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Tompkins Financial
TMP
#5712
Rank
$1.11 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$77.10
Share price
0.84%
Change (1 day)
24.88%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Tompkins Financial
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q2

Tompkins Financial - 10-Q quarterly report FY2023 Q2


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United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-Q
 
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2023
 
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 
 
For the transition period from _____ to ______
 
Commission File Number 1-12709
 Tomp_TF logo Color.jpg 

Tompkins Financial Corporation
(Exact name of registrant as specified in its charter)
New York 16-1482357
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
P.O. Box 460, Ithaca, NY
(Address of principal executive offices)
14851
(Zip Code)
 
Registrant’s telephone number, including area code: (888) 503-5753
Former name, former address, and former fiscal year, if changed since last report: NA
Indicate the number of shares of the Registrant’s Common Stock outstanding as of the latest practicable date:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, $0.10 par valueTMPNYSE American, 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 ☒ 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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐.
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer☒Accelerated Filer☐
Non-Accelerated Filer☐Smaller Reporting Company☐
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 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 ☒.

Indicate the number of shares of the Registrant's Common Stock outstanding as of the latest practicable date: 14,363,234 shares as of July 24, 2023.



TOMPKINS FINANCIAL CORPORATION
 
FORM 10-Q
 
INDEX
PART I -FINANCIAL INFORMATION
 
   PAGE
 
1
  
2
  
3
  
4
  
6
  
8
 
46
 
66
 
67
 
 
67
 
67
 
68
 
68
 
68
 
68
 
70
71




Item 1. Financial Statements

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)As ofAs of
ASSETS06/30/202312/31/2022
 (unaudited)(audited)
Cash and noninterest bearing balances due from banks$65,916 $18,572 
Interest bearing balances due from banks15,698 59,265 
Cash and Cash Equivalents81,614 77,837 
Available-for-sale debt securities, at fair value (amortized cost of $1,688,051 at June 30, 2023 and $1,831,791 at December 31, 2022)
1,468,003 1,594,967 
Held-to-maturity securities, at amortized cost (fair value of $262,444 at June 30, 2023 and $261,692 December 31, 2022)
312,369 312,344 
Equity securities, at fair value (amortized cost $778 at June 30, 2023 and $777 at December 31, 2022)
778 777 
Total loans and leases, net of unearned income and deferred costs and fees5,352,365 5,268,911 
Less: Allowance for credit losses48,545 45,934 
Net Loans and Leases5,303,820 5,222,977 
Federal Home Loan Bank and other stock23,649 17,720 
Bank premises and equipment, net81,087 82,140 
Corporate owned life insurance86,709 85,556 
Goodwill92,602 92,602 
Other intangible assets, net2,513 2,708 
Accrued interest and other assets173,094 181,058 
Total Assets$7,626,238 $7,670,686 
LIABILITIES
Deposits:
Interest bearing:
Checking, savings and money market3,659,220 3,820,739 
Time770,594 631,411 
Noninterest bearing2,024,837 2,150,145 
Total Deposits6,454,651 6,602,295 
Federal funds purchased and securities sold under agreements to repurchase50,483 56,278 
Other borrowings387,100 291,300 
Other liabilities97,563 103,423 
Total Liabilities$6,989,797 $7,053,296 
EQUITY
Tompkins Financial Corporation shareholders' equity:
Common Stock - par value $0.10 per share: Authorized 25,000,000 shares; Issued: 14,441,413 at June 30, 2023; and 14,555,741 at December 31, 2022
1,444 1,456 
Additional paid-in capital298,133 302,763 
Retained earnings537,095 526,727 
Accumulated other comprehensive loss(195,520)(208,689)
Treasury stock, at cost – 124,265 shares at June 30, 2023, and 128,749 shares at December 31, 2022
(6,185)(6,279)
Total Tompkins Financial Corporation Shareholders’ Equity634,967 615,978 
Noncontrolling interests1,474 1,412 
Total Equity$636,441 $617,390 
Total Liabilities and Equity$7,626,238 $7,670,686 
 
See notes to unaudited consolidated financial statements.


1

TOMPKINS FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF INCOME 
Three Months EndedSix Months Ended
(In thousands, except per share data) (Unaudited)06/30/202306/30/202206/30/202306/30/2022
INTEREST AND DIVIDEND INCOME
Loans$63,527 $52,505 $124,369 $103,636 
Due from banks183 64 322 105 
Available-for-sale debt securities6,618 7,063 13,361 13,833 
Held-to-maturity securities1,219 1,201 2,433 2,330 
Federal Home Loan Bank and other stock323 120 623 225 
Total Interest and Dividend Income71,870 60,953 141,108 120,129 
INTEREST EXPENSE
Time certificates of deposits of $250,000 or more2,526 400 4,313 826 
Other deposits13,119 1,647 23,513 3,267 
Federal funds purchased and securities sold under agreements to repurchase15 15 29 31 
Other borrowings4,314 629 7,111 1,129 
Total Interest Expense19,974 2,691 34,966 5,253 
Net Interest Income51,896 58,262 106,142 114,876 
Less: Provision for credit loss expense2,253 856 1,428 336 
Net Interest Income After Credit for Credit Loss Expense49,643 57,406 104,714 114,540 
NONINTEREST INCOME
Insurance commissions and fees8,672 8,429 18,181 17,746 
Wealth management fees4,678 4,596 9,187 9,513 
Service charges on deposit accounts1,640 1,756 3,386 3,535 
Card services income3,087 2,959 5,769 5,502 
Other income1,603 1,241 3,544 2,717 
Net loss on securities transactions(7,065)(37)(7,052)(84)
Total Noninterest Income12,615 18,944 33,015 38,929 
NONINTEREST EXPENSE
Salaries and wages25,337 24,396 49,849 47,668 
Other employee benefits6,647 6,341 13,388 12,138 
Net occupancy expense of premises3,327 3,131 6,626 6,672 
Furniture and fixture expense2,105 2,004 4,159 3,995 
Amortization of intangible assets84 219 167 437 
Other operating expense14,468 13,029 27,937 25,049 
Total Noninterest Expenses51,968 49,120 102,126 95,959 
Income Before Income Tax Expense10,290 27,230 35,603 57,510 
Income Tax Expense1,784 6,329 7,685 13,305 
Net Income Attributable to Noncontrolling Interests and Tompkins Financial Corporation8,506 20,901 27,918 44,205 
Less: Net Income Attributable to Noncontrolling Interests31 32 62 63 
Net Income Attributable to Tompkins Financial Corporation$8,475 $20,869 $27,856 $44,142 
Basic Earnings Per Share$0.59 $1.45 $1.94 $3.06 
Diluted Earnings Per Share$0.59 $1.45 $1.94 $3.05 
 
See notes to unaudited consolidated financial statements.



2

TOMPKINS FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 
Three Months Ended
(In thousands) (Unaudited)06/30/202306/30/2022
Net income attributable to noncontrolling interests and Tompkins Financial Corporation$8,506 $20,901 
Other comprehensive (loss) income, net of tax:
Available-for-sale debt securities:
Change in net unrealized loss during the period(13,237)(43,449)
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income5,325 0 
Employee benefit plans:
Amortization of net retirement plan actuarial loss197 389 
Amortization of net retirement plan prior service cost41 40 
Other comprehensive loss(7,674)(43,020)
Subtotal comprehensive income (loss) attributable to noncontrolling interests and Tompkins Financial Corporation832 (22,119)
Less: Net income attributable to noncontrolling interests(31)(32)
Total comprehensive income (loss) attributable to Tompkins Financial Corporation$801 $(22,151)

Six Months Ended
(In thousands) (Unaudited)06/30/202306/30/2022
Net income attributable to noncontrolling interests and Tompkins Financial Corporation$27,918 $44,205 
Other comprehensive income, net of tax:
Available-for-sale debt securities:
Change in net unrealized loss during the period7,341 (123,854)
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income5,325 0 
Employee benefit plans:
Amortization of net retirement plan actuarial loss421 853 
Amortization of net retirement plan prior service cost82 82 
Other comprehensive income (loss) 13,169 (122,919)
Subtotal comprehensive income (loss) attributable to noncontrolling interests and Tompkins Financial Corporation41,087 (78,714)
Less: Net income attributable to noncontrolling interests(62)(63)
Total comprehensive income (loss) attributable to Tompkins Financial Corporation$41,025 $(78,777)

See notes to unaudited consolidated financial statements.



3

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
(In thousands) (Unaudited)06/30/202306/30/2022
OPERATING ACTIVITIES
Net income attributable to Tompkins Financial Corporation$27,856 $44,142 
Provision for credit loss expense1,428 336 
Depreciation and amortization of premises, equipment, and software5,418 5,245 
Amortization of intangible assets167 437 
Earnings from corporate owned life insurance(1,169)(593)
Net amortization on securities1,856 3,280 
Amortization/accretion related to purchase accounting(369)(511)
Net loss on securities transactions7,052 84 
Net gain on sale of loans originated for sale(65)(57)
Proceeds from sale of loans originated for sale2,174 362 
Loans originated for sale(2,495)(1,127)
Net gain on sale of bank premises and equipment(54)(41)
Net excess tax benefit from stock based compensation13 29 
Stock-based compensation expense2,155 1,973 
Decrease in accrued interest receivable718 176 
Increase (decrease) in accrued interest payable742 (86)
Other, net(678)(2,132)
Net Cash Provided by Operating Activities44,749 51,517 
INVESTING ACTIVITIES
Proceeds from maturities, calls and principal paydowns of available-for-sale debt securities79,018 134,653 
Proceeds from sales of available-for-sale debt securities73,832 0 
Purchases of available-for-sale debt securities(18,044)(149,148)
Purchases of held-to-maturity securities0 (28,320)
Net increase in loans(84,989)(85,037)
Proceeds from sale/redemptions of Federal Home Loan Bank stock54,747 25,148 
Purchases of Federal Home Loan Bank and other stock(60,676)(32,065)
Proceeds from sale of bank premises and equipment98 123 
Purchases of bank premises, equipment and software(3,344)(4,774)
Redemption of corporate owned life insurance 20 0 
Other, net(138)(142)
Net Cash Provided by (Used in) Investing Activities40,524 (139,562)
FINANCING ACTIVITIES
Net (decrease) increase in demand, money market, and savings deposits(286,827)22,907 
Net increase (decrease) in time deposits139,452 (44,583)
Net decrease in Federal funds purchased and securities sold under agreements to repurchase(5,795)(16,712)
Increase in other borrowings145,100 235,600 
Repayment of other borrowings(49,300)(64,000)
Cash dividends(17,423)(16,634)
Common stock issued0 0 
Repurchase of common stock(6,378)(14,128)
Shares issued for employee stock ownership plan0 2,951 
Net shares issued related to restricted stock awards(207)(29)
Net proceeds from exercise of stock options(118)(42)
Net Cash (Used in) Provided by Financing Activities(81,496)105,330 
Net Increase in Cash and Cash Equivalents3,777 17,285 
Cash and cash equivalents at beginning of period77,837 63,107 
Total Cash and Cash Equivalents at End of Period$81,614 $80,392 

See notes to unaudited consolidated financial statements.


4

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
 
Six Months Ended
(In thousands) (Unaudited)06/30/202306/30/2022
Supplemental Information:
Cash paid during the year for - Interest$34,493 $5,578 
Cash paid during the year for - Taxes7,999 10,871 
Transfer of loans to other real estate owned0 82 
Right-of-use assets obtained in exchange for new lease liabilities422 568 
 
See notes to unaudited consolidated financial statements.
 


5

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(Unaudited)
(In thousands except share and per share data) (Unaudited)Common
Stock		Additional Paid-in CapitalRetained
Earnings		Accumulated Other Comprehensive (Loss) IncomeTreasury
Stock		Non-
controlling Interests		Total
Balances at April 1, 2022$1,460 $305,880 $490,200 $(135,849)$(5,642)$1,443 $657,492 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation20,869 32 20,901 
Other comprehensive loss(43,020)(43,020)
Total Comprehensive Income(22,119)
Cash dividends ($0.57 per share)
(8,299)(8,299)
Common stock repurchased and returned to unissued status (49,629 shares)
(5)(3,753)(3,758)
Stock-based compensation expense1,028 1,028 
Directors deferred compensation plan (2,688 shares)
205 (205)0 
Restricted stock activity (7,217 shares)
(1)(25)(26)
Balances at June 30, 2022$1,454 $303,335 $502,770 $(178,869)$(5,847)$1,475 $624,318 
Balances at April 1, 2023$1,456 $303,357 $537,331 $(187,846)$(5,976)$1,443 $649,765 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation8,475 31 8,506 
Other comprehensive loss(7,674)(7,674)
Total Comprehensive Income832 
Cash dividends ($0.60 per share)
(8,711)(8,711)
Net exercise of stock options (315 shares)
 (10)(10)
Common stock repurchased and returned to unissued status (108,219 shares)
(11)(6,367)(6,378)
Stock-based compensation expense1,110 1,110 
Directors deferred compensation plan (3,386 shares)
209 (209)0 
Restricted stock activity (6,341 shares)
(1)(166)(167)
Balances at June 30, 2023$1,444 $298,133 $537,095 $(195,520)$(6,185)$1,474 $636,441 


6

(In thousands except share and per share data)(Unaudited)Common
Stock		Additional Paid-in CapitalRetained
Earnings		Accumulated Other Comprehensive (Loss) IncomeTreasury
Stock		Non-
controlling Interests		Total
Balances at January 1, 2022$1,470 $312,538 $475,262 $(55,950)$(5,791)$1,412 $728,941 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation44,142 63 44,205 
Other comprehensive loss(122,919)(122,919)
Total Comprehensive Loss(78,714)
Cash dividends ($1.14 per share)
(16,634)(16,634)
Net exercise of stock options (630 shares)
(42)(42)
Common stock repurchased and returned to unissued status (179,797 shares)
(18)(14,110)(14,128)
Stock-based compensation expense1,973 1,973 
Shares issued for employee stock ownership plan (37,454 shares)
4 2,947 2,951 
Directors deferred compensation plan (1,679 shares)
56 (56)0 
Restricted stock activity (14,684 shares)
(2)(27)(29)
Balances at June 30, 2022$1,454 $303,335 $502,770 $(178,869)$(5,847)$1,475 $624,318 
Balances at January 1, 2023$1,456 $302,763 $526,727 $(208,689)$(6,279)$1,412 $617,390 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation27,856 62 27,918 
Other comprehensive income13,169 13,169 
Total Comprehensive Income41,087 
Cash dividends ($1.21 per share)
(17,423)(17,423)
Net exercise of stock options (1,824 shares)
 (118)(118)
Common stock repurchased and returned to unissued status (108,219 shares)
(11)(6,367)(6,378)
Stock-based compensation expense2,155 2,155 
Directors deferred compensation plan ((4,484) shares)
(94)94 0 
Restricted stock activity (7,933 shares)
(1)(206)(207)
Adoption of Accounting Guidance(65)(65)
Balances at June 30, 2023$1,444 $298,133 $537,095 $(195,520)$(6,185)$1,474 $636,441 
 
See notes to unaudited consolidated financial statements


7

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. Business
 
Tompkins Financial Corporation ("Tompkins" or the "Company") is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At June 30, 2023, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. Tompkins Community Bank provides a full array of trust and wealth management services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). The Company’s principal offices are located at 118 E. Seneca Street, Ithaca, New York, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the symbol "TMP."

As a registered financial holding company, the Company is regulated under the Bank Holding Company Act of 1956 ("BHC Act"), as amended and is subject to examination and comprehensive regulation by the Federal Reserve Board ("FRB"). The Company is also subject to the jurisdiction of the Securities and Exchange Commission ("SEC") and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended. The Company is subject to the rules of the NYSE American for listed companies.

Tompkins Community Bank is subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation ("FDIC"), and the New York State Department of Financial Services ("NYSDFS"). Each of these agencies issues regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities. These agencies also examine and regulate the trust business of Tompkins Community Bank.

Tompkins Insurance is subject to examination and regulation by the NYSDFS and the Pennsylvania Insurance Department.

2. Basis of Presentation
 
The unaudited consolidated financial statements included in this quarterly report do not include all of the information and footnotes required by U.S. Generally Accepted Accounting Principles ("GAAP") for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the SEC. In the application of certain accounting policies, management is required to make assumptions regarding the effect of matters that are inherently uncertain. These estimates and assumptions affect the reported amounts of certain assets, liabilities, revenues, and expenses in the unaudited consolidated financial statements. Different amounts could be reported under different conditions, or if different assumptions were used in the application of these accounting policies. The accounting policies that management considers critical in this respect are the determination of the allowance for credit losses and the review of its securities portfolio for other than temporary impairment.
 
In management’s opinion, the unaudited consolidated financial statements reflect all adjustments of a normal recurring nature. The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year ended December 31, 2023. The unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022.

Cash and cash equivalents in the consolidated statements of cash flow include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents.

The Company has evaluated subsequent events for potential recognition and/or disclosure, and determined that no further disclosures were required.



8

The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation. All significant intercompany balances and transactions are eliminated in consolidation.

3. Securities

Available-for-Sale Debt Securities
The following tables summarize available-for-sale debt securities held by the Company at June 30, 2023 and December 31, 2022:
Available-for-Sale Debt Securities
June 30, 2023Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
(In thousands)
U.S. Treasuries$190,275 $0 $22,181 $168,094 
Obligations of U.S. Government sponsored entities592,694 0 69,151 523,543 
Obligations of U.S. states and political subdivisions90,330 1 8,284 82,047 
Mortgage-backed securities – residential, issued by
 U.S. Government agencies54,852 9 5,919 48,942 
 U.S. Government sponsored entities757,400 0 114,265 643,135 
U.S. corporate debt securities2,500 0 258 2,242 
Total available-for-sale debt securities$1,688,051 $10 $220,058 $1,468,003 
 
Available-for-Sale Debt Securities
December 31, 2022Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
(In thousands)
U.S. Treasuries$190,170 $0 $22,919 $167,251 
Obligations of U.S. Government sponsored entities681,192 0 80,025 601,167 
Obligations of U.S. states and political subdivisions93,599 8 8,326 85,281 
Mortgage-backed securities – residential, issued by
U.S. Government agencies58,727 12 6,071 52,668 
U.S. Government sponsored entities805,603 0 119,381 686,222 
U.S. corporate debt securities2,500 0 122 2,378 
Total available-for-sale debt securities$1,831,791 $20 $236,844 $1,594,967 




9

Held-to-Maturity Debt Securities
The following tables summarize held-to-maturity debt securities held by the Company at June 30, 2023 and December 31, 2022:

Held-to-Maturity Securities
June 30, 2023Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
(In thousands)
U.S. Treasuries$86,370 $0 $12,598 $73,772 
Obligations of U.S. Government sponsored entities225,999 0 37,327 188,672 
Total held-to-maturity debt securities$312,369 $0 $49,925 $262,444 

Held-to-Maturity Securities
December 31, 2022Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair Value
(In thousands)
U.S. Treasuries$86,478 $0 $12,937 $73,541 
Obligations of U.S. Government sponsored entities225,866 0 37,715 188,151 
Total held-to-maturity debt securities$312,344 $0 $50,652 $261,692 

The Company may from time to time sell debt securities from its available-for-sale portfolio. Realized gains on sales of available-for-sale debt securities were $0 for both the three and six months ended June 30, 2023 and June 30, 2022. During the second quarter of 2023, the Company sold $80.9 million of available-for-sale debt securities at a loss of $7.1 million. Sales of available-for-sale investment securities were the result of general investment portfolio and interest rate risk management. Realized losses for the three and six months ended June 30, 2023 were $7.1 million, and $0 for the three and six months ended June 30, 2022, respectively. Proceeds from the sale of available-for-sale debt securities were $73.8 million for the three and six months ended June 30, 2023, and $0 for the three and six months ended June 30, 2022. The Company's investment portfolio includes callable securities that may be called prior to maturity. There were no realized gains or losses on called available-for-sale debt securities for both the three and six months ended June 30, 2023 and June 30, 2022. The Company also recognized net losses of $12,000 for the three months ended June 30, 2023 and net gains of $1,000 for the six months ended June 30, 2023, compared to net losses of $36,700 and $83,700 for the three and six months ended June 30, 2022, respectively, on equity securities, reflecting the change in fair value.

The following table summarizes available-for-sale debt securities that had unrealized losses at June 30, 2023, and December 31, 2022:

June 30, 2023Less than 12 Months12 Months or LongerTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. Treasuries$0 $0 $168,094 $22,181 $168,094 $22,181 
Obligations of U.S. Government sponsored entities28,596 758 494,947 68,393 523,543 69,151 
Obligations of U.S. states and political subdivisions26,104 756 55,842 7,528 81,946 8,284 
Mortgage-backed securities – residential, issued by
U.S. Government agencies6,244 254 42,351 5,665 48,595 5,919 
U.S. Government sponsored entities13,055 727 630,081 113,538 643,136 114,265 
U.S. corporate debt securities0 0 2,242 258 2,242 258 
Total available-for-sale debt securities$73,999 $2,495 $1,393,557 $217,563 $1,467,556 $220,058 



10

December 31, 2022Less than 12 Months12 Months or LongerTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. Treasuries$28,602 $2,132 $138,649 $20,787 $167,251 $22,919 
Obligations of U.S. Government sponsored entities143,794 7,508 457,373 72,517 601,167 80,025 
Obligations of U.S. states and political subdivisions46,638 2,385 33,435 5,941 80,073 8,326 
Mortgage-backed securities – residential, issued by
U.S. Government agencies22,9451,25829,3564,81352,3016,071
U.S. Government sponsored entities186,69016,869499,532102,512686,222119,381
U.S. corporate debt securities0 0 2,378 122 2,378 122 
Total available-for-sale debt securities$428,669 $30,152 $1,160,723 $206,692 $1,589,392 $236,844 

The following table summarizes held-to-maturity debt securities that had unrealized losses at June 30, 2023 and December 31, 2022:

June 30, 2023Less than 12 Months12 Months or LongerTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. Treasuries$0 $0 $73,772 $12,598 $73,772 $12,598 
Obligations of U.S. Government sponsored entities8,176 751 180,496 36,576 188,672 37,327 
Total held-to-maturity debt securities$8,176 $751 $254,268 $49,174 $262,444 $49,925 

December 31, 2022Less than 12 Months12 Months or LongerTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
U.S. Treasuries$0 $0 $73,542 $12,937 $73,542 $12,937 
Obligations of U.S. Government sponsored entities24,543 3,903 163,607 33,812 188,150 37,715 
Total held-to-maturity debt securities$24,543 $3,903 $237,149 $46,749 $261,692 $50,652 

The Company evaluates available-for-sale debt securities for expected credit losses ("ECL") in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.

Factors that may be indicative of ECL include, but are not limited to, the following:

•Extent to which the fair value is less than the amortized cost basis.
•Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice).
•Payment structure of the debt security with respect to underlying issuer or obligor.
•Failure of the issuer to make scheduled payment of principal and/or interest.
•Changes to the rating of a security or issuer by a nationally recognized statistical rating organization.
•Changes in tax or regulatory guidelines that impact a security or underlying issuer.

For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the Statement of Condition, limited to the amount by which the amortized cost basis


11

exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.

The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and
U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.

Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of June 30, 2023, the held-to-maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including the Federal National Mortgage Agency, the Federal Home Loan Bank ("FHLB") and the Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of June 30, 2023 or December 31, 2022.

The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.

June 30, 2023
(In thousands)Amortized CostFair Value
Available-for-sale debt securities:
Due in one year or less$47,677 $46,893 
Due after one year through five years514,770 461,320 
Due after five years through ten years269,157 230,292 
Due after ten years44,195 37,421 
Total875,799 775,926 
Mortgage-backed securities812,252 692,077 
Total available-for-sale debt securities$1,688,051 $1,468,003 

December 31, 2022
(In thousands)Amortized CostFair Value
Available-for-sale debt securities:
Due in one year or less$50,922 $50,269 
Due after one year through five years508,880 459,721 
Due after five years through ten years367,743 314,408 
Due after ten years39,916 31,679 
Total967,461 856,077 
Mortgage-backed securities864,330 738,890 
Total available-for-sale debt securities$1,831,791 $1,594,967 



12

June 30, 2023
(In thousands)Amortized CostFair Value
Held-to-maturity debt securities:
Due after five years through ten years$312,369 $262,444 
Total held-to-maturity debt securities$312,369 $262,444 

December 31, 2022
(In thousands)Amortized CostFair Value
Held-to-maturity debt securities:
Due after five years through ten years$312,344 $261,692 
Total held-to-maturity debt securities$312,344 $261,692 

The Company also holds non-marketable Federal Home Loan Bank of New York ("FHLBNY") stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and ACBB stock totaled $23.6 million and $95,000, respectively, at June 30, 2023. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase stock. Quarterly, we evaluate our investment in the FHLB for impairment. We evaluate recent and long-term operating performance, liquidity, funding and capital positions, stock repurchase history, dividend history and impact of legislative and regulatory changes. Based on our most recent evaluation, as of June 30, 2023, we determined that no impairment write-downs were required.



13

4. Loans and Leases
Loans and leases at June 30, 2023 and December 31, 2022 were as follows:
(In thousands)06/30/202312/31/2022
Commercial and industrial
Agriculture$64,815 $85,073 
Commercial and industrial other701,006 705,700 
PPP loans*613 756 
Subtotal commercial and industrial766,434 791,529 
Commercial real estate
Construction249,847 201,116 
Agriculture215,915 214,963 
Commercial real estate other2,487,067 2,437,339 
Subtotal commercial real estate2,952,829 2,853,418 
Residential real estate
Home equity185,529 188,623 
Mortgages1,348,448 1,346,318 
Subtotal residential real estate1,533,977 1,534,941 
Consumer and other
Indirect1,419 2,224 
Consumer and other85,794 75,412 
Subtotal consumer and other87,213 77,636 
Leases16,972 16,134 
Total loans and leases5,357,425 5,273,658 
Less: unearned income and deferred costs and fees(5,060)(4,747)
Total loans and leases, net of unearned income and deferred costs and fees$5,352,365 $5,268,911 
*SBA Paycheck Protection Program ("PPP")

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 3 – "Loans and Leases" in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in these policies and guidelines since the date of that report. As such, these policies are reflective of new originations as well as those balances held at December 31, 2022. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan origination, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
 
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Generally loans are placed on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question as well as when required by regulatory agencies. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts due are brought current, the borrower has established a payment history, and future payments are reasonably assured. When management determines that the collection of principal in full is not probable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.
 



14

The below tables are an age analysis of past due loans, segregated by class of loans, as of June 30, 2023 and December 31, 2022:
 
June 30, 2023
(In thousands)30-59 Days60-89 Days90 Days or MoreTotal Past DueCurrent LoansTotal Loans
Loans and Leases
Commercial and industrial
Agriculture$0 $53 $0 $53 $64,762 $64,815
Commercial and industrial other60 2,266 2,704 5,030 695,976 701,006 
PPP loans*0 0 0 0 613 613 
Subtotal commercial and industrial60 2,319 2,704 5,083 761,351 766,434 
Commercial real estate
Construction0 65 0 65 249,782 249,847
Agriculture165 0 0 165 215,750 215,915
Commercial real estate other0 15,408 9,405 24,813 2,462,254 2,487,067
Subtotal commercial real estate165 15,473 9,405 25,043 2,927,786 2,952,829 
Residential real estate
Home equity333 588 1,110 2,031 183,498 185,529
Mortgages0 1,000 8,141 9,141 1,339,307 1,348,448
Subtotal residential real estate333 1,588 9,251 11,172 1,522,805 1,533,977 
Consumer and other
Indirect13 25 44 82 1,337 1,419
Consumer and other160 119 138 417 85,377 85,794
Subtotal consumer and other173 144 182 499 86,714 87,213 
Leases0 0 0 0 16,972 16,972 
Total loans and leases731 19,524 21,542 41,797 5,315,628 5,357,425 
Less: unearned income and deferred costs and fees0 0 0 0 (5,060)(5,060)
Total loans and leases, net of unearned income and deferred costs and fees$731 $19,524 $21,542 $41,797 $5,310,568 $5,352,365 
*SBA Paycheck Protection Program


15

December 31, 2022
(In thousands)30-59 Days60-89 Days90 Days or MoreTotal Past DueCurrent LoansTotal Loans
Loans and Leases
Commercial and industrial
Agriculture$58 $0 $0 $58 $85,015 $85,073 
Commercial and industrial other50 381 82 513 705,187 705,700 
PPP loans*0 0 0 0 756 756 
Subtotal commercial and industrial108 381 82 571 790,958 791,529 
Commercial real estate
Construction0 0 0 0 201,116 201,116 
Agriculture128 0 0 128 214,835 214,963 
Commercial real estate other0 0 11,449 11,449 2,425,890 2,437,339 
Subtotal commercial real estate128 0 11,449 11,577 2,841,841 2,853,418 
Residential real estate
Home equity435 204 1,628 2,267 186,356 188,623 
Mortgages1,748 0 6,802 8,550 1,337,768 1,346,318 
Subtotal residential real estate2,183 204 8,430 10,817 1,524,124 1,534,941 
Consumer and other
Indirect66 31 53 150 2,074 2,224 
Consumer and other52 19 112 183 75,229 75,412 
Subtotal consumer and other118 50 165 333 77,303 77,636 
Leases0 0 0 0 16,134 16,134 
Total loans and leases2,537 635 20,126 23,298 5,250,360 5,273,658 
Less: unearned income and deferred costs and fees0 0 0 0 (4,747)(4,747)
Total loans and leases, net of unearned income and deferred costs and fees$2,537 $635 $20,126 $23,298 $5,245,613 $5,268,911 
*SBA Paycheck Protection Program



























16

The following tables present the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses. The below tables are an age analysis of nonaccrual loans segregated by class of loans, as of June 30, 2023 and December 31, 2022:

June 30, 2023
(In thousands)Nonaccrual Loans and Leases with no ACLNonaccrual Loans and LeasesLoans and Leases Past Due Over 89 Days and Accruing
Loans and Leases
Commercial and industrial
Commercial and industrial other$2,494 $3,146 $0 
Subtotal commercial and industrial2,494 3,146 0 
Commercial real estate
Agriculture0 179 0 
Commercial real estate other6,659 11,476 0 
Subtotal commercial real estate6,659 11,655 0 
Residential real estate
Home equity0 2,891 0 
Mortgages181 13,318 7 
Subtotal residential real estate181 16,209 7 
Consumer and other
Indirect0 87 0 
Consumer and other0 236 27 
Subtotal consumer and other0 323 27 
Total loans and leases$9,334 $31,333 $34 

December 31, 2022
(In thousands)Nonaccrual Loans and Leases with no ACLNonaccrual Loans and LeasesLoans and Leases Past Due Over 89 Days and Accruing
Loans and Leases
Commercial and industrial
Commercial and industrial other$411 $618 $25 
Subtotal commercial and industrial411 618 25 
Commercial real estate
Agriculture186 186 0 
Commercial real estate other13,101 13,672 0 
Subtotal commercial real estate13,287 13,858 0 
Residential real estate
Home equity318 2,391 0 
Mortgages1,177 11,153 0 
Subtotal residential real estate1,495 13,544 0 
Consumer and other
Indirect0 94 0 
Consumer and other0 175 0 
Subtotal consumer and other0 269 0 
Total loans and leases$15,193 $28,289 $25 



17

The Company recognized $0 of interest income on nonaccrual loans during the three and six months ended June 30, 2023 and 2022.

5. Allowance for Credit Losses
 
Management reviews the appropriateness of the allowance for credit losses ("allowance" or "ACL") on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.

The Company uses a Discounted Cash Flow ("DCF") method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, recovery lag, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data.

The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes forecasts of national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model.

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics.

Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.

The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.

Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of June 30, 2023, considers the allowance to be appropriate, under certain conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision expense in the Company's consolidated statements of income.



18

The following table details activity in the allowance for credit losses on loans for the three and six months ended June 30, 2023 and 2022. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

Three Months Ended June 30, 2023
(In thousands)Commercial
& Industrial		Commercial
Real Estate		Residential
Real Estate		Consumer
and Other		Finance
Leases		Total
Allowance for credit losses:
Beginning balance$6,316 $27,186 $10,858 $1,628 $111 $46,099 
Charge-offs0 0 0 (169)0 (169)
Recoveries13 (9)114 78 0 196 
Provision (credit) for credit loss expense356 1,791 139 143 (10)2,419 
Ending Balance$6,685 $28,968 $11,111 $1,680 $101 $48,545 

Three Months Ended June 30, 2022
(In thousands)Commercial
& Industrial		Commercial
Real Estate		Residential
Real Estate		Consumer
and Other		Finance
Leases		Total
Allowance for credit losses:
Beginning balance$7,027 $22,982 $10,447 $1,588 $82 $42,126 
Charge-offs0 (23)(51)(82)0 (156)
Recoveries6 764 197 76 0 1,043 
Provision (credit) for credit loss expense781 (496)489 9 (3)780 
Ending Balance$7,814 $23,227 $11,082 $1,591 $79 $43,793 

Six Months Ended June 30, 2023
(In thousands)Commercial
& Industrial		Commercial
Real Estate		Residential
Real Estate		Consumer
and Other		Finance
Leases		Total
Allowance for credit losses:
Beginning balance$6,039 $27,287 $11,154 $1,358 $96 $45,934 
Impact of adopting ASU 2016-132 16 46 0 0 64 
Charge-offs0 0 (2)(275)0 (277)
Recoveries59 1,237 178 111 0 1,585 
Provision (credit) for credit loss expense585 428 (265)486 5 1,239 
Ending Balance$6,685 $28,968 $11,111 $1,680 $101 $48,545 

Six Months Ended June 30, 2022
(In thousands)Commercial
& Industrial		Commercial
Real Estate		Residential
Real Estate		Consumer
and Other		Finance
Leases		Total
Allowance for credit losses:
Beginning balance$6,335 $24,813 $10,139 $1,492 $64 $42,843 
Charge-offs(23)(50)(51)(278)0 (402)
Recoveries26 805 307 168 0 1,306 
Provision (credit) for credit loss expense1,476 (2,341)687 209 15 46 
Ending Balance$7,814 $23,227 $11,082 $1,591 $79 $43,793 



19

The following table details activity in the liabilities for off-balance sheet credit exposures for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30,
(In thousands)20232022
Liabilities for off-balance sheet credit exposures at beginning of period$3,151 $2,720 
(Credit) provision for credit loss expense related to off-balance sheet credit exposures(166)76 
Liabilities for off-balance sheet credit exposures at end of period$2,985 $2,796 

Six Months Ended June 30,
(In thousands)20232022
Liabilities for off-balance sheet credit exposures at beginning of period$2,796 $2,506 
Provision for credit loss expense related to off-balance sheet credit exposures189 290 
Liabilities for off-balance sheet credit exposures at end of period$2,985 $2,796 

The following table presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans:

(In thousands)Real EstateBusiness AssetsOtherTotalACL Allocation
June 30, 2023
Commercial and Industrial$2,494 $0 $0 $2,494 $0 
Commercial Real Estate10,146 0 0 10,146 1,082 
Residential Real Estate181 0 0 181 0 
Total$12,821 $0 $0 $12,821 $1,082 

(In thousands)Real EstateBusiness AssetsOtherTotalACL Allocation
December 31, 2022
Commercial and Industrial$642 $28 $0 $670 $0 
Commercial Real Estate13,209 0 78 13,287 0 
Commercial Real Estate - Agriculture1,515 0 0 1,515 0 
Residential Real Estate188 0 0 188 3 
Total$15,554 $28 $78 $15,660 $3 

The Company adopted ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") effective January 1, 2023. ASU 2022-02 eliminates the guidance on troubled debt restructurings ("TDRs") and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases, which has been incorporated in the credit quality table below.

There were no new borrowers experiencing financial difficulty in the three and six months ended June 30, 2023, and no new TDRs reported in the three and six months ended June 30, 2022.








20

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of June 30, 2023 and December 31, 2022:

June 30, 2023
(In thousands)20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal Loans
Commercial and Industrial - Other:
Internal risk grade:
Pass$54,166 $110,845 $75,993 $33,954 $39,929 $169,064 $203,109 $2,954 $690,014 
Special Mention0 0 112 297 113 1,488 771 0 2,781 
Substandard0 0 94 420 26 1,175 6,496 0 8,211 
Total Commercial and Industrial - Other$54,166 $110,845 $76,199 $34,671 $40,068 $171,727 $210,376 $2,954 $701,006 
Current-period gross writeoffs$0 $0 $0 $0 $0 $0 $0 $0 $0 
Commercial and Industrial - PPP:
Pass$0 $0 $350 $263 $0 $0 $0 $0 $613 
Special Mention000000000
Substandard000000000
Total Commercial and Industrial - PPP$0 $0 $350 $263 $0 $0 $0 $0 $613 
Current-period gross writeoffs$0 $0 $0 $0 $0 $0 $0 $0 $0 
Commercial and Industrial - Agriculture:
Pass$5,774 $13,555 $3,754 $3,903 $3,559 $10,452 $23,314 $344 $64,655 
Special Mention0 0 53 0 0 0 30 0 83 
Substandard0 0 0 63 0 11 3 0 77 
Total Commercial and Industrial - Agriculture$5,774 $13,555 $3,807 $3,966 $3,559 $10,463 $23,347 $344 $64,815 
Current-period gross writeoffs$0 $0 $0 $0 $0 $0 $0 $0 $0 
Commercial Real Estate
Pass$89,762 $323,682 $363,357 $315,106 $275,367 $978,544 $30,045 $5,937 $2,381,800 
Special Mention0 640 2,028 1,672 11,142 35,097 1,384 0 51,963 
Substandard0 15,369 108 0 2,915 34,796 116 0 53,304 
Total Commercial Real Estate$89,762 $339,691 $365,493 316,778 289,424 1,048,437 $31,545 $5,937 $2,487,067 
Current-period gross writeoffs$0 $0 $0 $0 $0 $0 $0 $0 $0 
Commercial Real Estate - Agriculture:
Pass$7,532 $34,610 $23,534 $22,303 $24,520 $98,149 $1,165 $2,396 $214,209 
Special Mention0 0 0 0 390 1,088 0 0 1,478 
Substandard0 0 0 0 179 49 0 0 228 
Total Commercial Real Estate - Agriculture$7,532 $34,610 $23,534 $22,303 $25,089 $99,286 $1,165 $2,396 $215,915 
Current-period gross writeoffs$0 $0 $0 $0 $0 $0 $0 $0 $0 


21

(In thousands)20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal Loans
Commercial Real Estate - Construction
Pass$0 $40,996 $78,869 $16,481 $9,976 $11,449 $84,040 $8,036 $249,847 
Special Mention0 0 0 0 0 0 0 0 0 
Substandard0 0 0 0 0 0 0 0 0 
Total Commercial Real Estate - Construction$0 $40,996 $78,869 $16,481 $9,976 $11,449 $84,040 $8,036 $249,847 
Current-period gross writeoffs$0 $0 $0 $0 $0 $0 $0 $0 $0 
Residential - Home Equity
Performing$1,244 $2,363 $969 $583 $910 $9,697 $164,163 $2,709 $182,638 
Nonperforming0 0 0 0 0 451 2,440 0 2,891 
Total Residential - Home Equity$1,244 $2,363 $969 $583 $910 $10,148 $166,603 $2,709 $185,529 
Current-period gross writeoffs$0 $0 $0 $0 $0 $2 $0 $0 $2 
Residential - Mortgages
Performing$50,668 $191,160 $265,103 $231,672 $113,613 $482,913 $0 $0 $1,335,129 
Nonperforming0 395 330 868 908 10,818 0 0 13,319 
Total Residential - Mortgages$50,668 $191,555 $265,433 $232,540 $114,521 $493,731 $0 $0 $1,348,448 
Current-period gross writeoffs$0 $0 $0 $0 $0 $0 $0 $0 $0 
Consumer - Direct
Performing$31,859 $15,186 $12,737 $6,302 $5,360 $11,263 $2,851 $0 $85,558 
Nonperforming0 5 1 3 92 132 3 0 236 
Total Consumer - Direct$31,859 $15,191 $12,738 $6,305 $5,452 $11,395 $2,854 $0 $85,794 
Current-period gross writeoffs$155 $8 $0 $14 $36 $13 $0 $0 $226 
Consumer - Indirect
Performing$0 $0 $123 $113 $676 $420 $0 $0 $1,332 
Nonperforming0 0 0 0 71 16 0 0 87 
Total Consumer - Indirect$0 $0 $123 $113 $747 $436 $0 $0 $1,419 
Current-period gross writeoffs$0 $0 $0 $0 $39 $10 $0 $0 $49 


22

December 31, 2022
(In thousands)20222021202020192018PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal Loans
Commercial and Industrial - Other:
Internal risk grade:
Pass$124,190 $79,861 $38,158 $41,391 $33,238 $156,038 $215,890 $6,466 $695,232 
Special Mention0 127 421 285 271 1,380 501 0 2,985 
Substandard0 111 442 35 733 503 5,659 0 7,483 
Total Commercial and Industrial - Other$124,190 $80,099 $39,021 $41,711 $34,242 $157,921 $222,050 $6,466 $705,700 
Commercial and Industrial - Agriculture:
Pass$16,694 $4,120 $4,944 $4,186 $7,734 $4,883 $42,097 $215 $84,873 
Special Mention058000050 0108 
Substandard00710016 5 092 
Total Commercial and Industrial - Agriculture$16,694 $4,178 $5,015 $4,186 $7,734 $4,899 $42,152 $215 $85,073 
Commercial and Industrial - PPP:
Pass$0 $416 $340 $0 $0 $0 $0 $0 $756 
Special Mention0 0 0 0 0 0 0 0 0 
Substandard0 0 0 0 0 0 0 0 0 
Total Commercial and Industrial - PPP$0 $416 $340 $0 $0 $0 $0 $0 $756 
Commercial Real Estate
Pass$342,311 $367,104 $311,607 $279,587 $203,016 $812,563 $10,906 $24,503 $2,351,597 
Special Mention643 3,406 1,688 11,462 2,555 25,361 0 0 45,115 
Substandard78 110 0 3,394 1,692 35,221 132 0 40,627 
Total Commercial Real Estate$343,032 $370,620 $313,295 $294,443 $207,263 $873,145 $11,038 $24,503 $2,437,339 
Commercial Real Estate - Agriculture:
Pass$33,241 $24,125 $22,831 $25,576 $37,835 $65,112 $3,131 $1,235 $213,086 
Special Mention0 0 0 401 0 1,142 0 0 1,543 
Substandard0 0 0 186 38 110 0 0 334 
Total Commercial Real Estate - Agriculture$33,241 $24,125 $22,831 $26,163 $37,873 $66,364 $3,131 $1,235 $214,963 
Commercial Real Estate - Construction
Pass$23,105 $75,245 $27,584 $14,842 $9,083 $7,268 $42,701 $1,288 $201,116 
Special Mention0 0 0 0 0 0 0 0 0 
Substandard0 0 0 0 0 0 0 0 0 
Total Commercial Real Estate - Construction$23,105 $75,245 $27,584 $14,842 $9,083 $7,268 $42,701 $1,288 $201,116 







23

The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of December 31, 2022, continued:

December 31, 2022
(In thousands)20222021202020192018PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted to TermTotal Loans
Residential - Home Equity
Performing$3,030 $1,062 $637 $992 $792 $3,183 $175,451 $1,085 $186,232 
Nonperforming0 0 0 14 0 25 2,352 0 2,391 
Total Residential - Home Equity$3,030 $1,062 $637 $1,006 $792 $3,208 $177,803 $1,085 $188,623 
Residential - Mortgages
Performing$187,129 $272,235 $239,584 $117,391 $66,605 $452,221 $0 $0 $1,335,165 
Nonperforming218 335 628 682 1,552 7,738 0 0 11,153 
Total Residential - Mortgages$187,347 $272,570 $240,212 $118,073 $68,157 $459,959 $0 $0 $1,346,318 
Consumer - Direct
Performing$31,243 $13,999 $7,372 $6,138 $4,386 $8,029 $4,070 $0 $75,237 
Nonperforming0 0 3 93 76 0 3 0 175 
Total Consumer - Direct$31,243 $13,999 $7,375 $6,231 $4,462 $8,029 $4,073 $0 $75,412 
Consumer - Indirect
Performing$0 $156 $146 $1,092 $635 $101 $0 $0 $2,130 
Nonperforming0 0 0 76 10 8 0 0 94 
Total Consumer - Indirect$0 $156 $146 $1,168 $645 $109 $0 $0 $2,224 

6. Earnings Per Share
 
Earnings per share in the table below, for the three and six month periods ended June 30, 2023 and 2022 are calculated under the two-class method as required by ASC Topic 260, Earnings Per Share (ASC 260). ASC 260 provides that unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has issued restricted stock awards that contain such rights and are therefore considered participating securities. Basic earnings per common share are calculated by dividing net income allocable to common stock by the weighted average number of common shares, excluding participating securities, during the period. Diluted earnings per common share include the dilutive effect of participating securities.
 


24

Three Months Ended
(In thousands, except share and per share data)6/30/20236/30/2022
Basic
Net income available to common shareholders$8,475 $20,869 
Less: income attributable to unvested stock-based compensation awards(8)(67)
Net earnings allocated to common shareholders8,467 20,802 
Weighted average shares outstanding, including unvested stock-based compensation awards14,502,161 14,524,975 
Less: average unvested stock-based compensation awards(188,028)(207,560)
Weighted average shares outstanding - Basic14,314,133 14,317,415 
Diluted
Net earnings allocated to common shareholders8,467 20,802 
Weighted average shares outstanding - Basic14,314,133 14,317,415 
Plus: incremental shares from assumed conversion of stock-based compensation awards32,654 70,186 
Weighted average shares outstanding - Diluted14,346,787 14,387,601 
Basic EPS$0.59 $1.45 
Diluted EPS$0.59 $1.45 

Stock-based compensation awards representing 60,891 and 1,848 of common shares during the three months ended June 30, 2023 and 2022, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been anti-dilutive.
Six Months Ended
(In thousands, except share and per share data)6/30/20236/30/2022
Basic
Net income available to common shareholders$27,856 $44,142 
Less: income attributable to unvested stock-based compensation awards(26)(143)
Net earnings allocated to common shareholders27,830 43,999 
Weighted average shares outstanding, including unvested stock-based compensation awards14,511,078 14,568,102 
Less: unvested stock-based compensation awards(190,763)(209,633)
Weighted average shares outstanding - Basic14,320,315 14,358,469 
Diluted
Net earnings allocated to common shareholders27,830 43,999 
Weighted average shares outstanding - Basic14,320,315 14,358,469 
Plus: incremental shares from assumed conversion of stock-based compensation awards47,866 74,183 
Weighted average shares outstanding - Diluted14,368,181 14,432,652 
Basic EPS$1.94 $3.06 
Diluted EPS$1.94 $3.05 

Stock-based compensation awards representing approximately 32,036 and 6,113 of common shares during the six months ended June 30, 2023 and 2022, respectively were not included in the computations of diluted earnings per common share because the effect on those periods would have been anti-dilutive.


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7. Other Comprehensive Income (Loss)

The following tables present reclassifications out of accumulated other comprehensive income (loss) for the three and six month periods ended June 30, 2023 and 2022:
Three Months Ended June 30, 2023
(In thousands)Before-Tax
Amount		Tax (Expense)
Benefit		Net of Tax
Available-for-sale debt securities:
Change in net unrealized gain (loss) during the period$(17,531)$4,294 $(13,237)
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income7,052 (1,727)5,325 
Net unrealized gains/losses(10,479)2,567 (7,912)
Employee benefit plans:
Amortization of net retirement plan actuarial gain261 (64)197 
Amortization of net retirement plan prior service cost54 (13)41 
Employee benefit plans315 (77)238 
Other comprehensive (loss) income$(10,164)$2,490 $(7,674)
 
Three Months Ended June 30, 2022
(In thousands)Before-Tax
Amount		Tax (Expense)
Benefit		Net of Tax
Available-for-sale debt securities:
Change in net unrealized (loss) gain during the period$(57,544)$14,095 $(43,449)
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income0 0 0 
Net unrealized gains/losses(57,544)14,095 (43,449)
Employee benefit plans:
Amortization of net retirement plan actuarial gain514 (125)389 
Amortization of net retirement plan prior service cost53 (13)40 
Employee benefit plans567 (138)429 
Other comprehensive (loss) income$(56,977)$13,957 $(43,020)



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Six Months Ended June 30, 2023
(In thousands)Before-Tax
Amount		Tax (Expense)
Benefit		Net of Tax
Available-for-sale debt securities:
Change in net unrealized gain (loss) during the period$9,724 $(2,383)$7,341 
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income7,052 (1,727)5,325 
Net unrealized gains/losses16,776 (4,110)12,666 
Employee benefit plans:
Amortization of net retirement plan actuarial loss558 (137)421 
Amortization of net retirement plan prior service cost109 (27)82 
Employee benefit plans667 (164)503 
Other comprehensive (loss) income$17,443 $(4,274)$13,169 

Six Months Ended June 30, 2022
(In thousands)Before-Tax
Amount		Tax (Expense)
Benefit		Net of Tax
Available-for-sale debt securities:
Change in net unrealized (loss) gain during the period$(164,025)$40,171 $(123,854)
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income0 0 0 
Net unrealized gains/losses(164,025)40,171 (123,854)
Employee benefit plans:
Amortization of net retirement plan actuarial loss1,129 (276)853 
Amortization of net retirement plan prior service cost109 (27)82 
Employee benefit plans1,238 (303)935 
Other comprehensive (loss) income$(162,787)$39,868 $(122,919)



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The following table presents the activity in our accumulated other comprehensive (loss) income for the periods indicated:
 
(In thousands)Available-for-
Sale Debt Securities		Employee
Benefit Plans		Accumulated
Other
Comprehensive
(Loss) Income
Balance at March 31, 2023$(158,225)$(29,621)$(187,846)
Other comprehensive income before reclassifications(13,237)0 (13,237)
Amounts reclassified from accumulated other comprehensive (loss) income5,325 238 5,563 
Net current-period other comprehensive income (loss)(7,912)238 (7,674)
Balance at June 30, 2023$(166,137)$(29,383)$(195,520)
Balance at January 1, 2023$(178,803)$(29,886)$(208,689)
Other comprehensive income (loss) before reclassifications7,341 0 7,341 
Amounts reclassified from accumulated other comprehensive (loss) income5,325 503 5,828 
Net current-period other comprehensive (loss) income12,666 503 13,169 
Balance at June 30, 2023$(166,137)$(29,383)$(195,520)

(In thousands)Available-for-
Sale Debit Securities		Employee
Benefit Plans		Accumulated
Other
Comprehensive
(Loss) Income
Balance at March 31, 2022$(94,965)$(40,884)$(135,849)
Other comprehensive (loss) income before reclassifications(43,449)0 (43,449)
Amounts reclassified from accumulated other comprehensive (loss) income0 429 429 
Net current-period other comprehensive income (loss)(43,449)429 (43,020)
Balance at June 30, 2022$(138,414)$(40,455)$(178,869)
Balance at January 1, 2022$(14,560)$(41,390)$(55,950)
Other comprehensive (loss) income before reclassifications(123,854)0 (123,854)
Amounts reclassified from accumulated other comprehensive (loss) income0 935 935 
Net current-period other comprehensive (loss) income(123,854)935 (122,919)
Balance at June 30, 2022$(138,414)$(40,455)$(178,869)

















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The following tables present the amounts reclassified out of each component of accumulated other comprehensive (loss) income for the three and six months ended June 30, 2023 and 2022:

Three Months Ended June 30, 2023
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities$(7,052)Net (loss) gain on securities transactions
1,727 Tax expense
(5,325)Net of tax
Employee benefit plans:
Amortization of the following 2
Net retirement plan actuarial loss(261)Other operating expense
Net retirement plan prior service cost(54)Other operating expense
(315)Total before tax
77 Tax benefit
$(238)Net of tax
 
Three Months Ended June 30, 2022
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities$0 Net (loss) gain on securities transactions
0 Tax expense
0 Net of tax
Employee benefit plans:
Amortization of the following2
Net retirement plan actuarial loss(514)Other operating expense
Net retirement plan prior service cost(53)Other operating expense
(567)Total before tax
138 Tax benefit
$(429)Net of tax


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Six Months Ended June 30, 2023
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities$(7,052)Net (loss) gain on securities transactions
1,727 Tax expense
(5,325)Net of tax
Employee benefit plans:
Amortization of the following2
Net retirement plan actuarial loss(558)Other operating expense
Net retirement plan prior service cost(109)Other operating expense
(667)Total before tax
164 Tax benefit
$(503)Net of tax

Six Months Ended June 30, 2022
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands)
Amount
Reclassified from
Accumulated
Other
Comprehensive
(Loss) Income1
Affected Line Item in the
Statement Where Net Income is
Presented
Available-for-sale debt securities:
Unrealized gains and losses on available-for-sale debt securities$0 Net (loss) gain on securities transactions
0 Tax expense
0 Net of tax
Employee benefit plans:
Amortization of the following2
Net retirement plan actuarial loss(1,129)Other operating expense
Net retirement plan prior service cost(109)Other operating expense
(1,238)Total before tax
303 Tax benefit
$(935)Net of tax
1 Amounts in parentheses indicated debits in income statement.
2 The accumulated other comprehensive (loss) income components are included in the computation of net periodic benefit cost (See Note 8 - "Employee Benefit Plan").
 



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8. Employee Benefit Plans
 
The following tables set forth the amount of the net periodic benefit cost recognized by the Company for the Company’s pension plan, post-retirement plan (Life and Health), and supplemental employee retirement plans ("SERP") including the following components: service cost, interest cost, expected return on plan assets for the period, amortization of the unrecognized transitional obligation or transition asset, and the amounts of recognized gains and losses, prior service cost recognized, and gain or loss recognized due to settlement or curtailment.

Components of Net Periodic Benefit Cost
Pension BenefitsLife and HealthSERP Benefits
Three Months EndedThree Months EndedThree Months Ended
(In thousands)6/30/20236/30/20226/30/20236/30/20226/30/20236/30/2022
Service cost$0 $0 $1 $43 $7 $(13)
Interest cost814 529 88 59 275 206 
Expected return on plan assets(1,195)(1,474)0 0 0 0 
Amortization of net retirement plan actuarial loss274 285 (13)46 0 183 
Amortization of net retirement plan prior service (credit) cost0 0 (15)(15)69 68 
Net periodic benefit (income) cost$(107)$(660)$61 $133 $351 $444 

Pension BenefitsLife and HealthSERP Benefits
Six Months EndedSix Months EndedSix Months Ended
(In thousands)6/30/20236/30/20226/30/20236/30/20226/30/20236/30/2022
Service cost$0 $0 $16 $87 $21 $39 
Interest cost1,637 992 177 111 574 407 
Expected return on plan assets(2,394)(2,942)0 0 0 0 
Amortization of net retirement plan actuarial loss578 608 (20)98 0 423 
Amortization of net retirement plan prior service cost (credit)0 0 (30)(30)139 139 
Net periodic benefit (income) cost$(179)$(1,342)$143 $266 $734 $1,008 

The service component of net periodic benefit cost for the Company's benefit plans is recorded as a part of salaries and wages in the consolidated statements of income. All other components are recorded as part of other operating expenses in the consolidated statements of income.
 
The Company realized approximately $0.5 million and $0.9 million, net of tax, as amortization of amounts previously recognized in accumulated other comprehensive (loss) income, for the six months ended June 30, 2023 and 2022, respectively.
 
The Company is not required to contribute to the pension plan, but it may make voluntary contributions. The Company did not contribute to the pension plan in the first six months of 2023 and 2022.



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9. Other Income and Operating Expense
 
Other income and operating expense totals are presented in the table below. Components of these totals exceeding 1% of the aggregate of total noninterest income and total noninterest expenses for any of the periods presented below are stated separately.
 
Three Months EndedSix Months Ended
(In thousands)6/30/20236/30/20226/30/20236/30/2022
Noninterest Income
Other service charges$649 $669 $1,264 $1,296 
Earnings from corporate owned life insurance554 171 1,169 593 
Net gains on the sale of loans originated for sale27 53 65 57 
Other income373 348 1,046 771 
Total other income$1,603 $1,241 $3,544 $2,717 
Noninterest Expenses
Marketing expense$1,688 $1,456 $2,792 $2,513 
Professional fees2,124 1,719 3,928 3,325 
Legal fees635 498 1,054 708 
Technology expense3,656 3,690 7,663 7,373 
FDIC insurance779 677 1,833 1,378 
Cardholder expense1,116 1,280 2,133 2,422 
Other expenses4,470 3,709 8,534 7,330 
Total other operating expense$14,468 $13,029 $27,937 $25,049 
 
10. Revenue Recognition

As stated in Note 1 - "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2022, the Company adopted adopted ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers on January 1, 2022. The update relates to the previous adoption of ASC 606, "Revenue from Contracts with Customers" and all subsequent ASUs that modified ASC 606, and will be applied to future acquisitions. As there were no acquisitions during the current year, the adoption of ASU No. 2021-08 had no effect on the financial statements for the current fiscal year.

Generally, this new guidance strives to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity and inconsistency amongst entities in measuring contract assets and liabilities. The update requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contract. Changes in the acquiree’s balance of contract asset and contract liabilities identified as necessary to conform to the acquirer’s accounting policies would result in a reallocation of the purchase price.

ASC 606 does not apply to revenue associated with financial instruments, including revenue from loans and securities. In addition, certain noninterest income streams such as fees associated with mortgage servicing rights, financial guarantees, derivatives, and certain credit card fees are also not in scope of ASC 606. ASC 606 is applicable to noninterest revenue streams such as trust and asset management income, deposit related fees, interchange fees, merchant income, and annuity and insurance commissions. However, the recognition of these revenue streams did not change significantly upon adoption of ASC 606.

Insurance Commissions and Fees
Insurance commissions and fees from insurance product sales are typically earned upon the effective date of bound coverage, as no significant performance obligation remains after coverage is bound. Commission revenue on policies billed in installments is now accrued based upon the completion of the performance obligation creating a current asset for the unbilled revenue until such time as an invoice is generated, typically not to exceed twelve months. The impact of these changes was not significant, but it will result in slight variances from quarter to quarter. Contingent commissions are estimated based upon management’s expectations for the year with an appropriate constraint applied and accrued relative to the recognition of the corresponding core commissions.


32


Trust & Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are recognized monthly, based upon the month-end market value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.

Mutual Fund & Investment Income
Mutual fund and investment income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, and investment advisory fees from the Company’s Strategic Asset Management Services (SAM) wealth management product. Commissions from the sale of mutual funds and other investments are recognized on the trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value, recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from the wealth management product is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. The Company does engage a third party, LPL Financial, LLC (LPL), to satisfy part of this performance obligation, and therefore this income is reported net of any corresponding expenses paid to LPL.

Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.

Card Services Income
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for fees and exchange are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.

Other
Other service charges include revenue from processing wire and ACH transfers, lock box service and safe deposit box rental. Payment on these revenue streams is received primarily through a direct charge to the customer’s account, immediately or in the following month, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.



33

The following tables present noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606, for the three and six months ended June 30, 2023 and 2022:
Three Months Ended
(In thousands)06/30/202306/30/2022
Noninterest Income
In-scope of Topic 606:
Commissions and Fees$7,979 $7,872 
Installment Billing(42)(46)
Refund of Commissions113 10 
Contract Liabilities/Deferred Revenue(295)(266)
Contingent Commissions917 859 
Subtotal Insurance Revenues8,672 8,429 
Trust and Asset Management3,637 3,122 
Mutual Fund & Investment Income1,041 1,474 
Subtotal Investment Service Income4,678 4,596 
Service Charges on Deposit Accounts1,640 1,756 
Card Services Income3,087 2,959 
Other325 308 
Noninterest Income (in-scope of ASC 606)18,402 18,048 
Noninterest Income (out-of-scope of ASC 606)(5,787)896 
Total Noninterest Income$12,615 $18,944 

Six Months Ended
(In thousands)06/30/202306/30/2022
Noninterest Income
In-scope of Topic 606:
Commissions and Fees$16,495 $15,836 
Installment Billing(40)(2)
Refund of Commissions172 (18)
Contract Liabilities/Deferred Revenue(298)(267)
Contingent Commissions1,852 2,197 
Subtotal Insurance Revenues18,181 17,746 
Trust and Asset Management7,072 6,625 
Mutual Fund & Investment Income2,115 2,888 
Subtotal Investment Service Income9,187 9,513 
Service Charges on Deposit Accounts3,386 3,535 
Card Services Income5,769 5,502 
Other674 624 
Noninterest Income (in-scope of ASC 606)37,197 36,920 
Noninterest Income (out-of-scope of ASC 606)(4,182)2,009 
Total Noninterest Income$33,015 $38,929 

Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration or before payment is due, which would result in contract receivables or assets, respectively. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment or for which payment is due from the customer. The Company’s noninterest revenue streams, excluding some insurance commissions and fees, are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Receivables primarily consist of amounts due for insurance and wealth management services performed for


34

which the Company's performance obligations have been fully satisfied. Receivables for the insurance and wealth management services segments amounted to $3.7 million and $2.8 million, respectively, at June 30, 2023, compared to $6.1 million and $2.5 million, respectively, at December 31, 2022. Included in those amounts are contract assets related to contingent income of $1.3 million and $2.9 million, respectively, at June 30, 2023 and December 31, 2022, and contract liabilities of $2.5 million and $1.6 million, respectively at June 30, 2023 and December 31, 2022.

Contract Acquisition Costs
The Company is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less.

11. Financial Guarantees
 
The Company currently does not issue any guarantees that would require liability recognition or disclosure, other than standby letters of credit. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of June 30, 2023, the Company’s maximum potential obligation under standby letters of credit was $36.2 million compared to $35.8 million at December 31, 2022. Management uses the same credit policies to extend standby letters of credit that it uses for on-balance sheet lending decisions and may require collateral to support standby letters of credit based upon its evaluation of the counterparty. Management does not anticipate any significant losses as a result of these transactions, and has determined that the fair value of standby letters of credit is not significant.
 
12. Segment and Related Information
 
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC 280, "Segment Reporting": (i) banking ("Banking"), (ii) insurance ("Tompkins Insurance") and (iii) wealth management ("Tompkins Financial Advisors"). The Company’s insurance services and wealth management services, other than trust services, are managed separately from the Banking segment.
 
Banking
Tompkins Community Bank has twelve banking offices located in Ithaca, NY and surrounding communities; sixteen banking offices located in the Genesee Valley region of New York State, which includes Monroe County; thirteen banking offices located in the counties north of New York City; and nineteen banking offices headquartered and operating in the areas surrounding southeastern Pennsylvania.
 
Insurance
The Company provides property and casualty insurance services and employee benefits consulting through Tompkins Insurance Agencies, Inc., a 100% wholly-owned subsidiary of the Company, headquartered in Batavia, New York. Tompkins Insurance is an independent insurance agency, representing many major insurance carriers and provides employee benefit consulting to employers in Western and Central New York and Southeastern Pennsylvania, assisting them with their medical, group life insurance and group disability insurance. Tompkins Insurance has five stand-alone offices in Western New York.
 
Wealth Management
The Wealth Management segment is generally organized under the Tompkins Financial Advisors brand. Tompkins Financial Advisors offers a comprehensive suite of financial services to customers, including trust and estate services, investment management and financial and insurance planning for individuals, corporate executives, small business owners and high net worth individuals. Tompkins Financial Advisors has offices in each of the Company’s regional markets.

Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The “Intercompany” column identifies the intercompany activities of revenues, expenses and other assets between the banking, insurance and wealth management services segments. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by the bank and the holding company. All other accounting policies are the same as those described in the summary of significant accounting policies in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.
 


35

Three Months Ended June 30, 2023
(In thousands)BankingInsuranceWealth ManagementIntercompanyConsolidated
Interest income$71,870 $1 $0 $(1)$71,870 
Interest expense19,975 0 0 (1)19,974 
Net interest income51,895 1 0 0 51,896 
Provision for credit loss expense2,253 0 0 0 2,253 
Noninterest income(378)8,798 4,736 (541)12,615 
Noninterest expense41,385 7,201 3,922 (540)51,968 
Income before income tax expense7,879 1,598 814 (1)10,290 
Income tax expense1,147 437 200 0 1,784 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation6,732 1,161 614 (1)8,506 
Less: Net income attributable to noncontrolling interests31 0 0 0 31 
Net Income attributable to Tompkins Financial Corporation$6,701 $1,161 $614 $(1)$8,475 
Depreciation and amortization$2,652 $44 $44 $0 $2,740 
Assets7,569,195 44,640 28,896 (16,493)7,626,238 
Goodwill64,655 19,866 8,081 0 92,602 
Other intangibles, net975 1,496 42 0 2,513 
Net loans and leases5,303,820 0 0 0 5,303,820 
Deposits6,481,556 0 (11,019)(15,886)6,454,651 
Total Equity565,505 35,070 35,866 0 636,441 

Three Months Ended June 30, 2022
(In thousands)BankingInsuranceWealth
Management		IntercompanyConsolidated
Interest income$60,953 $1 $0 $(1)$60,953 
Interest expense2,692 0 0 (1)2,691 
Net interest income58,261 1 0 0 58,262 
Provision for credit loss expense856 0 0 0 856 
Noninterest income6,329 8,573 4,598 (556)18,944 
Noninterest expense39,395 6,812 3,469 (556)49,120 
Income before income tax expense24,339 1,762 1,129 0 27,230 
Income tax expense5,465 494 370 0 6,329 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation18,874 1,268 759 0 20,901 
Less: Net income attributable to noncontrolling interests32 0 0 0 32 
Net Income attributable to Tompkins Financial Corporation$18,842 $1,268 $759 $0 $20,869 
Depreciation and amortization$2,515 $44 $36 $0 $2,595 
Assets7,786,614 47,222 26,915 (18,290)7,842,461 
Goodwill64,500 19,866 8,081 0 92,447 
Other intangibles, net1,236 1,830 58 0 3,124 
Net loans and leases5,118,710 0 0 0 5,118,710 
Deposits6,786,754 0 (847)(16,386)6,769,521 
Total Equity563,994 34,860 25,464 0 624,318 


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Six Months Ended June 30, 2023
(In thousands)BankingInsuranceWealth
Management		IntercompanyConsolidated
Interest income$141,108 $2 $0 $(2)$141,108 
Interest expense34,968 0 0 (2)34,966 
Net interest income106,140 2 0 0 106,142 
Provision for credit loss expense1,428 0 0 0 1,428 
Noninterest income6,321 18,433 9,357 (1,096)33,015 
Noninterest expense81,233 14,417 7,572 (1,096)102,126 
Income before income tax expense29,800 4,018 1,785 0 35,603 
Income tax expense6,136 1,110 439 0 7,685 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation23,664 2,908 1,346 0 27,918 
Less: Net income attributable to noncontrolling interests62 0 0 0 62 
Net Income attributable to Tompkins Financial Corporation$23,602 $2,908 $1,346 $0 $27,856 
Depreciation and amortization$5,241 $88 $89 $0 $5,418 

Six Months Ended June 30, 2022
(In thousands)BankingInsuranceWealth
Management		IntercompanyConsolidated
Interest income$120,129 $2 $0 $(2)$120,129 
Interest expense5,255 0 0 (2)5,253 
Net interest income114,874 2 0 0 114,876 
Provision for credit loss expense336 0 0 0 336 
Noninterest income12,522 18,007 9,532 (1,132)38,929 
Noninterest expense76,584 13,314 7,193 (1,132)95,959 
Income before income tax expense50,476 4,695 2,339 0 57,510 
Income tax expense11,630 1,310 365 0 13,305 
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation38,846 3,385 1,974 0 44,205 
Less: Net income attributable to noncontrolling interests63 0 0 0 63 
Net Income attributable to Tompkins Financial Corporation$38,783 $3,385 $1,974 $0 $44,142 
Depreciation and amortization$5,093 $88 $64 $0 $5,245 

13. Fair Value Measurements

FASB ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. ASC 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). Transfers between levels, when determined to be appropriate, are recognized at the end of each reporting period.
 


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The three levels of the fair value hierarchy under ASC 820 are:
 
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; 

Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
 
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
 
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2023 and December 31, 2022, segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value:
 
Recurring Fair Value Measurements
June 30, 2023
(In thousands)Total(Level 1)(Level 2)(Level 3)
Assets
Available-for-sale debt securities
U.S. Treasuries$168,094 $0 $168,094 $0 
Obligations of U.S. Government sponsored entities523,543 0 523,543 0 
Obligations of U.S. states and political subdivisions82,047 0 82,047 0 
Mortgage-backed securities – residential, issued by:
U.S. Government agencies48,942 0 48,942 0 
U.S. Government sponsored entities643,135 0 643,135 0 
U.S. corporate debt securities2,242 0 2,242 0 
Total Available-for-sale debt securities$1,468,003 $0 $1,468,003 $0 
Equity securities, at fair value$778 $0 $0 $778 
Derivatives designated as hedging instruments3,420 0 3,420 0 
Liabilities
Derivatives not designated as hedging instruments$18 $0 $18 $0 


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Recurring Fair Value Measurements
December 31, 2022
(In thousands)Total(Level 1)(Level 2)(Level 3)
Assets
Available-for-sale debt securities
U.S. Treasuries$167,251 $0 $167,251 $0 
Obligations of U.S. Government sponsored entities601,167 0 601,167 0 
Obligations of U.S. states and political subdivisions85,281 0 85,281 0 
Mortgage-backed securities – residential, issued by:
U.S. Government agencies52,668 0 52,668 0 
U.S. Government sponsored entities686,222 0 686,222 0 
U.S. corporate debt securities2,378 0 2,378 0 
Total Available-for-sale debt securities$1,594,967 $0 $1,594,967 $0 
Equity securities, at fair value$777 $0 $0 $777 
Liabilities
Derivatives not designated as hedging instruments$21 $0 $21 $0 
 
Securities: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon a matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.

The change in the fair value of equity securities valued using significant unobservable inputs (level 3), for the periods ended June 30, 2023 and December 31, 2022, was immaterial.
 
There were no transfers between Levels 1, 2 and 3 for the six months ended June 30, 2023.
 
The Company determines fair value for its available-for-sale debt securities using an independent bond pricing service for identical assets or very similar securities. The Company determines fair value for its equity securities based on the underlying equity fund’s pricing and valuation procedures which consider recent sales price, market quotations from a pricing service, or market quotes from an independent broker-dealer. The Company has reviewed the pricing sources, including methodologies used, and finds them to be fairly stated.

Derivatives: The Company has contracted with a third party vendor to provide periodic valuations for its interest rate derivatives to determine the fair value of its interest rate contracts. The vendor utilizes standard valuation methodologies applicable to interest rate derivatives such as discounted cash flow analysis. Such valuations are based upon readily observable market data and are therefore considered Level 2 valuations by the Company.

Certain assets are measured at fair value on a nonrecurring basis. For the Company, these include loans held for sale, individually evaluated loans, and other real estate owned ("OREO"). For the three and six months ended June 30, 2023, certain individually evaluated loans were remeasured and reported at fair value through a specific valuation allowance and/or partial charge-offs for credit losses based upon the fair value of the underlying collateral. Collateral values are estimated using Level 3 inputs based upon customized discounting criteria. In addition to collateral dependent evaluated loans, certain other real estate owned were remeasured and reported at fair value based upon the fair value of the underlying collateral. The fair values of other real estate owned are estimated using Level 2 inputs based on observable market data or Level 3 inputs based on customized discounting criteria. In general, the fair values of other real estate owned are based upon appraisals, with discounts made to reflect estimated costs to sell the real estate. Upon initial recognition, fair value write-downs are taken through a charge-off to the allowance for credit losses. Subsequent fair value write-downs on other real estate owned are reported in other noninterest expense.


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Three months ended June 30, 2023
(In thousands)Fair value measurements at reporting
date using:		Gain (losses)
from fair
value changes
Assets:As of 06/30/2023Quoted prices in
active markets for
identical assets
(Level 1)		Significant other
observable inputs
(Level 2)		Significant
unobservable inputs
(Level 3)		Three months ended 06/30/2023
Individually evaluated loans$8,822 $0 $0 $8,822 $0 

Three months ended June 30, 2022
(In thousands)Fair value measurements at reporting
date using:		Gain (losses)
from fair
value changes
Assets:As of 06/30/2022Quoted prices in
active markets for
identical assets
(Level 1)		Significant other
observable inputs
(Level 2)		Significant
unobservable inputs
(Level 3)		06/30/2022
Individually evaluated loans$814 $0 $0 $814 $59 
Other real estate owned33 0 33 0 0 

Six months ended June 30, 2023
(In thousands)Fair value measurements at reporting
date using:		Gain (losses)
from fair
value changes
Assets:As of 06/30/2023Quoted prices in
active markets for
identical assets
(Level 1)		Significant other
observable inputs
(Level 2)		Significant
unobservable inputs
(Level 3)		Six months ended 06/30/2023
Individually evaluated loans$8,822 $0 $0 $8,822 $826 
Other real estate owned36 0 0 36 22 

Six months ended June 30, 2022
(In thousands)Fair value measurements at reporting
date using:		Gain (losses)
from fair
value changes
Assets:As of 06/30/2022Quoted prices in
active markets for
identical assets
(Level 1)		Significant other
observable inputs
(Level 2)		Significant
unobservable inputs
(Level 3)		Six months ended 06/30/2022
Individually evaluated loans$1,320 $0 $0 $1,320 $59 
Other real estate owned33 0 33 0 22 

The fair value estimates, methods and assumptions set forth below for the Company's financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by U.S. GAAP and should be read in conjunction with the financial statements and notes included in this Report.



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For loans where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the loan to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral and the amortized cost basis of the loan as of the measurement date. For real estate loans, fair value of the loan’s collateral is determined by third party appraisals, which are then adjusted for the estimated selling and closing costs related to liquidation of the collateral. For this asset class, the actual valuation methods (income, sales comparable, or cost) vary based on the status of the project or property. For example, land is generally based on the sales comparable method while construction is based on the income and/or sales comparable methods. The unobservable inputs may vary depending on the individual assets with no one of the three methods being the predominant approach. The Company reviews the third party appraisal for appropriateness and adjusts the value downward to consider selling and closing costs, which typically range from 5% to 8% of the appraised value. For non-real estate loans, fair value of the loan’s collateral may be determined 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. 

The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at June 30, 2023 and December 31, 2022. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions.

Estimated Fair Value of Financial Instruments
June 30, 2023
(In thousands)Carrying
Amount		Fair Value(Level 1)(Level 2)(Level 3)
Financial Assets:
Cash and cash equivalents$81,614 $81,614 $81,614 $0 $0 
Securities - held-to-maturity312,369 262,444 0 262,444 0 
FHLB and other stock23,649 23,649 0 23,649 0 
Accrued interest receivable24,147 24,147 0 24,147 0 
Loans/leases, net1
5,303,820 4,920,418 0 0 4,920,418 
Financial Liabilities:
Time deposits$770,594 $757,593 $0 $757,593 $0 
Other deposits5,684,057 5,684,057 0 5,684,057 0 
Fed funds purchased and securities sold
under agreements to repurchase50,483 50,483 0 50,483 0 
Other borrowings387,100 384,013 0 384,013 0 
Accrued interest payable2,162 2,162 0 2,162 0 
 


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Estimated Fair Value of Financial Instruments
December 31, 2022
(In thousands)Carrying
Amount		Fair Value(Level 1)(Level 2)(Level 3)
Financial Assets:
Cash and cash equivalents$77,837 $77,837 $77,837 $0 $0 
FHLB and other stock17,720 17,720 0 17,720 0 
Accrued interest receivable24,865 24,865 0 24,865 0 
Loans/leases, net1
5,222,977 4,939,246 0 0 4,939,246 
Financial Liabilities:
Time deposits$631,411 $616,488 $0 $616,488 $0 
Other deposits5,970,884 5,970,884 0 5,970,884 0 
Fed funds purchased and securities
sold under agreements to repurchase56,278 56,278 0 56,278 0 
Other borrowings291,300 289,234 0 289,234 0 
Accrued interest payable1,420 1,420 0 1,420 0 
1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
 
The following methods and assumptions were used in estimating fair value disclosures for financial instruments:
 
Cash and Cash Equivalents: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.

FHLB Stock and Other Stock: The carrying amount of FHLB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For miscellaneous equity securities, carrying value is cost.
 
Loans and Leases: Fair value for loans are calculated using an exit price notion. The Company's valuation methodology takes into account factors such as estimated cash flows, including contractual cash flow and assumptions for prepayments; liquidity risk; and credit risk. The fair values of residential loans were estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans were estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair values of loans held for sale were determined based upon contractual prices for loans with similar characteristics.
 
Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of these short term instruments approximate fair value.
 
Deposits: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.

Other borrowings: The fair value of other borrowings is based upon discounted cash flow analyses using current rates offered
for FHLB advances, with similar terms.

14. Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the


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Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s existing credit derivatives result from participations of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.

Fair Value Hedges of Interest Rate Risk

The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.

For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.

As of June 30, 2023, the following amounts were recorded on the balance sheet related to cumulative basis adjustment for fair value hedges. As of December 31, 2022, there no balances for Fixed Rate Loans.

Line Item in the Statement of Financial Position in Which the Hedged Item is IncludedCarrying Amount of the Hedged Assets/(Liabilities)Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities)
June 30, 2023June 30, 2023
Fixed Rate Loans1
$146,680$(3,320)
Total$146,680$(3,320)
1 These amounts include the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At June 30, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $795.6 million; the cumulative basis adjustments associated with these hedging relationships was $3.3 million; and the amounts of the designated hedged items were $150 million.

Non-designated Hedges

The Company’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans.

Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Statements of Condition

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of condition as of June 30, 2023 and December 31, 2022. The Company began entering into derivative transactions in the second quarter of 2022. Amounts below are presented on a net basis in accordance with applicable accounting guidance.

Derivative Assets
June 30, 2023
NotionalBalance SheetFair
(In thousands)AmountLocationValue*
Derivatives designated as hedging instruments
Interest Rate Products$150,000  Other Assets $3,420 
Total derivatives designated as hedging instruments$3,420 
*The Fair Value reported for June 30, 2023 includes $121,000 of accrued interest receivable.



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Derivative Assets
December 31, 2022
NotionalBalance SheetFair
(In thousands)AmountLocationValue
Derivatives designated as hedging instruments
Interest Rate Products$0  Other Assets $0 
Total derivatives designated as hedging instruments$0 

 Derivative Liabilities
June 30, 2023
NotionalBalance SheetFair
(In thousands)AmountLocationValue
Derivatives not designated as hedging instruments
Risk Participation Agreement$7,499  Other Liabilities $18 
Total derivatives not designated as hedging instruments $18 

 Derivative Liabilities
December 31, 2022
NotionalBalance SheetFair
(In thousands)AmountLocationValue
Derivatives not designated as hedging instruments
Risk Participation Agreement$7,499  Other Liabilities $21 
Total derivatives not designated as hedging instruments $21 

Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of income as of June 30, 2023:

The Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Financial Performance
Location of Gain or (Loss) Recognized in Income on Derivative
Three Months Ended June 30, 2023Three Months Ended June 30, 2022
(In thousands)Interest Income
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded$305 $0 
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items(3,320)0 
Derivatives designated as hedging instruments3,625 0 



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The Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Financial Performance
Location of Gain or (Loss) Recognized in Income on Derivative
Six Months Ended June 30, 2023Six Months Ended June 30, 2022
(In thousands)Interest Income
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded$305 $0 
The effects of fair value and cash flow hedging:
Gain or (loss) on fair value hedging relationships in Subtopic 815-20
Interest contracts
Hedged items(3,320)0 
Derivatives designated as hedging instruments3,625 0 

Tabular Disclosure of the Effect of Derivatives Not Designated as Hedging Instruments on the Income Statement

The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income for the three and six months ended June 30, 2023:

Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 Location of Gain or (Loss) Recognized in Income on DerivativeAmount of Gain or (Loss) Recognized in Income on DerivativeAmount of Gain or (Loss) Recognized in Income on Derivative
Three Months Ended
(In thousands)June 30, 2023June 30, 2022
Risk Participation AgreementOther income / (expense)$8 $41 
Total$8 $41 

Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 Location of Gain or (Loss) Recognized in Income on DerivativeAmount of Gain or (Loss) Recognized in Income on DerivativeAmount of Gain or (Loss) Recognized in Income on Derivative
Six Months Ended
(In thousands)June 30, 2023June 30, 2022
Risk Participation AgreementOther income / (expense)$2 $41 
Total$2 $41 

Credit-risk-related Contingent Features

Applicable for OTC derivatives with dealers

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the company could also be declared in default on its derivative obligations.

As of June 30, 2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $0. As of June 30, 2023, the Company has not posted any collateral related to these agreements. The interest rate hedge counterparty has posted $3.5 million of collateral in proportion to potential losses in the derivative position.


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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

BUSINESS
 
Tompkins Financial Corporation ("Tompkins" or the "Company") is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At June 30, 2023, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. Tompkins Community Bank provides a full array of wealth management services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). The Company’s principal offices are located at 118 E. Seneca Street, P.O. Box 460, Ithaca, NY, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the Symbol "TMP."

The Tompkins' strategy centers around our core values and a commitment to delivering long-term value to our clients, communities, and shareholders. A key strategic initiative for the Company is a focus on responsible and sustainable growth, including initiatives to grow organically through our current businesses, as well as through possible acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses that would complement the Company’s business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services.

Business Segments
Banking services consist primarily of attracting deposits from the areas served by Tompkins Community Bank, which has 60 banking offices (41 offices in New York and 19 offices in Pennsylvania) and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, and leases. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. Banking services also include a full suite of products such as debit cards, credit cards, remote deposit, electronic banking, mobile banking, cash management, and safe deposit services.
 
Wealth management services consist of investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Wealth management services are provided under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors offers services to customers of Tompkins Community Bank and shares offices in each of the banking markets.
 
Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance. Tompkins Insurance is headquartered in Batavia, New York. Over the years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company’s banking subsidiaries and successfully consolidated them into Tompkins Insurance. Tompkins Insurance offers services to customers of Tompkins Community Bank and shares offices in each of the banking markets. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York, and one stand-alone office in Tompkins County, New York.
 
The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for credit losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.
 
Competition
Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its business, the Company’s subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks.
 


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Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of facilities and services, and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community-based financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company’s community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company’s competitiveness. Management believes that the Company’s subsidiary bank can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services, including products that are accessible to our customers through digital means. Although management feels that this business model has caused the Company to grow its customer base in recent years and allows it to compete effectively in the markets it serves, we cannot assure you that such factors will result in future success.
Regulation
Banking, insurance services and wealth management are highly regulated. As a financial holding company including a community bank, a registered investment adviser, and an insurance agency subsidiary, the Company and its subsidiaries are subject to examination and regulation by the Federal Reserve Board ("FRB"), Securities and Exchange Commission ("SEC"), the Federal Deposit Insurance Corporation ("FDIC"), the New York State Department of Financial Services, the Financial Industry Regulatory Authority, and the Pennsylvania Insurance Department.

OTHER IMPORTANT INFORMATION
 
The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three and six months ended June 30, 2023. It should be read in conjunction with the Company’s Audited Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and the Unaudited Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.
 
This Report may include comparisons of the Company’s performance to that of a peer group, which is comprised of the group of 176 domestic bank holding companies with $3 billion to $10 billion in total assets as defined in the Federal Reserve’s "Bank Holding Company Performance Report" for March 31, 2023 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current quarter numbers.

Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the need to sell securities before recovery of amortized cost; the impact of changes in accounting standards; and trends, plans, prospects, growth and strategies. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements and historical performance. The following factors, in addition to those listed as Risk Factors in Item 1A of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2023 and our Annual Report on Form 10-K for the year ended December 31, 2022, are among those that could cause actual results to differ materially from the forward-looking statements and historical performance: changes in general economic, market and regulatory conditions; our ability to attract and retain deposits and other sources of liquidity; GDP growth and inflation trends; the impact of the interest rate and inflationary environment on the Company' business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as state and local government mandates, the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; technological developments and changes; cybersecurity incidents and threats, the ability to continue to introduce competitive new products and services on a timely, cost-


47

effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; the ability to access financial resources in the amounts, at the times and on the terms required to support the Company's future businesses; and the impact of national and global events, including the response to recent bank failures, the war in Ukraine, widespread protests, civil unrest, political uncertainty, and pandemics or other public health crises, including the COVID-19 pandemic on the economy.

Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. generally accepted accounting principles ("GAAP") and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for credit losses ("allowance", or "ACL"), and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.

The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to "Allowance for Credit Losses" below, Note 5 - "Allowance for Credit Losses", and Note 1 – "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2022.

For information on the Company's significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to Note 1 – "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. Refer to "Recently Issued Accounting Standards" in Management's Discussion and Analysis in this Quarterly Report on Form 10-Q for a discussion of recent accounting updates.

Critical Accounting Estimates

The Company's significant accounting policies conform with U.S. generally accepted accounting principles ("GAAP") and are described in Note 1 "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2022. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. The more significant area in which management of the Company applies critical assumptions and estimates includes the following:

•Accounting for credit losses - The Company accounts for the allowance for credit losses using the current expected credit loss model. Under this accounting guidance, the allowance for credit losses represents a valuation account that is deducted from the amortized cost basis of certain financial assets, including loans and leases, to present the net amount expected to be collected at the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Changes in the circumstances considered when determining management's estimates and assumptions


48

could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 5 - "Allowance for Credit Losses" in the Note to the Unaudited Consolidated Financial Statements.

Recent Events

During the first half of 2023, the banking industry experienced significant volatility with the recent high-profile bank failures, which resulted in industry wide concerns related to liquidity, deposit outflows, unrealized securities losses and eroding consumer confidence in the banking system. In response to these developments, the Company took a number of preemptive actions in the first quarter, which included proactive outreach to clients and actions to maximize its funding sources such as establishing the ability to borrow through the newly established Federal Reserve borrowing program called the Bank Term Funding Program. The Company maintains ready access liquidity of $1.7 billion through its membership with the FHLB and FRB. The Company’s total deposits of $6.5 billion at June 30, 2023 were down $54.4 million or 0.8% from March 31, 2023, reflecting minimal deposit outflow. At June 30, 2023, the Company estimates total uninsured deposits of $2.8 billion. These uninsured deposit balances of $2.8 billion at June 30, 2023 include $1.1 billion of collateralized government deposits and $1.8 billion of uninsured deposits without liquid collateral pledged. Total insured deposits and collateralized government deposits represent 73.6% of the Company's total FDIC insurance eligible deposits at June 30, 2023. Furthermore, the Company’s regulatory capital ratios at June 30, 2023, were up over December 31, 2022. At June 30, 2023, Tier 1 leverage and Total Capital ratios were 9.57% and 14.48%, respectively, compared to 9.34% and 14.42% at December 31, 2022.

RESULTS OF OPERATIONS
 
Performance Summary
Net income for the second quarter of 2023 was $8.5 million or $0.59 diluted earnings per share, compared to $20.9 million or $1.45 diluted earnings per share for the same period in 2022. Net income for the first six months of 2023 was $27.9 million or $1.94 diluted earnings per share compared to $44.1 million or $3.05 diluted earnings per share for the first six months of 2022. Net income for the three and six months ended June 30, 2023 was down $12.4 million or 59.4% and $16.3 million or 36.9%, respectively, when compared to the same periods in 2022. The decrease in net income for both the three and six month periods was primarily due to the increase in interest rates on interest-bearing liabilities outpacing increases on interest earning asset yields, and the sale of $80.9 million of available-for-sale securities at a pre-tax loss of $7.1 million. The sale of the available-for-sale securities at a loss was undertaken for general investment portfolio and interest rate risk management. The proceeds of the sale were redeployed to invest in higher yielding available-for-sale securities, and to pay down approximately $65.0 million of overnight borrowings with the FHLB.

Return on average assets ("ROA") for the quarter ended June 30, 2023 was 0.45%, compared to 1.07% for the quarter ended June 30, 2022. Return on average shareholders’ equity ("ROE") for the second quarter of 2023 was 5.22%, compared to 13.09% for the same period in 2022. For the year-to-date period ended June 30, 2023, ROA and ROE totaled 0.74% and 8.76%, respectively, compared to 1.13% and 13.17%, for the same period in 2022.

Segment Reporting
The Company operates in the following three business segments, banking, insurance, and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance Agencies, Inc. subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services, organized under the Tompkins Financial Advisors brand. All other activities are considered banking.
 
Banking Segment
The banking segment reported net income of $6.7 million for the second quarter of 2023, a decrease of $12.1 million or 64.4% from net income of $18.8 million for the same period in 2022. For the six months ended June 30, 2023, the banking segment reported net income of $23.6 million, a decrease of $15.2 million or 39.1% from the same period in 2022. The decrease in net income for the three and six month periods ended June 30, 2023 compared to the same periods in 2022 was due to lower net interest income; lower noninterest income, which included a pre-tax loss of $7.1 million on the sale of $80.9 million of available-for-sale securities; higher operating expenses; and an increase in provision for credit losses expense.
 


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Net interest income of $51.9 million for the second quarter of 2023 was down $6.4 million or 10.9% from the same period in 2022. For the six months ended June 30, 2023, net interest income of $106.1 million was down $8.7 million or 7.6% compared to the first six months of 2022. The decrease in net interest income and net interest margin in the current quarter compared to both prior periods was due primarily to the increase in interest rates on interest-bearing liabilities outpacing increases on interest earning asset yields due to the higher interest rate environment.

The provision for credit losses was $2.3 million for the three months ended June 30, 2023, compared to $856,000 for the same period in 2022. For the six month period ended June 30, 2023, the provision for credit losses was $1.4 million compared to $336,000 for the same period in 2022. The increase in provision for credit losses for both the three and six month periods is mainly driven by weaker economic forecasts, loan growth and additional reserves for individually evaluated loans. For additional information, see the section titled "The Allowance for Credit Losses" below.

Noninterest income was a loss of $378,000 for the three months ended June 30, 2023, which was down $6.7 million or 106.0% compared to the same period in 2022. For the six months ended June 30, 2023, noninterest income of $6.3 million was down $6.2 million or 49.5% compared to the six months ended June 30, 2022. The decrease was mainly driven by the pre-tax loss on the sale of securities of $7.1 million and lower service charges on deposit accounts, which were down $116,000 and $149,000, respectively, for the three and six months ended June 30, 2023, compared to the same periods in 2022. These were partially offset by cardholder service fees and income on bank owned life insurance being up $128,000 and $383,000 over the second quarter of 2022 and $267,000 and $576,000 over the first six months of 2022, respectively.

Noninterest expense of $41.4 million and $81.2 million for the three and six months ended June 30, 2023, respectively, was up $2.0 million or 5.1% and $4.6 million or 6.1%, respectively, over the same periods in 2022. The main driver for the increase in noninterest expenses was the annual merit increases in salaries and wages. Included in the quarter and year-to-date increases in 2023 were professional fees (up $355,000 and $546,000) and the non-service component of post-retirement compensation (up $395,000 and $815,000, respectively).

Insurance Segment
The insurance segment reported net income of $1.2 million for the three months ended June 30, 2023, which was down $107,000 or 8.4% compared to the second quarter of 2022. Total noninterest revenue was up $225,000 or 2.6% for the second quarter of 2023 compared to the same quarter in the prior year, primarily due to growth in both personal lines and employee benefits. The growth in personal lines commission revenue is attributed to new business, growth within the existing client base and premium increases related to change in general market conditions.

For the six months ended June 30, 2023, net income was down $477,000 or 14.1% compared to the same period in the prior year. Total revenue for the year-to-date period ended June 30, 2023, was up $426,000 or 2.4% compared to the same period last year. The increase in revenues for the six months ended June 30, 2023 compared to the prior year is mainly due to growth in overall commission revenue of $451,000 or 2.5%, with increases in personal lines (up 8.0%), commercial lines (up 1.9%), and employee benefit expense (up 4.1%) and driven by new business along with rate increases related to current market conditions.

Noninterest expenses for the three months ended June 30, 2023 were up $389,000 or 5.7% compared to the three months ended June 30, 2022. Year-to-date noninterest expenses were up $1.1 million or 8.3% compared to the six months ended June 30, 2022. The increase in noninterest expenses for the three and six months ended June 30, 2023 was mainly in salaries and wages, reflecting annual merit increases, incentive commissions related to new business and growth in revenues, and employee benefits, including increases in health insurance.


Wealth Management Segment
The wealth management segment reported net income of $614,000 for the three months ended June 30, 2023, which was down $145,000 or 19.1% compared to the second quarter of 2022. Revenue for the second quarter of 2023 was up $138,000 or 3.0% compared to the same period last year, primarily due to favorable market conditions during the second quarter of 2023, which contributed to an increase in assets under management. Total expense for the second quarter of 2023 was up $453,000 or 13.1% compared to the second quarter of 2022, which was primarily attributable to an increase in salaries and wages and benefits as well as professional fees, largely related to employee recruiting fees.

For the six months ended June 30, 2023, net income of $1.3 million was down $628,000 or 31.8% compared to the same period in the prior year. Total revenue for the year-to-date period ended June 30, 2023 was down $175,000 or 1.8% as compared to the prior year period. Noninterest expense for the six months ended June 30, 2023 was up $379,000 or 5.3% as compared to the prior year period, mainly in professional fees and salaries and wages and benefits.


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Net Interest Income
The following tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with prior quarter of 2023 and for each of the three and six month periods ended June 30, 2023 and 2022:

Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
Quarter EndedQuarter Ended
June 30, 2023March 31, 2023
AverageAverage
BalanceAverageBalanceAverage
(Dollar amounts in thousands)(QTD)InterestYield/Rate(QTD)InterestYield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks$13,585 $183 5.40 %$12,733 $139 4.42 %
Securities (1)
U.S. Government securities1,972,719 7,304 1.49 %2,033,307 7,424 1.48 %
State and municipal (2)92,194 590 2.57 %93,201 599 2.60 %
Other securities (2)3,288 56 6.86 %3,284 53 6.55 %
Total securities2,068,201 7,950 1.54 %2,129,792 8,076 1.54 %
FHLBNY and FRB stock23,211 323 5.59 %16,750 300 7.26 %
Total loans and leases, net of unearned income (2)(3)5,304,717 63,709 4.82 %5,251,278 61,034 4.71 %
Total interest-earning assets7,409,714 72,165 3.91 %7,410,553 69,549 3.81 %
Other assets226,086 223,240 
Total assets$7,635,800 $7,633,793 
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money market3,701,229 10,590 1.15 %3,833,566 8,641 0.91 %
Time deposits745,970 5,055 2.72 %673,871 3,541 2.13 %
Total interest-bearing deposits4,447,199 15,645 1.41 %4,507,437 12,182 1.10 %
Federal funds purchased & securities sold under agreements to repurchase56,083 15 0.11 %57,523 14 0.10 %
Other borrowings379,744 4,314 4.56 %269,752 2,796 4.20 %
Total interest-bearing liabilities4,883,026 19,974 1.64 %4,834,712 14,992 1.26 %
Noninterest bearing deposits2,004,560 2,065,701 
Accrued expenses and other liabilities97,660 102,172 
Total liabilities6,985,246 7,002,585 
Tompkins Financial Corporation Shareholders’ equity649,097 629,784 
Noncontrolling interest1,457 1,424 
Total equity650,554 631,208 
Total liabilities and equity$7,635,800 $7,633,793 
Interest rate spread2.27 %2.55 %
Net interest income/margin on earning assets52,191 2.83 %54,557 2.99 %
Tax Equivalent Adjustment(295)(311)
Net interest income per consolidated financial statements$51,896 $54,246 



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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
Quarter EndedQuarter Ended
June 30, 2023June 30, 2022
AverageAverage
BalanceAverageBalanceAverage
(Dollar amounts in thousands)(QTD)InterestYield/Rate(QTD)InterestYield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks$13,585 $183 5.40 %$88,094 $64 0.29 %
Securities (1)
U.S. Government securities1,972,719 7,304 1.49 %2,305,102 7,746 1.35 %
State and municipal (2)92,194 590 2.57 %97,481 619 2.55 %
Other securities (2)3,288 56 6.86 %3,337 28 3.40 %
Total securities2,068,201 7,950 1.54 %2,405,920 8,393 1.40 %
FHLBNY and FRB stock23,211 323 5.59 %12,234 120 3.92 %
Total loans and leases, net of unearned income (2)(3)5,304,717 63,709 4.82 %5,115,340 52,733 4.14 %
Total interest-earning assets7,409,714 72,165 3.91 %7,621,588 61,310 3.23 %
Other assets226,086 209,057 
Total assets$7,635,800 $7,830,645 
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money market3,701,229 10,590 1.15 %4,073,279 890 0.09 %
Time deposits745,970 5,055 2.72 %603,791 1,157 0.77 %
Total interest-bearing deposits4,447,199 15,645 1.41 %4,677,070 2,047 0.18 %
Federal funds purchased & securities sold under agreements to repurchase56,083 15 0.11 %54,885 15 0.11 %
Other borrowings379,744 4,314 4.56 %169,390 629 1.49 %
Total interest-bearing liabilities4,883,026 19,974 1.64 %4,901,345 2,691 0.22 %
Noninterest bearing deposits2,004,560 2,189,132 
Accrued expenses and other liabilities97,660 100,813 
Total liabilities6,985,246 7,191,290 
Tompkins Financial Corporation Shareholders’ equity649,097 637,896 
Noncontrolling interest1,457 1,459 
Total equity650,554 639,355 
Total liabilities and equity$7,635,800 $7,830,645 
Interest rate spread2.27 %3.01 %
Net interest income/margin on earning assets52,191 2.83 %58,619 3.09 %
Tax Equivalent Adjustment(295)(357)
Net interest income per consolidated financial statements$51,896 $58,262 




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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
Year to Date Period EndedYear to Date Period Ended
June 30, 2023June 30, 2022
AverageAverage
BalanceAverageBalanceAverage
(Dollar amounts in thousands)(YTD)InterestYield/Rate(YTD)InterestYield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks$13,161 $322 4.93 %$110,984 $105 0.19 %
Securities (1)
U.S. Government securities2,002,846 14,728 1.48 %2,299,389 15,108 1.32 %
State and municipal (2)92,695 1,188 2.58 %99,602 1,267 2.57 %
Other securities (2)3,286 110 6.70 %3,363 51 3.06 %
Total securities2,098,827 16,026 1.54 %2,402,354 16,426 1.38 %
FHLBNY and FRB stock19,998 623 6.29 %11,172 225 4.06 %
Total loans and leases, net of unearned income (2)(3)5,278,145 124,744 4.77 %5,085,808 104,088 4.13 %
Total interest-earning assets7,410,131 141,715 3.86 %7,610,318 120,844 3.20 %
Other assets224,671 259,809 
Total assets$7,634,802 $7,870,127 
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money market3,767,032 19,230 1.03 %4,116,870 1,638 0.08 %
Time deposits710,119 8,596 2.44 %617,616 2,455 0.80 %
Total interest-bearing deposits4,477,151 27,826 1.25 %4,734,486 4,093 0.17 %
Federal funds purchased & securities sold under agreements to repurchase56,799 29 0.10 %59,536 31 0.11 %
Other borrowings325,052 7,111 4.41 %147,466 1,129 1.54 %
Total interest-bearing liabilities4,859,002 34,966 1.45 %4,941,488 5,253 0.21 %
Noninterest bearing deposits2,034,961 2,149,201 
Accrued expenses and other liabilities99,905 103,451 
Total liabilities6,993,868 7,194,140 
Tompkins Financial Corporation Shareholders’ equity639,494 674,545 
Noncontrolling interest1,440 1,442 
Total equity640,934 675,987 
Total liabilities and equity$7,634,802 $7,870,127 
Interest rate spread2.41 %2.99 %
Net interest income/margin on earning assets106,749 2.90 %115,591 3.06 %
Tax Equivalent Adjustment(607)(715)
Net interest income per consolidated financial statements$106,142 $114,876 
1 Average balances and yields on available-for-sale debt securities are based on historical amortized cost.
2 Interest income includes the tax effects of taxable-equivalent adjustments using an effective income tax rate of 21% in 2023 and 2022 to increase tax exempt interest income to taxable-equivalent basis.
3 Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.

Net Interest Income 
Net interest income is the Company’s largest source of revenue, representing 80.4% and 76.3%, respectively, of total revenues for the three and six months ended June 30, 2023, compared to 75.5% and 74.7% for the same periods in 2022. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. The above table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.
 


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Net interest income for the three months and six months ended June 30, 2023, was down $6.4 million or 10.9%, and $8.7 million or 7.6%, respectively, from the same periods in 2022. The decrease was primarily due to higher funding costs and a decrease in average earnings assets, partially offset by an increase in the average yield on interest-earning assets in 2023 over 2022.

Net interest margin for the three months ended June 30, 2023 was 2.83% compared to 3.09% for the same period in 2022. Net interest margin for the six months ended June 30, 2023 was 2.90% compared to 3.06% for the same period in 2022. The decrease in net interest margin for the three and six months ended June 30, 2023 compared to the same periods in 2022 was due to increases in interest rates on interest-bearing liabilities outpacing increases on interest earning asset yields due to the higher interest rate environment, as well as increases in higher rate borrowings due to lower deposit balances.

The quarterly net interest margin for the second quarter of 2023 was 2.83%, down from a net interest margin of 2.99% for the first quarter of 2023. The decrease in net interest margin was driven mainly by higher funding costs during the second quarter as a result of higher average rates paid on interest-bearing deposits and borrowings exceeding the growth in average asset yields. The average cost of interest-bearing liabilities for the second quarter of 2023 was 1.64% compared to 1.26% for the first quarter of 2023, while the average yield on interest earning assets was 3.91% and 3.81% for the same two periods. Average interest-bearing deposit balances for the second quarter of 2023 were down $60.2 million or 1.3%, while other borrowings were up $110.0 million or 40.8%, compared to the first quarter of 2023.

Interest income for the three and six months ended June 30, 2023 was $72.2 million and $141.7 million, up 17.7% and 17.3%, respectively, compared to the same periods in 2022. The growth in the three and six month periods was mainly driven by higher interest earning asset yields due to the higher interest rate environment. The three and six months ended June 30, 2023 average yield on interest-earning assets increased 68 and 66 basis points, respectively, while average interest earning assets decreased $211.9 million or 2.8% and $200.2 million or 2.6%, respectively, compared to the same period in 2022. The increase in interest income was mainly in interest and fees on loans, driven by higher yields and higher average balances for the three and six months ended June 30, 2023, compared to the same periods in 2022. The three and six months ended June 30, 2023 average loan balances for the second quarter of 2023 were up $189.4 million or 3.7% and $192.3 million or 3.8% from the same periods of 2022. The average yield on loans for the three and six months ended June 30, 2023, of 4.82% and 4.77% was up 68 and 64 basis points from the same periods in 2022. For the three and six months ended June 30, 2023, average balances for securities were down $337.7 million or 14.0% and $303.5 million or 12.63%, respectively, over the same periods in 2022, while the average yield on securities of 1.54% for the three and six months ended June 30, 2023, was up 14 and 16 basis points, respectively, over the same periods in 2022. During the second quarter of 2023, the Company sold $80.9 million of available-for-sale securities, which had an average yield of 0.48%, and a remaining average life of 2.3 years. Approximately $15.0 million of the proceeds from the sale were reinvested in available-for-sale securities with an average yield of approximately 4.86%, while the remaining proceeds were used to pay down approximately $65.0 million of overnight borrowings with the FHLB.

Interest expense for the three months ended June 30, 2023, increased $17.3 million or 642.3%, and increased $29.7 million or 565.6% for the six month period ended June 30, 2023 compared to the same periods in 2022. The average cost of interest-bearing deposits for the three and six months ended June 30, 2023 was 1.41% and 1.25%, respectively, up 123 and 108 basis points, respectively, compared to the same periods in 2022. Average interest-bearing deposits for the three and six months ended June 30, 2023, were down $230.0 million or 4.9% and $257.3 million or 5.4%, respectively, from the same three and six months period in 2022. Average noninterest bearing deposits were down $184.6 million or 8.4% for the three months ended June 30, 2023 when compared to the second quarter of 2022, and for the six months ended June 30, 2023 were down $114.2 million or 5.3% compared to the same period in 2022. Average other borrowings for the three and six months ended June 30, 2023 were up $210.4 million or 124.2%, and up $177.6 million or 120.4%, respectively, compared to the same periods in 2022.

Provision for Credit Losses 
The provision for credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses ("ACL") at an appropriate level. Provision for credit losses in the second quarter of 2023 was $2.3 million compared to $856,000 for the second quarter of 2022. Provision for credit losses for the six months ended June 30, 2023 was $1.4 million compared to $336,000 for the same period in 2022. The provision for credit losses for the three and six months ended June 30, 2023 and 2022 included a credit to provision expense of $166,000 and expense of $189,000, respectively, related to off-balance sheet credit exposures compared to a provision of $76,000 and $290,000, respectively, for the same periods in 2022. The increase in provision for credit losses for both the three and six month periods is mainly driven by weaker economic forecasts, loan growth, and changes in asset quality. The section captioned "Financial Condition – The Allowance for Credit Losses" below has further details on the allowance for credit losses and asset quality metrics.
 


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Noninterest Income 
Noninterest income was $12.6 million and $33.0 million for the three and six months ended June 30, 2023, which were down $6.3 million and $5.9 million, respectively, from the same periods in 2022. Noninterest income for the three and six months ended June 30, 2023 includes a pre-tax loss of $7.1 million on sale of available-for-sale securities. Noninterest income represented 19.6% of total revenue for the second quarter of 2023 and 23.7% for the six months ended June 30, 2023, compared to 24.5% and 25.3%, respectively, for the same periods in 2022.
 
Insurance commissions and fees, the largest component of noninterest income, were $8.7 million for the second quarter of 2023, an increase of 2.9% from the same period for the prior year. The increase in insurance commissions and fees in the second quarter of 2023 over the same period in 2022 was mainly life and health insurance and defined benefit plan commissions which grew by 9.2% and 7.5%, respectively. For the first six months of 2023, insurance commissions and fees were up $435,000 or 2.5% compared to the same period in 2022. The increase in revenues for the six months ended June 30, 2023 compared to the prior year period was primarily due to growth in personal lines revenue, which was up 8.2%, attributable to new business, growth within the existing client base and premium increases related to change in general market conditions.
 
Wealth management fees of $4.7 million in the second quarter of 2023 were up $82,000 or 1.8% compared to the second quarter of 2022. For the first six months of 2023, wealth management fees were down $326,000 or 3.4% compared to the same period in 2022. Wealth management fees include trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $3.1 billion at June 30, 2023, up from $2.8 billion at June 30, 2022. The increase in assets from prior year was mainly a result of stronger market performance, in comparison to declining markets experienced during the second quarter of 2022.
 
Service charges on deposit accounts of $1.6 million and $3.4 million for the three and six months ended June 30, 2023 were down $116,000 or 6.6% and $149,000 or 4.2%, respectively, over the same periods in 2022, mainly due to lower net overdraft fees.

Card services income in the second quarter of 2023 was up $128,000 or 4.3% over the same three month period end in 2022, and up $267,000 or 4.9% for the six months ended June 30, 2023 compared to the same period in 2022.

Other income of $1.6 million in the second quarter of 2023 was up $362,000 or 29.2% compared to the same period in 2022. For the first six months of 2023, other income of $3.5 million was up $827,000 or 30.4% compared to the same period in 2022. The increase for the three and six months ended June 30, 2023 compared to the same periods in 2022 was mainly due to higher earnings on bank owned life insurance. Earnings on bank owned life insurance were up $383,000 and $576,000, respectively, as certain separate account policies in 2022 were unfavorably impacted by decreases in the market value of the underlying assets.

Noninterest Expense 
Noninterest expense of $52.0 million for the second quarter of 2023 and $102.1 million for the first six months of 2023 was up 5.8%, and 6.4%, respectively, compared to the same periods in 2022.
 
Expenses associated with compensation and benefits comprise the largest component of noninterest expense, representing 61.5% and 61.9% of total noninterest expense for the three and six months ended June 30, 2023. Salaries and wages expense for the three and six months ended June 30, 2023, respectively, increased by 941,000 or 3.9%, and $2.2 million or 4.6%, respectively, compared to the same periods in 2022. The increases were mainly due to normal merit increases. Employee benefits for the three and six months ended June 30, 2023 increased by $306,000 or 4.8% and $1.3 million or 10.3%, respectively. The increase is mainly as a result of higher health care expense.

Other expense categories, not related to compensation and benefits, for the three and six months ended June 30, 2023 were up $1.6 million or 8.7%, and up $2.7 million or 7.6%, respectively from the prior year periods. Contributing to the growth in these expenses for the three and six months ended June 30, 2023, compared to the same periods in 2022 were the following: other losses, up $517,000 or 461.6% and $439,000 or 155.7%, respectively, mainly due to recent fraud related to Home Equity Lines of Credit ("HELOC") products; expenses related to the Company’s retirement plans, up $411,000 or 360.5% and $854,000 or 442.5%, respectively; professional fees, up $405,000 or 23.5% and $603,000 or 18.1%, respectively, marketing expenses, up $232,000 or 15.9% and $279,000 or 11.1%, respectively, FDIC insurance, up $102,000 or 15.1% and $455,000 or 33.0%, respectively; and travel and meetings expenses, up $160,000 or 50.6% and $329,000 or 67.4%, respectively.



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Income Tax Expense 
The provision for income taxes was $1.8 million for an effective rate of 17.3% for the second quarter of 2023, compared to tax expense of $6.3 million and an effective rate of 23.2% for the same quarter in 2022. For the first six months of 2023, the provision for income taxes was $7.7 million for an effective rate of 21.6% compared to tax expense of $13.3 million and an effective rate of 23.1% for the same period in 2022. The effective rates differ from the U.S. and state statutory rates primarily due to the effect of tax-exempt income from loans, securities and life insurance assets, and the income tax effects associated with stock based compensation. The decrease in the effective tax rate for the three and six months ended June 30, 2023, compared to the same periods in 2022 is largely due to the anticipated retention of certain New York State tax benefits.

The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on its New York State tax return for qualifying entities. A condition to claim the benefit is that the consolidated company has qualified average assets of no more than $8.0 billion for the taxable year. Based on current estimates of average assets during 2023, the Company expects to retain the benefits in 2023.

FINANCIAL CONDITION
 
Total assets were $7.6 billion at June 30, 2023, down $44.4 million or 0.6% from December 31, 2022. The decrease in total assets from year-end 2022 was mainly due to a decrease in available-for-sale securities, partially offset by an increase in the loan portfolio, compared to December 31, 2022. Total securities were $1.8 billion at June 30, 2023, down $126.9 million or 6.7% compared to the $1.9 billion reported at year-end 2022. The decrease was mainly due to the sale of $80.9 million of available-for-sale securities during the second quarter of 2023. Total loans were up $83.5 million or 1.6% over year-end 2022. Total deposits at June 30, 2023 were down $147.6 million or 2.2% from December 31, 2022. Other borrowings at June 30, 2023 increased $95.8 million or 32.9% from December 31, 2022, as loan growth outpaced deposit growth.

Securities
As of June 30, 2023, the Company’s securities portfolio was $1.8 billion or 23.4% of total assets, compared to $1.9 billion or 24.9% of total assets at year end 2022. The following table details the composition of the securities portfolio:

Available-for-Sale Debt Securities
June 30, 2023December 31, 2022
(In thousands)Amortized CostFair ValueAmortized CostFair Value
U.S. Treasuries$190,275 $168,094 $190,170 $167,251 
Obligations of U.S. Government sponsored entities592,694 523,543 681,192 601,167 
Obligations of U.S. states and political subdivisions90,330 82,047 93,599 85,281 
Mortgage-backed securities - residential, issued by
U.S. Government agencies54,852 48,942 58,727 52,668 
U.S. Government sponsored entities757,400 643,135 805,603 686,222 
U.S. corporate debt securities2,500 2,242 2,500 2,378 
Total available-for-sale debt securities$1,688,051 $1,468,003 $1,831,791 $1,594,967 
 
Held-to-Maturity Debt Securities
June 30, 2023December 31, 2022
(In thousands)Amortized CostFair ValueAmortized CostFair Value
U.S. Treasuries$86,370 $73,772 $86,478 $73,541 
Obligations of U.S. Government sponsored entities225,999 188,672 225,866 188,151 
Total held-to-maturity debt securities$312,369 $262,444 $312,344 $261,692 

As of June 30, 2023, the available-for-sale debt securities portfolio had net unrealized losses of $220.0 million compared to net unrealized losses of $236.8 million at December 31, 2022. The decrease in unrealized losses related to the available-for-sale debt securities portfolio, which reflects the amount that the amortized cost exceeds fair value, was impacted by interest rate volatility in the market, as well as the sale of $80.1 million in securities at a pre-tax loss of $7.1 million during the first six


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months of 2023. Approximately $15.0 million of the proceeds from the sale were reinvested in available-for-sale securities, while the remaining proceeds were used to pay down approximately $65.0 million of overnight borrowing with the FHLB. Management’s policy is to purchase investment grade securities that on average have relatively short duration, which helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital.
 
The Company evaluates available-for-sale and held-to-maturity debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.

The Company determined that at June 30, 2023, all impaired available-for-sale and held-to-maturity debt securities were because of changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit worthiness of the underlying issuers. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. Therefore, the Company carried no ACL at June 30, 2023 and there was no credit loss expense recognized by the Company with respect to the securities portfolio during the three and six months ended June 30, 2023.

Loans and Leases
Loans and leases as of the end of the second quarter and prior year-end period were as follows:
(In thousands)06/30/202312/31/2022
Commercial and industrial
Agriculture$64,815 $85,073 
Commercial and industrial other701,006 705,700 
PPP loans613 756 
Subtotal commercial and industrial766,434 791,529 
Commercial real estate
Construction249,847 201,116 
Agriculture215,915 214,963 
Commercial real estate other2,487,067 2,437,339 
Subtotal commercial real estate2,952,829 2,853,418 
Residential real estate
Home equity185,529 188,623 
Mortgages1,348,448 1,346,318 
Subtotal residential real estate1,533,977 1,534,941 
Consumer and other
Indirect1,419 2,224 
Consumer and other85,794 75,412 
Subtotal consumer and other87,213 77,636 
Leases16,972 16,134 
Total loans and leases5,357,425 5,273,658 
Less: unearned income and deferred costs and fees(5,060)(4,747)
Total loans and leases, net of unearned income and deferred costs and fees$5,352,365 $5,268,911 



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The below table shows a more detailed break-out of commercial real estate ("CRE") loans as of June 30, 2023 and December 31, 2022:
 
06/30/202312/31/2022
CRE ConcentrationBalance% CREBalance% CRE
Construction$249,847 8.46 %$201,031 7.05 %
Multi-family/Single family real estate629,305 21.31 %587,467 20.59 %
Agriculture221,303 7.49 %211,231 7.40 %
Retail1
428,556 14.51 %434,998 15.25 %
Hotels/motels159,603 5.41 %144,710 5.07 %
Office space2
257,101 8.71 %236,281 8.28 %
Mixed/Other1,007,113 34.11 %1,037,614 36.36 %
Total CRE$2,952,828 100.00 %$2,853,332 100.00 %
1Reatail includes 3.1% and 3.2% of owner occupied real estate at June 30, 2023 and December 31, 2022.
2Office space includes 1.5% of owner occupied real estate at both June 30, 2023 and December 31, 2022.
 
Total loans and leases of $5.4 billion at June 30, 2023 were up $83.5 million or 1.6% from December 31, 2022, mainly in the commercial real estate, and partially offset by the decline commercial loan balances. As of June 30, 2023, total loans and leases represented 70.2% of total assets compared to 68.7% of total assets at December 31, 2022.

Residential real estate loans, including home equity loans, were $1.5 billion at June 30, 2023, down $1.0 million or 0.1% compared to December 31, 2022, and comprised 28.7% of total loans and leases at June 30, 2023.
 
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. The Company's Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation ("FHLMC") or State of New York Mortgage Agency ("SONYMA") without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties.
 
During the first six months of 2023 and 2022, the Company sold residential loans totaling $2.1 million and $305,000, respectively, recognizing gains of $65,000 and $57,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights totaled $945,000 at June 30, 2023, and $973,000 at December 31, 2022. 

Commercial real estate loans and commercial and industrial loans totaled $3.0 billion and $766.4 million, respectively, and represented 55.2% and 14.3%, respectively, of total loans and leases as of June 30, 2023. The commercial real estate portfolio was up $99.4 million or 3.5% over year-end 2022, while commercial and industrial loans were down $25.1 million or 3.2%.

As of June 30, 2023, agriculturally-related loans totaled $280.7 million or 5.2% of total loans and leases, compared to $300.0 million or 5.7% of total loans and leases at December 31, 2022. Agriculturally-related loans include loans to dairy farms and crop farms. Agricultural-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.

The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 4 – "Loans and Leases" in the Notes to Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. There have been no significant changes in these policies and guidelines since the date of that report. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and


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has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. 

The Company’s loan and lease customers are located primarily in the New York and Pennsylvania communities served by its subsidiary bank. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states and the local economic conditions of the communities within those states in which the Company does business.

The Allowance for Credit Losses
The below table represents the allowance for credit losses as of June 30, 2023 and December 31, 2022. The table provides, as of the dates indicated, an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.
(In thousands)6/30/202312/31/2022
Allowance for credit losses
Commercial and industrial$6,685 $6,039 
Commercial real estate28,968 27,287 
Residential real estate11,111 11,154 
Consumer and other1,680 1,358 
Finance leases101 96 
Total$48,545 $45,934 
 
As of June 30, 2023, the total allowance for credit losses was $48.5 million, up $2.6 million or 5.7% compared to December 31, 2022. The ACL as a percentage of total loans measured 0.91% at June 30, 2023, compared to 0.87% at December 31, 2022. The increase in the ACL from year-end 2022 reflects updated economic forecasts for unemployment and gross domestic product ("GDP") coupled with loan growth, mainly in the real estate portfolios, and the addition of a specific reserve added to one commercial real estate relationship.

Asset quality measures at June 30, 2023 were generally favorable compared with December 31, 2022. Loans internally-classified Special Mention or Substandard were up $19.8 million or 20.2% compared to December 31, 2022. Nonperforming loans and leases were down $1.5 million or 4.5% from year end 2022 and represented 0.59% of total loans at June 30, 2023 compared to 0.62% at December 31, 2022. The allowance for credit losses covered 154.76% of nonperforming loans and leases at June 30, 2023, compared to 139.86% at December 31, 2022. The increase in Special Mention and Substandard loans and leases was mainly due to one commercial real estate loan totaling approximately $15.3 million being added to Substandard, and one commercial real estate relationship totaling approximately $18.6 million being added to Special Mention during the second quarter of 2023.



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Activity in the Company’s allowance for credit losses during the first six months of 2023 and 2022 is illustrated in the table below:

Analysis of the Allowance for Credit Losses
(In thousands)6/30/20236/30/2022
Average loans outstanding during period$5,278,145 $5,085,808 
Allowance at beginning of year, prior to adoption of ASU 2016-1345,934 42,843 
Impact of adopting ASU 2016-1364 0 
Balance of allowance at beginning of year45,998 42,843 
LOANS CHARGED-OFF:
Commercial and industrial0 23 
Commercial real estate0 50 
Residential real estate2 51 
Consumer and other275 278 
Finance leases0 0 
Total loans charged-off$277 $402 
RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF:
Commercial and industrial59 26 
Commercial real estate1,237 805 
Residential real estate178 307 
Consumer and other111 168 
Total loans recovered$1,585 $1,306 
Net loans recovered(1,308)(904)
Provision for credit losses related to loans1,239 46 
Balance of allowance at end of period$48,545 $43,793 
Allowance for credit losses as a percentage of total loans and leases0.91 %0.85 %
Annualized net (recoveries) charge-offs on loans to average total loans and leases during the period(0.05)%(0.04)%

The provision for credit losses for loans was $2.4 million for the three months ended June 30, 2023, compared to $780,000 for the same period in 2022. For the six month period ended June 30, 2023, the provision for credit losses for loans was $1.2 million compared to $46,000 for the same period in 2022. The provision expense for credit losses for loans is based upon the Company's quarterly evaluation of the appropriateness of the allowance for credit losses. As discussed above, the ACL model estimated higher reserves at June 30, 2023 due to lower GDP and unemployment forecasts coupled with loan growth and additional reserves for an individually evaluated commercial loan. Net loan and lease recoveries for the six months ended June 30, 2023 were $1.3 million compared to net recoveries of $904,000 for the same period in 2022.

Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision for credit loss expense in the Company's consolidated statements of income.

For the three months ended June 30, 2023, the provision for credit losses for off-balance sheet credit exposures was a credit of $166,000 compared to provision expense of $76,000 for the same period in 2022. For the six month period ended June 30, 2023, the provision for credit losses for off-balance sheet credit exposures was $189,000 compared to $290,000 for the same six month period in 2022.



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Analysis of Past Due and Nonperforming Loans  
(In thousands)6/30/202312/31/20226/30/2022
Loans 90 days past due and accruing
Commercial and industrial$0 $25 $62 
Residential real estate7 0 0 
Consumer and other27 0 0 
Total loans 90 days past due and accruing$34 $25 $62 
Nonaccrual loans
Commercial and industrial$3,146 $618 $293 
Commercial real estate11,655 13,858 12,545 
Residential real estate16,209 13,544 11,536 
Consumer and other323 269 291 
Total nonaccrual loans$31,333 $28,289 $24,665 
Performing troubled debt restructuring*0 4,530 4,872 
Total nonperforming loans and leases$31,367 $32,844 $29,599 
Other real estate owned36 152 122 
Total nonperforming assets$31,403 $32,996 $29,721 
Allowance as a percentage of nonperforming loans and leases154.76 %139.86 %147.95 %
Total nonperforming loans and leases as percentage of total loans and leases0.59 %0.62 %0.57 %
Total nonperforming assets as percentage of total assets0.41 %0.43 %0.38 %
*No amount shown for periods subsequent to the Company's adoption of ASU 2022-02 effective January 1, 2023.

Nonperforming assets include loans past due 90 days and accruing, nonaccrual loans, modified loans due to financial difficulty, and foreclosed real estate/other real estate owned. Total nonperforming assets of $31.4 million at June 30, 2023 were down $1.6 million or 4.8% compared to December 31, 2022, and up $1.7 million or 5.7% compared to June 30, 2022. Nonperforming assets represented 0.41% of total assets at June 30, 2023, down from 0.43% at December 31, 2022, and up from 0.38% at June 30, 2022. Our peer group's average ratio of nonperforming assets to total assets was 0.28% at March 31, 2023.

The Company adopted ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") effective January 1, 2023. ASU 2022-02 eliminates the guidance on TDRs and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. Loans in the current period are reported using ASU 2022-02, while loans for prior periods are reported using the previous TDR guidance. Loans are considered modified if the Company makes a concession(s) to a borrower experiencing financial difficulty that it would not otherwise consider and the borrower could not obtain elsewhere. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. Modified loans and TDRs reported for prior periods are included in the above table within the following categories: "loans 90 days past due and accruing", "nonaccrual loans", or "borrowers experiencing financial difficulty not included above". Loans in the latter category include loans that meet the definition of a modified loan but are performing in accordance with the modified terms and have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all is reasonably assured. At June 30, 2023, the Company had no modified loans under the new guidance.

In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by applicable regulations. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal, and interest income is recorded only after principal recovery is reasonably assured. 

The ratio of the allowance to nonperforming loans and leases (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 154.76% at June 30, 2023, compared to 139.86% at December 31, 2022, and 147.95% at June 30, 2022. The Company’s nonperforming loans and leases are mostly comprised of collateral dependent loans with limited exposure or loans that require limited specific reserve due to the level of collateral available with respect to these loans and/or previous charge-offs.
 


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The Company, through its internal loan review function, identified 18 commercial relationships from the loan portfolio totaling $47.0 million at June 30, 2023, that were potential problem loans. At December 31, 2022, the Company had identified 17 relationships totaling $33.3 million that were potential problem loans. Of the 18 relationships at June 30, 2023, that were Substandard, there were 6 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $43.2 million, the largest of which was $16.9 million. The Company continues to monitor these potential problem relationships; however, management cannot predict the extent to which continued weak economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis.

Capital
Total equity was $636.4 million at June 30, 2023, an increase of $19.1 million or 3.1% from December 31, 2022. The increase was the result of decrease in unrealized losses on the available-for-sale portfolio from $178.8 million at year-end 2022 to $166.1 million at June 30, 2023, and an increase in retained earnings.
 
Additional paid-in capital decreased by $4.6 million, from $302.8 million at December 31, 2022, to $298.1 million at June 30, 2023. The decrease was primarily attributable to a $6.3 million aggregate purchase price related to the Company's repurchase and retirement of 108,219 shares of its common stock during the first six months of 2023 pursuant to its publicly announced stock repurchase plan; partially offset by $2.2 million attributed to stock-based compensation.

Retained earnings increased by $10.4 million or 2.0% from $526.7 million at December 31, 2022, to $537.1 million at June 30, 2023, mainly reflecting net income of $27.9 million for the year-to-date period, less dividends of $17.4 million.

Accumulated other comprehensive loss decreased from a net loss of $208.7 million at December 31, 2022, to a net loss of $195.5 million at June 30, 2023, reflecting a $12.7 million decrease in unrealized losses on available-for-sale debt securities, mainly due to the sale of securities with a realized pre-tax loss of $7.1 million and a $503,000 decrease related to post-retirement benefit plan losses.

Cash dividends paid in the first six months of 2023 totaled approximately $17.4 million or $1.21 per common share, representing 62.5% of year to date 2023 earnings through June 30, 2023, compared to cash dividends of $16.6 million or $1.14 per common share paid in the first six months of 2022. Cash dividends per share during the first six months of 2023 were up 5.3% over the same period in 2022.
 
The Company and its subsidiary bank are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank meets all capital adequacy requirements to which they are subject.





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The following table provides a summary of the Company’s capital ratios as of June 30, 2023: 

Regulatory Capital Analysis
June 30, 2023ActualMinimum Capital Required - Basel III Fully Phased-InWell Capitalized Requirement
(dollar amounts in thousands)AmountRatioAmountRatioAmountRatio
Total Capital (to risk weighted assets)$789,322 14.48 %$572,407 10.50 %$545,149 10.00 %
Tier 1 Capital (to risk weighted assets)$736,317 13.51 %$463,377 8.50 %$436,119 8.00 %
Tier 1 Common Equity (to risk weighted assets)$736,317 13.51 %$381,604 7.00 %$354,347 6.50 %
Tier 1 Capital (to average assets)$736,317 9.57 %$307,613 4.00 %$384,517 5.00 %
 
As of June 30, 2023, the Company’s capital ratios exceeded the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions. The capital levels required to be considered well capitalized, presented in the above table, are based upon prompt corrective action regulations, as amended to reflect the changes under Basel III Capital Rules.

Total capital as a percent of risk weighted assets increased to 14.5% at June 30, 2023, compared with 14.4% as of December 31, 2022. Tier 1 capital as a percent of risk weighted assets remained unchanged from June 30, 2023 compared to the end of 2022 at 13.5%. Tier 1 capital as a percent of average assets was 9.6% at June 30, 2023, up from 9.3% as of December 31, 2022. Common equity Tier 1 capital was 13.5% at the end of the second quarter of 2023, identical to the end of 2022.

As of June 30, 2023, the capital ratios for the Company’s subsidiary bank also exceeded the minimum required capital ratios for well capitalized institutions, plus the fully phased-in capital conservation buffer.

In the first quarter of 2020, U.S. Federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition.
 
Deposits and Other Liabilities
Total deposits of $6.5 billion at June 30, 2023 were down $147.6 million or 2.2% from December 31, 2022, and were down $54.4 million or 0.8% from March 31, 2023. The decrease from year-end 2022 was primarily in noninterest bearing deposits, which were down $125.3 million or 5.8% and in checking, money market and savings balances, which collectively were down $161.5 million or 4.2%. These decreases were partially offset by increases in time deposits, which were up $139.2 million or 22.0% compared to December 31, 2022.

The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits, municipal money market deposits, and reciprocal deposit relationships with municipalities. Core deposits decreased by $296.3 million or 5.3% from year-end 2022, to $5.3 billion at June 30, 2023. Core deposits at June 30, 2023 were down $115.2 million or 2.1% from March 31, 2023. Core deposits represented 81.9% of total deposits at June 30, 2023, compared to 84.5% of total deposits at December 31, 2022 and 82.9% at March 31, 2023.
 
The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $50.5 million at June 30, 2023, and $56.3 million at December 31, 2022. Management generally views retail repurchase agreements as an alternative to large time deposits.
 
The Company’s other borrowings totaled $387.1 million at June 30, 2023, up $95.8 million or 32.9% from $291.3 million at December 31, 2022. Borrowings at June 30, 2023 consisted of $252.1 million in overnight FHLB advances and $135.0 million of FHLB term advances, compared to $241.3 million in FHLB overnight advances and $50.0 million of FHLB term advances at year end 2022. Of the $135.0 million in FHLB term advances at June 30, 2023, $20.0 million is due to mature in less than one year and $115.0 million is due to mature in over one year.



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Liquidity
The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company’s Asset/Liability Management Committee monitors asset and liability positions of the Company’s subsidiary banks individually and on a combined basis. The Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur. Management measures liquidity, including the level of cash, unencumbered securities, and the availability of dependable borrowing sources. The Board has set a policy limit stating that reliable sources of liquidity should remain in excess of 6% of total assets. The ratio was 19.6% at June 30, 2023 compared to 21.6% of assets at December 31, 2022.
 
Core deposits, discussed above under "Deposits and Other Liabilities", are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase and overnight and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of $1.6 billion at June 30, 2023 increased $238.8 million or 17.4% as compared to year-end 2022. Non-core funding sources, as a percentage of total liabilities, were 23.0% at June 30, 2023, compared to 19.4% at December 31, 2022. 
 
Non-core funding sources may require securities to be pledged against the underlying liability. Securities held at carrying value of $1.6 billion at June 30, 2023 and $1.8 billion at December 31, 2022, and were either pledged or sold under agreements to repurchase. Pledged securities represented 81.9% of total securities at June 30, 2023, compared to 82.4% of total securities at December 31, 2022.
 
Cash and cash equivalents totaled $81.6 million as of June 30, 2023 which increased from $77.8 million at December 31, 2022. Short-term investments, consisting of securities due in one year or less, decreased from $50.3 million at December 31, 2022, to $46.9 million on June 30, 2023.
 
Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were $692.1 million at June 30, 2023 compared with $738.9 million at December 31, 2022. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.6 billion at June 30, 2023, up $9.5 million or 0.6% compared with year-end 2022. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

The Company's liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered deposits, and FHLB advances. Through its subsidiary bank, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. As members of the FHLB, the Company can use certain unencumbered mortgage-related assets and securities to secure borrowings from the FHLB. At June 30, 2023, the established borrowing capacity with the FHLB was $1.7 billion, or 22.3% of total assets, with available unencumbered mortgage-related assets of $1.3 billion. Additional assets may also qualify as collateral for FHLB advances, upon approval of the FHLB. Through various programs at the Federal Reserve Bank, the Company has the ability to use certain unencumbered mortgage-related assets and securities to secure borrowings from the Federal Reserve Bank's Discount Window. At June 30, 2023 the available borrowing capacity with the Federal Reserve Bank was $245.7 million, secured by investment securities. In addition to the available borrowing lines at the FHLB and Federal Reserve Bank, the Company maintains $137.7 million of unencumbered securities which could be pledged to further enhance secured borrowing capacity.

Newly Adopted Accounting Standards

ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying U.S. generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of


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March 12, 2020 through December 31, 2022. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.

ASU 2022-01, "Derivatives and Hedging (Topic 815)" ("ASU 2022-01"): provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.

As required by ASU 2022-01, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.

In accordance with the FASB’s fair value measurement guidance [in ASU 2011-04], the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.

ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02"): eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 became effective for the Company on January 1, 2023. The Company elected to apply the ASU on a modified retrospective basis to recognize any change in the allowance for credit losses that had been recognized for receivables previously modified (or reasonably expected to be modified) in a TDR. This election resulted in cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amount of the adjustment to retained earnings was a decrease of $64,000. See Note 5 in the Consolidated Financial Statements for changes in disclosures related to this adoption. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.

ASU No. 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." The amendments in this update provides clarification on guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and provides new disclosure requirements for equity securities subject to contractual sale restrictions, that are measured at fair value. ASU 2022-03 became effective for the Company on January 1, 2023. As there are no equity securities subject to contract sales during the current or prior year, the adoption of ASU 2022-03 had no effect on the financial statements for the current fiscal year, and the Company will apply the guidance prospectively to future acquisitions.

Accounting Standards Pending Adoption

ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." This update will allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits or other income tax benefits. This update applies this to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC specific guidance removed from Subtopic 323-740 has been applied. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). The amendments in this Update permit reporting entities to elect to account for their tax


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equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023 and interim periods in those years. Tompkins is currently evaluating the potential impact of ASU 2023-02 on our consolidated financial statements.

The Company reviewed new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.

Item 3. Quantitative and Qualitative Disclosure About Market Risk
 
Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter, the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within levels approved by the Company’s Board of Directors. The Committee also considers strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company.

The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the most recent simulation analysis performed as of May 31, 2023, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 4.4%, while a 200 basis point parallel decline in interest rates over a one-year period would result in a one year increase in net interest income of 3.3% from the base case. This simulation assumes no balance sheet growth, no changes in balance sheet mix, deposit rates move in a manner that reflects the historical relationship between deposit rate movement and changes in Federal funds rate, and no management action to address balance sheet mismatches.
The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend slightly below the base assumption, as upward adjustments to rate sensitive deposits and short-term funding outpace increases to asset yields which are concentrated in intermediate to longer-term products. As intermediate and longer-term assets continue to reprice/adjust into higher rate environment and funding costs stabilize, the simulation shows net interest income is expected to trend upwards.

The down 200 basis point scenario increases net income slightly in the first year as a result of the Company's assets repricing downward to a lesser degree than the rates on the Company's interest-bearing liabilities, mainly deposits and overnight borrowings. The model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.

The most recent simulation of a base case scenario, which in addition to the above assumptions, also assumes interest rates remain unchanged from the date of the simulation, reflects a net interest margin that is increasing slightly over the next 12 to 18 months.

Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, balance sheet mix, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage the Company's interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.
 
In addition to the simulation analysis, management uses an interest rate gap measure. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of June 30, 2023. The Company’s one-year net interest rate gap was a negative $728.4 million or 9.55% of total assets at June 30, 2023, compared with a negative $656.5 million or 8.56% of total assets at December 31, 2022. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income contains a higher degree of risk in a rising rate environment over the next 12 months. An interest rate gap measure could be affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.


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Condensed Static Gap - June 30, 2023Repricing Interval 
(In thousands)Total0-3 months3-6 months6-12 monthsCumulative 12 months
Interest-earning assets1
$7,392,909 $1,104,481 $301,120 $555,824 $1,961,425 
Interest-bearing liabilities4,867,398 2,259,284 129,591 300,982 2,689,857 
Net gap position$(1,154,803)$171,529 $254,842 $(728,432)
Net gap position as a percentage of total assets(15.14)%2.25 %3.34 %(9.55)%
 1 Balances of available securities are shown at amortized cost 

Item 4. Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of June 30, 2023.

Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this Report on Form 10-Q, the Company's disclosure controls and procedures were effective.

Changes in Internal Control Over Financial Reporting
There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended June 30, 2023, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings 
The Company is subject to various claims and legal actions that arise in the ordinary course of conducting business. As of June 30, 2023, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company's consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. Although the Company does not believe that the outcome of pending litigation will be material to the Company's consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
 
Item 1A. Risk Factors
 
There have been no material changes in the risk factors previously disclosed under Item 1A. of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2023 and the Company's Annual Report on Form 10-K, for the fiscal year ended December 31, 2022.



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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
Issuer Purchases of Equity Securities
Total 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
(a)(b)(c)(d)
April 1, 2023 through April 30, 20232,449 $63.65 0 169,818 
May 1, 2023 through May 31, 20233,191 55.18 0 169,818 
June 1, 2023 through June 30, 2023108,499 58.35 108,219 61,599 
Total114,139 $58.38 108,219 61,599 

Included in the table above are 2,035 shares purchased in April 2023, at an average cost of $63.67, and 992 shares purchased in May 2023, at an average cost of $52.83, by the trustee of the rabbi trust established by the Company under the Company’s Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation and Participating Subsidiaries, which were part of the director deferred compensation under that plan. In addition, the table includes 414 shares delivered to the Company in April 2023, 2,199 shares in May and 280 shares in June at an average cost of $63.54, $56.24 and $57.39, respectively to satisfy mandatory tax withholding requirements upon vesting of restricted stock under the Company's 2009 and 2019 Equity Plans.

On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the "2021 Repurchase Plan") for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the 2021 Repurchase Plan. Shares may be repurchased from time to time under the 2021 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2021 Repurchase Plan, the Company repurchased 338,401 shares as of June 30, 2023, at an average cost of $71.93.

Recent Sales of Unregistered Securities
 
None
 
Item 3. Defaults Upon Senior Securities
 
None 

Item 4. Mine Safety Disclosures
 
Not applicable

Item 5. Other Information
 
(a)

Item 5.02 Departure of Directors or Certain Officers; Election of Directors; Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.

As previously announced and disclosed in the Company’s current report on Form 8-K filed with the Commission on May 3, 2023, Francis M. Fetsko will retire from his positions as Executive Vice President, Chief Financial Officer and Chief Operating Officer of the Company and Tompkins Community Bank, effective October 1, 2023. Mr. Fetsko will remain employed on an at-will, part-time basis as Director of Strategy Development through December 31, 2024, to assist in the transition of his responsibilities and perform such other duties as assigned by the Company’s Chief Executive Officer.

In connection with Mr. Fetsko’s planned retirement, the Company entered into a letter agreement (the “Letter Agreement”) with Mr. Fetsko regarding the terms of his transition employment. As of October 1, 2023, Mr. Fetsko will be eligible to receive his current base salary on a pro-rata basis and will be eligible to receive his annual cash bonus with a potential payout of 30% of his


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current base salary if he remains employed as of the payment date. The Company will pay Mr. Fetsko a stipend to cover the he difference between the cost of any employee medical and dental premiums he would have paid had he remained a full-time employee and the cost of premiums he will pay under any replacement COBRA plan. He will be eligible for benefits as applicable to part-time employees.

The Company and Mr. Fetsko also agreed to amend the terms of Mr. Fetsko’s Tompkins Financial Corporation 2019 Equity Plan Performance Share Award Agreements, dated November 12, 2019, November 9, 2020, November 9, 2021, and November 9, 2022 (the “Retention Award Agreements”), to clarify that Mr. Fetsko’s employment as Director of Strategy Development will not satisfy the additional time-vesting requirements under the Retention Award Agreements, which will result in the forfeiture of the shares of restricted stock granted thereunder.

(c)

None


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Item 6.     Exhibits
 
EXHIBIT INDEX
 
Exhibit NumberDescription
3.1
Amended and Restated Certificate of Incorporation of the Company, incorporated herein by reference to Exhibit 3(i) to the Company’s Form 10-Q, filed with the Commission on August 11, 2008.
3.2
Second Amended and Restated Bylaws of the Company, incorporated herein by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K, filed with the Commission on January 31, 2011.
10.1*
Amendment No. 1 to Tompkins Financial Corporation 2019 Equity Incentive Plan, incorporated herein by reference Appendix A of the Company's DEF 14A filed with the commission on March 30, 2023.
31.1
Certification of Principal Executive Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
31.2
Certification of Principal Financial Officer as required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended.
32.1
Certification of Principal Certification of Principal Executive Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350.C. Section 1350
32.2
Certification of Principal Financial Officer as required by Rule 13a-14(b) of the Securities Exchange Act of 1934, as amended, 18 U.S.C. Section 1350 
101 INS**The instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document
101 SCH**Inline XBRL Taxonomy Extension Schema Document
101 CAL**Inline XBRL Taxonomy Extension Calculation Linkbase Document
101 DEF**Inline XBRL Taxonomy Extension Definition Linkbase Document
101 LAB**Inline XBRL Taxonomy Extension Label Linkbase Document
101 PRE**Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover Page Interactive Data File - the cover page interactive data file does not appear in the interactive date file because its XBRL tags are embedded with the inline XBRL document.
*Indicates Management Contract
** Attached as Exhibit 101 to this report are the following formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Consolidated Statements of Condition as of June 30, 2023 and December 31, 2022; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2023 and 2022; (iii) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2023 and 2022; (iv) Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022; (v) Consolidated Statements of Changes in Shareholders' Equity for the three and six months ended June 30, 2023 and 2022; and (vi Notes to Unaudited Consolidated Financial Statements.



70

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.
 
Date: August 09, 2023
 
TOMPKINS FINANCIAL CORPORATION
 
By:/s/ Stephen S. Romaine 
 Stephen S. Romaine 
 President and Chief Executive Officer 
 (Principal Executive Officer) 
 
By:/s/ Francis M. Fetsko 
 Francis M. Fetsko 
 Executive Vice President, Chief Financial Officer, and Chief Operating Officer
 (Principal Financial Officer) 
(Principal Accounting Officer) 
 



71

What is the market capitalization of a company?

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