# Tompkins Financial Corp: Form 10-Q for the period ended Jun 30, 2023

- Company: [Tompkins Financial Corp](/companies/tmp.md) (CIK 1005817)
- Form: 10-Q
- Filed: 2023-08-09
- Accepted by EDGAR: Aug 9, 2023, 13:54 ET
- Period: 2023-06-30
- Accession: 0001005817-23-000009
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1005817/000100581723000009/tmp-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1005817/000100581723000009/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $18.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $37.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $20.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $35.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $1.8m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $7.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-04-01 to 2023-06-30 | $8.5m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2023-01-01 to 2023-06-30 | $27.9m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.59 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.94 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-04-01 to 2023-06-30 | $0.59 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2023-01-01 to 2023-06-30 | $1.94 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 14,346,787 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 14,368,181 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $44.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $3.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $17.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $6.4m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $81.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Total assets | at 2023-06-30 | $7.63bn | us-gaap:Assets |
| Total liabilities | at 2023-06-30 | $6.99bn | us-gaap:Liabilities |
| Shareholders' equity | at 2023-06-30 | $635.0m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 93,368 characters.

### BUSINESS

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

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

### Business Segments

Banking services consist primarily of attracting deposits from the areas served by Tompkins Community Bank, which has 60 banking offices (41 offices in New York and 19 offices in Pennsylvania) and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, and leases. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. Banking services also include a full suite of products such as debit cards, credit cards, remote deposit, electronic banking, mobile banking, cash management, and safe deposit services.

Wealth management services consist of investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Wealth management services are provided under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors offers services to customers of Tompkins Community Bank and shares offices in each of the banking markets.

Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance. Tompkins Insurance is headquartered in Batavia, New York. Over the years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company’s banking subsidiaries and successfully consolidated them into Tompkins Insurance. Tompkins Insurance offers services to customers of Tompkins Community Bank and shares offices in each of the banking markets. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York, and one stand-alone office in Tompkins County, New York.

The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for credit losses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities.

### Competition

Competition for commercial banking and other financial services is strong in the Company’s market areas. In one or more aspects of its business, the Company’s subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company’s non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks.

Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of facilities and services, and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community-based financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company’s community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company’s competitiveness. Management believes that the Company’s subsidiary bank can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services, including products that are accessible to our customers through digital means. Although management feels that this business model has caused the Company to grow its customer base in recent years and allows it to compete effectively in the markets it serves, we cannot assure you that such factors will result in future success.

### Regulation

Banking, insurance services and wealth management are highly regulated. As a financial holding company including a community bank, a registered investment adviser, and an insurance agency subsidiary, the Company and its subsidiaries are subject to examination and regulation by the Federal Reserve Board ("FRB"), Securities and Exchange Commission ("SEC"), the Federal Deposit Insurance Corporation ("FDIC"), the New York State Department of Financial Services, the Financial Industry Regulatory Authority, and the Pennsylvania Insurance Department.

### OTHER IMPORTANT INFORMATION

The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three and six months ended June 30, 2023. It should be read in conjunction with the Company’s Audited Consolidated Financial Statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, and the Unaudited Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q.

This Report may include comparisons of the Company’s performance to that of a peer group, which is comprised of the group of 176 domestic bank holding companies with $3 billion to $10 billion in total assets as defined in the Federal Reserve’s "Bank Holding Company Performance Report" for March 31, 2023 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current quarter numbers.

### Forward-Looking Statements

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the need to sell securities before recovery of amortized cost; the impact of changes in accounting standards; and trends, plans, prospects, growth and strategies. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements and historical performance. The following factors, in addition to those listed as Risk Factors in Item 1A of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2023 and our Annual Report on Form 10-K for the year ended December 31, 2022, are among those that could cause actual results to differ materially from the forward-looking statements and historical performance: changes in general economic, market and regulatory conditions; our ability to attract and retain deposits and other sources of liquidity; GDP growth and inflation trends; the impact of the interest rate and inflationary environment on the Company' business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as state and local government mandates, the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; technological developments and changes; cybersecurity incidents and threats, the ability to continue to introduce competitive new products and services on a timely, cost- effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; the ability to access financial resources in the amounts, at the times and on the terms required to support the Company's future businesses; and the impact of national and global events, including the response to recent bank failures, the war in Ukraine, widespread protests, civil unrest, political uncertainty, and pandemics or other public health crises, including the COVID-19 pandemic on the economy.

### Critical Accounting Policies

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

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

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

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

### Critical Accounting Estimates

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

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

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

### Recent Events

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

### RESULTS OF OPERATIONS

### Performance Summary

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

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

### Segment Reporting

The Company operates in the following three business segments, banking, insurance, and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance Agencies, Inc. subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services, organized under the Tompkins Financial Advisors brand. All other activities are considered banking.

### Banking Segment

The banking segment reported net income of $6.7 million for the second quarter of 2023, a decrease of $12.1 million or 64.4% from net income of $18.8 million for the same period in 2022. For the six months ended June 30, 2023, the banking segment reported net income of $23.6 million, a decrease of $15.2 million or 39.1% from the same period in 2022. The decrease in net income for the three and six month periods ended June 30, 2023 compared to the same periods in 2022 was due to lower net interest income; lower noninterest income, which included a pre-tax loss of $7.1 million on the sale of $80.9 million of available-for-sale securities; higher operating expenses; and an increase in provision for credit losses expense.

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

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

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

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

### Insurance Segment

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

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

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

### Wealth Management Segment

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

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

### Net Interest Income

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

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

*(Dollar amounts in thousands)*

| ASSETS Interest-earning assets | Quarter Ended June 30, 2023 Average Balance (QTD) | Interest | Average Yield/Rate | Quarter Ended March 31, 2023 Average Balance (QTD) | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing balances due from banks | $13,585 | $183 | 5.40% | $12,733 | $139 | 4.42% |
| Securities (1) |  |  |  |  |  |  |
| U.S. Government securities | 1,972,719 | 7,304 | 1.49% | 2,033,307 | 7,424 | 1.48% |
| State and municipal (2) | 92,194 | 590 | 2.57% | 93,201 | 599 | 2.60% |
| Other securities (2) | 3,288 | 56 | 6.86% | 3,284 | 53 | 6.55% |
| Total securities | 2,068,201 | 7,950 | 1.54% | 2,129,792 | 8,076 | 1.54% |
| FHLBNY and FRB stock | 23,211 | 323 | 5.59% | 16,750 | 300 | 7.26% |
| Total loans and leases, net of unearned income (2)(3) | 5,304,717 | 63,709 | 4.82% | 5,251,278 | 61,034 | 4.71% |
| **Total interest-earning assets** | **7,409,714** | **72,165** | **3.91%** | **7,410,553** | **69,549** | **3.81%** |
| Other assets | 226,086 |  |  | 223,240 |  |  |
| **Total assets** | **$7,635,800** |  |  | **$7,633,793** |  |  |
| **LIABILITIES & EQUITY** |  |  |  |  |  |  |
| Deposits |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Interest bearing checking, savings, & money market | 3,701,229 | 10,590 | 1.15% | 3,833,566 | 8,641 | 0.91% |
| Time deposits | 745,970 | 5,055 | 2.72% | 673,871 | 3,541 | 2.13% |
| Total interest-bearing deposits | 4,447,199 | 15,645 | 1.41% | 4,507,437 | 12,182 | 1.10% |
| Federal funds purchased & securities sold under agreements to repurchase | 56,083 | 15 | 0.11% | 57,523 | 14 | 0.10% |
| Other borrowings | 379,744 | 4,314 | 4.56% | 269,752 | 2,796 | 4.20% |
| **Total interest-bearing liabilities** | **4,883,026** | **19,974** | **1.64%** | **4,834,712** | **14,992** | **1.26%** |
| Noninterest bearing deposits | 2,004,560 |  |  | 2,065,701 |  |  |
| Accrued expenses and other liabilities | 97,660 |  |  | 102,172 |  |  |
| **Total liabilities** | 6,985,246 |  |  | 7,002,585 |  |  |
| Tompkins Financial Corporation Shareholders’ equity | 649,097 |  |  | 629,784 |  |  |
| Noncontrolling interest | 1,457 |  |  | 1,424 |  |  |
| **Total equity** | **650,554** |  |  | **631,208** |  |  |
| **Total liabilities and equity** | **$7,635,800** |  |  | **$7,633,793** |  |  |
| Interest rate spread |  |  | **2.27%** |  |  | **2.55%** |
| Net interest income/margin on earning assets |  | **52,191** | **2.83%** |  | **54,557** | **2.99%** |
| Tax Equivalent Adjustment |  | **(295)** |  |  | **(311)** |  |
| Net interest income per consolidated financial statements |  | **$51,896** |  |  | **$54,246** |  |

51

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

*(Dollar amounts in thousands)*

| ASSETS Interest-earning assets | Quarter Ended June 30, 2023 Average Balance (QTD) | Interest | Average Yield/Rate | Quarter Ended June 30, 2022 Average Balance (QTD) | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing balances due from banks | $13,585 | $183 | 5.40% | $88,094 | $64 | 0.29% |
| Securities (1) |  |  |  |  |  |  |
| U.S. Government securities | 1,972,719 | 7,304 | 1.49% | 2,305,102 | 7,746 | 1.35% |
| State and municipal (2) | 92,194 | 590 | 2.57% | 97,481 | 619 | 2.55% |
| Other securities (2) | 3,288 | 56 | 6.86% | 3,337 | 28 | 3.40% |
| Total securities | 2,068,201 | 7,950 | 1.54% | 2,405,920 | 8,393 | 1.40% |
| FHLBNY and FRB stock | 23,211 | 323 | 5.59% | 12,234 | 120 | 3.92% |
| Total loans and leases, net of unearned income (2)(3) | 5,304,717 | 63,709 | 4.82% | 5,115,340 | 52,733 | 4.14% |
| **Total interest-earning assets** | **7,409,714** | **72,165** | **3.91%** | **7,621,588** | **61,310** | **3.23%** |
| Other assets | 226,086 |  |  | 209,057 |  |  |
| **Total assets** | **$7,635,800** |  |  | **$7,830,645** |  |  |
| **LIABILITIES & EQUITY** |  |  |  |  |  |  |
| Deposits |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Interest bearing checking, savings, & money market | 3,701,229 | 10,590 | 1.15% | 4,073,279 | 890 | 0.09% |
| Time deposits | 745,970 | 5,055 | 2.72% | 603,791 | 1,157 | 0.77% |
| Total interest-bearing deposits | 4,447,199 | 15,645 | 1.41% | 4,677,070 | 2,047 | 0.18% |
| Federal funds purchased & securities sold under agreements to repurchase | 56,083 | 15 | 0.11% | 54,885 | 15 | 0.11% |
| Other borrowings | 379,744 | 4,314 | 4.56% | 169,390 | 629 | 1.49% |
| **Total interest-bearing liabilities** | **4,883,026** | **19,974** | **1.64%** | **4,901,345** | **2,691** | **0.22%** |
| Noninterest bearing deposits | 2,004,560 |  |  | 2,189,132 |  |  |
| Accrued expenses and other liabilities | 97,660 |  |  | 100,813 |  |  |
| **Total liabilities** | 6,985,246 |  |  | 7,191,290 |  |  |
| Tompkins Financial Corporation Shareholders’ equity | 649,097 |  |  | 637,896 |  |  |
| Noncontrolling interest | 1,457 |  |  | 1,459 |  |  |
| **Total equity** | **650,554** |  |  | **639,355** |  |  |
| **Total liabilities and equity** | **$7,635,800** |  |  | **$7,830,645** |  |  |
| Interest rate spread |  |  | **2.27%** |  |  | **3.01%** |
| Net interest income/margin on earning assets |  | **52,191** | **2.83%** |  | **58,619** | **3.09%** |
| Tax Equivalent Adjustment |  | **(295)** |  |  | **(357)** |  |
| Net interest income per consolidated financial statements |  | **$51,896** |  |  | **$58,262** |  |

52

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

*(Dollar amounts in thousands)*

| ASSETS Interest-earning assets | Year to Date Period Ended June 30, 2023 Average Balance (YTD) | Interest | Average Yield/Rate | Year to Date Period Ended June 30, 2022 Average Balance (YTD) | Interest | Average Yield/Rate |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Interest-bearing balances due from banks | $13,161 | $322 | 4.93% | $110,984 | $105 | 0.19% |
| Securities (1) |  |  |  |  |  |  |
| U.S. Government securities | 2,002,846 | 14,728 | 1.48% | 2,299,389 | 15,108 | 1.32% |
| State and municipal (2) | 92,695 | 1,188 | 2.58% | 99,602 | 1,267 | 2.57% |
| Other securities (2) | 3,286 | 110 | 6.70% | 3,363 | 51 | 3.06% |
| Total securities | 2,098,827 | 16,026 | 1.54% | 2,402,354 | 16,426 | 1.38% |
| FHLBNY and FRB stock | 19,998 | 623 | 6.29% | 11,172 | 225 | 4.06% |
| Total loans and leases, net of unearned income (2)(3) | 5,278,145 | 124,744 | 4.77% | 5,085,808 | 104,088 | 4.13% |
| **Total interest-earning assets** | **7,410,131** | **141,715** | **3.86%** | **7,610,318** | **120,844** | **3.20%** |
| Other assets | 224,671 |  |  | 259,809 |  |  |
| **Total assets** | **$7,634,802** |  |  | **$7,870,127** |  |  |
| **LIABILITIES & EQUITY** |  |  |  |  |  |  |
| Deposits |  |  |  |  |  |  |
| Interest-bearing deposits |  |  |  |  |  |  |
| Interest bearing checking, savings, & money market | 3,767,032 | 19,230 | 1.03% | 4,116,870 | 1,638 | 0.08% |
| Time deposits | 710,119 | 8,596 | 2.44% | 617,616 | 2,455 | 0.80% |
| Total interest-bearing deposits | 4,477,151 | 27,826 | 1.25% | 4,734,486 | 4,093 | 0.17% |
| Federal funds purchased & securities sold under agreements to repurchase | 56,799 | 29 | 0.10% | 59,536 | 31 | 0.11% |
| Other borrowings | 325,052 | 7,111 | 4.41% | 147,466 | 1,129 | 1.54% |
| **Total interest-bearing liabilities** | **4,859,002** | **34,966** | **1.45%** | **4,941,488** | **5,253** | **0.21%** |
| Noninterest bearing deposits | 2,034,961 |  |  | 2,149,201 |  |  |
| Accrued expenses and other liabilities | 99,905 |  |  | 103,451 |  |  |
| **Total liabilities** | 6,993,868 |  |  | 7,194,140 |  |  |
| Tompkins Financial Corporation Shareholders’ equity | 639,494 |  |  | 674,545 |  |  |
| Noncontrolling interest | 1,440 |  |  | 1,442 |  |  |
| **Total equity** | **640,934** |  |  | **675,987** |  |  |
| **Total liabilities and equity** | **$7,634,802** |  |  | **$7,870,127** |  |  |
| Interest rate spread |  |  | **2.41%** |  |  | **2.99%** |
| Net interest income/margin on earning assets |  | **106,749** | **2.90%** |  | **115,591** | **3.06%** |
| Tax Equivalent Adjustment |  | **(607)** |  |  | **(715)** |  |
| Net interest income per consolidated financial statements |  | **$106,142** |  |  | **$114,876** |  |

*1 Average balances and yields on available-for-sale debt securities are based on historical amortized cost.*

*2 Interest income includes the tax effects of taxable-equivalent adjustments using an effective income tax rate of 21% in 2023 and 2022 to increase tax exempt interest income to taxable-equivalent basis.*

*3 Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2022.*

### Net Interest Income

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

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

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

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

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

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

### Provision for Credit Losses

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

### Noninterest Income

Noninterest income was $12.6 million and $33.0 million for the three and six months ended June 30, 2023, which were down $6.3 million and $5.9 million, respectively, from the same periods in 2022. Noninterest income for the three and six months ended June 30, 2023 includes a pre-tax loss of $7.1 million on sale of available-for-sale securities. Noninterest income represented 19.6% of total revenue for the second quarter of 2023 and 23.7% for the six months ended June 30, 2023, compared to 24.5% and 25.3%, respectively, for the same periods in 2022.

Insurance commissions and fees, the largest component of noninterest income, were $8.7 million for the second quarter of 2023, an increase of 2.9% from the same period for the prior year. The increase in insurance commissions and fees in the second quarter of 2023 over the same period in 2022 was mainly life and health insurance and defined benefit plan commissions which grew by 9.2% and 7.5%, respectively. For the first six months of 2023, insurance commissions and fees were up $435,000 or 2.5% compared to the same period in 2022. The increase in revenues for the six months ended June 30, 2023 compared to the prior year period was primarily due to growth in personal lines revenue, which was up 8.2%, attributable to new business, growth within the existing client base and premium increases related to change in general market conditions.

Wealth management fees of $4.7 million in the second quarter of 2023 were up $82,000 or 1.8% compared to the second quarter of 2022. For the first six months of 2023, wealth management fees were down $326,000 or 3.4% compared to the same period in 2022. Wealth management fees include trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $3.1 billion at June 30, 2023, up from $2.8 billion at June 30, 2022. The increase in assets from prior year was mainly a result of stronger market performance, in comparison to declining markets experienced during the second quarter of 2022.

Service charges on deposit accounts of $1.6 million and $3.4 million for the three and six months ended June 30, 2023 were down $116,000 or 6.6% and $149,000 or 4.2%, respectively, over the same periods in 2022, mainly due to lower net overdraft fees.

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

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

### Noninterest Expense

Noninterest expense of $52.0 million for the second quarter of 2023 and $102.1 million for the first six months of 2023 was up 5.8%, and 6.4%, respectively, compared to the same periods in 2022.

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

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

### Income Tax Expense

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

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

### FINANCIAL CONDITION

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

### Securities

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

*(In thousands)*

| Available-for-Sale Debt Securities | June 30, 2023 Amortized Cost | Fair Value | December 31, 2022 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. Treasuries | **$190,275** | **$168,094** | $190,170 | $167,251 |
| Obligations of U.S. Government sponsored entities | **592,694** | **523,543** | 681,192 | 601,167 |
| Obligations of U.S. states and political subdivisions | **90,330** | **82,047** | 93,599 | 85,281 |
| Mortgage-backed securities - residential, issued by |  |  |  |  |
| U.S. Government agencies | **54,852** | **48,942** | 58,727 | 52,668 |
| U.S. Government sponsored entities | **757,400** | **643,135** | 805,603 | 686,222 |
| U.S. corporate debt securities | **2,500** | **2,242** | 2,500 | 2,378 |
| **Total available-for-sale debt securities** | **$1,688,051** | **$1,468,003** | $1,831,791 | $1,594,967 |

*(In thousands)*

| Held-to-Maturity Debt Securities | June 30, 2023 Amortized Cost | Fair Value | December 31, 2022 Amortized Cost | Fair Value |
| --- | ---: | ---: | ---: | ---: |
| U.S. Treasuries | **$86,370** | **$73,772** | $86,478 | $73,541 |
| Obligations of U.S. Government sponsored entities | **225,999** | **188,672** | 225,866 | 188,151 |
| **Total held-to-maturity debt securities** | **$312,369** | **$262,444** | $312,344 | $261,692 |

As of June 30, 2023, the available-for-sale debt securities portfolio had net unrealized losses of $220.0 million compared to net unrealized losses of $236.8 million at December 31, 2022. The decrease in unrealized losses related to the available-for-sale debt securities portfolio, which reflects the amount that the amortized cost exceeds fair value, was impacted by interest rate volatility in the market, as well as the sale of $80.1 million in securities at a pre-tax loss of $7.1 million during the first six months of 2023. Approximately $15.0 million of the proceeds from the sale were reinvested in available-for-sale securities, while the remaining proceeds were used to pay down approximately $65.0 million of overnight borrowing with the FHLB. Management’s policy is to purchase investment grade securities that on average have relatively short duration, which helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital.

The Company evaluates available-for-sale and held-to-maturity debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.

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

*Loans and leases as of the end of the second quarter and prior year-end period were as follows:*

*(In thousands)*

| Loans and Leases Commercial and industrial | 06/30/2023 | 12/31/2022 |
| --- | ---: | ---: |
| Agriculture | **$64,815** | $85,073 |
| Commercial and industrial other | **701,006** | 705,700 |
| PPP loans | **613** | 756 |
| Subtotal commercial and industrial | **766,434** | 791,529 |
| Commercial real estate |  |  |
| Construction | **249,847** | 201,116 |
| Agriculture | **215,915** | 214,963 |
| Commercial real estate other | **2,487,067** | 2,437,339 |
| Subtotal commercial real estate | **2,952,829** | 2,853,418 |
| Residential real estate |  |  |
| Home equity | **185,529** | 188,623 |
| Mortgages | **1,348,448** | 1,346,318 |
| Subtotal residential real estate | **1,533,977** | 1,534,941 |
| Consumer and other |  |  |
| Indirect | **1,419** | 2,224 |
| Consumer and other | **85,794** | 75,412 |
| Subtotal consumer and other | **87,213** | 77,636 |
| Leases | **16,972** | 16,134 |
| **Total loans and leases** | **5,357,425** | 5,273,658 |
| Less: unearned income and deferred costs and fees | **(5,060)** | (4,747) |
| **Total loans and leases, net of unearned income and deferred costs and fees** | **$5,352,365** | $5,268,911 |

57

The below table shows a more detailed break-out of commercial real estate ("CRE") loans as of June 30, 2023 and December 31, 2022:

| CRE Concentration | 06/30/2023 Balance | % CRE | 12/31/2022 Balance | % CRE |
| --- | ---: | ---: | ---: | ---: |
| Construction | **$249,847** | **8.46%** | $201,031 | 7.05% |
| Multi-family/Single family real estate | **629,305** | **21.31%** | 587,467 | 20.59% |
| Agriculture | **221,303** | **7.49%** | 211,231 | 7.40% |
| Retail1 | **428,556** | **14.51%** | 434,998 | 15.25% |
| Hotels/motels | **159,603** | **5.41%** | 144,710 | 5.07% |
| Office space2 | **257,101** | **8.71%** | 236,281 | 8.28% |
| Mixed/Other | **1,007,113** | **34.11%** | 1,037,614 | 36.36% |
| Total CRE | **$2,952,828** | **100.00%** | $2,853,332 | 100.00% |
| 1Reatail includes 3.1% and 3.2% of owner occupied real estate at June 30, 2023 and December 31, 2022. |  |  |  |  |
| 2Office space includes 1.5% of owner occupied real estate at both June 30, 2023 and December 31, 2022. |  |  |  |  |

Total loans and leases of $5.4 billion at June 30, 2023 were up $83.5 million or 1.6% from December 31, 2022, mainly in the commercial real estate, and partially offset by the decline commercial loan balances. As of June 30, 2023, total loans and leases represented 70.2% of total assets compared to 68.7% of total assets at December 31, 2022.

Residential real estate loans, including home equity loans, were $1.5 billion at June 30, 2023, down $1.0 million or 0.1% compared to December 31, 2022, and comprised 28.7% of total loans and leases at June 30, 2023.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. The Company's Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation ("FHLMC") or State of New York Mortgage Agency ("SONYMA") without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties.

During the first six months of 2023 and 2022, the Company sold residential loans totaling $2.1 million and $305,000, respectively, recognizing gains of $65,000 and $57,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights totaled $945,000 at June 30, 2023, and $973,000 at December 31, 2022.

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

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

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

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

### The Allowance for Credit Losses

The below table represents the allowance for credit losses as of June 30, 2023 and December 31, 2022. The table provides, as of the dates indicated, an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.

*(In thousands)*

| Allowance for credit losses | 6/30/2023 | 12/31/2022 |
| --- | ---: | ---: |
| Commercial and industrial | **$6,685** | $6,039 |
| Commercial real estate | **28,968** | 27,287 |
| Residential real estate | **11,111** | 11,154 |
| Consumer and other | **1,680** | 1,358 |
| Finance leases | **101** | 96 |
| **Total** | **$48,545** | $45,934 |

As of June 30, 2023, the total allowance for credit losses was $48.5 million, up $2.6 million or 5.7% compared to December 31, 2022. The ACL as a percentage of total loans measured 0.91% at June 30, 2023, compared to 0.87% at December 31, 2022. The increase in the ACL from year-end 2022 reflects updated economic forecasts for unemployment and gross domestic product ("GDP") coupled with loan growth, mainly in the real estate portfolios, and the addition of a specific reserve added to one commercial real estate relationship.

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

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

*Analysis of the Allowance for Credit Losses*

*(In thousands)*

|  | 6/30/2023 | 6/30/2022 |
| --- | ---: | ---: |
| Average loans outstanding during period | **$5,278,145** | $5,085,808 |
| Allowance at beginning of year, prior to adoption of ASU 2016-13 | **45,934** | 42,843 |
| Impact of adopting ASU 2016-13 | **64** | 0 |
| Balance of allowance at beginning of year | **45,998** | 42,843 |
| LOANS CHARGED-OFF: |  |  |
| Commercial and industrial | **0** | 23 |
| Commercial real estate | **0** | 50 |
| Residential real estate | **2** | 51 |
| Consumer and other | **275** | 278 |
| Finance leases | **0** | 0 |
| Total loans charged-off | **$277** | $402 |
| RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF: |  |  |
| Commercial and industrial | **59** | 26 |
| Commercial real estate | **1,237** | 805 |
| Residential real estate | **178** | 307 |
| Consumer and other | **111** | 168 |
| Total loans recovered | **$1,585** | $1,306 |
| Net loans recovered | **(1,308)** | (904) |
| Provision for credit losses related to loans | **1,239** | 46 |
| Balance of allowance at end of period | **$48,545** | $43,793 |
| Allowance for credit losses as a percentage of total loans and leases | 0.91% | 0.85% |
| Annualized net (recoveries) charge-offs on loans to average total loans and leases during the period | **(0.05)%** | (0.04)% |

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

### Allowance for Credit Losses on Off-Balance Sheet Credit Exposures

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

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

*(In thousands)*

| Analysis of Past Due and Nonperforming Loans Loans 90 days past due and accruing | 6/30/2023 | 12/31/2022 | 6/30/2022 |
| --- | ---: | ---: | ---: |
| Commercial and industrial | **$0** | $25 | $62 |
| Residential real estate | **7** | 0 | 0 |
| Consumer and other | **27** | 0 | 0 |
| Total loans 90 days past due and accruing | **$34** | $25 | $62 |
| Nonaccrual loans |  |  |  |
| Commercial and industrial | **$3,146** | $618 | $293 |
| Commercial real estate | **11,655** | 13,858 | 12,545 |
| Residential real estate | **16,209** | 13,544 | 11,536 |
| Consumer and other | **323** | 269 | 291 |
| Total nonaccrual loans | **$31,333** | $28,289 | $24,665 |
| Performing troubled debt restructuring\* | **0** | 4,530 | 4,872 |
| Total nonperforming loans and leases | **$31,367** | $32,844 | $29,599 |
| Other real estate owned | **36** | 152 | 122 |
| Total nonperforming assets | **$31,403** | $32,996 | $29,721 |
| Allowance as a percentage of nonperforming loans and leases | **154.76%** | 139.86% | 147.95% |
| Total nonperforming loans and leases as percentage of total loans and leases | **0.59%** | 0.62% | 0.57% |
| Total nonperforming assets as percentage of total assets | **0.41%** | 0.43% | 0.38% |
| \*No amount shown for periods subsequent to the Company's adoption of ASU 2022-02 effective January 1, 2023. |  |  |  |

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

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

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

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

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

### Capital

Total equity was $636.4 million at June 30, 2023, an increase of $19.1 million or 3.1% from December 31, 2022. The increase was the result of decrease in unrealized losses on the available-for-sale portfolio from $178.8 million at year-end 2022 to $166.1 million at June 30, 2023, and an increase in retained earnings.

Additional paid-in capital decreased by $4.6 million, from $302.8 million at December 31, 2022, to $298.1 million at June 30, 2023. The decrease was primarily attributable to a $6.3 million aggregate purchase price related to the Company's repurchase and retirement of 108,219 shares of its common stock during the first six months of 2023 pursuant to its publicly announced stock repurchase plan; partially offset by $2.2 million attributed to stock-based compensation.

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

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

Cash dividends paid in the first six months of 2023 totaled approximately $17.4 million or $1.21 per common share, representing 62.5% of year to date 2023 earnings through June 30, 2023, compared to cash dividends of $16.6 million or $1.14 per common share paid in the first six months of 2022. Cash dividends per share during the first six months of 2023 were up 5.3% over the same period in 2022.

The Company and its subsidiary bank are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank meets all capital adequacy requirements to which they are subject.

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

*Regulatory Capital Analysis*

*(dollar amounts in thousands)*

| June 30, 2023 | Actual Amount | Ratio | Minimum Capital Required - Basel III Fully Phased-In Amount | Ratio | Well Capitalized Requirement Amount | Ratio |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Total Capital (to risk weighted assets) | $789,322 | 14.48% | $572,407 | 10.50% | $545,149 | 10.00% |
| Tier 1 Capital (to risk weighted assets) | $736,317 | 13.51% | $463,377 | 8.50% | $436,119 | 8.00% |
| Tier 1 Common Equity (to risk weighted assets) | $736,317 | 13.51% | $381,604 | 7.00% | $354,347 | 6.50% |
| Tier 1 Capital (to average assets) | $736,317 | 9.57% | $307,613 | 4.00% | $384,517 | 5.00% |

As of June 30, 2023, the Company’s capital ratios exceeded the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions. The capital levels required to be considered well capitalized, presented in the above table, are based upon prompt corrective action regulations, as amended to reflect the changes under Basel III Capital Rules.

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

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

In the first quarter of 2020, U.S. Federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we elected to utilize the five-year CECL transition.

### Deposits and Other Liabilities

Total deposits of $6.5 billion at June 30, 2023 were down $147.6 million or 2.2% from December 31, 2022, and were down $54.4 million or 0.8% from March 31, 2023. The decrease from year-end 2022 was primarily in noninterest bearing deposits, which were down $125.3 million or 5.8% and in checking, money market and savings balances, which collectively were down $161.5 million or 4.2%. These decreases were partially offset by increases in time deposits, which were up $139.2 million or 22.0% compared to December 31, 2022.

The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits, municipal money market deposits, and reciprocal deposit relationships with municipalities. Core deposits decreased by $296.3 million or 5.3% from year-end 2022, to $5.3 billion at June 30, 2023. Core deposits at June 30, 2023 were down $115.2 million or 2.1% from March 31, 2023. Core deposits represented 81.9% of total deposits at June 30, 2023, compared to 84.5% of total deposits at December 31, 2022 and 82.9% at March 31, 2023.

The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $50.5 million at June 30, 2023, and $56.3 million at December 31, 2022. Management generally views retail repurchase agreements as an alternative to large time deposits.

The Company’s other borrowings totaled $387.1 million at June 30, 2023, up $95.8 million or 32.9% from $291.3 million at December 31, 2022. Borrowings at June 30, 2023 consisted of $252.1 million in overnight FHLB advances and $135.0 million of FHLB term advances, compared to $241.3 million in FHLB overnight advances and $50.0 million of FHLB term advances at year end 2022. Of the $135.0 million in FHLB term advances at June 30, 2023, $20.0 million is due to mature in less than one year and $115.0 million is due to mature in over one year.

### Liquidity

The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company’s Asset/Liability Management Committee monitors asset and liability positions of the Company’s subsidiary banks individually and on a combined basis. The Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur. Management measures liquidity, including the level of cash, unencumbered securities, and the availability of dependable borrowing sources. The Board has set a policy limit stating that reliable sources of liquidity should remain in excess of 6% of total assets. The ratio was 19.6% at June 30, 2023 compared to 21.6% of assets at December 31, 2022.

Core deposits, discussed above under "Deposits and Other Liabilities", are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase and overnight and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of $1.6 billion at June 30, 2023 increased $238.8 million or 17.4% as compared to year-end 2022. Non-core funding sources, as a percentage of total liabilities, were 23.0% at June 30, 2023, compared to 19.4% at December 31, 2022.

Non-core funding sources may require securities to be pledged against the underlying liability. Securities held at carrying value of $1.6 billion at June 30, 2023 and $1.8 billion at December 31, 2022, and were either pledged or sold under agreements to repurchase. Pledged securities represented 81.9% of total securities at June 30, 2023, compared to 82.4% of total securities at December 31, 2022.

Cash and cash equivalents totaled $81.6 million as of June 30, 2023 which increased from $77.8 million at December 31, 2022. Short-term investments, consisting of securities due in one year or less, decreased from $50.3 million at December 31, 2022, to $46.9 million on June 30, 2023.

Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were $692.1 million at June 30, 2023 compared with $738.9 million at December 31, 2022. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.6 billion at June 30, 2023, up $9.5 million or 0.6% compared with year-end 2022. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

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

### Newly Adopted Accounting Standards

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

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

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

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

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

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

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

### Accounting Standards Pending Adoption

*ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method."* This update will allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits or other income tax benefits. This update applies this to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC specific guidance removed from Subtopic 323-740 has been applied. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023 and interim periods in those years. Tompkins is currently evaluating the potential impact of ASU 2023-02 on our consolidated financial statements.

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

## Market risk

As filed, 5,586 characters.

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

The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the most recent simulation analysis performed as of May 31, 2023, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 4.4%, while a 200 basis point parallel decline in interest rates over a one-year period would result in a one year increase in net interest income of 3.3% from the base case. This simulation assumes no balance sheet growth, no changes in balance sheet mix, deposit rates move in a manner that reflects the historical relationship between deposit rate movement and changes in Federal funds rate, and no management action to address balance sheet mismatches.

The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend slightly below the base assumption, as upward adjustments to rate sensitive deposits and short-term funding outpace increases to asset yields which are concentrated in intermediate to longer-term products. As intermediate and longer-term assets continue to reprice/adjust into higher rate environment and funding costs stabilize, the simulation shows net interest income is expected to trend upwards.

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

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

Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, balance sheet mix, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage the Company's interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.

In addition to the simulation analysis, management uses an interest rate gap measure. The table below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of June 30, 2023. The Company’s one-year net interest rate gap was a negative $728.4 million or 9.55% of total assets at June 30, 2023, compared with a negative $656.5 million or 8.56% of total assets at December 31, 2022. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income contains a higher degree of risk in a rising rate environment over the next 12 months. An interest rate gap measure could be affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.

*(In thousands)*

| Condensed Static Gap - June 30, 2023 Total | 0-3 months | Repricing Interval 3-6 months | 6-12 months | Cumulative 12 months |
| --- | ---: | ---: | ---: | ---: |
| Interest-earning assets1 $7,392,909 | $1,104,481 | $301,120 | $555,824 | $1,961,425 |
| Interest-bearing liabilities 4,867,398 | 2,259,284 | 129,591 | 300,982 | 2,689,857 |
| Net gap position | $(1,154,803) | $171,529 | $254,842 | $(728,432) |
| Net gap position as a percentage of total assets | (15.14)% | 2.25% | 3.34% | (9.55)% |

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

## Controls and procedures

As filed, 947 characters.

### Evaluation of Disclosure Controls and Procedures

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

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

### Changes in Internal Control Over Financial Reporting

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

## Risk factors

As filed, 265 characters.

There have been no material changes in the risk factors previously disclosed under Item 1A. of the Company's Quarterly Report on Form 10-Q for the period ended March 31, 2023 and the Company's Annual Report on Form 10-K, for the fiscal year ended December 31, 2022.

Filed Aug 9, 2023.
Source: SEC EDGAR, the filing index for accession 0001005817-23-000009. Last ingested by Listed: Nov 14, 2026, 20:28 ET. No prices; not investment advice.