CHEMUNG FINANCIAL CORP (CHMG) FY 2024 MD&A

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

Overview

The following is the MD&A of the Corporation as of and for the years ended December 31, 2024 and 2023. The purpose of this discussion is to focus on information about the financial condition and results of operations of the Corporation. Reference should be made to the accompanying audited consolidated financial statements and footnotes for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 2-5.

The MD&A included in this Form 10-K contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties, see Forward-looking Statements below.

The Corporation has been a financial holding company since 2000, and the Bank was established in 1833, CFS in 2001, and Chemung Risk Management, Inc. (CRM) in 2016. Through the Bank and CFS, the Corporation provides a wide range of financial services, including demand, savings and time deposits, commercial, residential, and consumer loans, interest rate swaps, letters of credit, wealth management services, employee benefit plans, insurance products, mutual funds and brokerage services. The Bank relies substantially on a foundation of locally generated deposits. The Corporation, on a stand-alone basis, has minimal results of operations. The Bank derives its income primarily from interest and fees on loans, interest on investment securities, WMG fee income, and fees received in connection with deposit and other services. The Bank’s operating expenses are interest expense paid on deposits and borrowings, salaries and employee benefit plans, and general operating expenses.

CRM, a wholly-owned subsidiary of the Corporation, was formed and began operations on May 31, 2016 as a Nevada-based captive insurance company. Effective December 6, 2023, the State of Nevada, Department of Business and Industry, and the Division of Insurance, acknowledged the dissolution of Chemung Risk Management, Inc.

Forward-looking Statements

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act, Section 21E of the Exchange Act, and the Private Securities Litigation Reform Act of 1995. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to be correct. The Corporation's actual results could be materially different from expectations because of various factors, including changes in economic conditions or interest rates, credit risk, inflation, tariffs, cybersecurity risks, changes in FDIC assessments, bank failures, difficulties in managing the Corporation’s growth, competition, changes in law or the regulatory environment, and changes in general business and economic trends. Information concerning these and other factors can be found in the Corporation’s periodic filings with the SEC, including the discussion under the heading “Item 1A. Risk Factors” of this annual report on Form 10-K. The Corporation's quarterly filings are available publicly on the SEC’s website at http://www.sec.gov, on the Corporation's website at http://www.chemungcanal.com or by written request to: Kathleen S. McKillip, Corporate Secretary, Chemung Financial Corporation, One Chemung Canal Plaza, Elmira, NY 14901. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events, or otherwise.

36

Critical Accounting Estimates

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

Allowance for Credit Losses

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

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

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

As of December 31, 2024, the allowance for credit losses on loans totaled $21.4 million, compared to $22.5 million as of December 31, 2023. A significant portion of the allowance for credit losses is allocated to the commercial portfolio, both commercial real estate and commercial and industrial loans. As of December 31, 2024 and December 31, 2023, the allowance for credit losses allocated to the total commercial portfolio was $15.7 million and $17.1 million respectively, or 73.6% and 75.9%. For comparison, total commercial loans represented 73.2% and 70.3% of total loan balances, respectively, as of December 31, 2024 and 2023. Given the concentration of the allowance for credit losses allocated to the commercial portfolio, and the significant judgments made by management to derive its estimates, management analyzes risks distinctive to commercial lending with a high degree of scrutiny.

Changes in the FOMC's median forecasted year over year U.S. civilian unemployment rate and year over year change in U.S GDP could have a material impact on the model's estimation of the allowance. Currently, all pools, with the exception of the consumer loans pool, as defined in Note 1 to the Consolidated Financial Statements, utilize the FOMC's projections for unemployment as a loss driver, while the consumer pool utilizes the FOMC's projections for GDP growth. FOMC projections are sourced from a quarterly Summary of Projections, which accompanies select FOMC meetings. Each participant's projections represent the value to which selected variables would be expected to converge over time under appropriate monetary policy, and considering all currently available information. An immediate "shock" or increase of 100 bps in the FOMC's projected rate of U.S. civilian unemployment, and a decrease of 50 bps in the FOMC's projected rate of U.S. GDP growth, would increase the model's total calculated allowance by $1.3 million, or 6.2%, to $22.7 million, assuming qualitative adjustments are kept at current levels.

While management has concluded that its current evaluation is reasonable under the circumstances, and that sensitivity analysis is based on a series of hypothetical scenarios not intended to represent management’s assumptions or judgement of factors as of December 31, 2024, it has also concluded that differing assumptions could materially impact allowance calculations, either positively or adversely.

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

37

38

Consolidated Results of Operations

The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the years ended December 31, 2024 and 2023. For a discussion of the Critical Accounting Estimates that affect the Consolidated Results of Operations, see page 38.

Net Income

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

(a) See the GAAP to Non-GAAP reconciliations on pages 65-68.

Net income for the year ended December 31, 2024 was $23.7 million, or $4.96 per share, compared with net income of $25.0 million, or $5.28 per share, for the prior year. Return on average equity for the year ended December 31, 2024 was 11.53%, compared with 14.11% for the prior year. The decrease in net income for the year ended December 31, 2024, compared to the prior year, was due to an increase in non-interest expense, decreases in non-interest income and net interest income, offset by decreases in the provision for credit losses and income tax expense.

Net Interest Income

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

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

39

Net interest income for the year ended December 31, 2024 totaled $74.1 million, a decrease of $0.4 million, or 0.5%, compared with $74.5 million for the prior year. Fully taxable equivalent net interest margin was 2.76% for the year ended December 31, 2024 compared with 2.85% for the prior year. The decrease in net interest income was primarily due to increases of $14.1 million in interest expense on deposits and $0.8 million in interest expense on borrowed funds, and a decrease of $1.3 million in interest and dividend income on taxable securities, offset by increases of $14.9 million in interest income on loans including fees, and $0.9 million in interest income on interest-earning deposits.

The increase in interest expense on deposits was due primarily to a 68 basis points increase in the average rate paid on interest-bearing deposits, which included brokered deposits, and deposit campaigns primarily related to time deposits. The increase in interest expense on borrowed funds was due primarily to a $16.2 million increase in average balances of borrowed funds, compared to the prior year, partially offset by a 14 basis points decrease in the average interest paid on total borrowings, compared to the prior year. Average balances of borrowed funds in the current year consisted of FHLBNY overnight and term advances and a Federal Reserve Bank Term Funding Program Advance (BTFP), while borrowed funds in the prior year consisted primarily of FHLBNY overnight advances. The decrease in interest and dividend income on taxable securities was primarily due to a decrease of $58.0 million in average balances of taxable securities, primarily due to paydowns on mortgage-backed and SBA pooled loan securities. The average yield on taxable securities was comparable between 2023 and 2024.

The increase in interest income on loans, including fees was due primarily to an increase of $117.5 million in average total loan balances and an increase of 44 basis points increase in the average yield on loans. The increase in average balances was concentrated in the commercial loan portfolio, which increased $136.8 million compared to the prior year. Average balances of consumer loans and residential mortgage loans decreased $11.0 million and $8.3 million respectively, compared to the prior year. The average yield on commercial loans increased 37 basis points, while the average yields on consumer loans and residential mortgage loans increased 69 and 30 basis points respectively, compared to the prior year. The increase in interest income on interest-earning deposits was mainly due to an increase of $18.8 million in average balances of interest-earning deposits, due to an increase in deposits at the FRBNY.

Average interest-earning assets increased $76.9 million while average interest-bearing liabilities increased $108.1 million during 2024, compared to the prior year. The average yield on interest-earning assets increased 41 basis points to 4.74%, while the average cost of interest-bearing liabilities increased 67 basis points to 2.87% during 2024, compared to the prior year, both primarily due to the lagging effects of interest rate increases during 2022 and 2023.

40

Average Consolidated Balance Sheet and Interest Analysis

The following table presents certain information related to the Corporation’s average Consolidated Balance Sheets and its Consolidated Statements of Income for the years ended December 31, 2024, and 2023. It also reflects the average yield on interest-earning assets and average cost of interest-bearing liabilities for the years ended December 31, 2024, and 2023. For the purpose of the table below, nonaccrual loans are included in the daily average loan amounts outstanding. Daily balances were used for average balance computations. Investment securities are stated at amortized cost. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans, and dividends on equity investments.

(1) 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.

41

Changes Due to Rate and Volume

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

Provision for credit losses

Management's methodology for establishing and maintaining an allowance for credit losses conforms with ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which was adopted by the Corporation effective January 1, 2023. Based on a combination of quantitative and qualitative analysis, changes to the allowance are recorded through income as a provision (credit). The quantitative portion of the analysis is significantly influenced by changes in projected economic conditions and the composition of the numerous portfolio segments, while qualitative adjustments reflect the degree to which management anticipates actual credit risk may differ from the results projected by the quantitative analysis.

The provision for credit losses decreased $3.3 million, from a provision of $3.3 million for the year ended December 31, 2023 to a credit of $46 thousand for the year ended December 31, 2024. The decrease was largely due to the annual review and update of the loss drivers used in the Bank's CECL model. Updated loss drivers were applied to the CECL model in the first quarter of 2024, resulting in a credit (provision recapture) of $2.0 million for the three months ended March 31, 2024. Additionally, provisioning during 2023 included a $0.9 million specific allocation on a nonaccrual commercial real estate relationship, and higher growth-related provisioning compared to 2024. Partially offsetting these decreases were a decline in modeled prepayment speeds, which results in higher estimated credit losses, and an increase of $0.2 million in net charge-offs for the year ended December 31, 2024 compared to the year ended December 31, 2023.

42

Non-interest income

The following table presents non-interest income for the years ended December 31, 2024 and 2023, and the dollar and percent change (in thousands, except percentages):

Non-interest income for the year ended December 31, 2024 was $23.2 million compared with $24.5 million for the prior year, a decrease of $1.3 million, or 5.4%. The decrease was due primarily to decreases of $2.5 million in other non-interest income and $0.2 million in interchange revenue from debit card transactions, offset by an increase of $1.1 million in wealth management group fee income.

Other non-interest income

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

Interchange Revenue from Debit Card Transactions

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

Wealth Management Group Fee Income

The increase in wealth management group fee income was primarily due to improved equity market conditions during 2024.

43

Non-interest expenses

The following table presents non-interest expenses for the years ended December 31, 2024 and 2023, and the dollar and percent change (in thousands, except percentages):

Non-interest expense increased $3.0 million, or 4.7%, in 2024. The increase was due primarily to increases of $2.1 million in total compensation expenses and $0.9 million in total non-compensation expenses.

Compensation expenses

Compensation expenses increased $2.1 million, or 6.3%, when compared to the prior year, primarily due to increases of $1.6 million in salaries and wages and $0.7 million in pension and other employee benefits, offset by a decrease of $0.2 million in other components of net periodic pension benefits.

The increase in salaries and wages was primarily attributable to additional staffing in the Bank's new Western New York market, merit-based wage increases, and promotions, which was partially offset by savings from the outsourcing of certain back office functions during 2024. The increase in pension and other employee benefits was largely due to an increase in employee healthcare-related expenses, compared to the prior year. The decrease in other components of net periodic pension benefits was primarily due to a change in annual actuarial estimates.

Non-compensation expenses

Non-compensation expenses increased $0.9 million, or 2.9%, primarily due to increases of $0.3 million in marketing and advertising, $0.3 million in data processing expense, and $0.2 million in net occupancy expense.

The increase in marketing and advertising expense was primarily attributable to expenditures related to the Bank's 190th anniversary checking account promotion and ongoing certificate of deposit campaigns, the launch of the Bank's new Western New York "Canal Bank" brand, and a general increase in advertising efforts during the current year. The increase in data processing expense was primarily due to the addition of new contracts, an increase in debit card procurement expenses, and an increase in cybersecurity software expense. The increase in net occupancy expense was primarily due to an increase in building maintenance expenses including cleaning, lawn care, utilities, and property insurance.

44

Income tax expense

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

The effective tax rate increased to 21.3% for the year ended December 31, 2024 compared with 20.6% for the prior year. The decrease in income tax expense can be primarily attributed to a decrease in pre-tax income.

Financial Condition

The following table presents selected financial information as of December 31, 2024 and 2023, and the dollar and percent change (in thousands):

Cash and cash equivalents

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

Investment securities

The decrease in investment securities was primarily due to a decrease of $52.6 million in securities available for sale, compared to the prior year. Net paydowns and maturities of securities available for sale for the current year totaled $49.6 million, mainly due to paydowns on mortgage-backed securities and SBA pooled loan securities, and partially offset by purchases of $5.0 million. The market value of securities available for sale decreased $0.7 million, due to unfavorable changes in market interest rates during the current year. Partially offsetting the decrease in total investment securities was an increase of $3.6 million in FHLB and FRB stock, at cost, mainly due to an increase in FHLBNY overnight advances as of December 31, 2024, compared to the prior year end.

45

Loans, net

Loans, net of deferred origination fees and costs increased primarily due to growth concentrated in the commercial loan portfolio, which increased $129.2 million, or 9.3%, compared to the prior year end. Growth in commercial loans during the current year consisted of $35.1 million in commercial and industrial balances and $94.1 million in commercial real estate balances. Consumer loans decreased $27.4 million, or 8.9%, compared to the prior year end, largely due to lower indirect auto loan origination activity during the current year, and a relatively fast turnover rate in the portfolio. Residential mortgages decreased $3.0 million, or 1.1%, compared to the prior year end, as the Corporation continued to elect to sell a portion of originations into the secondary market and demand remained weakened in the current elevated interest rate environment.

Allowance for credit losses

The allowance for credit losses on loans decreased $1.1 million, or 5.0%, from $22.5 million as of December 31, 2023 to $21.4 million as of December 31, 2024. The decrease was mainly due to the annual review and update of loss drivers used in the Bank's CECL model. The results of the annual update were applied in the first quarter of 2024 and resulted in a decline in the baseline loss rates used for modeling. Partially offsetting these declines were a decline in modeled prepayment speeds during 2024 and loan growth, concentrated in the commercial portfolio, during 2024.

Goodwill and other intangible assets, net

There were no impairments of goodwill or other intangible assets during the years ended December 31, 2024 and 2023.

Other Assets

The increase in other assets can be mostly attributed to increases in prepaid expenses and interest receivable on interest rate swaps.

Deposits

Total deposits decreased by $32.5 million or 1.3%, compared to the prior year end, primarily due to decreases of $50.6 million in brokered deposits, $28.6 million in money market deposits, and $27.4 million in non interest-bearing demand deposits. These decreases were partially offset by increases of $62.3 million in customer time deposits and $15.4 million in interest-bearing demand deposits. Additionally, savings deposits decreased $3.6 million. Non interest-bearing deposits comprised 26.1% and 26.9% of total deposits as of December 31, 2024 and December 31, 2023, respectively.

Finance Lease Obligations and FHLBNY Advances

The increase in finance lease obligations and FHLBNY advances can be mostly attributed to an increase of $77.2 million in FHLBNY overnight advances and an increase of $0.7 million in finance lease obligations.

Other Liabilities

The increase in other liabilities can be mostly attributed to an increase in interest payable on deposits of $0.6 million.

Shareholders’ equity

The increase in shareholders' equity was due primarily to an increase of $17.8 million in retained earnings and a decrease of $0.9 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $23.7 million, offset by $5.9 million in dividends declared for the year ended December 31, 2024. The improvement in accumulated other comprehensive loss was primarily due to revised actuarial assumptions related to the Corporation's pension plans, offset by the unfavorable impact of interest rates on available for sale securities during the current year. Treasury stock decreased $0.3 million primarily due to the impact of the issuance of shares related to the Corporation's employee benefit plans.

Assets under management or administration

The market value of total assets under management or administration in WMG was $2.212 billion, including $301.9 million of assets held under management or administration for the Corporation, as of December 31, 2024 compared to $2.242 billion, including $381.3 million of assets held under management or administration for the Corporation as of December 31, 2023, a decrease of $30.4 million, or 1.4%. Excluding assets under management or administration for the Corporation, total Wealth Management Group assets increased $49.0 million, or 2.6%, primarily due to market improvements during the year.

46

Balance Sheet Comparisons

The table below contains selected year-end and average balance sheet information at and for the years ended December 31, 2024 and 2023 (in millions):

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

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

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

(4)    Borrowings include overnight advances, term advances, and finance lease obligations.

Cash and Cash Equivalents

Total cash and cash equivalents increased $10.2 million compared to December 31, 2023, due to increases of $6.2 million in interest-earning deposits at other financial institutions, and $4.0 million in cash and due from financial institutions.

Securities

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

The available for sale segment of the securities portfolio totaled $531.4 million as of December 31, 2024, a decrease of $52.6 million, or 9.0%, from $584.0 million as of December 31, 2023. The decrease was primarily due to net paydowns and maturities of $49.6 million, mainly due to paydowns on mortgage-backed securities and SBA pooled loan securities. The market value of securities available for sale decreased $0.7 million, due to unfavorable changes in market interest rates during the current year. Partially offsetting the decrease in total investment securities was an increase of $3.6 million in FHLB and FRB stock, at cost, primarily due to an increase in FHLBNY overnight advances as of December 31, 2024, compared to the prior year. The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas. These securities totaled $0.8 million as of December 31, 2024, and December 31, 2023. Non-marketable equity securities as of December 31, 2024 include shares of FRBNY stock and FHLBNY stock, carried at their cost of $1.9 million and $7.2 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 yield on the Corporation's investment portfolio, inclusive of interest-earnings deposits, as of December 31, 2024 and 2023 was 2.28% and 2.21% respectively, while the duration for the securities portfolio as of December 31, 2024 and 2023 was 4.0 years and 4.6 years, respectively.

47

The table below presents the composition of the Corporation's available for sale portfolio as of December 31, 2024 and 2023 (in thousands, except percentages):

The table below sets forth the carrying amounts and maturities of held to maturity debt securities as of December 31, 2024 and the weighted average yields of such securities (all yields are calculated on the basis of the amortized cost and weighted for the scheduled maturity of each security (in thousands, except percentages):

The weighted-average yield on the Corporation's held to maturity debt securities as of December 31, 2024 was 4.83%, related to obligations of states and political subdivisions. Management evaluates securities for credit loss exposure on a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For the years ended December 31, 2024 and 2023, the Corporation had no provisions for credit losses relating to its investment securities.

Loans

The table below presents the Corporation’s loan composition by type and percentage of total loans for the years ended December 31, 2024 and December 31, 2023 (dollars in thousands):

48

Portfolio loans totaled $2.071 billion as of December 31, 2024 and $1.973 billion as of December 31, 2023, an increase of $98.8 million, or 5.0%. The increase was driven by increases of $94.1 million in commercial real estate loans, or 8.4%, and $35.1 million, or 13.3%, in commercial and industrial loans, partially offset by decreases of $32.3 million in indirect consumer loans, or 15.4%, and $3.0 million, or 1.1%, in residential mortgages.

Commercial real estate lending continues to be a primary driver of asset growth for the Corporation, with persistent demand across the Corporation's footprint, particularly in the Capital and Western New York regions. The increase in total commercial real estate loans was the result of a $138.0 million increase in commercial mortgages, other, primarily driven by increases in non-owner occupied and multifamily properties, partially offset by a $43.9 million decrease in construction loans, which reflect the conversion of a number of projects to permanent financing. Commercial real estate growth in the Capital Bank division between December 31, 2023 and December 31, 2024 totaled $65.9 million, while growth in the Canal Bank division totaled $28.8 million, Commercial real estate balances in the legacy Chemung Canal Trust Company market decreased by $0.6 million. Growth in commercial and industrial balances was also primarily concentrated in the Capital and Western New York regions.

The decrease in indirect consumer loans was primarily due to turnover in the Corporation's auto lending portfolio during the year, as runoff of existing loans exceeded originations. The decrease in residential mortgage loans was primarily due to an increase in residential mortgage originated and sold into the secondary market. Residential mortgage originations held for investment on the balance sheet totaled $25.1 million and $20.8 million, respectively, for the years ended December 31, 2024 and 2023, an increase of $4.2 million, while mortgage loans originated and sold into the secondary market totaled $11.5 million and $6.4 million, respectively, for the years ended December 31, 2024 and 2023, an increase of $5.1 million. Additionally, residential mortgage origination activity remained weaker in 2024 due to the elevated interest rate environment and lower market mobility in the current environment.

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

Commercial real estate lending represented the largest portion of the Corporation's loan portfolio as of December 31, 2024 and 2023. Commercial real estate lending is comprised of the Construction and Commercial mortgage, other segments of the loan portfolio, as presented in Note 4 to the Corporation's Consolidated Financial Statements. As of December 31, 2024 and 2023, total commercial real estate loans totaled $1.217 billion and $1.123 billion, respectively. As the largest component of the Corporation's loan portfolio, quantitative and qualitative attributes of commercial real estate such as maturity and repricing schedules may have a significant impact on management's strategic initiatives, and understanding such attributes is critical in understanding the Corporation's anticipated future liquidity needs and sensitivity to changes in interest rates.

The following table presents commercial real estate loans by maturity and repricing date as of December 31, 2024 (dollars in thousands):

(1) Includes fixed rate loans

49

Management evaluates the risk inherent in its portfolio of commercial real estate loans using a variety of metrics, including but not limited to type, geography, collateral, and borrower or sponsor industry. The Corporation also monitors its level of non-owner occupied commercial real estate loans in relation to regulatory capital, as defined by the Bank's regulators. As of December 31, 2024 and 2023, total non-owner occupied commercial real estate loans divided by total Bank risk-based capital was 399.4% and 403.6%, respectively.

The table below presents the amortized basis of commercial real estate loans by type and percentage as of December 31, 2024 and 2023 (dollars in thousands):

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

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

The table below presents the amortized basis of commercial real estate loans by regional location of collateral and percentage as of December 31, 2024 and 2023 (dollars in thousands):

50

The Corporation closely monitors economic and credit trends for the industries in which its commercial real estate borrowers are involved. Property types are designated based on the purpose of the collateral securing commercial real estate loans. The table below presents the amortized basis of commercial real estate loans by borrower industry and percentage as of December 31, 2024 and 2023 (dollars in thousands):

Loan concentrations are considered to exist when there are amounts loaned to a multiple number of borrowers engaged in similar activities, which may cause them to be similarly impacted by changes in economic or other conditions. Industries are identified using NAICS codes, and the Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. As of December 31, 2024 and 2023, commercial loans to borrowers involved in the real estate, and real estate rental and leasing businesses, were 50.9% and 49.5% 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, 2024 and 2023.

The table below shows the maturity of loans outstanding as of December 31, 2024. Also provided are the amounts due after one year, classified according to fixed interest rates and variable interest rates (in thousands):

51

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

Non-Performing Loans and Non-Performing Assets

Non-performing assets consist of non-performing loans, other real estate owned that has been acquired in partial or full satisfaction of loan obligations or upon foreclosure, and vehicles that have been repossessed. Non-performing loans is comprised of nonaccrual loans. Past due status on all loans is based on the contractual terms of the loan. It is generally the Corporation's policy that a loan 90 days past due be placed on nonaccrual status unless factors exist that would eliminate the need to classify a loan as such. A loan may also be designated as nonaccrual 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 into nonaccrual status, the accrual of interest is discontinued and previously accrued interest is reversed. Payments received on nonaccrual loans are generally applied to principal using the cost recovery method. Loans are considered for return to accrual status when they become current as to principal and interest and remain current for a period of six consecutive months or when, in the opinion of management, the Corporation expects to receive all of its original principal and interest. In the case of nonaccrual loans where a portion of the loan has been charged off, the remaining balance is kept in nonaccrual status until the entire principal balance has been recovered.

52

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

NON-PERFORMING ASSETS

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

Non-performing loans totaled $9.0 million as of December 31, 2024, or 0.43% of total loans, compared with $10.4 million as of December 31, 2023, or 0.53% of total loans. The decrease in non-performing loans as of December 31, 2024 compared to December 31, 2023 was primarily due to the payoff of two larger nonaccrual commercial real estate loans during 2024, comprised of a $2.2 million construction loan and a $1.9 million non-owner occupied loan. There was $3.9 million in commercial loan balances added to non-performing loans during 2024, and $1.2 million in paydowns of existing non-performing commercial loans during 2024. Non-performing assets, which are comprised of non-performing loans, other real estate owned, and repossessed vehicles, was $9.6 million, or 0.35% of total assets, as of December 31, 2024, compared with $10.7 million, or 0.40% of total assets, as of December 31, 2023. The amortized basis of accruing loans past due 90 days or more was less than $0.1 million as of December 31, 2024 and December 31, 2023, respectively.

Loan Modifications to Borrowers Experiencing Financial Difficulty

The Corporation works closely with borrowers experiencing financial difficulties to identify viable solutions that minimize the potential for loss. The Corporation monitors modifications made to borrowers experiencing financial difficulty in which contractual cash flows are directly impacted. Modifications included under this guidance include principal reductions, reductions in effective interest rates, term extensions, significant payment delays, or a combination thereof. ASU 2022-02 was implemented on January 1, 2023 on a prospective basis. As of December 31, 2024, the Corporation had nine total loans modified under this accounting guidance, totaling $2.1 million, including four loans which were modified during the current year, compared with five loans as of December 31, 2023, totaling $3.3 million, all of which were modified during the year of initial adoption. The loans modified during the current year included two term extensions on commercial and industrial loans, one payment delay on a commercial real estate loan, and one payment delay on a residential mortgage. During the year ended December 31, 2024 one commercial and industrial loan given a payment extension of six months during 2023 experienced a payment default, while the remaining modified loans were performing under their modified terms. During the year ended December 31, 2024, two commercial mortgages previously modified under ASU 2022-02 were paid off, with a combined amortized basis at payoff of $2.2 million.

Allowance for Credit Losses

The allowance for credit losses is an amount that management believes will be adequate to absorb the estimated lifetime credit losses inherent in assets exhibiting credit risk as of the measurement date. The allowance is in conformity with the requirements established by ASC 326-Financial Instruments-Credit Losses, which was adopted effective January 1, 2023. The allowance for credit losses covers a broad range of assets including loans, unfunded commitments, and debt securities, incorporating both quantitative and qualitative components. As of December 31, 2024 and December 31, 2023, the Corporation did not allocate any allowance for credit losses to its portfolios of available for sale or held to maturity debt securities, due to either the explicit or implicit U.S. Government guarantee as to principal and interest payments on the majority of the portfolio, and the immateriality of credit risk on remaining unguaranteed securities.

53

Loans are analyzed for credit loss on either an individual basis or a pooled (collective) basis, determined by risk characteristics. The Corporation begins analyzing loans on an individual basis when management determines a loan no longer exhibited risk characteristics consistent with the risk characteristics in its designated pool under the Corporation's CECL methodology. The amortized cost basis of individually analyzed loans as of December 31, 2024 totaled $6.5 million, compared to $8.0 million as of December 31, 2023. Remaining loans are analyzed on a pooled basis and are segmented based on groups of assigned FFIEC Call Report codes. Management seeks to disaggregate its loan portfolio in a granular enough manner to capture the risk profile of each loan, yet broad enough to accurately allow for the application of certain pool-level assumptions.

A majority of the Corporation's individually analyzed loans are secured and measured for credit loss based on collateral evaluations, using the collateral-dependent practical expedient prescribed by ASC 326.  It is the Corporation's policy to obtain updated appraisals, by independent third parties, on loans secured by real estate at the time a loan is determined to require individual analysis. A measurement is performed based upon the most recent appraisal on file to determine the amount of any specific allocation to the allowance for credit losses or charge-off. In determining the amount of any specific allocation or charge-off, the Corporation makes adjustments to reflect the estimated costs to sell the property. Upon receipt and review of updated appraisals, an additional measurement is performed to determine if any adjustments are necessary to reflect proper provisioning or charge-offs. Individually analyzed loans are reviewed on a quarterly basis to determine if any changes in credit quality or market conditions would require additional allocations to the allowance for credit losses or recognition of additional charge-offs. Real estate values in each of the Corporation's market areas have remained stable. Non-real estate collateral may be valued using (i) an appraisal, (ii) net book value of the collateral per the borrower’s financial statements, or (iii) accounts receivable aging reports, that may be adjusted based on management’s knowledge of the client and client’s business. If market conditions warrant, future appraisals are obtained for both real estate and non-real estate collateral. Certain individually analyzed loans determined not to be collateral-dependent are analyzed using a cash flow analysis.

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

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

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

54

The allowance for credit losses was $21.4 million as of December 31, 2024, compared to $22.5 million as of December 31, 2023. The allowance for credit losses was 238.87% of non-performing loans as of December 31, 2024, compared to 216.28% as of December 31, 2023. The ratio of allowance for credit losses on loans to total loans was 1.03% as of December 31, 2024, compared to 1.14% as of December 31, 2023, respectively. Including the allowance for credit losses allocated to unfunded commitments, the ratio of the allowance for credit losses to total loans was 1.07% as of December 31, 2024, compared to 1.19% as of December 31, 2023. The allowance for credit losses on unfunded commitments is included in the line item accrued interest payable and other liabilities in the Consolidated Balance Sheets. The decrease in the allowance for credit losses during the current year was primarily due to the annual review and update of loss drivers used in the CECL model. Recalibration of loss drivers are applied in the first quarter of each year, and for 2024 resulted in a decline in baseline loss rates used in the model. The loss drivers used in each of the Corporation's pools of loans, either U.S. civilian unemployment or U.S. GDP growth, did not change as a result of these updates. Modeled economic conditions were relatively consistent between December 31, 2023 and December 31, 2024.

Net charge-offs for the year ended December 31, 2024 were $1.2 million compared with net charge-offs of $0.9 million for the year ended December 31, 2023. The ratio of net charge-offs to average loans outstanding was 0.06% for 2024 and 0.05% for 2023. Net charge-offs for the year ended December 31, 2024 were primarily due to $0.2 million in net charge-offs on commercial and industrial loans, comprised of $0.3 million in charge-offs on two loans in the fourth quarter of 2024 and $0.1 million in recoveries of previously charged-off loans throughout the year, and $1.0 million in net charge-offs of consumer loans, primarily relating to the indirect auto lending portfolio. Similarly, net charge-offs for the year ended December 31, 2023 were primarily due to the $0.3 million charge-off of a commercial and industrial loan and consumer charge-offs related to the indirect auto lending portfolio.

55

The table below summarizes the Corporation’s allowance for credit losses, nonaccrual loans, and ratio of net charge-offs and recoveries to average loans outstanding by loan category at or for the years ended December 31, 2024 and 2023 (in thousands):

The increase in the allowance to nonaccrual loans was primarily due to a 14.0% decrease in nonaccrual loans between December 31, 2023 and December 31, 2024, or $1.5 million, which was only partially offset by a 5.0% decrease in the allowance for credit losses, or $1.1 million. The majority of loan balances removed from nonaccrual loan balances during 2024 either due to payoff or return to accrual status did not have an associated specific allocation in the allowance for credit losses, primarily due to being well collateralized by real estate. Similarly, a majority of loan balances added to nonaccrual status during 2024 did not have an associated specific allocation in the allowance for credit losses as of December 31, 2024, due to being well collateralized by real estate. Of the loans added to nonaccrual during 2024 only one loan, a $1.0 million commercial real estate loan secured by 1-4 family residential properties, had a specifc allocation in the allowance for credit losses as of December 31, 2024, which was $0.1 million.

56

The table below summarizes the Corporation's credit loss experience for the years ended December 31, 2024 and 2023 (in thousands, except ratio data):

(1) Additional provision related to off-balance sheet exposure was a credit of $77 thousand for the year ended December 31, 2024 and a credit of $163 thousand for the year ended December 31, 2023.

Other Real Estate Owned and Repossessed Vehicles

As of December 31, 2024, OREO totaled $0.4 million compared to $0.3 million as of December 31, 2023. There were four properties relating to residential mortgages and four properties relating to residential home equity loans added to OREO in 2024. Three properties relating to residential mortgages and three properties relating to home equity loans were sold from OREO during 2024, resulting in a net loss on sale of OREO of $18 thousand for the year ended December 31, 2024. The Corporation had $0.2 million in repossessed vehicles as of December 31, 2024, which is included in other assets on the Consolidated Balance Sheet, and is a component of non-performing assets.

57

Deposits

The table below summarizes the Corporation’s deposit composition by segment as of December 31, 2024, and 2023, and the dollar and percent change from December 31, 2023 to December 31, 2024 (in thousands, except percentages):

Deposits totaled $2.397 billion as of December 31, 2024, compared with $2.429 billion as of December 31, 2023, a decrease of $32.5 million, or 1.3%. As of December 31, 2024, demand deposit and insured money market deposits comprised 63.7% of total deposits compared with 64.5% as of December 31, 2023.

The decrease in deposits was attributable to decreases of $50.6 million in brokered deposits, $28.6 million in insured money market deposits, $27.4 million in non interest-bearing demand deposits, and $3.6 million in savings deposits. These decreases were partially offset by increases of $62.3 million in customer time deposits and $15.4 million in interest-bearing demand deposits, primarily due the higher interest rate environment and a a shift in the mix of deposits towards higher cost interest-bearing accounts such as time deposits, when compared to the prior year. Excluding brokered deposits, total deposits increased $18.1 million compared to December 31, 2023.

The table below summarizes the Corporation’s deposit composition by customer as of December 31, 2024, and 2023 (in thousands, except percentages):

As of December 31, 2024, public funds deposits totaled $266.3 million, compared with $293.1 million as of December 31, 2023. The Corporation has developed a program for the retention and management of public funds deposits. These deposits are from public entities, such as school districts and municipalities. There is a seasonal component to public deposit levels associated with annual tax collections. Public funds deposits generally increase at the end of the first and third quarters. Public funds deposit accounts above the FDIC insured limit are collateralized by municipal bonds and eligible government and government agency securities such as those issued by the FHLB, Fannie Mae, and Freddie Mac.

58

The table below summarizes the Corporation’s public funds deposit composition by segment (in thousands, except percentages) as of December 31, 2024 and 2023:

The aggregate amount of the Corporation's outstanding uninsured deposits was $652.3 million, or 27.2% of total deposits, and $655.7 million, or 27.0% of total deposits, as of December 31, 2024 and 2023, respectively. As of December 31, 2024, the aggregate amount of the Corporation's outstanding certificates of deposit in amounts greater than $250,000 was $101.1 million. The table below presents the Corporation's scheduled maturity of those certificates as of December 31, 2024 (in thousands):

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

In addition to consumer, commercial and public deposits, other sources of funds include brokered deposits. The Regulatory Relief Act changed the definition of brokered deposits, such that subject to certain conditions, reciprocal deposits of another depository institution obtained through a deposit placement network for purposes of obtaining maximum deposit insurance would not be considered brokered deposits subject to the FDIC's brokered-deposit regulations. This applies to the Corporation's participation in the CDARS and ICS programs. The CDARS and ICS programs involve a network of financial institutions that exchange funds among members in order to ensure FDIC insurance coverage on customer deposits above the single institution limit. The CDARS and ICS reciprocal program uses a sophisticated matching system, where funds are exchanged on a dollar-for-dollar basis, so that the equivalent of an original deposit comes back to the originating institution. Additionally, the CDARS and ICS One-Way Buy Program allows the Corporation to obtain wholesale brokered deposits through the system. Deposits placed in the CDARS and ICS programs were $507.8 million and $424.6 million as of December 31, 2024 and 2023, respectively. Brokered deposits, which include funds obtained through brokers or the CDARS and ICS one-way buy programs, were $92.2 million and $142.8 million as of December 31, 2024 and 2023.

59

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

Information regarding deposits is included in Note 8 to the audited Consolidated Financial Statements appearing elsewhere in this report.

Borrowings

FHLBNY overnight advances were $109.1 million and $31.9 million as of December 31, 2024 and 2023, respectively, an increase of $77.2 million as of December 31, 2024, compared to December 31, 2023. For each year ended December 31, 2024, and 2023 respectively, the average outstanding balance of borrowings that mature in one year or less did not exceed 30% of shareholders' equity. There were no FHLBNY or FRB term advances as of December 31, 2024, and 2023.

Information regarding FHLBNY advances is included in Note 9 of the audited Consolidated Financial Statements appearing elsewhere in this report. There were no securities sold under agreements to repurchase as of and for the years ended December 31, 2024, or 2023.

Derivatives

The Corporation offers interest rate swap agreements to qualified commercial lending customers, which allow customers to effectively fix the interest rate on variable rate loans by entering into a separate agreement. Simultaneous with the execution of such an agreement with a customer, the Corporation enters into a mirroring agreement with an unrelated counterparty, a Domestic Systemically Important Bank (D-SIB), which allows the Corporation to continue receiving the variable rate under its loan agreement with the customer. Agreements with the unrelated counterparty are not designated as hedge contracts. Additionally, the agreements, as free-standing derivatives, are recorded at fair value in the Corporation's Consolidated Balance Sheets, which typically involves a day one gain. Since the terms of mirroring interest rate swap agreements are identical, the income statement impact to the Corporation is limited to the day one gain and a valuation allowance for potential credit loss exposure, in the event of nonperformance. The Corporation recognized $0.3 million in swap income for each of the years ended December 31, 2024 and 2023, respectively.

The Corporation also participates in the credit exposure of certain interest rate swaps of lead banks in which it is a participant in the related commercial loan. The Corporation receives an upfront fee for participating in the credit exposure of these interest rate swaps and immediately recognizes the fee as other non-interest income. 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 counterparty to the lead bank's interest rate swap. The Corporation determines the fair value of the credit loss exposure using historical loss experience for the loan category associated with the exposure.

Information regarding derivatives is included in Note 11 to the audited Consolidated Financial Statements appearing elsewhere in this report.

Shareholders’ Equity

Total shareholders’ equity was $215.3 million as of December 31, 2024, compared with $195.2 million as of December 31, 2023, an increase of $20.1 million, or 10.3%. The increase in shareholders' equity was due primarily to an increase of $17.8 million in retained earnings and a decrease of $0.9 million in accumulated other comprehensive loss. The increase in retained earnings was due primarily to net income of $23.7 million, offset by $5.9 million in dividends declared during the year ended December 31, 2024. The decrease in accumulated other comprehensive loss was primarily due to revised actuarial assumptions related to the Corporation's pension plans, offset by the unfavorable impact of interest rates on available for sale securities during the current year.

60

Treasury stock decreased $0.3 million primarily due to the Corporation's issuance of shares related to the Corporation's employee benefit plans. Total shareholders’ equity to total assets ratio was 7.76% as of December 31, 2024 compared with 7.20% as of December 31, 2023. Tangible equity to tangible assets ratio was 7.02% as of December 31, 2024, compared with 6.45% as of December 31, 2023. See the GAAP to Non-GAAP reconciliation on pages 65-68.

The Bank is subject to the capital adequacy guidelines of the Federal Reserve, which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. As of December 31, 2024, 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 as of December 31, 2024 and 2023, is included in Footnote 19 of the audited Consolidated Financial Statements. For more information regarding current capital regulations see Part I-“Business-Supervision and Regulation-Regulatory Capital Requirements.”

Cash dividends declared during 2024 and 2023 each totaled $5.9 million, or $1.24 per share. Dividends declared during 2024 amounted to 24.91% of net income compared to 23.41% of net income for 2023. Management seeks to continue generating sufficient capital internally, while continuing to pay dividends to the Corporation’s shareholders.

When shares of the Corporation become available in the market, the Corporation may purchase them after careful consideration of the Corporation’s liquidity and capital positions. Purchases may be made from time to time on the open market or in privately negotiated transactions at the discretion of management. On January 8, 2021, the Corporation announced that the Board of Directors approved a stock repurchase program. Under the repurchase program, the Corporation may repurchase up to 250,000 shares of its common stock, or approximately 5% of its then outstanding shares. The repurchase program permits shares to be repurchased in open market or privately negotiated transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. As of December 31, 2024, the Corporation repurchased a total of 49,184 shares of common stock at a total cost of $2.0 million under the repurchase program at the weighted average cost of $40.42 per share. The remaining buyback authority under the share repurchase program was 200,816 shares as of December 31, 2024.

On June 22, 2023, the Corporation filed with the SEC a Form S-3 Registration Statement under the Securities Act of 1933. The Corporation's Board of Directors approved the filing with the SEC of a Shelf Registration Statement to register for sale from time to time up to $75 million of the following securities: (i) shares of common stock; (ii) unsecured debt securities, which may consist of notes, debentures or other evidences of indebtedness; (iii) warrants; (iv) purchase contracts; (v) units consisting of any combination of the foregoing; and (vi) subscription rights to purchase shares of common stock or debt securities. The SEC declared the registration statement effective on July 13, 2023.

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of deposit clients, borrowers, and the operating, investing, and financing activities of the Corporation. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $250,000 or more, brokered deposits, FHLBNY overnight and term advances, FRB advances, and securities sold under agreements to repurchase. Borrowings may be used on a short-term basis for liquidity purposes or on a long-term basis to fund asset growth.

Uninsured deposits totaled $652.3 million as of December 31, 2024, or 27.2% of total deposits, including $145.6 million of municipal deposits collateralized by pledged assets, when required. As of December 31, 2023, uninsured deposits totaled $655.7 million, or 27.0% of total deposits, including $153.2 million of municipal deposits collateralized by pledged assets when required. The Corporation considers the level of uninsured deposits to be an important factor when considering liquidity management and strategic decisions due to their fluidity.

As of December 31, 2024, the Corporation's cash and cash equivalents balance was $47.0 million. The Corporation also maintains an investment portfolio of securities available for sale, comprised primarily of mortgage-backed securities, U.S. Government Treasury securities, Small Business Administration loan pools, and municipal bonds. Although this portfolio generates interest income for the Corporation, it also serves as an available source of liquidity and capital if the need should arise. As of December 31, 2024, the Corporation's investment in securities available for sale was $531.4 million, $349.9 million of which was not pledged as collateral.

61

The Corporation is a member of the FHLBNY, which allows it to access borrowings to enhance management's ability to satisfy future liquidity needs. The Bank has pledged $244.6 million and $254.6 million of residential mortgage loans and home equity loans under a blanket lien arrangement as collateral for future borrowings, as of December 31, 2024 and 2023, respectively. Borrowings may be used on a short-term basis for liquidity or on a long-term basis to fund asset growth.

The below table summarizes the Corporation's total sources of liquidity as of December 31, 2024 and 2023 (in millions):

(1) Total available based on the Corporation's internal limit.

Consolidated Cash Flows Analysis

The table below summarizes the Corporation's cash flows on a direct basis, for the years indicated (in thousands):

Operating activities

The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through borrowings are sufficient to fund the Corporation’s operating liquidity needs. Cash provided by operating activities in the years ended December 31, 2024 and 2023 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

Cash used in investing activities during the years ended December 31, 2024 and 2023 predominantly resulted from a net increase in loans, offset by maturities, and principal collected on securities available for sale.

Financing activities

Cash provided by financing activities during the years ended December 31, 2024 and 2023 resulted primarily from an increase in certificate of deposits, brokered deposits, and FHLBNY overnight advances, offset by the payment of dividends to shareholders.

Off-balance Sheet Arrangements

In the normal course of operations, the Corporation engages in a variety of financial transactions that, in accordance with GAAP are not recorded in the financial statements. The Corporation is also a party to certain financial instruments with off balance sheet risk such as commitments under standby letters of credit, unused portions of lines of credit, commitments to fund new loans, interest rate swaps, and risk participation agreements. The Corporation's policy is to record such instruments when funded. These transactions involve, to varying degrees, elements of credit, interest rate, and liquidity risk. Such transactions are generally used by the Corporation to manage clients' requests for funding and other client needs.

62

The table below shows the Corporation’s off-balance sheet arrangements as of December 31, 2024 (in thousands):

Capital Resources

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

Pursuant to the Regulatory Relief Act, the FRB finalized a rule that established a community bank leverage ratio (tier 1 capital to average consolidated assets) at 9% for institutions under $10 billion in assets that such institutions may elect to utilize in lieu of the general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank leverage ratio and certain other qualifying criteria will automatically be deemed to be well-capitalized. As of December 31, 2024 the Bank has not elected to use the community bank leverage ratio.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, under capitalized, significantly under capitalized, and critically under capitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required. Management believes that, as of December 31, 2024 and December 31, 2023 the Corporation and Bank met all capital adequacy requirements to which they were subject. As of December 31, 2024, the Corporation is not 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, 2024, the most recent notification from the Federal Reserve Bank of New York categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized the Bank must maintain minimum total risk-based, Tier 1 risk-based, common equity Tier 1 risk-based and Tier 1 leverage ratios. There have been no conditions or events since that notification that management believes have changed the Bank's capital category. Additionally, the Bank exceeded the capital conservation buffer above the adequately capitalized risk-based capital ratios, as of December 31, 2024.

The regulatory capital ratios as of December 31, 2024 and 2023 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies. Refer to Note 19 of the audited Consolidated Financial Statements appearing elsewhere in this report for a table summarizing the Corporation's and the Bank's actual and required regulatory capital ratios. For more information regarding current capital regulations see Part I-“Business-Supervision and Regulation-Regulatory Capital Requirements.”

63

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. As of December 31, 2024, the Bank could, without prior approval, declare dividends of approximately $62.2 million.

Adoption of New Accounting Standards

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

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

The Corporation prepares its Consolidated Financial Statements in accordance with GAAP; these financial statements appear on pages F-4 through F-9. That presentation provides the reader with an understanding of the Corporation’s results that can be tracked consistently from year-to-year and enables a comparison of the Corporation’s performance with other companies’ GAAP financial statements.

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

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

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.

64

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.

65

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

Tangible Equity (Average)

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

66

Adjustments for Certain Items of Income or Expense

In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROAA, and ROAE, 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.

67