# Tompkins Financial Corp: Form 10-K for the period ended Dec 31, 2022 - Company: [Tompkins Financial Corp](/companies/tmp.md) (CIK 1005817) - Form: 10-K - Filed: 2023-03-01 - Accepted by EDGAR: Mar 1, 2023, 14:08 ET - Period: 2022-12-31 - Accession: 0001005817-23-000002 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1005817/000100581723000002/tmp-20221231.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005817/000100581723000002/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2022-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 12 months, 2022-01-01 to 2022-12-31 | $74.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Interest expense | 12 months, 2022-01-01 to 2022-12-31 | $21.0m | us-gaap:InterestExpense | | Income tax | 12 months, 2022-01-01 to 2022-12-31 | $24.6m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2022-01-01 to 2022-12-31 | $85.0m | us-gaap:NetIncomeLoss | | Diluted EPS | 12 months, 2022-01-01 to 2022-12-31 | $5.89 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 12 months, 2022-01-01 to 2022-12-31 | $5.92 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2022-01-01 to 2022-12-31 | 14,404,294 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2022-01-01 to 2022-12-31 | $103.3m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2022-01-01 to 2022-12-31 | $8.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2022-01-01 to 2022-12-31 | $33.6m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 12 months, 2022-01-01 to 2022-12-31 | $15.4m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2022-12-31 | $77.8m | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Total assets | at 2022-12-31 | $7.67bn | us-gaap:Assets | | Total liabilities | at 2022-12-31 | $7.05bn | us-gaap:Liabilities | | Shareholders' equity | at 2022-12-31 | $616.0m | us-gaap:StockholdersEquity | ## Business As filed, 67,596 characters. *The disclosures set forth in this Item 1. Business are qualified by the section captioned "Forward-Looking Statements" in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report and other cautionary statements set forth elsewhere in this Report.* ### General 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. Effective January 1, 2022, the Company's four wholly-owned banking subsidiaries were combined into one bank, with the Bank of of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company (the "Trust Company" or the "Bank") with the Trust Company as the surviving institution. Immediately following the merger, the Trust Company changed its name to Tompkins Community Bank. At December 31, 2022, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. Banking services consist primarily of attracting deposits from the areas served by Tompkins Community Bank's 60 banking offices (41 offices in New York and 19 offices in Pennsylvania), and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, and leases in those same areas. The Company has a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). Tompkins Community Bank provides a full array of wealth management services under the Tompkins Financial Advisors brand, including investment management, trust and estate, financial and tax planning services. The Company’s principal offices are located at 118 E. Seneca St., P.O. Box 460, 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." Tompkins was organized in 1995, under the laws of the State of New York, as a bank holding company for the Trust Company, a commercial bank that has operated in Ithaca, New York and surrounding communities since 1836. The Tompkins strategy centers around its core values and a commitment to delivering long-term value to our clients, communities, and shareholders. A key strategic initiative for the Company is a focus on responsible and sustainable growth, including initiatives to grow organically through our current businesses, as well as through possible acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses that would complement the Company’s business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. The Company has pursued acquisition opportunities in the past, and continues to review new opportunities. The Company also has defined strategic initiatives around digital delivery of services to meet the changing needs of client expectations, while maintaining our commitment to excellence in the delivery of personal service when self-serve options are unable to meet the needs of our clients. Our strategy includes a focus on building a scalable foundation based on a continuous improvement approach necessary for our long term success. This foundation includes investments in automation, analytics and security to drive ongoing consistency, efficiency, and security in our operations. We also recognize the need to develop and acquire talent that is well prepared to succeed in our changing industry. Initiatives in this area include a focus on characteristics such as collaboration, innovation and agility, while also promoting and embracing diversity, inclusion and belonging in our workforce. ### Narrative Description of Business The Company has identified three business segments, consisting of banking, insurance and wealth management. Banking services consist primarily of attracting deposits from the areas served by the Company’s banking subsidiary and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, and leases in those same areas. The Company’s lending function is managed within the guidelines of a comprehensive Board of Directors-approved lending policy. Policies and procedures are reviewed on a regular basis. 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. The Company has an independent third party loan review process that samples, reviews, and validates the risk identification and assessment made by the lenders and credit personnel. The results of these reviews are presented to the Board of Directors of the Company’s banking subsidiary, and the Company’s Audit and Examining Committee. The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for credit loss expenses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities. The Company’s principal source of revenue is interest income on loans and securities. The Company maintains a portfolio of securities such as U.S. Treasury securities, obligations of U.S. government agencies and U.S. government sponsored entities, obligations of states and political subdivisions thereof, and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee. The Company has operated its insurance agency subsidiary, Tompkins Insurance, since 2001. Insurance services include property and casualty insurance, employee benefit consulting, 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 served by Tompkins Community Bank and successfully consolidated them into Tompkins Insurance. Tompkins Insurance offers services to customers of Tompkins Community Bank by sharing offices with Tompkins Community 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. Wealth management services consist of investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Wealth management services are provided under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors has office locations, and services are available, at certain of Tompkins Community Bank's branch locations. ### Subsidiaries ### Tompkins Community Bank At December 31, 2021, the Company’s subsidiaries included four wholly-owned banking subsidiaries, the Trust Company, The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), and VIST Bank (DBA Tompkins VIST Bank). Effective January 1, 2022, the Company’s four wholly-owned banking subsidiaries were combined into one bank, with The Bank of Castile, Mahopac Bank, and VIST Bank merging with and into the Trust Company with the Trust Company as the surviving institution. Immediately following the merger, the Trust Company changed its name to "Tompkins Community Bank." Tompkins Community Bank operates 60 branches, 41 branches in New York, and 19 located in Pennsylvania. Tompkins has operated in Ithaca, New York and surrounding communities since 1836. Tompkins Community Bank provides wealth management services through Tompkins Financial Advisors, a division of Tompkins Community Bank. As of December 31, 2022, Tompkins Community Bank had consolidated total assets of $7.6 billion, consolidated total loans of $5.3 billion, and consolidated total deposits of $6.6 billion. A description of markets served by Tompkins Community Bank are included below: ### Tompkins Central New York ("CNY") We operate 12 branches in our CNY market, with the largest market area being Tompkins County, which has a population of approximately 105,000. Education plays a significant role in the Tompkins County economy with Cornell University and Ithaca College being two of the county’s major employers. Tompkins Community Bank has a full-service office in Cortland, New York and a full-service office in Auburn, New York. Both of these offices are located in counties contiguous to Tompkins County. Tompkins Community Bank also has a full service branch in Fayetteville, New York which is located in Onondaga County. ### Tompkins Western New York ("WNY") We operate 16 banking offices in our WNY market, in towns situated in and around the areas commonly known as the Genesee Valley region of New York State. The main business office for WNY is located in Batavia, New York and is shared with Tompkins Insurance. Our WNY market is a six-county market, much of which is rural in nature, but also includes Monroe County (population approximately 755,000), where the city of Rochester is located, and Erie County (population approximately 951,000) located near Buffalo, New York. The population of the counties in our WNY market, other than Monroe and Erie, is approximately 200,000. ### Tompkins Hudson Valley New York ("HV") We operate 13 banking offices in our HV market. The 13 banking offices include 5 full-service offices in Putnam County, New York, 3 full-service offices in Dutchess County, New York, and 5 full-service offices in Westchester County, New York. Putnam County has a population of approximately 98,000 and is about 60 miles north of Manhattan. Dutchess County has a population of approximately 297,000, and Westchester County has a population of approximately 998,000. ### Tompkins Pennsylvania ("PA") PA operates 19 banking offices in Pennsylvania, including one limited-service office. The 19 banking offices include 12 offices in Berks County, 4 offices in Montgomery County, 1 office in Philadelphia County, 1 office in Delaware County and 1 office in Schuylkill County. The population of the counties served by PA is Philadelphia: 1.6 million, Montgomery: 861,000, Delaware: 574,000, Berks: 429,000 and Schuylkill: 143,000. The main office is located in Wyomissing, Pennsylvania. ### Tompkins Insurance Agencies, Inc. Tompkins Insurance is headquartered in Batavia, New York. Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance. Over the years, Tompkins Insurance has acquired smaller insurance agencies in the market areas served by Tompkins Community Bank and successfully consolidated them into Tompkins Insurance. Tompkins Insurance offers services to customers of the Tompkins Community Bank by sharing offices within Western New York, Central New York and Pennsylvania. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York, and 1 located in Tompkins County. ### Competition Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its business, Tompkins Community Bank competes 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 State and 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 Tompkins Community Bank can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services, including products that are accessible to our customers through digital channels. 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. ### Supervision and Regulation ### Regulatory Agencies As a registered financial holding company, the Company is regulated under the Bank Holding Company Act of 1956 as amended ("BHC Act"), and is subject to examination and comprehensive regulation by the Federal Reserve Board ("FRB"). The Company is also subject to the jurisdiction of the Securities and Exchange Commission ("SEC") and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company's activities, or those of its subsidiary bank, Tompkins Community Bank, are also subject to regulation under the Federal Reserve Act, the Federal Deposit Insurance Act, the Dodd-Frank Act, the Truth-in-Lending Act (which governs disclosures of credit terms to consumer borrowers), the Truth-in-Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act (which governs the manner in which consumer debts may be collected by collection agencies), the Home Mortgage Disclosure Act (which requires financial institutions to provide certain information about home mortgage and refinanced loans), the Servicemembers Civil Relief Act, Section 5 of the Federal Trade Commission Act (which prohibits unfair or deceptive acts and practices in or affecting commerce), the Real Estate Settlement Procedures Act, and the Electronic Funds Transfer Act, as well as other federal, state and local laws. The Company’s common stock is traded on the NYSE American under the Symbol "TMP" and as a result the Company is subject to the rules of the NYSE American for listed companies. Tompkins Community Bank is subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation ("FDIC"), and the New York State Department of Financial Services ("NYSDFS"). Each of these agencies issue regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities. The Company’s insurance subsidiary is subject to examination and regulation by the NYSDFS and the Pennsylvania Insurance Department. The Company’s wealth management subsidiary is subject to examination and regulation by various regulatory agencies. The trust division of Tompkins Community Bank is subject to examination and comprehensive regulation by the FDIC and NYSDFS. ### Federal Home Loan Bank System The Federal Home Loan Banks (the FHLBs) are a group of cooperatives that lending institutions use to finance housing and economic development in local communities. We are a member of the FHLB of New York ("FHLBNY"). FHLB members are required to maintain a minimum investment in capital stock of the applicable FHLB. The board of directors of the FHLBNY may increase the minimum investment requirements in the event it has concluded that additional capital is required to allow it to meet its own regulatory capital requirements. Any increase in the minimum investment requirements outside of specified ranges requires the approval of the Federal Housing Finance Agency. Because the extent of any obligation to increase our investment in the FHLBNY depends entirely upon the occurrence of a future event, the amount of any future investment in the capital stock of the FHLBNY is not determinable. ### Regulatory Reform Various legislation, some of which may be extensive and comprehensive in nature, is introduced in Congress and New York's legislature from time to time. Such legislation may change applicable statues and the operating environment in substantial and unpredictable ways. We cannot determine the ultimate effect that future legislation or implementing regulations would have upon our financial condition or upon our results of operations or the result of operations of any of our subsidiaries. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act") by way of example, contains a comprehensive set of provisions designed to govern the practices and oversight of financial institutions and other participants in the financial markets. The Dodd-Frank Act made extensive changes in the regulation of financial institutions and their holding companies. Some of the changes brought about by the Dodd-Frank Act were modified by the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 (the "Regulatory Relief Act"), signed into law on May 24, 2018. ### Debit-Card Interchange Fees FRB regulations mandated by the Dodd-Frank Act limit interchange fees on debit cards to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. Issuers that, together with their affiliates, have less than $10 billion in assets, such as the Company, are exempt from the debit card interchange fee standards. However, FRB regulations prohibit all card issuers, including Tompkins Community Bank, from restricting the number of networks over which electronic debit transactions may be processed to fewer than two unaffiliated networks, or inhibiting a merchant's ability to direct the routing of the electronic debit transaction over any network that the card issuer has enabled to process them. ### Volcker Rule The Dodd-Frank Act required the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in certain covered funds. The statutory provision is commonly called the "Volcker Rule," and is not applicable to depository institutions and their holding companies whose total assets do not exceed $10 billion. As of December 31, 2022, the Company's total assets on a consolidated basis did not exceed $10 billion. ### Federal Bank Holding Company Regulation We are a bank holding company subject to regulation under the BHC Act and the examination and reporting requirements of the FRB. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking. In addition, we have elected to be treated as a financial holding company under the BHC Act and therefore may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior approval of the FRB. If a bank holding company elects to be treated as a financial holding company, as we have, (i) the bank holding company and all of its depository institution subsidiaries must be "well-capitalized" and "well-managed," as defined in the FRB's Regulation Y and (ii) the bank holding company must file a declaration with the FRB that it elects to be a "financial holding company," which we have done. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be "well capitalized" and "well managed." A depository institution subsidiary is considered to be "well capitalized" if it satisfies the requirements for this status discussed in the section captioned "Capital Adequacy and Prompt Corrective Action," below. A depository institution subsidiary is considered "well managed" if it received a composite rating and management rating of at least "satisfactory" in its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as "well capitalized" and "well managed" under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions. Bank holding companies and banks must also be "well-capitalized" and "well-managed" in order to acquire banks located outside their home state. In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least "satisfactory" in its most recent examination under the Community Reinvestment Act ("CRA"). See the section captioned "Community Reinvestment Act", below. The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company. ### Share Repurchases and Dividends The ability of the Company to pay dividends on or to repurchase its common stock, and the ability of the Bank to pay dividends to the Company, may be restricted due to several factors including: (a) applicable federal and state corporate law and banking codes, (b) covenants contained in our subordinated debentures and borrowing agreements (as applicable), and (c) the regulatory authority of the FRB, the FDIC, and the NYSDFS. Our ability to pay dividends to our stockholders or to repurchase shares of our common stock is subject to the restrictions set forth in applicable corporate laws. Notification to the FRB is required prior to our declaring and paying a cash dividend to our stockholders during any period in which our quarterly and/or cumulative twelve‑month net earnings are insufficient to fund the dividend amount, among other requirements. Under such circumstances, we may not pay a dividend should the FRB object until such time as we receive approval from the FRB or no longer need to provide notice under applicable regulations. In addition, prior approval of the FRB may be required in certain circumstances prior to our repurchasing shares of our common stock. In connection with the decision regarding dividends and share repurchase programs, our Board will take into account general business conditions, our financial results, projected cash flows, capital requirements, contractual, legal and regulatory restrictions on the payment of dividends by Tompkins Community Bank to the Company and such other factors as deemed relevant. We can provide no assurance that we will continue to declare dividends on a quarterly basis, or otherwise, or to repurchase shares of our common stock. The declaration of dividends by the Company is subject to the discretion of our Board. The Company's primary source of liquidity is the receipt of cash dividends from Tompkins Community Bank. Various statutes and regulations limit the availability of cash dividends from Tompkins Community Bank and the dividends paid by Tompkins Community Bank are regulated by the NYSDFS and the FDIC under their general supervisory authority as it relates to a bank's capital requirements. Tompkins Community Bank may declare a dividend without the approval of the NYSDFS and FDIC as long as the total dividends declared in a calendar year do not exceed the net income for the current fiscal year, plus the retained net income for the prior two fiscal years. ### Transactions with Affiliates and Other Related Parties Transactions between Tompkins Community Bank and its affiliates are regulated under federal banking law. Subject to certain exceptions set forth in the Federal Reserve Act and its implementing regulations, found at Regulation W, a bank may enter into "covered transactions" with its affiliates if the aggregate amount of the covered transactions with any single affiliate does not exceed 10 percent of the bank's capital stock and surplus or 20 percent of the bank's capital stock and surplus for covered transactions with all affiliates. Covered transactions include, among other things, extension of credit, the investment in securities, the purchase of assets, the acceptance of collateral or the issuance of a guaranty. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization. Additionally, most transactions that a bank engages in with an affiliate, including where an affiliate performs a service for the bank, must be on similar terms and conditions as the bank would agree to with a non-affiliate. Tompkins Community Bank's authority to extend credit to its directors, executive officers and 10% shareholders (collectively, "Reg O Insiders"), as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O as promulgated by the FRB. Among other things, these provisions require that extensions of credit to Reg O Insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with persons or entities that are not Reg O Insiders (or their related parties), and that do not involve more than the normal risk of repayment or present other unfavorable features; and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by the bank’s board of directors. Additional restrictions apply to extensions of credit to executive officers of Tompkins Community Bank. A similar scope of restrictions on insider transactions is required by Title 3, Part 11 of NYSDFS Banking regulations. ### Mergers and Acquisitions The BHC Act, the Bank Merger Act, the Change in Bank Control Act and other federal and state statutes regulate acquisitions of interests in commercial banks. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its parent holding company and for a person, other than a bank holding company, to acquire 25% or more of any class of voting securities of a bank or bank holding company. Under the Bank Merger Act, the prior approval of the appropriate bank regulatory agencies is required for a member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the CRA (see the section captioned "Community Reinvestment Act" included elsewhere in this item) and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities. ### Source of Strength Doctrine The Dodd-Frank Act requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, Tompkins is expected to commit resources to support Tompkins Community Bank, including at times when it may not be advantageous for Tompkins to do so. Any capital loans by a bank holding company to a subsidiary bank are subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment. ### Capital Adequacy and Prompt Corrective Action Bank holding companies and banks are subject to various regulatory capital requirements administered by state and federal agencies. These agencies may establish higher minimum requirements if, for example, a banking organization previously has received special attention or has a high susceptibility to interest rate risk. Risk-based capital requirements determine the adequacy of capital based on the risk inherent in various classes of assets and off-balance sheet items. Under the Dodd-Frank Act, the Federal Reserve must apply consolidated capital requirements to depository institution holding companies that are no less stringent than those currently applied to depository institutions. The Dodd-Frank Act additionally requires capital requirements to be counter-cyclical so that the required amount of capital increases in times of economic expansion and decreases in times of economic contraction, consistent with safety and soundness. Under federal regulations, bank holding companies and banks must meet certain risk-based capital requirements. The Basel III final capital framework, among other things, (i) introduces as a new capital measure "Common Equity Tier 1" ("CET1"), (ii) specifies that Tier 1 capital consists of CET1 and "Additional Tier 1 capital" instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations. Financial institutions are also required to maintain a minimum "capital conservation buffer" to avoid restrictions on capital distributions such as dividends and equity repurchases and other payments such as discretionary bonuses to executive officers. The Basel III Capital Rules require Tompkins to maintain (i) a minimum ratio of CET1 to risk-weighted assets of 4.5%, plus a 2.5% capital conservation buffer (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.0%), (ii) a minimum ratio of Tier 1 capital to risk- weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s "eligible retained income" (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters). The Basel III Capital Rules also provide for a "countercyclical capital buffer" that is applicable to only certain covered institutions and is not expected to apply to Tompkins for the foreseeable future. The Basel III Capital Rules imposed stricter regulatory capital deductions from and adjustments to capital, with most deductions and adjustments taken against CET1 capital. These include, for example, the requirement that (i) mortgage servicing assets, net of associated deferred tax liabilities; (ii) deferred tax assets, which cannot be realized through net operating loss carrybacks, net of any relative valuation allowances and net of deferred tax liabilities; and (iii) significant investments (i.e. 10% or greater ownership) in unconsolidated financial institutions be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Under the Basel III Capital Rules, the effect of certain accumulated other comprehensive items are not excluded, which could result in significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s securities portfolio. Contained within the rule was a one-time option to permanently opt-out of the inclusion of accumulated other comprehensive income in the capital calculation based upon asset size. Tompkins decided to opt out of this requirement in January 2015. In February 2019, the federal bank regulatory agencies issued a final rule (the "2019 CECL Rule") that revised certain capital regulations to account for changes to credit loss accounting under GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard related to the measurement of current expected credit losses ("CECL") on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We elected to adopt the five-year transition option; however at the end of the two year transition period on December 31, 2019, the Company did not maintain a positive modified transition amount and therefore made no adjustment to CET1 for CECL’s impact as prescribed by regulatory rules. For the year ending December 31, 2020, a CECL transitional amount totaling $1.6 million was added back to CET1 as of December 31, 2020. The 2020 CECL transitional amount includes a $2.0 million decrease related to the cumulative effect of adopting CECL and a $3.6 million increase related to the estimated incremental effect of CECL since adoption. Section 38 of the Federal Deposit Insurance Act ("FDIA") requires federal banking agencies to take "prompt corrective action" ("PCA") should an insured depository institution fail to meet certain capital adequacy standards. If an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency and the holding company must guarantee the performance of that plan. Based upon its capital levels, a bank that is classified as well- capitalized, adequately capitalized or undercapitalized, may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice, warrants such treatment. With respect to Tompkins Community Bank, the Basel III Capital Rules revised the PCA regulations, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to 6%); and (iii) eliminating the provision that permitted a bank with a composite supervisory rating of 1 and a 3% leverage ratio to be considered adequately capitalized. The Basel III Capital Rules did not change the total risk-based capital requirement for any PCA category. Additionally, bank holding companies and insured depository institutions may also be subject to potential enforcement actions of varying levels of severity for unsafe or unsound practices in conducting their business or for violation of any law, rule, regulation, condition imposed in writing by federal banking agencies or term of a written agreement with such agency. The Company is in compliance, and management believes that the Company will continue to be in compliance, with the targeted capital ratios as such requirements are phased in. For further information concerning the regulatory capital requirements, actual capital amounts and the ratios of Tompkins and Tompkins Community Bank, see the discussion in "Note 20 - Regulations and Supervision" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. ### Deposit Insurance Substantially all of the deposits of Tompkins Community Bank's deposits are insured up to applicable limits by the Deposit Insurance Fund ("DIF") of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance to $250,000 per deposit category, per depositor, per institution retroactive to January 1, 2008. Tompkins Community Bank pays deposit insurance premiums to the FDIC based on assessment rates established by the FDIC. The assessment rates are based upon asset size and other risks the institution poses to the Deposit Insurance Fund, or DIF. Under this assessment system, risk is defined and measured using an institution’s supervisory ratings with other risk measures, including financial ratios. In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reached 1.35% by September 30, 2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets effective the quarter after the fund reserve ratio reached 1.15%. The fund reserve ratio reached 1.15% effective as of June 30, 2016. The Dodd-Frank Act required the FDIC to offset the effect of increasing the reserve ratio on insured depository institutions with total consolidated assets of less than $10 billion. In September 2018, the reserve ratio reached 1.36%, at which time banks with assets of less than $10 billion were awarded assessment credits for their portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%. When the reserve ratio reached 1.40% in June 2019, the FDIC applied these credits to assessment invoices for banks with assets of less than $10 billion. In 2019 and 2020, the Company's subsidiary banks applied credits of $1.5 million and $121,000, respectively, in the aggregate, to offset deposit insurance expense. On June 21, 2022, the FDIC adopted an Amended Restoration Plan and a notice of proposed rulemaking to increase the likelihood that the reserve ratio would be restored to at least 1.35% by September 30, 2028. The Board also approved to increase initial base deposit insurance assessment rate schedules uniformly by 2 basis points, which became effective January 1, 2023 and will be applicable to the first quarterly assessment period of 2023. Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. FDIC insurance expense totaled $2.8 million, $2.8 million, $2.4 million in 2022, 2021 and 2020, respectively. ### Depositor Preference The FDIA provides that, in the event of the "liquidation or other resolution" of an insured depository institution, such as Tompkins Community Bank, the claims of depositors of the institution, including the claims of the FDIC, as subrogee of the insured depositors, and certain claims for administrative expenses of the FDIC as receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institutions, as well as the shareholders of the parent bank holding company, who are unlikely to recover in the event a bank holding company's sole bank subsidiary fails. ### Community Reinvestment Act The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of such banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. As of December 31, 2022, the Company’s subsidiary bank had a rating of outstanding. On May 5, 2022, the Federal Reserve Board, FDIC, and OCC announced a joint proposal to strengthen and modernize regulations implementing the Community Reinvestment Act to better achieve the purposes of the law. Building on feedback from stakeholders and research, the agencies accepted public comments on their joint proposal through August 5, 2022. The proposal has the following key elements: - Expand access to credit, investment, and basic banking services in low-and moderate-income communities. Under the proposal, the agencies would evaluate bank performance across the varied activities they conduct and communities in which they operate so that CRA is a strong and effective tool to address inequities in access to credit. The proposal would promote community engagement and financial inclusion. It would also emphasize smaller-value loans and investments that can have high impact and be more responsive to the needs of LMI communities. - Adapt to changes in the banking industry, including internet and mobile banking. The proposal would update CRA assessment areas to include activities associated with online and mobile banking, branchless banking, and hybrid models. - Provide greater clarity, consistency, and transparency. The proposal would adopt a metrics-based approach to CRA evaluations of retail lending and community development financing, which includes public benchmarks, for greater clarity and consistency. It also would clarify eligible CRA activities, such as affordable housing, that are focused on LMI, underserved, and rural communities. - Tailor CRA evaluations and data collection to bank size and type. The proposal recognizes differences in bank size and business models. It provides that smaller banks would continue to be evaluated under the existing CRA regulatory framework with the option to be evaluated under aspects of the new proposed framework. - Maintain a unified approach. The proposal reflects a unified approach from the bank regulatory agencies and incorporates extensive feedback from stakeholders. The rule has not yet been finalized. The Company will continue to evaluate the impact of any changes to the regulations implementing the CRA. ### Federal Securities Laws The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Therefore, the Company is subject to the reporting, information disclosure, proxy solicitation and other requirements imposed on public companies by the SEC under the Exchange Act. Additionally, Company insiders are subject to security trading limitations and are required to file insider ownership reports with the SEC. The SEC and NYSE American have adopted regulations under the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") and the Dodd-Frank Act that apply to the Company as an exchange-traded, public company, which seek to improve corporate governance, accounting, and reporting requirements, provide enhanced penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings. For example, the Sarbanes-Oxley requirements include: (1) requirements for audit committees, including independence and financial expertise; (2) certification of financial statements by the chief executive officer and chief financial officer of the reporting company; (3) standards for auditors and regulation of audits; (4) disclosure and reporting requirements for the reporting company and directors and executive officers; and (5) a range of civil and criminal penalties for fraud and other violations of securities laws. ### Anti-Money Laundering and the USA Patriot Act The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 ("USA PATRIOT Act"), the Bank Secrecy Act, the Money Laundering Control Act, and other federal laws, collectively impose obligations on all financial institutions, including the Company, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required. The Anti-Money Laundering Act of 2020 ("AMLA"), which amends the Bank Secrecy Act of 1970 ("BSA"), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; and expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections. ### Financial Privacy The Gramm-Leach-Bliley Act of 1999 ("GLBA") requires that financial institutions implement comprehensive written information security programs that include administrative, technical and physical safeguards designed to protect consumer information. Under the GLBA, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies and certain security breaches to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These provisions affect, among other things, how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. ### Office of Foreign Assets Control Regulation The United States has imposed economic sanctions that affect transactions with designated foreign countries, designated nationals and others. These are known as the "OFAC" rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control ("OFAC"). The OFAC-administered sanctions targeting designated countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on "U.S. persons" engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to a U.S. jurisdiction (including property in the possession or control of U.S. persons). These sanctions that are applicable to countries and individuals also are imposed against some non-governmental organizations, associations, or other criminal networks. Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, strategic and reputational consequences, and result in civil money penalties against the Company and Tompkins Community Bank.. ### Consumer Protection Laws In connection with its lending and leasing activities, Tompkins Community Bank is subject to a number of federal and state laws designed to protect borrowers and promote lending. These consumer financial laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transaction Act of 2003, Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and similar laws at the state level. Tompkins Community Bank's failure to comply with any of the consumer financial laws can result in civil actions, regulatory enforcement action by the federal banking agencies and the U.S. Department of Justice. Additionally, the Dodd-Frank Act established a new Consumer Financial Protection Bureau ("CFPB") with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit "unfair, deceptive or abusive" acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Tompkins Community Bank is required to comply with the rules of the CFPB; however, these rules are generally enforced by our primary regulator, the FDIC. ### Cybersecurity The Company is also subject to data security standards and privacy and data breach notice requirements as established by federal and state regulators. Federal banking agencies, through the Federal Financial Institutions Examination Council, have adopted guidelines to encourage financial institutions to address cybersecurity risks and identify, assess and mitigate these risks, both internally and at critical third party service providers. For example, federal banking regulators have highlighted that financial institutions should establish several lines of defense and design their risk management processes to address the risk posed by compromised customer credentials. Further, financial institutions are expected to maintain sufficient business continuity planning processes designed to facilitate a recovery, resumption and maintenance of the institution’s operations after a cyber-attack. In November 2021, the federal banking agencies adopted new rules requiring banking organizations to notify their primary regulator within 36 hours of becoming aware of a "computer-security incident" or a "notification incident." The new rules also require bank service providers to notify their banking organization customers when it becomes aware of similar incidents. Compliance with the new rules was required by May 1, 2022. In accordance with the requirements, Tompkins has included appropriate language reflecting the changes to the notification requirements within related policies, standards, and procedures. Additionally, the Company must comply with a NYSDFS rule entitled "Cybersecurity Requirements for Financial Services Companies," which became effective March 1, 2017, subject to a phase-in period, concluding in 2019. This NYSDFS rule requires financial services companies, including Tompkins, to maintain a cybersecurity program designed to protect the confidentiality, integrity and availability of the company’s information systems, establish cybersecurity policies and procedures, identify persons responsible for implementing and enforcing the cybersecurity program and cybersecurity policies and procedures, and conduct periodic risk assessments of its information systems. See Item 1A. Risk Factors for a discussion of risks related to cybersecurity. ### Incentive Compensation The Dodd-Frank Act required the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in May 2016, which have not been finalized. If these or other regulations are adopted in a form similar to that initially proposed, they will impose limitations on the manner in which the Company may structure compensation for its executives. Given the uncertainty at this time whether or when a final rule will be adopted, management cannot determine the potential impact on the Company. It should also be noted that, pursuant to the Dodd-Frank Act, the SEC was required to adopt rules requiring national security exchanges to require their listed companies to adopt a "clawback policy." On October 26, 2022, the SEC issued a final rule defining the clawback standards, which require issuers to recover amounts of incentive compensation from current and former executives that were based on erroneously reported financial information, regardless of whether the executive was at fault, and associated reporting and disclosure obligations. Although the national security exchanges are in the process of updating their listing standards to reflect this requirement, Tompkins currently maintains a clawback policy for its executive officers. Once the listing standards are effective, Tompkins will ensure that its existing clawback policy complies with such listing standards, or will make necessary amendments. Additionally, the FRB, OCC and FDIC have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Management believes the current and past compensation practices of the Company do not encourage excessive risk taking or undermine the safety and soundness of the organization. The FRB reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not "large, complex banking organizations." The findings of the supervisory initiatives are included in reports of examination and deficiencies can lead to limitations on the Company’s abilities and even enforcement actions. The Company is also subject to the NYSDFS rule "Guidance on Incentive Compensation Arrangements," which directs all New York state regulated banks (including the Tompkins Community Bank) to ensure that any employee incentive arrangements do not encourage inappropriate risk-taking or improper sales practices. Under this guidance, incentive compensation based on employee performance indicators may only be paid if the bank has effective risk management, oversight and control systems in place. We believe the Company is compliant with all applicable state and federal regulation regarding incentive compensation ### Other Governmental Initiatives From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory authorities. These initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions, proposals to change the financial institution regulatory environment, or proposals that affect public companies generally. Such legislation could change banking laws and the operating environment of Tompkins in substantial, but unpredictable ways. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations would have on our financial condition or results of operations. Federal, state and local governments have taken a variety of actions in response to the COVID-19 pandemic, including the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the Consolidated Appropriations Act, 2021 ("Appropriations Act") and the rules and regulations promulgated thereunder. Among other impacts on the Company, these actions require lenders to offer loan payment deferrals, forbearance and other relief to certain borrowers (e.g., waiving late payment and other fees), under certain circumstances. These actions also affected the accounting treatment of certain loan modifications made for borrowers experiencing financial hardship as a result of the COVID-19 pandemic in 2020, 2021, and 2022. ### Employees and Human Capital Tompkins culture is underpinned by its core values, including “a commitment to our employees.” As of December 31, 2022, the Company had 1,072 total employees, which included 978 full-time employees and 94 part-time and temporary employees. Of the Company’s total employees, 899 are employed by Tompkins Community Bank, and 173 employees are in our insurance subsidiary (Tompkins Insurance). The Company's entire organization relies on its Shared Services division, which provides administrative and operational support to all of its subsidiaries. Because its Shared Services group is part of Tompkins Community Bank, these employees are included in the bank employee count listed above. No employees are covered by a collective bargaining agreement, and the Company believes its employee relations are excellent. The Company’s demand for qualified candidates at all levels of its organization grows as the Company’s business grows. While the Company does not formally track time-to-fill, its centralized Talent Acquisition Team is reporting greater challenges in recruiting and retaining talent. The Company is also mindful of macroeconomic factors such as inflation and record low unemployment in all four of its markets, and it routinely undertakes a salary review to confirm that its total compensation is aligned with the market. A key component of the Company's recruitment and retention strategy is to offer employees at all levels the opportunity to participate in the Company’s success. The Company maintains a robust Profit-Sharing plan for all employees who meet minimum service requirements. As of December 31, 2022, 75% of all employees received a profit-sharing contribution during 2022. The Company also offers incentive and/or equity compensation plans or programs to employees at many levels of the Company and, as of December 31, 2022, 53% of all employees had an opportunity to earn supplemental compensation reflective of their position and overall contributions towards the Company’s strategic objectives. Another important tool in the Company's recruiting and retention strategy was the implementation of a remote or hybrid scheduling option for the majority of team members. Today over half of the Company's employees have taken advantage of this opportunity. The Company continues to broaden the scope of its talent development initiatives across its geographically diverse footprint in order to sustain a value-driven and growth-oriented environment where employees can perform at their peak and the next generation of leaders are prepared to lead. The Company offers an array of programs including continuing education dedicated to strengthen employee engagement, personal accountability, productivity, and emotional well-being including customized programs, growth-focused coaching sessions, career-path roadmaps, curated learning resources and tuition assistance. The Company provides a blend of in person and virtual learning environments to ensure opportunities are available to all team members across its footprint. The Company also has a robust talent review and succession process. Significant time is spent at the Senior Leadership and Management level identifying and providing development for potential successors. The Company strives to promote a culture of diversity, inclusion and belonging. The Company's enterprise-wide Diversity, Inclusion & Belonging Action Team focuses on initiatives and events that recognize and engage our employees, and strengthens our employees’ sense of belonging within our organization. The Company's Diversity, Inclusion and Belonging Change Agent members play an important role in recommending educational opportunities, celebrating cultural events, and serving on a variety of teams that enhance our employee engagement. Local Acorn Community Alliance teams were established in each of the Company's markets to support our external DEI initiatives through their focus on providing Education, Volunteering and Sponsorship opportunities that meet the needs of their local communities. ### Available Information The Company maintains a website at www.tompkinsfinancial.com. The Company makes available free of charge through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, its proxy statements related to its shareholders’ meetings, and amendments to these reports or statements, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the SEC. Copies of these reports are also available at no charge to any person who requests them, with such requests directed to Tompkins Financial Corporation, Investor Relations Department, P.O. Box 460, Ithaca, New York 14851, telephone no. (888) 503-5753. The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including material filed by the Company, at www.sec.gov. The information contained on the Company's website is provided for the information of the reader and it is not intended to be active links. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K, or into any other report filed with or furnished to the SEC by the Company. ## Risk factors As filed, 48,719 characters. The Company's success depends on management's ability to identify and manage the risks inherent in its financial services business. These risks include credit risk, market risk, liquidity risk, operational risk, model risk, compliance and legal risk, and strategic and reputation risk. We list below the material risks we face. Any of these risks could result in a material adverse impact on the Company's business, operating results, financial condition, liquidity, and cash flow, or may cause the Company's results to vary materially from recent results, or from the results implied by any forward-looking statements made by the Company. ### Risks Related to the Company’s Business **The Company is subject to increased business risk because the Company has a significant concentration of commercial real estate and commercial business loans, repayment of which is often dependent on the cash flows of the borrower.** The Company offers different types of commercial loans to a variety of businesses, and we believe commercial loans will continue to comprise a significant concentration of our loan portfolio in 2023 and beyond. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan-to-collateral values. As such, declines in real estate valuations in the Company’s market area would lower the value of the collateral securing these loans. Additionally, the Company has experienced, and expects to continue experiencing, increased competition in commercial real estate lending. This increased competition may inhibit the Company's ability to generate additional commercial real estate loans or maintain its current inventory of commercial real estate loans. The Company’s commercial business loans are made based primarily on the cash flow and creditworthiness of the borrower and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. The borrowers’ cash flow may be difficult to predict, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. As of December 31, 2022, commercial and commercial real estate loans totaled $3.6 billion or 69.2% of total loans. **The Company’s agricultural loans are often dependent upon the health of the agricultural industry in the location of the borrower, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s control.** As part of the Company’s commercial business lending activities, the Company originates agricultural loans, consisting of agricultural real estate loans and agricultural operating loans. As of December 31, 2022, $300.0 million or 5.7% of the Company’s total loan portfolio consisted of agriculturally-related loans, including $215.0 million in agricultural real estate loans and $85.1 million in agricultural operating loans. Payments on agricultural loans are dependent on the profitable operation or management of the related farm property. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of governmental regulations and subsidies (including changes in price supports and environmental regulations). Many farms are dependent upon a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. While agricultural operating loans are generally secured by a blanket lien on the farm’s operating assets, any repossessed collateral in respect of a defaulted loan may not provide an adequate source of repayment of the outstanding balance. Additionally, the profitable operation or management of the related farm properties, and the value thereof, is impacted by changes in U.S. government trade policies. In 2020, 2021, and 2022, the U.S. government implemented tariffs on certain products, and certain countries or entities, such as Mexico, Canada, China and the European Union, have issued or continue to threaten retaliatory tariffs against products from the United States, including agricultural products. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that farm properties related to our agriculturally-related loans import or export could cause the costs of such farm operations and management to increase, the price of products from such farm operations to increase, demand for such products to decrease and the margins on such products to decrease. Such potential adverse effects on related farm property operations and management could reduce the related farm properties’ revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future. **Declines in asset values may result in impairment charges and may adversely affect the value of the Company’s results of operations, financial condition and cash flows.** A majority of the Company’s investment portfolio is comprised of securities which are collateralized by residential mortgages. These residential mortgage-backed securities include securities of U.S. government agencies, U.S. government-sponsored entities, and private-label collateralized mortgage obligations. The Company’s securities portfolio also includes obligations of U.S. government-sponsored entities, obligations of states and political subdivisions thereof, U.S. corporate debt securities and equity securities. A more detailed discussion of the investment portfolio, including types of securities held, the carrying and fair values, and contractual maturities, is provided in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report. Gains or losses on these instruments may have a direct impact on the results of operations, including higher or lower income and earnings, unless we adequately hedge our positions. The fair value of investments may be affected by factors other than the underlying performance of the issuer or composition of the obligations themselves, such as rating downgrades, adverse changes in the business climate, a lack of liquidity for resale of certain investment securities and changes in interest rates. For example, decreases in interest rates and increases in mortgage prepayment speeds, which are influenced by interest rates and other factors, could adversely impact the value of our securities collateralized by residential mortgages, causing a significant acceleration of purchase premium amortization on our mortgage portfolio because a decline in long-term interest rates shortens the expected lives of the securities. Conversely, increases in interest rates may result in a decrease in residential mortgage loan originations and mortgage prepayment speeds, directly impacting the value of these securities collateralized by residential mortgages. Management evaluates investment securities for expected credit losses impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. **A decline in the value of our goodwill and other intangible assets could adversely affect our financial condition and results of operations.** As of December 31, 2022, the Company had $95.3 million of goodwill and other intangible assets. The Company is required to test its goodwill and intangible assets for impairment on a periodic basis. A significant decline in the Company’s expected future cash flows, a significant adverse change in business climate, slower growth rates or a significant and sustained decline in the price of the Company’s common stock, may necessitate our taking charges in the future related to the impairment of the Company’s goodwill and intangible assets. If we make an impairment determination in a future reporting period, the Company’s earnings and the book value of these intangible assets would be reduced by the amount of the impairment. Further, a goodwill impairment charge could significantly restrict the ability of our banking subsidiary to make dividend payments to us without prior regulatory approval, which could have a material adverse effect on our financial condition and results of operations. **The Company may be adversely affected by the soundness of other financial institutions.** Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry. The most important counterparty for the Company, in terms of liquidity, is the Federal Home Loan Bank of New York ("FHLBNY"). The Company uses FHLBNY as its primary source of overnight funds and also has long-term advances and repurchase agreements with FHLBNY. The Company has placed sufficient collateral in the form of commercial and residential real estate loans at FHLBNY. In addition, the Company is required to hold stock in FHLBNY. The amount of borrowed funds and repurchase agreements with the FHLBNY, and the amount of FHLBNY stock held by the Company, at its most recent fiscal year-end are discussed in Part II, Item 8 of this Report on Form 10-K. There are 11 branches of the FHLB, including New York. The FHLBNY severally liable along with the other FHLBs for the consolidated obligations issued on behalf of the FHLBs through the Office of Finance. Dividends on, redemption of, or repurchase of shares of the FHLBNY’s capital stock cannot occur unless the principal and interest due on all consolidated obligations have been paid in full. If another FHLB were to default on its obligation to pay principal or interest on any consolidated obligations, the Federal Home Loan Finance Agency (the "Finance Agency") may allocate the outstanding liability among one or more of the remaining Federal Home Loan Banks on a pro rata basis or on any other basis the Finance Agency may determine. As a result, the FHLBNY’s ability to pay dividends on, to redeem, or to repurchase shares of capital stock could be affected by the financial condition of one or more of the other Federal Home Loan Banks. Any such adverse effects on the FHLBNY could adversely affect our liquidity, the value of our investment in FHLBNY common stock, and could negatively impact our results of operations. Systemic weakness in the FHLB could result in higher costs of FHLB borrowings, reduced value of FHLB stock, and increased demand for alternative sources of liquidity that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or lines of credit with correspondent banks. Any of these scenarios could adversely affect our liquidity, the value of our investment in FHLB common stock and our financial condition. **The Company relies on cash dividends from its subsidiaries to fund its operations, and payment of those dividends could be discontinued at any time.** The Company is a financial holding company whose principal assets and sources of income are its wholly-owned subsidiaries. The Company is a separate and distinct legal entity from its subsidiaries, and therefore the Company relies primarily on dividends from its banking and other subsidiaries to meet its obligations and to provide funds for the payment of dividends to the Company’s shareholders, to the extent declared by the Company’s board of directors. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company and impose regulatory capital and liquidity requirements on the Company and its banking subsidiary. Further, as a holding company, the Company’s right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary is subject to the prior claims of the subsidiary’s creditors (including, in the case of the Company’s banking subsidiary, the bank's depositors). If the Company were unable to receive dividends from its subsidiaries it would materially and adversely affect the Company’s liquidity and its ability to service its debt, pay its other obligations, or pay cash dividends on its common stock. **The Company’s business may be adversely affected by general economic conditions in local and national markets, the possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets.** General economic conditions impact the banking and financial services industry. The U.S. and global economies have experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assurance that economic conditions will not deteriorate. Unfavorable or uncertain economic conditions can be caused by many macro and micro factors, including declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies and other factors. The Company is particularly affected by U.S. domestic economic conditions, including U.S. interest rates, the unemployment rate, housing prices, the level of consumer confidence, changes in consumer spending, the number of personal bankruptcies and other factors. A decline in U.S. domestic business and economic conditions, without rapid recovery, could have adverse effects on our business, including the following: - consumer and business confidence levels could be lowered and cause declines in credit usage, adverse changes in payment patterns, decreases in demand for loans or other financial products and services and decreases in deposits or investments in accounts with Company; - the Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches the Company uses to select, manage and underwrite its customers become less predictive of future behaviors; - demand for and income received from the Company's fee-based services, including investment services and insurance commissions and fees, could decline, the cost to the Company to provide any or all products and services could increase, and the levels of assets under management could materially impact revenues from our trust and wealth management businesses; and - the credit quality or value of loans and other assets or collateral securing loans may decrease. **The Company's business is concentrated in and largely dependent upon the continued growth and welfare of the general geographic markets in which we operate.** The Company's operations are heavily concentrated in the New York State and, to a lesser extent, Pennsylvania and, as a result, the Company's financial condition, results of operations and cash flows are significantly impacted by changes in the economic conditions in those areas. Therefore, the Company’s financial performance generally, and in particular, the ability of borrowers to pay interest on and repay the principal of outstanding loans and the value of collateral securing these loans, is highly dependent upon the business environment in the markets where the Company operates, particularly New York State and Pennsylvania. The Company's success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets. Although the Company's clients’ business and financial interests may extend well beyond these markets, adverse economic conditions that affect these markets could disproportionately reduce the Company's growth rate, affect the ability of the Company's clients to repay their loans to the Company, affect the value of collateral underlying loans and generally affect the Company's financial condition and results of operations. Because of the Company's geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets. For additional information on the Company's market area, see Part I, Item 1, "Business" of this Report on Form 10-K. **The Company's insurance agency subsidiary’s commission revenues are based on premiums set by insurers and any decreases in these premium rates could adversely affect its operations and revenues.** The Company's insurance agency subsidiary, Tompkins Insurance, derives the bulk of its revenue from commissions paid by insurance underwriters on the sale of insurance products to clients. Tompkins Insurance does not determine the insurance premiums on which its commissions are based. Insurance premiums are cyclical in nature and may vary widely based on market conditions. As a result, insurance brokerage revenues and profitability can be volatile. Revenue from insurance commissions and fees could be negatively affected by fluctuations in insurance premiums and other factors beyond the Company’s control, including changes in laws and regulations impacting the healthcare and insurance markets. In addition, there have been and may continue to be various trends in the insurance industry toward alternative insurance markets including, among other things, increased use of self-insurance, captives, and risk retention groups. Even if Tompkins Insurance is able to participate in these activities, it is unlikely to realize revenues and profitability as favorable as those realized from our traditional brokerage activities. The Company cannot predict the timing or extent of future changes in premiums and thus commissions. As a result, the Company cannot predict the effect that future premium rates will have on its operations. Decreases in premium rates could adversely affect its operations and revenues. **The Company’s business and financial performance are impacted significantly by market interest rates and movements in those rates. The monetary, tax and other policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance over which the Company has no control and which the Company may not be able to anticipate adequately.** As a result of the high percentage of the Company’s assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve or in spreads between different market interest rates, can have a material effect on the Company’s business and profitability and the value of the Company’s assets and liabilities. For example, changes in interest rates or interest rate spreads may: - affect the difference between the interest that the Company earns on assets and the interest that the Company pays on liabilities, which impacts the Company's overall net interest income and profitability. - adversely affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments, which in turn, affects the Company's loss rates on those assets. - decrease the demand for interest rate-based products and services, including loans and deposits. - affect prepayment rates on the Company's loans and securities, which could adversely affect the Company's earnings, financial condition and cash flow. The monetary, tax and other policies of the Federal government and its agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance. These governmental policies can thus affect the activities and results of operations of banking organizations such as the Company. An important function of the Federal Reserve is to regulate the national supply of bank credit and certain interest rates. The actions of the Federal Reserve influence the rates of interest that the Company charges on loans and that the Company pays on borrowings and interest-bearing deposits and can also affect the value of the Company’s on-balance sheet and off-balance sheet financial instruments. Also, due to the impact on rates for short-term funding, the Federal Reserve’s policies influence, to a significant extent, the Company’s cost of such funding. The Company cannot predict the nature or timing of future changes in monetary, tax and other policies or the effect that they may have on the Company’s business activities, financial condition and results of operations. For information about how the Company manages its interest rate risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of this Report. **The Company's funding sources may prove insufficient to replace deposits and support future growth.** The Company must maintain sufficient cash flow and liquid assets to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which may include various short-term and long-term wholesale borrowings, including Federal funds purchased and securities sold under agreements to repurchase, brokered certificates of deposit, proceeds from the sale of loans, and borrowings from the FHLBNY and others. We also maintain available lines of credit with the FHLBNY that are secured by loans. Adverse operating results or changes in industry conditions could make it difficult or impossible for us to access these additional funding sources and could make our existing funds more volatile. Our financial flexibility could be materially constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case, our operating margins and profitability would be adversely affected. Further, the volatility inherent in some of these funding sources, particularly including brokered deposits, may increase our exposure to liquidity risk. Any interruption in these sources of liquidity when needed could adversely affect our results of operations, financial condition, cash flow or regulatory capital levels. In addition, reduced liquidity could result from circumstances beyond our control, such as general market disruptions or operational problems that affect us or third parties. Management’s efforts to closely monitor our liquidity position for compliance with internal policies may not be successful or sufficient to deal with dramatic or unanticipated reductions in liquidity. **The Company is or may become involved in lawsuits, legal proceedings, information-gathering requests, and investigations by governmental agencies or other parties that may lead to adverse consequences.** The Company’s primary business of financial services involves substantial risk of legal liability. The Company and its subsidiaries are, from time to time, named or threatened to be named as defendants in various lawsuits arising from their respective business activities, including activities of companies they have acquired. In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to delays in or prohibition to acquire other companies, significant penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which the Company conducts its business, or reputational harm. Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where it faces a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s ultimate losses may be higher than the amounts accrued for legal loss contingencies, which could adversely affect the Company’s financial condition and results of operations. ### Climate change could have a material negative impact on the Company and clients. The Company’s business, as well as the operations and activities of our clients, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its clients, and these risks are expected to increase over time. Climate change presents multi-faceted risks, including: operational risk from the physical effects of climate events on the Company and its clients’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; transition risks associated with the transition to a less carbon- dependent economy; and reputational risk from stakeholder concerns about our practices related to climate change, the Company’s carbon footprint, and the Company’s business relationships with clients who operate in carbon-intensive industries. Federal and state banking regulators and supervisory authorities, investors, and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their clients, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, the Company may face regulatory risk of increasing focus on the Company’s resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs. With the increased importance and focus on climate change, we are making efforts to enhance our governance of climate change-related risks and integrate climate considerations into our risk governance framework. Nonetheless, the risks associated with climate change are rapidly changing and evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. We could experience increased expenses resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor and stakeholder confidence due to our response to climate change and our climate change strategy, which, in turn, could have a material negative impact on our business, results of operations, and financial condition. **The Company operates in a highly regulated environment and may be adversely impacted by current or future laws and regulations due to increased compliance costs, potential fines for noncompliance, and restrictions on our ability to offer products or buy or sell businesses.** The Company is subject to extensive state and federal laws and regulations, supervision and legislation that affect how it conducts its business. The majority of these laws and regulations are for the protection of consumers, depositors and the deposit insurance funds. The regulations influence such things as the Company’s lending practices, capital structure, investment practices, and dividend policy. The Dodd-Frank Act, which established the CFPB, and enacted other reforms, has had, and will continue to have, a significant effect on the entire financial services industry. Compliance with these regulations and other initiatives negatively impacts revenue and increases the cost of doing business on an ongoing basis. New regulatory requirements or changes to existing requirements could necessitate changes to the Company’s businesses, result in increased compliance costs and affect the profitability of such businesses. Refer to "Supervision and Regulation" in Part I, Item 1 - "Business" of this Report on Form 10‑K for additional information on material laws and regulations impacting the Company’s business. Additionally, banking regulators are authorized to take supervisory actions that may restrict or limit a financial institution's activities. Regulatory restrictions on our activities could adversely affect our costs and revenues, and may impair our ability to execute our strategic plans. In addition, if our regulators identify a compliance failure, we may be assessed a fine, prohibited from completing a strategic acquisition or divestiture, or subject to other actions imposed by the regulatory authorities. The recent regulatory activity and increased scrutiny have resulted, and may continue to result, in increases in our costs of doing business, and could result in decreased revenues and net income, reduce our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes in federal or state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of such laws and regulations, could have a material adverse effect on our business, financial condition or results of operations. **The Company could be subject to environmental risks and associated costs on real estate properties owned by the Company, real estate properties that collateralize the Company’s loans or real estate properties that the Company obtains title to.** The Company owns various properties used in the operation of its business. In addition, from time to time, the Company forecloses on properties or may be deemed to become involved in the management of its borrowers’ properties. The Company could be subject to environmental liabilities imposed by applicable federal and state laws with respect to any of these properties. For example, we may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases, at a property, or may be subject to common law claims by third parties for damages and costs resulting from environmental contamination emanating from the property. Additionally, a significant portion of our loan portfolio at December 31, 2022 was secured by real estate and, if the real estate securing our assets is subject to environmental liability, our collateral position may be substantially weakened. Any such environmental liabilities imposed on the Company could have a material adverse impact on the Company's financial condition or results of operations. **The Company may be exposed to regulatory sanctions or liability if we do not timely detect and report money laundering or other illegal activities.** We are required to comply with anti-money laundering and anti-terrorism laws. These laws and regulations require us, among things, to enact policies and procedures to confirm the identity of our customers, and to report suspicious transactions to regulatory agencies. These laws and regulations are complex and require costly, sophisticated monitoring systems and qualified personnel. The policies and procedures that we have adopted in order to detect and prevent such illegal transactions may not be successful in eliminating all instances of such transactions. To the extent we fail to fully comply with applicable laws and regulations, we face the possibility of fines or other penalties, such as restrictions on our business activities, and we may also suffer reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition. Refer to "Supervision and Regulation" in Part I, Item 1 - "Business" of this Report on Form 10‑K for additional information on anti-money laundering and anti-terrorism laws impacting the Company’s business. **We will be subject to heightened regulatory requirements if we exceed $10 billion in total consolidated assets.** Based on our historical growth rates and current size, it is possible that our total assets could exceed $10 billion dollars in the future. Our total consolidated assets on December 31, 2022 were $7.7 billion. The Dodd-Frank Act and its implementing regulations impose enhanced supervisory requirements on bank holding companies with more than $10 billion in total consolidated assets. In addition to the additional regulatory requirements that we will become subject to upon crossing this asset threshold, federal financial regulators may require the Company to, or the Company may proactively, take actions to prepare for compliance with such increased regulations before we exceed $10 billion in total consolidated assets. We may, therefore, incur significant compliance costs in an effort to ensure compliance before we reach $10 billion in total consolidated assets. These additional compliance costs, if they occur, may adversely affect our business, results of operations and financial condition. ### The Company may be adversely affected by fraud. As a financial institution, the Company is inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers and other third parties targeting the Company and/or the Company’s customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Although the Company devotes substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, the Company may experience financial losses or reputational harm as a result of fraud. Fraudulent activity could have a material adverse effect on the Company’s business, financial condition and results of operations. **The Company's business requires the collection and retention of large volumes of sensitive data, which is subject to extensive regulation and oversight and exposes our business to additional risks.** In the Company's ordinary course of business, it collects and retains large volumes of customer data, including personally identifiable information in various information systems that we maintain and maintained by third parties with whom we contract to provide data services. The Company also maintains important internal Company data such as personally identifiable information about its employees and information relating to operations. Customers and employees have been, and will continue to be, targeted by cybersecurity threats attempting to misappropriate passwords, bank account information or other personal information. The Company's attempts to mitigate these threats may not be successful as cybercrimes are complex and continue to evolve. Publicized information concerning security and cyber-related problems could cause us to incur reputational harm and discourage customers from using our electronic or web-based applications or solutions, which could harm their utility as a means of conducting commercial transactions. Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in breach attempts or other disruptions are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third party vendors, including as a result of cyber-attacks, could (i) disrupt the proper functioning of our internal, or our third-party vendors’, networks and systems and therefore our operations and/or those of certain of our customers; (ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose the us to civil litigation, governmental fines and possible financial liability; (iv) require significant management attention and resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations. **A breach of information or other technological security, including as a result of cyber-attacks, could have a material adverse effect on our business, financial condition and results of operations.** In the ordinary course of business we rely on electronic communications and information systems, both internal and provided by external third parties, to conduct our operations and to store, process, and/or transmit sensitive data on a variety of computing platforms and networks and over the Internet. We cannot be certain that all of our systems, or third-party systems upon which we rely, are free from vulnerability to attack or other technological difficulties or failures. Information security breaches and cybersecurity-related incidents may include attempts to access information, including customer and company information, malicious code, computer viruses, phishing, denial of service attacks and other means of intrusion that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer or employee information), account takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. If information security is breached or difficulties or failures occur, despite the controls we and our third party vendors have instituted, information may be lost or misappropriated, resulting in financial loss or costs, reputational harm or damages and litigation, regulatory investigation costs or remediation costs to us or others. While we maintain specific "cyber" insurance coverage, which would apply in the event of many breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. Any of these consequences could have a material adverse effect on our financial condition and results of operations. The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, has significantly increased, in part due to the expansion of new technologies, the increased use of the Internet and mobile services and the increased intensity and sophistication of attempted attacks and intrusions from around the world. The threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Our technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats as well as the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities. **The Company is subject to risks presented by acquisitions, which, if realized, could negatively affect our results of operations and financial condition.** The Company’s strategic initiatives include diversification within its markets, growth of its fee-based businesses, and growth internally and through 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 within markets currently served by the Company or in other locations that would complement the Company’s business or its geographic reach. Any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks include: the difficulty of integrating operations and personnel, the potential disruption of our ongoing business, the inability of management to realize or maximize anticipated financial and strategic positions, increased operating costs, the inability to maintain uniform standards, controls, procedures and policies, the difficulty and cost of obtaining adequate financing, the potential for litigation risk, the potential loss of members of a key executive management group, the potential reputational damage and the impairment of relationships with employees and customers as a result of changes in ownership and management. Further, the asset quality or other financial characteristics of an acquired company may deteriorate after the acquisition agreement is signed or after the acquisition closes. We cannot provide any assurance that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions and any of these risks, if realized, could have an adverse effect on our results of operations and financial condition. **The Company's operations may be adversely affected if its external vendors do not perform as expected or if its access to third-party services is interrupted.** The Company relies on certain external vendors to provide products and services necessary to maintain the day-to-day operations of the Company. Some of the products and services provided by vendors include key components of our business infrastructure including data processing and storage and internet connections and network access, among other products and services. Accordingly, the Company’s operations are exposed to the risk that these vendors will not perform in accordance with the contracted arrangements or under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements or under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could disrupt the Company’s operations. If we are unable to find alternative sources for our vendors’ services and products quickly and cost-effectively, the failures of our vendors could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations. Additionally, our information technology and telecommunications systems interface with and depend on third-party systems, and we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. ### General Risks **Our success depends on our ability to offer our customers an evolving suite of products and services, and we may not be able to effectively manage the risks inherent in the development of financial products and services.** We continually monitor our suite of products and services, and prioritize new offerings based on our determination of customer demand, within regulatory parameters for financial products. We may invest significant time and resources in new products which become obsolete, or do not generate the revenues we had anticipated, or which are ultimately deemed unacceptable by regulatory authorities. As we expand the range and complexity of our products and services, we are exposed to increasingly complex risks, including potential fraud, and our employees and risk management systems may not be adequate to mitigate such risks effectively. Our failure to effectively identify and manage these risks and uncertainties could have a material adverse effect on our business. ### COVID-19 Pandemic and Recent Events The COVID-19 global pandemic continued to present health and economic challenges in the fourth quarter of 2022, but conditions were generally improved from 2021. In accordance with the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as troubled debt restructurings ("TDRs"). The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021. Under the Consolidated Appropriations Act, relief under the CARES Act was extended until the earlier of (i) 60 days after the date the COVID-19 national emergency comes to an end or (ii) January 1, 2022. Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions. ## Properties As filed, 870 characters. The Company’s executive offices are located at 118 East Seneca Street in Ithaca, New York. Tompkins Community Bank has 60 branch offices, of which 29 are owned and 31 are leased at market rents. The Company’s insurance subsidiary has 6 stand-alone offices, of which 3 are owned by the Company and 3 are leased at market rents. The Company’s wealth management and financial planning division has 2 offices which are leased at a market rent, and shares other locations within branches of Tompkins Community Bank. Management believes the current facilities are suitable for their present and intended purposes. For additional information about the Company’s facilities, including rental expenses, see "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. ## Legal proceedings As filed, 840 characters. The Company is subject to various claims and legal actions that arise in the ordinary course of conducting business. As of December 31, 2022, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future. ## Management's discussion and analysis As filed, 114,299 characters. The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiaries for the periods shown. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with other sections of this Report on Form 10-K, including Part I, "Item 1. Business," and Part II, "Item 8. Financial Statements and Supplementary Data." ### Overview 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. Effective January 1, 2022, the Company's four wholly-owned banking subsidiaries were combined into one bank, with the Bank of of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company (the "Trust Company") with the Trust Company as the surviving institution. Immediately following the merger, the Trust Company changed its name to Tompkins Community Bank. At December 31, 2022, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance. Tompkins Financial Advisors, a division of Tompkins Community Bank provides a full array of investment services, including investment management, trust and estate, financial and tax planning services. The Company’s principal offices are located at 118 E. Seneca Street, Ithaca, NY, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the Symbol "TMP." ### Forward-Looking Statements This Annual Report on Form 10-K 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", the negative and other variations of these terms and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the impact of changes in accounting standards; and trends, plans, prospects, growth and strategies. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements and historical performance. The following factors, in addition to those listed as Risk Factors in Item 1A are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; GDP growth and inflation trends; the impact of the interest rate and inflationary environment on the Company' business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; technological developments and changes; 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; uncertainties arising from national and global events, including the war in Ukraine, as well as the potential impact of widespread protests, civil unrest, political uncertainty on the economy and the financial services industry, and pandemics or other public health crises, including the COVID-19 pandemic; 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. generally accepted accounting principles ("GAAP") and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position. Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for credit losses ("allowance", or "ACL"), and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations. The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to "Allowance for Credit Losses" below, "Note 4 - Allowance for Credit Losses", and "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for the year ended December 31, 2022. For information on the Company's significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for the year ended December 31, 2022. ### Critical Accounting Estimates The Company's significant accounting policies conform with GAAP and are described in Note 1 of the Notes to Consolidated Financial Statements. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. The more significant area in which management of the Company applies critical assumptions and estimates include the following: - Accounting for credit losses - The Company accounts for the allowance for credit losses using the current expected credit loss model. Under this accounting guidance, the allowance for credit losses represents a valuation account that is deducted from the amortized cost basis of certain financial assets, including loans and leases, to present the net amount expected to be collected at the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 4 of Notes to Financial Statements. ### COVID-19 Pandemic and Recent Events The COVID-19 global pandemic continued to present health and economic challenges in the fourth quarter of 2022, but conditions were generally improved from 2021. In accordance with the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as troubled debt restructurings ("TDRs"). The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021, but expired on January 1, 2022. Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions. The Company funded a total of 5,140 applications for Paycheck Protection Plan ("PPP") loans totaling $694.1 million in 2020 and 2021. Out of the $694.1 million of PPP loans that the Company funded, approximately $693.3 million have been forgiven by the Small Business Administration ("SBA") under the terms of the program as of December 31, 2022, or paid back by the borrower. As of December 31, 2022, there were thirteen outstanding PPP loans totaling approximately $756,000. Total net deferred fees on the remaining balance of PPP loans amounted to $19,000 at December 31, 2022. ### Results of Operations ### (Comparison of December 31, 2022 and 2021 results) ### General The Company reported diluted earnings per share of $5.89 in 2022, a decrease of 2.6% compared to diluted earnings per share of $6.05 in 2021. Net income for the year ended December 31, 2022, was $85.0 million, a decrease of 4.7% compared to $89.3 million in 2021. Significant contributors to the negative variance in annual net income included a reduction in net deferred loan fees associated with PPP loans from $11.2 million in 2021 to $3.0 million in 2022, as well as an increase in provision for credit loss expense, which was a credit of $2.2 million in 2021 versus an expense of $2.8 million in 2022. Earnings performance in 2022 compared to 2021 benefited from growth in interest income sources, including loan and securities interest income. During the fourth quarter of 2022, the Company sold its VISA Class B common shares, recognizing a pre-tax gain of $11.4 million. Also in the fourth quarter of 2022, the Company sold $147.9 million of available-for-sale securities, recognizing a pre-tax loss on the sale of $11.9 million. The available-for-sale securities sold during the quarter had an average yield of 0.41% and remaining life of 2.1 years. Proceeds from the sale of the VISA Class B shares and the available-for-sale securities were used to pay down overnight borrowings with the FHLB. Earnings in 2021 included a $1.9 million purchase accounting charge related to the redemption of $15.2 million in trust preferred securities and $2.9 million in penalties related to the prepayment of $135.0 million in FHLB fixed rate advances. In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 13.25% in 2022, compared to 12.32% in 2021, while ROA was 1.09% in 2022 and 1.12% in 2021. Tompkins’ 2022 ROE compared favorably with peer ratios of 12.17% for ROE, while ROA trailed by 7 basis points when compared to peer ROA of 1.16%. The peer group data is derived from the FRB's "Bank Holding Company Performance Report", which covers banks and bank holding companies with assets between $3.0 billion and $10.0 billion as of September 30, 2022 (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 period numbers. ### Segment Reporting The Company operates in 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, subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services provided by Tompkins Financial Advisors, a division of Tompkins Community Bank. All other activities are considered banking. For additional financial information on the Company’s segments, refer to "Note 22 Segment and Related Information" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. ### Banking Segment The banking segment reported net income of $75.5 million for the year ended December 31, 2022, representing a $2.5 million or 3.1%, decrease compared to 2021. The decrease in net income in 2022 compared to 2021 was largely driven by an increase in the provision for credit losses, realized losses on the sale of available-for-sale securities in 2022, and an increase in noninterest expense. Net interest income increased $6.5 million or 2.9% in 2022 compared to 2021, as the increase in average asset yields offset the increase in the average cost of funds. Net deferred loan fees associated with PPP loans, included in net interest income, decreased from $11.2 million in 2021 to $3.0 million in 2022. Net interest income in 2021 included a $1.9 million purchase accounting charge related to the redemption of $15.2 million in trust preferred securities. The provision for credit loss expense was a expense of $2.8 million in 2022, compared to provision credit of $2.2 million in the prior year. The increase in the provision for credit losses in 2022 over 2021 is mainly driven by current economic forecasts coupled with loan growth. The allowance to total loan ratio at December 31, 2022 was 0.87%, up from 0.84% at December 31, 2021. For additional information, see the section titled "The Allowance for Credit Losses" below. Noninterest income of $25.4 million in 2022 decreased $550,000 or 2.1% compared to 2021. Noninterest expense of $156.2 million for the year ended December 31, 2022, increased $3.6 million or 2.3% from 2021. The decrease in noninterest income was mainly driven by pre-tax losses of $634,000 on the sales of available-for-sale securities in 2022 compared to pre-tax gains of $249,000 in 2021. During the fourth quarter of 2022, the Company sold its VISA Class B common shares, recognizing a pre-tax gain of $11.4 million. Also in the fourth quarter of 2022, the Company sold $147.9 million of available-for-sale securities, recognizing a pre-tax loss on the sale of $11.9 million. The available-for-sale securities sold during the quarter had an average yield of 0.41% and remaining life of 2.1 years. Proceeds from the sale of the VISA Class B shares and the available-for-sale securities were used to pay down overnight borrowings with the FHLB. The year-to-date increase in noninterest expense was mainly attributed to salary and wages and employee benefits reflecting normal annual merit adjustments and to nonrecurring expenses of $1.2 million, related to the consolidation of the Company's four banking charters into one charter, including the related conversion of the core banking system, which was completed in May of 2022. ### Insurance Segment The insurance segment reported net income of $6.5 million, an increase of $286,000 or 4.6% when compared to 2021, as a $1.3 million or 3.6% increase in noninterest revenue was only partially offset by an increase in expenses of $821,000 or 3.1%. The increase in revenue was mainly in property and casualty commissions, which were up $1.8 million or 7.7% in 2022 over 2021. Contingency revenue was down $300,000 or 6.8% in 2022 compared to 2021. Revenue growth in 2022 benefited from business development efforts and generally higher policy premium levels. The increase in expenses was mainly in salaries and wages and a result of normal annual merit increases and increases in health insurance costs. Certain expenses such as auto, travel, entertainment and marketing, which have been affected by the COVID-19 pandemic in prior years, increased for the year ended December 31, 2022. ### Wealth Management Segment The wealth management segment reported net income of $3.0 million for the year ended December 31, 2022, a decrease of $2.1 million or 40.8% compared to 2021. Revenue of $18.1 million decreased $1.6 million or 8.1% compared to 2021, mainly a result of decreased assets under management and advisory revenue, primarily as a result of market conditions. Noninterest expenses increased by $1.1 million or 8.4% compared to 2021. The increase was mainly driven by technology costs, attributable to a new core platform which was implemented at the beginning of 2022. The fair value of assets under management or in custody at December 31, 2022 totaled $2.9 billion, representing a decrease of $2.1 billion or 41.7% compared to $5.1 billion at year-end 2021. The balance at year-end 2021 included $1.7 billion of Company-owned securities where Tompkins was custodian. The decline in assets from prior year resulted in part from the outsourcing of the custody of Company-owned securities where Tompkins was custodian. Since these were inter-company related items, they did not have a meaningful impact on total income. The remaining decline in assets is related to negative market performance seen throughout the year. ### Net Interest Income Net interest income is the Company’s largest source of revenue, representing 74.7% of total revenues for the year ended December 31, 2022, and 74.0% of total revenues for the year ended December 31, 2021. 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. *Table 1 – Average Statements of Condition and Net Interest Analysis* shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. Tax-equivalent net interest income of $231.7 million for 2022 increased by $6.3 million or 2.8% from 2021. The increase resulted mainly from a 13 basis point increase in the average yield on interest-earning assets exceeding an 8 basis point increase in the average rate paid on interest-bearing liabilities, the investment of excess liquidity in securities and loans, and growth in average noninterest bearing deposits, which supported the decrease in average interest-bearing liabilities. The net interest margin for 2022 was 3.05% compared to 2.96% for 2021. The quarterly net interest margin for the fourth quarter of 2022 of 3.02% was down from a net interest margin of 3.04% for the third quarter of 2022. The decrease in net interest margin was driven mainly by higher funding costs during the fourth quarter as a result of higher average rates paid on interest-bearing deposits and borrowings exceeding the growth in average asset yields. The average cost of interest-bearing liabilities for the fourth quarter of 2022 was 0.84% compared to 0.45% for the third quarter of 2022, while the average yield on interest earning assets was 3.56% and 3.32% for the same two periods. Average interest-bearing deposit balances for the fourth quarter of 2022 were down $54.8 million or 1.2%, while other borrowings were up $19.6 million or 8.5%. The decrease in deposit balances was largely due to seasonal outflows of municipal deposits Tax-equivalent interest income increased $9.8 million or 4.0% in 2022 from 2021, driven mainly by an increase in the average yield on interest-earning assets reflecting higher market interest rate and growth in higher yielding securities as excess liquidity was invested in securities. For the year, average interest-earning assets were flat compared to 2021. Average loans and leases decreased $42.4 million or 0.8% in 2022 compared to 2021, and represented 67.6% of average earning assets in 2022 compared to 68.0% in 2021. The decrease was largely driven by a decrease in PPP loans. As a result of its participation in the SBA's PPP, the Company recorded net deferred loan fees of $3.0 million in 2022 and $11.2 million in 2021, which are included in interest income. The average yield on loans was 4.25% in 2022, an increase of 9 basis points compared to 4.16% in 2021. Average balances on securities increased $246.6 million or 11.6% in 2022 compared to 2021, while the average yield on the securities portfolio increased 17 basis points or 13.8% compared to 2021, reflecting the investment of excess liquidity in securities. Average interest-bearing balances due from banks in 2022 were down $221.5 million or 72.1% from 2021. Interest expense for 2022 increased $3.5 million or 20.1% compared to 2021, driven mainly by higher funding costs as average interest-bearing liabilities in 2022 were down $137.2 million or 2.7% compared to 2021. The average cost of interest-bearing deposits was 0.35% in 2022, an increase of 12 basis points from 0.23% in 2021, while the average cost of interest bearing liabilities increased to 0.43% in 2022 from 0.35% in 2021. Average interest bearing deposits in 2022 decreased $105.6 million or 2.2% compared to 2021. Average noninterest bearing deposit balances in 2022 increased $90.2 million or 4.3% over 2021 and represented 32.0% of average total deposits in 2022 compared to 30.6% in 2021. Average other borrowings decreased by $22.7 million or 10.4% in 2022 from 2021. ### Table 1 - Average Statements of Condition and Net Interest Analysis *(dollar amounts in thousands)* | ASSETS Interest-earning assets | For the year ended December 31, 2022 Average Balance (YTD) | Interest | Average Yield/Rate | 2021 Average Balance (YTD) | Interest | Average Yield/Rate | 2020 Average Balance (YTD) | Interest | Average Yield/Rate | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-bearing balances due from banks | $85,788 | $371 | 0.43% | $307,253 | $343 | 0.11% | $194,211 | $194 | 0.10% | | Securities1 | | | | | | | | | | | U.S. Government securities | 2,265,226 | 30,587 | 1.35% | 2,003,450 | 23,145 | 1.16% | 1,307,905 | 22,906 | 1.75% | | State and municipal2 | 97,283 | 2,490 | 2.56% | 112,391 | 2,871 | 2.55% | 114,462 | 3,048 | 2.66% | | Other securities2 | 3,329 | 135 | 4.06% | 3,417 | 92 | 2.68% | 3,430 | 117 | 3.40% | | Total securities | 2,365,838 | 33,212 | 1.40% | 2,119,258 | 26,108 | 1.23% | 1,425,797 | 26,071 | 1.83% | | FHLBNY and FRB stock | 13,354 | 646 | 4.84% | 14,830 | 776 | 5.24% | 20,815 | 1,373 | 6.60% | | Total loans and leases, net of unearned income2,3 | 5,142,098 | 218,494 | 4.25% | 5,184,491 | 215,709 | 4.16% | 5,228,135 | 228,806 | 4.38% | | **Total interest-earning assets** | **7,607,078** | **252,723** | **3.32%** | **7,625,832** | **242,936** | **3.19%** | **6,868,958** | **256,444** | **3.73%** | | Other assets | 221,442 | | | 343,119 | | | 489,520 | | | | **Total assets** | **$7,828,520** | | | **$7,968,951** | | | **$7,358,478** | | | | **LIABILITIES & EQUITY** | | | | | | | | | | | Deposits | | | | | | | | | | | Interest-bearing deposits | | | | | | | | | | | Interest bearing checking, savings, & money market | $4,029,008 | $10,389 | 0.26% | $4,034,969 | $3,736 | 0.09% | $3,650,358 | $9,430 | 0.26% | | Time deposits | 611,708 | 5,779 | 0.94% | 711,381 | 7,111 | 1.00% | 703,999 | 10,534 | 1.50% | | Total interest-bearing deposits | 4,640,716 | 16,168 | 0.35% | 4,746,350 | 10,847 | 0.23% | 4,354,357 | 19,964 | 0.46% | | Federal funds purchased & securities sold under agreements to repurchase | 57,126 | 60 | 0.10% | 58,627 | 64 | 0.11% | 55,973 | 95 | 0.17% | | Other borrowings | 195,110 | 4,815 | 2.47% | 217,799 | 4,382 | 2.01% | 365,732 | 7,799 | 2.13% | | Trust preferred debentures | 0 | 0 | 0.00% | 7,367 | 2,233 | 30.32% | 17,092 | 1,133 | 6.63% | | **Total interest-bearing liabilities** | **4,892,952** | **21,043** | **0.43%** | **5,030,143** | **17,526** | **0.35%** | **4,793,154** | **28,991** | **0.60%** | | Noninterest bearing deposits | 2,186,720 | | | 2,096,542 | | | 1,753,226 | | | | Accrued expenses and other liabilities | 107,122 | | | 117,790 | | | 112,544 | | | | **Total liabilities** | 7,186,795 | | | 7,244,475 | | | 6,658,924 | | | | Tompkins Financial Corporation Shareholders’ equity | 640,258 | | | 723,009 | | | 698,088 | | | | Noncontrolling interest | 1,468 | | | 1,467 | | | 1,466 | | | | **Total equity** | **641,725** | | | **724,476** | | | **699,554** | | | | **Total liabilities and equity** | **$7,828,520** | | | **$7,968,951** | | | **$7,358,478** | | | | Interest rate spread | | | **2.89%** | | | **2.84%** | | | **3.13%** | | Net interest income /margin on earning assets | | **231,680** | **3.05%** | | **225,410** | **2.96%** | | **227,453** | **3.31%** | | Tax Equivalent Adjustment | | **(1,399)** | | | **(1,618)** | | | **(2,114)** | | | Net interest income per consolidated financial statements | | **$230,281** | | | **$223,792** | | | **$225,339** | | 1 *Average balances and yields on available-for-sale debt securities are based on historical amortized cost.* 2 *Interest income includes the tax effects of tax-equivalent adjustments using the Federal income tax rate of 21.0% in 2022, 2021, and 2020 to increase tax exempt interest income to tax-equivalent basis.* 3 *Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of this annual report on Form 10-K.* ### Table 2 - Analysis of Changes in Net Interest Income | (In thousands)(taxable equivalent) INTEREST INCOME: | 2022 vs. 2021 Increase (Decrease) Due to Change in Average Volume | Yield/Rate | Total | 2021 vs. 2020 Increase (Decrease) Due to Change in Average Volume | Yield/Rate | Total | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | Interest-bearing balances due from banks | **$(389)** | **$417** | **$28** | $124 | $25 | $149 | | Investments1 | | | | | | | | Taxable | **3,245** | **4,240** | **7,485** | 9,653 | (9,439) | 214 | | Tax-exempt | **(386)** | **5** | **(381)** | (54) | (123) | (177) | | FHLB and FRB stock | **(73)** | **(57)** | **(130)** | (347) | (250) | (597) | | Loans, net1 | **(3,949)** | **6,734** | **2,785** | (1,897) | (11,200) | (13,097) | | Total interest income | **$(1,552)** | **$11,339** | **$9,787** | $7,479 | $(20,987) | $(13,508) | | **INTEREST EXPENSE:** | | | | | | | | Interest-bearing deposits: | | | | | | | | Interest checking, savings and money market | **$(6)** | **$6,659** | **$6,653** | $904 | $(6,598) | $(5,694) | | Time | **(1,063)** | **(269)** | **(1,332)** | 109 | (3,532) | (3,423) | | Federal funds purchased and securities sold under agreements to repurchase | **(2)** | **(2)** | **(4)** | 5 | (36) | (31) | | Other borrowings | **(1,607)** | **(193)** | **(1,800)** | (3,961) | 1,644 | (2,317) | | Total interest expense | **$(2,678)** | **$6,195** | **$3,517** | $(2,943) | $(8,522) | $(11,465) | | Net interest income | **$1,126** | **$5,144** | **$6,270** | $10,422 | $(12,465) | $(2,043) | *1 Interest income includes the tax effects of tax-equivalent adjustments using the Federal income tax rate of 21.0% in 2022, 2021 and 2020 to increase tax exempt interest income to tax-equivalent basis.* Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. In 2022, net interest income increased by $6.3 million, resulting from a $9.8 million increase in interest income, partially offset by a $3.5 million increase in interest expense. Higher yields on average interest-earning assets drove interest income up by $11.3 million, while the decrease in average balances on interest-earning assets decreased interest income by $1.6 million. The increase in interest expense reflects higher rates paid on interest bearing liabilities, both deposits and other borrowings and a decrease in average interest-bearing deposits and borrowings. ### Provision for Credit Loss Expense The provision for credit loss expense represents management’s estimate of the expense necessary to maintain the allowance for credit losses at an appropriate level. The ratio of total allowance to total loans and leases increased to 0.87% at December 31, 2022 from 0.84% at December 31, 2021. The increase in the ACL from year-end 2021 reflects updated economic forecasts for unemployment and gross domestic product ("GDP") coupled with loan growth, mainly in the real estate portfolios. Forecasts related to unemployment are beginning to deteriorate and GDP forecasts continue to weaken showing less growth compared to prior forecasts. The provision for credit loss expense was $2.8 million in 2022, compared to provision credit of $2.2 million in 2021. The provision for credit losses for 2022 included a provision of $290,000 related to off-balance sheet credit exposures compared to a provision of $586,000, respectively, for 2021. The fourth quarter of 2021 included a $7.0 million charge-off of a commercial real estate relationship consisting of two loans that were previously reported as nonperforming loans. 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 *(In thousands)* | | Year ended December 31, 2022 | 2021 | 2020 | | --- | ---: | ---: | ---: | | Insurance commissions and fees | **$36,201** | $34,836 | $31,505 | | Investment services | **18,091** | 19,388 | 17,520 | | Service charges on deposit accounts | **7,365** | 6,347 | 6,312 | | Card services | **11,024** | 10,826 | 9,263 | | Other income | **5,925** | 7,203 | 8,817 | | Net gain on securities transactions | **(634)** | 249 | 443 | | Total | **$77,972** | $78,849 | $73,860 | Noninterest income of $78.0 million for the year-ended December 31, 2022 decreased $877,000 or 1.1% from 2021. Noninterest income represented 25.3% of total revenues in 2022, down from 26.1% in 2021. Insurance commissions and fees of $36.2 million increased $1.4 million or 3.9% in 2022 compared to $34.8 million for 2021. The increase in revenue included $1.8 million or 7.7% growth in property and casualty commissions, partially offset by a $300,000 or 6.8% decrease in contingency revenue over 2021 Investment services income of $18.1 million in 2022 decreased $1.3 million or 6.7% compared to 2021, primarily a result of unfavorable market conditions. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $2.9 billion at December 31, 2022, a decrease from $5.1 billion at December 31, 2021. The fair value of assets in custody at December 31, 2021 included $1.7 billion of Company-owned securities where Tompkins is custodian. In the first quarter of 2022, the Company moved custody of Company-owned securities to a third party. Unfavorable market conditions also contributed to the decrease in the fair value of assets under management. Service charges on deposit accounts of $7.4 million increased $1.0 million of 16.0% in 2022 compared to 2021. The increase was in net overdraft fees and service fees on personal and business accounts, reflective of increased transaction activity. Card services income increased $198,000 or 1.8% in 2022 over 2021. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. The increase in card services income in 2022, when compared to 2021, was mainly driven by interchange income related to credit cards. Other income of $5.9 million decreased $1.3 million or 17.7% compared to 2021. The decrease was largely due to lower earnings on bank owned life insurance and lower gains on the sale of residential loans. Earnings on bank owned life insurance totaled $1.2 million in 2022, down from $1.9 million in 2021, as certain separate account policies were unfavorably impacted by decreases in the fair value of the underlying assets. Gains on the sale of residential loans were down $788,000 or 83.6% in 2022 when compared to 2021. During the fourth quarter of 2022, the Company sold its VISA Class B common shares, recognizing a pre-tax gain of $11.4 million. Also in the fourth quarter of 2022, the Company sold $147.9 million of available-for-sale securities, recognizing a pre-tax loss on the sale of $11.9 million. The available-for-sale securities sold during the quarter had an average yield of 0.41% and remaining life of 2.1 years. Proceeds from the sale of the VISA Class B shares and the available-for-sale securities were used to pay down overnight borrowings from the FHLB. ### Noninterest Expense *(In thousands)* | | Year ended December 31, 2022 | 2021 | 2020 | | --- | ---: | ---: | ---: | | Salaries and wages | **$98,261** | $96,038 | $92,519 | | Other employee benefits | **24,969** | 24,172 | 24,812 | | Net occupancy expense of premises | **13,093** | 13,179 | 12,930 | | Furniture and fixture expense | **8,058** | 8,328 | 7,846 | | FDIC insurance | **2,798** | 2,758 | 2,398 | | Amortization of intangible assets | **873** | 1,317 | 1,484 | | Other | **47,699** | 44,495 | 42,331 | | Total | **$195,751** | $190,287 | $184,320 | Noninterest expense as a percentage of total revenue was 63.5% in 2022, compared to 62.9% in 2021. Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2022, these expenses increased $3.0 million or 2.5% compared to 2021. Salaries and wages increased $2.2 million or 2.3% in 2022 over the prior year, mainly as a result of annual merit pay increases. Other employee benefits increased $797,000 or 3.3% over 2021, mainly in health insurance, which was up $754,000 or 8.5% in 2022 over 2021. The number of employees as measured by average full time equivalents (FTEs) for 2022 were 1,020, compared to 1,032 for 2021. Other operating expenses of $47.7 million increased by $3.2 million or 7.2% compared to 2021. The primary components of other operating expenses in 2022 were technology ($15.2 million), professional fees ($6.9 million), marketing ($5.7 million), and cardholder expense ($4.6 million). The increase in other operating expenses in 2022 compared to 2021 included increases in technology (up $3.4 million or 29.1%), marketing (up $1.4 million or 32.2%), and cardholder expense (up $1.0 million or 29.1%). Contributing to the growth in these expenses in 2022 were nonrecurring expenses of $1.2 million, related to the consolidation and rebranding of the Company's four banking charters, including the related conversion of the core banking system. Other expenses in 2021 included $2.9 million in penalties related to the prepayment of $135.0 million in FHLB fixed rate advances. ### Noncontrolling Interests Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $126,000 in 2022, in line with 2021. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company. ### Income Tax Expense The provision for income taxes provides for Federal, New York State, Pennsylvania and other miscellaneous state income taxes. The 2022 provision was $24.6 million, which decreased $625,000 or 2.5% compared to the 2021 provision. The effective tax rate for the Company was 22.4% in 2022, up from 22.0% in 2021. The effective rates for 2022 and 2021 differed from the U.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. The increase in the effective tax rate for 2022 over 2021 was due to lower excess tax benefits of stock based compensation and life insurance income. The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on its New York State tax return for qualifying entities. A condition to claim the benefit is that the consolidated company has average assets of no more than $8.0 billion for the taxable year. As of December 31, 2022, the Company's consolidated average assets, as defined by New York tax law, were under the $8.0 billion threshold. The Company will continue to monitor the consolidated average assets during 2023 to determine future eligibility. ### Financial Condition Total assets were $7.7 billion at December 31, 2022, down by 1.9% or $149.3 million from the previous year end. Total securities decreased $421.3 million or 18.1% over December 31, 2021, while total loans were up $193.4 million or 3.8%. Total deposits at year-end 2022 decreased $189.1 million or 2.8% over year-end 2021, while total borrowings were up $167.3 million or 134.9%. Loans and leases were 68.7% of total assets at December 31, 2022, compared to 64.9% of total assets at December 31, 2021. Total loan balances were $5.3 billion at December 31, 2022, an increase of $193.4 million or 3.8% compared to the $5.1 billion reported at year-end 2021. The increase was mainly in commercial real estate loans and residential real estate loans. A more detailed discussion of the loan portfolio is provided below in this section under the caption "Loans and Leases". As of December 31, 2022, total securities comprised 24.9% of total assets, compared to 29.8% of total assets at year-end 2021. Securities decreased $421.3 million or 18.1% at December 31, 2022, compared to December 31, 2021. Contributing to the decrease in securities from year-end 2021 were an increase in unrealized losses on the available-for-sale portfolio from $19.3 million at year-end 2021 to $236.8 million at December 31, 2022, as a result of the increase in market interest rates in 2022, and the use of proceeds from investment sales and principal maturities to fund loan growth and pay down borrowings. A detailed discussion of the securities portfolio is provided below in this section under the caption "Securities". Total deposits at year-end 2022 decreased by $189.1 million or 2.8% compared to December 31, 2021. At December 31, 2022 noninterest bearing deposits increased by $14.4 million or 0.7%, time deposit balances decreased $8.3 million or 1.3% and checking, savings and money market accounts decreased $195.3 million or 4.9% when compared to December 31, 2021. Other borrowings, consisting mainly of short term advances with the FHLB, increased $167.3 million or 53.2% from December 31, 2021. A more detailed discussion of deposits and borrowings is provided below in this section under the caption "Deposits and Other Liabilities". ### Shareholders’ Equity The Consolidated Statements of Changes in Shareholders’ Equity included in the Consolidated Financial Statements of the Company contained in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, detail changes in equity capital over prior year end. Total shareholders’ equity decreased $111.6 million or 15.3% to $617.4 million at December 31, 2022, from $728.9 million at December 31, 2021. The decrease was primarily the result of an increase in unrealized losses on the available-for-sale portfolio driven by the increase in market interest rates in 2022. Additional paid-in capital decreased by $9.8 million, from $312.5 million at December 31, 2021, to $302.8 million at December 31, 2022. The $9.8 million decrease included the following: a $15.4 million aggregate purchase price related to the Company's repurchase and retirement of 197,979 shares of its common stock in connection with Board-approved repurchase plans, and $2.3 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.3 million attributed to stock based compensation expense, and $488,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $51.5 million, reflecting net income of $85.0 million, less dividends paid of $33.6 million for the year-ended December 31, 2022. Accumulated other comprehensive loss increased from $56.0 million at December 31, 2021 to $208.7 million at December 31, 2022, reflecting a $164.2 million increase in unrealized losses on available-for-sale debt securities due to market interest rates, partially offset by a $11.5 million actuarial gain associated with employee benefit plans. Under regulatory requirements, 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 capital ratios. Total shareholders’ equity increased $11.3 million or 1.6% to $728.9 million at December 31, 2021, from $717.7 million at December 31, 2020. Additional paid-in capital decreased by $21.4 million, from $334.0 million at December 31, 2020, to $312.5 million at December 31, 2021. The $21.4 million decrease included the following: $23.8 million aggregate purchase price related to the Company's repurchase and retirement of 304,513 shares of its common stock in connection with the Board-approved repurchase plans, and $3.1 million related to the exercise of stock options and restricted stock activity. These were partially offset by $5.1 million attributed to stock based compensation expense, $257,000 related to shares issued in connection with the Company's dividend reinvestment program, and $255,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $56.8 million, reflecting net income of $89.3 million, less dividends paid of $32.4 million for the year ended December 31, 2021. Accumulated other comprehensive loss increased from $32.1 million at December 31, 2020 to $56.0 million at December 31, 2021; reflecting a $35.2 million increase in unrealized losses on available-for-sale debt securities due to market interest rates; partially offset by a $11.3 million increase in actuarial gain associated with employee benefit plans. The Company continued its long history of increasing cash dividends with a per share increase of 5.5% in 2022, which followed an increase of 4.3% in 2021. Dividends per share were $2.31 in 2022, compared to $2.19 in 2021, and $2.10 in 2020. Cash dividends paid represented 39.5%, 36.3%, and 40.4% of after-tax net income in 2022, 2021, and 2020, respectively. On January 30, 2020, the Company’s Board of Directors authorized a stock repurchase plan (the "2020 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. In the third quarter of 2021, the Company reached the 400,000 share limit under the 2020 Repurchase Plan; the 400,000 shares were purchased at an average price of $75.99. On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the "2021 Repurchase Plan") for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Shares may be repurchased from time to time under the 2021 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2021 Repurchase Plan, the Company repurchased 230,182 shares through December 31, 2022, at an average cost of $78.31. The Company and its subsidiary bank are subject to various regulatory capital requirements administered by federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary bank are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank 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 three year period that began on January 1, 2016, and was fully phased-in on January 1, 2019 at 2.5%. As of December 31, 2022, the capital ratios for the Company’s subsidiary bank exceeded the minimum levels required to be considered well capitalized. Effective January 1, 2022, the Company's four wholly-owned banking subsidiaries were combined into one bank, with the Bank of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company. Immediately following the merger, Tompkins Trust Company changed its name to Tompkins Community Bank. Additional information on the Company’s capital ratios and regulatory requirements is provided in "Note 20 - Regulations and Supervision" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. ### Securities The Company maintains a portfolio of securities such as U.S. Treasuries, U.S. government sponsored entities securities, U.S. government agencies, non-U.S. Government agencies or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy established by the Company’s Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee and Investment Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee. The Company classifies its securities at date of purchase as available-for-sale, held-to-maturity or trading. Securities, other than certain obligations of states and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. Securities in the held-to-maturity portfolio would consists of obligations of the U.S. Government, U.S. Government sponsored entities and obligations of state and political subdivisions. Securities in the trading portfolio would reflect those securities that the Company elects to account for at fair value, with the adoption of ASC Topic 825, *Financial Instruments.* The Company’s total securities portfolio at December 31, 2022 was $1.9 billion compared to $2.3 billion at December 31, 2021. The table below shows the composition of the available-for-sale and held-to-maturity securities portfolios as of year-end 2022, 2021 and 2020. Contributing to the decrease in securities from year-end 2021 were an increase in unrealized losses on the available-for-sale portfolio from $19.3 million at year-end 2021 to $236.8 million at December 31, 2022, as a result of the increase in market interest rates in 2022, and the use of proceeds from investment sales and principal maturities to fund loan growth and pay down borrowings. The Company purchased approximately $183.1 million of securities in 2022, which were offset by $208.7 million of payments, maturities and calls and $172.6 million of sales of available-for-sale securities. Additional information on the securities portfolio is available in "Note 2 Securities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, which details the types of securities held, the carrying and fair values, and the contractual maturities as of December 31, 2022 and 2021. *(In thousands)* | Available-for-Sale Debt Securities | As of December 31, 2022 Amortized Cost | Fair Value | 2021 Amortized Cost | Fair Value | 2020 Amortized Cost | Fair Value | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | U.S. Treasuries | **$190,170** | **$167,251** | $160,291 | $157,834 | $0 | $0 | | Obligations of U.S. Government sponsored entities | **681,192** | **601,167** | 843,218 | 832,373 | 599,652 | 607,480 | | Obligations of U.S. states and political subdivisions | **93,599** | **85,281** | 102,177 | 104,169 | 126,642 | 129,746 | | Mortgage-backed securities-residential, issued by | | | | | | | | U.S. Government agencies | **58,727** | **52,668** | 76,502 | 77,157 | 179,538 | 182,108 | | U.S. Government sponsored entities | **805,603** | **686,222** | 879,102 | 870,556 | 691,562 | 705,480 | | U.S. corporate debt securities | **2,500** | **2,378** | 2,500 | 2,424 | 2,500 | 2,379 | | Total available-for-sale debt securities | **$1,831,791** | **$1,594,967** | $2,063,790 | $2,044,513 | $1,599,894 | $1,627,193 | 37 *(In thousands)* | Held-to-Maturity Securities | As of December 31, 2022 Amortized Cost | Fair Value | 2021 Amortized Cost | Fair Value | 2020 Amortized Cost | Fair Value | | --- | ---: | ---: | ---: | ---: | ---: | ---: | | U. S. Treasuries | **$86,478** | **$73,541** | $86,689 | $86,368 | $0 | $0 | | Obligations of U.S. Government sponsored entities | **225,866** | **188,151** | 197,320 | 195,920 | 0 | 0 | | Total held-to-maturity securities | **$312,344** | **$261,692** | $284,009 | $282,288 | $0 | $0 | The Company evaluates available-for-sale debt securities for expected credit losses ("ECL") in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Factors that may be indicative of ECL include, but are not limited to, the following: - Extent to which the fair value is less than the amortized cost basis. - Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice). - Payment structure of the debt security with respect to underlying issuer or obligor. - Failure of the issuer to make scheduled payment of principal and/or interest. - Changes to the rating of a security or issuer by a NRSRO. - Changes in tax or regulatory guidelines that impact a security or underlying issuer. For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of December 31, 2022, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including Federal National Mortgage Agency, Federal Home Loan Bank, and Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of December 31, 2022. The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation ("FHLMC"), and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY") stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and ACBB stock totaled $17.6 million and $95,000 at December 31, 2022, respectively. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY. At December 31, 2021, the Company’s holdings of FHLBNY stock and ACBB stock totaled $9.9 million and $95,000, respectively. Management’s policy is to purchase investment grade securities that, on average, have relatively short expected durations. This policy helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The contractual maturity distribution of debt securities and mortgage-backed securities as of December 31, 2022, along with the weighted average yield of each category, is presented in *Table 3-Maturity Distribution* below. Balances are shown at amortized cost and weighted average yields are calculated on a fully tax-equivalent basis. Expected maturities will differ from contractual maturities presented in *Table 3-Maturity Distribution* below, because issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout the periods prior to contractual maturity. ### Table 3 - Maturity Distribution *(dollar amounts in thousands)* | U.S. Treasury | As of December 31, 2022 Securities Available-for-Sale1 Amount | Yield2 | Securities Held-to-Maturity Amount | Yield2 | | --- | ---: | ---: | ---: | ---: | | Over 1 to 5 years | $69,341 | 1.14% | $0 | 0.00% | | Over 5 to 10 years | 120,829 | 1.18% | 86,478 | 1.37% | | | $190,170 | 1.17% | $86,478 | 1.37% | | Obligations of U.S. Government sponsored entities | | | | | | Within 1 year | $47,690 | 2.42% | $0 | 0.00% | | Over 1 to 5 years | 419,323 | 1.07% | 0 | 0.00% | | Over 5 to 10 years | 194,179 | 1.30% | 225,866 | 1.63% | | Over 10 years | 20,000 | 2.22% | $0 | 0.00% | | | $681,192 | 1.26% | $225,866 | 1.63% | | Obligations of U.S. state and political subdivisions | | | | | | Within 1 year | $3,232 | 2.92% | $0 | 0.00% | | Over 1 to 5 years | 20,216 | 2.90% | 0 | 0.00% | | Over 5 to 10 years | 50,235 | 2.72% | 0 | 0.00% | | Over 10 years | 19,916 | 2.53% | 0 | 0.00% | | | $93,599 | 2.73% | $0 | 0.00% | | Mortgage-backed securities - residential | | | | | | Within 1 year | $0 | 0.00% | $0 | 0.00% | | Over 1 to 5 years | 17,724 | 2.48% | 0 | 0.00% | | Over 5 to 10 years | 304,286 | 1.34% | 0 | 0.00% | | Over 10 years | 542,320 | 1.78% | 0 | 0.00% | | | $864,330 | 1.64% | $0 | 0.00% | | Other securities | | | | | | Over 5 to 10 years | $2,500 | 6.40% | $0 | 0.00% | | | $2,500 | 6.40% | $0 | 0.00% | | Total securities | | | | | | Within 1 year | $50,922 | 2.45% | $0 | 0.00% | | Over 1 to 5 years | 526,604 | 1.20% | 0 | 0.00% | | Over 5 to 10 years | 672,029 | 1.42% | 312,344 | 1.56% | | Over 10 years | 582,236 | 1.82% | 0 | 0.00% | | | $1,831,791 | 1.51% | $312,344 | 1.56% | *1 Balances of available-for-sale* debt *securities are shown at amortized cost.* *2 Interest income includes the tax effects of tax-equivalent adjustments using a combined New York State and Federal effective income tax rate of 24.5% to increase tax exempt interest income to tax-equivalent basis.* The average tax-equivalent yield on the securities portfolio was 1.40% in 2022, 1.23% in 2021 and 1.83% in 2020. At December 31, 2022, there were no holdings of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of the Company’s shareholders’ equity. ### Loans and Leases ### Table 4 - Composition of Loan and Lease Portfolio *(In thousands)* | Loans and Leases Commercial and industrial | As of December 31, 2022 | 2021 | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | ---: | ---: | | Agriculture | **$85,073** | $99,172 | $94,489 | $105,786 | $107,494 | | Commercial and industrial other | **705,700** | 699,121 | 792,987 | 902,275 | 970,141 | | PPP loans | **756** | 71,260 | 291,252 | 0 | 0 | | Subtotal commercial and industrial | **791,529** | 869,553 | 1,178,728 | 1,008,061 | 1,077,635 | | Commercial real estate | | | | | | | Construction | **201,116** | 178,582 | 163,016 | 213,637 | 165,669 | | Agriculture | **214,963** | 195,973 | 201,866 | 184,898 | 170,229 | | Commercial real estate other | **2,437,339** | 2,278,599 | 2,204,310 | 2,045,030 | 2,004,763 | | Subtotal commercial real estate | **2,853,418** | 2,653,154 | 2,569,192 | 2,443,565 | 2,340,661 | | Residential real estate | | | | | | | Home equity | **188,623** | 182,671 | 200,827 | 219,245 | 229,608 | | Mortgages | **1,346,318** | 1,290,911 | 1,235,160 | 1,158,592 | 1,104,286 | | Subtotal residential real estate | **1,534,941** | 1,473,582 | 1,435,987 | 1,377,837 | 1,333,894 | | Consumer and other | | | | | | | Indirect | **2,224** | 4,655 | 8,401 | 12,964 | 12,663 | | Consumer and other | **75,412** | 67,396 | 61,399 | 61,446 | 58,326 | | Subtotal consumer and other | **77,636** | 72,051 | 69,800 | 74,410 | 70,989 | | Leases | **16,134** | 13,948 | 14,203 | 17,322 | 14,556 | | Total loans and leases | **$5,273,658** | $5,082,288 | $5,267,910 | $4,921,195 | $4,837,735 | | Less: unearned income and deferred costs and fees | **(4,747)** | (6,821) | (7,583) | (3,645) | (3,796) | | Total loans and leases, net of unearned income and deferred costs and fees | **$5,268,911** | $5,075,467 | $5,260,327 | $4,917,550 | $4,833,939 | Total loans and leases of $5.3 billion at December 31, 2022 increased $193.4 million or 3.8% from December 31, 2021. The increase was mainly in commercial real estate loans; all loan portfolios grew other than commercial and industrial, which decreased mainly in PPP loans as a result of the PPP forgiveness program. At December 31, 2022, total loans and leases represented 68.7% of total assets compared to 64.9% of total assets at December 31, 2021. Residential real estate loans, including home equity loans, were $1.5 billion at December 31, 2022, an increase of $61.4 million or 4.2% compared to $1.5 billion at year-end 2021. Residential real estate loans comprised 29.1% of total loans and leases at December 31, 2022 compared to 29.0% at December 31, 2021. Growth in residential loan balances is 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 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 2022, 2021, and 2020, the Company sold residential mortgage loans totaling $8.9 million, $31.5 million, and $51.7 million, respectively, and realized net gains on these sales of $155,000, $943,000, and $2.1 million, respectively. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2022, 2021, and 2020, the Company recorded mortgage-servicing assets of $66,000, $236,000, and $388,000, respectively. The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate given the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk. Commercial real estate loans totaled $2.9 billion at December 31, 2022, an increase of $200.3 million or 7.5% compared to December 31, 2021, and represented 54.2% of total loans and leases at December 31, 2022, compared to 52.3% at December 31, 2021. Commercial and industrial loans totaled $791.5 million at December 31, 2022, which is a decrease of $78.0 million or 9.0% from December 31, 2021. Commercial and industrial loans represented 15.0% of total loans at December 31, 2022 compared to 17.1% at December 31, 2021. The decrease was mainly in PPP loans, which totaled $756,000 at year end 2022, and $71.3 million at year-end 2021. The decrease in PPP loans is due to the PPP loan forgiveness program and pay downs made in 2022. As of December 31, 2022, agriculturally-related loans totaled $300.0 million or 5.7% of total loans and leases compared to $295.1 million or 5.8% of total loans and leases at December 31, 2021. Agriculturally-related loans include loans to dairy farms and cash and vegetable 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 consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $77.6 million at December 31, 2022, compared to $72.1 million at December 31, 2021. The lease portfolio increased by 15.7% to $16.1 million at December 31, 2022 from $13.9 million at December 31, 2021. As of December 31, 2022, commercial leases and municipal leases represented 100.0% of total leases. The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing policies, underwriting standards and loan review during 2022. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. The Company’s loan and lease customers are located primarily in the New York and Pennsylvania communities served by its subsidiary bank. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states. As a result, the economic consequences of the pandemic on our market area generally and on the Company in particular continue to be difficult to quantify. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. ### Analysis of Past Due and Nonperforming Loans *(In thousands)* | Loans 90 days past due and accruing1 | As of December 31, 2022 | 2021 | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | ---: | ---: | | Commercial and industrial | **$25** | $0 | $0 | $0 | $0 | | Total loans 90 days past due and accruing | **$25** | $0 | $0 | $0 | $0 | | Nonaccrual loans | | | | | | | Commercial and industrial | **$618** | $533 | $1,775 | $2,335 | $1,883 | | Commercial real estate | **13,858** | 13,893 | 23,627 | 10,789 | 8,007 | | Residential real estate | **13,544** | 11,178 | 13,145 | 10,882 | 12,072 | | Consumer and other | **269** | 429 | 429 | 275 | 234 | | Total nonaccrual loans and leases | **$28,289** | $26,033 | $38,976 | $24,281 | $22,196 | | Troubled debt restructurings not included above | **4,530** | 5,124 | 6,803 | 7,154 | 4,395 | | Total nonperforming loans and leases | **$32,844** | $31,157 | $45,779 | $31,435 | $26,591 | | Other real estate owned | **152** | 135 | 88 | 428 | 1,595 | | Total nonperforming assets | **$32,996** | $31,292 | $45,867 | $31,863 | $28,186 | | Total nonperforming loans and leases as a percentage of total loans and leases | **0.62%** | 0.61% | 0.87% | 0.64% | 0.55% | | Total nonperforming assets as a percentage of total assets | **0.43%** | 0.40% | 0.60% | 0.47% | 0.42% | | Allowance as a percentage of nonperforming loans and leases | **139.86%** | 137.51% | 112.87% | 126.90% | 163.25% | *1 The 2020, 2019 and 2018 columns in the above table exclude $794,000, $1.3 million, and $1.1 million, respectively, of acquired loans that were 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date of August 1, 2012. These loans are considered to be accruing as the Company can reasonably estimate future cash flows on these acquired loans and the Company expects to fully collect the carrying value of these loans. Therefore, the Company is accreting the difference between the carrying value of these loans and their expected cash flows into interest income.* The level of nonperforming assets as of the past five year-ends is illustrated in the table above. The Company’s total nonperforming assets as a percentage of total assets was 0.43% at December 31, 2022, compared to 0.40% at December 31, 2021, and compares to its peer group's most recent ratio of 0.37% at September 30, 2022. The peer data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion. Nonperforming loans and leases totaled $32.8 million at December 31, 2022 and increased 5.4% from December 31, 2021. Nonperforming loans and leases represented 0.62% of total loans at December 31, 2022, compared to 0.61% of total loans at December 31, 2021, and 0.87% of total loans at December 31, 2020. Nonperforming loans and leases in the residential real estate portfolio at year-end 2022 increased by $2.4 million compared to 2021. Loans are considered modified in a troubled debt restructuring ("TDR") when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that the Company would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDRs or impaired. 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 have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all amounts due are reasonably assured. At December 31, 2022, the Company had $6.4 million in TDR balances, which are included in the above table, of which $4.5 million are included in the line captioned "Troubled debt restructurings not included above" and the remainder are included within nonaccrual loans. 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 called for by regulatory requirements. 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. For additional financial information on the difference between the interest income that would have been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was recorded, refer to "Note 3 – Loans and Leases" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. The Company’s recorded investment in loans and leases that are individually evaluated totaled $20.8 million at December 31, 2022, and $20.5 million at December 31, 2021. A loan is individually evaluated when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Individually evaluated loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due. Specific reserves on individually evaluated loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. At December 31, 2022, there were specific reserves of $3,000, mainly related to residential real estate loans compared to $67,000 of specific reserves mainly related to one commercial real estate loan and one commercial loan at December 31, 2021. The majority of the individually evaluated loans are collateral dependent loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans or the loans have been written down to fair value. Interest payments on individually evaluated loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. There was no interest income recognized on individually evaluated loans and leases for 2022, 2021 and 2020. The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 139.9% at December 31, 2022, compared to 137.5% at December 31, 2021. The Company’s nonperforming loans are mostly made up of collateral dependent loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs. Management reviews the loan portfolio 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 credit administration function, identified 17 commercial relationships totaling $33.3 million at December 31, 2022 that were potential problem loans. At December 31, 2021, there were 25 commercial relationships totaling $36.5 million in the loan portfolio that were considered potential problem loans. Of the 17 commercial relationships from the portfolio that were classified as potential problem loans at December 31, 2022, there were 5 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $29.7 million. The potential problem 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. ### The Allowance for Credit Losses Management reviews the appropriateness of the ACL on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, *Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses* and *ASC Topic 326, Financial Instruments - Credit Losses.* The Company uses a discounted cash flow ("DCF") method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, recovery lag, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes and forecasts national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model. For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics. Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses. The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis. The Company adopted Accounting Standard Update ("ASU") 2016-13 on January 1, 2020, 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 will be accreted into interest income on a level-yield method over the life of the loans. Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of December 31, 2022, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations. ### Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company's consolidated statements of income. As of December 31, 2022, the Company's reserve for off-balance sheet credit exposures was $2.8 million, compared to $2.5 million at December 31, 2021. As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment increasing the allowance for credit losses on off-balance sheet credit exposures by $381,000 from $477,000 at December 31, 2019, to $858,000 at January 1, 2020. As of December 31, 2022, the total allowance for credit losses was $45.9 million, a increase of $3.1 million or 7.2% from year-end 2021. The increase reflects net loan recoveries of $592,000 and provision for credit loss expense of $2.5 million. The ratio of the allowance for credit losses as a percentage of total loans was 0.87% at year-end 2022 compared to 0.84% at year-end 2021. The allowance coverage to nonperforming loans and leases was 139.86% at December 31, 2022 compared to 137.50% at December 31, 2021. The increase in the ACL from year-end 2021 reflects updated economic forecasts for unemployment and gross domestic product ("GDP") coupled with loan growth, mainly in the real estate portfolios. Forecasts related to unemployment are beginning to deteriorate and GDP forecasts continue to weaken showing less growth compared to prior forecasts. Qualitative reserves established as a result of the COVID-19 pandemic to address specific portfolios with increased risk characteristics, including loans in our hotel portfolio, were reduced over 2022, and mainly removed from the allowance as of September 30, 2022, due to improved metrics that have stabilized and are in line with pre-pandemic trends. Qualitative reserves were added to the residential portfolio at year-end 2022 driven by uncertain impact of economic conditions, including rising interest rates, higher inflation, possible recession and rising consumer debt. Total loans were $5.3 billion at December 31, 2022, an increase of $193.4 million or 3.8% from December 31, 2021. The increase from year-end 2021 was mainly due to loan growth in the commercial real estate portfolio. Credit quality metrics at December 31, 2022, were mixed when compared to year-end 2021. Nonperforming assets represented 0.43% of total assets at December 31, 2022, compared to 0.40% at December 31, 2021. Nonperforming loans and leases increased $1.7 million or 5.4% from year end 2021 and represented 0.62% of total loans at December 31, 2022 compared to 0.61% at December 31, 2021. Loans internally-classified Special Mention or Substandard decreased $39.6 million or 28.8% compared to December 31, 2021. The improvement over December 31, 2021, were mainly due to improved economic conditions as pandemic-related restrictions are being lifted and businesses are reopening. Net loan recoveries totaled $592,000 in 2022, compared to net charge-offs of $6.0 million in 2021. The allocation of the Company’s allowance as of December 31, 2022, and each of the previous four years is illustrated in *Table 5- Allocation of the Allowance for Credit Losses*, below. The table represents the allowance for credit losses calculated under the new accounting guidance as of December 31, 2020, and the prior periods show amounts calculated under the incurred loss methodology calculation used prior to adoption. The table provides 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. ### Table 5 - Allocation of the Allowance for Credit Losses *(In thousands)* | | As of December 31, 2022 | 2021 | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | ---: | ---: | | Total loans outstanding at end of year | **$5,268,911** | $5,075,467 | $5,260,327 | $4,917,550 | $4,833,939 | | Allocation of the ACL by loan type: | | | | | | | Commercial and industrial | **$6,039** | $6,335 | $9,239 | $10,541 | $11,272 | | Commercial real estate | **27,287** | 24,813 | 30,546 | 21,608 | 23,483 | | Residential real estate | **11,154** | 10,139 | 10,257 | 6,381 | 7,345 | | Consumer and other | **1,358** | 1,492 | 1,562 | 1,362 | 1,310 | | Leases | **96** | 64 | 65 | 0 | 0 | | Total | **$45,934** | $42,843 | $51,669 | $39,892 | $43,410 | | Allocation of the ACL as a percentage of total allowance: | | | | | | | Commercial and industrial | **13%** | 15% | 18% | 26% | 26% | | Commercial real estate | **60%** | 58% | 59% | 54% | 54% | | Residential real estate | **24%** | 24% | 20% | 16% | 17% | | Consumer and other | **3%** | 3% | 3% | 3% | 3% | | Leases | **0%** | 0% | 0% | 0% | 0% | | Total | **100%** | 100% | 100% | 100% | 100% | | Loan and lease types as a percentage of total loans and leases: | | | | | | | Commercial and industrial | **16%** | 18% | 23% | 21% | 22% | | Commercial real estate | **54%** | 52% | 49% | 50% | 49% | | Residential real estate | **29%** | 29% | 27% | 28% | 28% | | Consumer and other | **1%** | 1% | 1% | 1% | 1% | | Leases | **0%** | 0% | 0% | 0% | 0% | | Total | **100%** | 100% | 100% | 100% | 100% | The above table shows a fairly consistent allocation of the loan portfolio and allowance over the period with commercial real estate and residential real estate representing the largest proportion of total loans and the allowance. The increase in commercial and industrial loans at year-end 2020, was mainly due to PPP loans, which decreased at year end 2021 and 2022 as these loans were forgiven by the SBA. Given the SBA guaranty of the PPP loans, there were no reserves allocated to PPP loans. *Table 6 - Analysis of the Allowance for Credit Losses* shows the activity in the allowance for credit losses over the past five years. The allowance at December 31, 2022 was $45.9 million, an increase of $3.1 million from year-end 2021, reflecting a provision expense of $2.5 million and net recoveries of $592,000 for the year-ended December 31, 2022. Net charge-offs of $6.0 million in 2021, were mainly due to one commercial real estate relationship that included two loans and was charged off in the fourth quarter of 2021. The $16.2 million provision expense in 2020 was 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 majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. Provision expense decreased in 2021, as businesses opened and economic conditions continued to improve, resulting in the ability to reverse some of the provision expense booked in the first quarter of 2020 related to the COVID-19 pandemic. ### Table 6 - Analysis of the Allowance for Credit Losses *(In thousands)* | | December 31, 2022 | 2021 | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | ---: | ---: | | Average loans outstanding during year | **$5,142,099** | $5,184,492 | $5,228,135 | $4,830,089 | $4,757,583 | | Balance of allowance at beginning of year | **42,843** | 51,669 | 39,892 | 43,410 | 39,771 | | Impact of adopting ASU 2016-13 | **0** | 0 | (2,534) | 0 | 0 | | **Loans charged-off:** | | | | | | | Commercial and industrial | **$559** | $274 | $2 | $696 | $334 | | Commercial real estate | **50** | 6,957 | 1,903 | 4,015 | 142 | | Residential real estate | **53** | 77 | 84 | 256 | 614 | | Consumer and other | **544** | 438 | 482 | 823 | 1,350 | | Leases | **0** | 0 | 0 | 0 | 0 | | **Total loans charged-off** | **$1,206** | $7,746 | $2,471 | $5,790 | $2,440 | | **Recoveries of loans previously charged-off:** | | | | | | | Commercial and industrial | **$195** | $118 | $131 | $103 | $156 | | Commercial real estate | **951** | 1,175 | 58 | 174 | 843 | | Residential real estate | **346** | 236 | 194 | 334 | 459 | | Consumer and other | **306** | 196 | 248 | 295 | 679 | | **Total loan recoveries** | **$1,798** | $1,725 | $631 | $906 | $2,137 | | Net loan charged-off | **(592)** | 6,021 | 1,840 | 4,884 | 303 | | Additions/(Reductions) to allowance charged to operations | **2,499** | (2,805) | 16,151 | 1,366 | 3,942 | | **Balance of allowance at end of year** | **$45,934** | $42,843 | $51,669 | $39,892 | $43,410 | | **Allowance as a percentage of total loans and leases outstanding** | **0.87%** | 0.84% | 0.98% | 0.81% | 0.90% | | **Net charge-offs as a percentage of average loans and leases outstanding during the year** | **(0.01)%** | 0.12% | 0.04% | 0.10% | 0.01% | As a result of the adoption of ASU 2016-13, 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. Management believes that, based upon its evaluation as of December 31, 2022, the allowance is appropriate. ### Deposits and Other Liabilities Total deposits were $6.6 billion at December 31, 2022, a decrease of $189.1 million or 2.8% compared to year-end 2021. The decrease from year-end 2021 consisted of savings and money market balances, and time deposit balances, which were down $195.3 million, and $8.3 million, respectively. This was partially offset by an increase in noninterest bearing deposits, which increased $14.4 million. The decrease in deposits was largely driven by inflation and higher rate alternatives due to the current interest rate environment and tighter monetary policy. The Company had significant deposit growth in 2021 and 2020 as deposit balances benefited from PPP loan originations and from government stimulus programs issued in response to the COVID-19 pandemic. Deposit balances were up $353.7 million or 5.5% at year end 2021 compared to year end 2020 and up $1.2 billion or 23.5% at year-end 2020 compared to 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, municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits decreased by $200.3 million or 3.5% to $5.6 billion at year-end 2022 from $5.8 billion at year-end 2021. Core deposits represented 84.5% of total deposits at December 31, 2022, compared to 85.1% of total deposits at December 31, 2021. Municipal money market accounts and reciprocal deposit relationships with municipalities totaled $679.0 million at year-end 2022, which decreased 18.12% from year-end 2021. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds. 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 $56.3 million at December 31, 2022, and $66.8 million at December 31, 2021. Management generally views local repurchase agreements as an alternative to large time deposits. Refer to "Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s repurchase agreements. The Company’s other borrowings totaled $291.3 million at year-end 2022, which were up $167.3 million over prior year end. Loan growth and lower deposit balances compared to year-end 2021 contributed to the increase in borrowings year-over-year. The $291.3 million in borrowings at December 31, 2022, represented $241.3 million in overnight advances from the FHLB and $50.0 million in term advances from the FHLB. Borrowings of $124.0 million at year-end 2021 represented $14.0 million in overnight borrowings and $110.0 million in FHLB term advances. Of the $50.0 million in FHLB term advances at year-end 2022, $40.0 million are due in over one year. Refer to "Note 9 - Other Borrowings" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s term borrowings with the FHLB. ### Liquidity Management The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, 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 may also use borrowings as part of a growth strategy. Asset and liability positions are monitored primarily through the Asset/Liability Management Committee of the Company’s subsidiary bank. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur. Management measures liquidity, including the level of cash, unencumbered securities, and the availability of of dependable borrowing sources. The board has set a policy limit stating that reliable sources of liquidity should remain in excess of 6% of total assets. The ratio was 21.6% of assets at December 31, 2022. Core deposits, discussed above under "Deposits and Other Liabilities", are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, brokered time deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight borrowings 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 totaled $1.4 billion at December 31, 2022, an increase of $168.1 million or 14.0% from $1.2 billion at December 31, 2021. The increase is due to lower deposit balances that were replaced by FHLB borrowings. Non-core funding sources as a percentage of total liabilities increased from 17.0% at year-end 2021 to 19.4% at year-end 2022. Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.8 billion at December 31, 2022 were either pledged or sold under agreements to repurchase, compared to $1.4 billion at December 31, 2021. Pledged securities or securities sold under agreements to repurchase represented 82.4% of total securities at December 31, 2022, compared to 59.4% of total securities at December 31, 2021. Cash and cash equivalents totaled $77.8 million at December 31, 2022, a decrease from $63.1 million at December 31, 2021. Short-term investments, consisting of securities due in one year or less, decreased from $77.9 million at December 31, 2021, to $50.3 million at December 31, 2022. 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 they have monthly principal reductions. Total mortgage-backed securities, at fair value, were $738.9 million at December 31, 2022 compared with $947.7 million at December 31, 2021. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.6 billion at both December 31, 2022 and 2021. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company. Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary bank, the Company has borrowing relationship with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At December 31, 2022, the unused borrowing capacity on established lines with the FHLB was $1.3 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 December 31, 2022, total unencumbered mortgage loans and securities of the Company were $1.3 billion. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB. The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term. ### Table 7 - Loan Maturity *(In thousands)* | Remaining maturity of loans | December 31, 2022 Total | Less than 1 year | After 1 year to 5 years | After 5 years to 15 years | After 15 years | | --- | ---: | ---: | ---: | ---: | ---: | | Commercial and industrial | $791,529 | $217,568 | $223,713 | $220,351 | $129,897 | | Commercial real estate | 2,853,418 | 93,810 | 424,172 | 1,354,025 | 981,411 | | Residential real estate | 1,534,941 | 996 | 26,136 | 311,141 | 1,196,668 | | **Total** | **$5,179,888** | **$312,374** | **$674,021** | **$1,885,517** | **$2,307,976** | Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1 year, $2.2 billion have fixed rates and $2.6 billion have adjustable rates. ### Off-Balance Sheet Arrangements In the normal course of business, the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States, are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan commitments expire within one year from the date of issue, the total amount of these loan commitments as of December 31, 2022, are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in "Note 17 Commitments and Contingent Liabilities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. ### Contractual Obligations The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application through June 30, 2024 along with contracts for more specialized software programs through 2026. Further information on the Company’s lease arrangements is provided in "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. The Company’s contractual obligations as of December 31, 2022, are shown in *Table 8-Contractual Obligations and Commitments* below. ### Table 8 - Contractual Obligations and Commitments *(In thousands)* | Contractual cash obligations | At December 31, 2022 Payments due within Total | 1 year | 1-3 years | 3-5 years | After 5 years | | --- | ---: | ---: | ---: | ---: | ---: | | Long-term debt | $51,117 | $10,810 | $40,307 | $0 | $0 | | Operating leases 1 | 44,207 | 3,995 | 7,542 | 6,683 | 25,987 | | Software contracts | 5,795 | 2,809 | 2,664 | 322 | 0 | | **Total contractual cash obligations** | **$101,119** | **$17,614** | **$50,513** | **$7,005** | **$25,987** | *1 Operating leases include renewals the Company considers reasonably certain to exercise.* ### Non-GAAP Disclosure The following table summarizes the Company’s results of operations on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. The non-GAAP financial measures adjust GAAP measures to exclude the effects of non-operating items, such as acquisition related intangible amortization expense, and significant nonrecurring income or expense on earnings, equity, and capital. The Company believes the non-GAAP measures provide meaningful comparisons of our underlying operational performance and facilitate management's and investors' assessments of business and performance trends in comparison to others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a measure of the Company's profitability or liquidity; they are in addition to, and are not a substitute for, financial measures under GAAP. The non-GAAP financial measures presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies. In the future, the Company may utilize other measures to illustrate performance. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP. *Reconciliation of Net Income Available to Common Shareholders/Diluted Earnings Per Share (GAAP) to Net Operating Income Available to Common Shareholders/Adjusted Diluted Earnings Per Share (Non-GAAP) and Adjusted Operating Return on Average Tangible Common Equity (Non-GAAP)* *(In thousands, except per share data)* | | For the year ended December 31, 2022 | 2021 | 2020 | 2019 | 2018 | | --- | ---: | ---: | ---: | ---: | ---: | | Net income available to common shareholders | **$85,030** | $89,264 | $77,588 | $81,718 | $82,308 | | Less: income attributable to unvested stock-based compensations awards | **(250)** | (615) | (857) | (1,306) | (1315) | | Net earnings allocated to common shareholders (GAAP) | **84,780** | 88,649 | 76,731 | 80,412 | 80,993 | | Diluted earnings per share (GAAP) | **5.89** | 6.05 | 5.20 | 5.37 | 5.35 | | Adjustments for non-operating income and expense: | | | | | | | Purchase accounting related to redemption of trust preferred securities | **0** | 1,849 | 0 | 0 | 0 | | Penalties on prepayment of FHLB borrowings | **0** | 2,929 | 0 | 0 | 0 | | Gain on sale of real estate | **0** | 0 | 0 | 0 | (2,950) | | Write-down of impaired leases | **0** | 0 | 0 | 0 | 2,536 | | Write-down of real estate pending sale | **0** | 0 | 673 | 0 | 0 | | Total adjustments | **0** | 4,778 | 673 | 0 | (414) | | Tax expense | **0** | 1,171 | 165 | 0 | 102 | | Total adjustments, net of tax | **0** | 3,607 | 508 | 0 | (312) | | Net operating income available to common shareholders (Non-GAAP) | **84,780** | 92,256 | 77,239 | 80,412 | 80,681 | | Weighted average shares outstanding (diluted) | **14,404,294** | 14,648,167 | 14,751,303 | 14,973,951 | 15,132,257 | | Adjusted diluted earnings per share (Non-GAAP) | **5.89** | 6.30 | 5.24 | 5.37 | 5.33 | | Net earnings allocated to common shareholders (Non-GAAP) | **84,780** | 92,256 | 76,731 | 80,412 | 80,681 | | Average Tompkins Financial Corporation shareholders' equity (GAAP) | **640,258** | 723,009 | 699,554 | 649,871 | 589,475 | | Amortization of intangibles | **873** | 1,317 | 1,484 | 1,673 | 1,771 | | Tax expense | **214** | 323 | 364 | 410 | 434 | | Amortization of intangibles, net of tax | **659** | 994 | 1,120 | 1,263 | 1,337 | | Adjusted net operating income available to common shareholders' (Non-GAAP) | **85,439** | 93,250 | 77,851 | 81,675 | 82,018 | | Average Tompkins Financial Corporation shareholders' equity | **723,009** | 723,009 | 698,088 | 649,871 | 589,475 | | Average goodwill and intangibles | **94,677** | 95,719 | 97,134 | 98,104 | 99,999 | | Average Tompkins Financial Corporation shareholders' tangible common equity (Non-GAAP) | **$628,332** | $627,290 | $600,954 | $551,767 | $489,476 | | Adjusted operating return on average shareholders' tangible common equity (Non-GAAP) | **13.60%** | 14.87% | 12.95% | 14.80% | 16.76% | ### Newly Adopted Accounting Standards *ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers*. Generally, this new guidance strives to improve the accounting for acquired revenue contracts with customers in a business combination by addressing diversity and inconsistency amongst entities in measuring contract assets and liabilities. The update requires that an entity (acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606 as if it had originated the contract. Changes in the acquiree’s balance of contract asset and contract liabilities identified as necessary to conform to the acquirer’s accounting policies would result in a reallocation of the purchase price. ASU 2021-08 became effective for the Company on January 1, 2022. As there were no acquisitions during the current year, the adoption of ASU No. 2021-08 had no effect on the financial statements for the current fiscal year, and will apply the guidance prospectively to future acquisitions. *ASU No. 2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance.* This ASU requires business entities to make annual disclosures about transactions with a government they account for by analogizing to a grant or contribution accounting model under ASC 958-605. ASU 2021-10 became effective for the Company on January 1, 2022, and did not have an impact on our consolidated financial statements. ### Accounting Standards Pending Adoption *ASU No. 2022-03, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions."* The amendments in this update provides clarification on guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and provides new disclosure requirements for equity securities subject to contractual sale restrictions, that are measured at fair value. ASU 2022-06 is effective for fiscal years ending beginning after December 15, 2023 and interim periods in those years, and is not expected to 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 U.S. generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. The Company does not expect the adoption of this standard to have a material impact on our consolidated financial statements. *ASU 2022-01, "Derivatives and Hedging (Topic 815)" ("ASU 2022-01")* clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance established the “last-of-layer” method for making the fair value hedge accounting for these portfolios more accessible and renamed that method the “portfolio layer” method. ASU 2022-01 is effective January 1, 2023 and is not expected to have a significant impact on our consolidated financial statements. *ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02")* eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023, with early adoption permitted. While the guidance will result in expanded disclosures, the Company does not expect the adoption of this standard to have a material impact on our consolidated financial statements. The Company reviewed new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements. ## Market risk As filed, 6,086 characters. ### Market Risk Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within Board-approved levels. 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 most recent simulation analysis performed as of November 30, 2022, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 4.0%, while a 200 basis point parallel decline in interest rates over a one-year period would result in a one year increase in net interest income of 1.9% from the base case. This simulation assumes no balance sheet growth, no changes in balance sheet mix, deposit rates move in a manner that reflects the historical relationship between deposit rate movement and changes in Federal funds rate, and no management action to address balance sheet mismatches. The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend slightly below the base assumption, as upward adjustments to rate sensitive deposits and short-term funding outpace increases to asset yields which are concentrated in intermediate to longer-term products. As intermediate and longer-term assets continue to reprice/adjust into higher rate environment and funding costs stabilize, the simulation shows net interest income is expected to trend upwards. The down 200 basis point scenario increases net income slightly in the first year as a result of the Company's assets repricing downward to a lesser degree than the rates on the Company's interest-bearing liabilities, mainly deposits and overnight borrowings. The model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates. The most recent simulation of a base case scenario, which in addition to the above assumptions, also assumes interest rates remain unchanged from the date of the simulation, reflects a net interest margin that is increasing slightly over the next 12 to 18 months. Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, balance sheet mix, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage its 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. *Table 9-Interest Rate Risk Analysis* below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of December 31, 2022. The Company’s one-year interest rate gap was a negative $656.5 million or 8.56% of total assets at December 31, 2022, compared with a negative $331.5 million or 4.24% of total assets at December 31, 2021. The change from year-end 2021 to year-end 2022 is mainly due to the sale of investment securities which were used to reduce borrowings with the FHLB and overall outpace declines in deposit balances. 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 at risk in an increasing rate environment over the next 12 months. 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. ### Table 9 - Interest Rate Risk Analysis *(In thousands)* | Condensed Static Gap - December 31, 2022 | Total | 0-3 months | 3-6 months | 6-12 months | 12 months | | --- | ---: | ---: | ---: | ---: | ---: | | Interest-earning assets1 | **$7,490,808** | $976,378 | $299,423 | $554,986 | $1,830,787 | | Interest-bearing liabilities | **4,799,728** | 2,225,269 | 86,921 | 175,127 | 2,487,317 | | Net gap position | | (1,248,891) | 212,502 | 379,859 | (656,530) | | **Net gap position as a percentage of total assets** | | **(16.28)%** | **2.77%** | **4.95%** | **(8.56)%** | *1Balances of available-for-sale* debt *securities are shown at amortized cost.* #### \[This Page Intentionally Left Blank\] ## Controls and procedures As filed, 2,062 characters. ### Evaluation of Disclosure Controls and Procedures The Company’s management, including its 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 Exchange Act) as of December 31, 2022. 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 Form 10-K, the Company’s disclosure controls and procedures were effective. ### Management’s Annual Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. As of December 31, 2022, management evaluated the effectiveness of the Company’s internal control over financial reporting based on the framework for effective internal control over financial reporting established in "Internal Control - Integrated Framework (2013)," issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on its evaluation under the COSO framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2022. The results of management’s assessment were reviewed with the Company’s Audit and Examining Committee of its Board of Directors. The independent registered public accounting firm that audited the Company’s consolidated financial statements included in this report has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2022, which is included in Part II, Item 8 of this Report. ### Changes in Internal Control Over Financial Reporting There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2022, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. Filed Mar 1, 2023. Source: SEC EDGAR, the filing index for accession 0001005817-23-000002. Last ingested by Listed: Oct 31, 2026, 15:15 ET. No prices; not investment advice.