# Tompkins Financial Corp: Form 10-Q for the period ended Mar 31, 2020

- Company: [Tompkins Financial Corp](/companies/tmp.md) (CIK 1005817)
- Form: 10-Q
- Filed: 2020-05-11
- Accepted by EDGAR: May 11, 2020, 16:30 ET
- Period: 2020-03-31
- Accession: 0001005817-20-000007
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005817/000100581720000007/tmp202010qforq1only.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005817/000100581720000007/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2020-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2020-01-01 to 2020-03-31 | $16.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2020-01-01 to 2020-03-31 | $10.2m | us-gaap:InterestExpense |
| Income tax | 3 months, 2020-01-01 to 2020-03-31 | $1.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2020-01-01 to 2020-03-31 | $7.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.53 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2020-01-01 to 2020-03-31 | $0.53 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2020-01-01 to 2020-03-31 | 14,774,269 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2020-01-01 to 2020-03-31 | $24.1m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2020-01-01 to 2020-03-31 | $909.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2020-01-01 to 2020-03-31 | $7.8m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2020-01-01 to 2020-03-31 | $5.6m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2020-03-31 | $115.3m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2020-03-31 | $6.74bn | us-gaap:Assets |
| Total liabilities | at 2020-03-31 | $6.06bn | us-gaap:Liabilities |
| Shareholders' equity | at 2020-03-31 | $681.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 90,355 characters.

### BUSINESS

### Corporate Overview and Strategic Initiatives

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 March 31, 2020, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), VIST Bank (DBA Tompkins VIST Bank); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The trust division of the Trust Company provides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. 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.”

The Tompkins strategy centers around our core values and a commitment to delivering long-term value to our clients, communities, and shareholders. To achieve this, the Company has developed a variety of strategic initiatives focused on delivering high quality products and services: a continual focus on improving operational effectiveness, investing in our people through talent management and development, maintaining appropriate risk management programs, and delivering profitable growth across all of our business lines. The Company's growth strategy includes 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 the Company’s four banking subsidiaries’ 64 banking offices (44 offices in New York and 20 offices in Pennsylvania) and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), 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 by the Trust Company under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors has office locations, and services are available to all customers at the Company's four subsidiary banks.

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. In the second quarter of 2019, Tompkins Insurance acquired the Cali Agency, Inc., an insurance agency located in western New York, in a cash transaction. The Company recorded the following intangible assets as a result of the acquisition: goodwill ($0.2 million), customer related intangible ($0.2 million) and a covenant-not-to-compete ($0.1 million). The values of the customer-related intangible and covenant-not-to-compete are being amortized over 15 years and 5 years, respectively. The goodwill is not being amortized but will be evaluated at least annually for impairment. Tompkins Insurance offers services to customers of the Company’s banking subsidiaries by sharing offices with The Bank of Castile, Trust Company, and VIST Bank. 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 businesses, 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.

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 each of the Company’s subsidiary banks 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. 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 with four community banks, 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, Pennsylvania Department of Banking and Securities, 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 months ended March 31, 2020. 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, 2019, and the Unaudited Condensed Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.

In this Report, there are comparisons of the Company’s performance to that of a peer group, which is comprised of the group of 148 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 December 31, 2019 (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; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates; 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. The following factors, in addition to those listed as Risk Factors in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019, and Item 1A in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the severity and duration of the COVID-19 outbreak and the impact of the outbreak (including the government’s response to the outbreak) on economic and financial markets, potential regulatory actions, and modifications to our operations, products, and services relating thereto; disruptions in our and our customers’ operations and loss of revenue due to pandemics, epidemics, widespread health emergencies, government-imposed travel/business restrictions, or outbreaks of infectious diseases such as the COVID-19, and the associated adverse impact on our financial position, liquidity, and our customers’ abilities to repay their obligations to us or willingness to obtain financial services products from the Company; the development of an interest rate environment that may adversely affect the Company’s interest rate spread, 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 the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; legislative and regulatory changes in response to COVID-19 with which we and our subsidiaries must comply, including the CARES Act and the rules and regulations promulgated thereunder, and state and local government mandates; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; and financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses.

### Critical Accounting Policies

The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. 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 policy relating to the allowance for credit losses (“allowance” or "ACL"), to be a critical accounting policy because of the uncertainty and subjectivity involved in this policy and the material effect that estimates related to this area can have on the Company’s results of operations. On January 1, 2020, the Company adopted ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which created material changes to the Company’s existing critical accounting policy that existed at December 31, 2019.

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 2 – Basis of Presentation in the accompanying notes to the unaudited condensed consolidated financial statements elsewhere in this report for further discussion of the allowance.

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, 2019. Refer to "Recently Issued Accounting Standards" in Management's Discussion and Analysis included in Part I of this Quarterly Report on Form 10-Q for a discussion of recent accounting updates.

### IMPACT OF, AND RESPONSE TO, COVID-19 PANDEMIC

### Economic Environment

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has led to government-mandated closures and stay at home orders across the nation, which have resulted in deteriorating economic conditions throughout the U.S. The various government orders issued in response to the pandemic are significantly impacting the U.S. labor market, consumer spending and business investments. During March 2020, in response to the deteriorating economic conditions, the Federal Reserve reduced the federal funds rate 1.5 percentage points, to .00 to .25 percent. The Federal Reserve also provided a pandemic-related stimulus package estimated at $4.0 trillion, in order to ease the stress on financial markets. In addition, the United States Congress passed the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), which would provide approximately $2.5 trillion of support to U.S. citizens and businesses affected by COVID-19.

### Company Response

The Company has designated a Pandemic Planning Committee, which includes key individuals across the Company as well as members of Senior Management, to oversee the Company’s response to COVID-19. The Company implemented a number of risk mitigation measures designed to protect our employees and customers, while maintaining services for our customers and community. These measures included restrictions on business travel and establishment of a remote work environment for most non-customer facing employees. The Company also implemented drive-up only or by appointment only operations across its branch network. Currently, over 85% of our workforce is working remotely and we have imposed social distancing restrictions and provided premium pay for those employees who are required to be on premise to complete essential to on-site functions. However, due to the significant uncertainty of the current economic climate, and the Company's ongoing response to the pandemic and related shutdowns, annual pay increases for our Company's executive officers (which is comprised of our Senior Leadership Team members) have been deferred indefinitely.

We incurred limited expense, mainly in technology equipment and software, in transition to and maintaining a remote work environment. We have adopted technological and workflow processes which are designed to mitigate the operations, fraud, and cybersecurity risks related to our remote work environment, and to date we are not aware of any materially negative impacts arising from these risks nor on our internal controls.

Tompkins has initiated and participated in a number of credit initiatives to support employees and customers who have been impacted by the shutdown associated with the COVID-19 pandemic. For non-executive employees affected by COVID-19, the Company implemented a low interest loan program. The Company also implemented a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Our standard program allows for the deferral of loan payments for up to 90 days and customers will be able to request a payment deferral until the middle of May 2020; in certain cases and/or where required by applicable law or regulation we will extend additional deferrals or other accommodations. As of March 31, 2020, total deferrals attributed to COVID-19 were $377.8 million, representing 994 borrowers or 7.7% of the total loan portfolio. As of April 20, 2020, total deferrals attributed to COVID-19 were $1.5 billion, representing 2,778 borrowers or 29.9% of the total loan portfolio. Of that total, 1,139 were retail customers representing $176.5 million, or 3.6% of total loans, and 1,639 were commercial customers representing $1.3 billion, or 26.3% of total loans. Loans in deferment status will continue to accrue interest during the deferment period unless otherwise classified as nonperforming. The provisions of the CARES Act and recently issued interagency guidance issued by Federal banking regulators provided guidance and clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loan to be reported as a troubled debt restructuring. In accordance with the CARES Act and the interagency guidance, the Company elected to adopt the provisions to not report eligible loan modifications as troubled debt restructurings.

The Company is participating in the U.S. Small Business Administration (SBA) Paycheck Protection Program (“PPP”). This program provides borrower guarantees for lenders, and envisions a certain amount of loan forgiveness for loan recipients who properly utilize funds, all in accordance with the rules and regulations established by the SBA for the PPP. The SBA's rules, regulations and guidance with respect to PPP have evolved since the program's inception in early April, and as of May 7, 2020, the SBA has not yet released final guidance with respect to loan forgiveness. Borrowers with loan balances which are not forgiven are obligated to repay such balances over a 2-year term at a rate of 1% interest, with principal and interest payments deferred for the first six months. The SBA has stated that it will pay participating lenders fees for processing PPP loans in the following amounts: 5% for loans of not more than $350,000; 3% for loans of more than $350,000 and less than $2,000,000; and 1% for loans of at least $2,000,000. The SBA has also announced that, under limited circumstances described in the current SBA guidance, these fees will not be paid, even if the participating lender has approved and processed the PPP loan. The fees are generally amortized as interest income over the life of the loan, and would be recognized net of origination costs. The Company began accepting applications for PPP loans on April 3, 2020, and as of May 10, 2020, has approved over 2,900 loans totaling about $500 million.

The impact of the COVID-19 pandemic on our results of operation for the three months ended March 31, 2020 was mainly reflected in our provision for credit losses. While the Company has not yet experienced any charge-offs related to COVID-19, our allowance calculation and resulting provision for credit loss expense are significantly impacted by changes in forecasted economic conditions. Should economic conditions worsen, the Company could experience further increases in its required allowance and record additional credit loss expense. The Company did see some slowdown toward the end of the first quarter in other areas of our business, including reduced transaction volumes in our card services business, a decrease in wealth management fees due to the decline in financial markets, and decreases in certain other fee related income.

As of March 31, 2020, we believe Tompkins was well positioned with a strong balance sheet and asset quality, capital ratios well above regulatory requirements, and strong liquidity position. Asset quality measures were strong and generally in line with

December 31, 2019, with total nonaccrual loans down 2.4%, and total nonperforming assets down 2.2%. There was limited impact of COVID-19 reflected in first quarter numbers, although it is uncertain what the impact on the second and future quarters will be. As mentioned above, the Company is working with its customers and implemented a loan deferral program and participates in the PPP. As of March 31, 2020, the Company had not experienced any significant impact to our liquidity or funding capabilities as a result of COVID-19. The Company’s participation as a lender in the PPP has been and will continue to be a use of liquidity; however, the Federal Reserve Bank has provided a lending facility that may be used by banks to obtain funding specifically for PPP loans. PPP loans would be pledged as collateral on a bank's borrowings under the Federal Reserve Bank's designated PPP lending facility.

The extent to which the COVID-19 pandemic will affect our business, results of operation and financial condition going forward is difficult to predict and depends on numerous evolving factors. There is currently a great deal of uncertainty regarding the length of the COVID-19 pandemic and the efficacy of the extraordinary measures being put in place to address it. The fair value of certain assets could be impacted by the effects of COVID-19. The carrying value of goodwill, right-of-use lease assets, and other real estate owned could decrease, resulting in future impairment losses. Management will continue to evaluate current economic conditions to determine if a triggering event would impact the current valuations for these assets. If efforts to contain COVID-19 are not as successful as anticipated, if restrictions on movement last into the third quarter or beyond, or if the federal government's economic stimulus packages are ineffective or delayed, the current economic downturn will likely be much longer and much more severe. The deeper the economic downturn is, and the longer it lasts, the more it will damage consumer fundamentals and sentiment. Similarly, an extended global recession due to COVID-19 would weaken the U.S. recovery and damage business fundamentals. As a result, the pandemic and its consequences, including responsive measures to manage it, have negatively impacted, and continue to negatively impact, demand for and profitability of our products and services, the valuation of our assets, the ability of borrowers to satisfy obligations, and our ability to meet the needs of our customers, all of which could have a material adverse effect on our business and financial performance.

### RESULTS OF OPERATION

### Performance Summary

Net income for the first quarter of 2020 was $7.9 million or $0.53 diluted earnings per share, compared to $21.0 million or $1.37 diluted earnings per share for the same period in 2019. The decrease in net income was primarily due to the $15.8 million increase in provision for credit loss expense in the first quarter of 2020. The provision expense for the first quarter of 2020 was $16.3 million, increasing the allowance for credit losses to $52.4 million at March 31, 2020. The increase in the first quarter of 2020 is not a direct result of specific credit risks currently identified in the loan portfolio; rather, the increase is mainly driven by current and projected economic conditions resulting from the ongoing COVID-19 pandemic and related market and economic impacts, as well as normal adjustments for loan growth, changing loan portfolio and segment mix, and the adoption of ASU 2016-13.

Return on average assets (“ROA”) for the quarter ended March 31, 2020 was 0.48%, compared to 1.27% for the quarter ended March 31, 2019. Return on average shareholders’ equity (“ROE”) for the first quarter of 2020 was 4.71%, compared to 13.53% for the same period in 2019.

### 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 $5.8 million for the first quarter of 2020, down $13.1 million or 69.3% from net income of $18.9 million for the same period in 2019.

Net interest income of $53.0 million for the first quarter of 2020 was up $1.1 million or 2.0% from the same period in 2019. The increase in net interest income was mainly a result of a decrease in interest expense resulting from lower market interest rates and a shift in funding mix from borrowings to deposits. Interest income also benefited from loan growth and an asset mix consisting of a greater percentage of loans to total assets.

The provision for credit losses was $16.3 million for the three months ended March 31, 2020, which was up $15.8 million compared to the same period in 2019. The increase in provision for credit losses in the first quarter is most notably due to the rapidly changing economic environment related to the COVID-19 pandemic and reflects the calculation of the allowance for credit losses in accordance with ASU 2016-13.

Noninterest income of $7.0 million for the three months ended March 31, 2020 was down $576,000 or 7.6% compared to the same period in 2019. The decrease in the three months ended March 31, 2020 over the same period in 2019 was mainly in card services income, due to a decrease in transaction volume in the first quarter of 2020, and a one-time incentive payment of $500,000 related to the Company's merchant card business that was received in the first quarter of 2019.

Noninterest expense of $36.7 million for the first quarter of 2020 was up $1.4 million or 3.9% from the same period in 2019. The increase was mainly attributable to increases in salaries and wages reflecting merit increases awarded in 2019, higher health insurance costs, and higher post-retirement benefit costs.

### Insurance Segment

The insurance segment reported net income of $1.2 million for the three months ended March 31, 2020, which was down $223,000 or 16.1% compared to the first quarter of 2019. Noninterest income was in line compared to the same period in 2019, as growth in personal and commercial lines were mainly offset by lower contingency revenues. Noninterest expenses were up $285,000 or 4.5% compared to the first quarter of 2019. The increase was mainly in salaries and wages and reflects merit increases awarded in 2019, and an increase in employees.

### Wealth Management Segment

The wealth management segment reported net income of $1.0 million for the three months ended March 31, 2020, which was up $192,000 or 23.6% compared to the first quarter of 2019. The increase in net income for the three month period ended March 31, 2020, was attributable to an increase in advisory income and estate and terminating trust fees. Noninterest expense for the first quarter of 2020 was down 2.2% compared to the same period in 2019. The decrease was mainly in salary and wages, primarily due to open positions and a decrease in other incentives.

### Net Interest Income

The following table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each for the three month periods ended March 31, 2020 and 2019.

*Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)*

*(Dollar amounts in thousands)*

| ASSETS Interest-earning assets | Quarter Ended March 31, 2020 Average Balance (QTD) | Interest |  | Quarter Ended March 31, 2019 Average Balance (QTD) | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing balances due from banks | $1,525 | $6 | 1.58% | $2,334 | $10 | 1.74% |
| Securities (1) |  |  |  |  |  |  |
| U.S. Government securities | 1,194,754 | 6,576 | 2.21% | 1,409,305 | 8,172 | 2.35% |
| State and municipal (2) | 97,480 | 666 | 2.75% | 94,609 | 626 | 2.68% |
| Other securities (2) | 3,422 | 36 | 4.23% | 3,415 | 41 | 4.87% |
| Total securities | 1,295,656 | 7,278 | 2.26% | 1,507,329 | 8,839 | 2.38% |
| FHLBNY and FRB stock | 26,558 | 435 | 6.59% | 48,055 | 878 | 7.41% |
| Total loans and leases, net of unearned income (2)(3) | 4,914,034 | 55,906 | 4.58% | 4,792,607 | 55,614 | 4.71% |
| **Total interest-earning assets** | **6,237,773** | **63,625** | **4.10%** | **6,350,325** | **65,341** | **4.17%** |
| Other assets | 435,175 |  |  | 393,035 |  |  |
| **Total assets** | **$6,672,948** |  |  | **$6,743,360** |  |  |
| **LIABILITIES & EQUITY** |  |  |  |  |  |  |
| Deposits |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Interest bearing checking, savings, & money market | 3,212,543 | 4,366 | 0.55% | 2,940,416 | 4,470 | 0.62% |
| Time deposits | 680,248 | 2,833 | 1.68% | 645,144 | 2,127 | 1.34% |
| Total interest-bearing deposits | 3,892,791 | 7,199 | 0.74% | 3,585,560 | 6,597 | 0.75% |
| Federal funds purchased & securities sold under agreements to repurchase | 63,528 | 36 | 0.23% | 72,664 | 44 | 0.25% |
| Other borrowings | 498,428 | 2,706 | 2.18% | 993,773 | 6,044 | 2.47% |
| Trust preferred debentures | 17,050 | 289 | 6.82% | 16,878 | 329 | 7.90% |
| **Total interest-bearing liabilities** | **4,471,797** | **10,230** | **0.92%** | **4,668,875** | **13,014** | **1.13%** |
| Noninterest bearing deposits | 1,409,661 |  |  | 1,338,623 |  |  |
| Accrued expenses and other liabilities | 112,673 |  |  | 105,131 |  |  |
| **Total liabilities** | 5,994,131 |  |  | 6,112,629 |  |  |
| Tompkins Financial Corporation Shareholders’ equity | 677,394 |  |  | 629,305 |  |  |
| Noncontrolling interest | 1,423 |  |  | 1,426 |  |  |
| **Total equity** | **678,817** |  |  | **630,731** |  |  |
| **Total liabilities and equity** | **$6,672,948** |  |  | **$6,743,360** |  |  |
| Interest rate spread |  |  | **3.18%** |  |  | **3.04%** |
| Net interest income/margin on earning assets |  | **53,395** | **3.44%** |  | **52,327** | **3.34%** |
| Tax Equivalent Adjustment |  | **(426)** |  |  | **(413)** |  |
| Net interest income per consolidated financial statements |  | **$52,969** |  |  | **$51,914** |  |

#### 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 2020 and 2019 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, 2019.*

### Net Interest Income

Net interest income is the Company’s largest source of revenue, representing 73.6% of total revenues for the three months ended March 31, 2020, compared to 72.8% for the same period in 2019. 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.

Taxable-equivalent net interest income for the three months ended March 31, 2020, was up $1.1 million or 2.0% over the same period in 2019. The increase compared to the prior year was mainly due to lower interest expense in the first three months of 2020, driven by lower market interest rates and deposit growth, which contributed to a reduction in other borrowings. Additionally, net interest income benefited from a shift in the composition of average earning assets, with loans, which carry higher average yields than securities, comprising an increased percentage of average earning assets. For the three months ended March 31, 2020, average loans represented 78.8% of average earning assets compared to 75.5% for the same period in 2019. Net interest margin for the three months ended March 31, 2020 was 3.44% compared to 3.34% for the same period in 2019.

Taxable-equivalent interest income for the three months ended March 31, 2020, was $63.6 million, down 2.6% compared to the same period in 2019. The decrease in taxable-equivalent interest income was mainly the result of a $112.6 million or 1.8% decrease in average earnings assets and a decrease in the yield on average earning assets for the three months ended March 31, 2020 compared to the same period in 2019. Asset yields in the first quarter of 2020 were impacted by lower market interest rates. The decrease in average earning assets was mainly in average securities and was mainly a result of the sale of $152.1 million of securities in the second quarter of 2019. Average securities balances for the three months ended March 31, 2020, were down $211.7 million or 14.0%, while the average yield on securities decreased 12 basis points compared to the same period in 2019. Average loan balances for the three months ended March 31, 2020, were up $121.4 million or 2.5% over the first quarter of 2019, however the average yield on loans for the first quarter of 2020 decreased 13 basis points compared to the first quarter of 2019.

Interest expense for the three months ended March 31, 2020, decreased by $2.8 million or 21.4% compared to the same period in 2019, driven mainly by lower market interest rates, an increase in average deposit balances and a decrease of average other borrowings. Average interest bearing deposits for the first quarter of 2020 were up $307.2 million or 8.6% compared to the same period in 2019. Average other borrowings for the three months ended March 31, 2020 were down $495.3 million or 49.8% compared to the same period in 2019, mainly due to the increase in deposit balances. The average cost of interest bearing deposits was 0.74% for the first quarter of 2020, compared to 0.75% for the first quarter of 2019. The average cost of interest bearing liabilities decreased to 0.92% for the first quarter of 2020 from 1.13% for the first quarter of 2019.

### Provision for Credit Losses

The provision for credit losses represents management’s estimate of the amount necessary to maintain the allowance for credit losses at an appropriate level. The provision for credit losses for the three months ended March 31, 2020 was $16.3 million which was up $15.8 million compared to the same period in 2019. The increase in the first quarter of 2020 is not a direct result of specific credit risks currently identified in the loan portfolio; rather, the increase is mainly driven by current and projected economic conditions resulting from the ongoing COVID-19 pandemic and related market and economic impacts, as well as normal adjustments for loan growth, and changing loan portfolio and segment mix, and is due to the calculation of the allowance for credit losses in accordance with ASU 2016-13. The section captioned “Financial Condition – The Allowance for Credit Losses” below has further details on the allowance for credit losses and asset quality metrics.

### Noninterest Income

Noninterest income was $19.0 million for the first quarter of 2020, which was down 2.3% compared to the same period prior year. Noninterest income represented 26.4% of total revenue for the three months ended March 31, 2020, compared to 27.2% for the same period in 2019.

Insurance commissions and fees were $8.0 million for the first quarter of 2020, which is in line with the same period prior year. For the three months ended March 31, 2020, growth in commercial and personal business lines were offset by lower contingency income compared to the same period in 2019.

Investment services income of $4.2 million in the first quarter of 2020 was up $118,000 or 2.9% compared to the first quarter of 2019. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. With fees largely based on the market value and the mix of assets managed, the general direction of the stock market can have a considerable impact on fee income. For the first quarter of 2020, the increase in investment services income was mainly attributable to an increase in advisory income, as the Company has experienced a higher mix of managed accounts that carry higher fees and a decrease in lower fee custody account balances, as well as an increase in estate and terminating trust fees. The fair value of assets managed by, or in custody of, Tompkins was $3.9 billion at March 31, 2020, compared to $4.0 billion for the same period in 2019. The fair value at March 31, 2020 includes $1.2 billion of Company-owned securities where Tompkins Trust Company is custodian.

Card services income of $2.2 million in the first quarter of 2020 was down $607,000 or 21.7% compared to the same period in 2019. Contributing to the decrease from the prior year was a one-time incentive payment of $500,000 (pre-tax) related to our merchant card business received in the first quarter of 2019, and a decrease in transaction volume.

The Company recognized $443,000 of gains on sales/calls of available-for-sale debt securities in the first quarter of 2020, compared to $12,000 of gains in the first three months of 2019. The gains include $178,000 of gains on the sales of available-for-sale debt securities, $251,000 of gains on securities called during the quarter and $14,000 of realized gains from the change in the fair value of equity securities. The sales of available-for-sale debt securities were generally the result of routine portfolio maintenance and interest rate risk management.

Other income of $2.1 million in the first quarter of 2020 was down 15.1% compared to the same period in 2019. The decrease in the first quarter of 2020 compared to the first quarter of 2019 was mainly a result of a decrease in the cash surrender value of bank owned life insurance, which was down $291,000. The decrease was mainly related to variable life insurance policies; the market value of the securities underlying these policies was adversely affected by the downturn in equities markets driven by COVID-19 in the first quarter of 2020.

### Noninterest Expense

Noninterest expense was $45.7 million for the first quarter of 2020, up 3.5% compared to the same period in 2019. Noninterest expense as a percentage of total revenue for the first quarter of 2020 was 63.6% compared to 62.0% for the same period in 2019.

Expenses associated with salaries and wages and employee benefits are the largest component of noninterest expense, representing 61.6% of total noninterest expense for the three months ended March 31, 2020 and 60.4% for the three months ended March 31, 2019. Salaries and wages expense for the three months ended March 31, 2020 was up 6.6% compared to the same period in 2019 driven mainly by an increase in employees, merit increases awarded in 2019, and other incentives. Other employee benefits expense was relatively flat compared to the same period in 2019.

Other expense categories, not related to compensation and benefits, for the three months ended March 31, 2020, were in line with the same period in 2019. The significant components of other expense are professional fees, technology, and marketing expenses. Technology expense for the first quarter of 2020 was up $283,000 or 11.0% over the same period in the prior year, mainly as a result of investments in strengthening the Company's compliance and information security infrastructure. Marketing expenses were down $221,000, while professional fees for the first quarter of 2020 were in line with prior year.

### Income Tax Expense

The provision for income taxes was $1.9 million for an effective rate of 19.3% for the first quarter of 2020, compared to tax expense of $5.6 million and an effective rate of 21.0% for the same quarter in 2019. The effective rates differ from the U.S. statutory rate 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.

### FINANCIAL CONDITION

Total assets were $6.7 billion at March 31, 2020, which were in line with December 31, 2019. Total originated loan balances were $4.7 billion at March 31, 2020 unchanged from year-end 2019. Total acquired loans of $213.5 million were down $6.6 million or 3.0% from December 31, 2019, due to expected run-off in the acquired portfolio. Total deposits were up $196.4 million or 3.8% from December 31, 2019. Other borrowings decreased $200.1 million or 30.4% from December 31, 2019, as a result of deposit growth outpacing loan growth in the period.

### Securities

As of March 31, 2020, the Company’s securities portfolio was $1.4 billion or 20.07% of total assets, compared to $1.3 billion or 19.3% of total assets at year-end 2019. The following table details the composition of available-for-sale debt securities.

*(In thousands)*

| Available-for-Sale Debt Securities | March 31, 2020 Amortized Cost | Fair Value | December 31, 2019 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. Treasuries | **$1,745** | **$1,750** | 1,840 | 1,840 |
| Obligations of U.S. Government sponsored entities | **302,086** | **313,428** | 367,551 | 372,488 |
| Obligations of U.S. states and political subdivisions | **101,452** | **102,484** | 96,668 | 97,785 |
| Mortgage-backed securities - residential, issued by |  |  |  |  |
| U.S. Government agencies | **171,500** | **174,515** | 164,643 | 164,451 |
| U.S. Government sponsored entities | **739,133** | **758,027** | 660,037 | 659,590 |
| U.S. corporate debt securities | **2,500** | **2,433** | 2,500 | 2,433 |
| **Total available-for-sale debt securities** | **$1,318,416** | **$1,352,637** | $1,293,239 | $1,298,587 |

The increase in unrealized gains, which reflects the amount that fair value exceeds amortized cost, related to the available-for-sale debt portfolio was due primarily to changes in market interest rates during the first three months of 2020. 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 debt securities 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. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings via credit loss expense.

The Company determined that at March 31, 2020, all impaired available-for-sale debt securities experienced a decline in fair value below the amortized cost basis due to noncredit-related factors. In addition, the Company does not intend to sell other-than-temporarily impaired investment securities that are in an unrealized loss position until recovery of unrealized losses (which may be until maturity), and it is not more-likely-than not that the Company will be required to sell the investment securities, before recovery of their amortized cost basis, which may be at maturity. Therefore, the Company carried no ACL at March 31, 2020 and there was no credit loss expense recognized by the Company with respect to the securities portfolio during the three months ended March 31, 2020.

*Loans and Leases*

*Loans and leases as of the end of the first quarter and prior year-end periods were as follows:*

*(In thousands)*

| Commercial and industrial | March 31, 2020 Originated | Acquired | Total Loans and Leases | December 31, 2019 Originated | Acquired | Total Loans and Leases |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Agriculture | **$95,385** | **$0** | **$95,385** | $105,786 | $0 | $105,786 |
| Commercial and industrial other | **849,273** | **38,570** | **887,843** | 863,199 | 39,076 | 902,275 |
| Subtotal commercial and industrial | **944,658** | **38,570** | **983,228** | 968,985 | 39,076 | 1,008,061 |
| Commercial real estate |  |  |  |  |  |  |
| Construction | **167,139** | **1,311** | **168,450** | 212,302 | 1,335 | 213,637 |
| Agriculture | **186,870** | **191** | **187,061** | 184,701 | 197 | 184,898 |
| Commercial real estate other | **1,980,264** | **140,675** | **2,120,939** | 1,899,645 | 145,385 | 2,045,030 |
| Subtotal commercial real estate | **2,334,273** | **142,177** | **2,476,450** | 2,296,648 | 146,917 | 2,443,565 |
| Residential real estate |  |  |  |  |  |  |
| Home equity | **201,231** | **14,509** | **215,740** | 203,894 | 15,351 | 219,245 |
| Mortgages | **1,158,544** | **17,429** | **1,175,973** | 1,140,572 | 18,020 | 1,158,592 |
| Subtotal residential real estate | **1,359,775** | **31,938** | **1,391,713** | 1,344,466 | 33,371 | 1,377,837 |
| Consumer and other |  |  |  |  |  |  |
| Indirect | **11,871** | **0** | **11,871** | 12,964 | 0 | 12,964 |
| Consumer and other | **60,301** | **860** | **61,161** | 60,661 | 785 | 61,446 |
| Subtotal consumer and other | **72,172** | **860** | **73,032** | 73,625 | 785 | 74,410 |
| Leases | **17,046** | **0** | **17,046** | 17,322 | 0 | 17,322 |
| Total loans and leases | **4,727,924** | **213,545** | **4,941,469** | 4,701,046 | 220,149 | 4,921,195 |
| Less: unearned income and deferred costs and fees | **(3,647)** | **0** | **(3,647)** | (3,645) | 0 | (3,645) |
| Total loans and leases, net of unearned income and deferred costs and fees | **$4,724,277** | **$213,545** | **$4,937,822** | $4,697,401 | $220,149 | $4,917,550 |

Total loans and leases of $4.9 billion at March 31, 2020 were up $20.3 million or 0.4% from December 31, 2019. Originated loan balances at March 31, 2020 were up $26.9 million or 0.6% from year-end 2019. As of March 31, 2020, total loans and leases represented 73.2% of total assets compared to 73.1% of total assets at December 31, 2019.

Residential real estate loans, including home equity loans were $1.4 billion at March 31, 2020, up $13.9 million or 1.0% compared to December 31, 2019, and comprised 28.2% of total loans and leases at March 31, 2020. Changes in residential loan balances are impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. 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 three months of 2020 and 2019, the Company retained the vast majority of residential mortgage loans originated, selling $4.1 million and $8.5 million, respectively, recognizing gains on these sales of $176,000 and $94,000, 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 $813,000 at March 31, 2020 and $805,000 at December 31, 2019.

Commercial real estate loans and commercial and industrial loans totaled $2.5 billion and $1.0 billion, respectively, and represented 50.2% and 19.9%, respectively of total loans as of March 31, 2020. The commercial real estate portfolio was up 1.3% over year end 2019, while commercial and industrial loans were down 2.5%. As of March 31, 2020, agriculturally-related loans totaled $282.4 million or 5.7% of total loans and leases, compared to $290.7 million or 5.9% of total loans and leases at December 31, 2019. Agriculturally-related loans include loans to dairy farms and crop farms. Agriculturally-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, 2019. There have been no significant changes in these policies and guidelines since the date of that report. Therefore, both new originations as well as those balances held at March 31, 2020, reflect these policies and guidelines. 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 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 four subsidiary banks. 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 suspension of business activities in our market area has led to a significant increase in unemployment rates and has had a negative effect on our market area, and there is a great deal of uncertainty regarding how long those conditions will continue to exist. Because these developments commenced late in the first quarter of 2020, and because the public health effects of COVID-19 are generally expected to peak later this year in the communities in which we operate, the economic consequences of the pandemic on our market area generally and on the Company in particular are difficult to quantify.

### Allowance for Credit Losses

During the first quarter of 2020, the Company adopted *ASU No. 2016-13 - Financial Instruments - Credit Losses*, also known as CECL. The below tables represents the allowance for credit losses calculated under the new accounting guidance as of March 31, 2020, and the prior period tables use the incurred loss methodology calculation used prior to adoption. The tables provide, 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)*

| Allowance for credit losses | 3/31/2020 |
| --- | ---: |
| Commercial and industrial | $11,665 |
| Commercial real estate | 22,446 |
| Residential real estate | 16,330 |
| Consumer and other | 1,883 |
| Finance leases | 80 |
| **Total** | **$52,404** |

53

*(In thousands)*

| Allowance for originated loans and leases | 12/31/2019 |
| --- | ---: |
| Commercial and industrial | $10,541 |
| Commercial real estate | 21,557 |
| Residential real estate | 6,360 |
| Consumer and other | 1,356 |
| **Total** | **$39,814** |
| **Allowance for acquired loans** |  |
| Commercial and industrial | $0 |
| Commercial real estate | 51 |
| Residential real estate | 21 |
| Consumer and other | 6 |
| **Total** | **$78** |

As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by $2.5 million from $39.9 million at December 31, 2019, to $37.4 million at January 1, 2020. As of March 31, 2020, the total allowance for credit losses was $52.4 million. The $15.0 million increase in the allowance at March 31, 2020, compared to January 1, 2020 was mainly due to a $16.3 million increase in the provision expense driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The Company had net charge-offs of $1.2 million in the first quarter of 2020, which included a write-down on one large credit in the commercial real estate portfolio.

Asset quality metrics remained favorable at March 31, 2020, with lower levels of nonperforming loans and leases than at December 31, 2019. Loans internally-classified Special Mention or Substandard were flat compared to December 31, 2019. Nonperforming loans and leases were down $742,000 or 2.4% from year end 2019 and represented 0.62% of total loans at March 31, 2020 compared to 0.64% at December 31, 2019. The allowance for credit losses covered 170.74% of nonperforming loans and leases as of March 31, 2020, compared to 126.90% at December 31, 2019.

The Company’s allowance for credit losses totaled $52.4 million at March 31, 2020, which represented 1.06% of total loans, up compared to 0.81% at December 31, 2019, and 0.84% at March 31, 2019.

Activity in the Company’s allowance for credit losses during the first three months of 2020 and 2019 is illustrated in the table below.

*Analysis of the Allowance for Credit Losses*

*(In thousands)*

|  | 3/31/2020 | 3/31/2019 |
| --- | ---: | ---: |
| Average loans outstanding during period | **$4,914,035** | $4,792,607 |
| Allowance at December 31, 2019 | **39,892** | 43,410 |
| Impact of adopting ASC 326 | **(2,534)** | 0 |
| Balance of allowance at beginning of year | **37,358** | 0 |
| LOANS CHARGED-OFF: |  |  |
| Commercial and industrial | **1** | 380 |
| Commercial real estate | **1,290** | 3,343 |
| Residential real estate | **2** | 18 |
| Consumer and other | **137** | 0 |
| Finance leases | **0** | 180 |
| Total loans charged-off | **$1,430** | $3,921 |
| RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF: |  |  |
| Commercial and industrial | **16** | 59 |
| Commercial real estate | **18** | 7 |
| Residential real estate | **79** | 233 |
| Consumer and other | **69** | 95 |
| Finance Leases | **0** | 0 |
| Total loans recoveries | **$182** | $394 |
| Net loans charged-off | **1,248** | 3,527 |
| Additions to allowance for credit losses charged to operations | **16,294** | 445 |
| Balance of allowance at end of period | **$52,404** | $40,328 |
| Allowance for credit losses as a percentage of total loans and leases | **1.06%** | 0.84% |
| Annualized net charge-offs on loans to average total loans and leases during the period | **0.10%** | 0.30% |

Net loan and lease charge-offs for the quarter ended March 31, 2020 were $1.2 million compared to $3.5 million at March 31, 2019. The first quarter of 2020 included a write-down on one credit in the commercial real estate portfolio for $1.2 million, compared to the first quarter of 2019, which included a $3.1 million write-down on one credit, also in the commercial real estate portfolio.

The provision for credit losses was $16.3 million for the three months ended March 31, 2020, compared to $445,000 for the same period in 2019. The provision expense for credit losses is based upon the Company's quarterly evaluation of the appropriateness of the allowance for credit losses. The increase in the provision expense over March 31, 2019 is mainly a result of the economic forecasts and other model assumptions impacted by the current economic shut down related to the COVID-19 pandemic.

*(In thousands)*

| Analysis of Past Due and Nonperforming Loans Loans 90 days past due and accruing | 3/31/2020 | 12/31/2019 | 3/31/2019 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | **$0** | $0 | $0 |
| Consumer and other | **0** | 0 | 0 |
| Total loans 90 days past due and accruing | **$0** | $0 | $0 |
| Nonaccrual loans |  |  |  |
| Commercial and industrial | **2,049** | 2,335 | 1,933 |
| Commercial real estate | **9,698** | 10,789 | 3,742 |
| Residential real estate | **11,544** | 10,882 | 11,833 |
| Consumer and other | **265** | 275 | 236 |
| Total nonaccrual loans | **$23,556** | $24,281 | $17,744 |
| Troubled debt restructurings not included above | **7,137** | 7,154 | 5,234 |
| Total nonperforming loans and leases | **$30,693** | $31,435 | $22,978 |
| Other real estate owned | **466** | 428 | 1,595 |
| Total nonperforming assets | **$31,159** | $31,863 | $24,573 |
| Allowance as a percentage of nonperforming loans and leases | **170.74%** | 126.90% | 175.51% |
| Total nonperforming loans and leases as percentage of total loans and leases | **0.62%** | 0.64% | 0.48% |
| Total nonperforming assets as percentage of total assets | **0.46%** | 0.47% | 0.36% |

*1 The December 31, 2019, and March 31, 2019 columns in the above table exclude $794,000, and $1.2 million, respectively, of acquired loans that are 90 days past due and accruing interest. At December 31, 2019 and March 31, 2019, purchased credit-impaired ("PCI") loans were excluded from past due and non-accrual loans reported because they continued to earn interest income from the accretable yield at the pool level. The PCI loan pools are accounted for as PCD loans (on a loan level basis with a related allowance for credit losses) under the CECL standard adopted at January 1, 2020 and reported in the past due loans and non-accrual loans in the table above at March 31, 2020.*

Nonperforming assets include nonaccrual loans, troubled debt restructurings (“TDR”), and foreclosed real estate/other real estate owned. Total nonperforming assets of $31.2 million at March 31, 2020 were down $704,000 or 2.2% compared to December 31, 2019, and up $6.6 million or 26.8% compared to March 31, 2019. Nonperforming assets represented 0.46% of total assets at March 31, 2020, down from 0.47% at December 31, 2019, and up from 0.36% at March 31, 2019. The Company’s ratio of nonperforming assets to total assets continues to compare favorably to our peer group’s most recent ratio of 0.56% at December 31, 2019.

Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower 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. TDRs are included in the above table within the following categories: “loans 90 days past due and accruing”, “nonaccrual loans”, or “troubled debt restructurings not included above”. Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and therefore classified as accruing loans. At March 31, 2020, the Company had $8.2 million in TDRs, and of that total $1.1 million were reported as nonaccrual and $7.1 million were considered performing and included in the table above.

For customers affected by COVID-19, the Company implemented a loan payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. The current program allows for deferral of payments of principal and interest for up to 90 days and customers will be able to request a payment deferral through the middle of May 2020; in certain cases and/or where required by applicable law or regulation, we will permit additional deferrals or other accommodation. The provisions of the CARES Act and recently issued interagency guidance issued by Federal banking regulators provided guidance and clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. The guidance and clarifications detail certain provisions whereby banks are permitted to make deferrals and modifications to the terms of a loan which would not require the loan to be reported as a troubled debt restructuring. In accordance with the CARES Act and the interagency guidance, the Company elected to adopt the provisions to not report eligible loan modifications as troubled debt restructurings.”

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 170.74% at March 31, 2020, compared to 126.90% at December 31, 2019, and 175.51% at March 31, 2019. The Company’s nonperforming loans and leases are mostly made up of collateral dependent impaired 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.

Management reviews the loan portfolio continuously for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases.

The Company, through its internal loan review function, identified 32 commercial relationships from the originated portfolio and 5 commercial relationships from the acquired portfolio totaling $38.9 million and $469,000, respectively at March 31, 2020 that were potential problem loans. At December 31, 2019, the Company had identified 34 relationships totaling $42.6 million in the originated portfolio and 7 relationships totaling $1.4 million in the acquired portfolio that were potential problem loans. Of the 32 commercial relationships in the originated portfolio at March 31, 2020 that were Substandard, there were 12 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $34.7 million, the largest of which was $8.7 million. Of the 5 commercial relationships from the acquired loan portfolio at March 31, 2020 that were Substandard, there were no relationships that equaled or exceeded $1.0 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 $682.6 million at March 31, 2020, an increase of $19.5 million or 3.0% from December 31, 2019. The increase reflects a decline in accumulated other comprehensive losses partially offset by a decrease in additional paid-in capital.

Additional paid-in capital declined from $338.5 million at December 31, 2019, to $333.7 million at March 31, 2020. The decrease was primarily attributable to a $5.6 million aggregate purchase price related to the Company's repurchase and retirement of 71,288 shares of its common stock during the first quarter of 2020 pursuant to its publicly announced stock repurchase plan and $1.2 million related to stock based compensation, partially offset by $0.2 million related to the exercise of stock options and $0.2 million related to the Company's director deferred compensation plan. Retained earnings increased by $1.8 million from $370.5 million at December 31, 2019, to $372.3 million at March 31, 2020, reflecting net income of $8.0 million less dividends paid of $7.8 million and the net cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.7 million. Accumulated other comprehensive loss decreased from a net loss of $43.6 million at December 31, 2019, to a net loss of $21.3 million at March 31, 2020, reflecting a $21.8 million increase in unrealized gains on available-for-sale debt securities due to changes in market rates coupled with a $0.5 million decrease related to post-retirement benefit plans.

In connection with the effectiveness of the Basel III Capital Rules on January 1, 2015, the Company elected to opt-out of the requirement to include most components of other comprehensive income in regulatory capital. Accordingly, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale debt securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage ratios.

Cash dividends paid in the first three months of 2020 totaled approximately $7.8 million or $0.52 per common share, representing 98.0% of year to date 2020 earnings through March 31, 2020, and were up 4.0% over cash dividends of $7.7 million or $0.50 per common share paid in the first three months of 2019.

The Company and its subsidiary banks 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 banks meet all capital adequacy requirements to which they are subject.

In addition to setting higher minimum capital ratios, the Basel III Capital Rules introduced a capital conservation buffer, which must be added to each of the minimum capital ratios and is designed to absorb losses during periods of economic stress. The capital conservation buffer was phased in over a 3-year period that began on January 1, 2016, and was fully phased-in on January 1, 2019 at 2.5%.

The following table provides a summary of the Company’s capital ratios as of March 31, 2020.

*REGULATORY CAPITAL ANALYSIS*

*(dollar amounts in thousands)*

| March 31, 2020 | Actual Amount | Ratio | Minimum Capital Required - Basel III Fully Phased-In Amount | Ratio | Well Capitalized Requirement Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Total Capital (to risk weighted assets) | $677,746 | 13.62% | $522,370 | 10.50% | $497,495 | 10.00% |
| Tier 1 Capital (to risk weighted assets) | 624,220 | 12.55% | 422,871 | 8.50% | 397,996 | 8.00% |
| Tier 1 Common Equity (to risk weighted assets) | 607,142 | 12.20% | 348,246 | 7.00% | 323,372 | 6.50% |
| Tier 1 Capital (to average assets) | 624,220 | 9.53% | 262,070 | 4.00% | 327,587 | 5.00% |

As of March 31, 2020, 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 13.6% at March 31, 2020, compared with 13.5% as of December 31, 2019. Tier 1 capital as a percent of risk weighted assets decreased from 12.7% at the end of 2019 to 12.6% as of March 31, 2020. Tier 1 capital as a percent of average assets was 9.5% at March 31, 2020, which is down from 9.6% at December 31, 2019. Common equity tier 1 capital was 12.2% at the end of the first quarter of 2020, down from 12.3% at the end of 2019.

As of March 31, 2020, the capital ratios for the Company’s subsidiary banks also exceeded the minimum required capital ratios plus the required conservation buffer, the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions.

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 have elected to utilize the five-year CECL transition.

### Deposits and Other Liabilities

Total deposits of $5.4 billion at March 31, 2020 were up $196.4 million or 3.8% from December 31, 2019. The increase from year-end was primarily in checking, money market and savings balances, which collectively were up $193.1 million or 6.3% from year end 2019. The majority of the increase was in municipal money market deposit balances. Noninterest bearing deposits and time deposits were down $30.6 million or 2.1% and up $33.9 million or 5.0%, respectively, from year-end 2019.

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 and municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits were up by $38.8 million or 0.90% from year-end 2019, to $4.3 billion at March 31, 2020. Core deposits represented 80.0% of total deposits at March 31, 2020, compared to 82.3% of total deposits at December 31, 2019.

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 $69.0 million at March 31, 2020, and $60.3 million at December 31, 2019. Management generally views local repurchase agreements as an alternative to large time deposits.

The Company’s other borrowings totaled $458.0 million at March 31, 2020, down $200.1 million or 30.4% from $658.1 million at December 31, 2019. Borrowings decreased primarily due to seasonal deposit growth from year-end 2019. Borrowings at March 31, 2020 included $29.0 million in FHLB overnight advances, $415.0 million of FHLB term advances, and a $14.0 million advance from a bank. Borrowings at year-end 2019 included $239.1 million in overnight advances from FHLB, $415.0 million of FHLB term advances, and a $4.0 million advance from a bank. Of the $415.0 million in FHLB term advances at March 31, 2020, $265.0 million is due in over one year.

### Liquidity

As of March 31, 2020, the Company had not experienced any significant impact to our liquidity or funding capabilities as a result of the COVID-19 pandemic. The Company is participating in the PPP under the CARES Act. The Federal Reserve Bank has provided a lending facility that may be used by banks to obtain funding specifically for PPP loans. PPP loans would be pledged as collateral on any of the Bank's borrowings under the Federal Reserve Bank's PPP lending facility. In April 2020, the Company had an increase in deposits and actively increased liquid assets to further strengthen the Company's position so that the Company can continue to serve our customers during these uncertain times. The Company has a long-standing liquidity plan in place that is designed to ensure that appropriate liquidity resources are available to fund the balance sheet. Additionally, given the uncertainties related to the impact of the COVID-19 crisis on liquidity, the Company has confirmed the availability of funds at the FHLB of NY and FHLB of Pittsburgh, completed actions required to activate participation in the Federal Reserve Bank PPP lending facility, and confirmed availability of Federal Fund lines with correspondent bank partners.

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.

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, brokered deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of $1.6 billion at March 31, 2020 decreased $33.8 million or 2.1% as compared to year end 2019. The decrease in non-core funding sources reflects mainly a decrease in overnight borrowings with the FHLB compared to year-end 2019. Non-core funding sources, as a percentage of total liabilities, were 26.5% at March 31, 2020, compared to 27.1% at December 31, 2019.

Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.1 billion at March 31, 2020 and at $1.2 billion at December 31, 2019, were either pledged or sold under agreements to repurchase. Pledged securities represented 81.2% of total securities at March 31, 2020, compared to 89.7% of total securities at December 31, 2019.

Cash and cash equivalents totaled $115.3 million as of March 31, 2020 which decreased from $138.0 million at December 31, 2019. Short-term investments, consisting of securities due in one year or less, decreased from $108.1 million at December 31, 2019, to $64.0 million at March 31, 2020.

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 $932.5 million at March 31, 2020 compared with $824.0 million at December 31, 2019. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.5 billion at March 31, 2020, down $12.2 million or 0.8% compared with year end 2019. 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 banks, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At March 31, 2020, the unused borrowing capacity on established lines with the FHLB was $1.5 billion.

As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At March 31, 2020, total unencumbered residential mortgage loans and securities were $1.0 billion. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.

### Newly Adopted Accounting Standards

*ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”* ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was effective for the Company on January 1, 2020. Upon adoption, a cumulative effect adjustment for the change in the allowance for credit losses was recognized in retained earnings. The cumulative-effect adjustment to retained earnings, net of taxes, is comprised of the impact to the allowance for credit losses on outstanding loans and leases and the impact to the liability for off-balance sheet commitments. The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326, while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net increase of retained earnings of $1.7 million, upon adoption. The transition adjustment includes a decrease in the allowance for credit losses on loans of $2.5 million, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $0.4 million, net of the corresponding decrease in deferred tax assets of $0.4 million.

The Company adopted ASU 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as purchased credit impaired (“PCI”) and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets was determined to be related to noncredit factors and will be accreted into interest income on a level-yield method over the life of the loans.

*ASU 2017-04, “Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment.”* ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 was effective for the Company on January 1, 2020 and did not have a material impact on our consolidated financial statements.

*ASU 2018-13, “Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement.”* ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 was effective for the Company on January 1, 2020, and did not have a significant impact on our consolidated financial statements.

*ASU 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.”* ASU 2018-15 clarifies certain aspects of ASU 2015-05, “Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement,” which was issued in April 2015. Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 was effective for the Company on January 1, 2020, and did not have a significant impact on our consolidated financial statements.

### Accounting Standards Pending Adoption

*ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).”* ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 will be effective for us on January 1, 2021, with early adoption permitted, and is not expected to have a significant impact on our consolidated financial statements.

*ASU No 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes.”* ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning after December 15, 2020, with early adoption permitted. Tompkins is currently evaluating the potential impact of ASU 2019-12 on our consolidated financial statements.

*ASU 2020-03 "Codification Improvements to Financial Instruments."* ASU 2020-03 revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release in March 2020 and did not have a significant impact on our consolidated financial statements.

*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 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 March 12, 2020 through December 31, 2022. Tompkins is currently evaluating the potential impact of ASU 2020-04 on our consolidated financial statements.

## Market risk

As filed, 5,749 characters.

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 does not currently use derivatives, such as interest rate swaps, to manage its interest rate risk exposure, but may consider such instruments in the future.

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 simulation analysis performed as of February 29, 2020, 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 3.6%, while a 100 basis point parallel decline in interest rates over a one-year period would result in an increase in one-year net interest income from the base case of 1.6%. The simulation assumes no balance sheet growth 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 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, net interest income is expected to trend upwards.

In the down 100 rate scenario increases net interest 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. Rates on savings and money market accounts have moved up from the historically low levels, allowing for some interest rate relief in the first year of a declining rate scenario. In addition, 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 assumes interest rates remain unchanged from the date of the simulation, reflects a net interest margin that is declining 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, 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 March 31, 2020. The Company’s one-year net interest rate gap was a negative $117.4 million or 1.74% of total assets at March 31, 2020, compared with a negative $173.6 million or 2.58% of total assets at December 31, 2019. 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 is moderately more vulnerable to an increasing rate environment than it is to a prolonged declining interest rate environment. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.

*(In thousands)*

| Condensed Static Gap - March 31, 2020 | Total | 0-3 months | Repricing Interval 3-6 months | 6-12 months | Cumulative 12 months |
| --- | ---: | ---: | ---: | ---: | ---: |
| Interest-earning assets1 | $6,284,715 | $1,223,201 | $367,865 | $661,051 | $2,252,117 |
| Interest-bearing liabilities | 4,526,801 | 1,944,740 | 200,208 | 224,563 | 2,369,511 |
| Net gap position |  | (721,539) | 167,657 | 436,488 | (117,394) |
| Net gap position as a percentage of total assets |  | (10.70)% | 2.49% | 6.47% | (1.74)% |

#### 1 Balances of available securities are shown at amortized cost

## Controls and procedures

As filed, 1,412 characters.

### 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 March 31, 2020.

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

The Company adopted *ASU No. 2016-13, "Financial Instruments: Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments"* on January 1, 2020. The Company implemented new controls and modified existing controls as part of the adoption. The new controls were implemented to account for the additional complexity of the expected credit loss model, review of economic forecasts, and other assumptions used in the estimation of the model. There were no other changes in the Company's internal control over financial reporting that occurred during the quarter ended March 31, 2020, that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

## Risk factors

As filed, 6,571 characters.

Except as set forth below, there have been no material changes in the risk factors previously disclosed under Item 1A. of the Company’s Annual Report on Form 10-K, for the fiscal year ended December 31, 2019:

**The economic impact of the novel COVID-19 outbreak has had, and likely will continue to have, a material adverse effect on our business, financial condition, liquidity, and results of operations.**

In December 2019, a novel coronavirus (COVID-19) was reported in China, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic dislocation in the United States as many state and local governments have ordered non-essential businesses to close and residents to shelter in place at home. The extent to which COVID-19 and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. COVID-19 has had and is likely to continue to have a material adverse impact on our results of operations and financial condition. Moreover, COVID-19 is likely to heighten or make more likely to occur many of our known risks, which are previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

The COVID-19 pandemic, and the actions taken by federal, state and local authorities in response thereto, have resulted, and will likely continue to result in, an unprecedented slow-down in economic activity, including the following:

- A dramatic increase in unemployment, including more than 30 million people in the U.S. filing claims for unemployment since the start of the COVID-19 outbreak.
- Stock markets generally, and bank stocks in particular, have significantly declined in value.
- The Federal Reserve Board has reduced the benchmark fed funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes have declined to historic lows.
- Various state governments and federal agencies are requiring lenders to provide forbearance and other relief to borrowers (e.g., waiving late payment and other fees). The federal banking agencies have recently issued guidance providing relief from reporting loan classifications due to modifications related to the COVID-19 outbreak.

Certain industries have been particularly hard-hit, including the travel and hospitality industry, the restaurant industry and the retail industry. Finally, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, and cancellation of physical participation in meetings, events and conferences. we may take further actions as may be required by government authorities or that we determine are in the best interest of our employees, customers and business partners.

As a result of the COVID-19 pandemic and the elated adverse local and national economic consequences, we could be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, liquidity, and results of operations:

- demand for our products and services may decline, making it difficult to grow assets and income;
- if the economy is unable to substantially reopen, and high levels of unemployment continue for an extended period of time, loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
- collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
- we may face a decline in the value of our goodwill and other intangible assets;
- our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
- the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
- the decline in the Federal Reserve Board’s target federal funds rate may cause the yield on our assets to decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and thereby reducing our net income;
- a material decrease in net income or a net loss over several quarters could result in a further decrease in the rate of our quarterly cash dividend;
- our wealth management and trust revenues may decline with continuing market turmoil;
- a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;
- our cybersecurity and fraud risks may increase due to our transition to a remote work environment;
- the unavailability of a third party vendor, whom we rely on for certain services, could cause a lapse in a critical service; and
- Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

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

Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain, including the scope and duration of the pandemic and the successfulness of efforts to abate it; the continued effectiveness of our business continuity plan; the direct and indirect impact of the pandemic on our employees, customers, clients, counterparties and service providers, as well as other market participants; and actions taken by governmental authorities and other third parties in response to the pandemic, including when, how and to what extent the economy may be reopened.

Any one or a combination of the factors identified above could negatively impact our business, financial condition and results of operations and prospects.

Filed May 11, 2020.
Source: SEC EDGAR, the filing index for accession 0001005817-20-000007. Last ingested by Listed: Oct 31, 2026, 15:15 ET. No prices; not investment advice.