UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
 
FORM 10-Q
[X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly period ended September 30, 2019
2020
Or
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File No. 000-13888
chmg-20200930_g1.jpg
CHEMUNG FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
New York16-1237038
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
One Chemung Canal Plaza, Elmira, NY14901
(Address of principal executive offices)(Zip Code)
(607) 737-3711 or (800) 836-3711
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each classTrading SymbolName of exchange on which registered
Common stock, par value $.01 per shareCHMGThe Nasdaq Stock Market, LLC
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:    X         NO:____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:    X        NO:____Yes: ☒        No: ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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[   ]Non-accelerated filer[   ]
Accelerated filer[X]Smaller reporting company[X]
Emerging growth company[   ]
If 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:    XYes: ☐       No: ☒
The number of shares of the registrant's common stock, $.01 par value, outstanding on November 5, 20194, 2020 was 4,846,630.

4,656,862.




CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES


INDEX



PAGES

2



GLOSSARY OF ABBREVIATIONS AND TERMS


To assist the reader the Corporation has provided the following list of commonly used abbreviations and terms included in the Notes to the Unaudited Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations.


Abbreviations
AFSAvailable for sale securities
ALCOAsset-Liability Committee
AOCIAccumulated Other Comprehensive Income
ASCAccounting Standards Codification
ASUAccounting Standards Update
BankChemung Canal Trust Company
Basel IIIThe Third Basel Accord of the Basel Committee on Banking Supervision
Board of DirectorsBoard of Directors of Chemung Financial Corporation
BOLIBank Owned Life Insurance
CAMCommon area maintenance charges
CDARSCARES ActCoronavirus Aid, Relief, and Economic Security Act
CDARSCertificate of Deposit Account Registry Service
CDOCollateralized Debt Obligation
CECLCurrent expected credit loss
CFSCFS Group, Inc.
CorporationChemung Financial Corporation
CRMCOVID-19Coronavirus disease 2019
CRMChemung Risk Management, Inc.
Dodd-Frank ActThe Dodd-Frank Wall Street Reform and Consumer Protection Act
EPSEarnings per share
Exchange ActSecurities Exchange Act of 1934
FASBFinancial Accounting Standards Board
FDICFederal Deposit Insurance Corporation
FHLBNYFederal Home Loan Bank of New York
FRBBoard of Governors of the Federal Reserve System
FRBNYFederal Reserve Bank of New York
Freddie MacFederal Home Loan Mortgage Corporation
GAAPU.S. Generally Accepted Accounting Principles
HTMHeld to maturity securities
ICSInsured Cash Sweep Service
IFRSInternational Financial Reporting Standards
IRTIncident Response Team
MD&AManagement’s Discussion and Analysis of Financial Condition and Results of Operations
NAICSNorth American Industry Classification System
N/MNot meaningful
OPEBOther postemployment benefits
OREOOther real estate owned
OTTIOther-than-temporary impairment


3


PCIPurchased credit impaired
PPPPaycheck Protection Program
PPPLFPaycheck Protection Program Liquidity Facility
Regulatory Relief ActEconomic Growth, Regulatory Relief, and Consumer Protection Act
ROAReturn on average assets
ROEReturn on average equity
RWARisk-weighted assets
SBASmall Business Administration
SECSecurities and Exchange Commission
Securities ActSecurities Act of 1933
Tax ActTax Cuts and Jobs Act of 2017
TDRsTroubled debt restructurings
WMGWealth Management Group


Terms
Allowance for loan losses to total loansRepresents period-end allowance for loan losses divided by retained loans.
Assets under administrationRepresents assets that are beneficially owned by clients and all investment decisions pertaining to these assets are also made by clients.
Assets under managementRepresents assets that are managed on behalf of clients.
Basel IIIA 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 obligationRefers to the projected benefit obligation for pension plans and the accumulated postretirement benefit obligation for OPEB plans.
Capital BankDivision of Chemung Canal Trust Company located in the “Capital Region” of New York State and includes the counties of Albany and Saratoga.
CDARSProduct 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.
Captive insurance companyA company that provides risk-mitigation services for its parent company.
Collateralized debt obligationA structured financial product that pools together cash flow-generating assets, such as mortgages, bonds, and loans.
Collateralized mortgage obligationsA 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 ActThe 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.
Fully taxable equivalent basisIncome 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.
GAAPAccounting principles generally accepted in the United States of America.
Holding companyConsists of the operations for Chemung Financial Corporation (parent only).
ICSProduct 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.
4


Loans held for saleResidential real estate loans originated for sale on the secondary market with maturities from 15-30 years.


Long term lease obligationAn obligation extending beyond the current year, which is related to a long term finance lease that is considered to have the economic characteristics of asset ownership.
Mortgage-backed securitiesA type of asset-backed security that is secured by a collection of mortgages.
Municipal clientsA political unit, such as a city, town, or village, incorporated for local self-government.
N/AData is not applicable or available for the period presented.
N/MNot meaningful.
Non-GAAPA calculation not made according to GAAP.
Obligations of state and political subdivisionsAn 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. GovernmentA federally guaranteed obligation backed by the full power of the U.S. government, including Treasury bills, Treasury notes and Treasury bonds.
Obligations of U.S. Government sponsored enterprise obligationsObligations 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.
OREORepresents 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.
OTTIImpairment 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 loansRepresents 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 subdivisionA 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.
Regulatory Relief ActThe Economic Growth, Regulatory Relief and Consumer Protection Act was enacted on May 24, 2018 provides certain limited amendments to the Dodd-Frank Act, as well as certain targeted modifications to other post-financial crisis regulatory requirements.  In addition, the legislation establishes new consumer protections and amends various securities- and investment company-related requirements.
RWARisk-weighted assets 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 poolsBusiness loans partially guaranteed by the SBA.
Securities sold under agreements to repurchaseSale of securities together with an agreement for the seller to buy back the securities at a later date.
Tax ActThe 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.
5


TDRA 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 securitiesA 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.
UnauditedFinancial statements and information that have not been subjected to auditing procedures sufficient to permit an independent certified public accountant to express an opinion.
WMGProvides 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.




6


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)September 30,
2020
December 31,
2019
ASSETS
Cash and due from financial institutions$35,327 $25,203 
Interest-earning deposits in other financial institutions114,575 96,701 
Total cash and cash equivalents149,902 121,904 
Equity investments, at estimated fair value2,291 2,174 
Securities available for sale, at estimated fair value396,300 284,090 
Securities held to maturity, estimated fair value of $3,093 at September 30, 2020
  and $3,139 at December 31, 2019
3,047 3,115 
FHLBNY and FRBNY Stock, at cost3,150 3,099 
Loans, net of deferred loan fees1,538,493 1,309,219 
Allowance for loan losses(24,590)(23,478)
Loans, net1,513,903 1,285,741 
Loans held for sale2,059 1,185 
Premises and equipment, net20,891 22,417 
Operating lease right-of-use assets7,474 8,001 
Goodwill21,824 21,824 
Other intangible assets, net371 742 
Bank-owned life insurance3,045 3,111 
Accrued interest receivable and other assets40,757 30,424 
Total assets$2,165,014 $1,787,827 
LIABILITIES AND SHAREHOLDERS' EQUITY 
Deposits: 
Non-interest-bearing$619,412 $468,238 
Interest-bearing1,304,777 1,103,900 
Total deposits1,924,189 1,572,138 
FHLBNY overnight advances245 
Long term finance lease obligation3,910 4,085 
Operating lease liabilities7,584 8,084 
Dividends payable1,229 1,263 
Accrued interest payable and other liabilities30,852 19,630 
Total liabilities1,968,009 1,605,200 
Shareholders' equity: 
Common stock, $0.01 par value per share, 10,000,000 shares authorized;
  5,310,076 issued at September 30, 2020 and December 31, 2019
53 53 
Additional paid-in capital46,892 46,382 
Retained earnings163,987 153,701 
Treasury stock, at cost; 589,694 shares at September 30, 2020 and 452,641
  shares at December 31, 2019
(15,569)(11,710)
Accumulated other comprehensive income (loss)1,642 (5,799)
Total shareholders' equity197,005 182,627 
Total liabilities and shareholders' equity$2,165,014 $1,787,827 
See accompanying notes to unaudited consolidated financial statements.
7
(in thousands, except share and per share data) September 30,
2019
 December 31,
2018
ASSETS    
Cash and due from financial institutions $36,497
 $33,040
Interest-earning deposits in other financial institutions 109,801
 96,932
Total cash and cash equivalents 146,298
 129,972
     
Equity investments, at estimated fair value 2,065
 1,909
Securities available for sale, at estimated fair value 267,529
 242,258
Securities held to maturity, estimated fair value of $3,443 at September 30, 2019
  and $4,858 at December 31, 2018
 3,420
 4,875
FHLBNY and FRBNY Stock, at cost 3,091
 3,138
     
Loans, net of deferred loan fees 1,306,638
 1,311,906
Allowance for loan losses (23,923) (18,944)
Loans, net 1,282,715
 1,292,962
     
Loans held for sale 1,313
 502
Premises and equipment, net 22,962
 24,980
Operating lease right-of-use assets 8,051
 
Goodwill 21,824
 21,824
Other intangible assets, net 886
 1,351
Bank-owned life insurance 3,096
 3,048
Accrued interest receivable and other assets 30,393
 28,524
     
Total assets $1,793,643
 $1,755,343
     
LIABILITIES AND SHAREHOLDERS' EQUITY    
Deposits:    
Non-interest-bearing $472,600
 $484,433
Interest-bearing 1,103,906
 1,084,804
Total deposits 1,576,506
 1,569,237
     
Long term finance lease obligation 4,140
 4,304
Operating lease liabilities 8,125
 
Dividends payable 1,260
 1,254
Accrued interest payable and other liabilities 21,568
 15,519
Total liabilities 1,611,599
 1,590,314
     
Shareholders' equity:    
Common stock, $0.01 par value per share, 10,000,000 shares authorized;
  5,310,076 issued at September 30, 2019 and December 31, 2018
 53
 53
Additional paid-in capital 46,464
 45,820
Retained earnings 150,759
 143,129
Treasury stock, at cost; 465,038 shares at September 30, 2019 and 488,844
  shares at December 31, 2018
 (11,956) (12,562)
Accumulated other comprehensive loss (3,276) (11,411)
Total shareholders' equity 182,044
 165,029
     
Total liabilities and shareholders' equity $1,793,643
 $1,755,343




CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
(in thousands, except per share data)2020201920202019
Interest and dividend income:
Loans, including fees$14,876 $14,664 $43,770 $43,723 
Taxable securities1,474 1,349 4,358 3,825 
Tax exempt securities263 293 799 872 
Interest-earning deposits101 502 643 1,735 
Total interest and dividend income16,714 16,808 49,570 50,155 
Interest expense:    
Deposits809 1,629 2,922 4,634 
Borrowed funds36 37 126 111 
Total interest expense845 1,666 3,048 4,745 
Net interest income15,869 15,142 46,522 45,410 
Provision for loan losses679 4,441 3,989 5,684 
Net interest income after provision for loan losses15,190 10,701 42,533 39,726 
Non-interest income:    
WMG fee income2,416 2,315 6,968 7,115 
Service charges on deposit accounts740 1,141 2,294 3,330 
Interchange revenue from debit card transactions1,082 1,058 2,989 3,113 
Net gains on security transactions19 
Changes in fair value of equity investments57 (10)(33)106 
Net gains on sales of loans held for sale553 69 916 146 
Net gains (losses) on sales of other real estate owned(1)(71)(87)
Income from bank-owned life insurance14 17 147 48 
Other471 367 1,940 1,177 
Total non-interest income5,339 4,956 15,150 14,967 
Non-interest expenses:    
Salaries and wages6,088 5,874 17,678 17,375 
Pension and other employee benefits1,245 1,470 4,095 4,488 
Other components of net periodic pension and postretirement benefits(254)(141)(762)(423)
Net occupancy1,454 1,424 4,406 4,469 
Furniture and equipment538 717 1,573 1,840 
Data processing1,777 1,818 5,630 5,418 
Professional services453 395 1,313 1,218 
Amortization of intangible assets120 151 371 465 
Marketing and advertising140 231 546 644 
Other real estate owned53 87 80 
FDIC insurance247 (10)726 476 
Loan expense301 171 798 557 
Other1,200 1,416 3,878 4,238 
Total non-interest expenses13,362 13,525 40,339 40,845 
Income before income tax expense7,167 2,132 17,344 13,848 
Income tax expense1,456 176 3,315 2,443 
Net income$5,711 $1,956 $14,029 $11,405 
Weighted average shares outstanding4,773 4,871 4,836 4,866 
Basic and diluted earnings per share$1.19 $0.40 $2.90 $2.34 
See accompanying notes to unaudited consolidated financial statements.
8
  Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
(in thousands, except per share data) 2019 2018 2019 2018
Interest and dividend income:        
Loans, including fees $14,664
 $14,580
 $43,723
 $42,930
Taxable securities 1,349
 1,200
 3,825
 3,753
Tax exempt securities 293
 272
 872
 875
Interest-earning deposits 502
 84
 1,735
 116
Total interest and dividend income 16,808
 16,136
 50,155
 47,674
Interest expense:  
  
  
  
Deposits 1,629
 858
 4,634
 1,967
Securities sold under agreements to repurchase 
 
 
 137
Borrowed funds 37
 199
 111
 574
Total interest expense 1,666
 1,057
 4,745
 2,678
Net interest income 15,142
 15,079
 45,410
 44,996
Provision for loan losses 4,441
 300
 5,684
 3,371
Net interest income after provision for loan losses 10,701
 14,779
 39,726
 41,625
         
Non-interest income:  
  
  
  
WMG fee income 2,315
 2,406
 7,115
 7,095
Service charges on deposit accounts 1,141
 1,231
 3,330
 3,539
Interchange revenue from debit card transactions 1,058
 982
 3,113
 3,013
Net gains on security transactions 
 
 19
 
Changes in fair value of equity investments (10) 2,141
 106
 2,165
Net gains on sales of loans held for sale 69
 79
 146
 184
Net gains (losses) on sales of other real estate owned (1) 123
 (87) 119
Income from bank-owned life insurance 17
 17
 48
 50
Other 367
 402
 1,177
 2,016
Total non-interest income 4,956
 7,381
 14,967
 18,181
         
Non-interest expenses:  
  
  
  
Salaries and wages 5,874
 5,691
 17,375
 16,969
Pension and other employee benefits 1,470
 1,262
 4,488
 4,438
Other components of net periodic pension and postretirement benefits (141) (408) (423) (1,224)
Net occupancy 1,424
 1,671
 4,469
 4,922
Furniture and equipment 717
 581
 1,840
 1,941
Data processing 1,818
 1,782
 5,418
 5,288
Professional services 395
 479
 1,218
 1,527
Legal accruals and settlements 
 
 
 989
Amortization of intangible assets 151
 182
 465
 558
Marketing and advertising 231
 212
 644
 816
Other real estate owned 9
 83
 80
 321
FDIC insurance (10) 263
 476
 881
Loan expense 171
 262
 557
 615
Other 1,416
 1,368
 4,238
 4,520
Total non-interest expenses 13,525
 13,428
 40,845
 42,561
Income before income tax expense 2,132
 8,732
 13,848
 17,245
Income tax expense 176
 1,802
 2,443
 3,349
Net income $1,956
 $6,930
 $11,405
 $13,896
         
Weighted average shares outstanding 4,871
 4,834
 4,866
 4,828
Basic and diluted earnings per share $0.40
 $1.43
 $2.34
 $2.88




CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
(in thousands)2020201920202019
Net income$5,711 $1,956 $14,029 $11,405 
Other comprehensive income (loss):    
Unrealized holding gains (losses) on securities available for sale(692)3,573 9,919 10,885 
Reclassification adjustment for gains realized in net income(19)
Net unrealized gains (losses)(692)3,573 9,919 10,866 
Tax effect(176)911 2,530 2,771 
Net of tax amount(516)2,662 7,389 8,095 
Change in funded status of defined benefit pension plan and other benefit plans:    
Reclassification adjustment for amortization of prior service costs(55)(55)(165)(165)
Reclassification adjustment for amortization of net actuarial loss77 72 231 218 
Total before tax effect22 17 66 53 
Tax effect14 13 
Net of tax amount16 13 52 40 
Total other comprehensive income (loss)(500)2,675 7,441 8,135 
Comprehensive income$5,211 $4,631 $21,470 $19,540 
See accompanying notes to unaudited consolidated financial statements.
9
  Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
(in thousands) 2019 2018 2019 2018
Net income $1,956
 $6,930
 $11,405
 $13,896
Other comprehensive income (loss):  
  
  
  
Unrealized holding gains (losses) on securities available for sale 3,573
 (1,583) 10,885
 (6,422)
Reclassification adjustment for gains realized in net income 
 
 (19) 
Net unrealized gains (losses) 3,573
 (1,583) 10,866
 (6,422)
Tax effect 911
 (404) 2,771
 (1,637)
Net of tax amount 2,662
 (1,179) 8,095
 (4,785)
         
Change in funded status of defined benefit pension plan and other benefit plans:  
  
  
  
Reclassification adjustment for amortization of prior service costs (55) (55) (165) (165)
Reclassification adjustment for amortization of net actuarial loss 72
 72
 218
 218
Total before tax effect 17
 17
 53
 53
Tax effect 4
 4
 13
 13
Net of tax amount 13
 13
 40
 40
         
Total other comprehensive income (loss) 2,675
 (1,166) 8,135
 (4,745)
         
Comprehensive income $4,631
 $5,764
 $19,540
 $9,151




CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)

(in thousands, except share and per share data)Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total(in thousands, except share and per share data)Common StockAdditional Paid-in CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Total
Balances at June 30, 2018$53
 $45,873
 $132,973
 $(12,998) $(14,121) $151,780
Net income
 
 6,930
 
 
 6,930
Other comprehensive loss
 
 
 
 (1,166) (1,166)
Restricted stock awards
 69
 
 
 
 69
Restricted stock units for directors' deferred compensation plan
 10
 
 
 
 10
Cash dividends declared ($0.26 per share)
 
 (1,249) 
 
 (1,249)
Sale of 2,648 shares of treasury stock (a)
 54
 
 71
 
 125
Balances at September 30, 2018$53
 $46,006
 $138,654
 $(12,927) $(15,287) $156,499
           
           
           
Balances at June 30, 2019$53
 $46,284
 $150,063
 $(12,062) $(5,951) $178,387
Balance at June 30, 2019Balance at June 30, 2019$53 $46,284 $150,063 $(12,062)$(5,951)$178,387 
Net income
 
 1,956
 
 
 1,956
Net income— — 1,956 — — 1,956 
Other comprehensive income
 
 
 
 2,675
 2,675
Other comprehensive income— — — — 2,675 2,675 
Restricted stock awards
 97
 
 
 
 97
Restricted stock awards— 97 — — — 97 
Restricted stock units for directors' deferred compensation plan
 10
 
 
 
 10
Restricted stock units for directors' deferred compensation plan— 10 — — — 10 
Cash dividends declared ($0.26 per share)
 
 (1,260) 
 
 (1,260)Cash dividends declared ($0.26 per share)— — (1,260)— — (1,260)
Sale of 4,100 shares of treasury stock (a)
 73
 
 106
 
 179
Sale of 2,485 shares of treasury stock (a)Sale of 2,485 shares of treasury stock (a)— 73 — 106 — 179 
Balances at September 30, 2019$53
 $46,464
 $150,759
 $(11,956) $(3,276) $182,044
Balances at September 30, 2019$53 $46,464 $150,759 $(11,956)$(3,276)$182,044 
Balances at Balance at June 30, 2020Balances at Balance at June 30, 2020$53 $46,758 $159,505 $(13,869)$2,142 $194,589 
Net incomeNet income— — 5,711 — — 5,711 
Other comprehensive incomeOther comprehensive income— — — — (500)(500)
Restricted stock awardsRestricted stock awards— 125 — — — 125 
Restricted stock units for directors' deferred compensation planRestricted stock units for directors' deferred compensation plan— — — — 
Cash dividends declared ($0.26 per share)Cash dividends declared ($0.26 per share)— — (1,229)— — (1,229)
Repurchase of 64,185 shares of common stockRepurchase of 64,185 shares of common stock— — — (1,816)— (1,816)
Sale of 18,202 shares of treasury stock (a)Sale of 18,202 shares of treasury stock (a)— — 116 — 120 
Balances at September 30, 2020Balances at September 30, 2020$53 $46,892 $163,987 $(15,569)$1,642 $197,005 
(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.




See accompanying notes to unaudited consolidated financial statements.
10


CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(in thousands, except share and per share data)(in thousands, except share and per share data)Common StockAdditional Paid-in CapitalRetained EarningsTreasury StockAccumulated Other Comprehensive Income (Loss)Total
Balances at January 1, 2019, as reportedBalances at January 1, 2019, as reported$53 $45,820 $143,129 $(12,562)$(11,411)$165,029 
(in thousands, except share and per share data)Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Accumulated Other Comprehensive Loss Total
Balances at January 1, 2018, as reported$53
 $45,967
 $128,453
 $(14,320) $(10,340) $149,813
Cumulative effect of accounting change (b)
 
 40
 
 (202) (162)
Balances at January 1, 2018, as adjusted53
 45,967
 128,493
 (14,320) (10,542) 149,651
Net income
 
 13,896
 
 
 13,896
Other comprehensive loss
 
 
 
 (4,745) (4,745)
Restricted stock awards
 301
 
 
 
 301
Restricted stock units for directors' deferred compensation plan
 57
 
 
 
 57
Cash dividends declared ($0.78 per share)
 
 (3,735) 
 
 (3,735)
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
Distribution of 36,681 shares of treasury stock for deferred directors’ compensation
 (722) 
 940
 
 218
Sale of 9,938 shares of treasury stock (a)
 212
 
 254
 
 466
Balances at September 30, 2018$53
 $46,006
 $138,654
 $(12,927) $(15,287) $156,499
           
           
           
Balances at January 1, 2019$53
 $45,820
 $143,129
 $(12,562) $(11,411) $165,029
Net income
 
 11,405
 
 
 11,405
Net income— — 11,405 — — 11,405 
Other comprehensive income
 
 
 
 8,135
 8,135
Other comprehensive income— — — — 8,135 8,135 
Restricted stock awards
 296
 
 
 
 296
Restricted stock awards— 296 — — — 296 
Restricted stock units for directors' deferred compensation plan
 31
 
 
 
 31
Restricted stock units for directors' deferred compensation plan— 31 — — — 31 
Distribution of 439 shares of treasury stock grants for employee restricted stock awards
 
 
 11
 
 11
Distribution of 439 shares of treasury stock grants for employee restricted stock awards— — — 11 — 11 
Cash dividends declared ($0.78 per share)
 
 (3,775) 
 
 (3,775)Cash dividends declared ($0.78 per share)— — (3,775)— — (3,775)
Distribution of 8,465 shares of treasury stock for directors' compensation
 139
 
 218
 
 357
Distribution of 8,465 shares of treasury stock for directors' compensation— 139 — 218 — 357 
Distribution of 2,373 shares of treasury stock for employee compensation
 39
 
 61
 
 100
Distribution of 2,373 shares of treasury stock for employee compensation— 39 — 61 — 100 
Distribution of 2,551 shares of treasury stock for deferred directors’ compensation
 (52) 
 65
 
 13
Distribution of 2,551 shares of treasury stock for for deferred directors' compensationDistribution of 2,551 shares of treasury stock for for deferred directors' compensation— (52)— 65 — 13 
Repurchase of 272 shares of common stock
 
 
 (13) 
 (13)Repurchase of 272 shares of common stock— — — (13)— (13)
Sale of 10,250 shares of treasury stock (a)
 191
 
 264
 
 455
Sale of 10,250 shares of treasury stock (a)— 191 — 264 — 455 
Balances at September 30, 2019$53
 $46,464
 $150,759
 $(11,956) $(3,276) $182,044
Balances at September 30, 2019$53 $46,464 $150,759 $(11,956)$(3,276)$182,044 
Balances at January 1, 2020Balances at January 1, 2020$53 $46,382 $153,701 $(11,710)$(5,799)$182,627 
Net incomeNet income— — 14,029 — — 14,029 
Other comprehensive incomeOther comprehensive income— — — — 7,441 7,441 
Restricted stock awardsRestricted stock awards— 431 — — — 431 
Restricted stock units for directors' deferred compensation planRestricted stock units for directors' deferred compensation plan— 25 — — — 25 
Distribution of 255 shares of treasury stock grants for employee restricted stock awardsDistribution of 255 shares of treasury stock grants for employee restricted stock awards— (7)— — 
Cash dividends declared ($0.78 per share)Cash dividends declared ($0.78 per share)— — (3,743)— — (3,743)
Distribution of 7,923 shares of treasury stock for directors' compensationDistribution of 7,923 shares of treasury stock for directors' compensation— 144 — 206 — 350 
Distribution of 2,274 shares of treasury stock for employee compensationDistribution of 2,274 shares of treasury stock for employee compensation— 41 — 59 — 100 
Distribution of 6,426 shares of treasury stock for deferred directors’ compensationDistribution of 6,426 shares of treasury stock for deferred directors’ compensation— (180)— 168 — (12)
Repurchase of 186,206 shares of common stockRepurchase of 186,206 shares of common stock— — — (5,137)— (5,137)
Sale of 32,387 shares of treasury stock (a)Sale of 32,387 shares of treasury stock (a)— 51 — 843 — 894 
Forfeiture of 112 shares of restricted stock awardsForfeiture of 112 shares of restricted stock awards— — (5)— 
Balances at September 30, 2020Balances at September 30, 2020$53 $46,892 $163,987 $(15,569)$1,642 $197,005 
(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
See accompanying notes to implementation of ASC 2016-01. See "Adoption of New Accounting Standards" discussion in Note 1.unaudited consolidated financial statements.

11





CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)Nine Months Ended 
 September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:20202019
Net income$14,029 $11,405 
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of right-of-use assets527 541 
Amortization of intangible assets371 465 
Provision for loan losses3,989 5,684 
Loss on disposal of fixed assets35 
Depreciation and amortization of fixed assets2,215 2,375 
Amortization of premiums on securities, net1,003 784 
Gain on sales of loans held for sale, net(916)(146)
Proceeds from sales of loans held for sale17,216 7,293 
Loans originated and held for sale(17,174)(7,958)
Net losses on sale of other real estate owned71 87 
Write-downs on other real estate owned38 53 
Net change in fair value of equity investments33 (106)
Proceeds from sales of trading assets24 22 
Purchase of equity investments(174)(72)
Increase in other assets and accrued interest receivable(10,264)(2,233)
(Decrease) increase in accrued interest payable(38)94 
Expense related to restricted stock units for directors' deferred compensation plan25 31 
Expense related to employee stock compensation102 100 
Expense related to employee restricted stock awards431 296 
Payments on operating leases(500)(467)
Increase in other liabilities9,119 3,592 
Income from bank owned life insurance(147)(48)
Net cash provided by operating activities19,987 21,808 
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of securities available for sale15,200 
Proceeds from maturities, calls, and principal paydowns on securities available for sale39,508 37,152 
Proceeds from maturities and principal collected on securities held to maturity1,349 2,498 
Purchases of securities available for sale(142,797)(67,522)
Purchases of securities held to maturity(1,286)(1,043)
Purchase of FHLBNY and FRBNY stock(51)(6)
Redemption of FHLBNY and FRBNY stock53 
Purchases of premises and equipment(696)(392)
Proceeds from sale of other real estate owned253 376 
Proceeds from bank owned life insurance213 
Net (increase) decrease in loans(232,582)4,411 
Net cash used in investing activities(336,089)(9,273)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in demand deposits, interest-bearing demand accounts, savings accounts, and insured money market accounts307,723 (12,330)
Increase in time deposits44,327 19,599 
Proceeds from FHLB overnight advances245 
Payments made on capital lease(175)(164)
Purchase of treasury stock(5,137)
Sale of treasury stock894 455 
Cash dividends paid(3,777)(3,769)
Net cash provided by financing activities344,100 3,791 
Net increase in cash and cash equivalents27,998 16,326 
Cash and cash equivalents, beginning of period121,904 129,972 
Cash and cash equivalents, end of period$149,902 $146,298 
See accompanying notes to unaudited consolidated financial statements.
12

CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)Nine Months Ended 
 September 30,
CASH FLOWS FROM OPERATING ACTIVITIES:2019 2018
Net income$11,405
 $13,896
Adjustments to reconcile net income to net cash provided by operating activities: 
  
Amortization of intangible assets465
 558
Provision for loan losses5,684
 3,371
Net losses on disposal of fixed assets35
 10
Depreciation and amortization of fixed assets2,375
 2,625
Amortization of right-of-use asset541
 
Amortization of premiums on securities, net784
 910
Gains on sales of loans held for sale, net(146) (184)
Proceeds from sales of loans held for sale7,293
 9,476
Loans originated and held for sale(7,958) (10,465)
Changes in fair value on equity investments(106) (2,165)
Proceeds from sales of equity investments22
 2,288
Net gains on securities transactions(19) 
Net losses on sales of other real estate owned87
 (119)
Write-downs on OREO53
 
Purchase of equity investments(72) (84)
Expense related to restricted stock units for directors' deferred compensation plan31
 57
Expense related to employee stock compensation100
 89
Expense related to employee restricted stock awards296
 301
Income from bank-owned life insurance(48) (50)
Increase in other assets and accrued interest receivable(2,233) (3,510)
Payments made on operating leases(467) 
Increase in accrued interest payable94
 28
Increase in other liabilities3,592
 3,073
Net cash provided by operating activities21,808
 20,105
    
CASH FLOWS FROM INVESTING ACTIVITIES: 
  
Proceeds from sales of securities available for sale15,200
 
Proceeds from maturities, calls, and principal paydowns on securities available for sale37,152
 39,286
Proceeds from maturities and principal collected on securities held to maturity2,498
 988
Purchases of securities available for sale(67,522) 
Purchases of securities held to maturity(1,043) (1,410)
Purchase of FHLBNY and FRBNY stock(6) (22,003)
Redemption of FHLBNY and FRBNY stock53
 24,649
Purchases of premises and equipment(392) (1,492)
Proceeds from sales of other real estate owned376
 1,576
Net (increase) decrease in loans4,411
 (13,955)
Net cash (used in) provided by investing activities(9,273) 27,639
    
CASH FLOWS FROM FINANCING ACTIVITIES: 
  
Net decrease in demand deposits, interest-bearing demand accounts,
  savings accounts, and insured money market accounts
(12,330) 82,012
Net increase in time deposits19,599
 26,539
Net decrease in securities sold under agreements to repurchase
 (10,000)
Net decrease in FHLBNY overnight advances
 (57,700)
Repayments of FHLBNY long term advances
 (2,000)
Payments made on finance leases(164) (159)
Sale of treasury stock455
 466
Cash dividends paid(3,769) (3,719)
Net cash used in financing activities3,791
 35,439
Net increase in cash and cash equivalents16,326
 83,183
Cash and cash equivalents, beginning of period129,972
 30,729
Cash and cash equivalents, end of period$146,298
 $113,912



CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
(UNAUDITED)
(in thousands)Nine Months Ended 
 September 30,
Supplemental disclosure of cash flow information:20202019
Cash paid for:
Interest$3,086 $4,651 
Income taxes3,785 3,225 
Supplemental disclosure of non-cash activity:
Transfer of loans to other real estate owned431 152 
Dividends declared, not yet paid1,229 1,260 
Repurchase of common stock in lieu of employee payroll taxes54 (13)
Distribution of treasury stock for directors' compensation350 357 
Distribution of treasury stock for deferred directors' compensation(12)13 
Forfeiture of shares of restricted stock awards(5)
See accompanying notes to unaudited consolidated financial statements.
13
(in thousands)Nine Months Ended 
 September 30,
Supplemental disclosure of cash flow information:2019 2018
Cash paid for:   
Interest$4,651
 $2,650
Income taxes$3,225
 $1,355
Supplemental disclosure of non-cash activity: 
  
  Transfer of loans to other real estate owned
$152
 $244
Dividends declared, not yet paid$1,260
 $1,249
Repurchase of common stock in lieu of employee payroll taxes$(13) $
Distribution of treasury stock for directors' compensation$357
 $301
Distribution of treasury stock for deferred directors' compensation$13
 $218




CHEMUNG FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS




NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES


Organization


The Corporation, through its wholly-owned subsidiaries, the Bank and CFS, provides a wide range of banking, financing, fiduciary and other financial services to its clients.  The Corporation and the Bank are subject to the regulations of certain federal and state agencies and undergo periodic examinations by those regulatory authorities.


CRM, a wholly-owned subsidiary of the Corporation,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 unaudited consolidated financial statements have been prepared in conformity with GAAP for interim financial information and pursuant to the requirements for reporting on Form 10-Q and Article 10 of Regulation S-X of the Exchange Act.  These financial statements include the accounts of the Corporation and its subsidiaries, and all significant intercompany balances and transactions are eliminated in consolidation.  Amounts in the prior periods' consolidated financial statements are reclassified whenever necessary to conform to the current period's presentation.


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. In the opinion of management, all adjustments (consisting of normal recurring adjustments) and disclosures necessary for the fair presentation of the accompanying consolidated financial statements have been included. The unaudited consolidated financial statements should be read in conjunction with the Corporation's 20182019 Annual Report on Form 10-K for the year ended December 31, 2018.2019. The results of operations for any interim periods are not necessarily indicative of the results which may be expected for the entire year or any other period.


Reclassifications


Some itemsAmounts in the prior year financial statements wereare reclassified whenever necessary to conform to the current year's presentation. Reclassifications had no effect on prior year net income or shareholders' equity.


Recent Accounting Pronouncements


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 beginning after December 15, 2019, though entities may adopt the amendments earlier for fiscal years beginning after December 15, 2018. In OctoberNovember 2019, the FASB votedadopted 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 proposed delay and planshas elected to implement the standard effectivedefer implementation until January 1, 2023. 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. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was signed into law. The CARES Act provides banking organizations which previously adopted for fiscal years beginning after December 15, 2019, temporary relief from complying with CECL. 

14



Section 4013 of the CARES Act 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.


InAdoption of New Accounting Standards

On January 2017,1, 2020, the FASB issuedCorporation 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 amendments in this ASU are effective for annual, or any interim, goodwill impairment tests in fiscal years beginning after December 15, 2019. The adoption of the ASU isdid not expected to have a significant impact on the Corporation's consolidated financial statements.


Adoption of New Accounting Standards

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 10 - Revenue from Contracts with Customers for further discussion on the Corporation's accounting policies for revenue sources within the scope of ASC 606.

On January 1, 2018, the Corporation adopted ASU 2016-01, an amendment to Recognition and Measurement of Financial Assets and Financial Liabilities ("ASC 825"). The objectives of the ASC 825 were (1) require equity investments to be measured at fair value, with changes in fair value recognized in net income, (2) simplify the impairment assessment of equity investments without readily determinable fair values, (3) eliminate the requirement to disclose methods and significant assumptions used to estimate fair value for financial instruments measured at amortized cost on the balance sheet, (4) require the use of the exit price notion when measuring the fair value of financial instruments, and (5) clarify the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The Corporation adopted all provisions of this ASU using the modified retrospective method. The adjustments to opening retained earnings and accumulated other comprehensive loss related to the adoption of ASC 825 are immaterial to the financial statements.

On January 1, 2018, the Corporation adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The objective of the ASU is to reduce the existing diversity in practice relating to eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transactions, and (8) separately identifiable cash flows and application of the predominance principal. The adoption of ASU 2016-15 did not result in a change to how the Corporation accounts for its cash flows.

On January 1, 2018, the Corporation adopted ASU 2017-07, Compensation - Retirement Benefits - Improving the Presentation of Net Periodic Cost and Net Periodic Postretirement Benefit Cost ("ASC 715"). The objective of ASC 715 was to improve guidance related to the presentation of defined benefit costs in the income statement. Specifically, ASC 715 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, ASC 715 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 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.



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.



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.

15


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. As of September 30, 2020, these "highly impacted" industries total $248.4 million, or 27.4% of the Bank's commercial loan portfolio. For a discussion of the effect of COVID-19 on our business, see pages 46-47 of this Form 10-Q.

NOTE 2EARNING PER COMMON SHARE (shares in thousands)


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.  All outstanding unvested share basedshare-based payment awards that contain rights to non-forfeitable dividends are considered participating securities for this calculation.  Restricted stock awards are grants of participating securities and are considered outstanding at grant date.  Earnings per share information is adjusted to present comparative results for stock splits and stock dividends that occur. Earnings per share were computed by dividing net income by 4,8714,773 and 4,8344,871weighted average shares outstanding for the three-monththree month periods ended September 30, 20192020 and 2018,2019, respectively. Earnings per share were computed by dividing net income by 4,8664,836 and 4,8284,866 weighted average shares outstanding for the nine-monthnine month periods ended September 30, 20192020 and 2018,2019, respectively. There were no0 common stock equivalents during the three and nine-monthnine month periods ended September 30, 20192020 or 2018.2019.




NOTE 3SECURITIES


Amortized cost and estimated fair value of securities available for sale are as follows (in thousands):
 September 30, 2020
 Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
Mortgage-backed securities, residential$317,087 $9,385 $204 $326,268 
Obligations of states and political subdivisions40,694 2,566 43,260 
Corporate bonds and notes7,000 64 7,064 
SBA loan pools19,766 47 105 19,708 
Total$384,547 $12,062 $309 $396,300 
  September 30, 2019
  Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value
Mortgage-backed securities, residential $201,152
 $2,757
 $385
 $203,524
Obligations of states and political subdivisions 45,122
 2,148
 
 47,270
Corporate bonds and notes 250
 
 
 250
SBA loan pools 16,377
 144
 36
 16,485
Total $262,901
 $5,049
 $421
 $267,529


 December 31, 2019
 Amortized CostUnrealized GainsUnrealized LossesEstimated Fair Value
Mortgage-backed securities, residential$225,029 $1,471 $1,266 $225,234 
Obligations of states and political subdivisions41,265 1,580 42,845 
Corporate bonds and notes250 250 
SBA loan pools15,712 95 46 15,761 
Total$282,256 $3,146 $1,312 $284,090 
  December 31, 2018
  Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value
Obligations of U.S. Government and U.S. Government sponsored enterprises $5,489
 $10
 $27
 $5,472
Mortgage-backed securities, residential 189,111
 146
 6,065
 183,192
Obligations of states and political subdivisions 44,390
 70
 308
 44,152
Corporate bonds and notes 249
 
 2
 247
SBA loan pools 9,257
 
 62
 9,195
Total $248,496
 $226
 $6,464
 $242,258




Amortized cost and estimated fair value of securities held to maturity are as follows (in thousands):
 September 30, 2020
 Amortized CostUnrecognized GainsUnrecognized LossesEstimated Fair Value
Obligations of states and political subdivisions$409 $$$409 
Time deposits with other financial institutions2,638 46 2,684 
Total$3,047 $46 $$3,093 

16


 September 30, 2019 December 31, 2019
 Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value Amortized CostUnrecognized GainsUnrecognized LossesEstimated Fair Value
Obligations of states and political subdivisions $1,125
 $
 $
 $1,125
Obligations of states and political subdivisions$1,045 $$$1,045 
Time deposits with other financial institutions 2,295
 23
 
 2,318
Time deposits with other financial institutions2,070 24 2,094 
Total $3,420
 $23
 $
 $3,443
Total$3,115 $24 $$3,139 

  December 31, 2018
  Amortized Cost Unrealized Gains Unrealized Losses Estimated Fair Value
Obligations of states and political subdivisions $3,020
 $
 $
 $3,020
Time deposits with other financial institutions 1,855
 
 17
 1,838
Total $4,875
 $
 $17
 $4,858


The amortized cost and estimated fair value of debt securities are shown below by expected 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):
September 30, 2020
Available for SaleHeld to Maturity
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
Within one year$$$609 $613 
After one, but within five years27,232 28,769 2,438 2,480 
After five, but within ten years19,703 20,755 
After ten years759 800 
47,694 50,324 3,047 3,093 
Mortgage-backed securities, residential317,087 326,268 
SBA loan pools19,766 19,708 
Total$384,547 $396,300 $3,047 $3,093 
  September 30, 2019
  Available for Sale Held to Maturity
  Amortized
Cost
 Fair
Value
 Amortized
Cost
 Fair
Value
Within one year $3,413
 $3,421
 $1,340
 $1,340
After one, but within five years 7,464
 7,722
 2,080
 2,103
After five, but within ten years 33,446
 35,285
 
 
After ten years 1,049
 1,092
 
 
  45,372
 47,520
 3,420
 3,443
Mortgage-backed securities, residential 201,152
 203,524
 
 
SBA loan pools 16,377
 16,485
 
 
Total $262,901
 $267,529
 $3,420
 $3,443



There were no0 proceeds from sales and calls of securities resulting in gains or losses for the three months ended September 30, 20192020 and 2018.2019.


The proceeds from sales and calls of securities resulting in gains or losses for the nine months ended September 30, 20192020 and 20182019 are listed below (in thousands):
 2019 201820202019
Proceeds $15,200
 $
Proceeds$$15,200 
Gross gains 79
 
Gross gains79 
Gross losses (60) 
Gross losses(60)
Tax expense 5
 
Tax expense




The following tables summarize the investment securities available for sale with unrealized losses at September 30, 20192020 and December 31, 20182019 by aggregated major security type and length of time in a continuous unrealized loss position (in thousands):

 Less than 12 months12 months or longerTotal
September 30, 2020Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Mortgage-backed securities, residential$77,898 $202 $1,056 $$78,954 $204 
SBA loan pools8,657 56 3,665 49 12,322 105 
Total temporarily impaired securities$86,555 $258 $4,721 $51 $91,276 $309 

17


Less than 12 months12 months or longerTotal
December 31, 2019December 31, 2019Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Less than 12 months 12 months or longer Total
September 30, 2019Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Mortgage-backed securities, residential$
 $
 $67,646
 $385
 $67,646
 $385
Mortgage-backed securities, residential$71,506 $791 $54,343 $475 $125,849 $1,266 
SBA loan pools3,353
 1
 1,525
 35
 4,878
 36
SBA loan pools3,014 1,405 37 4,419 46 
Total temporarily impaired securities$3,353
 $1
 $69,171
 $420
 $72,524
 $421
Total temporarily impaired securities$74,520 $800 $55,748 $512 $130,268 $1,312 

 Less than 12 months 12 months or longer Total
December 31, 2018Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
Obligations of U.S. Government and U.S. Government sponsored enterprises$
 $
 $4,969
 $27
 $4,969
 $27
Mortgage-backed securities, residential
 
 171,481
 6,065
 171,481
 6,065
Obligations of states and political subdivisions10,868
 38
 21,345
 270
 32,213
 308
Corporate bonds and notes247
 2
 
 
 247
 2
SBA loan pools5,985
 17
 3,210
 45
 9,195
 62
Total temporarily impaired securities$17,100
 $57
 $201,005
 $6,407
 $218,105
 $6,464


Other-Than-Temporary Impairment


As of September 30, 2019, the majority of2020, the Corporation’s unrealized and unrecognized losses in the investment securities portfolio related to mortgage-backed securities.  At September 30, 2019, 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 it is not likely that the Corporation 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 September 30, 2019.material.


Equity Investments


Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in the consolidated statement of income.




NOTE 4LOANS AND ALLOWANCE FOR LOAN LOSSES


The composition of the loan portfolio, net of deferred origination fees and costs, is summarized as follows (in thousands):
September 30, 2020December 31, 2019
Commercial and agricultural:
Commercial and industrial$403,911 $230,018 
Agricultural682 274 
Commercial mortgages:
Construction54,332 43,962 
Commercial mortgages, other636,179 604,832 
Residential mortgages227,372 188,338 
Consumer loans:
Home equity lines and loans81,556 91,784 
Indirect consumer loans121,406 134,973 
Direct consumer loans13,055 15,038 
Total loans, net of deferred loan fees1,538,493 1,309,219 
Interest receivable on loans5,035 3,684 
Total recorded investment in loans$1,543,528 $1,312,903 
  September 30, 
 2019
 December 31, 
 2018
Commercial and agricultural:    
Commercial and industrial $226,884
 $202,526
Agricultural 214
 328
Commercial mortgages:  
  
Construction 48,635
 54,476
Commercial mortgages, other 602,970
 606,694
Residential mortgages 184,013
 182,724
Consumer loans:  
  
Credit cards 
 1,449
Home equity lines and loans 92,456
 98,145
Indirect consumer loans 136,502
 149,380
Direct consumer loans 14,964
 16,184
Total loans, net of deferred origination fees and costs 1,306,638
 1,311,906
Interest receivable on loans 3,682
 3,703
Total recorded investment in loans $1,310,320
 $1,315,609


The Corporation's concentrations of credit risk by loan type are reflected in the preceding table.  The concentrations of credit risk with standby letters of credit, committed lines of credit and commitments to originate new loans generally follow the loan classifications in the table above. As of September 30, 2020, the Corporation had outstanding loan balances of $189.8 million for PPP loans which were included in commercial and industrial loans in the table above. These loans require no allowance for loan losses as of September 30, 2020 since they are government guaranteed loans.


The following tables present the activity in the allowance for loan losses by portfolio segment for the three month periods ended September 30, 20192020 and 20182019 (in thousands):
Three Months Ended September 30, 2020
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance$8,327 $10,549 $1,891 $3,363 $24,130 
Charge-offs(68)(42)(216)(326)
Recoveries18 87 107 
Net recoveries (charge-offs)(50)(42)(129)(219)
Provision180 361 232 (94)679 
Ending balance$8,457 $10,912 $2,081 $3,140 $24,590 
18


Three Months Ended September 30, 2019Three Months Ended September 30, 2019
Allowance for loan lossesCommercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans TotalAllowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance$5,476
 $9,545
 $1,229
 $3,406
 $19,656
Beginning balance$5,476 $9,545 $1,229 $3,406 $19,656 
Charge-offs
 
 (19) (283) (302)Charge-offs(19)(283)(302)
Recoveries29
 
 
 99
 128
Recoveries29 99 128 
Net recoveries (charge-offs)29
 
 (19) (184) (174)Net recoveries (charge-offs)29 (19)(184)(174)
Provision4,651
 (285) (26) 101
 4,441
Provision4,651 (285)(26)101 4,441 
Ending balance$10,156
 $9,260
 $1,184
 $3,323
 $23,923
Ending balance$10,156 $9,260 $1,184 $3,323 $23,923 

 Three Months Ended September 30, 2018
Allowance for loan lossesCommercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Beginning balance$4,969
 $8,740
 $1,445
 $4,491
 $19,645
Charge-offs

 
 (60) (380) (440)
Recoveries13
 
 
 117
 130
Net recoveries (charge-offs)13
 
 (60) (263) (310)
Provision285
 (91) 11
 95
 300
Ending balance$5,267
 $8,649
 $1,396
 $4,323
 $19,635




The following tables present the activity in the allowance for loan losses by portfolio segment for the nine month periods ended September 30, 20192020 and 20182019 (in thousands):
Nine Months Ended September 30, 2020
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance:$10,227 $8,869 $1,252 $3,130 $23,478 
Charge-offs:(134)(2,143)(56)(915)(3,248)
Recoveries:27 49 293 371 
Net recoveries (charge-offs)(107)(2,141)(7)(622)(2,877)
Provision(1,663)4,184 836 632 3,989 
Ending balance$8,457 $10,912 $2,081 $3,140 $24,590 
 Nine Months Ended September 30, 2019
Allowance for loan lossesCommercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Beginning balance:$5,383
 $8,184
 $1,226
 $4,151
 $18,944
Charge-offs:(55) 
 (60) (1,040) (1,155)
Recoveries:44
 2
 45
 359
 450
Net recoveries (charge-offs)(11) 2
 (15) (681) (705)
Provision4,784
 1,074
 (27) (147) 5,684
Ending balance$10,156
 $9,260
 $1,184
 $3,323
 $23,923

Nine Months Ended September 30, 2019
Allowance for loan lossesCommercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Beginning balance:$5,383 $8,184 $1,226 $4,151 $18,944 
Charge-offs:(55)(60)(1,040)(1,155)
Recoveries:44 45 359 450 
Net recoveries (charge-offs)(11)(15)(681)(705)
Provision4,784 1,074 (27)(147)5,684 
Ending balance$10,156 $9,260 $1,184 $3,323 $23,923 
 Nine Months Ended September 30, 2018
Allowance for loan lossesCommercial 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) (145) (225) (1,301) (5,315)
Recoveries:34
 2
 5
 377
 418
Net recoveries (charge-offs)(3,610) (143) (220) (924) (4,897)
Provision1,901
 278
 300
 892
 3,371
Ending balance$5,267
 $8,649
 $1,396
 $4,323
 $19,635


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 September 30, 20192020 and December 31, 20182019 (in thousands):
 September 30, 2020
Allowance for loan losses:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Ending allowance balance attributable to loans:
Individually evaluated for impairment$5,530 $184 $$52 $5,766 
Collectively evaluated for impairment2,927 10,728 2,081 3,088 18,824 
   Total ending allowance balance$8,457 $10,912 $2,081 $3,140 $24,590 
19


September 30, 2019 December 31, 2019
Allowance for loan losses:Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans TotalAllowance for loan losses:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Ending allowance balance attributable to loans:         Ending allowance balance attributable to loans:
Individually evaluated for impairment$6,141
 $2,519
 $
 $
 $8,660
Individually evaluated for impairment$6,000 $2,097 $$$8,097 
Collectively evaluated for impairment4,015
 6,741
 1,184
 3,323
 15,263
Collectively evaluated for impairment4,227 6,772 1,252 3,130 15,381 
Total ending allowance balance$10,156
 $9,260
 $1,184
 $3,323
 $23,923
Total ending allowance balance$10,227 $8,869 $1,252 $3,130 $23,478 
 September 30, 2020
Loans:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Loans individually evaluated for impairment$7,515 $6,750 $1,277 $812 $16,354 
Loans collectively evaluated for  impairment398,498 686,185 226,707 215,784 1,527,174 
   Total ending loans balance$406,013 $692,935 $227,984 $216,596 $1,543,528 
 December 31, 2018
Allowance for loan losses:Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Ending allowance balance attributable to loans:         
Individually evaluated for impairment$1,743
 $446
 $
 $
 $2,189
Collectively evaluated for impairment3,640
 7,738
 1,226
 4,151
 16,755
   Total ending allowance balance$5,383
 $8,184
 $1,226
 $4,151
 $18,944
 December 31, 2019
Loans:Commercial and AgriculturalCommercial MortgagesResidential MortgagesConsumer LoansTotal
Loans individually evaluated for impairment$6,147 $8,844 $525 $149 $15,665 
Loans collectively evaluated for  impairment224,775 641,726 188,349 242,388 1,297,238 
Loans acquired with deteriorated credit quality— — — — — 
   Total ending loans balance$230,922 $650,570 $188,874 $242,537 $1,312,903 
 September 30, 2019
Loans:Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Loans individually evaluated for impairment$6,349
 $13,708
 $407
 $153
 $20,617
Loans collectively evaluated for  impairment221,376
 639,697
 184,162
 244,468
 1,289,703
   Total ending loans balance$227,725
 $653,405
 $184,569
 $244,621
 $1,310,320


 December 31, 2018
Loans:Commercial and Agricultural Commercial Mortgages Residential Mortgages Consumer Loans Total
Loans individually evaluated for impairment$2,128
 $6,146
 $402
 $55
 $8,731
Loans collectively evaluated for  impairment201,284
 656,842
 182,823
 265,929
 1,306,878
   Total ending loans balance$203,412
 $662,988
 $183,225
 $265,984
 $1,315,609


The following table presents loans individually evaluated for impairment recognized by class of loans as of September 30, 20192020 and December 31, 20182019 (in thousands):
 September 30, 2020December 31, 2019
With no related allowance recorded:Unpaid Principal BalanceRecorded InvestmentAllowance for Loan Losses AllocatedUnpaid Principal BalanceRecorded InvestmentAllowance for Loan Losses Allocated
Commercial and agricultural:
Commercial and industrial$1,391 $1,391 $— $133 $133 $— 
Commercial mortgages:
Construction204 204 — 247 247 — 
Commercial mortgages, other6,339 4,287 — 3,501 3,503 — 
Residential mortgages1,297 1,277 — 554 525 — 
Consumer loans:
Home equity lines and loans657 642 — 171 149 — 
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial6,118 6,124 5,530 6,013 6,014 6,000 
Commercial mortgages:
Commercial mortgages, other2,347 2,259 184 5,093 5,094 2,097 
Consumer loans:
Home equity lines and loans170 170 52 
Total$18,523 $16,354 $5,766 $15,712 $15,665 $8,097 

20

 September 30, 2019 December 31, 2018
With no related allowance recorded:Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated Unpaid Principal Balance Recorded Investment Allowance for Loan Losses Allocated
Commercial and agricultural:           
Commercial and industrial$184
 $184
 $
 $345
 $346
 $
Commercial mortgages: 
  
  
  
  
  
Construction262
 263
 
 307
 308
 
Commercial mortgages, other3,305
 3,306
 
 4,007
 3,935
 
Residential mortgages436
 407
 
 424
 402
 
Consumer loans: 
  
  
  
  
  
Home equity lines and loans176
 153
 
 54
 55
 
With an allowance recorded: 
  
  
  
  
  
Commercial and agricultural:   
  
  
  
  
Commercial and industrial6,164
 6,165
 6,141
 1,780
 1,782
 1,743
Commercial mortgages: 
  
  
  
  
  
Commercial mortgages, other10,221
 10,139
 2,519
 1,902
 1,903
 446
Total$20,748
 $20,617
 $8,660
 $8,819
 $8,731
 $2,189




The following table presents the average recorded investment and interest income of loans individually evaluated for impairment recognized by class of loans for the three and nine-monthnine month periods ended September 30, 20192020 and 20182019 (in thousands):
 Three Months Ended 
 September 30, 2020
Three Months Ended 
 September 30, 2019
Nine Months Ended 
 September 30, 2020
Nine Months Ended 
 September 30, 2019
With no related allowance recorded:Average Recorded InvestmentInterest Income Recognized
(1)
Average Recorded InvestmentInterest Income Recognized
(1)
Average Recorded InvestmentInterest Income Recognized
(1)
Average Recorded InvestmentInterest Income Recognized
(1)
Commercial and agricultural:
Commercial and industrial$1,239 $$228 $$679 $$277 $
Commercial mortgages:
Construction213 270 226 285 
Commercial mortgages, other4,515 3,372 3,938 3,630 
Residential mortgages1,224 396 36 873 17 396 40 
Consumer loans:
Home equity lines & loans650 156 399 134 
With an allowance recorded:
Commercial and agricultural:
Commercial and industrial5,804 3,983 5,867 2,508 
Commercial mortgages:
Commercial mortgages, other2,229 10,240 3,645 16 6,881 
Consumer loans:
Home equity lines and loans175 88 
Total$16,049 $23 $18,645 $44 $15,715 $50 $14,111 $61 
  Three Months Ended 
 September 30, 2019
 Three Months Ended 
 September 30, 2018
 Nine Months Ended 
 September 30, 2019
 Nine Months Ended 
 September 30, 2018
With no related allowance recorded: Average Recorded Investment Interest Income Recognized
(1)
 Average Recorded Investment Interest Income Recognized
(1)
 Average Recorded Investment Interest Income Recognized
(1)
 Average Recorded Investment Interest Income Recognized
(1)
Commercial and agricultural:                
Commercial and industrial $228
 $
 $526
 $1
 $277
 $1
 $673
 $11
Commercial mortgages:  
  
  
  
  
  
  
  
Construction 270
 2
 330
 3
 285
 7
 344
 8
Commercial mortgages, other 3,372
 3
 4,339
 5
 3,630
 9
 4,257
 16
Residential mortgages 396
 36
 413
 2
 396
 40
 420
 6
Consumer loans:  
  
  
  
  
  
  
  
Home equity lines & loans 156
 3
 59
 1
 134
 4
 61
 2
With an allowance recorded:  
  
  
  
  
  
  
  
Commercial and agricultural:  
  
  
  
  
  
  
  
Commercial and industrial 3,983
 
 1,573
 1
 2,508
 
 3,359
 2
Commercial mortgages:  
  
  
  
  
  
  
  
Commercial mortgages, other 10,240
 
 2,040
 1
 6,881
 
 2,419
 4
Total $18,645
 $44
 $9,280
 $14
 $14,111
 $61
 $11,533
 $49
(1)Cash basis interest income approximates interest income recognized.


The following table presents the recorded investment in non-accrual and loans past due 90 days or more and still accruing by class of loans as of September 30, 20192020 and December 31, 20182019 (in thousands):

Non-accrualLoans Past Due 90 Days or More and Still Accruing
September 30, 2020December 31, 2019September 30, 2020December 31, 2019
Commercial and agricultural:
Commercial and industrial$6,272 $6,147 $$
Commercial mortgages:
Construction63 80 
Commercial mortgages, other6,027 8,407 
Residential mortgages1,742 2,155 
Consumer loans:
Home equity lines and loans1,017 641 
Indirect consumer loans604 571 
Direct consumer loans
Total$15,726 $18,008 $$

21

  Non-accrual Loans Past Due 90 Days or More and Still Accruing
  September 30, 2019 December 31, 2018 September 30, 2019 December 31, 2018
Commercial and agricultural:        
Commercial and industrial $6,335
 $2,048
 $53
 $10
Commercial mortgages:        
Construction 87
 109
 
 
Commercial mortgages, other 13,250
 5,529
 
 
Residential mortgages 2,455
 2,655
 
 
Consumer loans:        
Credit cards 
 
 
 9
Home equity lines and loans 722
 1,183
 
 
Indirect consumer loans 613
 693
 
 
Direct consumer loans 6
 37
 
 
Total $23,468
 $12,254
 $53
 $19


The following tables present the aging of the recorded investment in loans as of September 30, 20192020 and December 31, 20182019 (in thousands):
September 30, 2020
 30 - 59 Days Past Due60 - 89 Days Past Due90 Days or More Past DueTotal Past DueLoans Not Past DueTotal
Commercial and agricultural:
Commercial and industrial$2,433 $$3,982 $6,416 $398,913 $405,329 
Agricultural684 684 
Commercial mortgages: 
Construction54,523 54,523 
Commercial mortgages, other11,077 262 1,878 13,217 625,195 638,412 
Residential mortgages631 434 1,074 226,910 227,984 
Consumer loans: 
Credit cards— — — — — — 
Home equity lines and loans169 30 147 346 81,424 81,770 
Indirect consumer loans753 190 213 1,156 120,564 121,720 
Direct consumer loans18 187 206 12,900 13,106 
Total$15,081 $679 $6,655 $22,415 $1,521,113 $1,543,528 
 September 30, 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$1,782
 $249
 $302
 $2,333
 $225,177
 $227,510
Agricultural
 
 
 
 215
 215
Commercial mortgages: 
  
  
  
  
  
Construction279
 
 
 279
 48,490
 48,769
Commercial mortgages, other2,176
 402
 1,993
 4,571
 600,065
 604,636
Residential mortgages1,906
 674
 1,258
 3,838
 180,731
 184,569
Consumer loans: 
  
  
  
    
Home equity lines and loans36
 15
 496
 547
 92,205
 92,752
Indirect consumer loans1,356
 305
 349
 2,010
 134,830
 136,840
Direct consumer loans63
 14
 4
 81
 14,948
 15,029
Total$7,598
 $1,659
 $4,402
 $13,659
 $1,296,661
 $1,310,320


December 31, 2019
 30 - 59 Days Past Due60 - 89 Days Past Due90 Days or More Past DueTotal Past DueLoans Not Past DueTotal
Commercial and agricultural:
Commercial and industrial$1,285 $49 $4,398 $5,732 $224,916 $230,648 
Agricultural274 274 
Commercial mortgages: 
Construction44,082 44,082 
Commercial mortgages, other440 277 2,165 2,883 603,605 606,488 
Residential mortgages1,016 803 956 2,775 186,099 188,874 
Consumer loans: 
Credit cards— — — — — — 
Home equity lines and loans353 151 149 653 91,412 92,065 
Indirect consumer loans1,546 377 355 2,278 133,088 135,366 
Direct consumer loans32 11 49 15,057 15,106 
Total$4,672 $1,668 $8,029 $14,370 $1,298,533 $1,312,903 



 December 31, 2018
 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$284
 $61
 $71
 $416
 $202,667
 $203,083
Agricultural16
 
 
 16
 313
 329
Commercial mortgages: 
  
  
  
  
  
Construction
 
 
 
 54,626
 54,626
Commercial mortgages, other6,273
 158
 169
 6,600
 601,762
 608,362
Residential mortgages2,204
 516
 1,026
 3,746
 179,479
 183,225
Consumer loans: 
  
  
  
    
Credit cards1
 3
 9
 13
 1,437
 1,450
Home equity lines and loans279
 97
 730
 1,106
 97,360
 98,466
Indirect consumer loans1,511
 319
 436
 2,266
 147,540
 149,806
Direct consumer loans120
 53
 31
 204
 16,058
 16,262
Total$10,688
 $1,207
 $2,472
 $14,367
 $1,301,242
 $1,315,609


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 September 30, 2020, in conformance with Section 4013 of the CARES Act, the Corporation modified a total of 1,125 commercial and consumer loans represented by a total loan balance of $233.6 million. As of

22


September 30, 2020, 74 loans totaling $45.9 million remained in modified status, of which 44 loans totaling $32.8 million had been modified more than once.

As of September 30, 20192020 and December 31, 2018,2019, the Corporation has a recorded investment in TDRs of $9.3$10.8 million and $6.8$9.0 million, respectively. There were specific reserves of $2.4$0.6 million and $0.9$2.3 million allocated for TDRs at September 30, 20192020 and December 31, 2018,2019, respectively. As of September 30, 2020, TDRs totaling $2.8 million were accruing interest under the modified terms and $8.0 million were on non-accrual status. As of December 31, 2019, TDRs totaling $0.9 million were accruing interest under the modified terms and $8.4 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$8.1 million were on non-accrual status. The Corporation hadhas committed no additional amounts as of both September 30, 2019$37 thousand and December 31, 2018,$17 thousand to customers with outstanding loans that are classified as TDRs.TDRs as of September 30, 2020 and December 31, 2019, respectively.


During the three months ended September 30, 2019, the terms of a loan was modified as a TDR, while there were no loans modified as TDRs during the three months ended September 30, 2018. The modification of the terms of one commercial real estate term loan during the three months ended September 30, 2019 included a reduction of the scheduled amortized payments for greater than a three month period.

During the nine months ended September 30, 20192020 and 2018,2019, the terms of certain loans were modified as TDRs. In addition to the modifications noted above, during the nine months ended September 30, 2020 modifications included 2 commercial and industrial loans where deferral of payments were granted and both loans were risk rated Substandard while 1 loan was in non-accrual status prior to the modification. The modifications of 4 commercial mortgage loans included the deferral of payments with 3 of the loans risk rated Substandard and in non-accrual status, 3 of the borrowers were over one year past due in real estate taxes and 2 of loans were over 30 days past due in payments. The modifications of 3 residential mortgages included the deferral of payments while all 3 were in non-accrual status prior to the modifications, 2 were risk rated Substandard and 1 was over thirty days past due in payments. The modifications of 3 home equity lines and loans included the deferral of payments while all 3 loans were risk rated Substandard and in non-accrual status prior to the modifications. In addition to the modification noted above, the modification of the terms of one1 home equity loan during the nine months ended September 30, 2019 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. The modification of the terms of one commercial and industrial term loan during the nine months ended September 30, 2018 included an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk.




The following tables present loans by class modified as TDRs that occurred during the three monthsmonth period ended September 30, 20192020 and 2018September 30, 2019 (dollars in thousands):


September 30, 2020Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial$1,138 $1,138 
Agricultural
Commercial mortgages:
Commercial mortgages, other
Residential mortgages320 320 
Consumer loans:
Home equity lines and loans
Total$1,458 $1,458 

The TDRs described above did not increase the allowance for loan losses and resulted in 0 charge-offs during the three month period ended September 30, 2020.


September 30, 2019Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages, other$4,223 $4,223 
Total$4,223 $4,223 
23


September 30, 2019 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:      
Commercial mortgages:      
Commercial mortgages, other 1
 $4,223
 $4,223
Total 1
 $4,223
 $4,223


The TDR described above did not increase the allowance for loan losses and resulted in no0 charge-offs during the three month period ended September 30, 2019.


The following tables present loans by class modified as TDRs that occurred during the nine month period ended September 30, 2020 and September 30, 2019 (dollars in thousands):

September 30, 2020Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial and agricultural:
Commercial and industrial$2,068 $2,068 
Commercial mortgages:
Commercial mortgages, other1,297 1,297 
Residential mortgages997 997 
Consumer loans:
Home equity lines and loans738 738 
Total15 $5,100 $5,100 

The TDRs described above increased the allowance for loan losses by $142 thousand and resulted in 0 charge-offs during the nine months ended September 30, 2019 and 2018 (dollars in thousands):2020.
September 30, 2019Number of LoansPre-Modification Outstanding Recorded InvestmentPost-Modification Outstanding Recorded Investment
Troubled debt restructurings:
Commercial mortgages:
Commercial mortgages, other$4,223 $4,223 
Consumer loans:
Home equity lines and loans137 137 
Total$4,360 $4,360 
September 30, 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
Home equity lines and loans 1
 137
 137
Total 2
 $4,360
 $4,360

September 30, 2018 Number of Loans Pre-Modification Outstanding Recorded Investment Post-Modification Outstanding Recorded Investment
Troubled debt restructurings:      
Commercial and agricultural:      
Commercial and industrial 1
 $100
 $100
Total 1
 $100
 $100


The TDRs described above increased the allowance for loan losses by $1.7 million and resulted in no0 charge-offs during the nine month period ended September 30, 2019. The TDRs described above did not increase the allowance for loan losses and resulted in no charge-offs during the nine months ended September 30, 2018.


A loan is considered to be in payment default once it is 90 days contractually past due under the modified terms. There were no0 payment defaults on any loans previously modified as TDRs within twelve months following the modification during the three and nine month periods ended September 30, 20192020 and 2018.2019.


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 its 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.




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):

24



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 at 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.


Commercial loans not meeting the criteria above to be considered criticized or classified are considered to be pass rated loans.  Loans listed as not rated are included in groups of homogeneous loans performing under terms of the loan notes.  Based on the analyses performed as of September 30, 20192020 and December 31, 2018,2019, the risk category of the recorded investment of loans by class of loans is as follows (in thousands):
 September 30, 2020
 Not RatedPassSpecial MentionSubstandardDoubtfulTotal
Commercial and agricultural:
Commercial and industrial$$392,378 $2,779 $4,966 $5,206 $405,329 
Agricultural684 684 
Commercial mortgages:
Construction51,126 610 2,787 54,523 
Commercial mortgages610,687 6,732 18,755 2,238 638,412 
Residential mortgages226,242 1,742 227,984 
Consumer loans:
Credit cards— — — — — — 
Home equity lines and loans80,753 1,017 81,770 
Indirect consumer loans121,116 604 121,720 
Direct consumer loans13,105 13,106 
Total$441,216 $1,054,875 $10,121 $29,872 $7,444 $1,543,528 
 December 31, 2019
 Not RatedPassSpecial MentionSubstandardDoubtfulTotal
Commercial and agricultural:
Commercial and industrial$$208,552 $5,915 $10,361 $5,820 $230,648 
Agricultural274 274 
Commercial mortgages:
Construction40,304 168 3,610 44,082 
Commercial mortgages577,266 12,451 12,356 4,415 606,488 
Residential mortgages186,719 2,155 188,874 
Consumer loans:
Credit cards— — — — — — 
Home equity lines and loans91,424 641 92,065 
Indirect consumer loans134,795 571 135,366 
Direct consumer loans15,099 15,106 
Total$428,037 $826,396 $18,534 $29,701 $10,235 $1,312,903 
25


 September 30, 2019
 Not Rated Pass Special Mention Substandard Doubtful Total
Commercial and agricultural:           
Commercial and industrial$
 $210,620
 $4,250
 $10,997
 $1,643
 $227,510
Agricultural
 215
 
 
 
 215
Commercial mortgages: 
  
  
  
  
  
Construction
 48,682
 
 87
 
 48,769
Commercial mortgages
 572,663
 10,976
 16,522
 4,475
 604,636
Residential mortgages182,114
 
 
 2,455
 
 184,569
Consumer loans: 
  
  
  
  
  
Home equity lines and loans92,030
 
 
 722
 
 92,752
Indirect consumer loans136,227
 
 
 613
 
 136,840
Direct consumer loans15,023
 
 
 6
 
 15,029
Total$425,394
 $832,180
 $15,226
 $31,402
 $6,118
 $1,310,320


 December 31, 2018
 Not Rated Pass Special Mention Substandard Doubtful Total
Commercial and agricultural:           
Commercial and industrial$
 $190,666
 $4,452
 $6,222
 $1,743
 $203,083
Agricultural
 329
 
 
 
 329
Commercial mortgages: 
  
  
  
  
  
Construction
 54,517
 
 109
 
 54,626
Commercial mortgages
 574,221
 16,830
 15,948
 1,363
 608,362
Residential mortgages180,570
 
 
 2,655
 
 183,225
Consumer loans: 
  
  
  
  
  
Credit cards1,450
 
 
 
 
 1,450
Home equity lines and loans97,283
 
 
 1,183
 
 98,466
Indirect consumer loans149,113
 
 
 693
 
 149,806
Direct consumer loans16,225
 
 
 37
 
 16,262
Total$444,641
 $819,733
 $21,282
 $26,847
 $3,106
 $1,315,609


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. The following tables present the recorded investment in residential and consumer loans based on payment activity as of September 30, 20192020 and December 31, 20182019 (in thousands):

 September 30, 2020
 Consumer Loans
 Residential MortgagesHome Equity Lines and LoansIndirect Consumer LoansOther Direct Consumer Loans
Performing$226,242 $80,753 $121,117 $13,104 
Non-Performing1,742 1,017 604 
 $227,984 $81,770 $121,721 $13,105 

 December 31, 2019
 Consumer Loans
 Residential MortgagesHome Equity Lines and LoansIndirect Consumer LoansOther Direct Consumer Loans
Performing$186,719 $91,424 $134,795 $15,099 
Non-Performing2,155 641 571 
 $188,874 $92,065 $135,366 $15,106 


 September 30, 2019
   Consumer Loans
 Residential Mortgages Credit Card Home Equity Lines and Loans Indirect Consumer Loans Other Direct Consumer Loans
Performing$182,114
 $
 $92,030
 $136,227
 $15,023
Non-Performing2,455
 
 722
 613
 6
 $184,569
 $
 $92,752
 $136,840
 $15,029

 December 31, 2018
   Consumer Loans
 Residential Mortgages Credit Card Home Equity Lines and Loans Indirect Consumer Loans Other Direct Consumer Loans
Performing$180,570
 $1,450
 $97,283
 $149,113
 $16,225
Non-Performing2,655
 
 1,183
 693
 37
 $183,225
 $1,450
 $98,466
 $149,806
 $16,262


NOTE 5FAIR VALUE


Fair value is the exchange price that would be received for an asset or paid to transfer a liability 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 on a recurring basis:


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 deferred compensation plan and securities that have a readily determinable fair market value, are recorded at fair value with changes in fair value included in earnings.  The fair values of equity investments are determined by quoted market prices (Level 1 inputs).


26


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-dependentcollateral 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 its derivatives utilize credit default rate assumptions (Level 3 inputs).



27



Assets and liabilities measured at fair value on a recurring basis are summarized below (in thousands):
Fair Value Measurement at September 30, 2020 Using
Financial Assets:Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Mortgage-backed securities, residential$326,268 $$326,268 $
Obligations of states and political subdivisions43,260 43,260 
Corporate bonds and notes7,064 7,064 
SBA loan pools19,708 19,708 
Total available for sale securities$396,300 $$396,300 $
Equity investments, at fair value$2,291 $1,629 $$662 
Derivative assets16,886 16,886 
Financial Liabilities:
Derivative liabilities$17,097 $$16,886 $211 
  Fair Value Measurement at September 30, 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$203,524
 $
 $203,524
 $
Obligations of states and political subdivisions47,270
 
 47,270
 
Corporate bonds and notes250
 
 250
 
SBA loan pools16,485
 
 16,485
 
Total available for sale securities$267,529
 $
 $267,529
 $
        
Equity investments, at fair value$1,231
 $1,231
 $
 $
Derivative assets7,885
 
 7,885
 
        
Financial Liabilities:       
Derivative liabilities$8,311
 $
 $7,885
 $426


There were no0 transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2020.
Fair Value Measurement at December 31, 2019 Using
Financial Assets:Fair ValueQuoted 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 $$225,234 $
Obligations of states and political subdivisions42,845 42,845 
Corporate bonds and notes250 250 
SBA loan pools15,761 15,761 
Total available for sale securities$284,090 $$284,090 $
Equity investments, at fair value$1,442 $1,442 $$
Derivative assets6,466 6,466 
Financial Liabilities:
Derivative liabilities$6,831 $$6,466 $365 

There were 0 transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2019.

28

  Fair Value Measurement at December 31, 2018 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)
Obligations of U.S. Government and U.S. Government sponsored enterprises$5,472
 $
 $5,472
 $
Mortgage-backed securities, residential183,192
 
 183,192
 
Obligations of states and political subdivisions44,152
 
 44,152
 
Corporate bonds and notes247
 
 247
 
SBA loan pools9,195
 
 9,195
 
Total available for sale securities$242,258
 $
 $242,258
 $
        
Equity investments, at fair value$1,075
 $1,075
 $
 $
Derivative assets3,142
 
 3,142
 
        
Financial Liabilities:       
Derivative liabilities$3,282
 $
 $3,142
 $140


There were no transfers between Level 1 and Level 2 during the three and nine month periods ended September 30, 2018.



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 three-monththree month periods ended September 30, 20192020 and 20182019 (in thousands):

Assets (Liabilities)
Derivative Liabilities
September 30, 2020September 30, 2019
Balance of recurring Level 3 assets at July 1$(211)$(365)
Derivative instruments entered into(7)
Total gains or losses for the period:
Included in earnings - other non-interest income(54)
Included in other comprehensive income
Transfers out of Level 3
Balance of recurring Level 3 assets at September 30$(211)$(426)
  Assets (Liabilities)
  Corporate Bonds and Notes Derivative Liabilities
  September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Balance of recurring Level 3 assets at July 1 $
 $
 $(365) $(18)
Derivative instruments entered into 
 
 (7) 
Total gains or losses for the period:        
Included in earnings - other non-interest income 
 
 (54) 5
Included in other comprehensive income 
 
 
 
Transfers out of Level 3 
 
 
 
Balance of recurring Level 3 assets at September 30 $
 $
 $(426) $(13)


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 nine month periods ended September 30, 20192020 and September 30, 20182019 (in thousands):


Assets (Liabilities)
Derivative Liabilities
September 30, 2020September 30, 2019
Balance of recurring Level 3 assets at January 1$(365)$(140)
Derivative instruments entered into(15)(42)
Total gains or losses for the period:
Included in earnings - other non-interest income169 (244)
Included in other comprehensive income
Transfers out of Level 3
Balance of recurring Level 3 assets at September 30$(211)$(426)
  Assets (Liabilities)
  Corporate Bonds and Notes Derivative Liabilities
  September 30, 2019 September 30, 2018 September 30, 2019 September 30, 2018
Balance of recurring Level 3 assets at January 1 $
 $
 $(140) $(75)
Derivative instruments entered into 
 
 (42) 
Total gains or losses for the period:        
Included in earnings - other non-interest income 
 
 (244) 62
Included in other comprehensive income 
 
 
 
Transfers out of Level 3 
 
 
 
Balance of recurring Level 3 assets at September 30 $
 $
 $(426) $(13)


The following table presents information related to Level 3 recurring fair value measurements at September 30, 20192020 and December 31, 20182019 (in thousands):

DescriptionFair Value at September 30,
2020
Valuation TechniqueUnobservable InputsRange [Weighted Average] at September 30, 2020
Derivative liabilities$211 Historical trendCredit default rate
0.59% - 6.59%
[1.18%]
DescriptionFair Value at December 31,
2019
Valuation TechniqueUnobservable InputsRange [Weighted Average] at December 31, 2019
Derivative liabilities$365 Historical trendCredit default rate
7.30% - 7.30%
[7.30%]

29
Description Fair Value at
September 30,
2019
 Valuation Technique Unobservable Inputs Range
[Weighted Average]
at September 30, 2019
Derivative liabilities $426
 Historical trend Credit default rate 5.65% - 5.65%
[5.65%]



Description Fair Value at
December 31,
2018
 Valuation Technique Unobservable Inputs Range
[Weighted Average]
at December 31, 2018
Derivative liabilities $140
 Historical trend Credit default rate 7.46% - 7.46%
[7.46%]



Assets and liabilities measured at fair value on a non-recurring basis are summarized below (in thousands):
 Fair Value Measurement at September 30, 2020 Using
Financial Assets:Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Impaired Loans:
Commercial mortgages:
Commercial mortgages$512 $$$512 
Total impaired loans$512 $$$512 
Other real estate owned:    
Commercial mortgages:    
  Commercial mortgages$416 $$$416 
Residential mortgages126 126 
Consumer loans:    
Home equity lines and loans44 44 
Total other real estate owned, net$586 $$$586 
   Fair Value Measurement at September 30, 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$7,627
 $
 $
 $7,627
 $(1,673)
Total impaired loans$7,627
 $
 $
 $7,627
 $(1,673)
Other real estate owned: 
  
  
  
  
Commercial mortgages: 
  
  
  
  
  Commercial mortgages$62
 $
 $
 $62
 $
Residential mortgages62
 
 
 62
 
Consumer loans: 
  
  
  
  
Home equity lines and loans86
 
 
 86
 
Total other real estate owned, net$210
 $
 $
 $210
 $



 Fair Value Measurement at December 31, 2019 Using
Financial Assets:Fair ValueQuoted Prices in Active Markets for Identical Assets
(Level 1)
Significant Other Observable Inputs
(Level 2)
Significant Unobservable Inputs
(Level 3)
Impaired Loans:
Commercial mortgages:
  Commercial mortgages$1,554 $$$1,554 
Total impaired loans$1,554 $$$1,554 
Other real estate owned:    
Commercial mortgages:    
Commercial mortgages$111 $$$111 
Residential mortgages284 284 
Consumer loans:    
Home equity lines and loans122 122 
Total other real estate owned, net$517 $$$517 

30

   Fair Value Measurement at December 31, 2018 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$1,456
 $
 $
 $1,456
 $240
Total impaired loans$1,456
 $
 $
 $1,456
 $240
Other real estate owned: 
  
  
  
  
Commercial mortgages: 
  
  
  
  
Commercial mortgages$213
 $
 $
 $213
 $
Residential mortgages204
 
 
 204
 
Consumer loans: 
  
  
  
  
Home equity lines and loans157
 
 
 157
 (14)
Total other real estate owned, net$574
 $
 $
 $574
 $(14)




The following tables present information related to Level 3 non-recurring fair value measurement at September 30, 20192020 and December 31, 20182019 (in thousands):
DescriptionFair Value at September 30, 2020Valuation TechniqueUnobservable InputsRange [Weighted Average] at September 30, 2020
Impaired loans:
Commercial mortgages:
Commercial mortgages$512 Sales comparisonDiscount to appraised value
13.30% - 13.30%
[13.30%]
$512 
OREO:
Commercial mortgages:
Commercial mortgages$416 Sales comparisonDiscount to appraised value
42.28% - 42.28%
[42.28%]
Residential mortgages126 Sales comparisonDiscount to appraised value
20.80% - 20.80%
[20.80%]
Consumer loans:
Home equity lines and loans44 Sales comparisonDiscount to appraised value
20.80% - 20.80%
[20.80%]
$586 
Description Fair Value at September 30, 2019 Valuation Technique Unobservable Inputs Range
[Weighted Average]
at
September 30, 2019
Impaired loans:        
Commercial mortgages:        
Commercial mortgages $7,627
 Sales comparison Discount to appraised value 10.00% - 15.43%
[10.13%]
  $7,627
      
         
OREO:        
Commercial mortgages:        
Commercial mortgages $62
 Sales comparison Discount to appraised value 22.00% - 22.00%
[22.00%]
Residential mortgages 62
 Sales comparison Discount to appraised value 20.80% -20.80%
[20.80%]
Consumer loans:        
Home equity lines and loans 86
 Sales comparison Discount to appraised value 20.80% - 20.80%
[20.80%]
  $210
      
DescriptionFair Value at December 31, 2019Valuation TechniqueUnobservable InputsRange [Weighted Average] at December 31, 2019
Impaired loans:
Commercial mortgages:
  Commercial mortgages$1,554 Sales comparisonDiscount to appraised value
10.00% - 10.00%
[10.00%]
$1,554 
OREO:
Commercial mortgages:
  Commercial mortgages$111 Sales comparisonDiscount to appraised value
20.80% - 20.80%
[20.80%]
Residential mortgages284 Sales comparisonDiscount to appraised value
20.80% - 35.29%
[24.09%]
Consumer loans:
Home equity lines and loans122 Sales comparisonDiscount to appraised value
20.80% - 20.80%
[20.80%]
$517 


31

Description Fair Value at December 31, 2018 Valuation Technique Unobservable Inputs Range
[Weighted Average]
at
December 31, 2018
Impaired loans:        
Commercial and agricultural:        
Commercial and industrial $1,456
 Sales comparison Discount to appraised value 11.76% - 11.76%
[11.76%]
  $1,456
      
         
OREO:        
Commercial mortgages:        
  Commercial mortgages $213
 Sales comparison Discount to appraised value 10.00% - 24.80%
[17.72%]
Residential mortgages 204
 Sales comparison Discount to appraised value 20.80% - 39.78%
[22.94%]
Consumer loans:        
Home equity lines and loans 157
 Sales comparison Discount to appraised value 20.80% - 20.80%
[20.80%]
  $574
      




FAIR VALUE OF FINANCIAL INSTRUMENTS


The carrying amounts and estimated fair values of other financial instruments, at September 30, 20192020 and December 31, 2018,2019, are as follows (in thousands):
September 30, 2019September 30, 2020
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)
Financial assets:Carrying AmountQuoted 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$36,497
 $36,497
 $
 $
 $36,497
Cash and due from financial institutions$35,327 $35,327 $$$35,327 
Interest-earning deposits in other financial institutions109,801
 109,801
 
 
 109,801
Interest-earning deposits in other financial institutions114,575 114,575 114,575 
Equity investments834
 834
 
 
 834
Equity investments2,291 1,629 662 2,291 
Securities held to maturity3,420
 
 2,318
 1,125
 3,443
Securities held to maturity3,047 2,684 409 3,093 
FHLBNY and FRBNY stock3,091
 
 
 
 N/A
FHLBNY and FRBNY stock3,150 N/A
Loans, net and loans held for sale1,284,028
 
 
 1,262,536
 1,262,536
Loans, net and loans held for sale1,515,962 1,522,274 1,522,274 
Accrued interest receivable4,714
 89
 943
 3,682
 4,714
Accrued interest receivable6,230 1,194 5,035 6,230 
Derivative AssetsDerivative Assets16,886 16,886 16,886 
         
Financial liabilities: 
  
  
  
  
Financial liabilities:     
Deposits: 
  
  
  
  
Deposits:     
Demand, savings, and insured money market accounts$1,406,681
 $1,406,681
 $
 $
 $1,406,681
Demand, savings, and insured money market accounts$1,718,686 $1,718,686 $$$1,718,686 
Time deposits169,825
 
 172,617
 
 172,617
Time deposits205,503 208,491 208,491 
Accrued interest payable326
 30
 296
 
 326
Accrued interest payable260 10 250 260 
Derivative LiabilitiesDerivative Liabilities17,097 16,886 211 17,097 
(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.
32


December 31, 2018 December 31, 2019
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)
Financial assets:Carrying AmountQuoted 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$33,040
 $33,040
 $
 $
 $33,040
Cash and due from financial institutions$25,203 $25,203 $$$25,203 
Interest-earning deposits in other financial institutions96,932
 96,932
 
 
 96,932
Interest-earning deposits in other financial institutions96,701 96,701 96,701 
Equity investments834
 834
 
 
 834
Equity investments2,174 2,174 2,174 
Securities available for saleSecurities available for sale284,090 284,090 284,090 
Securities held to maturity4,875
 
 1,838
 3,020
 4,858
Securities held to maturity3,115 2,094 1,045 3,139 
FHLBNY and FRBNY stock3,138
 
 
 
 N/A
FHLBNY and FRBNY stock3,099 N/A
Loans, net and loans held for sale1,293,464
 
 
 1,287,495
 1,287,495
Loans, net and loans held for sale1,286,926 1,285,215 1,285,215 
Accrued interest receivable4,480
 80
 697
 3,703
 4,480
Accrued interest receivable4,633 63 885 3,685 4,633 
Derivative AssetDerivative Asset6,466 6,466 6,466 
         
Financial liabilities: 
  
  
  
  
Financial liabilities:     
Deposits: 
  
  
  
  
Deposits:     
Demand, savings, and insured money market accounts$1,419,011
 $1,419,011
 $
 $
 $1,419,011
Demand, savings, and insured money market accounts$1,410,962 $1,410,962 $$$1,410,962 
Time deposits150,226
 
 150,938
 
 150,938
Time deposits161,176 163,761 163,761 
Accrued interest payable232
 26
 206
 
 232
Accrued interest payable299 27 272 299 
Derivative LiabilitiesDerivative Liabilities6,831 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.






NOTE 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 September 30, 2019,2020, the weighted average remaining lease term was 11.410.5 years with a weighted average discount rate of 3.39%.  Rent expense was $0.2 million for the three months ended September 30, 2019.2020. Rent expense was $0.5$0.7 million for the nine months ended September 30, 2019.2020. 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.


Leased branch properties at September 30, 20192020 and December 31, 20182019 consist of the following (in thousands):
September 30, 2020December 31, 2019
Operating lease right-of-use asset$8,713 $8,713 
Less: accumulated amortization(1,239)(712)
Operating lease right-of-use-assets, net$7,474 $8,001 

33

  September 30, 2019 December 31, 2018
Operating lease right-of-use asset $8,592
 $
Less: accumulated amortization (541) 
Operating lease right-of-use-assets, net $8,051
 $


The following is a schedule by year of the undiscounted cash flows of the operating lease liabilities, excluding CAM charges, as of September 30, 20192020 (in thousands):
YearAmount
2020$233 
2021930 
2022869 
2023889 
2024880 
2025 and thereafter5,347 
Total minimum lease payments9,148 
Less: amount representing interest(1,564)
Present value of net minimum lease payments$7,584 
Year Amount
2019 $231
2020 932
2021 899
2022 831
2023 851
2024 and thereafter 6,091
Total minimum lease payments 9,835
Less: amount representing interest (1,710)
Present value of net minimum lease payments $8,125


As of September 30, 2019,2020, the Corporation had no operating leases that were signed, but had not yet commenced.


Finance Leases


The Corporation leases certain buildings under finance leases. The lease arrangements require monthly payments through 2036. As of September 30, 2019,2020, the weighted average remaining lease term was 13.212.3 years with a weighted average discount rate of 3.34%3.35%. The Corporation has included these leases in premises and equipment as of September 30, 20192020 and December 31, 20182019 as follows (in thousands):
September 30, 2020December 31, 2019
Buildings$5,572 $5,572 
Less: accumulated depreciation(1,791)(1,541)
Net book value$3,781 $4,031 
  September 30, 2019 December 31, 2018
Buildings $5,572
 $5,572
Less: accumulated depreciation (1,458) (1,208)
Net book value $4,114
 $4,364




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 September 30, 20192020 (in thousands):
YearAmount
2020$94 
2021388 
2022391 
2023391 
2024391 
2025 and thereafter3,250 
Total minimum lease payments4,905 
Less: amount representing interest(995)
Present value of net minimum lease payments$3,910 
Year Amount
2019 $92
2020 376
2021 388
2022 391
2023 391
2024 and thereafter 3,639
Total minimum lease payments 5,277
Less: amount representing interest (1,137)
Present value of net minimum lease payments $4,140


As of September 30, 2019,2020, the Corporation had no finance leases that were signed, but had not yet commenced.


Related Party Transactions


The Bank leases its branch located at 1365 New Scotland Road, Slingerlands, New York, under a lease agreement through July, 20202022 from a member of the Corporation's Board of Directors with monthly rent expense totaling $4$3 thousand per month. Rent paid to this Board of Directors member totaled $12$13 thousand and $12 thousand for the three month periods ended September 30, 20192020 and 2018,2019, respectively. Rent paid to this Board of Directors member totaled $40 thousand and $36 thousand for the nine month periods ended September 30, 20192020 and 2018, respectively.2019.


34


The Bank leases 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$7 thousand per month. Rent paid to this Board of Directors member totaled $24$26 thousand and $24 thousand for the three month periods ended September 30, 20192020 and 2018,2019, respectively. Rent paid to this Board of Directors member totaled $69$76 thousand and $60$69 thousand for the nine month periods ended September 30, 20192020 and 2018,2019, respectively.




NOTE 7        GOODWILL AND INTANGIBLE ASSETS


The changes in goodwill included in the core banking segment during the nine month periods ended September 30, 20192020 and 20182019 were as follows (in thousands):
 20202019
Beginning of year$21,824 $21,824 
Acquired goodwill
Ending balance September 30,$21,824 $21,824 
  2019 2018
Beginning of year $21,824
 $21,824
Acquired goodwill 
 
Ending balance September 30, $21,824
 $21,824


Acquired intangible assets were as follows at September 30, 20192020 and December 31, 20182019 (in thousands):
 At September 30, 2020At December 31, 2019
 Balance AcquiredAccumulated AmortizationBalance AcquiredAccumulated Amortization
Core deposit intangibles$5,975 $5,938 $5,975 $5,832 
Other customer relationship intangibles5,633 5,299 5,633 5,034 
Total$11,608 $11,237 $11,608 $10,866 
  At September 30, 2019 At December 31, 2018
  Balance Acquired Accumulated Amortization Balance Acquired Accumulated Amortization
Core deposit intangibles $5,975
 $5,776
 $5,975
 $5,576
Other customer relationship intangibles 5,633
 4,946
 5,633
 4,681
Total $11,608
 $10,722
 $11,608
 $10,257


Aggregate amortization expense was $0.1 million and $0.2 million for both of the three month periods ended September 30, 2020 and 2019, and 2018.respectively. Aggregate amortization expense was $0.5$0.4 million and $0.6$0.5 million for the nine month periods ended September 30, 20192020 and 2018,2019, respectively.




The remaining estimated aggregate amortization expense at September 30, 20192020 is listed below (in thousands):
YearEstimated Expense
2020$113 
2021258 
2022
2023
2024
Total$371 

The amount of goodwill reflected in the Corporation's Unaudited Consolidated Financial Statements is required to be tested by management for impairment on at least an annual basis. The test for impairment of goodwill on the identified reporting unit is considered a critical accounting estimate because it requires judgment on the part of management and the use of estimates related to the growth assumptions and market multiples used in the valuation model. The goodwill impairment testing is performed annually as of December 31 and no impairment charges were incurred. However, Management did conclude that the current decline in macroeconomic conditions is a triggering event, but other mitigating factors did not warrant an interim quantitative impairment test. 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.


35
Year Estimated Expense
2019 $144
2020 484
2021 258
2022 
2023 
Total $886




NOTE 8COMMITMENTS AND CONTINGENCIES


The Corporation is 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, overdraft protection and commitments to fund new loans. In accordance with GAAP, these financial instruments are not recorded in the financial statements. The Corporation's policy is to record such instruments when funded. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.  Such transactions are generally used by the Corporation to manage clients' requests for funding and other client needs.


The following table lists the contractual amounts of financial instruments with off-balance sheet risk at September 30, 20192020 and December 31, 20182019 (in thousands):
 September 30, 2020December 31, 2019
 Fixed RateVariable RateFixed RateVariable Rate
Commitments to make loans$31,698 $31,428 $15,560 $25,233 
Unused lines of credit1,191 268,784 1,062 229,137 
Standby letters of credit15,652 16,272 
 September 30, 2019 December 31, 2018
 Fixed Rate Variable Rate Fixed Rate Variable Rate
Commitments to make loans$17,021
 $28,797
 $9,137
 $18,033
Unused lines of credit1,431
 218,517
 848
 212,601
Standby letters of credit
 15,583
 
 16,161


On June 15, 2018,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. As disclosed in the Corporation’s September 12, 2019 Current Report on Form 8-K, the Bank through mediation, reachedowns 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 $3.3participating interest totaling $4.2 million in connection withan approximately $36.0 million commercial credit facility on which the settlementborrower defaulted due to fraudulent activity. The Bank’s complaint alleges that Pioneer Bank, as lead bank, breached the participation agreement and engaged in fraud and negligent misrepresentation. The Bank seeks to recover $4.2 million and additional damages as a result of purchasing the Action. As of January 1, 2018,participation interest. On April 23, 2020 the Corporation had a legal reservereceived payment of $2.3 million for$461,309 from Pioneer Bank related to its obligation under the Action and therefore recognized an additional $1.0 million of legal expense during 2018.participation agreements.


In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of September 30, 2019,2020, we believe that we are not a party to any additional pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.




NOTE 9        ACCUMULATED OTHER COMPREHENSIVE LOSSINCOME (LOSS)


Accumulated other comprehensive lossincome (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 lossincome (loss) by component, net of tax, for the periods indicated (in thousands):
 Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at July 1, 2020, as adjusted$9,273 $(7,131)$2,142 
Other comprehensive income before reclassification(516)(516)
Amounts reclassified from accumulated other comprehensive income16 16 
Net current period other comprehensive income (loss)(516)16 (500)
Balance at September 30, 2020$8,757 $(7,115)$1,642 
36


Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
 Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total
Balance at July 1, 2019 $787
 $(6,738) $(5,951)
Balance at July 1, 2019, as adjustedBalance at July 1, 2019, as adjusted$787 $(6,738)$(5,951)
Other comprehensive income before reclassification 2,662
 
 2,662
Other comprehensive income before reclassification2,662 2,662 
Amounts reclassified from accumulated other comprehensive income 
 13
 13
Amounts reclassified from accumulated other comprehensive income13 13 
Net current period other comprehensive income 2,662
 13
 2,675
Net current period other comprehensive income2,662 13 2,675 
Balance at September 30, 2019 $3,449
 $(6,725) $(3,276)Balance at September 30, 2019$3,449 $(6,725)$(3,276)


 Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at January 1, 2020, as adjusted$1,368 $(7,167)$(5,799)
Other comprehensive income before reclassification7,389 7,389 
Amounts reclassified from accumulated other comprehensive income52 52 
Net current period other comprehensive income7,389 52 7,441 
Balance at September 30, 2020$8,757 $(7,115)$1,642 

 Unrealized Gains and Losses on Securities Available for SaleDefined Benefit and Other Benefit PlansTotal
Balance at January 1, 2019, as adjusted$(4,646)$(6,765)$(11,411)
Other comprehensive income before reclassification8,109 8,109 
Amounts reclassified from accumulated other comprehensive income(14)40 26 
Net current period other comprehensive income8,095 40 8,135 
Balance at September 30, 2019$3,449 $(6,725)$(3,276)

37


  Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total
Balance at July 1, 2018 $(7,223) $(6,898) $(14,121)
Other comprehensive loss before reclassification (1,179) 
 (1,179)
Amounts reclassified from accumulated other comprehensive income 
 13
 13
Net current period other comprehensive income (loss) (1,179) 13
 (1,166)
Balance at September 30, 2018 $(8,402) $(6,885) $(15,287)

  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 before reclassification 8,109
 
 8,109
Amounts reclassified from accumulated other comprehensive income (14) 40
 26
Net current period other comprehensive income (loss) 8,095
 40
 8,135
Balance at September 30, 2019 $3,449
 $(6,725) $(3,276)

  Unrealized Gains and Losses on Securities Available for Sale Defined Benefit and Other Benefit Plans Total
Balance at January 1, 2018 $(3,415) $(6,925) $(10,340)
Cumulative effect of account change (202) 
 (202)
Balance at January 1, 2018, as adjusted (3,617) (6,925) (10,542)
Other comprehensive income before reclassification (4,785) 
 (4,785)
Amounts reclassified from accumulated other comprehensive income 
 40
 40
Net current period other comprehensive income (4,785) 40
 (4,745)
Balance at September 30, 2018 $(8,402) $(6,885) $(15,287)




The following is the reclassification out of accumulated other comprehensive income for the periods indicated (in thousands):
Details about Accumulated Other Comprehensive Income (Loss) ComponentsThree Months Ended 
 September 30,
Affected Line Item
in the Statement Where
Net Income is Presented
 20202019 
Unrealized gains and losses on securities available for sale:     
Realized gains on securities available for sale$$Net gains on securities transactions
Tax effectIncome tax expense
Net of tax 
Amortization of defined pension plan and other benefit plan items:       
Prior service costs (a)(55)(55)Other components of net periodic pension and postretirement benefits
Actuarial losses (a)77 72 Other components of net periodic pension and postretirement benefits
Tax effect(6)(4)Income tax expense
Net of tax16 13  
Total reclassification for the period, net of tax$16 $13  
Details about Accumulated Other Comprehensive Income Components Three Months Ended 
 September 30,
 Affected Line Item
in the Statement Where
Net Income is Presented
  2019 2018  
Unrealized gains and losses on securities available for sale:          
Realized gains on securities available for sale $
 $
 Net gains on securities transactions
Tax effect 
 
 Income tax expense
Net of tax 
 
  
Amortization of defined pension plan and other benefit plan items:  
  
      
Prior service costs (a) $(55) $(55) Other components of net periodic pension and postretirement benefits
Actuarial losses (a) 72
 72
 Other components of net periodic pension and postretirement benefits
Tax effect (4) (4) Income tax expense
Net of tax 13
 13
  
Total reclassification for the period, net of tax $13
 $13
  

(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).


Details about Accumulated Other Comprehensive Income ComponentsNine Months Ended 
 September 30,
Affected Line Item
in the Statement Where
Net Income is Presented
 20202019 
Unrealized gains and losses on securities available for sale:     
Realized gains on securities available for sale$$(19)Net gains on securities transactions
Tax effectIncome tax expense
Net of tax(14) 
Amortization of defined pension plan and other benefit plan items:       
Prior service costs (a)(165)(165)Other components of net periodic pension and postretirement benefits
Actuarial losses (a)231 218 Other components of net periodic pension and postretirement benefits
Tax effect(14)(13)Income tax expense
Net of tax52 40  
Total reclassification for the period, net of tax$52 $26  
Details about Accumulated Other Comprehensive Income Components Nine Months Ended 
 September 30,
 Affected Line Item
in the Statement Where
Net Income is Presented
  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) (165) (165) Other components of net periodic pension and postretirement benefits
Actuarial losses (a) 218
 218
 Other components of net periodic pension and postretirement benefits
Tax effect (13) (13) Income tax expense
Net of tax 40
 40
  
Total reclassification for the period, net of tax $26
 $40
  

(a) These accumulated other comprehensive income components are included in the computation of net periodic pension and other benefit plan costs (see Note 11 for additional information).




NOTE 10    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 three and nine months ended September 30, 20192020 and 20182019 (in thousands). Items outside the scope of ASC 606 are noted as such.



38


  Three Months Ended September 30, 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 $959
 $
 $
 $959
         Other 182
 
 
 182
Interchange revenue from debit card transactions 1,058
 
 
 1,058
WMG fee income 
 2,315
 
 2,315
CFS fee and commission income 
 
 145
 145
Net gains (losses) on sales of OREO (1) 
 
 (1)
Net gains on sales of loans(a)
 69
 
 
 69
Loan servicing fees(a)
 25
 
 
 25
Net gains on sales of securities(a)
 
 
 
 
Changes in fair value of equity investments(a)
 3
 
 (13) (10)
Other(a)
 269
 
 (55) 214
Total non-interest income (loss) $2,564
 $2,315
 $77
 $4,956

 Three Months Ended September 30, 2018Three Months Ended September 30, 2020
Revenue by Operating Segment: Core Banking WMG 
Holding Company, CFS, and CRM(b)
 TotalRevenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income        Non-interest income
Service charges on deposit accounts        Service charges on deposit accounts
Overdraft fees $1,035
 $
 $
 $1,035
Overdraft fees$668 $$$668 
Other 196
 
 
 196
Other72 72 
Interchange revenue from debit card transactions 982
 
 
 982
Interchange revenue from debit card transactions1,082 1,082 
WMG fee income 
 2,406
 
 2,406
WMG fee income2,416 2,416 
CFS fee and commission income 
 
 120
 120
CFS fee and commission income172 172 
Net gains (losses) on sales of OREO 123
 
 
 123
Net gains (losses) on sales of OREO
Net gains on sales of loans(a)
 79
 
 
 79
Net gains on sales of loans(a)
553 553 
Loan servicing fees(a)
 22
 
 
 22
Loan servicing fees(a)
32 32 
Net gains on sales of securities(a)
 
 
 
 
Changes in fair value of equity investments(a)
 2,140
 
 1
 2,141
Changes in fair value of equity investments(a)
71 (14)57 
Income from bank-owned life insurance(a)
Income from bank-owned life insurance(a)
14 14 
Other(a)
 410
 
 (133) 277
Other(a)
320 (53)267 
Total non-interest income $4,987
 $2,406
 $(12) $7,381
Total non-interest income (loss)Total non-interest income (loss)$2,818 $2,416 $105 $5,339 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.



  Nine Months Ended September 30, 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 $2,703
 $
 $
 $2,703
         Other 627
 
 
 627
Interchange revenue from debit card transactions 3,113
 
 
 3,113
WMG fee income 
 7,115
 
 7,115
CFS fee and commission income 
 
 502
 502
Net gains (losses) on sales of OREO (87) 
 
 (87)
Net gains on sales of loans(a)
 146
 
 
 146
Loan servicing fees(a)
 76
 
 
 76
Net gains on sales of securities(a)
 19
 
 
 19
Changes in fair value of equity investments(a)
 103
 
 3
 106
Other(a)
 844
 
 (197) 647
Total non-interest income $7,544
 $7,115
 $308
 $14,967


 Nine Months Ended September 30, 2018Three Months Ended September 30, 2019
Revenue by Operating Segment: Core Banking WMG 
Holding Company, CFS, and CRM(b)
 TotalRevenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income 
 
 
 
Non-interest income
Service charges on deposit accounts 
 
 
 
Service charges on deposit accounts
Overdraft fees $2,939
 $
 $
 $2,939
Overdraft fees$959 $$$959 
Other 600
 
 
 600
Other182 182 
Interchange revenue from debit card transactions 3,013
 
 
 3,013
Interchange revenue from debit card transactions1,058 1,058 
WMG fee income 
 7,095
 
 7,095
WMG fee income2,315 2,315 
CFS fee and commission income 
 
 365
 365
CFS fee and commission income145 145 
Net gains on sales of OREO 119
 
 
 119
Net gains (losses) on sales of OREONet gains (losses) on sales of OREO(1)(1)
Net gains on sales of loans(a)
 184
 
 
 184
Net gains on sales of loans(a)
69 69 
Loan servicing fees(a)
 67
 
 
 67
Loan servicing fees(a)
25 25 
Net gains on sales of securities(a)
 
 
 
 
Change in fair value of equity securities(a)
 2,148
 
 17
 2,165
Changes in fair value of equity investments(a)
Changes in fair value of equity investments(a)
(13)(10)
Income from bank-owned life insurance(a)
Income from bank-owned life insurance(a)
17 17 
Other(a)
 1,922
 
 (288) 1,634
Other(a)
252 (55)197 
Total non-interest income $10,992
 $7,095
 $94
 $18,181
Total non-interest income$2,564 $2,315 $77 $4,956 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.



39



Nine Months Ended September 30, 2020
Revenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income
Service charges on deposit accounts
Overdraft fees$1,894 $$$1,894 
Other400 400 
Interchange revenue from debit card transactions2,989 2,989 
WMG fee income6,968 6,968 
CFS fee and commission income502 502 
Net gains (losses) on sales of OREO(71)(71)
Net gains on sales of loans(a)
916 916 
Loan servicing fees(a)
88 88 
Changes in fair value of equity investments(a)
49 (82)(33)
Income from bank-owned life insurance(a)
147 147 
Other(a)
1,383 (33)1,350 
Total non-interest income$7,795 $6,968 $387 $15,150 
(a) Not within scope of ASC 606.
(b) The Holding Company, CFS, and CRM column above includes amounts to eliminate transactions between segments.

Nine Months Ended September 30, 2019
Revenue by Operating Segment:Core BankingWMG
Holding Company, CFS, and CRM(b)
Total
Non-interest income
Service charges on deposit accounts
Overdraft fees$2,703 $$$2,703 
Other627 627 
Interchange revenue from debit card transactions3,113 3,113 
WMG fee income7,115 7,115 
CFS fee and commission income502 502 
Net gains (losses) on sales of OREO(87)(87)
Net gains on sales of loans(a)
146 146 
Loan servicing fees(a)
76 76 
Net gains on sales of securities(a)
19 19 
Changes in fair value of equity investments(a)
103 106 
Income from bank-owned life insurance(a)
48 48 
Other(a)
796 (197)599 
Total non-interest income$7,544 $7,115 $308 $14,967 
(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
40


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.


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 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.






41


NOTE 11    COMPONENTS OF QUARTERLY AND YEAR TO DATE NET PERIODIC BENEFIT COSTS


The components of net periodic expense for the Corporation’s pension and other benefit plans for the periods indicated are as follows (in thousands):
 Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
 2020201920202019
Qualified Pension Plan
Service cost, benefits earned during the period$$$$
Interest cost on projected benefit obligation322 379 966 1,136 
Expected return on plan assets(610)(554)(1,830)(1,661)
Amortization of unrecognized transition obligation
Amortization of unrecognized prior service cost
Amortization of unrecognized net loss49 49 147 147 
Net periodic pension benefit$(239)$(126)$(717)$(378)
Supplemental Pension Plan    
Service cost, benefits earned during the period$$$$
Interest cost on projected benefit obligation10 13 30 39 
Expected return on plan assets
Amortization of unrecognized prior service cost
Amortization of unrecognized net loss
Net periodic supplemental pension cost$13 $14 $39 $42 
Postretirement Plan, Medical and Life    
Service cost, benefits earned during the period$$$$
Interest cost on projected benefit obligation10 
Expected return on plan assets
Amortization of unrecognized prior service cost(55)(55)(165)(165)
Amortization of unrecognized net loss25 22 75 68 
Net periodic postretirement, medical and life benefit$(28)$(29)$(84)$(87)


  Three Months Ended 
 September 30,
 Nine Months Ended 
 September 30,
  2019 2018 2019 2018
Qualified Pension Plan        
Service cost, benefits earned during the period $
 $
 $
 $
Interest cost on projected benefit obligation 379
 385
 1,136
 1,154
Expected return on plan assets (554) (826) (1,661) (2,478)
Amortization of unrecognized transition obligation 
 
 
 
Amortization of unrecognized prior service cost 
 
 
 
Amortization of unrecognized net loss 49
 43
 147
 130
Net periodic pension benefit $(126) $(398) $(378) $(1,194)
         
Supplemental Pension Plan  
  
  
  
Service cost, benefits earned during the period $
 $
 $
 $
Interest cost on projected benefit obligation 13
 12
 39
 36
Expected return on plan assets 
 
 
 
Amortization of unrecognized prior service cost 
 
 
 
Amortization of unrecognized net loss 1
 1
 3
 5
Net periodic supplemental pension cost $14
 $13
 $42
 $41
         
Postretirement Plan, Medical and Life  
  
  
  
Service cost, benefits earned during the period $
 $
 $
 $
Interest cost on projected benefit obligation 4
 4
 10
 11
Expected return on plan assets 
 
 
 
Amortization of unrecognized prior service cost (55) (55) (165) (165)
Amortization of unrecognized net loss 22
 28
 68
 83
Net periodic postretirement, medical and life benefit $(29) $(23) $(87) $(71)


NOTE 12    SEGMENT REPORTING


The Corporation manages its operations through two2 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 of the Corporation’s 20182019 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2019.12, 2020. 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 (in thousands).




42


 Three months ended September 30, 2019 Three months ended September 30, 2020
 Core Banking WMG Holding Company, CFS, and CRM Consolidated Totals Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income $16,787
 $
 $21
 $16,808
Interest and dividend income$16,701 $$13 $16,714 
Interest expense 1,666
 
 
 1,666
Interest expense845 845 
Net interest income 15,121
 
 21
 15,142
Net interest income15,856 13 15,869 
Provision for loan losses 4,441
 
 
 4,441
Provision for loan losses679 679 
Net interest income after provision for loan losses 10,680
 
 21
 10,701
Net interest income after provision for loan losses15,177 13 15,190 
Other non-interest income 2,564
 2,315
 77
 4,956
Other non-interest income2,818 2,416 105 5,339 
Other non-interest expenses 11,704
 1,559
 262
 13,525
Other non-interest expenses11,528 1,565 269 13,362 
Income (loss) before income tax expense (benefit) 1,540
 756
 (164) 2,132
Income (loss) before income tax expense (benefit)6,467 851 (151)7,167 
Income tax expense (benefit) 17
 193
 (34) 176
Income tax expense (benefit)1,271 218 (33)1,456 
Segment net income (loss) $1,523
 $563
 $(130) $1,956
Segment net income (loss)$5,196 $633 $(118)$5,711 


 Three months ended September 30, 2019
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$16,787 $$21 $16,808 
Interest expense1,666 1,666 
Net interest income15,121 21 15,142 
Provision for loan losses4,441 4,441 
Net interest income after provision for loan losses10,680 21 10,701 
Other non-interest income2,564 2,315 77 4,956 
Other non-interest expenses11,704 1,559 262 13,525 
Income (loss) before income tax expense (benefit)1,540 756 (164)2,132 
Income tax expense (benefit)17 193 (34)176 
Segment net income (loss)$1,523 $563 $(130)$1,956 

 Nine months ended September 30, 2020
 Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income$49,527 $$43 $49,570 
Interest expense3,048 3,048 
Net interest income46,479 43 46,522 
Provision for loan losses3,989 3,989 
Net interest income after provision for loan losses42,490 43 42,533 
Other non-interest income7,795 6,968 387 15,150 
Other non-interest expenses34,690 4,814 835 40,339 
Income (loss) before income tax expense (benefit)15,595 2,154 (405)17,344 
Income tax expense (benefit)2,884 552 (121)3,315 
Segment net income (loss)$12,711 $1,602 $(284)$14,029 
Segment assets$2,156,025 $3,153 $5,836 $2,165,014 

43


 Three months ended September 30, 2018 Nine months ended September 30, 2019
 Core Banking WMG Holding Company, CFS, and CRM Consolidated Totals Core BankingWMGHolding Company, CFS, and CRMConsolidated Totals
Interest and dividend income $16,122
 $
 $14
 $16,136
Interest and dividend income$50,108 $$47 $50,155 
Interest expense 1,057
 
 
 1,057
Interest expense4,745 $4,745 
Net interest income 15,065
 
 14
 15,079
Net interest income45,363 47 45,410 
Provision for loan losses 300
 
 
 300
Provision for loan losses5,684 5,684 
Net interest income after provision for loan losses 14,765
 
 14
 14,779
Net interest income after provision for loan losses39,679 47 39,726 
Other non-interest income 4,987
 2,406
 (12) 7,381
Other non-interest income7,544 7,115 308 14,967 
Other non-interest expenses 11,871
 1,307
 250
 13,428
Other non-interest expenses35,253 4,705 887 40,845 
Income (loss) before income tax expense (benefit) 7,881
 1,099
 (248) 8,732
Income (loss) before income tax expense (benefit)11,970 2,410 (532)13,848 
Income tax expense (benefit) 1,555
 281
 (34) 1,802
Income tax expense (benefit)1,934 615 (106)2,443 
Segment net income (loss) $6,326
 $818
 $(214) $6,930
Segment net income (loss)$10,036 $1,795 $(426)$11,405 
Segment assetsSegment assets$1,784,692 $3,410 $5,541 $1,793,643 



  Nine months ended September 30, 2019
  Core Banking WMG Holding Company, CFS, and CRM Consolidated Totals
Interest and dividend income $50,108
 $
 $47
 $50,155
Interest expense 4,745
 
 
 4,745
Net interest income 45,363
 
 47
 45,410
Provision for loan losses 5,684
 
 
 5,684
Net interest income after provision for loan losses 39,679
 
 47
 39,726
Other non-interest income 7,544
 7,115
 308
 14,967
Other non-interest expenses 35,253
 4,705
 887
 40,845
Income (loss) before income tax expense (benefit) 11,970
 2,410
 (532) 13,848
Income tax expense (benefit) 1,934
 615
 (106) 2,443
Segment net income (loss) $10,036
 $1,795
 $(426) $11,405
         
Segment assets $1,784,692
 $3,410
 $5,541
 $1,793,643



  Nine months ended September 30, 2018
  Core Banking WMG Holding Company, CFS, and CRM Consolidated Totals
Interest and dividend income $47,645
 $
 $29
 $47,674
Interest expense 2,678
 
 
 2,678
Net interest income 44,967
 
 29
 44,996
Provision for loan losses 3,371
 
 
 3,371
Net interest income after provision for loan losses 41,596
 
 29
 41,625
Other non-interest income 10,992
 7,095
 94
 18,181
Legal accruals and settlements 989
 
 
 989
Other non-interest expenses 36,300
 4,414
 858
 41,572
Income (loss) before income tax expense (benefit) 15,299
 2,681
 (735) 17,245
Income tax expense (benefit) 2,791
 684
 (126) 3,349
Segment net income (loss) $12,508
 $1,997
 $(609) $13,896
         
Segment assets $1,740,311
 $3,800
 $9,753
 $1,753,864


NOTE 13    STOCK COMPENSATION


Board of Directors' Stock Compensation


Pursuant to the Corporation's Directors' Compensation Plan, members of the Board of Directors receive common shares of the Corporation based on fees individually earned during the previous year for service as a director.  The common shares are distributed to the Corporation's individual board members from treasury shares of the Corporation on or about January 15 following the calendar year of service.


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 members not employed by the Corporation who have served for 12 months during the prior year.


During January 2020 and 2019, 7,923 and 2018, 8,465 and 6,015 shares, respectively, were re-issued from treasury to fund the stock component of directors' compensation.compensation for respective prior year. An expense of $79$67 thousand and $86$79 thousand related to this compensation was recognized during the three month periods ended September 30, 20192020 and 2018,2019, respectively. An expense of $256$232 thousand and $271$256 thousand related to this compensation was recognized during the nine month periods ended September 30, 20192020 and 2018,2019, respectively. This expense is accrued as shares are earned.


Restricted Stock Plan


Pursuant to the Corporation’s Restricted Stock 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 for the three month period ended September 30, 20192020 is presented below:
 SharesWeighted–Average Grant Date Fair Value
Nonvested at July 1, 202029,816 $43.34 
Granted
Vested(808)42.53 
Forfeited or cancelled
Nonvested at September 30, 202029,008 $43.36 

44

  Shares Weighted–Average Grant Date Fair Value
Nonvested at July 1, 2019 29,436
 $41.03
Granted 
 
Vested 
 
Forfeited or cancelled 
 
Nonvested at September 30, 2019 29,436
 $41.03


A summary of restricted stock activity for the nine month period ended September 30, 20192020 is presented below:
 SharesWeighted–Average Grant Date Fair Value
Nonvested at January 1, 202033,575 $43.24 
Granted255 39.35 
Vested(4,710)42.24 
Forfeited or cancelled(112)44.72 
Nonvested at September 30, 202029,008 $43.36 
  Shares Weighted–Average Grant Date Fair Value
Nonvested at January 1, 2019 29,694
 $40.81
Granted 439
 45.66
Vested (697) 34.58
Forfeited or cancelled 
 
Nonvested at September 30, 2019 29,436
 $41.03


As of September 30, 2019,2020, there was $0.9 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 3.053.18 years. The total fair value of shares vested was $32$159 thousand and $112$32 thousand for the nine month periods ended September 30, 20192020 and 2018,2019, respectively.




Item 2:Management's Discussion and Analysis of Financial Condition and Results of Operations


Introduction


The following is the MD&A of the Corporation in this Quarterly Report on Form 10-Q for the three and nine months ended September 30, 20192020 and 2018.2019. Reference should be made to the accompanying unaudited consolidated financial statements and footnotes, and the Corporation’s 20182019 Annual Report on Form 10-K, which was filed with the SEC on March 13, 2019,12, 2020, for an understanding of the following discussion and analysis. See the list of commonly used abbreviations and terms on pages 3–6.


The MD&A included in this Form 10-Q contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on the current beliefs and expectations of the Corporation's management and are subject to significant risks and uncertainties. Actual results may differ from those set forth in the forward-looking statements. For a discussion of those risks and uncertainties and the factors that could cause the Corporation’s actual results to differ materially from those risks and uncertainties,uncertainties, see Forward-looking Statements below, and in Part I, Item 1A, Risk Factors, on pages 19–2829 of the Corporation’s 20182019 Form 10-K.10-K, pages 67-68 of the Corporation's March 31, 2020 Form 10-Q, and page 83 of the Corporation's June 30, 2020 Form 10-Q. For a discussion of use of non-GAAP financial measures, see pages 67–7069–72 of the Corporation's 20182019 Form 10-K, and pages 71-7577-80 in this Form 10-Q.


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




Forward-looking Statements


This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Exchange Act. The Corporation intends its forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. All statements regarding the Corporation's expected financial position and operating results, the Corporation's business strategy, the Corporation's financial plans, forecasted demographic and economic trends relating to the Corporation's industry and similar matters are forward-looking statements. These statements can sometimes be identified by the Corporation's use of forward-looking words such as "may," "will," "anticipate," "estimate," "expect," or "intend." The Corporation cannot guarantee that its expectations in such forward-looking statements will turn out to
45


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, changes in law or the regulatory environment, including the Dodd-Frank Act, and changes in general business and economic trends.

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 additional risks, any of which could have a material, adverse effect on its business, financial condition, liquidity, and results of operations:

demand for our products and services may decline, making it difficult to grow assets and income;
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;
our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and reducing net income;
a material decrease in net income over several quarters could result in a decrease in the rate of our quarterly cash dividend;
our wealth management revenues may decline with continuing market turmoil;
our cyber security risks are increased as the result of an increase in the number of employees working remotely;
we rely 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 us; and
FDIC premiums may increase if the agency experiences additional resolution costs.

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” in the Corporation’s 20182019 Annual Report on Form 10-K.10-K, March 31, 2020 Quarterly Report on Form 10-Q, June 30, 2020 Quarterly Report on Form 10-Q, and in this Quarterly Report on Form 10-Q.  These filings are available publicly on the SEC’s web site at http://www.sec.gov, on the Corporation's web site at http://www.chemungcanal.com or upon request from the Corporate Secretary at (607) 737-3746. Except as otherwise required by law, the Corporation undertakes no obligation to publicly update or revise its forward-looking statements, whether as a result of new information, future events or otherwise.


COVID-19

The Effect of COVID-19 on Our Business
The Corporation continued to exercise COVID-19 precautions throughout its footprint, striving to ensure a healthy and safe work environment for our colleagues, clients and the communities we assist, and continued to provide the high level of customer service that our communities depend on in a manner that is accessible, reliable and efficient. At all times, social distancing, sanitizing and facial coverings were required. As of the date of this filing, 30 of our 32 offices have fully re-opened to normal business hours. The remaining two branches, currently being consolidated, are available by appointment. On or about November 20, 2020, these branches will consolidate into nearby branches. The Corporation is looking forward to assisting clients in the case that a next-phase stimulus package is passed by Congress, and with the SBA loan-forgiveness application process for PPP loans.

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.

46


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 September 30, 2020, total loan forbearances decreased to 2.98% of the total loan portfolio. As of September 30, 2020, 46.2% of total loan forbearances related to accommodation and food services, 31.4% related to real estate, rental and leasing, 10.9% to entertainment and recreation, and 11.5% to other industries.

COVID-19 Loan Modifications Outstanding As Of
June 30, 2020September 30, 2020
# ClientsTotal Loan Balance# ClientsTotal Loan Balance
Commercial172$167.7 million31$43.3 million
Retail and Residential457$18.0 million43$2.5 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 (the “SBA”). Included in the legislation, and additional legislation approved by Congress on April 23, 2020 and June 5, 2020, was a total of $659 billion to assist small businesses by providing SBA guaranteed loans to help pay for up to 24 weeks of their 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%, two-year or five-year loan terms to maturity, and principal and interest payments deferred until the lender receives the applicable forgiven amount or 10 months after the end of the borrower's loan forgiveness covered period. 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 the PPP. As of the date of this filing, the Corporation is preparing to assist the businesses who received PPP loans with the forgiveness application phase of the program. As of this filing, the Corporation has submitted 54 loans, a total of $39.2 million, to the SBA for forgiveness. As of the date of this filing, the Corporation has received $16.4 million related to 29 loans forgiven by the SBA.

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

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

Outlook

Management believes that the Corporation's liquidity position is strong. The Corporation uses a variety of resources to meet its liquidity needs. These include short term investments, cash flow from lending and investing activities, core-deposit growth and non-core funding sources, such as time deposits of $100,000 or more, FHLB borrowings, securities sold under agreements to repurchase and other borrowings. At September 30, 2020, the Corporation's cash and cash equivalents balance was $149.9 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 September 30, 2020, the Corporation's investment in securities available for sale was $396.3 million, $216.3 million of which was not pledged as collateral.
47


Additionally, the Bank's unused borrowing capacity at the Federal Home Loan Bank of New York was $97.1 million as of September 30, 2020. The Corporation did not experience excessive draws on available working capital lines of credit and home equity lines of credit during the first nine months of 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 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. The table below summarizes the Bank's commercial loan portfolio, excluding PPP loans, by NAICS code, as of September 30, 2020. While most industries have and will continue to experience adverse impacts as a result of the COVID-19 pandemic, the industries designated by Management to be most impacted by COVID-19 are indicated in bold.
Commercial Loan Portfolio by NAICS Codes
"Highly Impacted" industries in bold (dollars in thousands)
% of Total Loans excluding PPP Loans% of RBC*
Industry SectorsLoan Balance excluding PPP Loans
Real Estate, Rental & Leasing
    Multifamily$194,788 21.52 %102.33 %
    Hospitality39,410 4.35 %20.70 %
    Nursing Home/Assisted Living13,140 1.45 %6.90 %
    Medical Office18,662 2.06 %9.80 %
    Non-Essential Retail40,152 4.44 %21.09 %
    CRE Other284,920 31.47 %149.67 %
    Non-Real Estate Secured33,240 3.67 %17.46 %
Agricultural, Forestry, Farming and Hunting1,766 0.20 %0.93 %
Accommodation and Food Services43,714 4.83 %22.96 %
Manufacturing36,021 3.98 %18.92 %
Arts, Entertainment and Recreation34,745 3.84 %18.25 %
Health Care and Social Assistance29,059 3.21 %15.27 %
Construction23,653 2.61 %12.43 %
Wholesale Trade22,919 2.53 %12.04 %
Retail Trade25,049 2.77 %13.16 %
Professional, Scientific, and Technical Services12,371 1.37 %6.50 %
Transportation and Warehousing10,784 1.19 %5.67 %
Finance and Insurance10,247 1.13 %5.38 %
Administration and Support, Waste Management, Remediation6,048 0.67 %3.18 %
Educational Services4,791 0.53 %2.52 %
Mining2,687 0.30 %1.41 %
Other17,133 1.88 %9.01 %
Total Loans, excluding Paycheck Protection Program (PPP)$905,299 100.00 %
COVID-19 Highly Impacted Industries$248,384 27.44 %
* Risk Based Capital
COVID-19 highly impacted industries totaled $248.4 million, or 27.4% of the Bank's commercial loan portfolio excluding PPP loans, as of September 30, 2020. PPP loans totaling $189.8 million are 100% guaranteed by the SBA and represent virtually no risk. The rental and leasing sector encompasses real estate, rental properties plus rental of non-real estate items. In this same sector, $111.4 million of the loan balances related to commercial real estate rentals for hospitality, nursing home/assisted living, non-essential retail and medical offices and are considered "highly impacted." The arts, entertainment and recreation sector included $26.6 million of loan balances related to casinos. PPP loans to the highly impacted industries totaled $59.9 million.
The COVID-19 pandemic is expected to continue to impact the Corporation's financial results, as well as demand for its services and products during the remainder of 2020 and potentially beyond. The short and long-term implications of the COVID-19 pandemic, and related monetary and fiscal stimulus measures, on the Corporation's future revenues, earnings results, allowance for loan losses, capital reserves, and liquidity are uncertain at this time.
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Consolidated Financial Highlights

As of or for the
 As of or for the Three Months EndedNine Months Ended
Sept. 30,June 30,Mar. 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
(in thousands, except per share data)2020202020202019201920202019
RESULTS OF OPERATIONS
Interest income$16,714 $16,472 $16,384 $16,777 $16,808 $49,570 $50,155 
Interest expense845 881 1,322 1,576 1,666 3,048 4,745 
Net interest income15,869 15,591 15,062 15,201 15,142 46,522 45,410 
Provision for loan losses679 260 3,050 261 4,441 3,989 5,684 
Net interest income after provision for loan losses15,190 15,331 12,012 14,940 10,701 42,533 39,726 
Non-interest income5,339 5,080 4,730 5,106 4,956 15,150 14,967 
Non-interest expense13,362 13,227 13,749 14,851 13,525 40,339 40,845 
Income before income tax expense7,167 7,184 2,993 5,195 2,132 17,344 13,848 
Income tax expense1,456 1,357 502 991 176 3,315 2,443 
Net income$5,711 $5,827 $2,491 $4,204 $1,956 $14,029 $11,405 
Basic and diluted earnings per share$1.19 $1.20 $0.51 $0.87 $0.40 $2.90 $2.34 
Average basic and diluted shares outstanding4,773 4,850 4,895 4,879 4,871 4,836 4,866 
PERFORMANCE RATIOS - Annualized
Return on average assets1.08 %1.15 %0.55 %0.93 %0.44 %0.95 %0.87 %
Return on average equity11.56 %12.22 %5.32 %9.14 %4.29 %9.74 %8.76 %
Return on average tangible equity (a)13.03 %13.83 %6.04 %10.43 %4.91 %11.03 %10.09 %
Efficiency ratio (unadjusted) (f)63.00 %63.99 %69.47 %73.13 %67.30 %65.41 %67.65 %
Efficiency ratio (adjusted) (a) (b)62.19 %63.16 %68.50 %72.08 %66.21 %64.54 %66.56 %
Non-interest expense to average assets2.54 %2.62 %3.06 %3.28 %3.05 %2.72 %3.12 %
Loans to deposits79.96 %82.70 %82.11 %83.28 %82.88 %79.96 %82.88 %
 
YIELDS / RATES - Fully Taxable Equivalent
Yield on loans3.91 %4.06 %4.37 %4.43 %4.50 %4.10 %4.53 %
Yield on investments1.61 %1.58 %2.20 %2.29 %2.36 %1.78 %2.39 %
Yield on interest-earning assets3.37 %3.45 %3.86 %3.92 %4.03 %3.54 %4.05 %
Cost of interest-bearing deposits0.26 %0.28 %0.46 %0.55 %0.60 %0.33 %0.57 %
Cost of borrowings3.54 %0.82 %3.58 %3.58 %3.53 %1.44 %3.52 %
Cost of interest-bearing liabilities0.27 %0.29 %0.47 %0.56 %0.61 %0.34 %0.58 %
Interest rate spread3.10 %3.16 %3.39 %3.36 %3.42 %3.20 %3.47 %
Net interest margin, fully taxable equivalent (a)3.20 %3.26 %3.55 %3.56 %3.63 %3.33 %3.67 %
CAPITAL
Total equity to total assets at end of period9.10 %9.49 %10.34 %10.22 %10.15 %9.10 %10.15 %
Tangible equity to tangible assets at end of period (a)8.16 %8.49 %9.24 %9.07 %9.00 %8.16 %9.00 %
Book value per share$41.51 $40.51 $38.83 $37.35 $37.35 $41.51 $37.35 
Tangible book value per share (a)36.83 35.86 34.25 32.74 32.69 36.83 32.69 
Period-end market value per share28.87 27.30 32.98 42.50 42.00 28.87 42.00 
Dividends declared per share0.26 0.26 0.26 0.26 0.26 0.78 0.78 
AVERAGE BALANCES
Loans and loans held for sale (c)$1,515,762$1,456,080 $1,310,342 $1,303,349 $1,295,167 $1,427,716 $1,294,093 
Earning assets1,986,043 1,931,107 1,715,562 1,705,766 1,665,793 1,877,966 1,664,188 
Total assets2,094,114 2,032,729 1,807,753 1,798,385 1,760,385 1,978,570 1,752,948 
Deposits1,853,557 1,776,275 1,588,147 1,581,645 1,545,858 1,739,744 1,550,251 
Total equity196,569 191,853 188,427 182,522 180,896 192,299 173,998 
Tangible equity (a)174,302 169,464 165,911 159,889 158,111 169,909 151,052 
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           As of or for the
 As of or for the Three Months Ended Nine Months Ended
 Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
(in thousands, except per share data)2019 2019 2019 2018 2018 2019 2018
RESULTS OF OPERATIONS
Interest income$16,808
 $16,682
 $16,665
 $16,879
 $16,136
 $50,155
 $47,674
Interest expense1,666
 1,581
 1,498
 1,395
 1,057
 4,745
 2,678
Net interest income15,142
 15,101
 15,167
 15,484
 15,079
 45,410
 44,996
Provision (credit) for loan losses4,441
 150
 1,093
 (218) 300
 5,684
 3,371
Net interest income after provision (credit) for loan losses10,701
 14,951
 14,074
 15,702
 14,779
 39,726
 41,625
Non-interest income4,956
 5,086
 4,925
 4,893
 7,381
 14,967
 18,181
Non-interest expense13,525
 13,823
 13,497
 14,205
 13,428
 40,845
 42,561
Income before income tax expense2,132
 6,214
 5,502
 6,390
 8,732
 13,848
 17,245
Income tax expense176
 1,233
 1,034
 660
 1,802
 2,443
 3,349
Net income$1,956
 $4,981
 $4,468
 $5,730
 $6,930
 $11,405
 $13,896
              
Basic and diluted earnings per share$0.40
 $1.02
 $0.92
 $1.18
 $1.43
 $2.34
 $2.88
Average basic and diluted shares outstanding4,871
 4,866
 4,860
 4,843
 4,834
 4,866
 4,828
              
PERFORMANCE RATIOS - Annualized
Return on average assets0.44% 1.15% 1.03% 1.29% 1.61% 0.87% 1.09%
Return on average equity4.29% 11.51% 10.83% 14.29% 17.81% 8.76% 12.22%
Return on average tangible equity (a)4.91% 13.27% 12.56% 16.74% 21.01% 10.09% 14.47%
Efficiency ratio (unadjusted) (f)67.30% 68.47% 67.18% 69.71% 59.79% 67.65% 67.37%
Efficiency ratio (adjusted) (a) (b)66.21% 67.44% 66.04% 68.49% 64.72% 66.56% 66.80%
Non-interest expense to average assets3.05% 3.18% 3.12% 3.21% 3.13% 3.12% 3.34%
Loans to deposits82.88% 83.60% 82.93% 83.60% 83.80% 82.88% 83.80%
              
ASSET QUALITY
Net charge-offs$219 $2,363 $294 $706 $174 $2,877 $705 
Non-performing loans (d)15,726 17,280 17,948 18,008 23,468 15,726 23,468 
Non-performing assets (e)16,311 17,573 18,328 18,525 23,679 16,311 23,679 
Allowance for loan losses24,590 24,130 26,233 23,478 23,923 24,590 23,923 
Annualized net charge-offs to average loans0.06 %0.65 %0.09 %0.21 %0.05 %0.27 %0.07 %
Non-performing loans to total loans1.02 %1.15 %1.36 %1.38 %1.80 %1.02 %1.80 %
Non-performing assets to total assets0.75 %0.86 %1.00 %1.04 %1.32 %0.75 %1.32 %
Allowance for loan losses to total loans1.60 %1.61 %1.99 %1.79 %1.83 %1.60 %1.83 %
Allowance for loan losses to non-performing loans156.36 %139.64 %146.16 %130.38 %101.94 %156.36 %101.94 %
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.
(c) Loans and loans held for sale do not reflect the allowance for loan losses.
(d) Non-performing loans include non-accrual loans only.
(e) Non-performing assets include non-performing loans plus other real estate owned.
(f) Efficiency ratio (unadjusted) is non-interest expense divided by the total of net interest income plus non-interest income.


           As of or for the
 As of or for the Three Months Ended Nine Months Ended
 Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
(in thousands, except per share data)2019 2019 2019 2018 2018 2019 2018
YIELDS / RATES - Fully Taxable Equivalent
Yield on loans4.50% 4.54% 4.54% 4.54% 4.36% 4.53% 4.34%
Yield on investments2.36% 2.41% 2.42% 2.16% 2.18% 2.39% 2.20%
Yield on interest-earning assets4.03% 4.07% 4.07% 4.01% 3.96% 4.05% 3.95%
Cost of interest-bearing deposits0.60% 0.57% 0.54% 0.48% 0.33% 0.57% 0.25%
Cost of borrowings3.53% 3.52% 3.52% 3.58% 2.38% 3.52% 2.33%
Cost of interest-bearing liabilities0.61% 0.58% 0.55% 0.50% 0.39% 0.58% 0.33%
Interest rate spread3.42% 3.49% 3.52% 3.51% 3.57% 3.47% 3.62%
Net interest margin, fully taxable equivalent (a)3.63% 3.69% 3.71% 3.68% 3.71% 3.67% 3.73%
              
CAPITAL
Total equity to total assets at end of period10.15% 10.18% 9.69% 9.40% 8.92% 10.15% 8.92%
Tangible equity to tangible assets at end of period (a)9.00% 8.99% 8.50% 8.19% 7.69% 9.00% 7.69%
              
Book value per share$37.35
 $36.64
 $35.27
 $33.99
 $32.35
 $37.35
 $32.35
Tangible book value per share (a)32.69
 31.95
 30.54
 29.22
 27.53
 32.69
 27.53
Period-end market value per share42.00
 48.34
 46.93
 41.31
 42.43
 42.00
 42.43
Dividends declared per share0.26
 0.26
 0.26
 0.26
 0.26
 0.78
 0.78
              
AVERAGE BALANCES
Loans and loans held for sale (c)$1,295,167
 $1,290,923
 $1,296,200
 $1,306,556
 $1,330,071
 $1,294,093
 $1,324,610
Earning assets1,665,793
 1,654,156
 1,671,063
 1,680,269
 1,625,132
 1,664,188
 1,624,830
Total assets1,760,385
 1,744,599
 1,753,788
 1,756,765
 1,704,721
 1,752,948
 1,703,834
Deposits1,545,858
 1,539,739
 1,565,371
 1,576,629
 1,501,082
 1,550,251
 1,495,111
Total equity180,896
 173,534
 167,385
 159,032
 154,331
 173,988
 152,026
Tangible equity (a)158,111
 150,598
 144,293
 135,766
 130,891
 151,052
 128,396
              
ASSET QUALITY
Net charge-offs$174
 $239
 $292
 $472
 $310
 $705
 $4,897
Non-performing loans (d)23,468
 19,505
 15,099
 12,254
 12,629
 23,468
 12,629
Non-performing assets (e)23,679
 19,719
 15,304
 12,828
 13,356
 23,679
 13,356
Allowance for loan losses23,923
 19,656
 19,745
 18,944
 19,635
 23,923
 19,635
              
Annualized net charge-offs to average loans0.05% 0.07% 0.09% 0.14% 0.09% 0.07% 0.49%
Non-performing loans to total loans1.80% 1.51% 1.16% 0.93% 0.96% 1.80% 0.96%
Non-performing assets to total assets1.32% 1.12% 0.86% 0.73% 0.76% 1.32% 0.76%
Allowance for loan losses to total loans1.83% 1.53% 1.52% 1.44% 1.49% 1.83% 1.49%
Allowance for loan losses to non-performing loans101.94% 100.77% 130.77% 154.59% 155.48% 101.94% 155.48%
              
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.
(c) Loans and loans held for sale do not reflect the allowance for loan losses.
(d) Non-performing loans include non-accrual loans only.
(e) Non-performing assets include non-performing loans plus other real estate owned.
(f) Efficiency ratio (unadjusted) is non-interest expense divided by the total of net interest income plus non-interest income.    


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. Refer to pages 71-7577-80 for further explanation and reconciliation of the Corporation’s use of non-GAAP measures.

50




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


The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):
 Three Months Ended 
 September 30,
 20202019ChangePercentage Change
Net interest income$15,869 $15,142 $727 4.8 %
Non-interest income5,339 4,956 383 7.7 %
Non-interest expense13,362 13,525 (163)(1.2)%
Pre-provision income7,846 6,573 1,273 19.4 %
Provision for loan losses679 4,441 (3,762)(84.7)%
Income tax expense1,456 176 1,280 727.3 %
Net income$5,711 $1,956 $3,755 192.0 %
Basic and diluted earnings per share$1.19 $0.40 $0.79 197.5 %
Selected financial ratios:    
Return on average assets1.08 %0.44 %  
Return on average equity11.56 %4.29 %  
Net interest margin, fully taxable equivalent (a)3.20 %3.63 %  
Efficiency ratio (adjusted) (b)62.19 %66.21 %  
Non-interest expenses to average assets2.54 %3.05 %  
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.
  Three Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
Net interest income $15,142
 $15,079
 $63
 0.4 %
Non-interest income 4,956
 7,381
 (2,425) (32.9)%
Non-interest expense 13,525
 13,428
 97
 0.7 %
Pre-provision income 6,573
 9,032
 (2,459) (27.2)%
Provision for loan losses 4,441
 300
 4,141
 1,380.3 %
Income tax expense 176
 1,802
 (1,626) (90.2)%
Net income $1,956
 $6,930
 $(4,974) (71.8)%
         
Basic and diluted earnings per share $0.40
 $1.43
 $(1.03) (72.0)%
         
Selected financial ratios:  
  
  
  
Return on average assets 0.44% 1.61%  
  
Return on average equity 4.29% 17.81%  
  
Net interest margin, fully taxable equivalent (a) 3.63% 3.71%  
  
Efficiency ratio (adjusted) (b) 66.21% 64.72%  
  
Non-interest expenses to average assets 3.05% 3.13%  
  
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio (adjusted) is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.


Net income for the third quarter of 20192020 was $5.7 million, or $1.19 per share, compared to $2.0 million, or $0.40 per share, compared with $6.9 million, or $1.43 per share, for the same period in the prior year. Return on average equity for the current quarter was 4.29%11.56%, compared with 17.81%to 4.29% for the prior year quarter.  The decrease in net income was due to an increase in provision for loan losses and a decrease in non-interest income, offset by a decrease in income tax expense.

Net interest income
Net interest income increased by less than $0.1 million, or 0.4%, compared with the same period in the prior year. The increase in net income was due primarily to an increaseincreases in net interest income and dividendnon-interest income, decreases in non-interest expense and the provision for loan losses, offset by an increase in totalincome tax expense.

Net interest expense.

Non-interest income
Non-interestNet interest income decreased $2.4increased $0.7 million, or 32.9%4.8%, compared with the same period in the prior year.  The decrease can be mostly attributed to a decrease in the change in fair value of equity investments. The decrease was due primarily to an increase in the fair value of Visa Class B shares in the third quarter of 2018, which were subsequently sold during the third quarter of 2018.

Non-interest expense
Non-interest expense increased $0.1 million, or 0.7%, compared with the same period in the prior year. The increase was due primarily to increases in salariesinterest income on loans, including fees, interest and wages, pension and other employee benefits, furniture and equipment expenses,dividend income on taxable securities, and a reduced creditdecrease in other components of net periodic pension cost and post-retirement benefits,total interest expense, offset by decreasesa decrease in net occupancy expense and FDIC insurance expense. For the three months ended September 30, 2019,interest income on interest-earning deposits.

Non-interest income
Total non-interest expense to average assets was 3.05%, compared with 3.13% for the same period in the prior year.



Provision for loan losses
The provision for loan lossesincome increased $4.1$0.4 million, or 7.7%, compared to the same period in the prior year. The increase can be mostly attributed to increases in net gains on sales of residential mortgage loans sold into the secondary market, WMG fee income, change in fair value of equity investments and other non-interest income, offset by a specific impairment of $4.2 million relateddecrease in service charges on deposit accounts primarily attributable to a participating interestdecrease in a commercial credit. Net charge-offs forNSF and overdraft fees, as compared to the third quarter of 2019 weresame period in the prior year.

Non-interest expense
Non-interest expense decreased $0.2 million, compared with $0.3 million for the third quarter of 2018.

Income tax expense
Income tax expense was $0.2 million in the third quarter of 2019, a decrease of $1.6 million whenor 1.2%, compared to the same period in the prior year. The decrease was due primarily to decreases in pension and other employee benefits, other non-interest expense, and furniture and equipment expenses, offset by increases in FDIC insurance and salaries and wages. For the three months ended September 30, 2020, non-interest expense to average assets was 2.54%, compared to 3.05% for the same period in the prior year.

51




Provision for loan losses
The provision for loan losses decreased $3.8 million, compared to the same period in the prior year. The decrease in the provision for loan losses was primarily due to a decreasespecific impairment of $6.6$4.2 million related to a participating interest in a commercial credit in the third quarter of the prior year. Net charge-offs for the third quarter of 2020 and 2019 were $0.2 million, respectively.

Income tax expense
Income tax expense was $1.5 million in the third quarter of 2020, an increase of $1.3 million when compared to the same period in the prior year. The increase was due primarily to an increase of $5.0 million in income before income tax expense for the third quarter of 20192020 as compared to the same period in the prior year. The effective tax rate decreasedincreased from 20.6% for the third quarter of 2018 to 8.3% for the third quarter of 2019.2019 to 20.3% for the third quarter of 2020.


The following table presents selected financial information for the periods indicated, and the dollar and percent change (in thousands, except per share and ratio data):
 Nine Months Ended 
 September 30,
 20202019ChangePercentage Change
Net interest income$46,522 $45,410 $1,112 2.4 %
Non-interest income15,150 14,967 183 1.2 %
Non-interest expense40,339 40,845 (506)(1.2)%
Pre-provision income21,333 19,532 1,801 9.2 %
Provision for loan losses3,989 5,684 (1,695)(29.8)%
Income tax expense3,315 2,443 872 35.7 %
Net income$14,029 $11,405 $2,624 23.0 %
Basic and diluted earnings per share$2.90 $2.34 $0.56 23.9 %
Selected financial ratios:    
Return on average assets0.95 %0.87 %  
Return on average equity9.74 %8.76 %  
Net interest margin, fully taxable equivalent (a)3.33 %3.67 %  
Efficiency ratio (adjusted) (b)64.54 %66.56 %  
Non-interest expense to average assets2.72 %3.12 %  
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.
  Nine Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
Net interest income $45,410
 $44,996
 $414
 0.9 %
Non-interest income 14,967
 18,181
 (3,214) (17.7)%
Non-interest expense 40,845
 42,561
 (1,716) (4.0)%
Pre-provision income 19,532
 20,616
 (1,084) (5.3)%
Provision for loan losses 5,684
 3,371
 2,313
 68.6 %
Income tax expense 2,443
 3,349
 (906) (27.1)%
Net income $11,405
 $13,896
 $(2,491) (17.9)%
         
Basic and diluted earnings per share $2.34
 $2.88
 $(0.54) (18.8)%
         
Selected financial ratios:  
  
  
  
Return on average assets 0.87% 1.09%  
  
Return on average equity 8.76% 12.22%  
  
Net interest margin, fully taxable equivalent (a) 3.67% 3.73%  
  
Efficiency ratio (adjusted) (b) 66.56% 66.80%  
  
Non-interest expense to average assets 3.12% 3.34%  
  
(a) See the GAAP to Non-GAAP reconciliations.
(b) Efficiency ratio is non-interest expense less amortization of intangible assets less legal reserve divided by the total of fully taxable equivalent net interest income plus non-interest income less changes in fair value of equity investments less net gains on securities transactions.


Net income for the nine months ended September 30, 20192020 was $14.0 million, or $2.90 per share, compared to $11.4 million, or $2.34 per share, compared with $13.9 million, or $2.88 per share, for the same period in the prior year.  Return on average equity for the nine months ended September 30, 20192020 was 8.76%9.74%, compared with 12.22%to 8.76% for the same period in the prior year. The decreaseincrease in net income from the prior year period was driven by a decreaseattributable to increases in total net interest income and total non-interest income, and an increasedecreases in provision for loan losses offset by decreases inand non-interest expense, and income tax expense, andpartially offset by an increase in net interest income.income tax expense.


Net interest income
Net interest income increased $0.4$1.1 million, or 0.9%2.4%, compared withto the same period in the prior year. The increase can be mostly attributed to a decrease in total interest expense on deposits and an increase in interest income on taxable securities. This increase was offset by a decrease in interest income on interest-earning deposits.



52


Non-interest income
Non-interest income increased $0.2 million, or 1.2%, compared to the same period in the prior year. The increase was due primarily to increases in net gains on sales of residential mortgage loans including fees,sold into the secondary market, other non-interest income, and income from bank owned life insurance, offset by decreases in service charges on deposit accounts, WMG fee income, changes in fair value of equity investments, and interchange revenue from debit card transactions. The increase in other non-interest income was due primarily to receipt of an insurance claim payment in the current period and an increase in interest rate swap fee income from interest-earning deposits, and a decreasewhen compared to the same period in interest expense on borrowed funds, offset by an increase in interest expense on interest-bearing deposits.the prior year.


Non-interest incomeexpense
Non-interest incomeexpense decreased $3.2$0.5 million, or 17.7%1.2%, compared to the same period in the prior year. The decrease was due primarily to decreasesdecreased spending across all categories except salaries and wages, data processing, loan expenses, FDIC insurance, and an increased credit in other components of net periodic pension and postretirement benefits. For the nine months ended September 30, 2020, non-interest income, net gains (losses) on sales of other real estate owned, and change in fair value of equity investments. The decrease in other non-interest incomeexpense to average assets was due2.72%, compared to a New York sales tax refund received in March 2018, and additional rental income from OREO property received3.12% for the same period in the prior year, and a decrease in swap fees, partially offset by an increase in CFS fee and commission income.year.



Provision for loan losses

Non-interest expense
Non-interest expenseThe provision for loan losses decreased $1.7 million, or 4.0%29.8%, compared to the same period in the prior year. The $1.7 million decrease was due primarilyin the provision as compared to decreasesthe prior year can be mostly attributed to a specific impairment of $4.2 million related to a participation interest in legal accrualsa commercial credit in the prior year. The provision for loan losses included a $4.5 million increase in potential projected loss estimates in response to the COVID-19 pandemic, and settlements, net occupancy expenses, furniture and equipment expenses, other non-interest expenses, marketing and advertising expenses, professional services, other real estate owned expenses, and FDIC insurance. These items were partially offset by an increase in other components ofloan volume, offset by recoveries, decreases in specific allocations, and a net periodic pension cost (benefits), and salaries and wages. Fordecrease in historical loss factors due to a large 2018 loan charge-off which no longer impacts the provision calculation. Net charge-offs increased $2.2 million for the nine months ended September 30, 2019, non-interest expense2020, compared to average assets was 3.12%, compared with 3.34% for the same period in the prior year.year, mostly due to the partial charge-off of a commercial loan.


Provision for loan lossesIncome tax expense
The provision for loan lossesIncome tax expense increased $2.3$0.9 million, or 68.6%35.7%, compared to the same period in the prior year. The increase in the provision for loan losses can be mostly attributed to a third quarter impairment of a participating interest in a commercial credit for $4.2 million, offset by a decrease in the loan portfolio of $14.0 million between September 30, 2018 and September 30, 2019. Net charge-offs decreased $4.2 million for the nine months ended September 30, 2019, compared with the same period in the prior year, mostly due to the charge-off of multiple large commercial loans to one borrower during the first nine months of 2018.

Income tax expense
Income tax expense decreased $0.9 million, or 27.1%, compared to the same period in the prior year. The decrease was due primarily to a decreasean increase in income before income tax expense. The effective income tax rate decreasedincreased from 19.4% for the nine months ended September 30, 2018 to 17.6% for the nine months ended September 30, 2019.2019 to 19.1% for the nine months ended September 30, 2020.


Consolidated Results of Operations


The following section of the MD&A provides a comparative discussion of the Corporation’s Consolidated Results of Operations on a reported basis for the three and nine months ended September 30, 20192020 and 2018.2019. For a discussion of the Critical Accounting Policies, Estimates and Risks and Uncertainties that affect the Consolidated Results of Operations, see page 71pages 76-77 of this Form 10-Q and page 6769 of the Corporation’s 20182019 Form 10-K.


Net Interest Income


The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20202019ChangePercentage Change
Interest and dividend income$16,714 $16,808 $(94)(0.6)%
Interest expense845 1,666 (821)(49.3)%
Net interest income$15,869 $15,142 $727 4.8 %
 Three Months Ended 
 September 30,
    
 2019 2018 Change Percentage Change
Interest and dividend income$16,808
 $16,136
 $672
 4.2%
Interest expense1,666
 1,057
 609
 57.6%
Net interest income$15,142
 $15,079
 $63
 0.4%


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


53


Net interest income for the three months ended September 30, 20192020 increased less than $0.1$0.7 million, or 0.4%4.8%, to $15.1$15.9 million compared to the same period in the prior year, due primarily to a $0.7$0.8 million increasedecrease in total interest expense, offset by a $0.1 million decrease in total interest and dividend income, offset by a $0.6 million increase in total interest expense.income. Interest and fees from loans increased $0.1 million, interest from taxable securities increased $0.1 million, and interest from interest-earningexpense on deposits increased $0.4decreased $0.8 million in the third quarter of 20192020 as compared to the same period in the prior year. InterestThe decrease in interest expense on deposits increased $0.8was due primarily to a $0.7 million while interest expensedecrease in interest-bearing checking, savings, and money market expenses which was due to the decreases in average rates paid on borrowed fundsthese products in response to the Federal Reserve's 50 and 100 basis points drop on overnight rates in March, 2020. As a result, the average rate of interest-bearing liabilities decreased $0.2 million in34 basis points to 0.27% for the third quarter of 2019 when2020 compared to the same period in the previous year. The decrease in total interest and dividend income for the current quarter was due primarily to a decrease of $0.4 million in interest income on interest-earning deposits, offset by increases of $0.2 million in interest income on loans, including fees, and $0.1 million in interest income on taxable securities as compared to the same period in the prior year. The decrease in interest income 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 2.22% in the third quarter of 2019 to 0.31% in the third quarter of 2020. The increase in interest and dividend income on taxable securities was due primarily to an increase in average invested balances of $67.2 million in the third quarter 2020 as compared to the third quarter 2019 due to increased purchases. The increase in loan income was due primarily to an increase of $0.4 million in interest income on commercial loans primarily attributable to a $210.1 million increase in average balances of commercial loans and the recognition of $1.2 million of PPP loan fees, offset by a decrease in portfolio average yield due to a decrease in interest rates. Interest income on mortgage loans increased $0.3 million primarily due to an increase of $36.3 million in average balances of mortgage loans. These increases were offset by a decrease of $0.5 million in interest income on consumer loans which can be attributed to both decreases in average balances and average portfolio yield on consumer loans.

Fully taxable equivalent net interest margin was 3.63%3.20% in the third quarter of 2019,2020, compared with 3.71%to 3.63% for the same period in the prior year.



The average yield on interest-earning assets increased 7decreased 66 basis points, whileand the average cost of interest-bearing liabilities increased 22decreased 34 basis points in the third quarter of 2019,2020, compared to the same period in the prior year. Average interest-earning assets increased $40.7$320.3 million compared to the same period in the prior year. The increase in interest and dividend income for the current quarter can be mostly attributed to average annualized yield increases of 12 basis points on commercial loans, 25 basis points on consumer loans, and 23 basis points in taxable securities, along with a $74.1 million increase in the average balance of interest-earning deposits, offset by a $30.9 million decrease in the average balance of consumer loans, compared to the same period in the prior year.


The increase in interest expense for the current quarter can be mostly attributed to an increase in interest rates on average interest-bearing deposit accounts, including promotional rates on time deposits, offset by a $29.1 million decrease in the average balance of FHLB advances, other debt and repurchase agreements.

The following table presents net interest income for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20202019ChangePercentage Change
Interest and dividend income$49,570 $50,155 $(585)(1.2)%
Interest expense3,048 4,745 (1,697)(35.8)%
Net interest income$46,522 $45,410 $1,112 2.4 %
 Nine Months Ended 
 September 30,
    
 2019 2018 Change Percentage Change
Interest and dividend income$50,155
 $47,674
 $2,481
 5.2%
Interest expense4,745
 2,678
 2,067
 77.2%
Net interest income$45,410
 $44,996
 $414
 0.9%


Net interest income for the nine months ended September 30, 20192020 totaled $45.4$46.5 million compared with $45.0to $45.4 million for the same period in the prior year, an increase of $0.4$1.1 million, or 0.9%.  Interest2.4% due primarily to a $1.7 million decrease in total interest expense offset by a $0.6 million decrease in total interest and fees from loans increased $0.8dividend income.

The decrease in interest expense for the first nine months of 2020 can be mostly attributed to a decrease of $1.7 million in interest-bearing checking, savings and money market expenses, which was due to decreases in average rates paid on these products as a result of the Federal Reserve's 50 and 100 basis points drop on overnight rates in March, 2020. As a result, the average rate of interest-bearing liabilities decreased 24 basis points to 0.34% for the nine months ended September 30, 2020 compared to the same period in the previous year. Total interest fromand dividend income decreased primarily due to decreases of $1.1 million in interest income on interest-earning deposits, increased $1.6offset by an increase of $0.5 million in interest income on taxable securities. The decrease in interest-earning deposits can mostly be attributed to a decline in interest rates. The decrease in interest income on loans, including fees, can mostly be attributed to a decrease in average interest rates despite an increase in the average balances of loans and early payoff penalties and deferred fee income year to date. The increase in interest income on taxable securities can mostly be attributed to an increase in average balances of $44.3 million for the nine months ended September 30, 2019,2020 as compared to the same period in the prior year. Interest expense on borrowed funds andyear, due to increased purchases. Fully taxable equivalent net interest expense on securities sold under agreements to repurchase decreased $0.5 million and $0.1 million respectively,margin was 3.33% for the nine months ended September 30, 2019,2020 compared to 3.67% for the same period in the prior year. These items were partially offset by an increase in interest expense

54



The average yield on depositsinterest-earning assets decreased 51 basis points, and the average cost of $2.7 million on deposits for the nine month period ended September 30, 2019, compared to the same period in the prior year. Fully taxable equivalent net interest margin was 3.67%interest-bearing liabilitiesdecreased 24 basis points for the nine months ended September 30, 20192020, as compared with 3.73% forto the same period in the prior year. Average interest-earning assets increased $39.4$213.8 million for the nine months ended September 30, 2019, compared to the same period in the prior year.

The average yield on interest-earning assets increased 10 basis points, while the average cost of interest-bearing liabilitiesincreased 25 basis points for the nine months ended September 30, 2019, as compared to the same period in the prior year. The increasedecrease in interest and dividend income for the average yield on interest-earning assetsfirst nine months of 2020 can be mostly attributed to anaverage annualized yield decreases of 181 basis points on interest-earning deposits, 27 basis points on consumer loans, 12 basis points on taxable securities, and 55 basis points on commercial loans, offset by a $44.3 million increase in the average balance of interest-earning deposits of $87.7taxable securities, $137.1 million and a 16 basis points increase in the average yield on commercial loans, due to an increase in PRIME and LIBOR. The increase in the average cost of interest-bearing liabilities can be attributed to a 20 basis points increase in the average cost of savings and money market accounts due to rising rates, and an 85 basis points increase in the average cost of time deposits due to promotions, offset by a $36.6 million decrease in the average balance of FHLB advances, securities sold under agreement to repurchase,commercial loans, and other debt duea $21.0 million increase in the average balance of mortgage loans, compared to the maturity of one $2.0 million FHLB term advance (3.05% rate)same period in January 2018, and one $10.0 million repurchase agreement (3.72% rate) in May 2018.the prior year.


Average Consolidated Balance Sheets and Interest Analysis


The following tables present certain information related to the Corporation’s average consolidated balance sheets and its consolidated statements of income for the three and nine months ended September 30, 20192020 and 2018.2019. For the purpose of the tables below, non-accruing loans are included in the daily average loan amounts outstanding.  Daily balances were used for average balance computations. Investment securities are stated at amortized cost. Tax equivalent adjustments have been made in calculating yields on obligations of states and political subdivisions, tax-free commercial loans and dividends on equity investments.


55


AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSISAVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSISAVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)Three Months Ended 
 September 30, 2019
 Three Months Ended 
 September 30, 2018
(in thousands)Three Months Ended 
 September 30, 2020
Three Months Ended 
 September 30, 2019
Average Balance Interest Yield/Rate
(3)
 Average Balance Interest Yield/Rate
(3)
Average BalanceInterestYield/Rate
(3)
Average BalanceInterestYield/Rate
(3)
Interest-earning assets:           Interest-earning assets:
Commercial loans$864,923
 $10,160
 4.66% $861,513
 $9,868
 4.54%Commercial loans$1,075,029 $10,575 3.91 %$864,923 $10,160 4.66 %
Mortgage loans184,090
 1,788
 3.85% 191,493
 1,824
 3.78%Mortgage loans220,345 2,067 3.73 %184,090 1,788 3.85 %
Consumer loans246,154
 2,752
 4.44% 277,065
 2,925
 4.19%Consumer loans220,388 2,256 4.07 %246,154 2,752 4.44 %
Taxable securities234,075
 1,350
 2.29% 231,340
 1,201
 2.06%Taxable securities301,315 1,476 1.95 %234,075 1,350 2.29 %
Tax-exempt securities46,945
 357
 3.02% 48,226
 333
 2.74%Tax-exempt securities41,372 325 3.13 %46,945 357 3.02 %
Interest-earning deposits89,606
 502
 2.22% 15,495
 84
 2.15%Interest-earning deposits127,594 100 0.31 %89,606 502 2.22 %
Total interest-earning assets1,665,793
 16,909
 4.03% 1,625,132
 16,235
 3.96%Total interest-earning assets1,986,043 16,799 3.37 %1,665,793 16,909 4.03 %
           
Non-earning assets: 
  
  
  
  
  
Non-earning assets:      
Cash and due from banks25,784
     27,686
  
  
Cash and due from banks25,534 25,784   
Premises and equipment, net23,426
     25,896
  
  
Other assets63,149
     55,323
  
  
Other assets106,907 88,841   
Allowance for loan losses(20,033)     (19,879)  
  
Allowance for loan losses(24,370)(20,033)  
AFS valuation allowance2,266
     (9,437)  
  
Total assets$1,760,385
  
  
 $1,704,721
  
  
Total assets$2,094,114   $1,760,385   
           
Interest-bearing liabilities: 
  
  
  
  
  
Interest-bearing liabilities:      
Interest-bearing demand deposits$180,852
 $170
 0.37% $147,340
 $78
 0.21%Interest-bearing demand deposits$253,278 $55 0.09 %$180,852 $170 0.37 %
Savings and insured money market deposits724,451
 794
 0.43% 745,235
 513
 0.27%Savings and insured money market deposits791,004 231 0.12 %724,451 794 0.43 %
Time deposits178,107
 665
 1.48% 144,037
 267
 0.74%Time deposits188,889 524 1.10 %178,107 665 1.48 %
FHLBNY advances, securities sold under agreements to repurchase, and other debt4,161
 37
 3.53% 33,227
 199
 2.38%
Long-term advances, securities sold under agreements to repurchase, and other debtLong-term advances, securities sold under agreements to repurchase, and other debt3,930 35 3.54 %4,161 37 3.53 %
Total interest-bearing liabilities1,087,571
 1,666
 0.61% 1,069,839
 1,057
 0.39%Total interest-bearing liabilities1,237,101 845 0.27 %1,087,571 1,666 0.61 %
           
Non-interest-bearing liabilities: 
  
  
  
  
  
Non-interest-bearing liabilities:      
Demand deposits462,448
     464,470
  
  
Demand deposits620,386 462,448   
Other liabilities29,470
     16,081
  
  
Other liabilities40,058 29,470   
Total liabilities1,579,489
  
  
 1,550,390
  
  
Total liabilities1,897,545   1,579,489   
Shareholders' equity180,896
     154,331
  
  
Shareholders' equity196,569 180,896   
Total liabilities and shareholders’ equity$1,760,385
  
  
 $1,704,721
  
  
Total liabilities and shareholders’ equity$2,094,114   $1,760,385   
Fully taxable equivalent net interest income 
 15,243
  
  
 15,178
  
Fully taxable equivalent net interest income 15,954   15,243  
Net interest rate spread (1) 
  
 3.42%  
  
 3.57%Net interest rate spread (1)  3.10 %  3.42 %
Net interest margin, fully taxable equivalent (2) 
  
 3.63%  
  
 3.71%Net interest margin, fully taxable equivalent (2)  3.20 %  3.63 %
Taxable equivalent adjustment 
 (101) 

 

 (99)  
Taxable equivalent adjustment (85)(101) 
Net interest income 
 $15,142
  
  
 $15,079
  
Net interest income $15,869   $15,142  
(1)  Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2)  Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
(3) Annualized.




56
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)Nine Months Ended 
 September 30, 2019
 Nine Months Ended 
 September 30, 2018
 Average Balance Interest Yield/ Rate
(3)
 Average Balance Interest Yield/ Rate
(3)
Interest-earning assets:           
Commercial loans$858,997
 $30,184
 4.70% $853,832
 $28,962
 4.54%
Mortgage loans182,657
 5,223
 3.82% 193,539
 5,435
 3.75%
Consumer loans252,439
 8,425
 4.46% 277,239
 8,643
 4.17%
Taxable securities226,029
 3,830
 2.27% 240,650
 3,758
 2.09%
Tax-exempt securities48,550
 1,063
 2.93% 51,769
 1,075
 2.78%
Interest-earning deposits95,516
 1,735
 2.43% 7,801
 116
 1.99%
Total interest-earning assets1,664,188
 50,460
 4.05% 1,624,830
 47,989
 3.95%
            
Non-earning assets: 
  
  
  
  
  
Cash and due from banks25,860
  
  
 27,358
  
  
Premises and equipment, net26,873
  
  
 26,240
  
  
Other assets57,640
  
  
 55,029
  
  
Allowance for loan losses(19,784)  
  
 (20,779)  
  
AFS valuation allowance(1,829)  
  
 (8,844)  
  
Total assets$1,752,948
  
  
 $1,703,834
  
  
            
Interest-bearing liabilities: 
  
  
  
  
  
Interest-bearing demand deposits$186,327
 $554
 0.40% $143,556
 $141
 0.13%
Savings and insured money market deposits738,869
 2,378
 0.43% 762,993
 1,306
 0.23%
Time deposits165,088
 1,702
 1.38% 130,628
 520
 0.53%
FHLBNY advances, securities sold under agreements to repurchase, and other debt4,214
 111
 3.52% 40,778
 711
 2.33%
Total interest-bearing liabilities1,094,498
 4,745
 0.58% 1,077,955
 2,678
 0.33%
            
Non-interest-bearing liabilities: 
  
  
  
  
  
Demand deposits459,967
  
  
 457,934
  
  
Other liabilities24,495
  
  
 15,919
  
  
Total liabilities1,578,960
  
  
 1,551,808
  
  
Shareholders' equity173,988
  
  
 152,026
  
  
Total liabilities and shareholders’ equity$1,752,948
  
  
 $1,703,834
  
  
Fully taxable equivalent net interest income 
 45,715
  
  
 45,311
  
Net interest rate spread (1) 
  
 3.47%  
  
 3.62%
Net interest margin, fully taxable equivalent (2) 
  
 3.67%  
  
 3.73%
Taxable equivalent adjustment 
 (305)  
  
 (315)  
Net interest income 
 $45,410
  
  
 $44,996
  


AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(in thousands)Nine Months Ended 
 September 30, 2020
Nine Months Ended 
 September 30, 2019
 Average BalanceInterestYield/ Rate
(3)
Average BalanceInterestYield/ Rate
(3)
Interest-earning assets:
Commercial loans$996,136 $30,926 4.15 %$858,997 $30,184 4.70 %
Mortgage loans203,692 5,762 3.78 %182,657 5,223 3.82 %
Consumer loans227,888 7,150 4.19 %252,439 8,425 4.46 %
Taxable securities270,348 4,361 2.15 %226,029 3,830 2.27 %
Tax-exempt securities41,753 983 3.14 %48,550 1,063 2.93 %
Interest-earning deposits138,149 643 0.62 %95,516 1,735 2.43 %
Total interest-earning assets1,877,966 49,825 3.54 %1,664,188 50,460 4.05 %
Non-earning assets:      
Cash and due from banks25,111   25,860   
Other assets100,276   82,684   
Allowance for loan losses(24,783)  (19,784)  
Total assets$1,978,570   $1,752,948   
Interest-bearing liabilities:      
Interest-bearing demand deposits$231,085 $262 0.15 %$186,327 $554 0.40 %
Savings and insured money market deposits774,706 1,000 0.17 %738,869 2,378 0.43 %
Time deposits173,556 1,660 1.28 %165,088 1,702 1.38 %
Long-term advances, securities sold under agreements to repurchase, and other debt11,661 126 1.44 %4,214 111 3.52 %
Total interest-bearing liabilities1,191,008 3,048 0.34 %1,094,498 4,745 0.58 %
Non-interest-bearing liabilities:      
Demand deposits560,397   459,967   
Other liabilities34,866   24,495   
Total liabilities1,786,271   1,578,960   
Shareholders' equity192,299   173,988   
Total liabilities and shareholders’ equity$1,978,570   $1,752,948   
Fully taxable equivalent net interest income 46,777   45,715  
Net interest rate spread (1)  3.20 %  3.47 %
Net interest margin, fully taxable equivalent (2)  3.33 %  3.67 %
Taxable equivalent adjustment (255)  (305) 
Net interest income $46,522   $45,410  
(1)  Net interest rate spread is the difference in the average yield on interest-earning assets less the average rate on interest-bearing liabilities.
(2)  Net interest margin is the ratio of fully taxable equivalent net interest income divided by average interest-earning assets.
(3) Annualized.




57


Changes Due to Rate and Volume


Net interest income can be analyzed in terms of the impact of changes in rates and volumes. The tables below illustrate the extent to which changes in interest rates and the volume of average interest-earning assets and interest-bearing liabilities have affected the Corporation’s interest income and interest expense during the three and nine months ended September 30, 20192020 and 2018.2019. Information is provided in each category with respect to (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rates (changes in rates multiplied by prior volume); and (iii) the net changes. For purpose of these tables, changes that are not due solely to volume or rate changes have been allocated to these categories based on the respective percentage changes in average volume and rate. Due to the numerous simultaneous volume and rate changes during the periods analyzed, it is not possible to precisely allocate changes between volume and rates. In addition, average interest-earning assets include non-accrual loans and taxable equivalent adjustments were made.
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
 Three Months Ended
September 30, 2020 vs. 2019
 Increase/(Decrease)
 Total ChangeDue to VolumeDue to Rate
(in thousands)
Interest and dividend income on:
Commercial loans$415 $2,212 $(1,797)
Mortgage loans279 337 (58)
Consumer loans(496)(276)(220)
Taxable investment securities126 348 (222)
Tax-exempt investment securities(32)(44)12 
Interest-earning deposits(402)152 (554)
Total interest and dividend income, fully taxable equivalent(110)2,729 (2,839)
Interest expense on:   
Interest-bearing demand deposits(115)49 (164)
Savings and insured money market deposits(563)64 (627)
Time deposits(141)38 (179)
Long-term advances, securities sold under agreements to repurchase and other debt(2)(2)— 
Total interest expense(821)149 (970)
Net interest income, fully taxable equivalent$711 $2,580 $(1,869)

58
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
  Three Months Ended
September 30, 2019 vs. 2018
  Increase/(Decrease)
  Total Change Due to Volume Due to Rate
(in thousands) 
Interest and dividend income on:      
Commercial loans $292
 $38
 $254
Mortgage loans (36) (70) 34
Consumer loans (173) (340) 167
Taxable investment securities 149
 14
 135
Tax-exempt investment securities 24
 (9) 33
Interest-earning deposits 418
 415
 3
Total interest and dividend income, fully taxable equivalent 674
 48
 626
       
Interest expense on:      
Interest-bearing demand deposits 92
 22
 70
Savings and insured money market deposits 281
 (14) 295
Time deposits 398
 76
 322
FHLBNY advances, securities sold under agreements to repurchase and other debt (162) (228) 66
Total interest expense 609
 (144) 753
Net interest income, fully taxable equivalent $65
 $192
 $(127)





 Nine Months Ended
September 30, 2019 vs. 2018
Nine Months Ended
September 30, 2020 vs. 2019
 Increase/(Decrease) Increase/(Decrease)
 Total Change Due to Volume Due to Rate Total ChangeDue to VolumeDue to Rate
(in thousands) (in thousands)
Interest and dividend income on:      Interest and dividend income on:
Commercial loans $1,222
 $179
 $1,043
Commercial loans$742 $4,521 $(3,779)
Mortgage loans (212) (311) 99
Mortgage loans539 595 (56)
Consumer loans (218) (799) 581
Consumer loans(1,275)(786)(489)
Taxable investment securities 72
 (239) 311
Taxable investment securities531 739 (208)
Tax-exempt investment securities (12) (69) 57
Tax-exempt investment securities(80)(154)74 
Interest-earning deposits 1,619
 1,587
 32
Interest-earning deposits(1,092)563 (1,655)
Total interest and dividend income, fully taxable equivalent 2,471
 348
 2,123
Total interest and dividend income, fully taxable equivalent(635)5,478 (6,113)
       
Interest expense on:      Interest expense on:   
Interest-bearing demand deposits 413
 52
 361
Interest-bearing demand deposits(292)113 (405)
Savings and insured money market deposits 1,072
 (42) 1,114
Savings and insured money market deposits(1,378)112 (1,490)
Time deposits 1,182
 167
 1,015
Time deposits(42)85 (127)
FHLBNY advances, securities sold under agreements to repurchase and other debt (600) (845) 245
Long-term advances, securities sold under agreements to repurchase and other debtLong-term advances, securities sold under agreements to repurchase and other debt15 110 (95)
Total interest expense 2,067
 (668) 2,735
Total interest expense(1,697)420 (2,117)
Net interest income, fully taxable equivalent $404
 $1,016
 $(612)Net interest income, fully taxable equivalent$1,062 $5,058 $(3,996)


Provision for loan losses


Management performs an ongoing assessment of the adequacy of the allowance for loan losses based upon a number of factors including an analysis of historical loss factors, collateral evaluations, recent charge-off experience, credit quality of the loan portfolio, current economic conditions and loan growth. Management continues to evaluate the potential impact of the COVID-19 pandemic as it relates to the loan portfolio. As part of this analysis, management identified what it believes to be higher risk loans through a detailed analysis of industry codes. 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 during the first half of 2020.

Based on this analysis,approach, the Corporation determined that additional provision specifically related to the COVID-19 pandemic was not necessary in the third quarter of 2020. The provision for loan losses for the third quarter of 2020 and 2019 and 2018 was $4.4$0.7 million and $0.3$4.4 million, respectively. The increasedecrease in the provision for loan losses for the three months ended September 30, 2019, comparedwas primarily due to the same period in the prior year, can be mostly attributed to thea specific impairment of $4.2 million related to a participating interest in a commercial credit for $4.2 million due to potentially fraudulent activity duringin the third quarter of 2019.the prior year. Net charge-offs for the third quarter of 2020 and 2019 were $0.2 million, respectively.


The provision for loan losses for the nine months ended September 30, 2020 and 2019 and 2018 was $5.7$4.0 million and $3.4$5.7 million, respectively. The increasedecrease in the provision for loan losses for the nine months ended September 30, 2019,2020, compared to the same period in the prior year, can mostly be mostly attributed to thea specific impairment of $4.2 million related to a participatingparticipation interest in a commercial credit for $4.2 million due to a potentially fraudulent activity in the third quarter of 2019, offset bythe prior year. The provision for loan losses included a decrease$4.5 million increase in potential projected loss estimates in response to the total loan portfolio of $14.0 million between September 30, 2018COVID-19 pandemic, and September 30, 2019. Additionally, during 2018 there was an increase in theloan volume, offset by recoveries, decreases in specific allocations, and a net decrease in historical loss factor of the commercial and industrial loan portfolio,factors due to a large 2018 loan charge-off which no longer impacts the charge-off of multiple large commercial loans to one borrower for $3.6 million during the second quarter of 2018.

Net charge-offs for the three months ended September 30, 2019 and 2018 were $0.2 million and $0.3 million, respectively.provision calculation. Net charge-offs for the nine months ended September 30, 2020 and 2019 and 2018 were $0.7$2.9 million and $4.9$0.7 million, respectively. The decreaseincrease in net charge offs for the nine month periodperiods ended September 30, 20192020 can be mostly attributed to the partial charge-off of multiple largea commercial loans to one borrower for $3.6 million duringloan in the second quarter of 2018.2020.




59


Non-interest income


The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20202019ChangePercentage Change
WMG fee income$2,416 $2,315 $101 4.4 %
Service charges on deposit accounts740 1,141 (401)(35.1)%
Interchange revenue from debit card transactions1,082 1,058 24 2.3 %
Changes in fair value of equity investments57 (10)67 (670.0)%
Net gains on sales of loans held for sale553 69 484 701.4 %
Net gains (losses) on sales of other real estate owned(1)N/M
Income from bank owned life insurance14 17 (3)(17.6)%
CFS fee and commission income172 145 27 18.6 %
Other299 222 77 34.7 %
Total non-interest income$5,339 $4,956 $383 7.7 %
  Three Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
WMG fee income $2,315
 $2,406
 $(91) (3.8)%
Service charges on deposit accounts 1,141
 1,231
 (90) (7.3)%
Interchange revenue from debit card transactions 1,058
 982
 76
 7.7 %
Changes in fair value of equity investments (10) 2,141
 (2,151) (100.5)%
Net gains on sales of loans held for sale 69
 79
 (10) (12.7)%
Net gains (losses) on sales of other real estate owned (1) 123
 (124) (100.8)%
Income from bank owned life insurance 17
 17
 
 N/A
CFS fee and commission income 145
 120
 25
 20.8 %
Other 222
 282
 (60) (21.3)%
Total non-interest income $4,956
 $7,381
 $(2,425) (32.9)%


Total non-interest income for the third quarter of 2019 decreased $2.42020 increased $0.4 million compared withto the same period in the prior year. The decrease can be mostly attributed to a decreaseIncreases in net gains on sales of $2.2 million in theloans held for sale, WMG fee income, other non-interest income and changes in fair value of equity investments.investments were offset partially by a decrease in service charges on deposit accounts.


Change in Net Gains on Sales of Loans Held for Sale
The increase in net gains on sales of loans held for sale was primarily attributable to an increase in residential mortgage loans originated and sold in the secondary market when compared to the same period in the prior year, primarily due to increased home purchases and refinancings due to the low interest rate environment.

Change in WMG Fee Income
The increase in WMG fee income was primarily due to a general increase in the equity markets when compared to the same period in the prior year.

Change in Other Non-Interest Income
The increase in other non-interest income was due primarily to receipt of an insurance claim payment.

Changes in Fair Value of Equity Investments
The decreaseincrease in changes in fair value of equity investments was primarily due primarily to ana general increase in the fair value of Visa Class B sharesequity markets when compared to the same period in the third quarter of 2018, which were then subsequently sold duringprior year.

Change in Service Charges on Deposit Accounts
The decrease in service charges on deposit accounts was primarily due to a decline in non-sufficient fund and overdraft fees when compared to the third quarter of 2018.same period in the prior year.


60


The following table presents non-interest income for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20202019ChangePercentage Change
WMG fee income$6,968 $7,115 $(147)(2.1)%
Service charges on deposit accounts2,294 3,330 (1,036)(31.1)%
Interchange revenue from debit card transactions2,989 3,113 (124)(4.0)%
Net gains on securities transactions— 19 (19)(100.0)
Changes in fair value of equity investments(33)106 (139)(131.1)%
Net gains on sales of loans held for sale916 146 770 527.4 %
Net gains (losses) on sales of other real estate owned(71)(87)16 (18.4)%
Income from bank owned life insurance147 48 99 206.3 %
CFS fee and commission income502 502 — N/A
Other1,438 675 763 113.0 %
Total non-interest income$15,150 $14,967 $183 1.2 %
  Nine Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
WMG fee income $7,115
 $7,095
 $20
 0.3 %
Service charges on deposit accounts 3,330
 3,539
 (209) (5.9)%
Interchange revenue from debit card transactions 3,113
 3,013
 100
 3.3 %
Net gains on securities transactions 19
 
 19
 N/A
Changes in fair value of equity investments 106
 2,165
 (2,059) (95.1)%
Net gains on sales of loans held for sale 146
 184
 (38) (20.7)%
Net gains (losses) on sales of other real estate owned (87) 119
 (206) N/M
Income from bank owned life insurance 48
 50
 (2) (4.0)%
CFS fee and commission income 502
 365
 137
 37.5 %
Other 675
 1,651
 (976) (59.1)%
Total non-interest income $14,967
 $18,181
 $(3,214) (17.7)%


Total non-interest income for the nine months ended September 30, 2019 decreased $3.22020 increased $0.2 million compared withto the same period in the prior year. The decreaseincrease was mostly due to increases in net gains on sales of loans held for sale, and other non-interest income, offset by decreases in service charges on deposit accounts, WMG fee income and changes in fair value of equity investments,investments.

Change in Net Gains on Sales of Loans Held for Sale
The increase in net gains on sales of loans held for sale was primarily attributable to an increase in residential mortgage loans originated and sold in the secondary market when compared to the same period in the prior year, primarily due to increased home purchases and refinancings due to the low interest rate environment.

Change in Other Non-Interest Income
The increase in other non-interest income and net gains (losses) on saleswas due primarily to receipt of other real estate owned, partially offset byan insurance claim payment in the current year and an increase in CFSinterest rate swap fee income as compared to the same period in the prior year.

Change in Service Charges on Deposit Accounts
The decrease in service charges on deposit accounts was primarily due to a decline in non-sufficient fund and commission income.overdraft fees when compared to the same period in the prior year.


ChangesChange in fair valueWMG Fee Income
The decrease in WMG fee income was primarily due to fees earned from terminating trusts in the prior year period.

Change in Fair Value of equity investmentsEquity Investments
The decrease in changes in fair value of equity investments was primarily due primarily to an increasea general decrease in the fair value of Visa Class B shares of $2.1 million in the third quarter of 2018, which were then subsequently sold during the third quarter of 2018.



Other
The decrease in other non-interest income,equity markets when compared to the same period in the prior year can be mostly attributed to a $0.4 million New York State sales tax refund received during the first quarter of 2018, and decreases in swap fee income and rental income from OREO.period.


Net gains (losses) on sales of other real estate owned
The decrease in net gains (losses) on sales of other real estate owned was due to net losses on the sale of ten properties in the nine months ended September 30, 2019 versus net gains on the sale of seven properties in the nine months ended September 30, 2018.
61


CFS fee and commission income

The increase in CFS fee and commission income, compared to the same period in the prior year, can be mostly attributed to an increase in annuity commissions.

Non-interest expense


The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20202019ChangePercentage Change
Compensation expense:
Salaries and wages$6,088 $5,874 $214 3.6 %
Pension and other employee benefits1,245 1,470 (225)(15.3)%
Other components of net periodic pension and postretirement benefits(254)(141)(113)N/M
Total compensation expense7,079 7,203 (124)(1.7)%
Non-compensation expense:    
Net occupancy1,454 1,424 30 2.1 %
Furniture and equipment538 717 (179)(25.0)%
Data processing1,777 1,818 (41)(2.3)%
Professional services453 395 58 14.7 %
Amortization of intangible assets120 151 (31)(20.5)%
Marketing and advertising140 231 (91)(39.4)%
Other real estate owned expenses53 44 488.9 %
FDIC insurance247 (10)257 N/M
Loan expenses301 171 130 76.0 %
Other1,200 1,416 (216)(15.3)%
Total non-compensation expense6,283 6,322 (39)(0.6)%
Total non-interest expense$13,362 $13,525 $(163)(1.2)%
  Three Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
Compensation expense:        
Salaries and wages $5,874
 $5,691
 $183
 3.2 %
Pension and other employee benefits 1,470
 1,262
 208
 16.5 %
Other components of net periodic pension and postretirement benefits (141) (408) 267
 N/M
Total compensation expense 7,203
 6,545
 658
 10.1 %
         
Non-compensation expense:  
  
  
  
Net occupancy 1,424
 1,671
 (247) (14.8)%
Furniture and equipment 717
 581
 136
 23.4 %
Data processing 1,818
 1,782
 36
 2.0 %
Professional services 395
 479
 (84) (17.5)%
Amortization of intangible assets 151
 182
 (31) (17.0)%
Marketing and advertising 231
 212
 19
 9.0 %
Other real estate owned expenses 9
 83
 (74) (89.2)%
FDIC insurance (10) 263
 (273) (103.8)%
Loan expenses 171
 262
 (91) (34.7)%
Other 1,416
 1,368
 48
 3.5 %
Total non-compensation expense 6,322
 6,883
 (561) (8.2)%
Total non-interest expense $13,525
 $13,428
 $97
 0.7 %


Total non-interest expense for the third quarter of 2019 increased $0.12020 decreased $0.2 million compared withto the same period in the prior year. The increasedecrease was due to an increasedecreases in total compensation expense offset by a decrease inand total non-compensation expense.


Compensation expense
The increasedecrease in compensation expense, compared to the same period in the prior year, can be mostly be attributedattributable to annual merit increasesa decrease in pension and other employee benefits, offset by an increase in salaries and wages, and a reduced credit in other components of net periodic pension and postretirement benefits. The increasedecrease in pension and other employee benefits was mostly attributable to a decrease in healthcare expenses as compared to the same period in the prior year. The reduced credit in other components of net periodic pension and postretirement benefits was primarily due primarily to increased health care costs.a change in assumptions used to prepare annual actuarial expense estimates. The increase in salaries and wages was mostly attributable to an increase in reward and incentive payments.


Non-compensation expense
The decrease in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to decreases in net occupancyother non-interest expense, furniture and equipment, and marketing and advertising, offset by increases in FDIC insurance expense. and loan expenses.

The decrease in net occupancyother non-interest expense wascan mostly attributablebe attributed to overall decreases in expenditures due to the closingCOVID-19 pandemic including, corporate travel and client and bank relations, supplies, and statement and notice processing. The decrease in furniture and equipment can mostly be attributed to a decrease in the overall depreciation expense after the closure of the Oakdale Mall and Painted Post branchestwo branch locations in 2019. The decrease in marketing and advertising can mostly be attributed to decreased promotional efforts due to the COVID-pandemic. The increase in FDIC insurance expense was primarily dueattributable to the receipt of a $0.2 million credit in the third quarter of the prior year related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment. The increase in loan expenses was mostly attributable to increased loan volume compared to the same period in the prior year.




62


The following table presents non-interest expense for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20202019ChangePercentage Change
Compensation expense:
Salaries and wages$17,678 $17,375 $303 1.7 %
Pension and other employee benefits4,095 4,488 (393)(8.8)%
Other components of net periodic pension and postretirement benefits(762)(423)(339)N/M
Total compensation expense21,011 21,440 (429)(2.0)%
Non-compensation expense:    
Net occupancy4,406 4,469 (63)(1.4)%
Furniture and equipment1,573 1,840 (267)(14.5)%
Data processing5,630 5,418 212 3.9 %
Professional services1,313 1,218 95 7.8 %
Amortization of intangible assets371 465 (94)(20.2)%
Marketing and advertising546 644 (98)(15.2)%
Other real estate owned expenses87 80 8.8 %
FDIC insurance726 476 250 52.5 %
Loan expenses798 557 241 43.3 %
Other3,878 4,238 (360)(8.5)%
Total non-compensation expense19,328 19,405 (77)(0.4)%
Total non-interest expense$40,339 $40,845 $(506)(1.2)%
  Nine Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
Compensation expense:        
Salaries and wages $17,375
 $16,969
 $406
 2.4 %
Pension and other employee benefits 4,488
 4,438
 50
 1.1 %
Other components of net periodic pension and postretirement benefits (423) (1,224) 801
 N/M
Total compensation expense 21,440
 20,183
 1,257
 6.2 %
         
Non-compensation expense:  
  
  
  
Net occupancy 4,469
 4,922
 (453) (9.2)%
Furniture and equipment 1,840
 1,941
 (101) (5.2)%
Data processing 5,418
 5,288
 130
 2.5 %
Professional services 1,218
 1,527
 (309) (20.2)%
Legal accruals and settlements 
 989
 (989) (100.0)%
Amortization of intangible assets 465
 558
 (93) (16.7)%
Marketing and advertising 644
 816
 (172) (21.1)%
Other real estate owned expenses 80
 321
 (241) (75.1)%
FDIC insurance 476
 881
 (405) (46.0)%
Loan expenses 557
 615
 (58) (9.4)%
Other 4,238
 4,520
 (282) (6.2)%
Total non-compensation expense 19,405
 22,378
 (2,973) (13.3)%
Total non-interest expense $40,845
 $42,561
 $(1,716) (4.0)%


Total non-interest expense for the nine months ended September 30, 20192020 decreased $1.7$0.5 million compared withto the same period in the prior year. The decrease was due to a decrease in total non-compensation expense, offset by an increasedecreases in total compensation expense and total non-compensation expense.


Compensation expense
The increasedecrease in compensation expense, compared to the same period in the prior year, can be mostly attributable to an increasea decrease in salariespension and wagesother employee benefits and a reduced credit in other components of net periodic pension benefits. Theand postretirement benefits, offset by an increase in salaries and wages can be attributed to annual merit increases.wages. The decrease in pension and other employee benefits was mostly attributable to a decrease in healthcare expenses as compared to the benefitsame period in the prior year. The reduced credit in other components of net periodic pension and post-retirementpostretirement benefits was due to a change in assumptions used to prepare annual actuarial expense estimates. The increase in salaries and wages was due to an increase in reward and incentive payments.


Non-compensation expense
The decrease in non-compensation expense, compared to the same period in the prior year, can be mostly attributed to decreases in legal accruals and settlements, net occupancy expenses, furniture and equipment expenses, other non-interest expenses, marketing and advertising expenses, professional services, other real estate owned, and FDIC insurance. The decrease in legal accruals and settlements can be attributed to the settlement agreement in the matter of Fane vs. Chemung Canal Trust Company during the second quarter of 2018. The decrease in net occupancynon-compensation expense and furniture and equipment expenses, wasoffset by increases in FDIC insurance and loan expenses.

The decrease in other non-compensation expense can mostly attributablebe attributed to runoffa decrease in depreciation expense related to mechanical equipment, the closing of the Oakdale Mallbank and Painted Post branches, as well as a reduction in non-capitalizable fixed asset purchasesclient relations and travel expenditures as compared to the prior yearsame period due to the opening of two new branches in 2018. The decrease in marketing and advertising expenses was due to promotional expenses associated with the opening of two new branches during 2018. The decrease in professional services was due to consulting fees incurred in the prior year associated withdue to the NYS sales tax refund received in March 2018.COVID-19 pandemic. The decrease in OREOfurniture and equipment expenses can mostly be attributed to fewer OREO properties retaineda decrease in the first nine monthsoverall depreciation expense after the closure of 2019 as compared to the first nine months of 2018.two branch locations in 2019. The decreaseincrease in FDIC insurance expense was primarily dueattributed to the receipt of a $0.2 million credit in the third quarter of the prior year related to the Deposit Insurance Fund's (DIF) minimum reserve ratio assessment. The increase in loan expenses was primarily attributable 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.

63





Income tax expense


The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
 Three Months Ended 
 September 30,
 20202019ChangePercentage Change
Income before income tax expense$7,167 $2,132 $5,035 236.2 %
Income tax expense1,456 176 1,280 727.3 %
Effective tax rate20.3 %8.3 %
  Three Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
Income before income tax expense $2,132
 $8,732
 $(6,600) (75.6)%
Income tax expense 176
 1,802
 (1,626) (90.2)%
Effective tax rate 8.3% 20.6%    


Income tax expense for the current quarter was $0.2$1.5 million compared to $1.8$0.2 million for the same period in the prior year. The decreaseincrease in income tax expense was due primarily to a decreasean increase of $6.6$5.0 million in income before income tax expense. The effective income tax rate decreasedincreased from 20.6% for the third quarter of 2018 to 8.3% for the third quarter of 2019.2019 to 20.3% for the third quarter of 2020.


The following table presents income tax expense and the effective tax rate for the periods indicated, and the dollar and percent change (in thousands):
 Nine Months Ended 
 September 30,
 20202019ChangePercentage Change
Income before income tax expense$17,344 $13,848 $3,496 25.2 %
Income tax expense3,315 2,443 872 35.7 %
Effective tax rate19.1 %17.6 %  
  Nine Months Ended 
 September 30,
    
  2019 2018 Change Percentage Change
Income before income tax expense $13,848
 $17,245
 $(3,397) (19.7)%
Income tax expense 2,443
 3,349
 (906) (27.1)%
Effective tax rate 17.6% 19.4%  
  


Income tax expense for the nine months ended September 30, 2020 and 2019 and 2018 were $2.4$3.3 million and $3.3$2.4 million, respectively. The decreaseincrease in income tax expense was due primarily to a decreasean increase of $3.4$3.5 million in income before income tax expense. The effective income tax rate decreasedincreased from 19.4% for the nine months ended September 30, 2018 to 17.6% for the nine months ended September 30, 2019.2019 to 19.1% for the nine months ended September 30, 2020.




64


Financial Condition


The following table presents selected financial information at the dates indicated, and the dollar and percent change (in thousands):
 September 30, 2020December 31, 2019ChangePercentage Change
ASSETS
Total cash and cash equivalents$149,902 $121,904 $27,998 23.0 %
Total investment securities, FHLB, and FRB stock404,788 292,478 112,310 38.4 %
Loans, net of deferred loan fees1,538,493 1,309,219 229,274 17.5 %
Allowance for loan losses(24,590)(23,478)(1,112)4.7 %
Loans, net1,513,903 1,285,741 228,162 17.7 %
Goodwill and other intangible assets, net22,195 22,566 (371)(1.6)%
Other assets74,226 65,138 9,088 14.0 %
Total assets$2,165,014 $1,787,827 $377,187 21.1 %
LIABILITIES AND SHAREHOLDERS' EQUITY    
Total deposits$1,924,189 $1,572,138 $352,051 22.4 %
Long-term advances and other debt4,155 4,085 70 1.7 %
Other liabilities39,665 28,977 10,688 36.9 %
Total liabilities1,968,009 1,605,200 362,809 22.6 %
Total shareholders’ equity197,005 182,627 14,378 7.9 %
Total liabilities and shareholders’ equity$2,165,014 $1,787,827 $377,187 21.1 %
  September 30, 2019 December 31, 2018 Change Percentage Change
ASSETS        
Total cash and cash equivalents $146,298
 $129,972
 $16,326
 12.6 %
Total investment securities, FHLB, and FRB stock 276,105
 252,180
 23,925
 9.5 %
         
Loans, net of deferred loan fees 1,306,638
 1,311,906
 (5,268) (0.4)%
Allowance for loan losses (23,923) (18,944) (4,979) 26.3 %
Loans, net 1,282,715
 1,292,962
 (10,247) (0.8)%
         
Goodwill and other intangible assets, net 22,710
 23,175
 (465) (2.0)%
Other assets 65,815
 57,054
 8,761
 15.4 %
Total assets $1,793,643
 $1,755,343

$38,300
 2.2 %
         
LIABILITIES AND SHAREHOLDERS' EQUITY  
  
  
  
Total deposits $1,576,506
 $1,569,237
 $7,269
 0.5 %
FHLBNY advances and other debt 4,140
 4,304
 (164) (3.8)%
Other liabilities 30,953
 16,773
 14,180
 84.5 %
Total liabilities 1,611,599
 1,590,314
 21,285
 1.3 %
         
Total shareholders’ equity 182,044
 165,029
 17,015
 10.3 %
Total liabilities and shareholders’ equity $1,793,643
 $1,755,343
 $38,300
 2.2 %


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


Investment securities
The increase in investment securities can be mostly attributed to purchases in the amount of $67.6$138.4 million and an increase in the fair value of the portfolio of $11.8 million, offset by $15.2$38.9 million in sales of mortgage-backed and municipal securities, along with maturities, and principal paydowns.


Loans, net
The decreaseincrease in total loans net, can be mostly attributed to decreasesincreases of $9.6$41.7 million in commercial mortgages, $12.9$174.3 million in commercial and agricultural loans, and $39.0 million in residential mortgages, partially offset by decreases of $13.6 million in indirect consumer loans, and $8.4$12.2 million in other consumer loans. $189.8 million of the increase in loan balances relates to loans partially offset by an increaseextended as part of $24.2 million in commercial and agriculture loans and $1.3 million in residential mortgages.the Paycheck Protection Program (PPP).


Goodwill and other intangible assets, net
The decrease in goodwill and other intangible assets, net, can be attributed to the amortization of intangible assets.


Other assets
The increase in other assets can be mostly attributed to an increase of $8.6$10.4 million in operating lease right-of-use assets related to the adoption of ASU No. 2016-02 Leases as of January 1, 2019.interest rate swap assets.


Deposits
The increase in deposits can be attributed to increases of $28.6 million in interest-bearing demand deposits and $19.6 million in time deposits, offset by decreases of $27.8$49.3 million in money market accounts, $70.9 million in interest-bearing demand deposit accounts, $36.4 million in savings deposits, $44.3 million in time deposits, and $11.8$151.2 million in non-interest-bearing demand deposits. The decrease in non-interest-bearing demand deposit can be mostly attributed to an outflow of personal deposits and the decrease in money market accounts can be mostly attributed to an outflow of municipal deposits.



65



Other liabilities
The increase in other liabilities can be mostly attributed to an increase in operating lease liabilities related to the January 1, 2019 adoption of ASU No. 2016-02 Leases, and an increase$10.3 million in interest rate swap liabilities.


Shareholders’ equity
Shareholders’ equity was $182.0$197.0 million at September 30, 20192020 compared with $165.0to $182.6 million at December 31, 2018.2019. The increase in retained earnings of $7.6 million can be mostly attributed to earnings of $11.4$14.0 million, and an increase in accumulated other comprehensive income of $7.4 million, offset by $3.8$3.7 million in dividendsdeclared during the nine months ended September 30, 2019.2020. The decreaseincrease in accumulated other comprehensive loss of $8.1 millionincome can be mostly attributed to the increase in the fair market value of the securities portfolio. Also, treasuryTreasury stock decreased $0.6increased $3.9 million, primarily due to the issuancerepurchase of shares to the Corporation's employee benefit stock plans and directors' stock plans.common stock. As of September 30, 2020, 184,360 shares have been repurchased at an average cost of $27.57 per share.


Assets under management or administration
The market value of total assets under management or administration in WMG was $1.863$1.935 billion at September 30, 2019,2020, including $301.3$299.0 million of assets held under management or administration for the Corporation, compared with $1.768to $1.915 billion at December 31, 2018,2019, including $283.0$289.7 million of assets held under management or administration for the Corporation, an increase of $94.4$20.0 million, or 5.3%1.1%. The growthincrease in total assets under management or administration can be mostly attributed to an increase in the market value of total assets.


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 "A""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 segment of the securities portfolio is summarized in the table as follows (in thousands):
SECURITIES AVAILABLE FOR SALE
 September 30, 2020December 31, 2019
 Amortized CostEstimated Fair ValuePercent of Total Estimated Fair ValueAmortized CostEstimated Fair ValuePercent of Total Estimated Fair Value
Mortgage-backed securities, residential and collateralized mortgage obligations$317,087 $326,268 82.3 %$225,029 $225,234 79.3 %
Obligations of states and political subdivisions40,694 43,260 10.9 %41,265 42,845 15.1 %
Other securities26,766 26,772 6.8 %15,962 16,011 5.6 %
Total$384,547 $396,300 100.0 %$282,256 $284,090 100.0 %
SECURITIES AVAILABLE FOR SALE
  September 30, 2019 December 31, 2018
  Amortized Cost Estimated Fair Value Percent of Total Estimated Fair Value Amortized Cost Estimated Fair Value Percent of Total Estimated Fair Value
Obligations of U.S. Government sponsored enterprises $
 $
 % $5,489
 $5,472
 2.3%
Mortgage-backed securities, residential and collateralized mortgage obligations 201,152
 203,524
 76.1% 189,111
 183,192
 75.6%
Obligations of states and political subdivisions 45,122
 47,270
 17.7% 44,390
 44,152
 18.2%
Other securities 16,627
 16,735
 6.2% 9,506
 9,442
 3.9%
Total $262,901
 $267,529
 100.0% $248,496
 $242,258
 100.0%


The available for sale segment of the securities portfolio totaled $267.5$396.3 million at September 30, 2019,2020, an increase of $25.3$112.2 million, or 10.4%39.5%, from $242.3$284.1 million at December 31, 2018.2019. The increase can be mostly attributed to purchases in the amount of $67.5$138.4 million and an increase in the fair value of the portfolio of $11.8 million, offset by $15.2$38.9 million in sales of mortgage-backed and municipal securities, and $37.2 million in proceeds from maturities, calls and principal paydowns on securities available for sale.paydowns.


The held to maturity segment of the securities portfolio consists of obligations of political subdivisions in the Corporation’s market areas and certificates of deposit. These securities totaled $3.4$3.0 million at September 30, 2019,2020, a decrease of $1.4$0.1 million, or 29.1%1.5%, from $4.9$3.1 million at December 31, 2018,2019, mostly attributed to maturities.




66


Loans


The Corporation has reporting systems to monitor: (i) loan origination and concentrations, (ii) delinquent loans, (iii) non-performing assets, including non-performing loans, troubled debt restructurings, and 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 segment at the dates indicated, and the dollar and percent change from December 31, 20182019 to September 30, 20192020 (in thousands):
LOANS
 September 30, 2020December 31, 2019Dollar ChangePercentage Change
Commercial and agricultural$404,593 $230,292 $174,301 75.7 %
Commercial mortgages690,511 648,794 41,717 6.4 %
Residential mortgages227,372 188,338 39,034 20.7 %
Indirect consumer loans121,406 134,973 (13,567)(10.1)%
Other consumer loans94,611 106,822 (12,211)(11.4)%
Total loans, net of deferred loan fees$1,538,493 $1,309,219 $229,274 17.5 %
LOANS
  September 30, 2019 December 31, 2018 Dollar Change Percentage Change
Commercial and agricultural $227,098
 $202,854
 $24,244
 12.0 %
Commercial mortgages 651,605
 661,170
 (9,565) (1.4)%
Residential mortgages 184,013
 182,724
 1,289
 0.7 %
Indirect consumer loans 136,502
 149,380
 (12,878) (8.6)%
Other consumer loans 107,420
 115,778
 (8,358) (7.2)%
Total loans, net of deferred loan fees $1,306,638
 $1,311,906
 $(5,268) (0.4)%


Portfolio loans totaled $1.307$1.538 billion at September 30, 2019, a decrease2020, an increase of $5.3$229.3 million, or 0.4%17.5%, from $1.312$1.309 billion at December 31, 2018.2019.  The decreaseincrease in loans can be attributed to decreasesincreases of $9.6$174.3 million in commercial and agricultural loans, $41.7 million in commercial mortgages $12.9and $39.0 million in residential mortgages, offset by decreases of $13.6 million in indirect consumer loans, and $8.4$12.2 million in other consumer loans. $189.8 million of the increase in loan balances relates to loans partially offset by increasesextended as part of $24.2 million in commercial and agricultural loans, and $1.3 million in residential mortgages. The decline in commercial mortgages, indirect consumer loans, and other consumer loans can be mostly attributed to the portfolio runoff rate exceeding production during the nine months ended September 30, 2019.Paycheck Protection Program (PPP).


Residential mortgage loans totaled $184.0$227.4 million at September 30, 2019,2020, an increase of $1.3$39.0 million, or 0.7%20.7%, from December 31, 2018.2019. During the nine months ended September 30, 2019, $29.72020, $110.1 million of residential mortgages were originated, of which $6.6$30.7 million were sold in the secondary market to Freddie Mac and $0.5$0.4 million were sold to the State of New York Mortgage Agency. 


The Corporation anticipates that future growth in portfolio loans will continue to be in commercial mortgages and commercial and industrial loans, especially withinloans. Recent growth in residential mortgages was driven by both home purchases and refinancings due to the Capital Bank division of the Bank.low interest rate environment. The table below presents the Corporation’s outstanding loan balance by bank division (in thousands):
LOANS BY DIVISIONLOANS BY DIVISIONLOANS BY DIVISION
September 30, 2019 December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015 September 30, 2020December 31, 2019December 31, 2018December 31, 2017December 31, 2016
Chemung Canal Trust Company*$585,783
 $603,133
 $630,732
 $636,836
 $683,137
Chemung Canal Trust Company*$678,477 $576,399 $603,133 $630,732 $636,836 
Capital Bank Division720,855
 708,773
 681,092
 563,454
 485,496
Capital Bank Division860,016 732,820 708,773 681,092 563,454 
Total loans$1,306,638
 $1,311,906
 $1,311,824
 $1,200,290
 $1,168,633
Total loans$1,538,493 $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 economic or other conditions.  Specific industries are identified using NAICS codes. The Corporation monitors specific NAICS industry classifications of commercial loans to identify concentrations greater than 10.0% of total loans. At September 30, 20192020 and December 31, 2018,2019, commercial loans to borrowers involved in the real estate, and real estate rental and lending businesses were 44.5%41.4% and 47.2%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 September 30, 20192020 and December 31, 2018.2019.


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.



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


The following table summarizes the Corporation's non-performing assets, excluding acquired PCI loans (in thousands):
NON-PERFORMING ASSETS
 September 30, 2020December 31, 2019
Non-accrual loans$7,701 $9,938 
Non-accrual troubled debt restructurings8,025 8,070 
Total non-performing loans15,726 18,008 
Other real estate owned585 517 
Total non-performing assets$16,311 $18,525 
Ratio of non-performing loans to total loans1.02 %1.38 %
Ratio of non-performing assets to total assets0.75 %1.04 %
Ratio of allowance for loan losses to non-performing loans156.36 %130.38 %
Accruing loans past due 90 days or more (1)$— $
Accruing troubled debt restructurings (1)$2,825 $900 
(1) These loans are not included in non-performing assets above.
NON-PERFORMING ASSETS
  September 30, 2019 December 31, 2018
Non-accrual loans $15,061
 $6,305
Non-accrual troubled debt restructurings 8,407
 5,949
Total non-performing loans 23,468
 12,254
Other real estate owned 211
 574
Total non-performing assets $23,679
 $12,828
     
Ratio of non-performing loans to total loans 1.80% 0.93%
Ratio of non-performing assets to total assets 1.32% 0.73%
Ratio of allowance for loan losses to non-performing loans 101.94% 154.59%
     
     
Accruing loans past due 90 days or more (1) $53
 $19
Accruing troubled debt restructurings (1) 887
 816
(1) These loans are not included in non-performing assets above.    


Non-Performing Loans


Non-performing loans totaled $23.5$15.7 million at September 30, 2019,2020, or 1.80%1.02% of total loans, compared with $12.3to $18.0 million at December 31, 2018,2019, or 0.93%1.38% of total loans. Non-performing assets, which are comprised of non-performing loans and other real estate owned, was $23.7$16.3 million, or 1.32%0.75% of total assets, at September 30, 2019,2020, compared with $12.8to $18.5 million, or 0.73%1.04% of total assets, at December 31, 2018.2019. The increasedecrease in non-performing loans can mostly be mostly attributed to twopayments received on commercial mortgage relationshipsloans and onea partial charge-off of a large commercial loan, partially offset by additional non-performing commercial and agricultural participation loan, offset by paydowns withinconsumer loans. The decrease in non-performing assets can be attributed to the commercial portfolio.aforementioned change in non-performing loans and sales of other real estate owned.


Accruing Loans Past due 90 Days or More


The recorded investment in accruing loans past due 90 days or more totaled $53less than $1 thousand at September 30, 2019, an increase2020, a decrease of $34$7 thousand from December 31, 2018.2019.


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 has 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. As of September 30, 2019,2020, the Corporation had $8.4$8.0 million of non-accrual TDRs compared with $6.0to $8.1 million as of December 31, 2018.2019.  As of September 30, 20192020 and December 31, 2018,2019, the Corporation had $0.9$2.8 million and $0.8$0.9 million respectively, of accruing TDRs.

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Impaired Loans


A loan is classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect both the principal and interest due under the contractual terms of the loan agreement. Impaired loans at September 30, 20192020 totaled $20.6$16.4 million, including TDRs of $10.2 million, compared to $15.7 million, including TDRs of $9.3 million, compared to $8.7 million, including TDRs of $6.8$9.0 million, at December 31, 2018.  The increase in impaired loans was due primarily to the impairment of a commercial mortgage to one borrower for $3.4 million during the first quarter of 2019, a commercial mortgage to one borrower for $5.0 million during the second quarter of 2019, and a commercial and industrial participation credit for $4.2 million during the third quarter of 2019. Included in the recorded investment of impaired loans at September 30, 2019,2020, were loans totaling $16.3 $8.6 million for which impairment allowances of $8.7$5.8 million have been specifically allocated to the allowance for loan losses. As of December 31, 2018,2019, the impaired loan total included $3.7$11.1 million of loans for which specific impairment allowances of $2.2$8.1 million were allocated to the allowance for loan losses. The increase in impaired loans with specific impairment allowances can be mostly attributed to the impairment of a commercial mortgage to one borrower for $3.4 million during the first quarter of 2019, a commercial mortgage to one borrower for $5.0 million during the second quarter of 2019, and a commercial and industrial participation credit 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.


Allowance for Loan Losses


The allowance is an amount that management believes will be adequate to absorb probable incurred losses on existing loans.  The allowance is established based on management’s evaluation of the probable incurred losses inherent 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 analysis of individually impaired loans. Factors considered by management in determining impairment include payment status, evaluations of the underlying collateral, expected cash flows, delinquent or unpaid property taxes, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. If a loan is determined to be impaired and is placed on non-accrual status, all future payments received are applied to principal and a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.




The general component covers non-impaired loans and is based on historical loss experience adjusted for current qualitative factors.  Loans not impaired but classified as substandard and special mention use a historical loss factor on a rolling five-year history of net losses. For all other unclassified loans, the historical loss experience is determined by portfolio class and is based on the actual loss history experienced by the Corporation over the most recent two years. This actual loss experience is supplemented with other qualitative factors based on the risks present for each portfolio class. These qualitative factors include consideration of the following: (1) lending policies and procedures, including underwriting standards and collection, charge-off and recovery policies, (2) national and local economic and business conditions and developments, including the condition of various market segments, and more recently the expected impact of COVID-19 on the various portfolios, (3) loan profiles and volume of the portfolio, (4) the experience, ability, and depth of lending management and staff, (5) the volume and severity of past due, classified and watch-list loans, non-accrual loans, troubled debt restructurings, and other modifications (6) the quality of the Bank’s loan review system and the degree of oversight by the Bank’s Board of Directors, (7) collateral related issues: 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.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. 
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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 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 $23.9$24.6 million at September 30, 2019,2020, compared with $18.9to $23.5 million at December 31, 2018.2019.  The ratio of allowance for loan losses to total loans was 1.83%1.60% at September 30, 2019,2020, compared with 1.44%to 1.79% at December 31, 2018.2019.  Net charge-offs for the nine months ended September 30, 2019 and 20182020 were $0.7$2.9 million, and $4.9 million, respectively. Net charge-offs decreased $4.2 million, compared with the same periodincluding a partial charge-off of a commercial loan in the prior year, mostly duesecond quarter of 2020, as compared to net charge-offs for the charge-offnine months ended September 30, 2019 of multiple large commercial loans to one borrower for $3.6 million in 2018.$0.7 million.




The table below summarizes the Corporation’s loan loss experience for the nine months ended September 30, 20192020 and 20182019 (in thousands, except ratio data):
SUMMARY OF LOAN LOSS EXPERIENCE
 Nine Months Ended 
 September 30,
 20202019
Balance of allowance for loan losses at beginning of period$23,478 $18,944 
Charge-offs:  
Commercial and agricultural134 55 
Commercial mortgages2,143 — 
Residential mortgages56 60 
Consumer loans915 1,040 
Total charge-offs3,248 1,155 
Recoveries:  
Commercial and agricultural27 44 
Commercial mortgages
Residential mortgages49 45 
Consumer loans293 359 
Total recoveries371 450 
Net charge-offs2,877 705 
Provision for loan losses3,989 5,684 
Balance of allowance for loan losses at end of period$24,590 $23,923 
Ratio of net charge-offs to average loans outstanding0.27 %0.07 %
Ratio of allowance for loan losses to total loans outstanding1.60 %1.83 %

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SUMMARY OF LOAN LOSS EXPERIENCE
 Nine Months Ended 
 September 30,
 2019 2018
Balance of allowance for loan losses at beginning of period$18,944
 $21,161
    
Charge-offs: 
  
Commercial and agricultural55
 3,644
Commercial mortgages
 145
Residential mortgages60
 225
Consumer loans1,040
 1,301
Total charge-offs1,155
 5,315
    
Recoveries: 
  
Commercial and agricultural44
 34
Commercial mortgages2
 2
Residential mortgages45
 5
Consumer loans359
 377
Total  recoveries450
 418
    
Net charge-offs705
 4,897
Provision for loan losses5,684
 3,371
Balance of allowance for loan losses at end of period$23,923
 $19,635
    
Ratio of net charge-offs to average loans outstanding0.05% 0.09%
Ratio of allowance for loan losses to total loans outstanding1.83% 1.49%



Deposits


The table below summarizes the Corporation’s deposit composition by segment at the dates indicated, and the dollar and percent change from December 31, 20182019 to September 30, 20192020 (in thousands):
DEPOSITS
 September 30, 2020December 31, 2019Dollar ChangePercentage Change
Non-interest-bearing demand deposits$619,412 $468,238 $151,174 32.3 %
Interest-bearing demand deposits270,949 200,089 70,860 35.4 %
Insured money market accounts579,574 530,242 49,332 9.3 %
Savings deposits248,751 212,393 36,358 17.1 %
Time deposits205,503 161,176 44,327 27.5 %
Total$1,924,189 $1,572,138 $352,051 22.4 %
DEPOSITS
 September 30, 2019 December 31, 2018 Dollar Change Percentage Change
Non-interest-bearing demand deposits$472,600
 $484,433
 $(11,833) (2.4)%
Interest-bearing demand deposits208,222
 179,603
 28,619
 15.9 %
Insured money market accounts510,194
 537,948
 (27,754) (5.2)%
Savings deposits215,665
 217,027
 (1,362) (0.6)%
Time deposits169,825
 150,226
 19,599
 13.0 %
Total$1,576,506
 $1,569,237
 $7,269
 0.5 %


Deposits totaled $1.577$1.924 billion at September 30, 20192020 compared with $1.569to $1.572 billion at December 31, 2018, a2019, an increase of $7.3$352.1 million, or 0.5%22.4%. The increase was attributable to increases of $19.6$44.3 million in time deposits, due to a rate promotion, and $28.6$70.9 million in interest-bearing demand deposit accounts, offset by decreases of $27.8$49.3 million in money market accounts, $36.4 million in savings deposits, and $11.8$151.2 million in non-interest-bearing demand deposits. The decreasegrowth in money market accounts can be mostly attributeddeposits was due primarily to an outflowincreases of municipal deposits.$220.7 million in commercial deposits, $69.7 million in public deposits, and $61.6 million in consumer funds. The decreaseincrease in non-interest-bearing demand deposits can be mostly attributedwas partially due to an outflowthe collection of personal deposits.stimulus checks and PPP loan disbursements. At September 30, 2019,2020, demand deposit and money market accounts comprised 75.5%76.4% of total deposits compared with 76.6%to 76.2% at December 31, 2018.2019.




The table below presents the Corporation's deposits balance by bank division (in thousands):
DEPOSITS BY DIVISIONDEPOSITS BY DIVISIONDEPOSITS BY DIVISION
September 30, 2019 December 31, 2018 December 31, 2017 December 31, 2016 December 31, 2015 September 30, 2020December 31, 2019December 31, 2018December 31, 2017December 31, 2016
Chemung Canal Trust Company*$1,344,087
 $1,328,658
 $1,264,883
 $1,249,870
 $1,219,282
Chemung Canal Trust Company*$1,587,452 $1,317,225 $1,328,658 $1,264,883 $1,249,870 
Capital Bank Division232,419
 240,579
 202,563
 206,473
 181,013
Capital Bank Division336,737 254,913 240,579 202,563 206,473 
Total$1,576,506
 $1,569,237
 $1,467,446
 $1,456,343
 $1,400,295
Total$1,924,189 $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 recently enacted 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. Brokered deposits include funds obtained through brokers.  There were no deposits obtained through brokers as of September 30, 20192020 and December 31, 2018.2019. Deposits obtained through the CDARS and ICS programs were $186.2$233.6 million and $193.6$180.4 million as of September 30, 20192020 and December 31, 2018,2019, respectively. The decreaseincrease in CDARS and ICS deposits was due to the seasonal outflowinflow of municipal client balances.


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 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) link business and consumer loans to the customer's 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.


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Borrowings


Borrowings decreased $0.2increased $0.1 million from $4.3$4.1 million at December 31, 20182019 to $4.1$4.2 million at September 30, 2019,2020, attributable to normal recurring finance lease payments.


Shareholders’ Equity


Total shareholders' equity increased $17.0$14.4 million from $165.0$182.6 million at December 31, 20182019 to $182.0$197.0 million at September 30, 2019,2020, due primarily to an increase in retained earnings and a decreasean increase in accumulated other comprehensive loss.income. The increase in retained earnings of $7.6$10.3 million was due primarily to earnings of $11.4$14.0 million, offset by $3.8$3.7 million in dividends declared during the nine months ended September 30, 2019.2020. The decreaseincrease in accumulated other comprehensive lossincome of $8.1$7.4 million can be mostly attributed to the increase in the fair market value of the securities portfolio. Also, treasuryTreasury stock decreased $0.6increased $3.9 million, primarily due to the issuanceCorporation's common stock repurchase program. As of September 30, 2020, 184,360 shares pursuant to the Corporation's employee benefit plans and the directors' stock compensation plans.have been repurchased at an average cost of $27.57 per share.


The total shareholders’ equity to total assets ratio was 10.15%9.10% at September 30, 20192020 compared with 9.40%to 10.22% at December 31, 2018.2019.  The tangible equity to tangible assets ratio was 9.00%8.16% at September 30, 20192020 compared with 8.19%to 9.07% at December 31, 2018.2019.  Book value per share increased to $37.35$41.51 at September 30, 20192020 from $33.99$37.35 at December 31, 2018.2019.


On March 18, 2020, the Corporation's Board of Directors approved a stock repurchase program which replaced the previously authorized 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 starting March 18, 2020. 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. For the three month period ended September 30, 2020, the Corporation repurchased 63,870 shares of common stock at a total cost of $3.2 million under the share repurchase program. The weighted average cost was $28.29 per share repurchased. For the nine month period ended September 30, 2020, the Corporation repurchased a total of 184,360 shares of common stock at a total cost of $5.1 million under the repurchase program at the weighted average cost of $27.57 per share. Remaining buyback authority under the share repurchase program was 65,640 shares at September 30, 2020.

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.

The Bank is subject to capital adequacy guidelines of the Federal Reserve which establish a framework for the classification of financial institutions into five categories: well-capitalized, adequately capitalized, under-capitalized, significantly under-capitalized and critically under-capitalized. As of September 30, 2019,2020, the Bank’s capital ratios were in excess of those required to be considered well-capitalized under regulatory capital guidelines.



The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Regulatory Relief Act”) simplifies capital calculations by requiring the federal 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 eligible institutions may choose to elect to replace the general applicable risk-based capital requirements under the Basel III capital rules for such institutions. Such institutions that meet the community bank leverage ratio will automatically be deemed to be well-capitalized under the federal regulator’s prompt corrective action framework, although the regulators retain the flexibility to determine that the institution may not qualify for the community bank leverage ratio test based on the institution’s risk profile. The federal regulators jointly issued a final rule on October 29, 2019, whereby a qualifying community bank organization may elect, but is not required to, use the community bank leverage ratio capital framework, in which case it will be considered well-capitalized so long as its community bank leverage ratio (tier 1 capital to average consolidated assets) is greater than 9%. The new rule took effect on January 1, 2020. Pursuant to the CARES Act, the federal banking regulators in April 2020 issued interim 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 elected not to use the community bank leverage ratio.



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Off-balance Sheet Arrangements

See Note 8 – Commitments and Contingencies in the Notes to Unaudited Consolidated Financial Statements for a discussion of off-balance sheet arrangements.

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 $97.1 million and $141.8 million at September 30, 2020 and December 31, 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 was available at September 30, 2020. The Corporation had a total of $58.0 million of unsecured lines of credit with five different financial institutions at December 31, 2019, all of which was available.

Consolidated Cash Flows Analysis

The table below summarizes the Corporation's cash flows for the periods indicated (in thousands):
CONSOLIDATED SUMMARY OF CASH FLOWS
(in thousands)Nine Months Ended 
 September 30,
 20202019
Net cash provided by operating activities$19,987 $21,808 
Net cash used (provided) in investing activities(336,089)(9,273)
Net cash provided (used) in financing activities344,100 3,791 
Net increase (decrease) in cash and cash equivalents$27,998 $16,326 

Operating activities

The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through short-term and long-term borrowings are sufficient to fund the Corporation’s operating liquidity needs.

Cash provided by operating activities in the first nine months of 2020 and 2019 predominantly resulted from net income after non-cash operating adjustments.

Investing activities

Cash used in investing activities during the first nine months of 2020 predominantly resulted from purchases of securities available for sale, and a net increase in loans, offset by maturities and principal paydowns on securities available for sale. Cash provided by investing activities during the first nine months of 2019 predominantly resulted from a net decrease in loans, maturities and principal paydowns on securities available for sale, and proceeds from sales of securities available for sale, offset by purchases of securities available for sale.

Financing activities

Cash provided by financing activities during the first nine months of 2020 predominantly resulted from a net increase in deposits. Cash used in financing activities during the first nine months of 2019 predominantly resulted from a net decrease in deposits.

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Capital Resources

The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the recently enacted 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 no longernot subject to regulatory capital requirements, effective on August 30, 2018. 

Off-balance Sheet Arrangements

See Note 8 – Commitments and Contingencies in the Notes to Unaudited Consolidated Financial Statements for a discussion of off-balance sheet arrangements.

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 $154.2 million and $112.6 million at September 30, 2019 and December 31, 2018, respectively.  The Corporation also had a total of $58.0 million of unsecured lines of credit with five different financial institutions, all of which was available at September 30, 2019. The Corporation had a total of $28.0 million of unsecured lines of credit with four different financial institutions at December 31, 2018, all of which was available.

Consolidated Cash Flows Analysis

The table below summarizes the Corporation's cash flows for the periods indicated (in thousands):
CONSOLIDATED SUMMARY OF CASH FLOWS
(in thousands) Nine Months Ended 
 September 30,
  2019 2018
Net cash provided by operating activities $21,808
 $20,105
Net cash (used in) provided by investing activities (9,273) 27,639
Net provided by financing activities 3,791
 35,439
Net increase in cash and cash equivalents $16,326
 $83,183

Operating activities

The Corporation believes cash flows from operations, available cash balances and its ability to generate cash through short-term and long-term borrowings are sufficient to fund the Corporation’s operating liquidity needs.

Cash provided by operating activities in the first nine months of 2019 and 2018 predominantly resulted from net income after non-cash operating adjustments. 

Investing activities

Cash used in investing activities during the first nine months of 2019 was predominantly a result of purchases of securities available for sale, offset by proceeds from sales, maturities, and principal paydowns on securities available for sale. Cash provided by investing activities during the first nine months of 2018 predominantly resulted from sales, calls, maturities, and principal collected in securities available for sale, offset by a net increase in loans.

Financing activities

Cash provided by financing activities during the first nine months of 2019 predominantly resulted from a net increase in deposits. Cash provided by financing activities during the first nine months of 2018 predominantly resulted from a net increase in deposits, offset by the maturity of one $10.0 million repurchase agreement and the repayment of FHLBNY overnight and long term advances.



Capital Resources

The Bank is subject to regulatory capital requirements administered by federal banking agencies. As a result of the recently enacted 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 no longer subject to regulatory capital requirements, effective August 30, 2018.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. 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 capital conservation buffer for 2019 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.


As a result ofPursuant to the Regulatory Relief Act, the federal banking agencies adoptedFRB finalized a “Community Bank Leverage Ratio” (therule that established a community bank leverage ratio of a bank’s Tier(tier 1 capital to average total consolidated assets) at 9% for financial institutions withunder $10 billion in assets that such institutions may elect to utilize in lieu of less than $10 billion.  The federal banking agencies have approved a Community Bank Leverage Ratio of 9.0%. A “qualifyingthe general applicable risk-based capital requirements under Basel III. Such institutions that meet the community bank” that exceeds thisbank leverage ratio and certain other qualifying criteria will automatically be deemed to be in compliance with all other capital and leverage requirements, including the capital requirements to be considered “well capitalized” under prompt corrective action statutes.  A qualifying financial institution can elect to be subject to thiswell-capitalized. The new definition. The rule will taketook 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, as of September 30, 20192020 and December 31, 2018,2019, the Bank met all capital adequacy requirements to which it was subject.


As of September 30, 2019,2020, 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 September 30, 20192020 and December 31, 20182019 were calculated under Basel III rules. There is no threshold for well-capitalized status for bank holding companies.



74



The Corporation and the Bank’s capital ratios as of September 30, 20192020 were as follows (in thousands, except ratio data):
 ActualMinimum Capital AdequacyMinimum Capital Adequacy with Capital BufferTo Be Well Capitalized Under Prompt Corrective Action Provisions
As of September 30, 2020AmountRatioAmountRatioAmountRatioAmountRatio
Total Capital (to Risk Weighted Assets):
Consolidated$190,303 13.96 %N/AN/AN/AN/A N/AN/A
Bank$183,963 13.51 %$108,959 8.00 %$143,009 10.50 %$136,199 10.00 %
Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$173,167 12.70 %N/AN/AN/AN/A N/AN/A
Bank$166,845 12.25 %$81,719 6.00 %$115,769 8.50 %$108,959 8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$173,167 12.70 %N/AN/AN/AN/A N/AN/A
Bank$166,845 12.25 %$61,289 4.50 %$95,339 7.00 %$88,529 6.50 %
Tier 1 Capital (to Average Assets):     
Consolidated$173,167 8.41 %N/AN/AN/AN/A N/AN/A
Bank$166,845 8.12 %$82,141 4.00 %N/AN/A$102,676 5.00 %
 Actual Minimum Capital Adequacy Minimum Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions
As of September 30, 2019Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets): 
Consolidated$179,011
 13.72% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$170,576
 13.09% $104,251
 8.00% $128,685
 9.875% $130,314
 10.00%
Tier 1 Capital (to Risk Weighted Assets): 
  
  
  
      
  
Consolidated$162,609
 12.46% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$154,192
 11.83% $78,188
 6.00% $102,622
 7.875% $104,251
 8.00%
Common Equity Tier 1 Capital (to Risk Weighted Assets): 
  
  
  
      
  
Consolidated$162,609
 12.46% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$154,192
 11.83% $58,641
 4.50% $83,075
 6.375% $84,704
 6.50%
Tier 1 Capital (to Average Assets): 
    
  
      
  
Consolidated$162,609
 9.37% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$154,192
 8.92% $69,178
 4.00% N/A
 N/A
 $86,472
 5.00%


The Corporation and the Bank’s capital ratios as of December 31, 20182019 were as follows (in thousands, except ratio data):
 ActualMinimum Capital AdequacyMinimum Capital Adequacy with Capital BufferTo Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2019AmountRatioAmountRatioAmountRatioAmountRatio
Total Capital (to Risk Weighted Assets):
Consolidated$182,239 13.98 %N/AN/AN/AN/A N/AN/A
Bank$175,062 13.45 %$104,136 8.00 %$136,679 10.500 %$130,170 10.00 %
Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$165,859 12.73 %N/AN/AN/AN/A N/AN/A
Bank$158,702 12.19 %$78,102 6.00 %$110,645 8.500 %$104,136 8.00 %
Common Equity Tier 1 Capital (to Risk Weighted Assets):      
Consolidated$165,859 12.73 %N/AN/AN/AN/A N/AN/A
Bank$158,702 12.19 %$58,577 4.50 %$91,119 7.000 %$84,611 6.50 %
Tier 1 Capital (to Average Assets):     
Consolidated$165,859 9.35 %N/AN/AN/AN/A N/AN/A
Bank$158,702 8.98 %$70,719 4.00 %N/AN/A$88,399 5.00 %
 Actual Minimum Capital Adequacy Minimum Capital Adequacy with Capital Buffer To Be Well Capitalized Under Prompt Corrective Action Provisions
As of December 31, 2018Amount Ratio Amount Ratio Amount Ratio Amount Ratio
Total Capital (to Risk Weighted Assets): 
Consolidated$169,416
 13.14% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$162,536
 12.62% $103,039
 8.00% $127,189
 9.875% $128,799
 10.00%
Tier 1 Capital (to Risk Weighted Assets): 
  
  
  
      
  
Consolidated$153,263
 11.89% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$146,401
 11.37% $77,280
 6.00% $101,429
 7.875% $103,039
 8.00%
Common Equity Tier 1 Capital (to Risk Weighted Assets): 
  
  
  
      
  
Consolidated$153,263
 11.89% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$146,401
 11.37% $57,960
 4.50% $82,110
 6.375% $83,720
 6.50%
Tier 1 Capital (to Average Assets): 
    
  
      
  
Consolidated$153,263
 8.79% N/A
 N/A
 N/A
 N/A
  N/A
 N/A
Bank$146,401
 8.41% $69,598
 4.00% N/A
 N/A
 $86,998
 5.00%




Dividend Restrictions


The Corporation’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. Under these regulations, the amount of dividends that may be paid in any calendar year is limited to current year’s net income, combined with the retained net income of the preceding two years, subject to the capital requirements in the table above. At September 30, 2019,2020, the Bank could, without prior approval, declare dividends of approximately $25.7$37.4 million.

75





Adoption of New Accounting Standards


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


Critical Accounting Policies, Estimates and Risks and Uncertainties


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 periods 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.


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. However, Management did conclude that the current decline in macroeconomic conditions is a triggering event, but other mitigating factors did not warrant an interim quantitative impairment test. 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.

Intangible assets identified in acquisitions consist primarily of wealth management advisory contracts. The fair value of intangible assets was estimated using valuation techniques, based on a discounted cash flow analysis. The value attributed to
76


other intangible assets was based on the time period over which they are expected to generate economic benefits. Intangible assets are amortized over their estimated lives using a method that approximates the amount of economic benefits that are realized by the Corporation.

For additional information on critical accounting policies and to gain a greater understanding of how the Corporation's financial performance is reported, refer to Note 1 - "Summary of Significant Accounting Policies" in Notes to Unaudited Consolidated Financial Statements included in Part I of this Quarterly Report on Form 10-Q for a discussion of recent accounting updates, and the section captioned "Critical Accounting Policies" in Management's Discussion and Analysis of Financial Condition and Results of Operations, contained in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2018.2019.




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


The Corporation prepares its Consolidated Financial Statements in accordance with GAAP;GAAP; these financial statements appear on pages 7–13.12. That presentation provides the reader with an understanding of the Corporation’sCorporation’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 new 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.

77


          As of theAs of the
As of the Three Months Ended Nine Months Ended As of the Three Months EndedNine Months Ended
(in thousands, except ratio data)Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,(in thousands, except ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2019 2019 2019 2018 2018 2019 20182020202020202019201920202019
NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT             NET INTEREST MARGIN - FULLY TAXABLE EQUIVALENT
Net interest income (GAAP)$15,142
 $15,101
 $15,167
 $15,484
 $15,079
 $45,410
 $44,996
Net interest income (GAAP)$15,869 $15,591 $15,062 $15,201 $15,142 $46,522 $45,410 
Fully taxable equivalent adjustment101
 104
 100
 105
 99
 305
 315
Fully taxable equivalent adjustment85 84 86 98 101 255 305 
Fully taxable equivalent net interest income (non-GAAP)$15,243
 $15,205
 $15,267
 $15,589
 $15,178
 $45,715
 $45,311
Fully taxable equivalent net interest income (non-GAAP)$15,954 $15,675 $15,148 $15,299 $15,243 $46,777 $45,715 
             
Average interest-earning assets (GAAP)$1,665,793
 $1,654,156
 $1,671,063
 $1,680,269
 $1,625,132
 $1,664,188
 $1,624,830
Average interest-earning assets (GAAP)$1,986,043 $1,931,107 $1,715,562 $1,705,766 $1,665,793 $1,877,966 $1,664,188 
             
Net interest margin - fully taxable equivalent (non-GAAP)3.63% 3.69% 3.71% 3.68% 3.71% $
 $
Net interest margin - fully taxable equivalent (non-GAAP)3.20 %3.26 %3.55 %3.56 %3.63 %3.33 %3.67 %


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 the
 As of the Three Months EndedNine Months Ended
(in thousands, except ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2020202020202019201920202019
EFFICIENCY RATIO
Net interest income (GAAP)$15,869 $15,591 $15,062 $15,201 $15,142 $46,522 $45,410 
Fully taxable equivalent adjustment85 84 86 98 101 255 305 
Fully taxable equivalent net interest income (non-GAAP)$15,954 $15,675 $15,148 $15,299 $15,243 $46,777 $45,715 
Non-interest income (GAAP)$5,339 $5,080 $4,730 $5,106 $4,956 $15,150 $14,967 
Less:  net (gains) losses on security transactions— — — — — (19)
Adjusted non-interest income (non-GAAP)$5,339 $5,080 $4,730 $5,106 $4,956 $15,150 $14,948 
Non-interest expense (GAAP)$13,362 $13,227 $13,749 $14,851 $13,525 $40,339 $40,845 
Less:  amortization of intangible assets(120)(119)(132)(144)(151)(371)(465)
Adjusted non-interest expense (non-GAAP)$13,242 $13,108 $13,617 $14,707 $13,374 $39,968 $40,380 
Efficiency ratio (unadjusted)63.00 %63.99 %69.47 %73.13 %67.30 %65.41 %67.65 %
Efficiency ratio (adjusted)62.19 %63.16 %68.50 %72.08 %66.21 %64.54 %66.56 %


           As of the
 As of the Three Months Ended Nine Months Ended
(in thousands, except ratio data)Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
2019 2019 2019 2018 2018 2019 2018
EFFICIENCY RATIO             
Net interest income (GAAP)$15,142
 $15,101
 $15,167
 $15,484
 $15,079
 $45,410
 $44,996
Fully taxable equivalent adjustment101
 104
 100
 105
 99
 305
 315
Fully taxable equivalent net interest income (non-GAAP)$15,243
 $15,205
 $15,267
 $15,589
 $15,178
 $45,715
 $45,311
              
Non-interest income (GAAP)$4,956
 $5,086
 $4,925
 $4,893
 $7,381
 $14,967
 $18,181
Less: changes in fair value of equity investments
 
 
 
 (2,093) 
 (2,093)
Less:  net (gains) losses on security transactions
 (19) 
 
 
 (19) 
Adjusted non-interest income (non-GAAP)$4,956
 $5,067
 $4,925
 $4,893
 $5,288
 $14,948
 $16,088
              
Non-interest expense (GAAP)$13,525
 $13,823
 $13,497
 $14,205
 $13,428
 $40,845
 $42,561
Less:  amortization of intangible assets(151) (151) (163) (176) (182) (465) (558)
Less: legal reserve
 
 
 
 
 
 (989)
Adjusted non-interest expense (non-GAAP)$13,374
 $13,672
 $13,334
 $14,029
 $13,246
 $40,380
 $41,014
              
Efficiency ratio (unadjusted)67.30% 68.47% 67.18% 69.71% 59.79% 67.65% 67.37%
Efficiency ratio (adjusted)66.21% 67.44% 66.04% 68.49% 64.72% 66.56% 66.80%


Tangible Equity and Tangible Assets (Period-End)


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


78


          As of or for theAs of or for the
As of or for the Three Months Ended Nine Months Ended As of or for the Three Months EndedNine Months Ended
(in thousands, except per share and ratio data)Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,(in thousands, except per share and ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2019 2019 2019 2018 2018 2019 20182020202020202019201920202019
TANGIBLE EQUITY AND TANGIBLE ASSETS             TANGIBLE EQUITY AND TANGIBLE ASSETS
(PERIOD END)             (PERIOD END)
Total shareholders' equity (GAAP)$182,044
 $178,387
 $171,534
 $165,029
 $156,499
 $182,044
 $156,499
Total shareholders' equity (GAAP)$197,005 $194,589 $190,447 $182,627 $182,044 $197,005 $182,044 
Less: intangible assets(22,710) (22,861) (23,012) (23,175) (23,351) (22,710) (23,351)Less: intangible assets(22,195)(22,315)(22,434)(22,566)(22,710)(22,195)(22,710)
Tangible equity (non-GAAP)$159,334
 $155,526
 $148,522
 $141,854
 $133,148
 $159,334
 $133,148
Tangible equity (non-GAAP)$174,810 $172,274 $168,013 $160,061 $159,334 $174,810 $159,334 
             
Total assets (GAAP)$1,793,643
 $1,752,997
 $1,769,572
 $1,755,343
 $1,753,864
 $1,793,643
 $1,753,864
Total assets (GAAP)$2,165,014 $2,050,921 $1,841,329 $1,787,827 $1,793,643 $2,165,014 $1,793,643 
Less: intangible assets(22,710) (22,861) (23,012) (23,175) (23,351) (22,710) (23,351)Less: intangible assets(22,195)(22,315)(22,434)(22,566)(22,710)(22,195)(22,710)
Tangible assets (non-GAAP)$1,770,933
 $1,730,136
 $1,746,560
 $1,732,168
 $1,730,513
 $1,770,933
 $1,730,513
Tangible assets (non-GAAP)$2,142,819 $2,028,606 $1,818,895 $1,765,261 $1,770,933 $2,142,819 $1,770,933 
             
Total equity to total assets at end of period (GAAP)10.15% 10.18% 9.69% 9.40% 8.92% 10.15% 8.92%Total equity to total assets at end of period (GAAP)9.10 %9.49 %10.34 %10.22 %10.15 %9.10 %10.15 %
Book value per share (GAAP)$37.35
 $36.64
 $35.27
 $33.99
 $32.35
 $37.35
 $32.35
Book value per share (GAAP)$41.51 $40.51 $38.83 $37.35 $37.35 $41.51 $37.35 
             
Tangible equity to tangible assets at end of period (non-GAAP)9.00% 8.99% 8.50% 8.19% 7.69% 9.00% 7.69%Tangible equity to tangible assets at end of period (non-GAAP)8.16 %8.49 %9.24 %9.07 %9.00 %8.16 %9.00 %
Tangible book value per share (non-GAAP)$32.69
 $31.95
 $30.54
 $29.22
 $27.53
 $32.69
 $27.53
Tangible book value per share (non-GAAP)$36.83 $35.86 $34.25 $32.74 $32.69 $36.83 $32.69 
 
Tangible Equity (Average)


Average tangible equity and return on average tangible equity are each non-GAAP financial measures. Average tangible equity represents the Corporation’s average stockholders’ equity, less average goodwill and intangible assets for the period.  Return on average tangible equity measures the Corporation’s earnings as a percentage of average tangible equity.  These measures are meaningful to the Corporation, as well as investors and analysts, in assessing the Corporation’s use of equity.
As of or for the
 As of or for the Three Months EndedNine Months Ended
 Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
(in thousands, except ratio data)2020202020202019201920202019
TANGIBLE EQUITY (AVERAGE)
Total average shareholders' equity (GAAP)$196,569 $191,853 $188,427 $182,522 $180,896 $192,299 $173,988 
Less: average intangible assets(22,267)(22,389)(22,516)(22,633)(22,785)(22,390)(22,936)
Average tangible equity (non-GAAP)$174,302 $169,464 $165,911 $159,889 $158,111 $169,909 $151,052 
Return on average equity (GAAP)11.56 %12.22 %5.32 %9.14 %4.29 %9.74 %8.76 %
Return on average tangible equity (non-GAAP)13.03 %13.83 %6.04 %10.43 %4.91 %11.03 %10.09 %
           As of or for the
 As of or for the Three Months Ended Nine Months Ended
 Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,
(in thousands, except ratio data)2019 2019 2019 2018 2018 2019 2018
TANGIBLE EQUITY (AVERAGE)             
Total average shareholders' equity (GAAP)$180,896
 $173,534
 $167,385
 $159,032
 $154,331
 $173,988
 $152,026
Less: average intangible assets(22,785) (22,936) (23,092) (23,266) (23,440) (22,936) (23,630)
Average tangible equity (non-GAAP)$158,111
 $150,598
 $144,293
 $135,766
 $130,891
 $151,052
 $128,396
              
Return on average equity (GAAP)4.29% 11.51% 10.83% 14.29% 17.81% 8.76% 12.22%
Return on average tangible equity (non-GAAP)4.91% 13.27% 12.56% 16.74% 21.01% 10.09% 14.47%




Adjustments for Certain Items of Income or Expense


In addition to disclosures of certain GAAP financial measures, including net income, EPS, ROA, and ROE, we may also provide comparative disclosures that adjust these GAAP financial measures for a particular period by removing from the calculation thereof the impact of certain transactions or other material items of income or expense occurring during the period, including certain nonrecurring items. The Corporation believes that the resulting non-GAAP financial measures may improve an understanding of its results of operations by separating out any such transactions or items that may have had a disproportionate positive or negative impact on the Corporation’s financial results during the particular period in question. In the Corporation’s presentation of any such non-GAAP (adjusted) financial measures not specifically discussed in the preceding paragraphs, the Corporation supplies the supplemental financial information and explanations required under Regulation G.
79


          As of or for theAs of or for the
As of or for the Three Months Ended Nine Months Ended As of or for the Three Months EndedNine Months Ended
(in thousands, except per share and ratio data)Sept. 30, June 30, March 31, Dec. 31, Sept. 30, Sept. 30, Sept. 30,(in thousands, except per share and ratio data)Sept. 30,June 30,March 31,Dec. 31,Sept. 30,Sept. 30,Sept. 30,
2019 2019 2019 2018 2018 2019 20182020202020202019201920202019
NON-GAAP NET INCOME             NON-GAAP NET INCOME
Reported net income (GAAP)$1,956
 $4,981
 $4,468
 $5,730
 $6,930
 $11,405
 $13,896
Reported net income (GAAP)$5,711 $5,827 $2,491 $4,204 $1,956 $14,029 $11,405 
Net changes in fair value of investments (net of tax)
 
 
 
 (1,559) 
 (1,559)
Net (gains) losses on security transactions (net of tax)
 (14) 
 
 
 (14) 
Net (gains) losses on security transactions (net of tax)— — — — — (14)
Legal reserve (net of tax)
 
 
 
 
 
 737
Revaluation of net deferred tax asset
 
 
 (445) 
 
 
Non- GAAP net income$1,956
 $4,967
 $4,468
 $5,285
 $5,371
 $11,391

$13,074
Non- GAAP net income$5,711 $5,827 $2,491 $4,204 $1,956 $14,029 $11,391 
             
Average basic and diluted shares outstanding4,871
 4,866
 4,860
 4,843
 4,834
 4,866
 4,828
Average basic and diluted shares outstanding4,773 4,850 4,895 4,879 4,871 4,836 4,866 
             
Reported basic and diluted earnings per share (GAAP)$0.40
 $1.02
 $0.92
 $1.18
 $1.43
 $2.34
 $2.88
Reported basic and diluted earnings per share (GAAP)$1.19 $1.20 $0.51 $0.87 $0.40 $2.90 $2.34 
Reported return on average assets (GAAP)0.44% 1.15% 1.03% 1.29% 1.61% 0.87% 1.09%Reported return on average assets (GAAP)1.08 %1.15 %0.55 %0.93 %0.44 %0.95 %0.87 %
Reported return on average equity (GAAP)4.29% 11.51% 10.83% 14.29% 17.81% 8.76% 12.22%Reported return on average equity (GAAP)11.56 %12.22 %5.32 %9.14 %4.29 %9.74 %8.76 %
             
Non-GAAP basic and diluted earnings per share$0.40
 $1.02
 $0.92
 $1.09
 $1.11
 $2.34
 $2.10
Non-GAAP basic and diluted earnings per share$1.19 $1.20 $0.51 $0.87 $0.40 $2.90 $2.34 
Non-GAAP return on average assets0.44% 1.14% 1.03% 1.19% 1.25% 0.87% 1.03%Non-GAAP return on average assets1.08 %1.15 %0.55 %0.93 %0.44 %0.95 %0.87 %
Non-GAAP return on average equity4.29% 11.48% 10.83% 13.18% 13.81% 8.75% 11.50%Non-GAAP return on average equity11.56 %12.22 %5.32 %9.14 %4.29 %9.74 %8.75 %
 
 

80



ITEM 3:    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 earning assets.


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


Interest rate risk is the risk that net interest income will fluctuate as a result of a change in interest rates. It is the assumption of interest rate risk, along with credit risk, that drives the net interest margin of a financial institution. For that reason, the ALCO has established tolerance limits based upon a 200-basisvarious basis point changechanges in interest rates, with appropriate floors set for interest-bearing liabilities. At September 30, 2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the next 12 months net interest income by 13.13% and an immediate 200-basis point increase would positively impact the next 12 months net interest income by 9.41%.  Both are within the Corporation's policy guideline of 15%. Given the overall low level of current interest rates and the unlikely event of a 200-basis point decline at this time, management additionally modeled an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates. When applied,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 5.73%6.03% and an immediate 300-basis200-basis point increase would positively impact the next 12 months net interest income by 14.00%11.97%. 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 equity account will fluctuate with changes in interest rates. This component is a direct corollary to the earnings-impact component: an institution exposed to earnings erosion is also exposed to a decline in market value. At September 30, 2019, it is estimated that an immediate 200-basis point decrease in interest rates would negatively impact the market value of the Corporation’s capital account by 17.30%, above the Corporation's policy guidelines of 15%. An immediate 200-basis point increase in interest rates would positively impact the market value by 10.97%, which is within the Corporation’s policy guideline of 15%.  Management also modeled the impact to the market value of the Corporation’s capital with an immediate 100-basis point decline and an immediate 300-basis point increase in interest rates, based on the current interest rate environment.  When applied,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 7.39% and an9.39%. An immediate 300-basis200-basis point increase in interest rates would positively impact the market value by 15.59%14.67%. Both are 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 Risk Officer (non-voting member)(non-voting), Chief Credit and Risk Officer, (non-voting member), Business Client Division Manager, Retail Client Division Manager, Retail Loan Manager, Senior Commercial Real Estate Lender, and Commercial Loan Managers, implements the Board-approved loan policy.




81


ITEM 4:CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


The Corporation's management, with the participation of its Chief Executive Officer, who is the Corporation's principal executive officer, and its Chief Financial Officer and Treasurer, who is the Corporation's principal financial officer, have evaluated the effectiveness of the Corporation's disclosure controls and procedures as of September 30, 20192020 pursuant to Rule 13a-15 of the Exchange Act, as amended. Based upon that evaluation, the principal executive officer and principal financial officer have concluded that the Corporation's disclosure controls and procedures are effective as of September 30, 2019.2020. In addition, there have been no changes in the Corporation’s internal control over financial reporting during the most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Corporation’s internal control over financial reporting.


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

82



PART II.    OTHER INFORMATION


ITEM 1.    LEGAL PROCEEDINGS


In the normal course of business, there are various outstanding claims and legal proceedings involving the Corporation or its subsidiaries. As of September 30, 2019,2020, we believe that we are not a party to any additional pending legal, arbitration, or regulatory proceedings that could have a material adverse impact on our financial results or liquidity.


ITEM 1A.    RISK FACTORS


There have been noIn addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factor represents material changes inupdates and additions to the risk factors set forthpreviously disclosed in the Corporation'sour Annual Report on Form 10-K for the fiscal year ended December 31, 2018,2019 as filed with the Securities and Exchange CommissionSEC on March 13, 2019.12, 2020. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factor set forth below also is a cautionary statement identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.


The economic impact of the COVID-19 outbreak could adversely affect our financial condition and results of operations.

In December 2019, a coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020 the President of the United States declared the COVID-19 pandemic in the United States a national emergency. 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 experienced extreme volatility, and in particular bank stocks have significantly declined in value. In response to the COVID-19 pandemic, the Federal Reserve 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. The State of New York and certain 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 has provided relief from reporting loan classifications due to modifications related to the COVID-19 pandemic. 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. As the result of the COVID-19 pandemic and the related adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

demand for our products and services may decline, making it difficult to grow assets and income;
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;
our allowance for loan losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us.
as the result of the decline in the Federal Reserve Board’s target federal funds rate to near 0%, the yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our 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 in the rate of our quarterly cash dividend,
our wealth management revenues may decline with continuing market turmoil;
our cyber security risks are increased as the result of an increase in the number of employees working remotely;
83


we rely 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 us; and
Federal Deposit Insurance Corporation premiums may increase if the agency experience additional resolution costs.

Moreover, our future success and profitability substantially depends on the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the outbreak could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

Anyoneoracombinationofthefactorsidentifiedabovecouldnegativelyimpactourbusiness,financialconditionandresultsof operations and prospects.


ITEM 2.    Unregistered Sales of Equity Securities and Use of Proceeds


(c)    Issuer Purchases of Equity Securities (1)
PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum number of shares that may yet be purchased under the plans or programs
July 1 - July 31, 202027,924 $26.65 27,924 101,586 
August 1 - August 31, 202021,408 29.31 21,408 80,178 
September 1 - September 30, 202014,538 29.96 14,538 65,640 
Quarter ended September 30, 202063,870 $28.29 63,870 65,640 
(1) On March 18, 2020, the Corporation’s Board of Directors approved a stock repurchase plan which replaced the previously authorized 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 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.

PeriodTotal number of shares purchasedAverage price paid per shareTotal number of shares purchased as part of publicly announced plans or programsMaximum number of shares that may yet be purchased under the plans or programs
7/1/19-7/31/19
$

121,906
8/1/19-8/31/19


121,906
9/1/19-9/30/19


121,906
Quarter ended 9/30/19
$

121,906
(1) On December 19, 2012, the Corporation’s Board of Directors approved a stock repurchase plan authorizing the purchase of up to 125,000 shares of the Corporation's outstanding common stock. 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. For the three months ended September 30, 2019, no shares had been purchased under this plan. Since inception of the plan, a total of 3,094 shares have been purchased under the plan.

ITEM 3.    DEFAULTS UPON SENIOR SECURITIES


Not applicable.


ITEM 4.    MINE SAFETY DISCLOSURES


Not applicable.


ITEM 5.    OTHER INFORMATION


Not applicable.




84


ITEM 6.    EXHIBITS


The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888.

3.1Certificate 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 filed with the Commission on March 13, 2008).
3.2Certificate 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 filed with the Commission on March 13, 2008).
3.3Certificate 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).
3.4Amended and Restated Bylaws of Chemung Financial Corporation, as amended to May 15, 2019September 16, 2020 (as incorporated by reference to Exhibit 3.13.2 to Registrant’s Form 8-K filed with the Commission on May 16, 2019)September 18, 2020).
31.1Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
31.2Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.*
32.1Certification of Principal Executive Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*
32.2Certification of Principal Financial Officer of the Registrant pursuant to Rule 13a-14(b) under the Securities Exchange Act of 1934 and 18 U.S.C. §1350.*
101.INSInstance Document*
101.SCHXBRL Taxonomy Schema*
101.CALXBRL Taxonomy Calculation Linkbase*
101.DEFXBRL Taxonomy Definition Linkbase*
101.LABXBRL Taxonomy Label Linkbase*
101.PREXBRL Taxonomy Presentation Linkbase*
*Filed herewith.

85



SIGNATURES


Pursuant to the requirements 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: November 6, 20195, 2020By:  /s/ Anders M. Tomson
Anders M. Tomson

President and Chief Executive Officer

(Principal Executive Officer)



DATED: November 6, 20195, 2020By:  /s/ Karl F. Krebs
Karl F. Krebs

Chief Financial Officer and Treasurer

(Principal Financial Officer)




86


EXHIBIT INDEX


The following exhibits are either filed with this Form 10-Q or are incorporated herein by reference. The Corporation’s Securities Exchange Act File number is 000-13888
3.1
3.2
3.3
3.4
31.1
31.2
32.1
32.2
101.INSInstance Document*
101.SCHXBRL Taxonomy Schema*
101.CALXBRL Taxonomy Calculation Linkbase*
101.DEFXBRL Taxonomy Definition Linkbase*
101.LABXBRL Taxonomy Label Linkbase*
101.PREXBRL Taxonomy Presentation Linkbase*
*Filed herewith.