principal actuarial assumptions used in determining the net periodic benefit cost for the years ended December 31, 2020, 2019 and 2018 were as follows:

|  | 2020 |  | 2019 |  | 2018
Discount rate |  | 3.33 | % |  | 4.35 | % |  | 3.74 | %
Expected return on assets |  | 5.50 | % |  | 5.50 | % |  | 7.25 | %
Assumed rate of future compensation increase |  | N/A |  | N/A |  | N/A
Weighted-average interest crediting rate |  | N/A |  | N/A |  | N/A

F-43

The Corporation changes important assumptions whenever changing conditions warrant. At December 31, 2020 the Corporation used IRS Static 2021 Mortality Table with Mortality Improvement Scale MP-2019 as a basis for the Plan's valuation. At December 31, 2019, the Corporation used IRS Static 2020 Mortality Table with Mortality Improvement Scale MP-2018 as a basis for the Plan's valuation. The discount rate is evaluated at least annually and the expected long-term return on plan assets will typically be revised every three to five years, or as conditions warrant.
The Corporation's overall investment strategy is to achieve a mix of investments for long-term growth and for near-term benefit payments with a wide diversification of asset types. The target allocations for plan assets are shown in the table below. Equity securities primarily include investments in common or preferred shares of both U.S. and international companies. Debt securities include U.S. Treasury and Government bonds as well as U.S. Corporate bonds. Other investments may consist of mutual funds, money market funds and cash & cash equivalents. While no significant changes in the asset allocations are expected during 2021, the Corporation may make changes at any time.
The expected return on plan assets was determined based on a CAPM using historical and expected future returns of the various asset classes, reflecting the target allocations described below.

Asset Class |  | Target Allocation 2020 |  | Percentage of Plan Assets at December 31, |  | Expected Long-Term Rate of Return
|  |  |  | 2020 |  | 2019 |  |
Large cap domestic equities |  | 20% - 50% |  | 43 | % |  | 38 | % |  | 8.7 | %
Mid-cap domestic equities |  | 0% - 15% |  | 2 | % |  | 2 | % |  | 9.4 | %
Small-cap domestic equities |  | 0% - 10% |  | 3 | % |  | 2 | % |  | 8.8 | %
International equities |  | 0% - 20% |  | 3 | % |  | 8 | % |  | 5.1 | %
Intermediate fixed income |  | 30% - 70% |  | 45 | % |  | 45 | % |  | 4.7 | %
Alternative assets |  | 0% - 10% |  | — | % |  | — | % |  | — | %
Cash |  | 0% - 20% |  | 4 | % |  | 5 | % |  | 1.3 | %
Total |  |  |  | 100 | % |  | 100 | % |  |

The investment policy of the plan is to provide for long-term growth of principal and income without undue exposure to risk. The focus is on long-term capital appreciation and income generation. The Corporation maintains an IPS that guides the investment allocation in the plan. The IPS describes the target asset allocation positions as shown in the table above.
The Corporation has appointed an Employee Pension and Profit Sharing Committee to manage the general philosophy, objectives and process of the plan. The Employee Pension and Profit Sharing Committee meets with the Investment Manager periodically to review the plan's performance and to ensure that the current investment allocation is within the guidelines set forth in the IPS. Only the Employee Pension and Profit Sharing Committee, in consultation with the Investment Manager, can make adjustments to maintain target ranges and for any permanent changes to the IPS. Quarterly, the Board of Directors' Trust and Employee Benefits Committee reviews the performance of the plan with the Investment Manager.
As of December 31, 2020 and 2019, the Corporation's pension plan did not hold any direct investment in the Corporation's common stock.
The Corporation used the following methods and significant assumptions to estimate the fair value of each type of financial instrument held by the pension plan:
Fair value is the exchange price that would be received for an asset in the principal or most advantageous market for the asset in an orderly transaction between market participants on the measurement date. The fair value hierarchy described below requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3).
Discounted cash flows are calculated using spread and optionality. During times when trading is more liquid, broker quotes are used (if available) to validate the model. Rating agency and industry research reports as well as defaults and deferrals on individual securities are reviewed and incorporated into the calculations.
F-44

The fair value of the plan assets at December 31, 2020 and 2019, by asset class are as follows (in thousands):

|  | Fair Value Measurement atDecember 31, 2020 Using
Plan Assets |  | Carrying Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Cash |  | $ | 2,047 |  |  | $ | 2,047 |  |  | $ | — |  |  | $ | — |
Equity securities: |  |  |  |  |  |  |  |
U.S. companies |  | 21,716 |  |  | 21,716 |  |  | — |  |  | — |
Mutual funds |  | 23,778 |  |  | 23,778 |  |  | — |  |  | — |
Debt securities: |  |  |  |  |  |  |  |
U.S. Treasuries/Government bonds |  | 2,318 |  |  | — |  |  | 2,318 |  |  | — |
U.S. Corporate bonds |  | 275 |  |  | — |  |  | 275 |  |  | — |
Total plan assets |  | $ | 50,134 |  |  | $ | 47,541 |  |  | $ | 2,593 |  |  | $ | — |

|  | Fair Value Measurement atDecember 31, 2019 Using
Plan Assets |  | Carrying Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Cash |  | $ | 2,210 |  |  | $ | 2,210 |  |  | $ | — |  |  | $ | — |
Equity securities: |  |  |  |  |  |  |  |
U.S. companies |  | 17,939 |  |  | 17,939 |  |  | — |  |  | — |
Mutual funds |  | 21,328 |  |  | 21,328 |  |  | — |  |  | — |
Debt securities: |  |  |  |  |  |  |  |
U.S. Treasuries/Government bonds |  | 3,054 |  |  | — |  |  | 3,054 |  |  | — |
U.S. Corporate bonds |  | 1,026 |  |  | — |  |  | 1,026 |  |  | — |
Total plan assets |  | $ | 45,557 |  |  | $ | 41,477 |  |  | $ | 4,080 |  |  | $ | — |

The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten for the pension plan (in thousands):

Calendar Year |  | Future Expected Benefit Payments
2021 |  | $ | 2,273 |
2022 |  | $ | 2,279 |
2023 |  | $ | 2,276 |
2024 |  | $ | 2,283 |
2025 |  | $ | 2,284 |
2026-2030 |  | $ | 11,379 |

F-45

The Corporation does not expect to contribute to the plan during 2021. Funding requirements for subsequent years are uncertain and will significantly depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes the Corporation may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.
Defined Contribution Profit Sharing, Savings and Investment Plan
On October 20, 2016, the Bank amended its defined contribution profit sharing, savings, and investment plan for all active participants to supersede the current contribution formula used by the Plan, which included eliminating the 1000 hours of service requirement to participate in employer contributions. Beginning on January 1, 2017, the Bank began contributing a non-discretionary 3% of gross annual wages for each participant, regardless of the participant’s deferral, and eliminated discretionary contributions for participants hired prior to July 1, 2010. Additionally, beginning January 1, 2017 the Bank began contributing a 50% match up to 6% of gross annual wages.
Expense related to both plans totaled $1.3 million, $1.3 million, and $1.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. The plan's assets at December 31, 2020, 2019 and 2018 include 137,698, 155,696, and 148,716 shares, respectively, of Chemung Financial Corporation common stock, as well as other common and preferred stocks, U.S. Government securities, corporate bonds and notes, and mutual funds.
Defined Benefit Health Care Plan
On October 20, 2016, the Corporation amended its defined benefit health care plan to not allow any new retirees into the plan, effective January 1, 2017. The effects of this freeze are reflected in the defined benefit health care plan disclosures as of December 31, 2017.
The Corporation uses a December 31 measurement date for its defined benefit health care plan.
The following table presents (1) changes in the plan's accumulated postretirement benefit obligation and (2) the plan's funded status at December 31, 2020 and 2019 (in thousands):

Changes in accumulated postretirement benefit obligation: |  | 2020 |  | 2019
Accumulated postretirement benefit obligation - beginning of year |  | $ | 332 |  |  | $ | 363 |
Service cost |  | — |  |  | — |
Interest cost |  | 9 |  |  | 16 |
Participant contributions |  | 35 |  |  | 49 |
Amendments |  | — |  |  | — |
Actuarial (gain) loss |  | (57) |  |  | 31 |
Benefits paid |  | (70) |  |  | (127) |
Accumulated postretirement benefit obligation at end of year |  | $ | 249 |  |  | $ | 332 |

Change in plan assets: |  | 2020 |  | 2019
Fair value of plan assets at beginning of year |  | $ | — |  |  | $ | — |
Employer contribution |  | 35 |  |  | 78 |
Plan participants’ contributions |  | 35 |  |  | 49 |
Benefits paid |  | (70) |  |  | (127) |
Fair value of plan assets at end of year |  | $ | — |  |  | $ | — |
Unfunded status |  | $ | (249) |  |  | $ | (332) |

Amount recognized in accumulated other comprehensive income (loss) at December 31, 2020 and 2019 consist of the following (in thousands):

|  | 2020 |  | 2019
Net actuarial loss |  | $ | 286 |  |  | $ | 417 |
Prior service credit |  | (220) |  |  | (440) |
Total before tax effects |  | $ | 66 |  |  | $ | (23) |

F-46

Weighted-average assumption for disclosure as of December 31: |  | 2020 |  | 2019 |  | 2018
Discount rate |  | 2.61% |  | 3.33% |  | 4.35%
Assumed rate of future compensation increase |  | N/A |  | N/A |  | N/A
Health care cost trend: Initial (Pre-65/Post 65) |  | 6.95% / 5.45% |  | 6.95% / 5.45% |  | 6.95% / 5.45%
Health care cost trend: Ultimate (Pre-65/Post 65) |  | 4.75% / 4.75% |  | 4.75% / 4.75% |  | 4.75% / 4.75%
Year ultimate cost trend reached |  | 2026 |  | 2025 |  | 2024

The components of net periodic postretirement benefit cost for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

Net periodic cost (benefit) |  | 2020 |  | 2019 |  | 2018
Service cost |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest cost |  | 9 |  |  | 16 |  |  | 16 |
Expected return on plan assets |  | — |  |  | — |  |  | — |
Amortization of prior service benefit |  | (220) |  |  | (220) |  |  | (220) |
Recognized actuarial loss |  | 74 |  |  | 105 |  |  | 123 |
Recognized prior service benefit due to curtailments |  | — |  |  | — |  |  | — |
Net periodic postretirement cost (benefit) |  | $ | (137) |  |  | $ | (99) |  |  | $ | (81) |

Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss): |  | 2020 |  | 2019 |  | 2018
Net actuarial (gain) loss |  | $ | (57) |  |  | $ | 31 |  |  | $ | 22 |
Recognized actuarial loss |  | (74) |  |  | (105) |  |  | (123) |
Prior service credit |  | — |  |  | — |  |  | — |
Amortization of prior service benefit |  | 220 |  |  | 220 |  |  | 220 |
Total recognized in other comprehensive income (loss)(before tax effect) |  | $ | 89 |  |  | $ | 146 |  |  | $ | 119 |
Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect) |  | $ | (48) |  |  | $ | 47 |  |  | $ | 38 |

Actuarial gain for 2020 is primarily the net impact of a decrease in discount rate, which raised the Accumulated Postretirement Benefit Obligation (APBO) by $10 thousand and claims and date experience, which (combined) decreased the APBO by $65 thousand. During 2020 the plan's total unrecognized net loss decreased by $131 thousand. Because the total unrecognized net gain or loss in the plan exceeds 10% of the accumulated postretirement benefit obligation, the excess will be amortized over the average future life expectancy of all plan participants. As of January 1, 2020, the average future life expectancy of all plan participants was 5.0 years. Previous to the plan freeze as of December 31, 2016, the amortization period was based upon average future working lifetime of active employees. Actual results for 2021 will depend on the 2021 actuarial valuation of the plan.
The change in unrecognized gain/loss is one measure of the degree to which important assumptions have coincided with actual experience. During 2020, the unrecognized net loss decreased by 39.2% of the December 31, 2019 accumulated postretirement benefit obligation. The Corporation changes important assumptions whenever changing conditions warrant. The discount rate and per capita costs are typically changed at least annually. Other material assumptions include rates of participant mortality and rates of increase in medical costs.
F-47

Weighted-average assumptions for net periodic cost as of December 31: |  | 2020 |  | 2019 |  | 2018
Discount rate |  | 3.33% |  | 4.35% |  | 3.74%
Expected return on plan assets |  | N/A |  | N/A |  | N/A
Assumed rate of future compensation increase |  | N/A |  | N/A |  | N/A
Health care cost trend: Initial |  | 6.95% / 5.45% |  | 6.95% / 5.45% |  | 6.50%
Health care cost tread: Ultimate |  | 4.75% / 4.75% |  | 4.75% / 4.75% |  | 5.00%
Year ultimate reached |  | 2025 |  | 2024 |  | 2021

The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten (in thousands):

Calendar Year |  | Future Estimated Benefit Payments
2021 |  | $ | 48 |
2022 |  | $ | 35 |
2023 |  | $ | 36 |
2024 |  | $ | 20 |
2025 |  | $ | 19 |
2026-2030 |  | $ | 74 |

The Corporation’s policy is to contribute the amount required to fund postretirement benefits as they become due to retirees. The amount expected to be required in contributions to the plan during 2021 is $48 thousand.
Executive Supplemental Pension Plan
The Corporation also sponsors an Executive Supplemental Pension Plan for certain former executive officers to restore certain pension benefits that may be reduced due to limitations under the Internal Revenue Code. The benefits under this plan are unfunded as of December 31, 2020 and 2019.
The Corporation uses a December 31 measurement date for its Executive Supplemental Pension Plan.
The following table presents Executive Supplemental Pension plan status at December 31, 2020 and 2019 (in thousands):

Change in projected benefit obligation: |  | 2020 |  | 2019
Benefit obligation at beginning of year |  | $ | 1,232 |  |  | $ | 1,179 |
Service cost |  | — |  |  | — |
Interest cost |  | 39 |  |  | 49 |
Actuarial (gain) loss |  | 89 |  |  | 113 |
Benefits paid |  | (109) |  |  | (109) |
Projected benefit obligation at end of year |  | $ | 1,251 |  |  | $ | 1,232 |

Changes in plan assets: |  | 2020 |  | 2019
Fair value of plan assets at beginning of year |  | $ | — |  |  | $ | — |
Employer contributions |  | 109 |  |  | 109 |
Benefits paid |  | (109) |  |  | (109) |
Fair value of plan assets at end of year |  | $ | — |  |  | $ | — |
Unfunded status |  | $ | (1,251) |  |  | $ | (1,232) |

F-48

Amounts recognized in accumulated other comprehensive income (loss) at December 31, 2020 and 2019 consist of the following (in thousands):

|  | 2020 |  | 2019
Net actuarial loss |  | $ | 359 |  |  | $ | 283 |
Prior service cost |  | — |  |  | — |
Total before tax effects |  | $ | 359 |  |  | $ | 283 |

Accumulated benefit obligation at December 31, 2020 and 2019 was $1.3 million and $1.2 million, respectively.

Weighted-average assumption for disclosure as of December 31: |  | 2020 |  | 2019 |  | 2018
Discount rate |  | 2.61 | % |  | 3.33 | % |  | 4.35 | %
Assumed rate of future compensation increase |  | N/A |  | N/A |  | N/A
Weighted-average interest crediting rate |  | N/A |  | N/A |  | N/A

The components of net periodic benefit cost for the years ended December 31, 2020, 2019 and 2018 are as follows (in thousands):

Net periodic benefit cost |  | 2020 |  | 2019 |  | 2018
Service cost |  | $ | — |  |  | $ | — |  |  | $ | — |
Interest cost |  | 39 |  |  | 49 |  |  | 46 |
Recognized actuarial loss |  | 13 |  |  | 4 |  |  | 7 |
Net periodic postretirement benefit cost |  | $ | 52 |  |  | $ | 53 |  |  | $ | 53 |

Other changes in plan assets and benefit obligation recognized in other comprehensive income (loss): |  | 2020 |  | 2019 |  | 2018
Net actuarial (gain) loss |  | $ | 89 |  |  | $ | 113 |  |  | $ | (47) |
Recognized actuarial loss |  | (13) |  |  | (4) |  |  | (7) |
Total recognized in other comprehensive income (loss) (before tax effect) |  | $ | 76 |  |  | $ | 109 |  |  | $ | (54) |
Total recognized in net benefit cost and other comprehensive income (loss) (before tax effect) |  | $ | 128 |  |  | $ | 162 |  |  | $ | (1) |

Actuarial losses in the projected benefit obligation in 2020 were primarily the result of the decrease in discount rate, $69 thousand, and mortality losses, $23 thousand. Other sources of gains/losses, including the update in mortality table, generated losses of less than 1% of expected year end obligations.
During 2020, the plan's total unrecognized net loss increased by $76 thousand. Because the total unrecognized net gain or loss exceeds the greater of 10% of the projected benefit obligation or 10% of the plan assets, the excess will be amortized over the average future life expectancy of all participants. Previously, the excess had been amortized over the average future working lifetime of active participants, however, there are no longer any active participants in the plan as of January 1, 2017, so the amortization period was changed to be the average future life expectancy of all plan participants. As of January 1, 2021, the average future life expectancy of plan participants was 12.04 years.

Weighted-average assumptions for net periodic cost as of December 31: |  | 2020 |  | 2019 |  | 2018
Discount rate |  | 3.33 | % |  | 4.35 | % |  | 3.74 | %
Expected asset return |  | N/A |  | N/A |  | N/A
Assumed rate of future compensation increase |  | N/A |  | N/A |  | N/A
Weighted-average interest crediting rate |  | N/A |  | N/A |  | N/A

F-49

The discount rate was determined by projecting the plan's expected future benefit payments as defined for the projected benefit obligation, discounting those expected payments using a theoretical zero-coupon spot yield curve derived from a universe of high-quality bonds as of the measurement date, and solving for the single equivalent discount rate that resulted in the same projected benefit obligation.
The change in unrecognized net gain.loss is one measure of the degree to which important assumptions have coincided with actual experience. During 2020 the unrecognized net loss increased by 6.2% of the December 31, 2019 projected benefit obligation.
The following table presents the estimated benefit payments for each of the next five years and the aggregate amount expected to be paid in years six through ten for the Supplemental Pension Plan (in thousands):

Calendar Year |  | Future Estimated Benefit Payments
2021 |  | $ | 108 |
2022 |  | $ | 106 |
2023 |  | $ | 104 |
2024 |  | $ | 101 |
2025 |  | $ | 97 |
2026-2030 |  | $ | 417 |

The Corporation expects to contribute $110 thousand to the plan during 2021. Corporation contributions are equal to the benefit payments to plan participants. Funding requirements for subsequent years are uncertain and will significantly depend upon changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes, the Corporation may increases, accelerate, decrease or delay contributions to the plan to the extent permitted by law.
Defined Contribution Supplemental Executive Retirement Plan
The Corporation also sponsors a Defined Contribution Supplemental Executive Retirement Plan for certain current executive officers, which was initiated in 2012. The plan is unfunded as of December 31, 2020 and is intended to provide nonqualified deferred compensation benefits payable at retirement, disability, death or certain other events. The accrued obligation for the plan as of December 31, 2020 and 2019 was $2.0 million and $1.6 million, respectively. A total of $0.4 million, $0.4 million, and $0.3 million was expensed during the years ended December 31, 2020, 2019, and 2018, respectively. In addition to each participants account being credited with the annual company contribution, each account will receive a quarterly interest credit that will equal the average yield on five year U.S. Treasury Notes.
(15) STOCK COMPENSATION
Board of Directors' Stock Compensation
Members of the Board of Directors receive common shares of the Corporation equal in value to the amount of fees individually earned during the previous year for service as a director. The common shares are distributed to the Corporation's individual Board of Directors members from treasury shares of the Corporation on or about January15 following the calendar year of service. In 2019, the annual cash retainer paid to each non-employee director of the Corporation was increased by $6,000 to $11,500 and $19,250 for the Chairman of the Board. The retainer for the Chairman of the Audit Committee was also increased by an additional $2,875 to $14,375. The directors waived their right to stock compensation for the additional retainer fees paid.
Additionally, the Chief Executive Officer of the Corporation, who does not receive cash compensation as a member of the Board of Directors, is awarded common shares equal in value to the average of those awarded to Board of Directors members not employed by the Corporation who have served for 12 months during the prior year.
During January 2021, 2020, and 2019, 9,291, 7,923 and 8,465 shares, respectively, were re-issued from treasury to fund the stock component of the directors' and the Chief Executive Officer’s compensation. An expense of $318 thousand, $350 thousand and $357 thousand related to this compensation was recognized during the years ended December 31, 2020, 2019 and 2018, respectively. This expense is accrued as shares are earned.
F-50

Restricted Stock Plan
Pursuant to the Corporation’s Restricted Stock Plan (the “Plan”), the Corporation may make discretionary grants of restricted stock to officers other than the Corporation's Chief Executive Officer. Compensation expense is recognized over the vesting period of the awards based on the fair value of the stock at issue date.
A summary of restricted stock activity as of December 31, 2020, and changes during the year ended is presented below:

|  | Shares |  | Weighted–Average Grant Date Fair Value
Nonvested at December 31, 2019 |  | 33,575 |  |  | $ | 43.24 |
Granted |  | 14,805 |  |  | 35.21 |
Vested |  | (16,438) |  |  | 41.65 |
Forfeited or Cancelled |  | (112) |  |  | 44.72 |
Nonvested at December 31, 2020 |  | 31,830 |  |  | $ | 40.32 |

As of December 31, 2020, there was $1.1 million of total unrecognized compensation cost related to nonvested shares granted under the Plan. The cost is expected to be recognized over a weighted-average period of 3.88 years. The total fair value of shares vested during the years ended December 31, 2020, 2019 and 2018 were $556 thousand, $438 thousand and $432 thousand, respectively.
(16) RELATED PARTY TRANSACTIONS
Members of the Board of Directors, certain Corporation officers, and their immediate families directly, or through entities in which they are principal owners (more than 10% interest) or board members, were customers of, and had loans and other transactions with the Corporation. These loans are summarized as follows for the years ended December 31, 2020 and 2019 (in thousands):

|  | 2020 |  | 2019
Balance at beginning of year |  | $ | 59,973 |  |  | $ | 62,741 |
New loans or additional advances |  | 7,461 |  |  | 1,895 |
Effect of changes in composition of related parties |  | — |  |  | 4,456 |
Repayments |  | (11,382) |  |  | (9,119) |
Balance at end of year |  | $ | 56,052 |  |  | $ | 59,973 |

Deposits from principal officers, directors, and their affiliates at December 31, 2020 and 2019 were $39.5 million and $18.3 million, respectively.
The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through July 2022 from a member of the Corporation's Board of Directors with monthly rent expense totaling $4 thousand per month. Annual rent paid to this Board of Directors member totaled $51 thousand, $52 thousand, and $45 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
The Bank utilized legal services from a local law firm in 2019 and 2018 which a former member of the Board of Directors is a principal owner. Services totaled $10 thousand, and $28 thousand for the years ended December 31, 2019 and 2018, respectively. The Bank did not utilize legal services from the same local law firm for the year ended December 31, 2020.
The Bank entered into a lease agreement in 2018 related to its branch located at 2 Rush Street, Schenectady, New York, under a lease agreement through February 2033 from a member of the Corporation's Board of Directors with monthly rent expense totaling $8 thousand per month. Rent paid to this Board of Directors member totaled $106 thousand, $93 thousand and $84 thousand for the years ended December 2020, 2019 and 2018, respectively.
F-51

The Bank leases its branch located at 127 Court Street, Binghamton, New York under a lease agreement through June 2030 with monthly lease payments of $5 thousand. The lease originated with an entity in whom the employer of a Director of the Corporation had a twenty percent interest. In July 2017, the employer of the Director sold its interest in the property to an unrelated third party from which the Bank continues to lease the property. CFS offered insurance products to its customers through the same employer of a Director of the Corporation during the year ended December 31, 2018. CFS earned income of less than $1 thousand related to these insurance products during the year ended December 31, 2018. The Bank purchased insurance products from the same employer of a Director of the Corporation in the amount of $34 thousand during the year ended December 31, 2018.
WMG provided trust services to members of the Board of Directors, certain Corporation officers, and their immediate families directly, or through entities in which they are principal owners or board members. WMG fee income for the trust services provided totaled $614 thousand, $580 thousand, and $593 thousand for the years ended December 31, 2020, 2019, and 2018, respectively.
(17) COMMITMENTS AND CONTINGENCIES
Some financial instruments, such as loan commitments, credit lines, letters of credit, and overdraft protection, are issued to meet customer financing needs. These are agreements to provide credit or to support the credit of others, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies are used to make such commitments as are used for loans, including obtaining collateral at exercise of the commitment.
The contractual amounts of financial instruments with off-balance sheet risk at year-end were as follows (in thousands):

|  | 2020 |  | 2019
|  | Fixed Rate |  | Variable Rate |  | Fixed Rate |  | Variable Rate
Commitments to make loans |  | $ | 28,459 |  |  | $ | 39,056 |  |  | $ | 15,560 |  |  | $ | 25,233 |
Unused lines of credit |  | $ | 1,300 |  |  | $ | 268,075 |  |  | $ | 1,062 |  |  | $ | 229,137 |
Standby letters of credit |  | $ | — |  |  | $ | 16,094 |  |  | $ | — |  |  | $ | 16,272 |

Commitments to make real estate and home equity loans are generally made for periods of sixty days or less. As of December 31, 2020, the fixed rate real estate and home equity commitments to make loans have interest rates ranging from 2.63% to 5.50% and maturities ranging from three years to thirty years. Commitments to fund commercial draw notes are generally made for periods of three months to twenty-four months. As of December 31, 2020, the fixed rate commercial draw commitments have interest rates ranging from 3.50% to 6.25%.
Because many commitments and almost all standby letters of credit expire without being funded in whole or in part, the contract amounts are not estimates of future cash flows. Loan commitments and unused lines of credit have off-balance sheet credit risk because only origination fees are recognized on the consolidated balance sheet until commitments are fulfilled or expire. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and collateral or other security is of no value. The Corporation does not anticipate losses as a result of these transactions. These commitments also have off-balance sheet interest rate risk in that the interest rate at which these commitments were made may not be at market rates on the date the commitments are fulfilled.
The Corporation has issued conditional commitments in the form of standby letters of credit to guarantee payment on behalf of a customer and guarantee the performance of a customer to a third party. Standby letters of credit generally arise in connection with lending relationships. The credit risk involved in issuing these instruments is essentially the same as that involved in extending loans to customers. Contingent obligations under standby letters of credit totaled $16.1 million at December 31, 2020 and represent the maximum potential future payments the Corporation could be required to make. Typically, these instruments have terms of twelve months or less and expire unused; therefore, the total amounts do not necessarily represent future cash requirements. Each customer is evaluated individually for creditworthiness under the same underwriting standards used for commitments to extend credit and on-balance sheet instruments. Corporation policies governing loan collateral apply to standby letters of credit at the time of credit extension. The carrying amount and fair value of the Corporation's standby letters of credit at December 31, 2020 was not significant.
F-52

On March 23, 2016, the Bank received a summons and complaint for an action brought in the State of New York Supreme Court for the County of Tompkins, regarding its lease of 202 East State Street, Ithaca, NY, a branch location which the Bank had vacated. The owner of the leased premises has alleged that the Bank has breached its contract and is requesting a judgment declaring that the term of the lease runs through December 31, 2025 or a judgment in his favor in the amount of $4.0 million. The Bank has denied that it breached the contract. On July 25, 2016, the Corporation received Notice of Entry of the decision and order of the New York Supreme Court for the County of Tompkins, involving claims by the owner of the leased premises at 202 East State Street, Ithaca, New York against the Bank. The Court granted, in part, partial summary judgment in favor of the plaintiff - on the issue of liability only - for anticipatory breach and breach of contract. The fraud claims were dismissed, and summary judgment was denied on the plaintiff’s trespass claims. The Court set the matter down for an inquest on damages at a later date, with the original claim by the plaintiff seeking $4.0 million in damages. The Corporation established a legal reserve of $1.2 million in connection with this case during the second quarter of 2016.
Subsequent to an appeal of the lower court determination, which was perfected in the Appellate Division, Third Department of State Supreme Court, on June 29, 2017, the Bank received Notice of Entry of the decision and Order of that Court which affirmed the lower court’s decision in favor of the plaintiff with damages to be determined at a later proceeding. The Bank established an additional legal reserve in the amount of $850 thousand, in connection with this case, during the second quarter of 2017. The Bank’s total reserve with respect to this matter stood at $2.3 million, including $0.2 million accrued for related expenses not yet paid as of June 30, 2017. A motion to the Appellate Division for reargument or permission for leave to appeal to the Court of Appeals was filed and denied during the fourth quarter of 2017.
On June 15, 2018, the Bank, through mediation, reached a resolution by way of a settlement agreement in the matter of Fane v. Chemung Canal Trust Company (the “Action”). The parties agreed to release each other from any and all liabilities, claims, counterclaims, demands, charges, complaints and causes of action, to dismiss the Action with prejudice, and the Bank agreed to pay Fane $3.3 million in connection with the settlement of the Action. As of March 31, 2018, the Corporation had a legal reserve of $2.3 million for the Action and therefore recognized an additional $1.0 million of legal expense during the second quarter of 2018.
In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. Except for the above matter, the Corporation believes that it is not a party to any pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on its financial results or liquidity.
F-53

(18) PARENT COMPANY FINANCIAL INFORMATION
Condensed parent company only financial statement information of Chemung Financial Corporation is as follows (investment in subsidiaries is recorded using the equity method of accounting) (in thousands):

BALANCE SHEETS - DECEMBER 31 |  | 2020 |  | 2019
Assets: |  |  |  |
Cash on deposit with subsidiary bank |  | $ | 2,243 |  |  | $ | 3,938 |
Investment in subsidiary - Chemung Canal Trust Company |  | 192,364 |  |  | 175,470 |
Investment in subsidiary - CFS Group, Inc. |  | 876 |  |  | 868 |
Investment in subsidiary - Chemung Risk Management, Inc. |  | 2,563 |  |  | 1,954 |
Dividends receivable from subsidiary bank |  | 1,214 |  |  | — |
Securities available for sale, at estimated fair value |  | 377 |  |  | 492 |
Other assets |  | 1,420 |  |  | 1,266 |
Total assets |  | $ | 201,057 |  |  | $ | 183,988 |
Liabilities and shareholders' equity: |  |  |  |
Dividends payable |  | $ | 1,214 |  |  | $ | 1,263 |
Other liabilities |  | 144 |  |  | 98 |
Total liabilities |  | 1,358 |  |  | 1,361 |
Shareholders' equity: |  |  |  |
Total shareholders' equity |  | 199,699 |  |  | 182,627 |
Total liabilities and shareholders' equity |  | $ | 201,057 |  |  | $ | 183,988 |

STATEMENTS OF INCOME - YEARS ENDED DECEMBER 31 |  | 2020 |  | 2019 |  | 2018
Dividends from subsidiary bank and non-bank |  | $ | 10,806 |  |  | $ | 4,516 |  |  | $ | 3,187 |
Interest and dividend income |  | 5 |  |  | 9 |  |  | 10 |
Non-interest income |  | (50) |  |  | (62) |  |  | (20) |
Non-interest expenses |  | 503 |  |  | 439 |  |  | 477 |
Income before impact of subsidiaries' undistributed earnings |  | 10,258 |  |  | 4,024 |  |  | 2,700 |
Equity in undistributed earnings of Chemung Canal Trust Company |  | 8,204 |  |  | 11,220 |  |  | 16,670 |
Equity in undistributed earnings of CFS Group, Inc. |  | 8 |  |  | (4) |  |  | (32) |
Equity in undistributed earnings of Chemung Risk Management, Inc. |  | 610 |  |  | 205 |  |  | 124 |
Income before income tax |  | 19,080 |  |  | 15,445 |  |  | 19,462 |
Income tax benefit |  | (182) |  |  | (164) |  |  | (164) |
Net income |  | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |

F-54

STATEMENTS OF CASH FLOWS - YEARS ENDED DECEMBER 31 |  | 2020 |  | 2019 |  | 2018
Cash flows from operating activities: |  |  |  |  |  |
Net Income |  | $ | 19,262 |  |  | $ | 15,609 |  |  | $ | 19,626 |
Adjustments to reconcile net income to net cash provided by operating activities: |  |  |  |  |  |
Equity in undistributed earnings of Chemung Canal Trust Company |  | (8,204) |  |  | (11,220) |  |  | (16,670) |
Equity in undistributed earnings of CFS Group, Inc. |  | (8) |  |  | 4 |  |  | 32 |
Equity in undistributed earnings of Chemung Risk Management, Inc. |  | (610) |  |  | (205) |  |  | (124) |
Change in dividend receivable |  | (1,214) |  |  | — |  |  | 1,233 |
Change in other assets |  | (154) |  |  | (196) |  |  | (32) |
Change in other liabilities |  | 6 |  |  | (48) |  |  | 773 |
Expense related to employee stock compensation |  | 101 |  |  | 100 |  |  | 89 |
Expense related to restricted stock units for directors' deferred compensation plan |  | 29 |  |  | 42 |  |  | 67 |
Expense to employee restricted stock awards |  | 672 |  |  | 503 |  |  | 405 |
Net cash provided by operating activities |  | 9,880 |  |  | 4,589 |  |  | 5,399 |
Cash flow from financing activities: |  |  |  |  |  |
Cash dividends paid |  | (5,006) |  |  | (5,029) |  |  | (4,969) |
Purchase of treasury stock |  | (7,589) |  |  | (185) |  |  | (112) |
Sale of treasury stock |  | 1,018 |  |  | 585 |  |  | 643 |
Net cash used in financing activities |  | (11,577) |  |  | (4,629) |  |  | (4,438) |
Increase (decrease) in cash and cash equivalents |  | (1,697) |  |  | (40) |  |  | 961 |
Cash and cash equivalents at beginning of year |  | 3,938 |  |  | 3,978 |  |  | 3,017 |
Cash and cash equivalents at end of year |  | $ | 2,241 |  |  | $ | 3,938 |  |  | $ | 3,978 |

(19) FAIR VALUES
Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair value:
Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.
Level 2: Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3: Significant unobservable inputs that reflect a reporting entity's own assumptions about the assumptions that market participants would use in pricing an asset or liability.
The Corporation used the following methods and significant assumptions to estimate fair value:
Available for Sale Securities: The fair values of securities available for sale are usually determined by obtaining quoted prices on nationally recognized securities exchanges (Level 1 inputs), or matrix pricing, which is a mathematical technique widely used to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities' relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3 inputs).
Equity Investments: Securities that are held to fund a non-qualified deferred compensation plan and securities that have a readily determinable fair market value, are recorded with changes in fair value included in earnings. The fair values of equity investments are determined by quoted market prices (Level 1 inputs).
F-55

Impaired Loans: At the time a loan is considered impaired, it is valued at the lower of cost or fair value. Impaired loans carried at fair value have been partially charged-off or receive specific allocations as part of the allowance for loan loss accounting. For collateral dependent loans, fair value is commonly based on real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, typically resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted accordingly.
OREO: Assets acquired through or instead of loan foreclosures are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. Fair value is commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent impaired loans and OREO are performed by certified general appraisers (commercial properties) or certified residential appraisers (residential properties) whose qualifications and licenses have been reviewed and verified by the Corporation. Once received, appraisals are reviewed for reasonableness of assumptions, approaches utilized, Uniform Standards of Professional Appraisal Practice and other regulatory compliance, as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Appraisals are generally completed within the previous 12 month period prior to a property being placed into OREO. On impaired loans, appraisal values are adjusted based on the age of the appraisal, the position of the lien, the type of the property and its condition.
Derivatives: The fair values of interest rate swaps are based on valuation models using observable market data as of the measurement date (Level 2 inputs). Derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair values of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices, and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The Corporation also incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counter-party's nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Corporation has considered the impact of any applicable credit enhancements, such as collateral postings. Although the Corporation has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with credit risk participations are based on credit default rate assumptions (Level 3 inputs).
F-56

Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):

|  | Fair Value Measurement at December 31, 2020 Using
Financial Assets: |  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Mortgage-backed securities, residential |  | $ | 467,866 |  |  | $ | — |  |  | $ | 467,866 |  |  | $ | — |
Obligations of states and political subdivisions |  | 43,405 |  |  | — |  |  | 43,405 |  |  | — |
Corporate bonds and notes |  | 9,035 |  |  | — |  |  | 9,035 |  |  | — |
SBA loan pools |  | 34,305 |  |  | — |  |  | 34,305 |  |  | — |
Total available for sale securities |  | $ | 554,611 |  |  | $ | — |  |  | $ | 554,611 |  |  | $ | — |
Equity Investments |  | $ | 1,880 |  |  | $ | 1,880 |  |  | $ | — |  |  | $ | — |
Derivative assets |  | 14,702 |  |  | — |  |  | 14,702 |  |  | — |
Financial Liabilities: |  |  |  |  |  |  |  |
Derivative liabilities |  | $ | 15,059 |  |  | $ | — |  |  | $ | 14,702 |  |  | $ | 357 |

|  | Fair Value Measurement at December 31, 2019 Using
Financial Assets: |  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3)
Mortgage-backed securities, residential |  | $ | 225,234 |  |  | $ | — |  |  | $ | 225,234 |  |  | $ | — |
Obligations of states and political subdivisions |  | 42,845 |  |  | — |  |  | 42,845 |  |  | — |
Corporate bonds and notes |  | 250 |  |  | — |  |  | 250 |  |  | — |
SBA loan pools |  | 15,761 |  |  | — |  |  | 15,761 |  |  | — |
Total available for sale securities |  | $ | 284,090 |  |  | $ | — |  |  | $ | 284,090 |  |  | $ | — |
Equity investments |  | $ | 1,442 |  |  | $ | 1,442 |  |  | $ | — |  |  | $ | — |
Derivative assets |  | 6,466 |  |  | — |  |  | 6,466 |  |  | — |
Financial Liabilities: |  |  |  |  |  |  |  |
Derivative liabilities |  | $ | 6,831 |  |  | $ | — |  |  | $ | 6,466 |  |  | $ | 365 |

F-57

There were no transfers between Level 1 and Level 2 during the twelve month periods ending December 31, 2020 and 2019.
The table below presents a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31:

|  |  |  |  |  | Assets (Liabilities)
|  |  |  | Derivative Liabilities
(in thousands) |  |  |  |  |  | 2020 |  | 2019
Balance of recurring Level 3 assets at January 1 |  |  |  |  |  | $ | (365) |  |  | $ | (140) |
Derivative instruments entered into |  |  |  |  |  | (52) |  |  | (43) |
Total gains or losses for the period: |  |  |  |  |  |  |  |
Included in earnings - other non-interest income |  |  |  |  |  | 60 |  |  | (182) |
Balance of recurring Level 3 assets at December 31 |  |  |  |  |  | $ | (357) |  |  | $ | (365) |

The following table presents information related to Level 3 recurring fair value measurement at December 31, 2020 and December 31, 2019 (in thousands):

Description |  | Fair Value at December 31, 2020 |  | Valuation Technique |  | Unobservable Inputs |  | Range [Weighted Average] at December 31, 2020
Derivative liabilities |  | $ | 357 |  |  | Historical trend |  | Credit default rate |  | 0.93% - 27.78% [2.27%]

Description |  | Fair Value at December 31, 2019 |  | Valuation Technique |  | Unobservable Inputs |  | Range [Weighted Average] at December 31, 2019
Derivative liabilities |  | $ | 365 |  |  | Historical trend |  | Credit default rate |  | 7.30% - 7.30% [7.30%]

Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):

|  | Fair Value Measurement at December 31, 2020 Using |  |
Financial Assets: |  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Gains (Losses)
Impaired Loans: |  |  |  |  |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |
Commercial mortgages |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Total impaired loans |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |
Other real estate owned: |  |  |  |  |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |
Commercial mortgages |  | $ | 111 |  |  | $ | — |  |  | $ | — |  |  | $ | 111 |  |  | $ | — |
Residential mortgages |  | 126 |  |  | — |  |  | — |  |  | 126 |  |  | — |
Total other real estate owned, net |  | $ | 237 |  |  | $ | — |  |  | $ | — |  |  | $ | 237 |  |  | $ | — |

F-58

|  | Fair Value Measurement at December 31, 2019 Using |  |
Financial Assets: |  | Fair Value |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Total Gains (Losses)
Impaired Loans: |  |  |  |  |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |
Commercial mortgages |  | $ | 1,554 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,554 |  |  | $ | (1,597) |
Total impaired loans |  | $ | 1,554 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,554 |  |  | $ | (1,597) |
Other real estate owned: |  |  |  |  |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |  |  |  |  |
Commercial mortgages |  | $ | 111 |  |  | $ | — |  |  | $ | — |  |  | $ | 111 |  |  | $ | — |
Residential mortgages |  | 284 |  |  | — |  |  | — |  |  | 284 |  |  | (12) |
Consumer loans: |  |  |  |  |  |  |  |  |  |
Home equity lines and loans |  | 122 |  |  | — |  |  | — |  |  | 122 |  |  | — |
Total other real estate owned, net |  | $ | 517 |  |  | $ | — |  |  | $ | — |  |  | $ | 517 |  |  | $ | (12) |

The following table presents information related to Level 3 non-recurring fair value measurement at December 31, 2020 and 2019 (in thousands):

Asset |  | Fair Value at December 31, 2020 |  | Valuation Technique |  | Unobservable Inputs |  | Range [Weighted Average] at December 31, 2020
OREO: |  |  |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |  |  |
Commercial mortgages |  | $ | 111 |  |  | Sales comparison |  | Discount to appraised value |  | 20.80% - 20.80% [20.80%]
Residential mortgages |  | 126 |  |  | Sales comparison |  | Discount to appraised value |  | 20.80% - 20.80% [20.80%]
|  | $ | 237 |  |  |  |  |  |  |

Asset |  | Fair Value at December 31, 2019 |  | Valuation Technique |  | Unobservable Inputs |  | Range [Weighted Average] at December 31, 2019
Impaired loans: |  |  |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |  |  |
Commercial mortgages |  | $ | 1,554 |  |  | Sales comparison |  | Discount to appraised value |  | 10.00% - 10.00% [10.00%]
|  | $ | 1,554 |  |  |  |  |  |  |
OREO: |  |  |  |  |  |  |  |
Commercial mortgages: |  |  |  |  |  |  |  |
Commercial mortgages |  | $ | 111 |  |  | Sales comparison |  | Discount to appraised value |  | 20.80% - 20.80% [20.80%]
Residential mortgages |  | 284 |  |  | Sales comparison |  | Discount to appraised value |  | 20.80% - 35.29% [24.09%]
Consumer loans: |  |  |  |  |  |  |  |
Home equity lines and loans |  | 122 |  |  | Sales comparison |  | Discount to appraised value |  | 20.80% - 20.80% [20.80%]
|  | $ | 517 |  |  |  |  |  |  |

F-59

FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of other financial instruments, at December 31, 2020 and December 31, 2019, are as follows (in thousands):

|  |  |  | Fair Value Measurements at December 31, 2020 Using |  |
Financial assets: |  | Carrying Amount |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Estimated Fair Value (1)
Cash and due from financial institutions |  | $ | 29,467 |  |  | $ | 29,467 |  |  | $ | — |  |  | $ | — |  |  | $ | 29,467 |
Interest-bearing deposits in other financial institutions |  | 79,071 |  |  | 79,071 |  |  | — |  |  | — |  |  | 79,071 |
Equity investments |  | 2,542 |  |  | 2,542 |  |  | — |  |  | — |  |  | 2,542 |
Securities available for sale |  | 554,611 |  |  | — |  |  | 554,611 |  |  | — |  |  | 554,611 |
Securities held to maturity |  | 2,469 |  |  | — |  |  | 2,175 |  |  | 326 |  |  | 2,501 |
FHLBNY and FRBNY stock |  | 3,150 |  |  | — |  |  | — |  |  | — |  |  | N/A
Loans, net and loans held for sale |  | 1,515,709 |  |  | — |  |  | — |  |  | 1,514,318 |  |  | 1,514,318 |
Accrued interest receivable |  | 6,271 |  |  | — |  |  | 1,356 |  |  | 4,915 |  |  | 6,271 |
Derivative assets |  | 14,702 |  |  | — |  |  | 14,702 |  |  | — |  |  | 14,702 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |
Demand, savings, and insured money market accounts |  | $ | 1,752,043 |  |  | $ | 1,752,043 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,752,043 |
Time deposits |  | 285,731 |  |  | — |  |  | 288,398 |  |  | — |  |  | 288,398 |
Accrued interest payable |  | 262 |  |  | 11 |  |  | 251 |  |  | — |  |  | 262 |
Derivative liabilities |  | 15,059 |  |  | — |  |  | 14,702 |  |  | 357 |  |  | 15,059 |

(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
F-60

|  |  |  | Fair Value Measurements at December 31, 2019 Using |  |
Financial Assets: |  | Carrying Amount |  | Quoted Prices in Active Markets for Identical Assets (Level 1) |  | Significant Other Observable Inputs (Level 2) |  | Significant Unobservable Inputs (Level 3) |  | Estimated Fair Value (1)
Cash and due from financial institutions |  | $ | 25,203 |  |  | $ | 25,203 |  |  | $ | — |  |  | $ | — |  |  | $ | 25,203 |
Interest-bearing deposits in other financial institutions |  | 96,701 |  |  | 96,701 |  |  | — |  |  | — |  |  | 96,701 |
Equity investments |  | 2,174 |  |  | 2,174 |  |  | — |  |  | — |  |  | 2,174 |
Securities available for sale |  | 284,090 |  |  | — |  |  | 284,090 |  |  | — |  |  | 284,090 |
Securities held to maturity |  | 3,115 |  |  | — |  |  | 2,094 |  |  | 1,045 |  |  | 3,139 |
FHLBNY and FRBNY stock |  | 3,099 |  |  | — |  |  | — |  |  | — |  |  | N/A
Loans, net and loans held for sale |  | 1,286,926 |  |  | — |  |  | — |  |  | 1,285,215 |  |  | 1,285,215 |
Accrued interest receivable |  | 4,633 |  |  | 63 |  |  | 885 |  |  | 3,685 |  |  | 4,633 |
Derivative assets |  | 6,466 |  |  | — |  |  | 6,466 |  |  | — |  |  | 6,466 |
Financial liabilities: |  |  |  |  |  |  |  |  |  |
Deposits: |  |  |  |  |  |  |  |  |  |
Demand, savings, and insured money market accounts |  | $ | 1,410,962 |  |  | $ | 1,410,962 |  |  | $ | — |  |  | $ | — |  |  | $ | 1,410,962 |
Time deposits |  | 161,176 |  |  | — |  |  | 163,761 |  |  | — |  |  | 163,761 |
Accrued interest payable |  | 299 |  |  | 27 |  |  | 272 |  |  | — |  |  | 299 |
Derivative liabilities |  | 6,831 |  |  | — |  |  | 6,466 |  |  | 365 |  |  | 6,831 |

(1) Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
(20) REGULATORY CAPITAL REQUIREMENTS
The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and 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. The final rules implementing Basel III rules became effective for the Bank on January 1, 2015 with full compliance with all of the requirements being phased in over a multi-year schedule, and fully phased in by January 1, 2019. Under Basel III rules, the Bank must hold a capital conservation buffer above the adequately capitalized risk-based capital ratios. 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. Management believes as of December 31, 2020, the Bank met all capital adequacy requirements to which they are subject.
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. At December 31, 2019, the most recent regulatory notifications categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. At December 31, 2019, the most recent regulatory notifications categorized the Corporation and the Bank as well capitalized under the regulatory framework for prompt corrective action. 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. There are no conditions or events since that notification that management believes have changed the institution's category.
F-61

As of December 31, 2020, 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 or the Corporation's capital category.
The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to the current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table below. During 2021, the Bank could, without prior approval, declare dividends of approximately $36.1 million plus any 2021 net income retained to the date of the dividend declaration.
The actual capital amounts and ratios of the Corporation and the Bank are presented in the following tables (in thousands):

|  | Actual |  | Minimal Capital Adequacy |  | Minimal Capital Adequacy with Capital Buffer |  | To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2020 |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
Total Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 192,960 |  |  | 13.62 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 185,606 |  |  | 13.12 | % |  | $ | 113,182 |  |  | 8.00 | % |  | $ | 148,551 |  |  | 10.50 | % |  | $ | 141,478 |  |  | 10.00 | %
Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,216 |  |  | 12.37 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 167,881 |  |  | 11.87 | % |  | $ | 84,887 |  |  | 6.00 | % |  | $ | 120,256 |  |  | 8.50 | % |  | $ | 113,182 |  |  | 8.00 | %
Common Equity Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,216 |  |  | 12.37 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 167,881 |  |  | 11.87 | % |  | $ | 63,665 |  |  | 4.50 | % |  | $ | 99,034 |  |  | 7.00 | % |  | $ | 91,960 |  |  | 6.50 | %
Tier 1 Capital (to Average Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 175,216 |  |  | 7.90 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 167,881 |  |  | 7.59 | % |  | $ | 88,474 |  |  | 4.00 | % |  | N/A |  | N/A |  | $ | 110,592 |  |  | 5.00 | %

|  | Actual |  | Minimum Capital Adequacy |  | Minimal Capital Adequacy with Capital Buffer |  | To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2019 |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio |  | Amount |  | Ratio
Total Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 182,239 |  |  | 13.98 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 175,062 |  |  | 13.45 | % |  | $ | 104,136 |  |  | 8.00 | % |  | $ | 136,679 |  |  | 10.50 | % |  | $ | 130,170 |  |  | 10.00 | %
Tier 1 Capital (to Risk Weighted Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 165,859 |  |  | 12.73 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 158,702 |  |  | 12.19 | % |  | $ | 78,102 |  |  | 6.00 | % |  | $ | 110,645 |  |  | 8.50 | % |  | $ | 104,136 |  |  | 8.00 | %
Common Equity Tier 1 Capital (to Risk Weighted Assets):
Consolidated |  | $ | 165,859 |  |  | 12.73 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 158,702 |  |  | 12.19 | % |  | $ | 58,577 |  |  | 4.50 | % |  | $ | 91,119 |  |  | 7.00 | % |  | $ | 84,611 |  |  | 6.50 | %
Tier 1 Capital (to Average Assets): |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consolidated |  | $ | 165,859 |  |  | 9.35 | % |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A |  | N/A
Bank |  | $ | 158,702 |  |  | 8.98 | % |  | $ | 70,719 |  |  | 4.00 | % |  | N/A |  | N/A |  | $ | 88,399 |  |  | 5.00 | %

F-62

(21) ACCUMULATED OTHER COMPREHENSIVE INCOME OR LOSS
Accumulated other comprehensive income or loss represents the net unrealized holding gains or losses on securities available for sale and the funded status of the Corporation's defined benefit pension plan and other benefit plans, as of the consolidated balance sheet dates, net of the related tax effect.
The following is a summary of the changes in accumulated other comprehensive income or loss by component, net of tax, for the periods indicated (in thousands):

|  | Unrealized Gains and Losses on Securities Available for Sale |  | Defined Benefit and Other Benefit Plans |  | Total
Balance at January 1, 2020 |  | $ | 1,368 |  |  | $ | (7,167) |  |  | $ | (5,799) |
Other comprehensive income before reclassification |  | 7,759 |  |  | 377 |  |  | 8,136 |
Amounts reclassified from accumulated other comprehensive income (loss) |  | — |  |  | 64 |  |  | 64 |
Net current period other comprehensive income (loss) |  | 7,759 |  |  | 441 |  |  | 8,200 |
Balance at December 31, 2020 |  | $ | 9,127 |  |  | $ | (6,726) |  |  | $ | 2,401 |

|  | Unrealized Gains and Losses on Securities Available for Sale |  | Defined Benefit and Other Benefit Plans |  | Total
Balance at January 1, 2019 |  | $ | (4,646) |  |  | $ | (6,765) |  |  | $ | (11,411) |
Other comprehensive income (loss) before reclassification |  | 6,028 |  |  | (467) |  |  | 5,561 |
Amounts reclassified from accumulated other comprehensive income (loss) |  | (14) |  |  | 65 |  |  | 51 |
Net current period other comprehensive income (loss) |  | 6,014 |  |  | (402) |  |  | 5,612 |
Balance at December 31, 2019 |  | $ | 1,368 |  |  | $ | (7,167) |  |  | $ | (5,799) |

|  | Unrealized Gains and Losses on Securities Available for Sale |  | Defined Benefit and Other Benefit Plans |  | Total
Balance at Balance at December 31, 2017 |  | $ | (3,415) |  |  | $ | (6,925) |  |  | $ | (10,340) |
Cumulative effect of accounting change |  | (202) |  |  | — |  |  | (202) |
Balance at January 1, 2018 |  | (3,617) |  |  | (6,925) |  |  | (10,542) |
Other comprehensive income (loss) before reclassification |  | (1,029) |  |  | (530) |  |  | (1,559) |
Amounts reclassified from accumulated other comprehensive income (loss) |  | — |  |  | 690 |  |  | 690 |
Net current period other comprehensive loss |  | (1,029) |  |  | 160 |  |  | (869) |
Balance at December 31, 2018 |  | $ | (4,646) |  |  | $ | (6,765) |  |  | $ | (11,411) |

F-63

The following is the reclassification out of accumulated other comprehensive income (loss) for the periods indicated (in thousands):

Details about Accumulated Other Comprehensive Income (Loss) Components |  | Year Ended December 31, |  | Affected Line Item in the Statement Where Net Income is Presented
|  | 2020 |  | 2019 |  | 2018 |  |
Unrealized gains and losses on securities available for sale: |  |  |  |  |  |  |  |
Realized gains on securities available for sale |  | $ | — |  |  | $ | (19) |  |  | $ | — |  |  | Net gains on securities transactions
Tax effect |  | — |  |  | 5 |  |  | — |  |  | Income tax expense
Net of tax |  | — |  |  | (14) |  |  | — |  |  |
Amortization of defined pension plan and other benefit plan items: |  |  |  |  |  |  |  |
Prior service costs (a) |  | (220) |  |  | (220) |  |  | (220) |  |  | Other components of net periodic pension and postretirement benefits
Actuarial losses (a) |  | 300 |  |  | 312 |  |  | 1,146 |  |  | Other components of net periodic pension and postretirement benefits
Tax effect |  | (15) |  |  | (27) |  |  | (236) |  |  | Income tax expense
Net of tax |  | 65 |  |  | 65 |  |  | 690 |  |  |
Total reclassification for the period, net of tax |  | $ | 65 |  |  | $ | 51 |  |  | $ | 690 |  |  |

(a) These accumulated other comprehensive income (loss) components are included in the computation of net periodic pension and other benefit plan costs (see Note 14 for additional information).
(22) SEGMENT REPORTING
The Corporation manages its operations through two primary business segments: core banking and WMG. The core banking segment provides revenues by attracting deposits from the general public and using such funds to originate consumer, commercial, commercial real estate, and residential mortgage loans, primarily in the Corporation’s local markets and to invest in securities. The WMG services segment provides revenues by providing trust and investment advisory services to clients.
Accounting policies for the segments are the same as those described in Note 1. Summarized financial information concerning the Corporation’s reportable segments and the reconciliation to the Corporation’s consolidated results are shown in the following table. Income taxes are allocated based on the separate taxable income of each entity and indirect overhead expenses are allocated based on reasonable and equitable allocations applicable to the reportable segment. The Holding Company, CFS, and CRM column below includes amounts to eliminate transactions between segments as well as income and expenses related to insurance products, mutual funds, brokerage services, and captive insurance (in thousands).

Year ended December 31, 2020 |  | Core Banking |  | WMG |  | Holding Company, CFS and CRM |  | Consolidated Totals
Interest and dividend income |  | $ | 66,849 |  |  | $ | — |  |  | $ | 58 |  |  | $ | 66,907 |
Interest expense |  | 3,988 |  |  | — |  |  | — |  |  | 3,988 |
Net interest income |  | 62,861 |  |  | — |  |  | 58 |  |  | 62,919 |
Provision for loan losses |  | 4,239 |  |  | — |  |  | — |  |  | 4,239 |
Net interest income after provision for loan losses |  | 58,622 |  |  | — |  |  | 58 |  |  | 58,680 |
Non-interest income |  | 10,982 |  |  | 9,492 |  |  | 650 |  |  | 21,124 |
Non-interest expenses |  | 48,479 |  |  | 6,283 |  |  | 1,173 |  |  | 55,935 |
Income (loss) before income tax expense |  | 21,125 |  |  | 3,209 |  |  | (465) |  |  | 23,869 |
Income tax expense (benefit) |  | 3,952 |  |  | 824 |  |  | (169) |  |  | 4,607 |
Segment net income (loss) |  | $ | 17,173 |  |  | $ | 2,385 |  |  | $ | (296) |  |  | $ | 19,262 |
Segment assets |  | $ | 2,271,923 |  |  | $ | 3,231 |  |  | $ | 4,297 |  |  | $ | 2,279,451 |

F-64

Year ended December 31, 2019 |  | Core Banking |  | WMG |  | Holding Company, CFS and CRM |  | Consolidated Totals
Interest and dividend income |  | $ | 66,868 |  |  | $ | — |  |  | $ | 64 |  |  | $ | 66,932 |
Interest expense |  | 6,321 |  |  | — |  |  | — |  |  | 6,321 |
Net interest income |  | 60,547 |  |  | — |  |  | 64 |  |  | 60,611 |
Provision for loan losses |  | 5,945 |  |  | — |  |  | — |  |  | 5,945 |
Net interest income after provision for loan losses |  | 54,602 |  |  | — |  |  | 64 |  |  | 54,666 |
Non-interest income |  | 10,356 |  |  | 9,503 |  |  | 214 |  |  | 20,073 |
Non-interest expenses |  | 48,213 |  |  | 6,326 |  |  | 1,157 |  |  | 55,696 |
Income (loss) before income tax expense |  | 16,745 |  |  | 3,177 |  |  | (879) |  |  | 19,043 |
Income tax expense (benefit) |  | 2,778 |  |  | 810 |  |  | (154) |  |  | 3,434 |
Segment net income (loss) |  | $ | 13,967 |  |  | $ | 2,367 |  |  | $ | (725) |  |  | $ | 15,609 |
Segment assets |  | $ | 1,780,401 |  |  | $ | 3,345 |  |  | $ | 4,082 |  |  | $ | 1,787,827 |

Year ended December 31, 2018 |  | Core Banking |  | WMG |  | Holding Company and CFS |  | Consolidated Totals
Interest and dividend income |  | $ | 64,511 |  |  | $ | — |  |  | $ | 42 |  |  | $ | 64,553 |
Interest expense |  | 4,073 |  |  | — |  |  | — |  |  | 4,073 |
Net interest income |  | 60,438 |  |  | — |  |  | 42 |  |  | 60,480 |
Provision for loan losses |  | 3,153 |  |  | — |  |  | — |  |  | 3,153 |
Net interest income after provision for loan losses |  | 57,285 |  |  | — |  |  | 42 |  |  | 57,327 |
Non-interest income |  | 13,597 |  |  | 9,317 |  |  | 160 |  |  | 23,074 |
Non-interest expenses |  | 49,650 |  |  | 5,997 |  |  | 1,119 |  |  | 56,766 |
Income (loss) before income tax expense |  | 21,232 |  |  | 3,320 |  |  | (917) |  |  | 23,635 |
Income tax expense (benefit) |  | 3,329 |  |  | 847 |  |  | (167) |  |  | 4,009 |
Segment net income (loss) |  | $ | 17,903 |  |  | $ | 2,473 |  |  | $ | (750) |  |  | $ | 19,626 |
Segment assets |  | $ | 1,747,208 |  |  | $ | 3,606 |  |  | $ | 4,529 |  |  | $ | 1,755,343 |

F-65

SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

| CHEMUNG FINANCIAL CORPORATION
DATED: MARCH 24, 2021 | By: /s/ Anders M. Tomson
| Anders M. Tomson, President and Chief Executive Officer (Principal Executive Officer)

DATED: MARCH 24, 2021 | By: /s/ Karl F. Krebs
| Karl F. Krebs, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been executed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

Signature |  | Title |  | Date
/s/ Raimundo C. Archibold, Jr. |  | Director |  | March 24, 2021
Raimundo C. Archibold, Jr. |  |  |  |
/s/ Larry H. Becker |  | Director |  | March 24, 2021
Larry H. Becker |  |  |  |
/s/ Ronald M. Bentley |  | Director |  | March 24, 2021
Ronald M. Bentley |  |  |  |
/s/ David M. Buicko |  | Director |  | March 24, 2021
David M. Buicko |  |  |  |
/s/ David J. Dalrymple |  | Director and Chairman of the Board of Directors |  | March 24, 2021
David J. Dalrymple |  |  |  |
/s/ Robert H. Dalrymple |  | Director |  | March 24, 2021
Robert H. Dalrymple |  |  |  |
/s/ Richard E. Forrestel, Jr. |  | Director |  | March 24, 2021
Richard E. Forrestel, Jr. |  |  |  |
/s/ Denise V. Gonick |  | Director |  | March 24, 2021
Denise V. Gonick |  |  |  |
/s/ Stephen M. Lounsberry, III |  | Director |  | March 24, 2021
Stephen M. Lounsberry, III |  |  |  |
/s/ Jeffrey B. Streeter |  | Director |  | March 24, 2021
Jeffrey B. Streeter |  |  |  |

(Signatures, continued)
F-66

Signature |  | Title |  | Date
/s/ Richard W. Swan |  | Director |  | March 24, 2021
Richard W. Swan |  |  |  |
/s/ G. Thomas Tranter, Jr. |  | Director |  | March 24, 2021
G. Thomas Tranter, Jr. |  |  |  |
/s/ Thomas R. Tyrrell |  | Director |  | March 24, 2021
Thomas R. Tyrrell |  |  |  |
/s/ Anders M. Tomson |  | Chief Executive Officer and President |  | March 24, 2021
Anders M. Tomson |  |  |  |
/s/ Karl F. Krebs |  | Chief Financial Officer and Treasurer |  | March 24, 2021
Karl F. Krebs |  |  |  |

F-67

EXHIBIT INDEX

| Exhibit | The following exhibits are either filed with this Form 10-K or are incorporated herein by reference. The Corporation’s Securities Exchange Act file number is 000-13888.
| 3.1 | Certificate of Incorporation of Chemung Financial Corporation dated December 20, 1984 (as incorporated by reference to Exhibit 3.1 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008).
| 3.2 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated March 28, 1988 (as incorporated by reference to Exhibit 3.2 to Registrant's Form 10-K for the year ended December 31, 2007 and filed with the Commission on March 13, 2008).
| 3.3 | Certificate of Amendment to the Certificate of Incorporation of Chemung Financial Corporation, dated May 13, 1998 (as incorporated by reference to Exhibit 3.4 to Registrant’s Form 10-K for the year ended December 31, 2005 and filed with the Commission on March 15, 2006).
| 3.4 | Amended and Restated Bylaws of Chemung Financial Corporation, as amended to January 20, 20 21 (as incorporated by reference to Exhibit 3.2 to Registrant’s Form 8-K and filed with the Commission on J anuary 25, 2021).
| 4.1 | Specimen Stock Certificate (filed as Exhibit 4.1 to Registrant's Form 10-K for the year ended December 31, 2002 and incorporated herein by reference).
| 4.2 | Description of Common Stock Registered Under Section 12 of the Securities Exchange Act of 1934, filed herewith (as incorporated by reference to Exhibit 4.2 to Registrant's Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020).
| 10.1 | Chemung Financial Corporation 2014 Omnibus Plan and Component Plans (Chemung Financial Corporation Restricted Stock Plan, Chemung Financial Corporation Incentive Compensation Plan, Chemung Financial Corporation Directors’ Compensation Plan and Chemung Financial Corporation/Chemung Canal Trust Company Directors’ Deferred Fee Plan) (filed as Exhibits 10.1, 10.2, 10.3, 10.4 and 10.5 to Registrant’s Form S-8 filed with the Commssion on January 27, 2015 and incorporated herein by reference).
| 10.2 | Change of Control Agreement dated December 19, 2018 between Chemung Canal Trust Company and Anders M. Tomson, President and Chief Executive Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commission on December 19, 2018 and incorporated herein by reference).
| 10.3 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Karl F. Krebs, Executive Vice President and Chief Financial Officer (filed as Exhibit 10.1 to Registrant’s Form 8-K filed with the Commissio n on December 23, 2019 and incorporated herein by reference).
| 10.4 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Louis C. DiFabio, Executive Vice President, (as incorporated by reference to Exhibit 10.4 to Registrant's Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020).
| 10.5 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Karen R. Makowski, Executive Vice President and Chief Administration and Risk Officer (filed as Exhibit 10.3 to Registrant’s Form 8-K on December 23, 2019 and incorporated herein by reference).
| 10.6 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Thomas W. Wirth, Executive Vice President (filed as Exhibit 10.4 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference).
| 10.7 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Daniel D. Fariello, President of Capital Bank Division (filed as Exhibit 10.2 to Registrant’s Form 8-K filed with the Commission on December 23, 2019 and incorporated herein by reference).
| 10.8 | Change of Control Agreement dated December 18, 2019 between Chemung Canal Trust Company and Loren D. Cole, Executive Vice President and Chief Information Officer, (as incorporated by reference to Exhibit 10.8 to Registrant's Form 10-K for the year ended December 31, 2019 and filed with the Commission on March 12, 2020).
| 10.9 | Change of Control Agreement dated January 4, 2021 between Chemung Canal Trust Company and Jeffrey P. Kenefick, Regional President (filed as Exhibit 10.1 to Registrant's Form 8-K filed with the Commission on January 5, 2021 and incorporated herein by reference).
| 21 | Subsidiaries of the Registrant.*
| 23 | Consent of Crowe LLP, Independent Registered Public Accounting Firm.*
| 31.1 | Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
| 31.2 | Certification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
| 32.1 | Certification of President and Chief Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
| 32.2 | Ce rtification of Treasurer and Chief Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 19 U.S.C. §1350.*
| 101.INS | Instance Document
| 101.SCH | XBRL Taxonomy Schema*
| 101.CAL | XBRL Taxonomy Calculation Linkbase*
| 101.DEF | XBRL Taxonomy Definition Linkbase*
| 101.LAB | XBRL Taxonomy Label Linkbase*
| 101.PRE | XBRL Taxonomy Presentation Linkbase*
| * | Filed herewith.