Docoh
Loading...

TMP Tompkins Financial

Filed: 1 Mar 21, 3:51pm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________________________________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______to ______
 Commission File Number 1-12709 
tmp-20201231_g1.jpg 
Tompkins Financial Corporation
(Exact name of registrant as specified in its charter)
New York16-1482357
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
118 E. Seneca Street, P.O. Box 460, Ithaca, NY
(Address of principal executive offices)
14851
(Zip Code)
Registrant’s telephone number, including area code: (888) 503-5753
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock ($.10 Par Value Per Share)TMPNYSE American
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of Securities Act. Yes No .
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes No .
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  No .
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (S232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a nonaccelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "nonaccelerated filer", "smaller reporting company", and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated FilerAccelerated FilerNonaccelerated Filer
Smaller Reporting Company ¨
Emerging Growth Company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))by the registered public accounting firm that prepared or issued its audit report.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No .
The aggregate market value of the registrant’s common stock held by non-affiliates was $780.7 million on June 30, 2020, based on the closing sales price of a share of the registrant’s common stock, $.10 par value (the “Common Stock”), as reported on the NYSE American, on such date.
The number of shares of the registrant’s Common Stock outstanding as of February 18, 2021, was 14,979,825 shares.



DOCUMENTS INCORPORATED BY REFERENCE
 Portions of the registrant’s definitive Proxy Statement relating to its 2021 Annual Meeting of stockholders, to be held on May 11, 2021, are incorporated by reference into Part III of this Form 10-K where indicated.


TOMPKINS FINANCIAL CORPORATION
 
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 2020
Table of Contents
 
 
 


PART I
 
Item 1A. Risk Factors
 
Our Company's success is dependent on management's ability to identify and manage the risks inherent in our financial services business. These risks include credit risk, market risk, liquidity risk, operational risk, model risk, compliance and legal risk, and strategic and reputation risk. We list below the material risk factors we face. Any of these risks could result in a material adverse impact on our business, operating results, financial condition, liquidity, and cash flow, or may cause our results to vary materially from recent results, or from the results implied by any forward-looking statements made by us.
Risks Related to the COVID-19 Pandemic.

The ongoing COVID-19 pandemic and measures intended to prevent its spread have had, and likely will continue to have, a material adverse effect on our business, financial condition, liquidity, and results of operations. The nature and extent of such effects will depend on future developments, which are highly uncertain and are difficult to predict.

A novel coronavirus (COVID-19) was first reported in December 2019, and, in March 2020, the World Health Organization declared it a pandemic. On March 12, 2020, the President of the United States declared the COVID-19 outbreak in the United States a national emergency. The COVID-19 pandemic has caused significant economic stress in the United States and in the geographic markets that we serve. While distribution of a COVID-19 vaccine is underway in the U.S. and business and travel restrictions have partially eased within the primary geographic markets we serve, rates of transmission have fluctuated both nationally and in our geographic market. The extent to which COVID-19 and measures taken in response thereto impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and are difficult to predict. COVID-19, and governmental/regulatory measures taken in response thereto, have had and are likely to continue to have a material adverse impact on our results of operations and financial condition.

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

As a result of the COVID-19 pandemic, the national unemployment rate and unemployment rates in our geographic markets dramatically increased during the first half of 2020, and while they have decreased from their peak levels, they are expected to remain elevated typical levels for the foreseeable future.
Stock markets generally, and bank stocks in particular, have significantly fluctuated in value.
The Federal Reserve Board has reduced the benchmark federal funds rate to a target range of 0% to 0.25%, and the yields on 10 and 30-year treasury notes remain at historic lows.
Various state governments and federal agencies are requiring lenders to offer loan payment deferrals, forbearance and other relief to certain borrowers (e.g., waiving late payment and other fees) under certain circumstances.
Business and travel restrictions, including within the geographic markets that we serve, have negatively impacted our customers.

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

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

demand for our products and services could decline, making it difficult to grow assets and income;
if the economy is unable to fully reopen, and high levels of unemployment continue for an extended period of time; loan delinquencies, problem assets, and foreclosures may increase, resulting in increased charges and reduced income;
collateral for loans, especially real estate, may decline in value, which could cause credit losses to increase;
we may face a decline in the value of our goodwill and other intangible assets;
our allowance for credit losses may have to be increased if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;
until business and travel restrictions are lifted and consumers resume pre-pandemic travel and leisure activities, our customers, particularly those in the travel and hospitality industries, may continue to face financial stress, which has
1

increased, and may continue to increase the level of provision for credit losses, nonperforming assets, net charge-offs and allowance for credit losses;
our profitability could be negatively impacted if borrowers repay deferred amounts and/or resume scheduled payments under terms which are less profitable than originally agreed, all of which may be further impacted by new, changed, or extended government/regulatory expectations or requirements;
the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;
the decline in the Federal Reserve Board’s target federal funds rate may cause the yield on our assets to decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and spread and thereby reducing our net income;
a material decrease in net income or a net loss over several quarters could result in a decrease in the rate of our quarterly cash dividend;
our wealth management and trust revenues may continue to fluctuate with continuing market turmoil;
a prolonged weakness in economic conditions resulting in a reduction of future projected earnings could result in our recording a valuation allowance against our current outstanding deferred tax assets;
our cybersecurity and fraud risks may increase due to our transition of a large portion of our workforce to a remote work environment;
the unavailability of a third party vendor, whom we rely on for certain services, could cause a lapse in a critical service; and
Federal Deposit Insurance Corporation premiums may increase if the agency experiences additional resolution costs.

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

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

Risks Related to the Company’s Business

The Company is subject to increased business risk because the Company has a significant concentration of commercial real estate and commercial business loans, repayment of which is often dependent on the cash flows of the borrower.
The Company offers different types of commercial loans to a variety of businesses, and we believe commercial loans will continue to comprise a significant concentration of our loan portfolio in 2021 and beyond. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan-to-collateral values. As such, declines in real estate valuations in the Company’s market area would lower the value of the collateral securing these loans. Additionally, the Company has experienced, and expects to continue experiencing, increased competition in commercial real estate lending. This increased competition may inhibit the Company's ability to generate additional commercial real estate loans or maintain its current inventory of commercial real estate loans. The Company’s commercial business loans are made based primarily on the cash flow and creditworthiness of the borrower and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. The borrowers’ cash flow may be difficult to predict, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. As of December 31, 2020, commercial and commercial real estate loans totaled $3.7 billion or 71.2% of total loans.

The Company’s agricultural loans are often dependent upon the health of the agricultural industry in the location of the borrower, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s control. 
As part of the Company’s commercial business lending activities, the Company originates agricultural loans, consisting of agricultural real estate loans and agricultural operating loans. As of December 31, 2020, $296.4 million or 5.6% of the Company’s total loan portfolio consisted of agriculturally-related loans, including $201.9 million in agricultural real estate loans and $94.5 million in agricultural operating loans. Payments on agricultural loans are dependent on the profitable operation
2

or management of the related farm property. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of governmental regulations and subsidies (including changes in price supports and environmental regulations). Many farms are dependent upon a limited number of key individuals whose injury or death may significantly affect the successful operation of the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. While agricultural operating loans are generally secured by a blanket lien on the farm’s operating assets, any repossessed collateral in respect of a defaulted loan may not provide an adequate source of repayment of the outstanding balance.

Additionally, the profitable operation or management of the related farm properties, and the value thereof, is impacted by changes in U.S. government trade policies. In 2018, 2019, and 2020, the U.S. government implemented tariffs on certain products, and certain countries or entities, such as Mexico, Canada, China and the European Union, have issued or continue to threaten retaliatory tariffs against products from the United States, including agricultural products. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that farm properties related to our agriculturally-related loans import or export could cause the costs of such farm operations and management to increase, could cause the price of products from such farm operations to increase, could cause demand for such products to decrease and could cause the margins on such products to decrease. Such potential adverse effects on related farm property operations and management could reduce the related farm properties’ revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.

Declines in asset values may result in impairment charges and may adversely affect the value of the Company’s results of operations, financial condition and cash flows.
A majority of the Company’s investment portfolio is comprised of securities which are collateralized by residential mortgages. These residential mortgage-backed securities include securities of U.S. government agencies, U.S. government-sponsored entities, and private-label collateralized mortgage obligations. The Company’s securities portfolio also includes obligations of U.S. government-sponsored entities, obligations of states and political subdivisions thereof, U.S. corporate debt securities and equity securities. A more detailed discussion of the investment portfolio, including types of securities held, the carrying and fair values, and contractual maturities is provided in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report. Gains or losses on these instruments may have a direct impact on the results of operations, including higher or lower income and earnings, unless we adequately hedge our positions. The fair value of investments may be affected by factors other than the underlying performance of the issuer or composition of the obligations themselves, such as rating downgrades, adverse changes in the business climate, a lack of liquidity for resale of certain investment securities and changes in interest rates. For example, decreases in interest rates and increases in mortgage prepayment speeds, which are influenced by interest rates and other factors, could adversely impact the value of our securities collateralized by residential mortgages, causing a significant acceleration of purchase premium amortization on our mortgage portfolio because a decline in long-term interest rates shortens the expected lives of the securities. Conversely, increases in interest rates may result in a decrease in residential mortgage loan originations and mortgage prepayment speeds, directly impacting the value of these securities collateralized by residential mortgages. Management evaluates investment securities for expected credit losses impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the statement of condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.

A decline in the value of our goodwill and other intangible assets could adversely affect our financial condition and results of operations.
As of December 31, 2020, the Company had $97.4 million of goodwill and other intangible assets. The Company is required to test its goodwill and intangible assets for impairment on a periodic basis. A significant decline in the Company’s expected future cash flows, a significant adverse change in business climate, slower growth rates or a significant and sustained decline in the price of the Company’s common stock, may necessitate our taking charges in the future related to the impairment of the Company’s goodwill and intangible assets. If we make an impairment determination in a future reporting period, the Company’s earnings and the book value of these intangible assets would be reduced by the amount of the impairment. Further, a goodwill impairment charge could significantly restrict the ability of our banking subsidiaries to make dividend payments to us without prior regulatory approval, which could have a material adverse effect on our financial condition and results of operations.
3


Changes in accounting standards could materially impact our financial statements.

Periodically, the Financial Accounting Standards Board (“FASB”) and the SEC change the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can materially impact how we record and report our financial condition and results of operations.

In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, Measurement of Credit Losses on Financial Instruments. ASU 2016-13, effective for the Company as of January 1, 2020, substantially changes the accounting for credit losses on loans, leases and other financial assets held by banks, financial institutions and other organizations. The new standard requires the recognition of credit losses on loans, leases and other financial assets based on an entity's current estimate of expected losses over the lifetime of each loan, lease or other financial asset, referred to as the Current Expected Credit Loss ("CECL") model, as opposed to the existing "incurred loss" model, which required recognition of losses on loans, leases and other financial assets only when those losses were "probable." In December 2018, the bank regulatory agencies approved a final rule modifying the agencies' regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of adoption of the CECL model.

The Company adopted ASU 2016-13 effective January 1, 2020, and recorded a net increase to retained earnings of $1.7 million upon adoption. The transition adjustment includes a decrease in the allowance for credit losses ("ACL") on loans of $2.5 million, and an increase in the ACL on off-balance sheet credit exposures of $0.4 million, net of the corresponding decrease in deferred tax assets of $0.4 million. At December 31, 2020, the Company's ACL totaled $51.7 million, up from $39.9 million at December 31, 2019, driven by provision expenses calculated under the new accounting guidance. The first quarter of 2020 included a provision expense of $16.3 million driven by the impact of the economic restrictions/shutdowns related to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, as well as normal adjustments for loan growth and changing loan portfolio mix.

The determination of the ACL in future periods under the CECL model depend significantly upon the Company's assumptions and judgments with respect to a variety of factors, including the performance of the loan and lease portfolio, the weighted-average remaining lives of different classifications of loans and leases within the loan and lease portfolio, and current and forecasted economic conditions, as well as changes in the rate of growth in the loan and lease portfolio and changes in the composition of the loan and lease portfolio. As under the existing incurred loss model, if the Company's assumptions and judgments regarding such matters prove to be inaccurate, its allowance for credit losses might not be sufficient, and additional provisions for credit losses might need to be made. Depending on the amount of such provisions for credit losses, the adverse impact on the Company's earnings could be material.

The Company may be adversely affected by the soundness of other financial institutions.
 
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry. The most important counterparty for the Company, in terms of liquidity, is the Federal Home Loan Bank of New York (“FHLBNY”). The Company also has a relationship with the Federal Home Loan Bank of Pittsburgh (“FHLBPITT”). The Company uses FHLBNY as its primary source of overnight funds and also has long-term advances and repurchase agreements with FHLBNY. The Company has placed sufficient collateral in the form of commercial and residential real estate loans at FHLBNY. In addition, the Company is required to hold stock in FHLBNY and FHLBPITT. The amount of borrowed funds and repurchase agreements with the FHLBNY and FHLBPITT, and the amount of FHLBNY and FHLBPITT stock held by the Company, at its most recent fiscal year-end are discussed in Part II, Item 8 of this Report on Form 10-K.
 
There are 11 branches of the FHLB, including New York and Pittsburgh. The FHLBNY and the FHLBPITT are jointly and severally liable along with the other Federal Home Loan Banks for the consolidated obligations issued on behalf of the Federal Home Loan Banks through the Office of Finance. Dividends on, redemption of, or repurchase of shares of the FHLBNY’s or FHLBPITT’s capital stock cannot occur unless the principal and interest due on all consolidated obligations have been paid in full. If another Federal Home Loan Bank were to default on its obligation to pay principal or interest on any consolidated obligations, the Federal Home Loan Finance Agency (the “Finance Agency”) may allocate the outstanding liability among one or more of the remaining Federal Home Loan Banks on a pro rata basis or on any other basis the Finance Agency may determine. As a result, the FHLBNY’s or FHLBPITT’s ability to pay dividends on, to redeem, or to repurchase shares of capital stock could be affected by the financial condition of one or more of the other Federal Home Loan Banks. Any such adverse effects on the FHLBNY or FHLBPITT could adversely affect our liquidity, the value of our investment in FHLBNY or FHLBPITT common stock, and could negatively impact our results of operations.
4


Systemic weakness in the FHLB could result in higher costs of FHLB borrowings, reduced value of FHLB stock, and increased demand for alternative sources of liquidity that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or lines of credit with correspondent banks. Any of these scenarios could adversely affect our liquidity, the value of our investment in FHLB common stock and our financial condition.

The Company relies on cash dividends from its subsidiaries to fund its operations, and payment of those dividends could be discontinued at any time.
 
The Company is a financial holding company whose principal assets and sources of income are its wholly-owned subsidiaries. The Company is a separate and distinct legal entity from its subsidiaries, and therefore the Company relies primarily on dividends from these banking and other subsidiaries to meet its obligations and to provide funds for the payment of dividends to the Company’s shareholders, to the extent declared by the Company’s board of directors. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company and impose regulatory capital and liquidity requirements on the Company and its banking subsidiaries. Further, as a holding company, the Company’s right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary is subject to the prior claims of the subsidiary’s creditors (including, in the case of the Company’s banking subsidiaries, the banks’ depositors). If the Company were unable to receive dividends from its subsidiaries it would materially and adversely affects the Company’s liquidity and its ability to service its debt, pay its other obligations, or pay cash dividends on its common stock.

The Company’s business may be adversely affected by general economic conditions in local and national markets, the possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets.

General economic conditions impact the banking and financial services industry. The U.S. and global economies have experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assurance that economic conditions will not deteriorate. Unfavorable or uncertain economic conditions can be caused by many macro and micro factors, including declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies and other factors. The Company is particularly affected by U.S domestic economic conditions, including U.S. interest rates, the unemployment rate, housing prices, the level of consumer confidence, changes in consumer spending, the number of personal bankruptcies and other factors. A decline in U.S. domestic business and economic conditions, without rapid recovery, could have adverse effects on our business, including the following:

consumer and business confidence levels could be lowered and cause declines in credit usage, adverse changes in payment patterns, decreases in demand for loans or other financial products and services and decreases in deposits or investments in accounts with Company;
the Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches the Company uses to select, manage and underwrite its customers become less predictive of future behaviors;
demand for and income received from the Company's fee-based services, including investment services and insurance commissions and fees, could decline, the cost to the Company to provide any or all products and services could increase, and the levels of assets under management could materially impact revenues from our trust and wealth management businesses; and
the credit quality or value of loans and other assets or collateral securing loans may decrease.

Our business is concentrated in and largely dependent upon the continued growth and welfare of the general geographic markets in which we operate.

Our operations are heavily concentrated in the New York State and, to a lesser extent, Pennsylvania and, as a result, our financial condition, results of operations and cash flows are significantly impacted by changes in the economic conditions in those areas. Therefore, the Company’s financial performance generally, and in particular, the ability of borrowers to pay interest on and repay the principal of outstanding loans and the value of collateral securing these loans, is highly dependent upon the business environment in the markets where the Company operates, particularly New York State and Pennsylvania. Our success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets. Although our clients’ business and financial interests may extend well beyond these markets, adverse economic conditions that affect these markets could disproportionately reduce our growth rate, affect the ability of our clients to repay their loans to us, affect the value of collateral underlying loans and generally affect our financial condition and results of operations. Because of our geographic concentration, we are less able than other regional or national financial institutions to
5

diversify our credit risks across multiple markets. For additional information on our market area, see Part I, Item 1, “Business” of this Report on Form 10-K.

Our insurance agency subsidiary’s commission revenues are based on premiums set by insurers and any decreases in these premium rates could adversely affect our operations and revenues.
Our insurance agency subsidiary, Tompkins Insurance, derives the bulk of its revenue from commissions paid by insurance underwriters on the sale of insurance products to clients. Tompkins Insurance does not determine the insurance premiums on which its commissions are based. Insurance premiums are cyclical in nature and may vary widely based on market conditions. As a result, insurance brokerage revenues and profitability can be volatile. Revenue from insurance commissions and fees could be negatively affected by fluctuations in insurance premiums and other factors beyond the Company’s control, including changes in laws and regulations impacting the healthcare and insurance markets. In addition, there have been and may continue to be various trends in the insurance industry toward alternative insurance markets including, among other things, increased use of self-insurance, captives, and risk retention groups. Even if Tompkins Insurance is able to participate in these activities, it is unlikely to realize revenues and profitability as favorable as those realized from our traditional brokerage activities. We cannot predict the timing or extent of future changes in premiums and thus commissions. As a result, we cannot predict the effect that future premium rates will have on our operations. Decreases in premium rates could adversely affect our operations and revenues.
The Company’s business and financial performance are impacted significantly by market interest rates and movements in those rates. The monetary, tax and other policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance over which the Company has no control and which the Company may not be able to anticipate adequately.
As a result of the high percentage of the Company’s assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve or in spreads between different market interest rates, can have a material effect on the Company’s business and profitability and the value of the Company’s assets and liabilities. For example, changes in interest rates or interest rate spreads may:

affect the difference between the interest that the Company earns on assets and the interest that the Company pays on liabilities, which impacts the Company's overall net interest income and profitability.
adversely affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments, which in turn, affects the Company's loss rates on those assets.
decrease the demand for interest rate-based products and services, including loans and deposits.
affect prepayment rates on the Company's loans and securities, which could adversely affect the Company's earnings, financial condition and cash flow.

The monetary, tax and other policies of the Federal government and its agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance. These governmental policies can thus affect the activities and results of operations of banking organizations such as the Company. An important function of the Federal Reserve is to regulate the national supply of bank credit and certain interest rates. The actions of the Federal Reserve influence the rates of interest that the Company charges on loans and that the Company pays on borrowings and interest-bearing deposits and can also affect the value of the Company’s on-balance sheet and off-balance sheet financial instruments. Also, due to the impact on rates for short-term funding, the Federal Reserve’s policies influence, to a significant extent, the Company’s cost of such funding. The Company cannot predict the nature or timing of future changes in monetary, tax and other policies or the effect that they may have on the Company’s business activities, financial condition and results of operations.

For information about how the Company manages its interest rate risk, refer to Part II, Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” of this Report.

The Company may be adversely impacted by the transition from LIBOR as a reference rate.

In 2017, the United Kingdom’s Financial Conduct Authority announced that after 2021 it would no longer compel banks to submit the rates required to calculate the London Interbank Offered Rate (“LIBOR”). In November 2020, the administrator of LIBOR announced it will consult on its intention to extend the retirement date of certain offered rates whereby the publication of the one week and two month LIBOR offered rates will cease after December 31, 2021, but the publication of the remaining LIBOR offered rates will continue until June 30, 2023. Given consumer protection, litigation, and reputation risks, the bank regulatory agencies have indicated that entering into new contracts that use LIBOR as a reference rate after December 31, 2021, would create safety and soundness risks and that they will examine bank practices accordingly. Therefore, the agencies
6

encouraged banks to cease entering into new contracts that use LIBOR as a reference rate as soon as practicable and in any event by December 31, 2021.

It is not possible to predict what rate or rates may become accepted alternatives to LIBOR, or what the effect of any such changes in views or alternatives may be on the markets for LIBOR-indexed financial instruments. In particular, regulators, industry groups and certain committees (e.g., the Alternative Reference Rates Committee) have, among other things, published recommended fall-back language for LIBOR-linked financial instruments, identified recommended alternatives for certain LIBOR rates (e.g., AMERIBOR or the Secured Overnight Financing Rate as the recommended alternative to U.S. Dollar LIBOR), and proposed implementations of the recommended alternatives in floating rate instruments. At this time, it is not possible to predict whether these specific recommendations and proposals will be broadly accepted, whether they will continue to evolve, and what the effect of their implementation may be on the markets for floating-rate financial instruments.

The Company has loans, borrowings and other financial instruments with attributes that are either directly or indirectly dependent on LIBOR. The transition from LIBOR could create costs and additional risk. Uncertainty as to the nature of alternative reference rates and as to potential changes or other reforms to LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and securities in our portfolio. If LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers, we may experience significant expenses in effecting the transition, and may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our results of operations. Further, since proposed alternative rates are calculated differently, payments under contracts referencing new rates will differ from those referencing LIBOR. Although we are currently unable to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have an adverse effect on our business, financial condition and results of operations.

Our funding sources may prove insufficient to replace deposits and support our future growth.

We must maintain sufficient cash flow and liquid assets to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which may include various short-term and long-term wholesale borrowings, including Federal funds purchased and securities sold under agreements to repurchase, brokered certificates of deposit, proceeds from the sale of loans, and borrowings from the FHLBNY and FHLBPITT and others.   We also maintain available lines of credit with the FHLBNY and FHLBPITT that are secured by loans. Adverse operating results or changes in industry conditions could make it difficult or impossible for us to access these additional funding sources and could make our existing funds more volatile. Our financial flexibility could be materially constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case, our operating margins and profitability would be adversely affected. Further, the volatility inherent in some of these funding sources, particularly including brokered deposits, may increase our exposure to liquidity risk. Any interruption in these sources of liquidity when needed could adversely affect our results of operations, financial condition, cash flow or regulatory capital levels. In addition, reduced liquidity could result from circumstances beyond our control, such as general market disruptions or operational problems that affect us or third parties.  Management’s efforts to closely monitor our liquidity position for compliance with internal policies may not be successful or sufficient to deal with dramatic or unanticipated reductions in liquidity. 

The Company is or may become involved in lawsuits, legal proceedings, information-gathering requests, and investigations by governmental agencies or other parties that may lead to adverse consequences.

The Company’s primary business of financial services involves substantial risk of legal liability. The Company and its subsidiaries are, from time to time, named or threatened to be named as defendants in various lawsuits arising from their respective business activities, including activities of companies they have acquired. In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to delays in or prohibition to acquire other companies, significant penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which the Company conducts its business, or reputational harm.

7

Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where it faces a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s ultimate losses may be higher than the amounts accrued for legal loss contingencies, which could adversely affect the Company’s financial condition and results of operations.

The Company operates in a highly regulated environment and may be adversely impacted by current or future laws and regulations due to increased compliance costs, potential fines for noncompliance, and restrictions on our ability to offer products or buy or sell businesses.
 
The Company is subject to extensive state and federal laws and regulations, supervision and legislation that affect how it conducts its business. The majority of these laws and regulations are for the protection of consumers, depositors and the deposit insurance funds. The regulations influence such things as the Company’s lending practices, capital structure, investment practices, and dividend policy. The Dodd-Frank Act, which established the CFPB, and enacted other reforms, has had, and will continue to have, a significant effect on the entire financial services industry. Compliance with these regulations and other initiatives negatively impacts revenue and increases the cost of doing business on an ongoing basis. New regulatory requirements or changes to existing requirements could necessitate changes to the Company’s businesses, result in increased compliance costs and affect the profitability of such businesses. Refer to “Supervision and Regulation” in Part I, Item 1 - “Business” of this Report on Form 10‑K for additional information on material laws and regulations impacting the Company’s business.

Additionally, banking regulators are authorized to take supervisory actions that may restrict or limit a financial institution's activities. Regulatory restrictions on our activities could adversely affect our costs and revenues, and may impair our ability to execute our strategic plans. In addition, if our regulators identify a compliance failure, we may be assessed a fine, prohibited from completing a strategic acquisition or divestiture, or subject to other actions imposed by the regulatory authorities. The recent regulatory activity and increased scrutiny have resulted, and may continue to result, in increases in our costs of doing business, and could result in decreased revenues and net income, reduce our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes in federal or state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of such laws and regulations, could have a material adverse effect on our business, financial condition or results of operations.

The Company could be subject to environmental risks and associated costs on real estate properties owned by the Company, real estate properties that collateralize the Company’s loans or real estate properties that the Company obtains title to.
The Company owns various properties used in the operation of its business. In addition, from time to time, the Company forecloses on properties or may be deemed to become involved in the management of its borrowers’ properties. The Company could be subject to environmental liabilities imposed by applicable federal and state laws with respect to any of these properties. For example, we may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases, at a property, or may be subject to common law claims by third parties for damages and costs resulting from environmental contamination emanating from the property. Additionally, a significant portion of our loan portfolio at December 31, 2020 was secured by real estate and, if the real estate securing our assets is subject to environmental liability, our collateral position may be substantially weakened. Any such environmental liabilities imposed on the Company could have a material adverse impact on the Company's financial condition or results of operations.

The Company may be exposed to regulatory sanctions or liability if we do not timely detect and report money laundering or other illegal activities.
 
We are required to comply with anti-money laundering and anti-terrorism laws. These laws and regulations require us, among things, to enact policies and procedures to confirm the identity of our customers, and to report suspicious transactions to regulatory agencies. These laws and regulations are complex and require costly, sophisticated monitoring systems and qualified personnel. The policies and procedures that we have adopted in order to detect and prevent such illegal transactions may not be successful in eliminating all instances of such transactions. To the extent we fail to fully comply with applicable laws and regulations, we face the possibility of fines or other penalties, such as restrictions on our business activities, and we may also
8

suffer reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition. Refer to “Supervision and Regulation” in Part I, Item 1 - “Business” of this Report on Form 10‑K for additional information on anti-money laundering and anti-terrorism laws impacting the Company’s business.

We will be subject to heightened regulatory requirements if we exceed $10 billion in total consolidated assets.

Based on our historical growth rates and current size, it is possible that our total assets could exceed $10 billion dollars in the future. Our total consolidated assets on December 31, 2020 were $7.6 billion. The Dodd-Frank Act and its implementing regulations impose enhanced supervisory requirements on bank holding companies with more than $10 billion in total consolidated assets.

In addition to the additional regulatory requirements that we will become subject to upon crossing this asset threshold, federal financial regulators may require the Company to, or the Company may proactively, take actions to prepare for compliance with such increased regulations before we exceed $10 billion in total consolidated assets. We may, therefore, incur significant compliance costs in an effort to ensure compliance before we reach $10 billion in total consolidated assets. These additional compliance costs, if they occur, may adversely affect our business, results of operations and financial condition.

The Company may be adversely affected by fraud.
As a financial institution, the Company is inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers and other third parties targeting the Company and/or the Company’s customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Although the Company devotes substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, the Company may experience financial losses or reputational harm as a result of fraud. Fraudulent activity could have a material adverse effect on the Company’s business, financial condition and results of operations.

Our business requires the collection and retention of large volumes of sensitive data, which is subject to extensive regulation and oversight and exposes our business to additional risks.
In our ordinary course of business, we collect and retain large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal Company data such as personally identifiable information about our employees and information relating to our operations. Our customers and employees have been, and will continue to be, targeted by cybersecurity threats attempting to misappropriate passwords, bank account information or other personal information. Our attempts to mitigate these threats may not be successful as cybercrimes are complex and continue to evolve. Publicized information concerning security and cyber-related problems could cause us to incur reputational harm and discourage our customers from using our electronic or web-based applications or solutions, which could harm their utility as a means of conducting commercial transactions.

Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in breach attempts or other disruptions are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third party vendors, including as a result of cyber-attacks, could (i) disrupt the proper functioning of our internal, or our third-party vendors’, networks and systems and therefore our operations and/or those of certain of our customers; (ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose the us to civil litigation, governmental fines and possible financial liability; (iv) require significant management attention and resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.

A breach of information or other technological security, including as a result of cyber-attacks, could have a material adverse effect on our business, financial condition and results of operations.

In the ordinary course of business we rely on electronic communications and information systems, both internal and provided by external third parties, to conduct our operations and to store, process, and/or transmit sensitive data on a variety of
9

computing platforms and networks and over the Internet. We cannot be certain that all of our systems, or third-party systems upon which we rely, are free from vulnerability to attack or other technological difficulties or failures. Information security breaches and cybersecurity-related incidents may include attempts to access information, including customer and company information, malicious code, computer viruses, phishing, denial of service attacks and other means of intrusion that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer or employee information), account takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. If information security is breached or difficulties or failures occur, despite the controls we and our third party vendors have instituted, information may be lost or misappropriated, resulting in financial loss or costs, reputational harm or damages and litigation, regulatory investigation costs or remediation costs to us or others. While we maintain specific “cyber” insurance coverage, which would apply in the event of many breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. Any of these consequences could have a material adverse effect on our financial condition and results of operations.

The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, has significantly increased, in part due to the expansion of new technologies, the increased use of the Internet and mobile services and the increased intensity and sophistication of attempted attacks and intrusions from around the world. The threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Our technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats as well as the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities.

The Company is subject to risks presented by acquisitions, which, if realized, could negatively affect our results of operations and financial condition. 
The Company’s strategic initiatives include diversification within its markets, growth of its fee-based businesses, and growth internally and through acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses within markets currently served by the Company or in other locations that would complement the Company’s business or its geographic reach. In the second quarter of 2019, the Company's insurance subsidiary, Tompkins Insurance, acquired a small insurance agency, The Cali Agency, which was folded into Tompkins Insurance. Any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks include: the difficulty of integrating operations and personnel, the potential disruption of our ongoing business, the inability of management to realize or maximize anticipated financial and strategic positions, increased operating costs, the inability to maintain uniform standards, controls, procedures and policies, the difficulty and cost of obtaining adequate financing, the potential for litigation risk, the potential loss of members of a key executive management group, the potential reputational damage and the impairment of relationships with employees and customers as a result of changes in ownership and management. Further, the asset quality or other financial characteristics of an acquired company may deteriorate after the acquisition agreement is signed or after the acquisition closes. We cannot provide any assurance that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions and any of these risks, if realized, could have an adverse effect on our results of operations and financial condition.

The Company's operations may be adversely affected if its external vendors do not perform as expected or if its access to third-party services is interrupted.
The Company relies on certain external vendors to provide products and services necessary to maintain the day-to-day operations of the Company. Some of the products and services provided by vendors include key components of our business infrastructure including data processing and storage and internet connections and network access, among other products and services. Accordingly, the Company’s operations are exposed to the risk that these vendors will not perform in accordance with the contracted arrangements or under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements or under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could disrupt the
10

Company’s operations. If we are unable to find alternative sources for our vendors’ services and products quickly and cost-effectively, the failures of our vendors could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Additionally, our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

Risks Associated with the Company’s Common Stock
 
The Company’s stock price may be volatile.
 
The Company’s stock price can fluctuate widely in response to a variety of factors, including: actual or anticipated variations in our operating results; recommendations by securities analysts; significant acquisitions or business combinations; operating and stock price performance of other companies that investors deem comparable to Tompkins; new technology used, or services offered by our competitors; news reports relating to trends, concerns and other issues in the financial services industry; and changes in government regulations. Other factors, including general market fluctuations, industry-wide factors and economic and general political conditions and events, including foreign and national governmental policy decisions, terrorist attacks, pandemics, economic slowdowns or recessions, interest rate changes, credit loss trends or currency fluctuations, may adversely affect the Company’s stock price even though they do not directly pertain to the Company’s operating results. The economic impact of the COVID-19 pandemic has caused and may continue to cause the Company's stock price to decline and fluctuate.
 
The trading volume in our common stock is less than that of larger financial services companies, which may adversely affect the price of our common stock.
 
The Company’s common stock is traded on the NYSE American. The trading volume in the Company’s common stock is less than that of larger financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of the Company’s common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.
 
An investment in our common stock is not an insured deposit.
 
The Company’s common stock is not a bank deposit and, therefore, is not insured against loss by the FDIC, any other deposit insurance fund or by any other public or private entity. Investment in the Company’s common stock is inherently risky for the reasons described in this “Risk Factors” section and is subject to the same market forces that affect the price of common stock in any company. As a result, if you acquire the Company’s common stock, you may lose some or all of your investment.

We may not pay, or may reduce, the dividends paid on our common stock.
 
Holders of Tompkins’ common stock are only entitled to receive such dividends as its board of directors may declare out of funds legally available for such payments. While Tompkins has a long history of paying dividends on its common stock, Tompkins is not required to pay dividends on its common stock and could reduce or eliminate its common stock dividend in the future. This could adversely affect the market price of Tompkins’ common stock. Also, Tompkins is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends. See “Supervision and Regulation” for a description of certain material limitations on the Company’s ability to pay dividends to shareholders.







11

General Risks

As an organization focused on building comprehensive relationships with clients, employees and the communities we serve, our reputation is critical to our business, and damage to it could have a material adverse effect on our business and prospects.

Our success as a Company relies on maintaining the value of our brand and our good reputation with our current and potential customers and employees. Through our branding, we communicate to the market about our Company and our product and service offerings. Maintaining a positive reputation is critical to our attracting and retaining clients and employees. Accordingly, reputational damage would likely have a materially adverse impact on our business prospects and our ability to execute on our business strategy. Harm to our reputation can arise from many sources, including regulatory actions or fines, improperly handled conflicts of interest, operating system failures or security breaches, customer complaints, litigation, actual or perceived employee misconduct, misconduct by our outsourced service providers or other counterparties, or other unethical or improper behavior conducted by our Company or affiliated service providers or other counterparties could all cause harm to our reputation, impair our ability to attract and retain customers, make it more difficult or expensive to obtain external funding and have other adverse effects on our business, results of operations and financial condition. Negative publicity regarding us or any of our subsidiaries, whether or not accurate, may damage our reputation, which could have a material adverse effect on our assets, business, prospects, financial condition and results of operations.

We continually encounter technological changes and the failure to understand and adapt to these changes could hurt our business.

The financial services industry is continually undergoing rapid technological changes with frequent introductions of new technology-driven products and services which increase efficiency and enable financial institutions to serve customers better and to reduce costs. The Company’s future success depends, in part, upon its ability to leverage technology to increase our operational efficiency as well as address the current and evolving needs of our customers. However, our competitors may have greater resources to invest in technological improvements, we may not always have capital levels which are sufficient to support a robust investment in our technology infrastructure or we may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological changes affecting the financial services industry could have a material adverse effect on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Our success depends on our ability to offer our customers an evolving suite of products and services, and we may not be able to effectively manage the risks inherent in the development of financial products and services.

We continually monitor our suite of products and services, and prioritize new offerings based on our determination of customer demand, within regulatory parameters for financial products. We may invest significant time and resources in new products which become obsolete, or do not generate the revenues we had anticipated, or which are ultimately deemed unacceptable by regulatory authorities. As we expand the range and complexity of our products and services, we are exposed to increasingly complex risks, including potential fraud, and our employees and risk management systems may not be adequate to mitigate such risks effectively. Our failure to effectively identify and manage these risks and uncertainties could have a material adverse effect on our business. 
Our future success is dependent on our ability to compete effectively in a highly competitive industry and market areas.
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. In addition, a number of out-of-state financial intermediaries have opened production offices, or otherwise solicit deposits, or have announced plans to do so in the Company’s market areas. Some of these competitors have substantially greater resources and lending capabilities than the Company 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. The financial services industry could become even more competitive as a result of legislative, regulatory and technological changes and continued consolidation. Additionally, technology has lowered barriers to entry and made it possible for non-banks to offer products and services traditionally provided by banks, such as automatic transfer and automatic payment systems. Failure to compete effectively to attract new and retain current customers could adversely affect our growth and profitability, which could have a materially adverse effect on our business, financial condition and results of operations.

12


Item 1. Business
 
The disclosures set forth in this Item 1. Business are qualified by the section captioned “Forward-Looking Statements” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of this Report and other cautionary statements set forth elsewhere in this Report.
 
General
 
Tompkins Financial Corporation (“Tompkins” or the “Company”) is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance. At December 31, 2020, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), VIST Bank (DBA Tompkins VIST Bank); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The Trust Company provides a full array of trust and investment 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’s principal offices are located at 118 E. Seneca St., P.O. Box 460, Ithaca, New York, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the symbol “TMP.”
 
Tompkins was organized in 1995, under the laws of the State of New York, as a bank holding company for the Trust Company, a commercial bank that has operated in Ithaca, New York and surrounding communities since 1836.
 
The Tompkins strategy centers around its core values and a commitment to delivering long-term value to our clients, communities, and shareholders. A key strategic initiative for the Company is a focus on responsible and sustainable growth, including initiatives to grow organically through our current businesses, as well as through possible acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses that would complement the Company’s business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. The Company has pursued acquisition opportunities in the past, and continues to review new opportunities.

The Company also has defined strategic initiatives around digital delivery of services to meet the changing needs of client expectations, while maintaining our commitment to excellence in the delivery of personal service when self-serve options are unable to meet the needs of our clients. Our strategy includes a focus on building a scalable foundation based on a continuous improvement approach necessary for our long term success. This foundation will include investments in automation, analytics and security to drive ongoing consistency, efficiency, and security in our operations. We also recognize the need to develop and acquire talent that is well prepared to succeed in our changing industry. Initiatives in this area include a focus on characteristics such as collaboration, innovation and agility, while also promoting and embracing diversity, inclusion and belonging in our workforce.
 
Narrative Description of Business
 
The Company has identified three business segments, consisting of banking, insurance and wealth management.
 
Banking services consist primarily of attracting deposits from the areas served by the Company’s four banking subsidiaries’ 64 banking offices (44 offices in New York and 20 offices in Pennsylvania), and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, and leases in those same areas. The Company’s lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Policies and procedures are reviewed on a regular basis. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, concentrations of credit, loan delinquencies and nonperforming and potential problem loans. The Company has an independent third party loan review process that reviews and validates the risk identification and assessment made by the lenders and credit personnel. The results of these reviews are presented to the Board of Directors of each of the Company’s banking subsidiaries, and the Company’s Audit Committee.
 
13

The Company’s principal expenses are interest on deposits, interest on borrowings, and operating and general administrative expenses, as well as provisions for credit loss expenses. Funding sources, other than deposits, include borrowings, securities sold under agreements to repurchase, and cash flow from lending and investing activities. The Company’s principal source of revenue is interest income on loans and securities.
 
The Company maintains a portfolio of securities such as obligations of U.S. government agencies and U.S. government sponsored entities, obligations of states and political subdivisions thereof, and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee.
 
The Company has operated its insurance agency subsidiary, Tompkins Insurance Agencies Inc., since 2001. Insurance services include property and casualty insurance, employee benefit consulting, life, long-term care and disability insurance. Tompkins Insurance is headquartered in Batavia, New York. Over the years, Tompkins Insurance has acquired smaller insurance agencies in the market areas served by the Company’s banking subsidiaries and successfully consolidated them into Tompkins Insurance. Tompkins Insurance offers services to customers of the Company’s banking subsidiaries by sharing offices with Tompkins Bank of Castile, the Trust Company, and Tompkins VIST Bank. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York, and one stand-alone office in Tompkins County, New York.
 
Wealth management services consist of investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Wealth management services are provided under the trade name Tompkins Financial Advisors. Tompkins Financial Advisors has office locations, and services are available, within all four of the Company’s subsidiary banks.
Subsidiaries
 
The Company operates four banking subsidiaries, and an insurance agency subsidiary. In addition, the Company also owns 100% of the common stock of Leesport Capital Trust II and Madison Statutory Trust I. The Company’s banking subsidiaries operate 64 offices, including 2 limited-service offices, with 44 banking offices located in New York and 20 banking offices located in southeastern Pennsylvania. The decision to operate as four locally managed community banks reflects management’s commitment to community banking as a business strategy. For Tompkins, personal delivery of high quality services, a commitment to the communities in which we operate, and the convergence of a single-source financial service provider characterize management’s community banking approach. The combined resources of the Tompkins organization provide increased capacity for growth and the greater capital resources necessary to make investments in technology and services. Tompkins has a comprehensive suite of products and services in the markets served by all four banking subsidiaries. These services include trust and investment services, insurance, leasing, card services, Internet banking, and remote deposit services.
 
Tompkins Trust Company (the “Trust Company”) 
The Trust Company is a New York State-chartered commercial bank that has operated in Ithaca, New York and surrounding communities since 1836. The Trust Company provides wealth management services through Tompkins Financial Advisors (“TFA”), a division of Tompkins Trust Company. The Trust Company operates 14 banking offices, including one limited-service banking office in Tompkins County, in New York. The Trust Company’s largest market area is Tompkins County, which has a population of approximately 102,000. Education plays a significant role in the Tompkins County economy with Cornell University and Ithaca College being two of the county’s major employers. The Trust Company has a full-service office in Cortland, New York and a full-service office in Auburn, New York. Both of these offices are located in counties contiguous to Tompkins County. The Trust Company also has a full service branch in Fayetteville, New York which is located in Onondaga County. As of December 31, 2020, the Trust Company had total assets of $2.4 billion, total loans of $1.5 billion and total deposits of $2.0 billion.
Tompkins Bank of Castile  
Tompkins Bank of Castile is a New York State-chartered commercial bank and conducts its operations through its 16 banking offices, in towns situated in and around the areas commonly known as the Genesee Valley region of New York State. The main business office for Tompkins Bank of Castile is located in Batavia, New York and is shared with Tompkins Insurance. Tompkins Bank of Castile serves a six-county market, much of which is rural in nature, but also includes Monroe County (population approximately 742,000), where the city of Rochester is located, and Erie County (population approximately
14

918,000) located near Buffalo, New York. The population of the counties served by Tompkins Bank of Castile, other than Monroe and Erie, is approximately 201,000. As of December 31, 2020, Tompkins Bank of Castile had total assets of $1.8 billion, total loans of $1.3 billion and total deposits of $1.6 billion.

Tompkins Mahopac Bank
Tompkins Mahopac Bank is a New York State-chartered commercial bank that operates 14 banking offices. The 14 banking offices include 5 full-service offices in Putnam County, New York, 3 full-service offices in Dutchess County, New York, and 6 full-service offices in Westchester County, New York. Putnam County has a population of approximately 98,000 and is about 60 miles north of Manhattan. Dutchess County has a population of approximately 294,000, and Westchester County has a population of approximately 968,000. As of December 31, 2020, Tompkins Mahopac Bank had total assets of $1.5 billion, total loans of $1.1 billion and total deposits of $1.3 billion.

Tompkins VIST Bank  
Tompkins VIST Bank is a full service Pennsylvania State-charted commercial bank that operates 20 banking offices in Pennsylvania, including one limited-service office. The 20 banking offices include 12 offices in Berks County, 5 offices in Montgomery County, 1 office in Philadelphia County, 1 office in Delaware County and 1 office in Schuylkill County. The population of the counties served by Tompkins VIST Bank is Philadelphia: 1.6 million, Montgomery: 835,000, Delaware: 568,000, Berks: 421,000 and Schuylkill: 141,000. The main office is located in Wyomissing, Pennsylvania. As of December 31, 2020, Tompkins VIST Bank had total assets of $2.0 billion, total loans of $1.4 billion and total deposits of $1.6 billion.
Tompkins Insurance Agencies, Inc. ("Tompkins Insurance")
Tompkins Insurance is headquartered in Batavia, New York. Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance. Over the years, Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company's banking subsidiaries and successfully consolidated them into Tompkins Insurance. Tompkins Insurance offers services to customers of the Company's banking subsidiaries by sharing offices with Tompkins Bank of Castile, Trust Company, and Tompkins VIST Bank. In addition to these shared offices, Tompkins Insurance has five stand-alone offices in Western New York.

Leesport Capital Trust II 
Leesport Capital Trust II, a Delaware statutory business trust, was formed in 2002 and issued $10.0 million of mandatory redeemable capital securities carrying a floating interest rate of three-month LIBOR plus 3.45%. The Company assumed the rights and obligations of VIST Financial Corporation ("VIST Financial") pertaining to the Leesport Capital Trust II through the Company’s acquisition of VIST Financial in 2012.
 
Madison Statutory Trust I 
Madison Statutory Trust I, a Connecticut statutory business trust formed in 2003, issued $5.0 million of mandatory redeemable capital securities carrying a floating interest rate of three-month LIBOR plus 3.10%. VIST Financial assumed Madison Statutory Trust I pursuant to the purchase of Madison Bancshares Group, Ltd in 2004. The Company assumed the rights and obligations of VIST Financial pertaining to the Madison Statutory Trust I through the Company’s acquisition of VIST Financial in 2012.
 
For additional details on the above capital trusts refer to “Note 10 - Trust Preferred Debentures” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.
 
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
15

financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company’s community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company’s competitiveness. Management believes that each of the Company’s subsidiary banks can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services, 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.
Supervision and Regulation
 
Regulatory Agencies 
As a registered financial holding company, the Company is regulated under the Bank Holding Company Act of 1956 as amended (“BHC Act”), and is subject to examination and comprehensive regulation by the Federal Reserve Board (“FRB”). The Company is also subject to the jurisdiction of the Securities and Exchange Commission (“SEC”) and is subject to disclosure and regulatory requirements under the Securities Act of 1933, as amended (the “Securities Act”), and the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The Company's activities are also subject to regulation under the Federal Reserve Act, the Federal Deposit Insurance Act, the Dodd-Frank Act, the Truth-in-Lending Act (which governs disclosures of credit terms to consumer borrowers), the Truth-in-Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act (which governs the manner in which consumer debts may be collected by collection agencies), the Home Mortgage Disclosure Act (which requires financial institutions to provide certain information about home mortgage and refinanced loans), the Servicemembers Civil Relief Act, Section 5 of the Federal Trade Commission Act (which prohibits unfair or deceptive acts and practices in or affecting commerce), the Real Estate Settlement Procedures Act, and the Electronic Funds Transfer Act, as well as other federal, state and local laws. The Company’s common stock is traded on the NYSE American under the Symbol “TMP” and as a result the Company is subject to the rules of the NYSE American for listed companies.
The Company’s banking subsidiaries are subject to examination and comprehensive regulation by various regulatory authorities, including the Federal Deposit Insurance Corporation (“FDIC”), the New York State Department of Financial Services (“NYSDFS”), and the Pennsylvania Department of Banking and Securities (“PDBS”). Each of these agencies issues regulations and requires the filing of reports describing the activities and financial condition of the entities under its jurisdiction. Likewise, such agencies conduct examinations on a recurring basis to evaluate the safety and soundness of the institutions, and to test compliance with various regulatory requirements, including: consumer protection, privacy, fair lending, the Community Reinvestment Act, the Bank Secrecy Act, sales of non-deposit investments, electronic data processing, and trust department activities.

The Company’s insurance subsidiary is subject to examination and regulation by the NYSDFS and the Pennsylvania Insurance Department.
The Company’s wealth management subsidiary is subject to examination and regulation by various regulatory agencies. The trust division of Tompkins Trust Company is subject to examination and comprehensive regulation by the FDIC and NYSDFS. 
Federal Home Loan Bank System 
The Company’s banking subsidiaries are also members of the Federal Home Loan Bank (“FHLB”), which provides a central credit facility primarily for member institutions for home mortgage and neighborhood lending. The Company’s banking subsidiaries are subject to the rules and requirements of the FHLB, including the requirement to acquire and hold shares of capital stock in the FHLB in an amount at least equal to the sum of 0.35% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, up to a maximum of $25.0 million. The Company’s banking subsidiaries were in compliance with FHLB rules and requirements as of December 31, 2020.
 
Regulatory Reform 
The enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) placed U.S. banks and financial services firms under enhanced regulation and oversight. While many provisions of the Dodd-Frank Act are currently effective, certain provisions of the legislation are still subject to further rulemaking, guidance and interpretation by the federal regulatory agencies. In addition, the Economic Growth, Regulatory Relief, and Consumer Protection Act (“EGRRCPA”), which was enacted on May 24, 2018, amended certain provisions of the Dodd-Frank Act. Key provisions of EGRRCPA and its implementing regulations that are likely to impact the Company, include:

16

A simplified capital rule change that exempts "qualifying community banks" from all risk-based capital requirements, including Basel III, and deems such banks "well capitalized" for purposes of federal "prompt corrective action" capital standards. To qualify for the framework and elect to adopt the simplifying changes, a community bank must have less than $10 billion in total consolidated assets, limited amounts of off-balance-sheet exposures and trading assets and liabilities, and a leverage ratio greater than nine percent. The Company has elected not to adopt exemption from risk based capital requirements as a qualifying community bank.
Amendment of the Liquidity Coverage Ratio Rule such that all qualifying investment-grade, liquid and readily-marketable municipal securities are treated as level 2B liquid assets;
Modification of the definition of "high volatility commercial real estate" loans that trigger heightened risk-based capital requirements to ease the burden of those requirements;
Exemption of certain reciprocal deposits of certain FDIC-insured institutions from being considered "brokered deposits," subject to certain limitations, for institutions meeting minimum capital and exam-rating requirements;
Exemption of some community banks from mortgage escrow requirements, exemption of certain transactions involving real property in rural areas and valued at less than $400,000 from appraisal requirements and implementation of a "qualified mortgage" exemption for community banks which satisfies, subject to certain limitations, the "ability to repay" requirements in the Truth in Lending Act; and
Exemption of certain qualifying financial institutions with less than $10 billion in total assets, such as the Company, from the Volcker Rule proprietary trading requirements implemented under the Dodd-Frank Act.

While EGRRCPA improves regulatory conditions for the Company, many provisions of the Dodd-Frank Act and its implementing regulations remain effective and will continue to result in additional operating and compliance costs that could have a material adverse effect on our business, financial condition and results of operation.

Debit-Card Interchange Fees
FRB regulations mandated by the Dodd-Frank Act limit interchange fees on debit cards to a maximum of 21 cents per transaction plus 5 basis points of the transaction amount. Issuers that, together with their affiliates, have less than $10 billion in assets, such as the Company, are exempt from the debit card interchange fee standards. However, FRB regulations prohibit all card issuers, including the Company and its banking subsidiaries, from restricting the number of networks over which electronic debit transactions may be processed to fewer than two unaffiliated networks, or inhibiting a merchant's ability to direct the routing of the electronic debit transaction over any network that the card issuer has enabled to process them.

Volcker Rule
The Dodd-Frank Act required the federal financial regulatory agencies to adopt rules that prohibit banks and their affiliates from engaging in proprietary trading and investing in and sponsoring certain unregistered investment companies (defined as hedge funds and private equity funds). The statutory provision is commonly called the “Volcker Rule.” As of December 31, 2020, the Company had outstanding investments of less than $100,000 in covered funds (the "Legacy Investments"), which are exempt from the divestiture requirements of the Volcker Rule unless the Company crosses the $10 billion in total asset threshold.

Federal Bank Holding Company Regulation 
We are a bank holding company subject to regulation under the BHC Act and the examination and reporting requirements of the FRB. In general, the BHC Act limits the business of bank holding companies to banking, managing or controlling banks and other activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. In addition, we qualified for the status of and elected to be a financial holding company under the BHC Act and therefore may engage in any activity, or acquire and retain the shares of a company engaged in any activity, that is either (i) financial in nature or incidental to such financial activity (as determined by the FRB in consultation with the Secretary of the Treasury) or (ii) complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally (as solely determined by the FRB), without prior approval of the FRB.

If a bank holding company seeks to engage in the broader range of activities permitted under the BHC Act for financial holding companies, as we do, (i) the bank holding company and all of its depository institution subsidiaries must be “well-capitalized” and “well-managed,” as defined in the FRB's Regulation Y and (ii) it must file a declaration with the FRB that it elects to be a “financial holding company.” If we cease to meet these requirements, the Company will not be in compliance with the BHC Act’s requirements and the FRB may impose limitations or conditions on the conduct of its activities to encourage compliance. If the Company does not return to compliance within 180 days, the FRB may require divestiture of our depository institutions, among other potential penalties and limitations. To maintain financial holding company status, a financial holding company and all of its depository institution subsidiaries must be “well capitalized” and “well managed.” A depository institution subsidiary is considered to be “well capitalized” if it satisfies the requirements for this status discussed in the section captioned “Capital
17

Adequacy and Prompt Corrective Action,” below. A depository institution subsidiary is considered “well managed” if it received a composite rating and management rating of at least “satisfactory” in its most recent examination. A financial holding company’s status will also depend upon it maintaining its status as “well capitalized” and “well managed” under applicable FRB regulations. If a financial holding company ceases to meet these capital and management requirements, the FRB’s regulations provide that the financial holding company must enter into an agreement with the FRB to comply with all applicable capital and management requirements. Until the financial holding company returns to compliance, the FRB may impose limitations or conditions on the conduct of its activities, and the company may not commence any of the broader financial activities permissible for financial holding companies or acquire a company engaged in such financial activities without prior approval of the FRB. If the company does not return to compliance within 180 days, the FRB may require divestiture of the holding company’s depository institutions. Bank holding companies and banks must also be “well-capitalized” and “well-managed” in order to acquire banks located outside their home state.

In order for a financial holding company to commence any new activity permitted by the BHC Act or to acquire a company engaged in any new activity permitted by the BHC Act, each insured depository institution subsidiary of the financial holding company must have received a rating of at least “satisfactory” in its most recent examination under the Community Reinvestment Act (“CRA”). See the section captioned “Community Reinvestment Act”, below.

The FRB has the power to order any bank holding company or its subsidiaries to terminate any activity or to terminate its ownership or control of any subsidiary when the FRB has reasonable grounds to believe that continuation of such activity or such ownership or control constitutes a serious risk to the financial soundness, safety or stability of any bank subsidiary of the bank holding company.

Share Repurchases and Dividends 
Under FRB regulations, the Company may not, without providing prior notice to the FRB, purchase or redeem its own common stock if the gross consideration for the purchase or redemption, combined with the net consideration paid for all such purchases or redemptions during the preceding twelve months, is equal to ten percent or more of the Company’s consolidated net worth.
 
FRB regulations provide that dividends shall not be paid except out of current earnings and unless the prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality, and overall financial condition. Tompkins’ primary source of funds to pay dividends on its common stock is dividends from its subsidiary banks. The subsidiary banks are subject to regulations that limit the dividends that they may pay to Tompkins. Member banks may not declare or pay a dividend during the current calendar year that exceeds the sum of the bank's net income during the current calendar year and the retained net income of the prior two calendar years, unless approved by the pertinent regulatory agencies.

Transactions with Affiliates and Other Related Parties 
There are Federal laws and regulations that govern transactions between the Company’s non-bank subsidiaries and its banking subsidiaries, including Sections 23A and 23B of the Federal Reserve Act and related regulations. These laws establish certain quantitative limits and other prudent requirements for loans, purchases of assets, and certain other transactions between a member bank and its affiliates. In general, transactions between the Company’s banking subsidiaries and its non-bank subsidiaries must be on terms and conditions, including credit standards, that are substantially the same or at least as favorable to the banking subsidiaries as those prevailing at the time for comparable transactions involving non-affiliated companies. The Dodd-Frank Act significantly expanded the coverage and scope of the limitations on affiliate transactions within a banking organization.

The Company’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons, is governed by the requirements of Sections 22(g) and 22(h) of the Federal Reserve Act and Regulation O as promulgated by the FRB. Among other things, these provisions require that extensions of credit to insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features; and (ii) not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the Bank’s capital. In addition, extensions of credit in excess of certain limits must be approved by the Bank’s board of directors.

Mergers and Acquisitions 
The BHC Act, the Bank Merger Act, the Change in Bank Control Act and other federal and state statutes regulate acquisitions of interests in commercial banks. The BHC Act requires the prior approval of the FRB for the direct or indirect acquisition by a bank holding company of more than 5.0% of the voting shares of a commercial bank or its parent holding company and for a person, other than a bank holding company, to acquire 25% or more of any class of voting securities of a bank or bank holding
18

company. Under the Bank Merger Act, the prior approval of the FRB or other appropriate bank regulatory authority is required for a member bank to merge with another bank or purchase the assets or assume the deposits of another bank. In reviewing applications seeking approval of merger and acquisition transactions, the bank regulatory authorities will consider, among other things, the competitive effect and public benefits of the transactions, the capital position of the combined organization, the risks to the stability of the U.S. banking or financial system, the applicant’s performance record under the CRA (see the section captioned “Community Reinvestment Act” included elsewhere in this item) and fair housing laws and the effectiveness of the subject organizations in combating money laundering activities.
 
Source of Strength Doctrine
The Dodd-Frank Act requires bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. Under this requirement, Tompkins is expected to commit resources to support its banking subsidiaries, including at times when it may not be advantageous for Tompkins to do so. Any capital loans by a bank holding company to any of its subsidiary banks are subordinated in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Liability of Commonly Controlled Institutions 
FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of an FDIC-insured depository institution controlled by the same bank holding company, or for any assistance provided by the FDIC to an FDIC-insured depository institution controlled by the same bank holding company that is in danger of default. “Default” means generally the appointment of a conservator or receiver. “In danger of default” means generally the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance.
 
Capital Adequacy and Prompt Corrective Action 
The Basel III Capital Rules were implemented by the FRB in 2013, became effective for Tompkins on January 1, 2015 and were subject to a phase-in period that concluded on January 1, 2019.

The Basel III Capital Rules, among other things, (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specified that Tier 1 capital consists of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defined CET1 narrowly by requiring that most deductions/adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expanded the scope of the deductions/adjustments as compared to existing regulations.

Under Basel III, the Company is required to maintain a “capital conservation buffer” above the minimum risk-based capital requirements. The capital conservation buffer, fully phased in on January 1, 2019, is 2.5%. At December 31, 2020, the Company complied with the capital conservation buffer requirement.

As fully phased in on January 1, 2019, the Basel III Capital Rules require Tompkins to maintain (i) a minimum ratio of CET1 to risk-weighted assets of 4.5%, plus a 2.5% capital conservation buffer (resulting in a minimum ratio of CET1 to risk-weighted assets of 7.0%), (ii) a minimum ratio of Tier 1 capital to risk- weighted assets of 6.0%, plus the capital conservation buffer (resulting in a minimum Tier 1 capital ratio of 8.5%), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of 8.0%, plus the capital conservation buffer (resulting in a minimum total capital ratio of 10.5%), and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average assets. Banking institutions that fail to meet the effective minimum ratios once the capital conservation buffer is taken into account, as detailed above, will be subject to constraints on capital distributions, including dividends and share repurchases, and certain discretionary executive compensation. The severity of the constraints depends on the amount of the shortfall and the institution’s “eligible retained income” (that is, the greater of (i) net income for the preceding four quarters, net of distributions and associated tax effects not reflected in net income and (ii) average net income over the preceding four quarters).

The Basel III Capital Rules also provide for a “countercyclical capital buffer” that is applicable to only certain covered institutions and is not expected to apply to Tompkins for the foreseeable future.

The Basel III Capital Rules imposed stricter regulatory capital deductions from and adjustments to capital, with most deductions and adjustments taken against CET1 capital. These include, for example, the requirement that (i) mortgage servicing assets, net of associated deferred tax liabilities; (ii) deferred tax assets, which cannot be realized through net operating loss carrybacks, net of any relative valuation allowances and net of deferred tax liabilities; and (iii) significant investments (i.e. 10% or greater ownership) in unconsolidated financial institutions be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other
19

adjustments to CET1 began on January 1, 2015. The deductions were phased-in over a four-year period, beginning on January 1, 2015 and concluding on January 1, 2019.

Under the Basel III Capital Rules, the effect of certain accumulated other comprehensive items are not excluded, which could result in significant variations in the level of capital depending upon the impact of interest rate fluctuations on the fair value of the Company’s securities portfolio. Contained within the rule was a one-time option to permanently opt-out of the inclusion of accumulated other comprehensive income in the capital calculation based upon asset size. Tompkins decided to opt out of this requirement in January 2015.

The Basel III Capital Rules also required the phase-out of certain hybrid securities, such as trust preferred securities, as Tier 1 capital of bank holding companies. However, because the trust preferred securities held by Tompkins were issued prior to May 19, 2010, and because Tompkins’ total consolidated assets were less than $15.0 billion as of December 31, 2009, these trust preferred securities are permanently grandfathered under the final rule and may continue to be included as Tier 1 capital.
 
In addition, the Basel III Capital Rules provide more advantageous risk weights for derivatives and repurchase-style transactions cleared through a qualifying central counterparty and increase the scope of eligible guarantors and eligible collateral for purposes of credit risk mitigation.
 
The Standardized Approach Proposal expands the risk-weighting categories from the current four Basel I-derived categories (0%, 20%, 50% and 100%) to a much larger and more risk-sensitive number of categories, depending on the nature of the assets, generally ranging from 0% for U.S. government and agency securities, to 600% for certain equity exposures, and resulting in higher risk weights for a variety of asset categories, including many residential mortgages and certain commercial real estate loans. Specifics include, among other things:
–    Applying a 150% risk weight instead of a 100% risk weight for certain high volatility commercial real estate acquisition, development and construction loans.
–    For residential mortgage exposures, the current approach of a 50% risk weight for high-quality seasoned mortgages and a 100% risk-weight for all other mortgages is replaced with a risk weight of between 35% and 200% depending upon the mortgage’s loan-to-value ratio and whether the mortgage is a “category 1” or “category 2” residential mortgage exposure (based on eight criteria that include the term, use of negative amortization, balloon payments and certain rate increases).
–    Assigning a 150% risk weight to exposures (other than residential mortgage exposures) that are 90 days past due.
–    Providing for a 20% credit conversion factor for the unused portion of a commitment with an original maturity of one year or less that is not unconditionally cancellable (currently set at 0%).
–    Providing for a risk weight, generally not less than 20% with certain exceptions, for securities lending transactions based on the risk weight category of the underlying collateral securing the transaction.
–    Providing for a 100% risk weight for claims on securities firms.
–    Eliminating the current 50% cap on the risk weight for OTC derivatives.
 
In February 2019, the federal bank regulatory agencies issued a final rule (the “2019 CECL Rule”) that revised certain capital regulations to account for changes to credit loss accounting under U.S. GAAP. The 2019 CECL Rule included a transition option that allows banking organizations to phase in, over a three-year period, the day-one adverse effects of adopting a new accounting standard related to the measurement of current expected credit losses (“CECL”) on their regulatory capital ratios (three-year transition option). In March 2020, the federal bank regulatory agencies issued an interim final rule that maintains the three-year transition option of the 2019 CECL Rule and also provides banking organizations that were required under U.S. GAAP (as of January 2020) to implement CECL before the end of 2020 the option to delay for two years an estimate of the effect of CECL on regulatory capital, relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period (five-year transition option). We elected to adopt the five-year transition option. Accordingly, a CECL transitional amount totaling $1.6 million has been added back to CET1 as of December 31, 2020. The CECL transitional amount includes a $2.0 million decrease related to the cumulative effect of adopting CECL and a $3.6 million increase related to the estimated incremental effect of CECL since adoption.

Section 38 of the Federal Deposit Insurance Act (“FDIA”) requires federal banking agencies to take “prompt corrective action” (“PCA”) should an insured depository institutions fail to meet certain capital adequacy standards. If an insured depository institution is classified in one of the undercapitalized categories, it is required to submit a capital restoration plan to the appropriate federal banking agency and the holding company must guarantee the performance of that plan. Based upon its
20

capital levels, a bank that is classified as well- capitalized, adequately capitalized or undercapitalized, may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice, warrants such treatment.

With respect to the Company’s banking subsidiaries, the Basel III Capital Rules revised the PCA regulations, by: (i) introducing a CET1 ratio requirement at each PCA category (other than critically undercapitalized), with the required CET1 ratio being 6.5% for well-capitalized status; (ii) increasing the minimum Tier 1 capital ratio requirement for each category, with the minimum Tier 1 capital ratio for well-capitalized status being 8% (as compared to 6%); and (iii) eliminating the provision that permitted a bank with a composite supervisory rating of 1 and a 3% leverage ratio to be considered adequately capitalized. The Basel III Capital Rules did not change the total risk-based capital requirement for any PCA category. Additionally, Bank holding companies and insured depository institutions may also be subject to potential enforcement actions of varying levels of severity for unsafe or unsound practices in conducting their business or for violation of any law, rule, regulation, condition imposed in writing by federal banking agencies or term of a written agreement with such agency. The Company is in compliance, and management believes that the Company will continue to be in compliance, with the targeted capital ratios as such requirements are phased in.

For further information concerning the regulatory capital requirements, actual capital amounts and the ratios of Tompkins and its bank subsidiaries, see the discussion in “Note 20 - Regulations and Supervision” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.
 
Deposit Insurance  
Substantially all of the deposits of the Company’s banking subsidiaries are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The Dodd-Frank Act permanently increased the maximum amount of deposit insurance to $250,000 per deposit category, per depositor, per institution retroactive to January 1, 2008.
 
The Company’s banking subsidiaries pay deposit insurance premiums to the FDIC based on assessment rates established by the FDIC. The assessment rates are based upon asset size and other risks the institution poses to the Deposit Insurance Fund, or DIF. Under this assessment system, risk is defined and measured using an institution’s supervisory ratings with other risk measures, including financial ratios.

In October 2010, the FDIC adopted a new Restoration Plan for the DIF to ensure that the fund reserve ratio reached 1.35% by September 30, 2020, as required by the Dodd-Frank Act. On April 26, 2016, the FDIC adopted a rule amending pricing for deposit insurance for institutions with less than $10 billion in assets effective the quarter after the fund reserve ratio reached 1.15%. The fund reserve ratio reached 1.15% effective as of June 30, 2016. The Dodd-Frank Act required the FDIC to offset the effect of increasing the reserve ratio on insured depository institutions with total consolidated assets of less than $10 billion. In September 2018, the reserve ratio reached 1.36%, at which time banks with assets of less than $10 billion were awarded assessment credits for their portion of their assessments that contributed to the growth in the reserve ratio from 1.15% to 1.35%. When the reserve ratio reached 1.40% in June 2019, the FDIC applied these credits to assessment invoices for banks with assets of less than $10 billion. In 2019 and 2020, the Company's subsidiary banks applied credits of $1.5 million and $121,000, respectively, in the aggregate, to offset deposit insurance expense.

On June 26, 2020, the FDIC adopted a Final Rule to mitigate the effect on deposit insurance assessments resulting from an insured institution’s participation as a lender in the Paycheck Protection Program (PPP), the Paycheck Protection Program Liquidity Facility (PPPLF), and the Money Market Mutual Fund Liquidity Facility (MMLF). The regulation provides adjustments to remove the effects of participating in PPP, PPPLF, and MMLF on the assessment rate calculation, and an offset to assessments attributable to the MMLF and PPP assessment base increases. In 2020, the Company's subsidiary banks applied $71,000 of these credits to offset deposit insurance expense.
 
Under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

FDIC insurance expense totaled $2.4 million, $773,000 and $2.6 million in 2020, 2019 and 2018, respectively. The increase in expense between 2020 and 2019 and the decrease in expense between 2019 and 2018 was due to the deposit insurance credits mentioned above, which were recognized mainly in 2019.


21

Depositor Preference 
The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, such as the Company’s subsidiary banks, the claims of depositors of the institution, including the claims of the FDIC, as subrogee of the insured depositors, and certain claims for administrative expenses of the FDIC as receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including the parent bank holding company, with respect to any extensions of credit they have made to such insured depository institutions.

Community Reinvestment Act 
The CRA and the regulations issued thereunder are intended to encourage banks to help meet the credit needs of their entire service area, including low and moderate income neighborhoods, consistent with the safe and sound operations of such banks. These regulations also provide for regulatory assessment of a bank’s record in meeting the needs of its service area when considering applications to establish branches, merger applications and applications to acquire the assets and assume the liabilities of another bank. As of December 31, 2020, the Company’s subsidiary banks all had ratings of satisfactory or better.

In April 2018, the U.S. Department of Treasury issued a memorandum to the federal banking regulators with recommended changes to the CRA’s implementing regulations to reduce their complexity and associated burden on banks. In December 2019, the OCC and FDIC issued a notice of proposed rulemaking intended to (i) clarify which activities qualify for CRA credit; (ii) update where activities count for CRA credit; (iii) create a more transparent and objective method for measuring CRA performance; and (iv) provide for more transparent, consistent, and timely CRA-related data collection, recordkeeping, and reporting. However, the Federal Reserve did not join the proposed rulemaking. In May 2020, the OCC issued its final CRA rule, effective October 1, 2020. The FDIC has not finalized the revisions to its CRA rule. In September 2020, the Federal Reserve Board issued an Advance Notice of Proposed Rulemaking (“ANPR”) that invites public comment on an approach to modernize the regulations that implement the CRA by strengthening, clarifying, and tailoring them to reflect the current banking landscape and better meet the core purpose of the CRA. The ANPR seeks feedback on ways to evaluate how banks meet the needs of low- and moderate-income communities and address in equities in credit access. As such, we will continue to evaluate the impact of any changes to the regulations implementing the CRA and their impact on our financial condition, results of operations, and/or liquidity, which cannot be predicted at this time. The Company will continue to evaluate the impact of any changes to the regulations implementing the CRA.

Federal Securities Laws
The common stock of the Company is registered with the SEC under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Therefore, the Company is subject to the reporting, information disclosure, proxy solicitation and other requirements imposed on public companies by the SEC under the Exchange Act. Additionally, Company insiders are subject to security trading limitations and are required to file insider ownership reports with the SEC. The SEC and NYSE American have adopted regulations under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) and the Dodd-Frank Act that apply to the Company as an exchange-traded, public company, which seek to improve corporate governance, accounting, and reporting requirements, provide enhanced penalties for financial reporting improprieties and improve the reliability of disclosures in SEC filings. For example, the Sarbanes-Oxley requirements include: (1) requirements for audit committees, including independence and financial expertise; (2) certification of financial statements by the chief executive officer and chief financial officer of the reporting company; (3) standards for auditors and regulation of audits; (4) disclosure and reporting requirements for the reporting company and directors and executive officers; and (5) a range of civil and criminal penalties for fraud and other violations of securities laws.
 
Anti-Money Laundering and the USA Patriot Act 
The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA Patriot Act”), the Bank Secrecy Act, the Money Laundering Control Act, and other federal laws, collectively impose obligations on all financial institutions, including the Company, to implement policies, procedures and controls which are reasonably designed to detect and report instances of money laundering and the financing of terrorism. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal and reputational consequences for the institution, including causing applicable bank regulatory authorities not to approve merger or acquisition transactions when regulatory approval is required or to prohibit such transactions even if approval is not required.

The Anti-Money Laundering Act of 2020 (“AMLA”), which amends the Bank Secrecy Act of 1970 (“BSA”), was enacted in January 2021. The AMLA is intended to be a comprehensive reform and modernization to U.S. bank secrecy and anti-money laundering laws. Among other things, it codifies a risk-based approach to anti-money laundering compliance for financial institutions; requires the development of standards for evaluating technology and internal processes for BSA compliance; and
22

expands enforcement- and investigation-related authority, including increasing available sanctions for certain BSA violations and instituting BSA whistleblower incentives and protections.
 
Financial Privacy
The Gramm-Leach-Bliley Act of 1999 (“GLBA”) requires that financial institutions implement comprehensive written information security programs that include administrative, technical and physical safeguards designed to protect consumer information. Under the GLBA, federal banking regulators adopted rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to non-affiliated third parties. These limitations require disclosure of privacy policies and certain security breaches to consumers and, in some circumstances, allow consumers to prevent disclosure of certain personal information to a non-affiliated third party. These provisions affect, among other things, how consumer information is transmitted through diversified financial companies and conveyed to outside vendors.

Office of Foreign Assets Control Regulation
The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are known as the “OFAC” rules based on their administration by the U.S. Treasury Department Office of Foreign Assets Control (“OFAC”). The OFAC-administered sanctions take many forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to a U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences.

Consumer Protection Laws
In connection with their lending and leasing activities, the Company’s banking subsidiaries are subject to a number of federal and state laws designed to protect borrowers and promote lending. These laws include the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair and Accurate Credit Transaction Act of 2003, Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Truth in Lending Act, the Truth in Savings Act, the Home Mortgage Disclosure Act, and the Real Estate Settlement Procedures Act, and similar laws at the state level. The Company’s failure to comply with any of the consumer financial laws can result in civil actions, regulatory enforcement action by the federal banking agencies and the U.S. Department of Justice.

Additionally, the Dodd-Frank Act established a new Bureau of Consumer Financial Protection (“CFPB”) with broad powers to supervise and enforce consumer protection laws. The CFPB has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. The Company and its subsidiaries are required to comply with the rules of the CFPB; however, these rules are generally enforced by our primary regulators, the FRB and the FDIC.

Cybersecurity 
The Company is also subject to data security standards and privacy and data breach notice requirements as established by federal and state regulators. Federal banking agencies, through the Federal Financial Institutions Examination Council, have adopted guidelines to encourage financial institutions to address cybersecurity risks and identify, assess and mitigate these risks, both internally and at critical third party service providers. For example, federal banking regulators have highlighted that financial institutions should establish several lines of defense and design their risk management processes to address the risk posed by compromised customer credentials. Further, financial institutions are expected to maintain sufficient business continuity planning processes designed to facilitate a recovery, resumption and maintenance of the institution’s operations after a cyber-attack.

In December 2020, the federal banking agencies issued a Notice of Proposed Rulemaking that would require banking organizations to notify their primary regulator within 36 hours of becoming aware of a “computer-security incident” or a “notification incident.” The Notice of Proposed Rulemaking also would require specific and immediate notifications by bank service providers that become aware of similar incidents.

Additionally, the Company must comply with a NYSDFS rule entitled “Cybersecurity Requirements for Financial Services Companies,” which became effective March 1, 2017, subject to a full phase-in over the following two years, concluding in
23

2019. This NYSDFS rule requires financial services companies, including Tompkins, to maintain a cybersecurity program designed to protect the confidentiality, integrity and availability of the company’s information systems, establish cybersecurity policies and procedures, identify persons responsible for implementing and enforcing the cybersecurity program and cybersecurity policies and procedures, and conduct periodic risk assessments of its information systems. See Item 1A. Risk Factors for a further discussion of risks related to cybersecurity.
 
Incentive Compensation 
The Dodd-Frank Act required the federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in May 2016, which have not been finalized. If these or other regulations are adopted in a form similar to that initially proposed, they will impose limitations on the manner in which the Company may structure compensation for its executives. Given the uncertainty at this time whether or when a final rule will be adopted, management cannot determine the potential impact on the Company.
Additionally, the FRB, OCC and FDIC have issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. Management believes the current and past compensation practices of the Company do not encourage excessive risk taking or undermine the safety and soundness of the organization.

The FRB reviews, as part of the regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” The findings of the supervisory initiatives are included in reports of examination and deficiencies can lead to limitations on the Company’s abilities and even enforcement actions.

The Company is also subject to the NYSDFS rule “Guidance on Incentive Compensation Arrangements,” which directs all New York state regulated banks (including the Trust Company, Tompkins Bank of Castile, and Tompkins Mahopac Bank) to ensure that any employee incentive arrangements do not encourage inappropriate risk-taking or improper sales practices. Under this guidance, incentive compensation based on employee performance indicators may only be paid if the bank has effective risk management, oversight and control systems in place. We believe the Company is compliant with all state and federal regulation regarding incentive compensation

Other Governmental Initiatives 
From time to time, various legislative and regulatory initiatives are introduced in Congress and state legislatures, as well as by regulatory authorities. These initiatives may include proposals to expand or contract the powers of bank holding companies and depository institutions, proposals to change the financial institution regulatory environment, or proposals that affect public companies generally. Such legislation could change banking laws and the operating environment of Tompkins in substantial, but unpredictable ways. We cannot predict whether any such legislation will be enacted, and, if enacted, the effect that it, or any implementing regulations would have on our financial condition or results of operations.
As described in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - COVID-19 Pandemic and Recent Events, federal, state and local governments have taken a variety of actions in response to the COVID-19 Pandemic, including the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the Consolidated Appropriations Act, 2021 and the rules and regulations promulgated thereunder. Among other impacts on the Company, these actions require lenders to offer loan payment deferrals, forbearance and other relief to certain borrowers (e.g., waiving late payment and other fees), under certain circumstances. These actions also affected the accounting treatment of certain loan modifications made for borrowers experiencing financial hardship as a result of the COVID-19 Pandemic.
Employees and Human Capital
At Tompkins Financial, our culture is underpinned by our core values, including “a commitment to our employees.” As of December 31, 2020, the Company had 1,084 total employees, which included 978 full-time employees and 106 part-time and temporary employees. Of the Company’s total employees, 855 are employed by one of our four subsidiary banks, 61 employees
24

are in our wealth management subsidiary (Tompkins Financial Advisors), and 168 employees are in our insurance subsidiary (Tompkins Insurance Agencies). Our entire organization relies on our Shared Services division, which provides administrative and operational support to all of our subsidiaries. Because our Shared Services division is part of Tompkins Trust Company, the employees of this division are included in bank employee count listed above. No employees are covered by a collective bargaining agreement, and the Company believes its employee relations are excellent.
The success and growth of our business is largely dependent on our ability to attract, develop, and retain qualified employees at all levels of our organization.
A key component of our recruitment and retention strategy is to offer employees at all levels the opportunity to participate in the Company’s success. The Company maintains a robust Profit Sharing plan for all employees who meet minimum service requirements. As of December 31, 2020, 74% of all employees received a profit sharing contribution during 2020. We also offer incentive and/or equity compensation plans or programs to employees at many levels of our Company and, as of December 31, 2020, 56% of all employees had an opportunity to earn supplemental compensation reflective of their position and overall contributions towards the Company’s strategic objectives.
To support the development of our employees, we provide a variety of resources to help them grow in their current roles and build new skills. We utilize internally developed training programs and customized corporate training engagements to encourage employees at all levels of our organization to engage with different learning opportunities. We also host a series of leadership and professional development programs to invest in the continued growth of our current and future leaders and key contributors. We converted many of these programs to virtual learning as part of our business continuity efforts, beginning in 2020.
The Company strives to promote a culture of diversity, inclusion and belonging. We created our enterprise-wide Diversity, Inclusion & Belonging team whose objective is to create an inclusive work environment by focusing on initiatives and events that recognize and engage our employees, and which strengthen our employees’ sense of belonging within our organization. Our Diversity, Inclusion & Belonging team recommends educational/training opportunities, celebrates cultural events, and sends representatives to support other employee engagement initiatives.
In response to the COVID-19 pandemic, the Company took swift action to ensure business continuity, and to support the well-being of our employees. We established a Pandemic Response Team led by our Chief Risk Officer and our Director of Human Resources. With support from our information technology team, the Pandemic Response Team oversaw the rapid shift to a remote work environment for the majority of our employees. In addition, the Company implemented a variety of operational practices designed to decrease the risk of COVID-19 spread among our on-site team members and our customers. A more detailed description of the Company’s pandemic-response efforts on behalf of our employees and our customers appears under the heading, “Management’s Discussion and Analysis of Financial Condition and Results of Operations - COVID-19 Pandemic and Recent Events.”
Available Information
The Company maintains a website at www.tompkinsfinancial.com. The Company makes available free of charge through its website its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, its proxy statements related to its shareholders’ meetings, and amendments to these reports or statements, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, as soon as reasonably practicable after the Company electronically files such material with, or furnishes such material to, the SEC. Copies of these reports are also available at no charge to any person who requests them, with such requests directed to Tompkins Financial Corporation, Investor Relations Department, 118 E. Seneca St., P.O. Box 460, Ithaca, New York 14850, telephone no. (888) 503-5753. The SEC maintains an Internet website that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC, including material filed by the Company, at www.sec.gov. The information contained on the Company's website is provided for the information of the reader and it is not intended to be active links. The Company is not including the information contained on the Company’s website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K, or into any other report filed with or furnished to the SEC by the Company.

Item 1B. Unresolved Staff Comments
 
None.

Item 2. Properties
 
25

The Company’s executive offices are located at 118 East Seneca Street in Ithaca. The Company’s banking subsidiaries have 64 branch offices, of which 34 are owned and 30 are leased at market rents. The Company’s insurance subsidiary has 5 stand-alone offices, of which 3 are owned by the Company and 2 are leased at market rents. The Company’s wealth management and financial planning division has 2 offices which are leased at a market rent, and shares other locations with the Company’s other subsidiaries. Management believes the current facilities are suitable for their present and intended purposes. For additional information about the Company’s facilities, including rental expenses, see “Note 6 Premises and Equipment” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.

Item 3. Legal Proceedings
 
The Company is subject to various claims and legal actions that arise in the ordinary course of conducting business. As of December 31, 2020, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.

Item 4. Mine Safety Disclosures
 
Not applicable.

Information About Our Executive Officers
 
The information concerning the Company’s executive officers is provided below as of March 1, 2021.
 
NameAgeTitleYear Joined Company
Stephen S. Romaine56President and CEOJanuary 2000
David S. Boyce54Executive Vice PresidentJanuary 2001
Francis M. Fetsko56Executive Vice President, COO, CFO and TreasurerOctober 1996
Alyssa H. Fontaine40Executive Vice President & General CounselJanuary 2016
Scott L. Gruber64Executive Vice PresidentApril 2013
Gregory J. Hartz60Executive Vice PresidentAugust 2002
Brian A. Howard56Executive Vice PresidentJuly 2016
Gerald J. Klein, Jr.62Executive Vice PresidentJanuary 2000
John M. McKenna54Executive Vice PresidentApril 2009
Susan M. Valenti66Executive Vice President of Corporate MarketingMarch 2012
Steven W. Cribbs44Senior Vice President, Chief Risk OfficerJune 2018
Bonita N. Lindberg64Senior Vice President, Director of Human ResourcesDecember 2015
 
Business Experience of the Executive Officers:
 
Stephen S. Romaine was appointed President and Chief Executive Officer of the Company effective January 1, 2007. From 2003 through 2006, he served as President and Chief Executive Officer of Mahopac Bank. Mr. Romaine currently serves on the board of the Federal Home Loan Bank of New York and the New York Bankers Association.

David S. Boyce has been employed by the Company since January 2001 and was promoted to Executive Vice President in April 2004. He was appointed President and Chief Executive Officer of Tompkins Insurance Agencies in 2002. He has been employed by Tompkins Insurance Agencies and a predecessor company to Tompkins Insurance Agencies for 31 years.

Francis M. Fetsko has been employed by the Company since 1996, and has served as Chief Financial Officer since December 2000. He also serves as the Chief Financial Officer for the Company’s four banking subsidiaries. In July 2003, he was promoted to Executive Vice President and he assumed the additional role of Chief Operating Officer in April 2012.

26

Alyssa H. Fontaine joined the Company in January 2016 as Executive Vice President and General Counsel. She had previously been a partner in the corporate/securities practice group of Harris Beach PLLC, a regional law firm which she joined in 2006. Ms. Fontaine serves on the American Bankers Association General Counsels Committee.

Scott L. Gruber has been employed by the Company since April 2013 and was appointed President & COO of VIST Bank and Executive Vice President of the Company effective April 30, 2013. He was appointed President & CEO of VIST Bank effective January 1, 2014. Before joining VIST Bank, Mr. Gruber spent 16 years at National Penn Bank, most recently as Group Executive Vice President, where he led the Corporate Banking team.

Gregory J. Hartz has been employed by the Company since 2002 and was appointed President and Chief Executive Officer of Tompkins Trust Company and Executive Vice President of the Company effective January 1, 2007. Mr. Hartz is past Chair of the Independent Bankers Association of New York State.

Brian A. Howard has been employed by the Company since July 2016 and was appointed President of Tompkins Financial Advisors and Executive Vice President of the Company effective July 25, 2016. Prior to joining Tompkins, he served as a Senior Vice President, Market Manager for Key Bank covering the Central New York region from May 2012 to July 2016, where he oversaw the bank’s full service wealth management division for high net worth clients.

Gerald J. Klein, Jr. has been employed by the Company since 2000 and was appointed President and Chief Executive Officer of Mahopac Bank and Executive Vice President of the Company effective January 1, 2007. Mr. Klein currently serves on the Board of the Independent Bankers Association of New York (IBANYS) and is as a member of the Community Depository Institutions Advisory Council of the Federal Reserve Bank of NY.

John M. McKenna has been employed by the Company since April 2009. He was appointed President and CEO of The Bank of Castile effective January 1, 2015. From 2009 to 2014, Mr. McKenna was a senior vice president at The Bank of Castile, concentrating in commercial lending. Mr. McKenna previously served on the New York Bankers Association Political Action Committee (NYBA PAC).

Susan M. Valenti joined Tompkins in March of 2012 as Senior Vice President, Corporate Marketing. She was promoted to Executive Vice President of the Company in June 2014.

Steven W. Cribbs joined Tompkins in June 2018 as Senior Vice President, Chief Risk Officer.  Prior to joining Tompkins, Mr. Cribbs served as Director of Enterprise Risk Management at Customers Bancorp, Inc. from 2016 to 2018 and Senior Vice President and Chief Risk Officer at Metro Bancorp, Inc. from 2012 to 2016. 

Bonita N. Lindberg joined Tompkins in December 2015 as Senior Vice President, Director of Human Resources. Before joining the Company, Ms. Lindberg served as Director of Human Resources at Cortland Regional Medical Center (2014 - 2015); prior to that she served as the Director of Organizational Development at Albany International Corporation. Ms. Lindberg serves on the HR Conference Committee for New York Bankers Association.


27

PART II
 
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Market Price and Dividend Information 
The Company’s common stock is traded under the symbol “TMP” on the NYSE American.

While the Company has a long history of paying cash dividends on shares of its common stock, the Company's ability to pay dividends is generally limited to earnings from the prior year, although retained earnings and dividends from its subsidiaries may also be used to pay dividends under certain circumstances. The Company's primary source of funds to pay for shareholder dividends is receipt of dividends from its subsidiaries. Future dividend payments to the Company by its subsidiaries will be dependent on a number of factors, including earnings and the financial condition of each subsidiary, and are subject to regulatory limitations discussed in "Supervision and Regulation" in Part I, Item 1 of this Report.

The following table reflects all Company repurchases, including those made pursuant to publicly announced plans or programs, during the quarter ended December 31, 2020. 
Issuer Purchases of Equity Securities
Total Number of Shares PurchasedAverage Price Paid Per ShareTotal Number of Shares Purchased as Part of Publicly Announced Plans or ProgramsMaximum Number (or Approximate Dollar Value) of Shares that May Yet Be Purchased Under the Plans or Programs
Period(a)(b)(c)(d)
October 1, 2020 through
October 31, 20202,232 $58.72 328,712 
November 1, 2020 through
November 30, 202036,854 $62.94 14,000 314,712 
December 1, 2020 through
December 31, 202042,402 $68.66 42,402 272,310 
Total81,488 $65.80 56,402 272,310 
 
Included above are 2,232 shares purchased in October 2020, at an average cost of $58.72, and 749 shares purchased in November 2020, at an average cost of $63.52, by the trustee of the rabbi trust established by the Company under the Company’s Stock Retainer Plan For Eligible Directors of Tompkins Financial Corporation and Participating Subsidiaries, which were part of the director deferred compensation under that plan.  In addition, the table includes 22,105 shares delivered to the Company in November 2020 at an average cost of $62.85 to satisfy mandatory tax withholding requirements upon vesting of restricted stock under the Company's 2009 and 2019 Equity Plans.
 
On July 19, 2018, the Company’s Board of Directors authorized a share repurchase plan (the “2018 Repurchase Plan”) for the Company to repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. The repurchase program could be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2018 Repurchase Plan, the Company repurchased 393,004 shares through December 31, 2019, at an average cost of $79.15.

On January 30, 2020, the Company’s Board of Directors authorized a share repurchase plan (the “2020 Repurchase Plan”) for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. As with the 2018 Repurchase Plan, shares may be repurchased from time to time under the 2020 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2020 Repurchase Plan, the Company repurchased 127,690 shares through December 31, 2020, at an average cost of $73.72.
28

Recent Sales of Unregistered Securities
 
None. 
 
Performance Graph 
The following graph compares the Company’s cumulative total stockholder return over the five-year period from December 31, 2015 through December 31, 2020, with (1) the total return for the NASDAQ Composite and (2) the total return for SNL Bank Index. The graph assumes $100.00 was invested on December 31, 2015, in the Company’s common stock and the comparison groups and assumes the reinvestment of all cash dividends prior to any tax effect and retention of all stock dividends. 
 
In accordance with and to the extent permitted by applicable law or regulation, the information set forth below under the heading “Performance Graph” shall not be incorporated by reference into any future filing under the Securities Act or Exchange Act and shall not be deemed to be “soliciting material” or to be “filed” with the SEC under the Securities Act or the Exchange Act, except to the extent that the Company specifically requests that such information be treated as soliciting material or specifically incorporates it by reference into such filings. The performance graph represents past performance and should not be considered an indication of future performance.

tmp-20201231_g2.jpg

Period Ending
Index12/31/1512/31/1612/31/1712/31/1812/31/1912/31/20
Tompkins Financial Corporation100.00172.99152.11143.69179.65143.03
NASDAQ Composite100.00108.87141.13137.12187.44271.64
SNL Bank100.00126.35149.21124.00167.93145.49
 

29

Item 6. Selected Financial Data
 
The following consolidated selected financial data is taken from the Company’s audited financial statements as of and for the five years ended December 31, 2020. The following selected financial data should be read in conjunction with the consolidated financial statements and the notes thereto in Part II, Item 8. of this Report. All of the Company’s acquisitions during the five year period were accounted for using the purchase method. Accordingly, the operating results of the acquired companies are included in the Company’s results of operations since their respective acquisition dates.
Year ended December 31,
(In thousands, except per share data)20202019201820172016
FINANCIAL STATEMENT HIGHLIGHTS
Assets$7,622,171 $6,725,623 $6,758,436 $6,648,290 $6,236,756 
Total loans5,260,327 4,917,550 4,833,939 4,669,120 4,258,033 
Deposits6,437,752 5,212,921 4,888,959 4,837,807 4,625,139 
Other borrowings265,000 658,100 1,076,075 1,071,742 884,815 
Total equity717,689 663,054 620,871 576,202 549,405 
Interest and dividend income254,330 261,378 251,592 226,764 202,739 
Interest expense28,991 50,750 39,792 25,460 22,103 
Net interest income225,339 210,628 211,800 201,304 180,636 
Provision for credit loss expense16,151 1,366 3,942 4,161 4,321 
Net gains (losses) on securities transactions443 645 (466)(407)926 
Net income attributable to Tompkins Financial Corporation77,588 81,718 82,308 52,494 59,340 
PER SHARE INFORMATION
Basic earnings per share5.22 5.39 5.39 3.46 3.94 
Diluted earnings per share5.20 5.37 5.35 3.43 3.91 
    Adjusted diluted earnings per share1
5.24 5.37 5.33 4.42 3.91 
Cash dividends per share2.10 2.02 1.94 1.82 1.77 
Common equity per share47.98 44.17 40.45 37.65 36.20 
SELECTED RATIOS
Return on average assets1.05 %1.22 %1.23 %0.82 %1.01 %
Return on average equity11.09 %12.55 %13.93 %9.09 %10.85 %
Average shareholders’ equity to average assets9.51 %9.75 %8.83 %9.04 %9.28 %
Dividend payout ratio40.23 %37.48 %35.99 %52.60 %44.92 %
OTHER SELECTED DATA (in whole numbers, unless otherwise noted)
Employees (average full-time equivalent)1,057 1,047 1,035 1,041 1,019 
Banking offices64 64 66 65 66 
Bank access centers (ATMs)85 87 83 84 85 
Trust and investment services assets under  management, or custody (In thousands)$4,447,019 $4,062,325 $3,806,274 $4,017,363 $3,941,484 
1Adjusted diluted earnings per share reflects adjustments made for certain nonrecurring items. Adjustments for nonrecurring items in 2020 included a $673,000 loss on the write-down of real estate pending sale ($0.04 per share). Adjustments in 2018 included a $2.2 million gain on sale of real estate and a $1.9 million write-down of impaired leases ($0.02 per share). Adjustments in 2017 included a $14.9 million ($0.99 per share) one-time non-cash write-down of net deferred tax assets related to the Tax Cuts and Jobs Act of 2017. There were no adjustments in 2019 and 2016. Adjusted diluted earnings per share is a non-GAAP measure. Please see the discussion below under “Management's Discussion and Analysis of Financial Condition and Results of Operations" - "Non-GAAP Disclosure” for an explanation of why management believes this non-GAAP financial measure is useful and a reconciliation to diluted earnings per share.   
30

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiaries for the periods shown. This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with other sections of this Report on Form 10-K, including Part I, “Item 1. Business,” Part II, “Item 6. Selected Financial Data,” and Part II, “Item 8. Financial Statements and Supplementary Data.”

Overview
 
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 December 31, 2020, the Company’s subsidiaries included: four wholly-owned banking subsidiaries, Tompkins Trust Company (the “Trust Company”), The Bank of Castile (DBA Tompkins Bank of Castile), Mahopac Bank (DBA Tompkins Mahopac Bank), VIST Bank (DBA Tompkins VIST Bank); and a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The trust division of the Trust Company provides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company’s principal offices are located at 118 E. Seneca Street, 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.”

Forward-Looking Statements
 
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the impact of changes in accounting standards; and trends, plans, prospects, growth and strategies. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements. The following factors, in addition to those listed as Risk Factors in Item 1A are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; the severity and duration of the COVID-19 outbreak and the impact of the outbreak (including the government’s response to the outbreak) on economic and financial markets, potential regulatory actions, and modifications to our operations, products, and services relating thereto; disruptions in our and our customers’ operations and loss of revenue due to pandemics, epidemics, widespread health emergencies, government-imposed travel/business restrictions, or outbreaks of infectious diseases such as the COVID-19, and the associated adverse impact on our financial position, liquidity, and our customers’ abilities or willingness to repay their obligations to us or willingness to obtain financial services products from the Company; a decision to amend or modify the terms under which our customers are obligated to repay amounts owed to us; the development of an interest rate environment that may adversely affect the Company’s interest rate spread, other income or cash flow anticipated from the Company’s operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; legislative and regulatory changes in response to COVID-19 with which we and our subsidiaries must comply, including the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the Consolidated Appropriations Act, 2021 and the rules and regulations promulgated thereunder, and federal, state and local government mandates; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; uncertainties arising from national and global events, including the potential impact of widespread protests, civil unrest, and political uncertainty on the economy and the financial services industry; and financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses.
31

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. On January 1, 2020, the Company adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," which resulted in changes to the Company's existing critical accounting policy that existed at December 31, 2019.

The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to “Allowance for Credit Losses” below, "Note 4 - Allowance for Credit Losses", and "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K for the year ended December 31, 2020.

For information on the Company's significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Form 10-K for the year ended December 31, 2020.

COVID-19 Pandemic and Recent Events

The COVID-19 global pandemic presented health and economic challenges on an unprecedented scale in 2020. During the year, the Company focused on the health and well-being of its workforce, meeting its clients' needs, and supporting its communities. The Company has designated a Pandemic Planning Committee, which includes key individuals across the Company as well as members of Senior Management, to oversee the Company’s response to COVID-19, and has implemented a number of risk mitigation measures designed to protect our employees and customers while maintaining services for our customers and community. These measures included restrictions on business travel, establishment of a remote work environment for most non-customer facing employees, and social distancing restrictions for those employees working at our offices and branch locations. In July 2020, we began initiating the reopening of our offices and reinstatement of branch services, and the return of our workforce, but as of December 31, 2020, approximately 85% of our noncustomer facing employees continued to work remotely. To promote the health and well-being of the Company's workforce, customers, and visitors as we reopen, we implemented several new social distancing protocols and other protective measures, such as temperature screenings, distribution of personal protective equipment, and workforce self-certifications.

Tompkins continues to offer assistance to its customers affected by the COVID-19 pandemic by implementing a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Our standard program allows for the deferral of loan payments for up to 90 days. In certain cases, and where required by applicable law or regulations, we extend additional deferrals or other accommodations. Weekly deferral requests for the month of December 2020 were down 98.5% from peak levels the Company experienced in late March 2020. As of December 31, 2020, total loans impacted by COVID-19 that continued in a deferral status amounted to approximately $212.2 million, representing 4.0% of total loans. Loans to finance hotels and motels comprise approximately 53.0% of total loans that continue in deferral status. Of the loans that had come out of the deferral program as of December 31, 2020, about 94.4% had made at least one payment and 0.13% were more than 30 days delinquent. We expect that loans that are currently in deferral will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. The provisions of the CARES Act and interagency guidance issued by Federal banking regulators provided clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. Under the CARES Act, a modification deemed to be COVID-19 related is not considered to be a troubled debt restructuring ("TDR") if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the
32

earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The Consolidated Appropriations Act, 2021 extended the termination of these provisions to the earlier of 60 days after the COVID-19 national emergency date or January 1, 2022. The Federal banking regulators issued similar guidance. In accordance with the CARES Act, the Consolidated Appropriations Act, 2021, and the interagency guidance, the Company is not designating eligible loan modifications and deferrals resulting from the impacts of COVID-19 as TDRs.

Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions. The table below lists certain larger industry concentrations within our loan portfolio and the percentage of each segment that are currently in a deferral status.

Deferral Credit Concentrations
(In thousands)As of December 31, 2020
DescriptionPortfolio Balance ($)Concentration*Deferral Balance ($)Percent of Loans Currently in Deferral Status
Lessors of Residential Buildings and Dwellings$520,793 16.1 %$490 0.1 %
Hotels and Motels191,690 5.9 %101,496 52.9 %
Dairy Cattle and Milk Production194,050 6.0 %
Health Care and Social Assistance156,693 4.8 %
Lessors of Other Real Estate Property123,835 3.8 %8,678 7.0 %
$2,176,729 $171,934 
*Concentration is defined as outstanding loan balances as a percent of total commercial and commercial real estate

The Company is also participating in the U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”). Borrowers with loan balances which are not forgiven are obligated to repay such balances over a 2-year term at a rate of 1% interest, with principal and interest payments deferred for the first six months. The SBA has announced that, under limited circumstances described in the current SBA guidance, fees will not be paid, even if the participating lender has approved and processed the PPP loan. The Company began accepting applications for PPP loans on April 3, 2020, and approved and funded 2,998 loans totaling approximately $465.6 million during the second quarter of 2020. The Company received approximately $14.5 million of fees related to the PPP loans funded. The fees are amortized as interest income over the life of the loan and recognized net of origination costs. The Company recognized net loan fees of $9.2 million in 2020 related to the PPP loans. This program provides borrower guarantees for lenders, and envisions a certain amount of loan forgiveness for loan recipients who properly utilize funds, all in accordance with the rules and regulations established by the SBA for the PPP. At December 31, 2020, the Company had submitted 1,484 loans totaling $244.0 million to the SBA for forgiveness under the terms of the PPP program. Approximately 1,212 of those loans, totaling $171.1 million, had been forgiven by the SBA as of December 31, 2020. On January 11, 2021, the SBA reactivated the PPP. The Company's banking subsidiaries have originated additional PPP loans through the PPP, which is currently scheduled to extend through March 31, 2021. As of February 21, 2021 the Company had submitted 1,341 PPP loan applications totaling $171.0 million under the 2021 PPP authorization.

As of December 31, 2020, the Company's nonperforming assets represented 0.60% of total assets, up from 0.44% at September 30, 2020, and 0.47% at December 31, 2019. Special Mention loans totaled $121.3 million at the end of the fourth quarter of 2020, in line with the quarter ended September 30, 2020, and up compared to the $29.8 million reported for the fourth quarter of 2019. Total Substandard loans increased during the quarter to $68.6 million at December 31, 2020, compared to $45.4 million at September 30, 2020, and $60.5 million at December 31, 2019. The increases in nonperforming loans and leases and Substandard loans were mainly related to the downgrades of credit in the loan portfolio related to the hospitality industry. Included in the nonperforming and Substandard loans and leases are 17 loans totaling $17.8 million, that are currently in deferral status.

Results of Operations
(Comparison of December 31, 2020 and 2019 results)

General

The Company reported diluted earnings per share of $5.20 in 2020, compared to diluted earnings per share of $5.37 in 2019. Net income for the year ended December 31, 2020, was $77.6 million, a decrease of 5.1% compared to $81.7 million in 2019.

33

In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 11.09% in 2020, compared to 12.55% in 2019, while ROA was 1.05% in 2020 and 1.22% in 2019. Tompkins’ 2020 ROE and ROA compared favorably with peer ratios of 8.40% for ROE and 0.88% for ROA, as of September 30, 2020. The peer group data is derived from the FRB's "Bank Holding Company Performance Report", which covers banks and bank holding companies with assets between $3.0 billion and $10.0 billion as of September 30, 2020 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current period numbers.

Segment Reporting

The Company operates in three business segments: banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance Agencies, Inc. subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services provided by Tompkins Financial Advisors, a division of the Trust Company. All other activities are considered banking. For additional financial information on the Company’s segments, refer to “Note 23 – Segment and Related Information” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.

Banking Segment
The banking segment reported net income of $69.3 million for the year ended December 31, 2020, representing a $5.2 million or 7.0%, decrease compared to 2019. Net interest income increased $14.7 million or 7.0% in 2020 compared to 2019. Contributing to the increase from 2019 were lower funding costs and an increase in average earning assets, which were partially offset by lower asset yield. Interest income decreased $7.0 million or 2.7% compared to 2019, while interest expense decreased $21.8 million or 42.9%.

The provision for credit loss expense was $16.2 million in 2020, compared to $1.4 million in the prior year. The first quarter of 2020 included provision expense of $16.3 million related to the impact of the economic conditions due to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, and reflects the calculation of the allowance for credit losses in accordance with ASU 2016-13. For additional information, see the section titled "The Allowance for Credit Losses" below.

Noninterest income in the banking segment of $26.0 million in 2020 decreased by $3.0 million or 10.5% when compared to 2019. The negative variance compared to the prior year was mainly in fee based services and was largely a result of a decrease in transactions attributable to the economic impact of pandemic-related travel and business restrictions, which reduced card services and the related service charge income. Card services fees and deposit fees in 2020 were down 12.0% and 24.1%, respectively, from prior year. This decrease was partially offset by gains on sales of residential loans, which were up $1.8 million over 2019, and the increase was mainly due to a higher volume of loans sold and higher premiums paid on sold loans.

Noninterest expense of $148.7 million for the year ended December 31, 2020, was up $3.6 million or 2.5% from 2019. The increases were mainly attributed to increases in salary and wages and employee benefits reflecting normal annual merit increases, premium pay for employees required to be on-site during pandemic-related business restrictions, and higher health insurance expense over the comparable periods in the prior year. Noninterest expenses for the year ended December 31, 2020, included $1.0 million in off-balance sheet exposures calculated due to changes in methodology in accordance with the adoption of ASU 2016-13.

Insurance Segment
The insurance segment reported net income of $4.4 million, up $198,000 or 4.7% when compared to 2019, as a $429,000 or 1.4% increase in noninterest revenue was only partially offset by a 0.1% increase in expenses. The increase in revenue included $384,000 or 1.9% of organic growth in property and casualty commissions and a $167,000 or 5.5% increase in contingency revenue over 2019. Health and voluntary benefits grew by $105,000 or 1.4%, while life, financial services and other revenue was $212,000 or 40.2% less than 2019; 2019 benefited from the new business of one large relationship in 2019.

Increases in expenses, mainly attributed to salaries, wages and employee benefits reflecting normal annual merit and incentive adjustments along with higher health insurance costs, were mainly offset by reductions in items such as auto, travel, entertainment and marketing that were affected by COVID-19 pandemic.

34

Wealth Management Segment
The wealth management segment reported net income of $4.0 million for the year ended December 31, 2020, an increase of $0.9 million or 29.0% compared to 2019. Noninterest income of $18.1 million increased $1.1 million or 6.6% compared to 2019, mainly a result of estate and terminating trust fees, which were up $569,000 or 176.4% in 2020 over 2019, as a result of the settlement of a large estate in 2020, and an increase in assets under management. Noninterest expenses remained flat year over year, as increases in technology expenses were offset by decreases in travel and meetings expenses as a result of the COVID-19 pandemic. The market value of assets under management or in custody at December 31, 2020 totaled $4.4 billion, an increase of 9.5% compared to year-end 2019. This figure included $1.2 billion at year-end 2020, of Company-owned securities from which no income was recognized as the Trust Company was serving as custodian.

Net Interest Income

Net interest income is the Company’s largest source of revenue, representing 75.3% of total revenues for the year ended December 31, 2020, and 73.6% of total revenues for the year ended December 31, 2019. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Table 1 – Average Statements of Condition and Net Interest Analysis shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.

Tax-equivalent net interest income for 2020 increased by $15.2 million or 7.1% from 2019. The increase was mainly due to lower interest expense in 2020 compared to 2019, driven by lower market interest rates and by deposit growth, which contributed to a reduction in other borrowings. Average total deposits represented 91.7% of average total liabilities in 2020 compared to 84.4% in 2019, while total average borrowings represented 6.6% of average total liabilities in 2020 and 13.9% in 2019. Net interest income also benefited from the growth in average earning assets in 2020 over 2019; however, average asset yields for 2020 were down from 2019. The net interest margin for 2020 was 3.31% compared to 3.39% for 2019. The decline in net interest margin for 2020 when compared to 2019 was mainly due to a decrease in overall asset yields. The decrease in average asset yields was mainly due to lower securities yields and a slight shift in the composition of average earning assets, with a greater mix of lower yielding average interest bearing balances.

Tax-equivalent interest income decreased $6.6 million or 2.5% in 2020 from 2019. The decrease in taxable-equivalent interest income was mainly due to lower asset yields, partially offset by an increase in the volume of average earning assets. Average asset yields for 2020 were down 47 basis points compared to 2019, which reflects the impact of reductions in market interest rates during 2020, and the addition of lower yielding PPP loans. Average loans and leases increased $398.0 million or 8.2% in 2020 compared to 2019, and represented 76.1% of average earning assets in 2020 compared to 77.1% in 2019. The increase in average loans includes $465.6 million in PPP loans originated in the second quarter of 2020. As a result of its participation in the SBA's PPP, the Company recorded net deferred loan fees of $9.2 million, which are included in interest income. The average yield on loans was 4.38% in 2020, a decrease of 34 basis points compared to 4.72% in 2019. Average balances on securities increased $27.4 million or 2.0% in 2020 compared to 2019, while the average yield on the securities portfolio decreased 47 basis points or 20.4% compared to 2019 due to lower market interest rates in 2020.

Interest expense for 2020 decreased $21.8 million or 42.9% compared to 2019, driven mainly by decreases in rates paid on deposits and borrowings as a result of lower market interest rates. The average cost of interest bearing deposits was 0.46% in 2020, down 38 basis points from 0.84% in 2019, while the average cost of interest bearing liabilities decreased to 0.60% in 2020 from 1.12% in 2019. Average interest bearing deposits in 2020 increased $671.0 million or 18.2% compared to 2019. Average noninterest bearing deposit balances in 2020 increased $349.9 million or 24.9% over 2019 and represented 28.7% of average total deposits in 2020 compared to 27.6% in 2019. Average total deposits were up $1.0 billion or 20.1% in 2020 over 2019. Average deposit balances increased due to the $465.6 million of PPP loan originations during the second quarter of 2020, the majority of which were deposited into Tompkins checking accounts, as well as brokered funds obtained in the first half of 2020 to support PPP loans and overall liquidity during COVID-19. Average other borrowings decreased by $397.3 million or 52.1% in 2020 from 2019. The decrease in borrowings was due to the strong deposit growth during 2020.
 
35

Table 1 - Average Statements of Condition and Net Interest Analysis
For the year ended December 31,
202020192018
(dollar amounts in thousands)Average
Balance
(YTD)
InterestAverage
Yield/Rate
Average
Balance
(YTD)
InterestAverage
Yield/Rate
Average
Balance
(YTD)
InterestAverage
Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks$194,211 $194 0.10 %$1,647 $41 2.49 %$2,139 $31 1.45 %
Securities1
U.S. Government securities
1,307,905 22,906 1.75 %1,301,813 29,411 2.26 %1,429,875 31,645 2.21 %
State and municipal2
114,462 3,048 2.66 %93,168 2,547 2.73 %97,116 2,520 2.59 %
Other securities2
3,430 117 3.40 %3,417 158 4.62 %3,491 153 4.38 %
Total securities
1,425,797 26,071 1.83 %1,398,398 32,116 2.30 %1,530,482 34,318 2.24 %
FHLBNY and FRB stock
20,815 1,373 6.60 %38,308 3,003 7.84 %51,815 3,377 6.52 %
Total loans and leases, net of unearned income2,3
5,228,135 228,806 4.38 %4,830,089 227,869 4.72 %4,757,583 215,648 4.53 %
Total interest-earning assets6,868,958 256,444 3.73 %6,268,442 263,029 4.20 %6,342,019 253,374 4.00 %
Other assets
489,520 411,136 350,659 
Total assets
$7,358,478 $6,679,578 $6,692,678 
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
Interest bearing checking, savings, & money market
$3,650,358 $9,430 0.26 %$3,007,221 $20,099 0.67 %$2,822,747 $9,847 0.35 %
Time deposits
703,999 10,534 1.50 %676,106 10,805 1.60 %664,788 6,748 1.02 %
Total interest-bearing deposits
4,354,357 19,964 0.46 %3,683,327 30,904 0.84 %3,487,535 16,595 0.48 %
Federal funds purchased & securities sold under agreements to repurchase
55,973 95 0.17 %59,825 143 0.24 %63,472 152 0.24 %
Other borrowings
365,732 7,799 2.13 %762,993 18,427 2.42 %1,086,847 21,818 2.01 %
Trust preferred debentures17,092 1,133 6.63 %16,943 1,276 7.53 %16,771 1,227 7.32 %
 Total interest-bearing liabilities
4,793,154 28,991 0.60 %4,523,088 50,750 1.12 %4,654,625 39,792 0.85 %
Noninterest bearing deposits
1,753,226 1,403,330 1,382,550 
Accrued expenses and other liabilities
112,544 101,819 64,559 
Total liabilities6,658,924 6,028,237 6,101,734 
Tompkins Financial Corporation Shareholders’ equity698,088 649,871 589,475 
Noncontrolling interest
1,466 1,470 1,469 
Total equity699,554 651,341 590,944 
Total liabilities and equity
$7,358,478 $6,679,578 $6,692,678 
Interest rate spread
3.13 %3.07 %3.14 %
Net interest income /margin on earning assets
227,453 3.31 %212,279 3.39 %213,582 3.37 %
Tax Equivalent Adjustment
(2,114)(1,651)(1,782)
Net interest income per consolidated financial statements
$225,339 $210,628 $211,800 
1 Average balances and yields on available-for-sale securities are based on historical amortized cost.
2 Interest income includes the tax effects of taxable-equivalent adjustments using the Federal income tax rate of 21.0% in 2020, 2019 and 2018 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 this annual report on Form 10-K.

36

Table 2 - Analysis of Changes in Net Interest Income
2020 vs. 20192019 vs. 2018
Increase (Decrease) Due to Change
in Average
Increase (Decrease) Due to Change
in Average
(In thousands)(taxable equivalent)  
VolumeYield/RateTotalVolumeYield/RateTotal
INTEREST INCOME:
Interest-bearing balances due from banks$229 $(76)$153 $(10)$20 $10 
Investments1
Taxable
139 (6,685)(6,546)(2,896)667 (2,229)
Tax-exempt
566 (65)501 (105)132 27 
FHLB and FRB stock(1,212)(418)(1,630)(970)596 (374)
Loans, net1
18,122 (17,185)937 3,354 8,867 12,221 
Total interest income$17,844 $(24,429)$(6,585)$(627)$10,282 $9,655 
INTEREST EXPENSE:
Interest-bearing deposits:
Interest checking, savings and money market
3,638 (14,307)(10,669)938 9,314 10,252 
Time
440 (711)(271)148 3,909 4,057 
Federal funds purchased and securities sold under agreements to repurchase
(8)(40)(48)(9)(9)
Other borrowings(8,642)(2,129)(10,771)(7,148)3,806 (3,342)
Total interest expense(4,572)(17,187)(21,759)(6,071)17,029 10,958 
Net interest income$22,416 $(7,242)$15,174 $5,444 $(6,747)$(1,303)
1 Interest income includes the tax effects of taxable-equivalent adjustments using the Federal income tax rate of 21.0% in 2020, 2019 and 2018 to increase tax exempt interest income to taxable-equivalent basis.  

Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. In 2020, net interest income increased by $15.2 million, resulting from a $21.8 million decrease in interest expense, partially offset by a $6.6 million decrease in interest income. Lower yields on average earning assets reduced interest income by $24.4 million, while the increase in average balances on interest-earning assets increased interest income by $17.8 million. The decrease in interest expense reflects lower rates paid on interest bearing liabilities, both deposits and other borrowings. Lower rates on deposits and borrowings reduced interest expense by $17.2 million, while lower average balances of interest bearing liabilities reduced interest expense by $4.6 million.

Provision for Credit Loss Expense

The provision for credit loss expense represents management’s estimate of the expense necessary to maintain the allowance for credit losses at an appropriate level. The provision for credit loss expense was $16.2 million in 2020, compared to $1.4 million in 2019. The ratio of total allowance to total loans and leases increased to 0.98% at December 31, 2020 from 0.81% at December 31, 2019. The first quarter of 2020 included a provision expense of $16.3 million driven by the impact of the economic restrictions/shutdowns related to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, as well as normal adjustments for loan growth and changing loan portfolio mix. See the section captioned “The Allowance for Credit Losses” included within “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition” of this Report for further analysis of the Company’s allowance for credit losses.

37

Noninterest Income
Year ended December 31,
(In thousands)202020192018
Insurance commissions and fees$31,505 $31,091 $29,369 
Investment services17,520 16,434 17,288 
Service charges on deposit accounts6,312 8,321 8,435 
Card services9,263 10,526 9,693 
Other income8,817 8,416 13,130 
Net gain (loss) on securities transactions443 645 (466)
Total$73,860 $75,433 $77,449 
 
Noninterest income represented 24.7% of total revenues in 2020, and 26.4% in 2019.

Insurance commissions and fees increased 1.3% to $31.5 million in 2020, compared to $31.1 million in 2019. The increase in insurance commissions and fees in 2020 over 2019, was mainly in property and casualty commissions, personal line commissions, and contingency income, partially offset by an increase in reserves for cancellations and policy changes as a result of economic uncertainties related to COVID-19. New business volumes were also negatively impacted by COVID-19.

Investment services income of $17.5 million increased $1.1 million or 6.6% in 2020 compared to 2019, mainly due to an increase in advisory fee income resulting from the growth in assets under management, and higher estate and terminating trust fees earned in 2020. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $4.4 billion at December 31, 2020, up from $4.1 billion at December 31, 2019. The fair value of assets in custody at December 31, 2020 and 2019 includes $1.2 billion, and $1.0 billion, respectively, of Company-owned securities where Tompkins Trust Company is custodian.

Service charges on deposit accounts in 2020 were down $2.0 million or 24.1% compared to the prior year. Overdraft/insufficient funds charges, the largest component of service charges on deposit accounts, were down $1.7 million or 32.2% in 2020 compared to 2019. The decreases in overdraft/insufficient funds charges during 2020 were primarily related to a decrease in the volume of overdrafts relative to 2019.

Card services income decreased $1.3 million or 12.0% over 2019. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. The reduction in card services income in 2020, when compared to 2019, is largely related to the pandemic-related travel and business restrictions, which resulted in lower transaction volume. Additionally, card services income for 2019 included a one-time incentive payment of $500,000 related to the Company's merchant card business.

Other income of $8.8 million was up $401,000 or 4.8% compared to 2019. The increase was largely due to gains on sales of residential mortgage loans of $2.0 million in 2020, compared to gains of $227,000 in 2019, due to a higher volume of loans sold and higher premiums paid on loans sold in 2020.

Noninterest Expense
Year ended December 31,
(In thousands)202020192018
Salaries and wages$92,519 $89,399 $85,625 
Other employee benefits24,812 23,488 22,090 
Net occupancy expense of premises12,930 13,210 13,309 
Furniture and fixture expense7,846 7,815 7,351 
FDIC insurance2,398 773 2,618 
Amortization of intangible assets1,484 1,673 1,771 
Other43,393 45,476 48,303 
Total$185,382 $181,834 $181,067 
 
Noninterest expense as a percentage of total revenue was 62.0% in 2020, compared to 63.6% in 2019. Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2020, these expenses increased $4.4 million or 3.9% compared to 2019. Salaries and wages increased $3.1 million or 3.5% in 2020 over the prior
38

year, mainly as a result of annual merit pay increases. Other employee benefits increased $1.3 million or 5.6% over 2019, mainly in health insurance, which was up $942,000 or 10.4% in 2020 over 2019. The $1.6 million increase in FDIC expense in 2020 over 2019 is due to the benefit of the FDIC insurance assessment small bank credits in 2019.

Other operating expenses of $43.4 million decreased by $2.1 million or 4.6% compared to 2019. The primary components of other operating expenses in 2020 were technology expense ($11.8 million), professional fees ($6.1 million), marketing expense ($4.8 million), and cardholder expense ($3.3 million) The decrease in other operating expenses in 2020 compared to 2019 was mainly in professional fees (down $2.9 million or 32.3%) and business related travel and entertainment expense (down $1.3 million or 67.3%). These decreases were partially offset by increases in technology related expenses in 2020 over 2019 (up $1.1 million or 10.5%), and expense related to our allowance for off-balance sheet exposures (up $1.0 million).

Noncontrolling Interests
 
Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $154,000 in 2020, up $27,000 from 2019. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company’s New York banking subsidiaries.
 
Income Tax Expense
 
The provision for income taxes provides for Federal, New York State, Pennsylvania and other miscellaneous state income taxes. The 2020 provision was $19.9 million, which decreased $1.1 million or 5.2% compared to the 2019 provision. The effective tax rate for the Company was 20.4% in 2020, down from 20.5% in 2019. The effective rates for 2020 and 2019 differed from the U.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation.
 
Results of Operations
(Comparison of December 31, 2019 and 2018 results)

General

The Company reported diluted earnings per share of $5.37 in 2019, compared to diluted earnings per share of $5.35 in 2018. Net income for the year ended December 31, 2019, was $81.7 million, a decrease of 0.7% compared to $82.3 million in 2018.

In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 12.55% in 2019, compared to 13.93% in 2018, while ROA was 1.22% in 2019 and 1.23% in 2018.

Segment Reporting

Banking Segment
The banking segment reported net income of $74.5 million for the year ended December 31, 2019, representing a $424,000 or 0.6% decrease compared to 2018. Net interest income decreased $1.2 million or 0.6% in 2019 compared to 2018. Contributing to the decline from 2018, was a decline in average security balances, which was partially offset by an improved net interest margin in 2019. Interest income increased $9.8 million or 3.9% compared to 2018, while interest expense increased $11.0 million or 27.5%.

The provision for loan and lease losses was $1.4 million in 2019, compared to $3.9 million in the prior year. The reduction in provision was primarily due to a $3.0 million specific reserve on one commercial real estate property at December 31, 2018, which was subsequently charged off in the first quarter of 2019. The provision expense in 2019 also benefited from favorable trends in certain qualitative factors and lower average historical loan loss rates in all loan portfolios except commercial real estate at year-end 2019, compared to year-end 2018.

Noninterest income in the banking segment of $29.1 million in 2019 decreased by $2.7 million or 8.5% when compared to 2018. The negative variance to prior year was mainly due to the $2.9 million gain on the sale of two properties in 2018 related to the completion and move to the Company's new headquarters building and the collection of fees and nonaccrual interest of $2.5 million in 2018 on a loan that was charged off in 2010. This was partially offset by the $500,000 one-time incentive payment received by the Company in the first quarter of 2019 related to the Company's merchant card business, and gains of
39

$645,000 on sales of available-for-sale securities in 2019 compared to net losses on sales of available-for-sale securities of $466,000 in 2018.

Noninterest expenses in 2019 were flat compared to 2018. Salary and wages and employee benefits were up in 2019 over 2018, mainly as a result of an increase in average FTEs, normal annual merit and incentive adjustments and higher health insurance costs. These increases were mainly offset by a decrease in other operating expenses. FDIC insurance expense was down in 2019 compared to 2018, mainly as a result of deposit insurance credits received from the FDIC, which included $1.5 million that were applied in 2019. 2018 operating expenses included write-downs of $2.3 million on leases on space vacated in 2018 following completion of the Company's new headquarters in 2018.

Insurance Segment
The insurance segment reported net income of $4.2 million, up $926,000 or 28.5% when compared to 2018, as a 5.9% increase in noninterest revenue was only partially offset by a 1.9% increase in expenses. This increase included $900,000 or 4.6% of organic growth in property and casualty commissions and a $738,000 or 32.0% increase in contingency revenue over 2018, while life, health and financial services commissions decreased slightly.

On May 1, 2019, Tompkins Insurance purchased the assets of Cali Agency, Inc. in Warsaw, NY, adding an additional $112,000 in non-interest income for 2019. The increase in expenses was mainly attributed to an increase in salary and wages and employee benefits reflecting normal annual merit and incentive adjustments and higher health insurance costs, respectively, over the prior year.

Wealth Management Segment
The wealth management segment reported net income of $3.1 million for the year ended December 31, 2019, a decrease of $1.1 million or 26.3% compared to 2018. Noninterest income of $17.0 million decreased $1.0 million or 5.5% compared to 2018, mainly a result of estate and terminating trust fees, which were down $1.0 million or 75.4% in 2019 over 2018, as a result of the settlement of a large estate in 2018. Noninterest expenses increased by $331,000 or 2.6% in 2019 compared to 2018, mainly due to changes in staffing and normal merit and incentive adjustments in 2019 compared to 2018. The market value of assets under management or in custody at December 31, 2019 totaled $4.1 billion, an increase of 6.7% compared to year-end 2018. This figure included $1.0 billion at year-end 2019 of Company-owned securities from which no income was recognized as the Trust Company was serving as custodian.

Net Interest Income

Net interest income is the Company’s largest source of revenue, representing 73.6% of total revenues for the year ended December 31, 2019, and 73.2% of total revenues for the year ended December 31, 2018. 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.

Tax-equivalent net interest income for 2019 decreased by $1.3 million or 0.6% from 2018. The decrease was mainly due to the decline in average earning assets and higher funding costs in 2019 compared to 2018. Average total deposits represented 84.4% of average total liabilities in 2019 compared to 79.8% in 2018, while total average borrowings represented 13.9% of average total liabilities in 2019 and 19.1% in 2018.

Tax-equivalent interest income increased $9.7 million or 3.8% in 2019 over 2018. The increase in taxable-equivalent interest income was mainly the result of improved asset yields and an increase in average loan balances. Average loans and leases increased $72.5 million or 1.5% in 2019 compared to 2018. Average loan balances represented 77.1% of average earning assets in 2019 compared to 75.0% in 2018. The average yield on interest earning assets for 2019 was 4.2%, which increased by 20 basis points from 2018. The average yield on loans was 4.72% in 2019, an increase of 19 basis points compared to 4.53% in 2018. Average balances on securities decreased $132.1 million or 8.6% compared to 2018, while the average yield on the securities portfolio increased 5 basis points or 2.2% compared to 2018. The decrease in average securities was mainly due to the sale of approximately $152.1 million of available-for-sale securities in the second quarter of 2019. The proceeds from the sale were mainly used to reduce borrowings.

Interest expense for 2019 increased $11.0 million or 27.5% compared to 2018, reflecting higher rates as average interest bearing liabilities decreased $131.5 million or 2.8% from 2018. The increase in interest expense was the result of the increase in the average rates paid on deposits and interest bearing liabilities in 2019 compared to 2018. The average cost of interest bearing deposits was 0.84% in 2019, up 36 basis points from 0.48% in 2018, while the average costs of interest bearing liabilities increased to 1.12% in 2019 from 0.85% in 2018. Average total deposits were up $216.6 million or 4.4% in 2019 over 2018, with the majority of the growth in average interest bearing deposits. Average interest bearing deposits in 2019 increased $195.8
40

million or 5.6% compared to 2018. Average noninterest bearing deposit balances in 2019 increased $20.8 million or 1.5% over 2018 and represented 27.6% of average total deposits in 2019 compared to 28.4% in 2018. Average other borrowings decreased by $323.9 million or 29.8% in 2019 from 2018. The decrease in borrowings was due to strong deposit growth during the third quarter of 2019 as well as pay downs resulting from proceeds from sales of $152.1 million of available-for-sale securities in the second quarter of 2019.

Provision for Loan and Lease Losses

The provision for loan and lease losses represents management’s estimate of the expense necessary to maintain the allowance for loan and lease losses at an appropriate level. The provision for loan and lease losses was $1.4 million in 2019, compared to $3.9 million in 2018. The ratio of total allowance to total loans and leases decreased to 0.81% at December 31, 2019 from 0.90% at December 31, 2018. Favorable trends in certain qualitative factors and lower average historical loan loss rates in all loan portfolios except commercial real estate at year-end 2019, compared to year-end 2018, and lower specific reserves for impaired loans, contributed to the lower allowance level at December 31, 2019. The allowance at December 31, 2018 included a specific reserve of $3.0 million related to one commercial real estate credit that was subsequently charged off in the first quarter of 2019. See the section captioned “The Allowance for Loan and Lease Losses” included within “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition” of this Report for further analysis of the Company’s allowance for loan and lease losses.

Noninterest Income
Noninterest income represented 26.4% of total revenues in 2019, and 26.8% in 2018.

Insurance commissions and fees increased 5.9% to $31.1 million in 2019, compared to $29.4 million in 2018. This increase included $900,000 or 4.6% of organic growth in property and casualty commissions and a $738,000 or 32.0% increase in contingency revenue over 2018, while life, health and financial services commissions decreased slightly.

Investment services income of $16.4 million decreased $854,000 or 4.9% in 2019 compared to 2018. Investment services income includes trust services, financial planning, and wealth management services. The decrease in income was mainly a result of estate and terminating trust fees being down $1.0 million or 75.4% in 2019 over 2018, due to fees received in 2018 related to the settlement of a large estate. Fees are largely based on the market value and the mix of assets managed, and accordingly, the general direction of the stock market can have a considerable impact on fee income. The market value of assets managed by, or in custody of, the Trust Company was $4.1 billion at December 31, 2019, and $3.8 billion at December 31, 2018. These figures included $1.0 billion in 2019 and 2018 of Company-owned securities from which no income was recognized as the Trust Company was serving as custodian.

Service charges on deposit accounts in 2019 were down $114,000 or 1.4% compared to prior year. Overdraft/insufficient funds charges, the largest component of service charges on deposit accounts, were down $180,000 or 3.2% in 2019 compared to 2018, while service fees on personal and business accounts were up by $36,000 or 1.4% in 2019 compared to 2018.

Card services income increased $833,000 or 8.6% over 2018. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. Card services income for 2019 included a one-time incentive payment of $500,000 related to the Company's merchant card business. Increased revenue was also driven by increased transaction volume in both credit and debit cards.

The Company recognized $645,000 of gains on sales/calls of available-for-sale securities in 2019, compared to $466,000 of losses in 2018. The gains are primarily related to the sales of available-for-sale securities, which are generally the result of general portfolio maintenance and interest rate risk management.

Other income of $8.4 million was down $4.7 million or 35.9% compared to 2018. The primary contributors for the decrease in 2019 over 2018 were $2.9 million of gains on the sale of two properties we sold in 2018 upon completion of the Company's new headquarters building and $2.5 million related to the collection of fees and nonaccrual interest for a credit that was charged off in 2010.

41

Noninterest Expense

Noninterest expense as a percentage of total revenue was 63.6% in 2019, compared to 62.6% in 2018. Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2019, these expenses increased $5.2 million or 4.8% compared to 2018. Salaries and wages increased $3.8 million or 4.4% in 2019 over prior year, mainly as a result of annual merit pay increases. Other employee benefits increased $1.4 million or 6.3% over 2018, mainly in health insurance, which was up $736,000 or 8.9% in 2019 over 2018.

Other operating expenses of $45.5 million decreased by $2.8 million or 5.9% compared to 2018. The primary components of other operating expenses in 2019 were technology expense ($10.7 million), professional fees ($8.9 million), marketing expense ($4.9 million), cardholder expense ($3.2 million) and other miscellaneous expense ($18.3 million). Professional fees and technology related expenses in 2019 were up by $378,000 and $567,000, respectively, over 2018, mainly as a result of investments in strengthening the Company's compliance and information security infrastructure. Other operating expense in 2018 included $2.5 million of write-downs related to two leases on space vacated in 2018.
 
Noncontrolling Interests
 
Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $127,000 in 2019 and 2018. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company’s New York banking subsidiaries.
 
Income Tax Expense
 
The provision for income taxes provides for Federal, New York State, Pennsylvania and other miscellaneous state income taxes. The 2019 provision was $21.0 million, which decreased $789,000 or 3.6% compared to the 2018 provision. The effective tax rate for the Company was 20.5% in 2019, down from 20.9% in 2018. The effective rates for 2019 and 2018 differed from the U.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation.

Financial Condition

Total assets were $7.6 billion at December 31, 2020, increasing by 13.3% or $896.5 million from the previous year end. The increase in total assets was mainly due to increases in loans, securities, and cash and cash equivalent balances. Total cash and cash equivalents were up $250.5 million or 181.5% over December 31, 2019. The increase in cash and cash equivalents was mainly in balances held at the Federal Reserve and reflects the investment of excess liquidity in short term investments. Total deposits at year-end 2020 were up $1.2 billion or 23.5% over year-end 2019.

Loans and leases were 69.0% of total assets at December 31, 2020, compared to 73.1% of total assets at December 31, 2019. Total loan balances were $5.2 billion at December 31, 2020, up $342.8 million or 7.0% compared to the $4.9 billion reported at year-end 2019, mainly due to the addition of PPP loans originated and funded in the second quarter of 2020. PPP loan balances totaled $291.3 million at year-end 2020. A more detailed discussion of the loan portfolio is provided below in this section under the caption “Loans and Leases”.

As of December 31, 2020, total securities comprised 21.4% of total assets, compared to 19.3% of total assets at year-end 2019. Securities were up $328.6 million or 25.3% at December 31, 2020, compared to December 31, 2019. The increase in securities from year-end 2019 was largely due to the investment of excess liquidity into securities and interest bearing balances. The securities portfolio primarily contains mortgage-backed securities, obligations of U.S. Government sponsored entities, and obligations of states and political subdivisions. A more detailed discussion of the securities portfolio is provided below in this section under the caption “Securities”.

Total deposits at year-end 2020 increased by $1.2 billion or 23.5% compared to December 31, 2019. All deposit categories at year-end 2020 were up over year-end 2019, with noninterest bearing deposits up by $472.4 million or 32.4%, time deposit balances up by $71.2 million or 10.6% and checking, savings and money market accounts up by $681.2 million or 22.1% at December 31, 2020 compared to December 31, 2019. Other borrowings, consisting mainly of short term advances with the FHLB, decreased $393.1 million from December 31, 2019, as deposit growth were used to reduce borrowings. A more detailed discussion of deposits and borrowings is provided below in this section under the caption “Deposits and Other Liabilities”.
42

Shareholders’ Equity

The Consolidated Statements of Changes in Shareholders’ Equity included in the Consolidated Financial Statements of the Company contained in Part II, Item 8. of this Report, detail changes in equity capital over prior year end. Total shareholders’ equity was up $54.6 million or 8.2% to $717.7 million at December 31, 2020, from $663.1 million at December 31, 2019. Additional paid-in capital decreased by $4.5 million, from $338.5 million at December 31, 2019, to $334.0 million at December 31, 2020. The $4.5 million decrease included the following: a $9.4 million aggregate purchase price related to the Company's repurchase and retirement of 127,690 shares of its common stock in connection with the 2020 Repurchase Plan and $1.9 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.7 million attributed to stock based compensation expense, $1.8 million related to shares issued in connection with the Company's dividend reinvestment program and $255,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $47.9 million, reflecting net income of $77.6 million, less dividends paid of $31.4 million and the net cumulative effect adjustment related to the adoption of ASU 2016-13 of $1.7 million.

Accumulated other comprehensive loss decreased from $43.6 million at December 31, 2019 to $32.1 million at December 31, 2020, reflecting a $16.6 million increase in unrealized gains on available-for-sale securities due to market interest rates, and a $5.1 million increase in actuarial loss associated with employee benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage capital ratios.

Total shareholders’ equity was up $42.2 million or 6.8% to $663.1 million at December 31, 2019, from $620.9 million at December 31, 2018. Additional paid-in capital decreased by $28.1 million, from $366.6 million at December 31, 2018, to $338.5 million at December 31, 2019. The $28.1 million decrease included the following: $29.9 million aggregate purchase price related to the Company's repurchase and retirement of 376,021 shares of its common stock in connection with its stock repurchase plan and $2.9 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.2 million attributed to stock based compensation expense and $377,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $51.1 million, reflecting net income of $81.7 million, less dividends paid of $30.6 million.

Accumulated other comprehensive loss decreased from $63.2 million at December 31, 2018 to $43.6 million at December 31, 2019; reflecting a $27.6 million increase in unrealized gains on available-for-sale securities due to market interest rates, and a $8.0 million decrease in actuarial loss associated with employee benefit plans.

The Company continued its long history of increasing cash dividends with a per share increase of 4.0% in 2020, which followed an increase of 4.1% in 2019. Dividends per share amounted to $2.10 in 2020, compared to $2.02 in 2019, and $1.94 in 2018. Cash dividends paid represented 40.4%, 37.5%, and 36.0% of after-tax net income in 2020, 2019, and 2018, respectively.

On July 19, 2018, the Company’s Board of Directors authorized a stock repurchase plan (the "2018 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Through December 31, 2019, the Company had repurchased 393,004 shares under the 2018 Repurchase Plan at an average price of $79.15.

On January 30, 2020, the Company’s Board of Directors authorized a stock repurchase plan (the "2020 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. As with the 2018 Repurchase Plan, shares may be repurchased from time to time under the 2020 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Through December 31, 2020, the Company had repurchased 127,690 shares under the 2020 Repurchase Plan at an average price of $73.72.

The Company and its subsidiary banks are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk
43

weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject.

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

As of December 31, 2020, the capital ratios for the Company’s four subsidiary banks exceeded the minimum levels required to be considered well capitalized. Additional information on the Company’s capital ratios and regulatory requirements is provided in “Note 20 - Regulations and Supervision” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report on Form 10-K.

Securities

The Company maintains a portfolio of securities such as U.S. Treasuries, U.S. government sponsored entities securities, U.S. government agencies, non-U.S. Government agencies or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy established by the Company’s Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee.

The Company classifies its securities at date of purchase as available-for-sale, held-to-maturity or trading.  Securities, other than certain obligations of states and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. Securities in the held-to-maturity portfolio would consists of obligations of U.S. Government sponsored entities and obligations of state and political subdivisions. Securities in the trading portfolio would reflect those securities that the Company elects to account for at fair value, with the adoption of ASC Topic 825, Financial Instruments.

The Company’s total securities portfolio at December 31, 2020 totaled $1.63 billion compared to $1.30 billion at December 31, 2019. The table below shows the composition of the available-for-sale and held-to-maturity securities portfolio as of year-end 2020, 2019 and 2018. The increase in the available-for-sale portfolio at year-end 2020 over year-end 2019 reflects the reinvestment of excess liquidity. The Company purchased about $904.9 million of securities in 2020, which were partially offset by $545.6 million of payments, maturities and calls. In 2020, fair values were favorably impacted by changes in market interest rates.

For held-to-maturity securities, the Company early adopted ASU 2019-04 on November 30, 2019.  Since the Company had already adopted ASUs 2016-01 and 2017-12, the related amendments were effective as of November 30, 2019.  As part of the adoption of ASU 2019-04, the Company reclassified $138.2 million in aggregate amortized cost basis of debt securities from held-to-maturity to available-for-sale.  Included in other comprehensive income at December 31, 2019 is an unrealized gain of approximately $3.8 million related to the fair market value versus the cost basis of the portfolio at the time of the transfer.  The Company had not reclassified debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12.  Under ASU 2019-04, entities that did not reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12 and elect to reclassify debt securities upon adoption of the amendments in ASU 2019-04 are required to reflect the reclassification as of the date of adoption of that Update. 

Additional information on the securities portfolio is available in “Note 2 Securities” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report, which details the types of securities held, the carrying and fair values, and the contractual maturities as of December 31, 2020 and 2019.

44

As of December 31,
Available-for-Sale Securities202020192018
(In thousands)Amortized
Cost
Fair ValueAmortized
Cost
Fair ValueAmortized
Cost
Fair Value
U.S. Treasuries$0 $0 $1,840 $1,840 $289 $289 
Obligations of U.S. Government sponsored entities599,652 607,480 367,551 372,488 493,371 485,898 
Obligations of U.S. states and political subdivisions126,642 129,746 96,668 97,785 86,260 85,440 
Mortgage-backed securities-residential, issued by
U.S. Government agencies179,538 182,108 164,643 164,451 131,831 128,267 
U.S. Government sponsored entities691,562 705,480 660,037 659,590 649,620 630,558 
Non-U.S. Government agencies or sponsored entities0 0 31 31 
U.S. corporate debt securities2,500 2,379 2,500 2,433 2,500 2,175 
Total available-for-sale securities$1,599,894 $1,627,193 $1,293,239 $1,298,587 $1,363,902 $1,332,658 

Held-to-Maturity Securities202020192018
(In thousands)Amortized
Cost
Fair ValueAmortized
Cost
Fair ValueAmortized
Cost
Fair Value
Obligations of U.S. Government sponsored entities$0 $0 $$$131,306 $130,108 
Obligations of U.S. states and political subdivisions0 0 9,273 9,269 
Total held-to-maturity securities$0 $0 $$$140,579 $139,377 

Effective January 1, 2020, the Company adopted a new accounting standard (ASU 2016-13), "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which amends the accounting guidance on the impairment of financial instruments. Management evaluates investment securities for expected credit losses (“ECL”) impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Factors that may be indicative of ECL include, but are not limited to, the following:

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

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

However, if the Company intends to sell an impaired available for sale debt security, or more likely than not be required to sell the debt security before the recovery of the amortized cost basis, the entire impairment amount, including any previously
45

recognized ACL, must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL.

The Company also holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock, non-marketable Federal Home Loan Bank Pittsburgh (“FHLBPITT”) stock and non-marketable Atlantic Community Bankers Bank (“ACBB”) stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock, FHLBPITT stock and ACBB stock totaled $11.0 million, $5.2 million and $95,000 at December 31, 2020, respectively. These securities are carried at par, which is also cost. The FHLBNY and FHLBPITT continue to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY and FHLBPITT stock. At December 31, 2019, the Company’s holdings of FHLBNY stock, FHLBPITT stock, and ACBB stock totaled $24.3 million, $9.3 million, and $95,000, respectively.

Management’s policy is to purchase investment grade securities that, on average, have relatively short expected durations. This policy helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The contractual maturity distribution of debt securities and mortgage-backed securities as of December 31, 2020, along with the weighted average yield of each category, is presented in Table 3-Maturity Distribution below. Balances are shown at amortized cost and weighted average yields are calculated on a fully taxable-equivalent basis. Expected maturities will differ from contractual maturities presented in Table 3-Maturity Distribution below, because issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout the periods prior to contractual maturity.
46

Table 3 - Maturity Distribution 
As of December 31, 2020
Securities
Available-for-Sale
1
Securities
Held-to-Maturity
(dollar amounts in thousands)Amount
Yield2
Amount
Yield2
Obligations of U.S. Government sponsored entities
Within 1 year$43,255 2.31 %$0.00 %
Over 1 to 5 years358,032 1.35 %0.00 %
Over 5 to 10 years173,156 0.82 %0.00 %
Over 10 years25,209 1.87 %$0.00 %
$599,652 1.29 %$0.00 %
Obligations of U.S. state and political subdivisions
Within 1 year$11,229 2.75 %$0.00 %
Over 1 to 5 years21,011 2.46 %0.00 %
Over 5 to 10 years52,917 2.92 %0.00 %
Over 10 years41,485 2.51 %0.00 %
$126,642 2.69 %$0.00 %
Mortgage-backed securities - residential
Within 1 year$0.00 %$0.00 %
Over 1 to 5 years7,914 3.22 %0.00 %
Over 5 to 10 years105,389 2.05 %0.00 %
Over 10 years757,797 1.10 %0.00 %
$871,100 1.23 %$0.00 %
Other securities
Over 5 to 10 years$2,500 3.04 %$0.00 %
$2,500 3.04 %$0.00 %
Total securities
Within 1 year$54,484 2.40 %$0.00 %
Over 1 to 5 years386,958 1.45 %0.00 %
Over 5 to 10 years333,961 1.56 %0.00 %
Over 10 years824,491 1.19 %0.00 %
$1,599,894 1.37 %$0.00 %
Balances of available-for-sale securities are shown at amortized cost.
Interest income includes the tax effects of taxable-equivalent adjustments using a combined New York State and Federal effective income tax rate of 24.5% to increase tax exempt interest income to taxable-equivalent basis.

The average taxable-equivalent yield on the securities portfolio was 1.83% in 2020, 2.30% in 2019 and 2.24% in 2018.

At December 31, 2020, there were no holdings of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of the Company’s shareholders’ equity.

47

Loans and Leases

Table 4 - Composition of Loan and Lease Portfolio
Loans and LeasesAs of December 31,
(In thousands)20202019201820172016
Commercial and industrial
Agriculture$94,489 $105,786 $107,494 $108,608 $118,247 
Commercial and industrial other792,987 902,275 970,141 983,043 926,372 
PPP Loans291,252 
Subtotal commercial and industrial1,178,728 1,008,061 1,077,635 1,091,651 1,044,619 
Commercial real estate
Construction163,016 213,637 165,669 203,966 144,770 
Agriculture201,866 184,898 170,229 129,959 102,776 
Commercial real estate other2,204,310 2,045,030 2,004,763 1,866,802 1,673,295 
Subtotal commercial real estate2,569,192 2,443,565 2,340,661 2,200,727 1,920,841 
Residential real estate
Home equity200,827 219,245 229,608 241,256 247,014 
Mortgages1,235,160 1,158,592 1,104,286 1,061,685 972,801 
Subtotal residential real estate1,435,987 1,377,837 1,333,894 1,302,941 1,219,815 
Consumer and other
Indirect8,401 12,964 12,663 12,144 14,835 
Consumer and other61,399 61,446 58,326 50,979 45,219 
Subtotal consumer and other69,800 74,410 70,989 63,123 60,054 
Leases14,203 17,322 14,556 14,467 16,650 
Total loans and leases5,267,910 4,921,195 4,837,735 4,672,909 4,261,979 
Less: unearned income and deferred costs and fees(7,583)(3,645)(3,796)(3,789)(3,946)
Total loans and leases, net of unearned income and deferred costs and fees$5,260,327 $4,917,550 $4,833,939 $4,669,120 $4,258,033 

Total loans and leases of $5.3 billion at December 31, 2020 were up $342.8 million or 7.0% from December 31, 2019. The growth was mainly in PPP loans, which totaled $291.3 million at year-end 2020. As of December 31, 2020, total loans and leases represented 69.0% of total assets compared to 73.1% of total assets at December 31, 2019.

Residential real estate loans, including home equity loans, of $1.4 billion at December 31, 2020, increased by $58.2 million or 4.2% from $1.4 billion at year-end 2019, and comprised 27.3% of total loans and leases at December 31, 2020. Growth in residential loan balances is impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to 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 2020, 2019, and 2018, the Company sold residential mortgage loans totaling $51.7 million, $16.9 million, and $27.7 million, respectively, and realized net gains on these sales of $2.1 million, $227,000, and $458,000, respectively. The increase in sold residential mortgage loans was mainly due to a higher volume of originated loans in 2020 compared to 2019. The higher volume sold coupled with higher premiums paid on sold loans resulted in higher net gains on the sales of residential mortgage loans. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2020, 2019, and 2018, the Company recorded mortgage-servicing assets of $388,000, $127,000, and $207,000, respectively.
48

The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate given the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk.

Commercial real estate loans totaled $2.6 billion at December 31, 2020, an increase of $125.6 million or 5.1% compared to December 31, 2019, and represented 48.8% of total loans and leases at December 31, 2020, compared to 49.7% at December 31, 2019.

Commercial and industrial loans totaled $1.2 billion at December 31, 2020, which is an increase of $170.7 million or 16.9% from December 31, 2019. Commercial and industrial loans represented 22.4% of total loans at December 31, 2020 compared to 20.5% at December 31, 2019. The increase at year-end 2020 over year-end 2019 was mainly due to PPP loan originations. In the second quarter of 2020, the Company funded $465.6 million of PPP loans. At December 31, 2020, PPP loans totaled $291.3 million, with the decrease reflecting loans forgiven by the SBA. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related expenses and certain other eligible business operating costs, all in accordance with the rules and regulations established by the SBA. On January 11, 2021, the SBA reactivated the PPP. The Company's banking subsidiaries have originated additional PPP loans through the PPP, which is currently scheduled to extend through March 31, 2021. As of February 21, 2021, the Company had submitted 1,341 PPP loan applications totaling $171.0 million under the 2021 PPP authorization.

As of December 31, 2020, agriculturally-related loans totaled $296.4 million or 5.6% of total loans and leases compared to $290.7 million or 5.9% of total loans and leases at December 31, 2019. Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.

The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $69.8 million at December 31, 2020, compared to $74.4 million at December 31, 2019.

The lease portfolio decreased by 18.0% to $14.2 million at December 31, 2020 from $17.3 million at December 31, 2019. As of December 31, 2020, commercial leases and municipal leases represented 100.0% of total leases.
 
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing policies, underwriting standards and loan review during 2020. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. 

The Company’s loan and lease customers are located primarily in the New York and Pennsylvania communities served by its four subsidiary banks. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states. The suspension of business activities in our market area has led to a significant increase in unemployment rates and has had a negative effect on our customers. There continues to be a great deal of uncertainty regarding how long those conditions will continue to exist. As a result, the economic consequences of the pandemic on our market area generally and on the Company in particular continue to be difficult to quantify. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.

49

Analysis of Past Due and Nonperforming Loans
As of December 31,
(In thousands)20202019201820172016
Loans 90 days past due and accruing1
Consumer and other$0 $$$44 $
Total loans 90 days past due and accruing0 44 
Nonaccrual loans
Commercial and industrial1,775 2,335 1,883 2,852 738 
Commercial real estate23,627 10,789 8,007 5,948 9,076 
Residential real estate13,145 10,882 12,072 10,363 9,061 
Consumer and other429 275 234 354 166 
Total nonaccrual loans and leases38,976 24,281 22,196 19,517 19,041 
Troubled debt restructurings not included above6,803 7,154 4,395 3,449 2,631 
Total nonperforming loans and leases45,779 31,435 26,591 23,010 21,672 
Other real estate owned88 428 1,595 2,047 908 
Total nonperforming assets$45,867 $31,863 $28,186 $25,057 $22,580 
Total nonperforming loans and leases as a percentage of total loans and leases0.87 %0.64 %0.55 %0.49 %0.51 %
Total nonperforming assets as a percentage of total assets0.60 %0.47 %0.42 %0.38 %0.36 %
Allowance as a percentage of nonperforming loans and leases112.87 %126.90 %163.25 %172.84 %164.98 %
1 The 2019, 2018, 2017 and 2016 columns in the above table exclude $794,000, $1.3 million, $1.1 million, and $2.6 million, respectively, of acquired loans that are 90 days past due and accruing interest.  These loans were originally recorded at fair value on the acquisition date of August 1, 2012.  These loans are considered to be accruing as the Company can reasonably estimate future cash flows on these acquired loans and the Company expects to fully collect the carrying value of these loans.  Therefore, the Company is accreting the difference between the carrying value of these loans and their expected cash flows into interest income.

The level of nonperforming assets at the past five year-ends is illustrated in the table above. The Company’s total nonperforming assets as a percentage of total assets was 0.60% at December 31, 2020, up from 0.47% at December 31, 2019, and compares to its peer group's most recent ratio of 0.51% at September 30, 2020. The peer data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion. A breakdown of nonperforming loans by portfolio segment is shown above. Nonperforming loans totaled $45.8 million at December 31, 2020 and were up 45.6% from December 31, 2019. Nonperforming loans represented 0.87% of total loans at December 31, 2020, compared to 0.64% of total loans at December 31, 2019, and 0.55% of total loans at December 31, 2018. The increase in nonperforming loans was mainly in the commercial real estate and residential real estate portfolios, and a result of unfavorable economic conditions related to the COVID-19 pandemic. Nonperforming loans in the commercial real estate portfolio at year-end 2020 increased by $12.8 million compared to 2019; the increase was mainly due to one credit totaling $11.8 million in the hospitality industry that was downgraded to Substandard and placed on nonaccrual status in the fourth quarter of 2020. The loan is also currently in the Company's deferral payment program. At December 31, 2020, other real estate owned was down $340,000 from prior year-end and represented 0.2% of total nonperforming assets, down from 1.3% at December 31, 2019. The decrease in other real estate owned was mainly a result of sales during 2020.

The Company implemented a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Weekly deferral requests for the month of December were down 98.5% from peak levels the Company experienced in late March. As of December 31, 2020, total loans, impacted by COVID-19 and that continued in a deferral status amounted to approximately $212.2 million, representing 4.0% of total loans. Loans to finance hotels and motels comprise approximately 53.0% of total loans that continue in deferral status. Of loans that had come out of the deferral program as of December 31, 2020, about 94.4% had made at least one payment and only 0.13% were more than 30 days delinquent.
50

Loans are considered modified in a troubled debt restructuring (“TDR”) when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that the Company would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDRs or impaired. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: “loans 90 days past due and accruing”, “nonaccrual loans”, or “troubled debt restructurings not included above”. Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all is reasonably assured. At December 31, 2020, the Company had $8.5 million in TDR balances, which are included in the above table, of which $6.8 million are included in the line captioned “Troubled debt restructurings not included above” and the remainder are included within nonaccrual loans.

In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when called for by regulatory requirements. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal and interest income is recorded only after principal recovery is reasonably assured. For additional financial information on the difference between the interest income that would have been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was recorded, refer to “Note 3 – Loans and Leases” in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.

The Company’s recorded investment in loans and leases that are individually evaluated totaled $32.18 million at December 31, 2020, and $19.4 million at December 31, 2019. A loan is individually evaluated when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Individually evaluated loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due. Specific reserves on individually evaluated loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off.

At December 31, 2020, there were specific reserves of $308,000 on four commercial real estate loans and five commercial loans, compared to $907,000 of specific reserves on seven commercial real estate loans at December 31, 2019. The majority of the individually evaluated loans are collateral dependent loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans or the loans have been written down to fair value. Interest payments on individually evaluated loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. There was no interest income recognized on individually evaluated loans and leases for 2020, 2019 and 2018.

The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 112.87% at December 31, 2020, compared to 126.90% at December 31, 2019. The Company’s nonperforming loans are mostly made up of collateral dependent loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs.

Management reviews the loan portfolio for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its credit administration function, identified 35 commercial relationships totaling $40.8 million at December 31, 2020 that were potential problem loans. At December 31, 2019, there were 41 relationships totaling $44.0 million in the loan portfolio that were considered potential problem loans. Of the 35 commercial relationships from the portfolio that were classified as potential problem loans at December 31, 2020, there were 12 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $36.1 million. The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis.
51

 The Allowance for Credit Losses

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

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

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

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

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

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

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

Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of December 31, 2020, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance bases on their judgements and information available to them at the time of their examinations.

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

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company's consolidated statements of income.
52

As of December 31, 2020, the Company's reserve for off-balance sheet credit exposures was $1.9 million, compared to $477,000 at December 31, 2019. As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment increasing the allowance for credit losses on off-balance sheet credit exposures by $381,000 from $477,000 at December 31, 2019, to $858,000 at January 1, 2020.

The allocation of the Company’s allowance as of December 31, 2020, and each of the previous four years is illustrated in Table 5- Allocation of the Allowance for Credit Losses, below. The table represents the allowance for credit losses calculated under the new accounting guidance as of December 31, 2020, and the prior period show amounts calculated under the incurred loss methodology calculation used prior to adoption. The table provides an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.
Table 5 - Allocation of the Allowance for Credit Losses
As of December 31,
(In thousands)20202019201820172016
Total loans outstanding at end of year$5,260,327 $4,917,550 $4,833,939 $4,669,120 $4,258,033 
Allocation of the ACL by loan type:
Commercial and industrial$9,239 $10,541 $11,272 $11,837 $9,389 
Commercial real estate30,546 21,608 23,483 20,412 19,933 
Residential real estate10,257 6,381 7,345 6,215 5,203 
Consumer and other1,562 1,362 1,310 1,307 1,230 
Leases65 
Total$51,669 $39,892 $43,410 $39,771 $35,755 
Allocation of the ACL as a percentage of total allowance:
Commercial and industrial18 %26 %26 %30 %26 %
Commercial real estate59 %54 %54 %51 %56 %
Residential real estate20 %16 %17 %16 %15 %
Consumer and other3 %%%%%
Leases0 %%%%%
Total100 %100 %100 %100 %100 %
Loan and lease types as a percentage of total loans and leases:
Commercial and industrial23 %21 %22 %24 %25 %
Commercial real estate49 %50 %49 %47 %45 %
Residential real estate27 %28 %28 %28 %29 %
Consumer and other1 %%%%%
Leases0 %%%%%
Total100 %100 %100 %100 %100 %

The five year trend in the allowance is shown above. Over the three year period between 2016 through 2018, the allowance steadily increased driven in large part by growth in loans. The increase in 2018 was also a result of specific reserve allocations for one commercial real estate relationship. This credit was charged off during 2019, which contributed to the decrease in the allowance from year-end 2018 to year-end 2019.

As a result of the adoption of ASU 2016-13, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by $2.5 million from $39.9 million at December 31, 2019 to $37.4 million at January 1, 2020. As of December 31, 2020, the total allowance for credit losses was $51.7 million, which was up $11.8 million or 29.5% from year-end 2019. The $14.3 million increase in the allowance at December 31, 2020, compared to January 1, 2020 was mainly due to a $14.9 million increase in the provision expense driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. The allowance was relatively flat
53

between June 30, 2020 and December 31, 2020, as lower estimated reserves driven by improvements in forecasts for unemployment and the gross domestic product used in our model were offset by increases in qualitative reserves for loans within the hospitality and certain other industries that may have an elevated level of risk due to the adverse economic impact of the COVID-19 pandemic, as well as loans that remain in the Company's payment deferral program implemented in response to the COVID-19 pandemic. The qualitative reserves were added to all portfolio segments with the majority in commercial real estate and then residential real estate.

Total loans were $5.3 billion at December 31, 2020, up $342.8 million or 7.0% from December 31, 2019. The increase from year-end 2019 included $465.6 million of PPP loans originated in the second quarter of 2020. Since the PPP loans are guaranteed by the SBA, there are no reserves allocated to these loans. Credit quality metrics at December 31, 2020, were mixed compared to year-end 2019. Nonperforming assets represented 0.60% of total assets at December 31, 2020, compared to 0.47% at December 31, 2019. Nonperforming loans and leases were up $14.3 million or 45.6% from year end 2019 and represented 0.87% of total loans at December 31, 2020 compared to 0.64% at December 31, 2019. Loans internally-classified Special Mention or Substandard were up $99.6 million or 110.3% compared to December 31, 2019. The increase over December 31, 2019, was mainly a result of the downgrade of loans in the hospitality industry, reflecting cash flow stress related to the pandemic-related business and travel restrictions and social distancing guidelines. Many of these hospitality loans are in the Company's payment deferral program and are included in the estimate of qualitative reserves.

Table 6 - Analysis of the Allowance for Credit Losses 

December 31,
(In thousands)20202019201820172016
Average loans outstanding during year$5,228,135 $4,830,089 $4,757,583 $4,401,205 $3,957,221 
Balance of allowance at beginning of year39,892 43,410 39,771 35,755 32,004 
Impact of adopting ASU 2016-13(2,534)
Loans charged-off:
Commercial and industrial$$696 $334 $365 $1,576 
Commercial real estate1,903 4,015 142 180 193 
Residential real estate84 256 614 1,067 298 
Consumer and other482 823 1,350 962 642 
Leases
Total loans charged-off2,471 5,790 2,440 2,574 2,709 
Recoveries of loans previously charged-off:
Commercial and industrial131 103 156 143 596 
Commercial real estate58 174 843 1,617 1,127 
Residential real estate194 334 459 256 63 
Consumer and other248 295 679 413 353 
Total loan recoveries631 906 2,137 2,429 2,139 
Net loan charge-offs and (recoveries)1,840 4,884 303 145 570 
Additions to allowance charged to operations16,151 1,366 3,942 4,161 4,321 
Balance of allowance at end of year$51,669 $39,892 $43,410 $39,771 $35,755 
Allowance as a percentage of total loans and leases outstanding0.98 %0.81 %0.90 %0.85 %0.84 %
Net charge-offs (recoveries) as a percentage of average loans and leases outstanding during the year0.04 %0.10 %0.01 %0.00 %0.01 %

The above table shows a fairly stable level of gross loan charge-offs over the period, with the increase in 2019 mainly related to a $3.3 million charge-off related to one commercial real estate loan. The higher level of loan recoveries in 2016 to 2018 was mainly a result of recoveries on two large commercial/commercial real estate relationships that were charged off in 2011 and 2012. Provision expense was stable between 2016 and 2018. For 2019, favorable trends in certain qualitative factors, lower
54

historical loss rates in all loan portfolios except for commercial real estate at year-end 2019 compared to year-end 2018, and lower specific reserves for impaired loans contributed to the lower allowance level at December 31, 2019 compared to December 31, 2018 and a decrease in provision expense in 2019 compared to 2018. As mentioned above, the $16.2 million provision expense in 2020 was driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020.

The ratio of the allowance for credit losses as a percentage of total loans was 0.98% at year-end 2020 compared to 0.81% at year-end 2019. The allowance coverage to nonperforming loans and leases was 112.87% at December 31, 2020 compared to 126.90% at December 31, 2019. Management believes that, based upon its evaluation as of December 31, 2020, the allowance is appropriate.

Deposits and Other Liabilities 

Total deposits were $6.4 billion at December 31, 2020, up $1.2 billion or 23.5% compared to year-end 2019. The increase from year-end 2019 consisted of savings and money market balances, noninterest bearing deposits, and time deposits up $681.2 million, $472.4 million, and $71.2 million, respectively. Deposit balances during 2020 benefited from the $465.6 million of PPP loan originations during the second quarter of 2020, the majority of which were deposited in Tompkins checking accounts. The growth also included short-term brokered deposits. In April 2020, the Company obtained $295.0 million of short-term brokered deposits and actively increased liquid assets to further strengthen the Company's liquidity position in response to the economic uncertainty related to the COVID-19 pandemic. Of the $295.0 million of brokered deposits, $95.0 million matured and were paid in the fourth quarter of 2020; the remaining $200.0 million mature in April 2021.
 
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 increased by $863.8 million or 20.1% to $5.2 billion at year-end 2020 from $4.3 billion at year-end 2019. Core deposits represented 80.1% of total deposits at December 31, 2020, compared to 82.3% of total deposits at December 31, 2019.

Municipal money market accounts and reciprocal deposit relationships with municipalities totaled $685.6 million at year-end 2020, which increased 11.3% over year-end 2019. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds.

Table 1-Average Statements of Condition and Net Interest Analysis, shows the average balance and average rate paid on the Company’s primary deposit categories for the years ended December 31, 2020, 2019, and 2018. Average interest-bearing deposits in 2020 increased $671.0 million or 18.2% when compared to 2019. The average cost of interest-bearing deposits was 0.46% for 2020 and 0.84% for 2019. Average noninterest bearing deposits for 2020 were up $349.9 million or 24.9% over 2019. A maturity schedule of time deposits outstanding at December 31, 2020 is included in “Note 7 Deposits” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.
  
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 $65.8 million at December 31, 2020, and $60.3 million at December 31, 2019. Management generally views local repurchase agreements as an alternative to large time deposits. Refer to “Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company’s repurchase agreements.

The Company’s other borrowings totaled $265.0 million at year-end 2020, which was $393.1 million below prior year end. The decrease in borrowings was due to core deposit growth, municipal deposit growth, and an increase in brokered deposits from year-end 2019. The $265.0 million in borrowings at December 31, 2020, represented term advances from the FHLB. Borrowings of $658.1 million at year-end 2019 included $239.1 million in overnight advances from the FHLB, $415.0 million of FHLB term advances, and a $4.0 million advance from a bank. Of the $265.0 million in FHLB term advances at year-end 2020, $235.0 million are due in over one year. Refer to “Note 9 - Other Borrowings” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company’s term borrowings with the FHLB.

55

Liquidity Management

As of December 31, 2020, the Company had not experienced any significant impact on our liquidity or funding capabilities as a result of the COVID-19 pandemic. As previously noted, the Company participated in the SBA's PPP. The Company began accepting applications for PPP loans on April 3, 2020, and funded 2,998 PPP loans during the second quarter of 2020. Outstanding PPP loans totaled $291.3 million as of December 31, 2020. The majority of the PPP loan proceeds were deposited into accounts at Tompkins, which contributed to the deposit growth in the second quarter of 2020. In April 2020, the Company obtained $295.0 million of short-term brokered deposits and actively increased liquid assets to further strengthen the Company's position with the goal of guarding against economic uncertainty related to the COVID-19 pandemic. The Company has a long-standing liquidity plan in place that is designed to ensure that appropriate liquidity resources are available to fund the balance sheet. Additionally, given the uncertainties related to the impact of the COVID-19 crisis on liquidity, the Company has confirmed the availability of funds at the FHLB of NY and FHLB of Pittsburgh, completed actions required to activate participation in the Federal Reserve Bank PPP lending facility, and confirmed availability of Federal Fund lines with correspondent bank partners.

The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company may also use borrowings as part of a growth strategy. Asset and liability positions are monitored primarily through the Asset/Liability Management Committee of the Company’s subsidiary banks. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur.

Core deposits, discussed above under “Deposits and Other Liabilities”, are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, brokered time deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight borrowings and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources.

Non-core funding sources totaled $1.6 billion at December 31, 2020, a decrease of $26.6 million or 1.6% from $1.6 billion at December 31, 2019. The decrease reflects the pay down of FHLB borrowings, partially offset by the increase in brokered deposits mentioned above under "Deposits and Other Liabilities". Non-core funding sources decreased year-over-year as the Company experienced sufficient growth in core deposits to fund earning asset growth. Non-core funding sources as a percentage of total liabilities decreased from 27.1% at year-end 2019 to 23.4% at year-end 2020.

Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.2 billion at December 31, 2020 and 2019, were either pledged or sold under agreements to repurchase. Pledged securities or securities sold under agreements to repurchase represented 75.3% of total securities at December 31, 2020, compared to 89.7% of total securities at December 31, 2019.

Cash and cash equivalents totaled $388.5 million as of December 31, 2020, up from $138.0 million at December 31, 2019. Short-term investments, consisting of securities due in one year or less, decreased from $108.1 million at December 31, 2019, to $55.0 million at December 31, 2020.

Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but they have monthly principal reductions. Total mortgage-backed securities, at fair value, were $887.6 million at December 31, 2020 compared with $824.0 million at December 31, 2019. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.5 billion at December 31, 2020 compared to $1.5 billion at December 31, 2019. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.

Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has
56

borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At December 31, 2020, the unused borrowing capacity on established lines with the FHLB was $2.1 billion.

As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At December 31, 2020, total unencumbered mortgage loans and securities of the Company were $1.6 billion. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.

The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.

Table 7 - Loan Maturity
Remaining maturity of loansDecember 31, 2020
(In thousands)TotalLess than 1 yearAfter 1 year to 5 yearsAfter 5 years
Commercial and industrial$1,178,728 $213,472 $597,066 $368,190 
Commercial real estate2,569,192 98,844 342,075 2,128,273 
Residential real estate1,435,987 855 20,897 1,414,235 
Total$5,183,907 $313,171 $960,038 $3,910,698 
 
Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1 year, $2.3 billion have fixed rates and $2.5 billion have adjustable rates.

Off-Balance Sheet Arrangements

In the normal course of business, the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States, are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan commitments expire within one year from the date of issue, the total amount of these loan commitments as of December 31, 2020, are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in “Note 17 Commitments and Contingent Liabilities” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report.

Contractual Obligations

The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application through June 30, 2024 along with contracts for more specialized software programs through 2021. Further information on the Company’s lease arrangements is provided in “Note 6 Premises and Equipment” in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company’s contractual obligations as of December 31, 2020, are shown in Table 8-Contractual Obligations and Commitments below.

57

Table 8 - Contractual Obligations and Commitments
Contractual cash obligationsAt December 31, 2020
Payments due within
(In thousands)Total1 year1-3 years3-5 yearsAfter 5 years
Long-term debt$276,330 $35,175 $170,658 $70,497 $
Trust Preferred Debentures1
21,662 540 1,079 1,079 18,964 
Operating leases 2
43,446 4,528 8,196 7,120 23,602 
Software contracts5,420 1,764 2,835 821 
Total contractual cash obligations$346,858 $42,007 $182,768 $79,517 $42,566 
1 Dollar amounts include interest payments and contractual payments due until maturity without conversion to stock or early redemption for the remainder of the Company's Trust Preferred Debentures.
2 Operating leases include renewals the Company considers reasonably certain to exercise.

Non-GAAP Disclosure

The following table summarizes the Company’s results of operations on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. The non-GAAP financial measures adjust GAAP measures to exclude the effects of non-operating items, such as acquisition related intangible amortization expense, and significant nonrecurring income or expense on earnings, equity, and capital. The Company believes the non-GAAP measures provide meaningful comparisons of our underlying operational performance and facilitate management's and investors' assessments of business and performance trends in comparison to others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a measure of the Company's profitability or liquidity; they are in addition to, and are not a substitute for, financial measures under GAAP. The non-GAAP financial measures presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies. In the future, the Company may utilize other measures to illustrate performance. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP.

58

Reconciliation of Net Income Available to Common Shareholders/Diluted Earnings Per Share (GAAP) to Net Operating Income Available to Common Shareholders/Adjusted Diluted Earnings Per Share (Non-GAAP) and Adjusted Operating Return on Average Tangible Common Equity (Non-GAAP)
For the year ended December 31,
(In thousands, except per share data)20202019201820172016
Net income available to common shareholders$77,588 $81,718 $82,308 $52,494 $59,340 
Less: income attributable to unvested stock-based compensations awards(857)(1,306)(1,315)(818)(912)
Net earnings allocated to common shareholders (GAAP)76,731 80,412 80,993 51,676 58,428 
Diluted earnings per share (GAAP)5.20 5.37 5.35 3.43 3.91 
Adjustments for non-operating income and expense:
Gain on sale of real estate0 (2,950)
Write-down of impaired leases0 2,536 
Remeasurement of deferred taxes0 14,944 
  Write-down of real estate pending sale673 
Total adjustments673 (414)14,944 
Tax (benefit) expense(165)102 
Total adjustments, net of tax508 (312)14,944 
Net operating income available to common shareholders (Non-GAAP)77,239 80,412 80,681 66,620 58,428 
Weighted average shares outstanding (diluted)14,751,303 14,973,951 15,132,257 15,073,255 14,936,231 
Adjusted diluted earnings per share (Non-GAAP)5.24 5.37 5.33 4.42 3.91 
Net earnings allocated to common shareholders (GAAP)76,731 80,412 80,681 66,620 58,428 
Average Tompkins Financial Corporation shareholders' equity (GAAP)699,554 649,871 589,475 575,958 545,545 
Amortization of intangibles1,484 1,673 1,771 1,932 2,090 
Tax expense364 410 434 773 836 
Amortization of intangibles, net of tax1,120 1,263 1,337 1,159 1,254 
Adjusted net operating income available to common shareholders' (Non-GAAP)77,851 81,675 82,018 67,779 59,682 
Average Tompkins Financial Corporation shareholders' common equity698,088 649,871 589,475 575,958 545,545 
Average goodwill and intangibles97,134 98,104 99,999 101,583 104,263 
Average Tompkins Financial Corporation shareholders' tangible common equity (Non-GAAP)$600,954 $551,767 $489,476 $474,375 $441,282 
Adjusted operating return on average shareholders' tangible common equity (Non-GAAP)12.95 %14.80 %16.76 %14.29 %13.52 %

Newly Adopted Accounting Standards

ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization’s portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was effective for the Company on January 1, 2020. Upon adoption, a cumulative effect adjustment for the change in the allowance for credit losses was recognized in
59

retained earnings.  The cumulative-effect adjustment to retained earnings, net of taxes, is comprised of the impact on the allowance for credit losses on outstanding loans and leases and the impact on the liability for off-balance sheet commitments. The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326, while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net increase to retained earnings of $1.7 million, upon adoption. The transition adjustment includes a decrease in the allowance for credit losses on loans of $2.5 million, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $0.4 million, net of the corresponding decrease in deferred tax assets of $0.4 million.

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

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

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

ASU 2018-14, “Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20).” ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 became effective for us on December 31, 2020, and did not have a significant impact on our consolidated financial statements. The Company updated its disclosures at December 31, 2020, to comply with the amended guidance.

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

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

Accounting Standards Pending Adoption

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

60

ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Tompkins is currently evaluating the potential impact of ASU 2020-04 on our consolidated financial statements.

Fourth Quarter Summary

Net income was $24.0 million for the fourth quarter of 2020 , compared to $21.1 million reported for the same period in 2019. Diluted earnings per share of $1.61 for the fourth quarter of 2020 were up 15.0% from $1.40 in the fourth quarter of 2019.

Net interest income was $57.8 million for the fourth quarter of 2020, compared to $53.2 million reported for the same period in 2019. The net interest margin for the fourth quarter of 2020 was 3.12%, down from the 3.44% reported for the quarter ended December 31, 2019, and 3.26% for the third quarter of 2020.

Net interest income benefited from lower funding costs and growth in average earning assets and average deposits. The cost of interest bearing liabilities for the fourth quarter of 2020 was 0.45% compared to 1.03% for the fourth quarter of 2019. The decrease reflects lower market interest rates as well as an improved funding mix as a result of deposit growth and the pay down of borrowings. Average earnings assets for the fourth quarter of 2020 were up $1.2 billion, or 19.7% compared to the fourth quarter of 2019. Average loans, average securities, and average interest bearing balances due from banks for the fourth quarter of 2020 increased by $447.1 million or 9.2%, $344.5 million or 26.7%, and $437.0 million, respectively, over the same quarter in the prior year. The growth in average earning assets was offset by a decrease in the average yield on earning assets from 4.17% for the fourth quarter of 2019 to 3.43% for the fourth quarter of 2020. The decrease in the yield on average assets for the fourth quarter of 2020 compared to the fourth quarter of 2019 reflects lower market interest rates and an increase in the mix of lower yielding securities and cash balances as a percentage of average earning assets for 2020 compared to 2019.

Average deposits for the fourth quarter of 2020 increased $1.3 billion, or 24.0% compared to the same period in 2019. Included in the growth of average deposits for the fourth quarter of 2020 was a $442.4 million or 30.1% increase in average noninterest bearing deposits over the fourth quarter of 2019.

Provision for credit losses for the fourth quarter of 2020 was $6,000 compared to a negative $1.0 million for the same period in 2019. Net charge-offs for the fourth quarter of 2020 were $630,000 compared to net charge-offs of $479,000 reported in the fourth quarter of 2019.

Noninterest income of $18.8 million for the fourth quarter of 2020 was up 4.8% compared to the same period in 2019. The increase was mainly in insurance commissions and fees, investment services income and gains on sales of residential real estate loans. Investment services income in the fourth quarter of 2020 benefited from fees related to the settlement of a large estate. These increases were partially offset by lower service charges on deposit accounts, mainly due to a decrease in overdraft fees, resulting from a decline in the volume of overdrafts related to the COVID-19 pandemic.

Noninterest expense was $46.4 million for the fourth quarter of 2020, up $505,000, or 1.1%, over the fourth quarter of 2019.

Income tax expense for the fourth quarter of 2020 was $6.1 million compared to $5.2 million for the fourth quarter of 2019. The Company's effective tax rate was 20.4% for the fourth quarter of 2020, compared to 19.8% for the same period in 2019.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk

Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within Board-approved levels. The Committee also discusses strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the
61

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

The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the simulation analysis performed as of November 30, 2020, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income of approximately 2.0% from the base case, while a 100 basis point parallel decline in interest rates over a one-year period would result in a one-year decrease in net interest income of approximately 0.7% from the base case. The simulation assumes no balance sheet growth and no management action to address balance sheet mismatches.

The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend 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, net interest income is expected to trend upwards.

The down 100 basis point scenario decreases net income slightly in the first year as a result of the Company's assets repricing downward to a greater degree than the rates on the Company's interest-bearing liabilities, mainly deposits and overnight borrowings. Rates on savings and money market accounts have moved down in the last 3 months, approaching historically low levels, allowing for minimal interest expense relief in the first year of a declining rate scenario. In addition, the model assumes that prepayments accelerate in the lower interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.

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

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

In addition to the simulation analysis, management uses an interest rate gap measure. Table 9-Interest Rate Risk Analysis below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of December 31, 2020. The Company’s one-year interest rate gap was a positive $58.9 million or 0.77% of total assets at December 31, 2020, compared with a negative $173.6 million or 2.58% of total assets at December 31, 2019. The change from year-end 2019 to year-end 2020 is mainly due to deposit growth, which resulted in a decrease in overnight borrowings with the FHLB as well as an increase some shorter term assets, including interest bearing balances. A positive gap position exists when the amount of interest-bearing assets maturing or repricing exceeds the amount of interest-earning liabilities maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is equally at risk in both an increasing and decreasing rate environment over the next 12 months. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.

Table 9 - Interest Rate Risk Analysis
Condensed Static Gap - December 31, 2020
(In thousands)Total0-3 months3-6 months6-12 months12 months
Interest-earning assets1
$7,244,820 $1,715,224 $589,020 $861,581 $3,165,825 
Interest-bearing liabilities4,852,232 2,219,960 508,777 378,180 3,106,917 
Net gap position(504,736)80,243 483,401 58,908 
Net gap position as a percentage of total assets(6.62)%1.05 %6.34 %0.77 %
1Balances of available-for-sale securities are shown at amortized cost.

62

[This Page Intentionally Left Blank]
 

63

Item 8. Financial Statements and Supplementary Data
 
Financial Statements and Supplementary Data consist of the consolidated financial statements and the unaudited quarterly financial data as indexed and presented below.


64

Management’s Statement of Responsibility
 
Management is responsible for the preparation of the consolidated financial statements and related financial information contained in all sections of this annual report, including the determination of amounts that must necessarily be based on judgments and estimates. It is the belief of management that the consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.
 
Management establishes and monitors the Company’s system of internal accounting controls to meet its responsibility for reliable financial statements. The system is designed to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management’s authorization and are properly recorded.
 
The Audit/Examining Committee of the board of directors, composed solely of outside directors, meets periodically and privately with management, internal auditors, and the independent registered public accounting firm, KPMG LLP, to review matters relating to the quality of financial reporting, internal accounting control, and the nature, extent, and results of audit efforts. The independent registered public accounting firm and internal auditors have unlimited access to the Audit/Examining Committee to discuss all such matters. The consolidated financial statements have been audited by KPMG LLP for the purpose of expressing an opinion on the consolidated financial statements. In addition, KPMG LLP has audited the Company's internal control over financial reporting, as of December 31, 2020.
 
/s/ Stephen S. Romaine/s/ Francis M. FetskoDate:March 1, 2021
Stephen S. RomaineFrancis M. Fetsko
Chief Executive OfficerChief Financial Officer
Chief Operating Officer

65

Report of Independent Registered Public Accounting Firm
 
To the Shareholders and Board of Directors
Tompkins Financial Corporation:

Opinion on Internal Control Over Financial Reporting
We have audited Tompkins Financial Corporation and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated statements of condition of the Company as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity for each of the years in the three-year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements), and our report dated March 1, 2021 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 
/s/ KPMG LLP
Rochester, New York
March 1, 2021

66

Report of Independent Registered Public Accounting Firm
 
To the Shareholders and Board of Directors
Tompkins Financial Corporation:
 
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated statements of condition of Tompkins Financial Corporation and subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, cash flows, and changes in shareholders’ equity for each of the years in the three‑year period ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 1, 2021 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Change in Accounting Principle

As discussed in Note 1 to the consolidated financial statements, the Company has changed its method of accounting for the recognition and measurement of credit losses as of January 1, 2020 due to the adoption of ASC Topic 326, Financial Instruments – Credit Losses.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses – Loans evaluated on a Collective Basis

As discussed in Note 1 to the consolidated financial statements, the Company adopted ASU No. 2016-13, Financial Instruments — Credit Losses (ASC Topic 326), as of January 1, 2020. As discussed in Notes 1 and 4 to the consolidated financial statements, the Company’s allowance for credit losses on loans was $51.7 million as of December 31, 2020, a portion of which related to the allowance for credit losses on loans evaluated on a collective bases (the collective ACL on loans). The collective ACL on loans includes the measure of expected credit losses on a
67

collective basis for those loans that share similar risk characteristics. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable. The Company uses a discounted cash flow methodology (DCF methodology) where the respective cash flows for each segment are developed using the assumptions of probability of default (PD), loss given default (LGD), and exposure at default using estimated prepayment speeds. The DCF methodology is calculated at the loan level and aggregated at the segment level, and expected credit losses are estimated over the effective life of the loans by measuring the difference between the net present value of modeled cash flows and the amortized cost basis. The Company uses models to develop the PD and LGD, which are derived from internal and selected peer groups’ historical default and loss experience, that incorporate probability weighted economic scenarios and macroeconomic assumptions over a reasonable and supportable forecast period. In order to capture the unique risks of the loan segments within the PD and LGD models, the Company measures expected credit losses at the loan level by segment, by pooling loans when the financial assets share similar risk characteristics. After the reasonable and supportable forecast period, the Company reverts back to a historical loss rate over eight quarters on a straight-line basis. A portion of the collective ACL on loans is comprised of adjustments to historical loss information. These adjustments are based on qualitative factors not reflected in the quantitative model but are likely to impact the measurement of estimated credit losses.

We identified the assessment of the collective ACL on loans as a critical audit matter. A high degree of audit effort, including specialized skills and knowledge, and subjective and complex auditor judgment was involved in the assessment of the collective ACL on loans due to significant measurement uncertainty. Specifically, the assessment encompassed the evaluation of the collective ACL on loans methodology, including the methods and models used to estimate the PD, LGD and their significant assumptions, including portfolio segmentation, estimated prepayment speeds, the economic forecast scenarios and scenario weightings, macroeconomic assumptions, the reasonable and supportable forecast period, the composition of the peer group data, and the historical observation period. The assessment also included the evaluation of the qualitative factors and their significant assumptions, including the effects of limitations inherent in the quantitative model and an evaluation of the conceptual soundness and performance of the PD and LGD models. In addition, auditor judgment was required to evaluate the sufficiency of audit evidence obtained.

The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls related to the measurement of the collective ACL on loans, including controls over the:

development of the collective ACL on loans methodology
development of the PD and LGD models
performance monitoring of the PD and LGD models
identification and determination and measurement of the significant assumptions used in the PD and LGD models, including prepayment assumptions
development of the qualitative adjustments, including the significant assumptions
analysis of the collective ACL on loans results, trends, and ratios.

We evaluated the Company’s process to develop the collective ACL on loans estimate by testing certain sources of data, factors, and assumptions that the Company used, and considered the relevance and reliability of such data, factors, and assumptions. In addition, we involved credit risk professionals with specialized skills and knowledge, who assisted in:

evaluating the Company’s collective ACL on loans methodology for compliance with U.S. generally accepted accounting principles
evaluating judgments made by the Company relative to the development and performance testing of the PD and LGD models, and other significant assumptions such as prepayment speeds by comparing them to relevant Company-specific metrics and trends and the applicable industry and regulatory practices
assessing the conceptual soundness and performance testing of the PD and LGD models, by inspecting the model documentation to determine whether the models are suitable for their intended use
68

evaluating the economic forecast, including selection of the economic forecast scenarios and weightings, by comparing them to the Company's business environment and relevant industry practices
evaluating the length of the historical observation period and reasonable and supportable forecast period evaluating to relevant trends
assessing the composition of the peer group by comparing to specific portfolio characteristics
evaluating the methodology used to develop the qualitative factors and the effect of those factors on the collective ACL on loans compared with relevant credit risk factors and consistency with credit trends and identified limitations of the underlying quantitative model.

We also assessed the sufficiency of the audit evidence obtained related to the collective ACL on loans by evaluating the:
cumulative results of the audit procedures
qualitative aspects of the Company’s accounting practices
potential bias in the accounting estimate.

/s/ KPMG LLP
We have served as the Company's auditor since 1995.
Rochester, New York
March 1, 2021

69

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CONDITION
(In thousands, except share and per share data)As ofAs of
ASSETS12/31/202012/31/2019
Cash and noninterest bearing balances due from banks$21,245 $136,010 
Interest bearing balances due from banks367,217 1,972 
Cash and Cash Equivalents388,462 137,982 
Available-for-sale debt securities, at fair value (amortized cost of $1,599,894 at December 31, 2020 and $1,293,239 at December 31, 2019)1,627,193 1,298,587 
Equity securities, at fair value (amortized cost $929 at December 31, 2020 and $915 at December 31, 2019)929 915 
Total loans and leases, net of unearned income and deferred costs and fees5,260,327 4,917,550 
Less: Allowance for credit losses51,669 39,892 
Net Loans and Leases5,208,658 4,877,658 
Federal Home Loan Bank and other stock16,382 33,695 
Bank premises and equipment, net88,709 94,355 
Corporate owned life insurance84,736 82,961 
Goodwill92,447 92,447 
Other intangible assets, net4,905 6,223 
Accrued interest and other assets109,750 100,800 
Total Assets7,622,171 6,725,623 
LIABILITIES
Deposits:
Interest bearing:
  Checking, savings and money market3,761,933 3,080,686 
  Time746,234 675,014 
Noninterest bearing1,929,585 1,457,221 
Total Deposits6,437,752 5,212,921 
Federal funds purchased and securities sold under agreements to repurchase65,845 60,346 
Other borrowings265,000 658,100 
Trust preferred debentures13,220 17,035 
Other liabilities122,665 114,167 
Total Liabilities6,904,482 6,062,569 
EQUITY
Tompkins Financial Corporation shareholders' equity:
Common Stock - par value $.10 per share: Authorized 25,000,000 shares; Issued: 14,964,389 at December 31, 2020; and 15,014,499 at December 31, 20191,496 1,501 
Additional paid-in capital333,976 338,507 
Retained earnings418,413 370,477 
Accumulated other comprehensive loss(32,074)(43,564)
Treasury stock, at cost – 124,849 shares at December 31, 2020, and 123,956 shares at December 31, 2019(5,534)(5,279)
Total Tompkins Financial Corporation Shareholders’ Equity716,277 661,642 
Noncontrolling interests1,412 1,412 
Total Equity717,689 663,054 
Total Liabilities and Equity$7,622,171 $6,725,623 
 See notes to consolidated financial statements. 
70

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Year ended December 31,
(In thousands, except per share data)202020192018
INTEREST AND DIVIDEND INCOME
Loans$227,313 $226,723 $214,370 
Due from banks194 41 31 
Available-for-sale securities25,450 28,460 30,377 
Held-to-maturity securities0 3,151 3,437 
Federal Home Loan Bank stock and Federal Reserve Bank stock1,373 3,003 3,377 
Total Interest and Dividend Income254,330 261,378 251,592 
INTEREST EXPENSE
Time certificates of deposits of $250,000 or more3,175 3,095 1,712 
Other deposits16,789 27,809 14,883 
Federal funds purchased and securities sold under agreements to repurchase95 143 152 
Trust preferred debentures1,133 1,276 1,227 
Other borrowings7,799 18,427 21,818 
Total Interest Expense28,991 50,750 39,792 
Net Interest Income225,339 210,628 211,800 
Less: Provision for Credit Loss Expense16,151 1,366 3,942 
Net Interest Income After Provision for Credit Loss Expense209,188 209,262 207,858 
NONINTEREST INCOME
Insurance commissions and fees31,505 31,091 29,369 
Investment services income17,520 16,434 17,288 
Service charges on deposit accounts6,312 8,321 8,435 
Card services income9,263 10,526 9,693 
Other income8,817 8,416 13,130 
Net gain (loss) on securities transactions443 645 (466)
Total Noninterest Income73,860 75,433 77,449 
NONINTEREST EXPENSES
Salaries and wages92,519 89,399 85,625 
Other employee benefits24,812 23,488 22,090 
Net occupancy expense of premises12,930 13,210 13,309 
Furniture and fixture expense7,846 7,815 7,351 
Amortization of intangible assets1,484 1,673 1,771 
Other operating expenses45,791 46,249 50,921 
Total Noninterest Expenses185,382 181,834 181,067 
Income Before Income Tax Expense97,666 102,861 104,240 
Income Tax Expense19,924 21,016 21,805 
Net Income Attributable to Noncontrolling Interests and Tompkins Financial Corporation77,742 81,845 82,435 
Less: Net income attributable to noncontrolling interests154 127 127 
Net Income Attributable to Tompkins Financial Corporation$77,588��$81,718 $82,308 
Basic Earnings Per Share$5.22 $5.39 $5.39 
Diluted Earnings Per Share$5.20 $5.37 $5.35 
See notes to consolidated financial statements.
71

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Year ended December 31,
(In thousands)202020192018
Net income attributable to noncontrolling interests and Tompkins Financial Corporation$77,742 $81,845 $82,435 
Other comprehensive income (loss), net of tax:
Available-for-sale securities:
Change in net unrealized gain (loss) during the period16,894 25,241 (10,981)
 Unrealized gains on HTM securities transferred to AFS securities0 2,852 
Reclassification adjustment for net realized (gain) loss on sale included in available-for-sale securities(324)(465)332 
Employee benefit plans:
Net retirement plan loss(7,028)(7,642)(2,594)
Net actuarial gain due to curtailment0 (302)
Net retirement plan prior service (credit) cost0 (1,373)
Amortization of net retirement plan actuarial gain1,786 1,266 1,298 
Amortization of net retirement plan prior service cost162 24 11 
Other comprehensive income (loss)11,490 19,601 (11,934)
Subtotal comprehensive income attributable to noncontrolling interests and Tompkins Financial Corporation89,232 101,446 70,501 
Less: Total comprehensive income attributable to noncontrolling interests(154)(127)(127)
Total comprehensive income attributable to Tompkins Financial Corporation$89,078 $101,319 $70,374 
 
See notes to consolidated financial statements.
 
72

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31,
(In thousands)202020192018
OPERATING ACTIVITIES
Net income attributable to Tompkins Financial Corporation$77,588 $81,718 $82,308 
Adjustments to reconcile net income attributable to Tompkins Financial Corporation, to net cash provided by operating activities:
Provision for credit loss expense16,151 1,366 3,942 
Depreciation and amortization of premises, equipment, and software10,192 10,044 9,554 
Accretion related to purchase accounting(1,066)(1,448)(1,948)
Amortization of intangible assets1,484 1,673 1,771 
Earnings from corporate owned life insurance, net(2,188)(2,164)(1,818)
Net amortization on securities10,737 7,435 8,816 
Deferred income tax (benefit) expense(6,284)3,073 2,354 
Net (gain) loss on sale of securities transactions(443)(645)466 
Loss on redemption of trust preferred debentures139 
Net gain on sale of loans(2,054)(227)(458)
Proceeds from sale of loans53,726 17,122 28,195 
Loans originated for sale(55,232)(15,007)(30,151)
Net gain on sale of bank premises and equipment(3)(98)(2,946)
Net excess tax benefit from stock based compensation118 944 680 
Stock-based compensation expense4,733 4,235 3,477 
(Increase) decrease in accrued interest receivable(12,732)1,629 (800)
(Decrease) increase in accrued interest payable(759)78 355 
Other, net7,280 (8,113)3,468 
Net Cash Provided by Operating Activities101,387 101,615 107,265 
INVESTING ACTIVITIES
Proceeds from maturities, calls and principal paydowns of available-for-sale securities545,617 302,978 151,053 
Proceeds from sales of available-for-sale securities42,333 232,598 70,652 
Proceeds from maturities, calls and principal paydowns of held-to-maturity securities0 9,588 6,729 
Purchases of available-for-sale securities(904,913)(333,151)(185,467)
Purchases of held-to-maturity securities0 (7,589)(8,492)
Net increase in loans and leases(340,475)(89,582)(161,760)
Proceeds from sales/redemption of Federal Home Loan Bank stock42,706 126,755 113,478 
Purchases of Federal Home Loan Bank and other stock(25,393)(108,188)(115,242)
Proceeds from sale of bank premises and equipment22 448 3,317 
Purchases of bank premises, equipment and software(4,551)(6,014)(18,084)
Redemption of corporate owned life insurance446 1,370 
Net cash used in acquisitions0 (436)
Other, net489 5,209 216 
Net Cash (Used in) Provided by Investing Activities(643,719)133,986 (143,600)
FINANCING ACTIVITIES
Net increase in demand, money market, and savings deposits1,153,611 286,243 162,107 
Net increase (decrease) in time deposits71,809 38,591 (109,732)
Net increase (decrease) in securities sold under agreements to repurchase and Federal funds purchased5,499 (21,496)6,665 
Increase in other borrowings74,583 526,853 524,492 
Redemption of trust preferred debentures(4,124)
Repayment of other borrowings(467,683)(944,828)(520,159)
Net shares issued related to restricted stock awards(1,682)(1,875)(1,403)
Cash dividends(31,359)(30,637)(29,634)
Repurchase of common stock(9,414)(29,867)(2,448)
Shares issued for dividend reinvestment plan1,825 
Shares issued for employee stock ownership plan0 3,073 
Net proceeds from exercise of stock options(253)(992)(540)
Net Cash Provided by (Used in) Financing Activities792,812 (178,008)32,421 
Net Increase (Decrease) Cash and Cash Equivalents250,480 57,593 (3,914)
Cash and cash equivalents at beginning of year137,982 80,389 84,303 
Total Cash & Cash Equivalents at End of Year$388,462 $137,982 $80,389 
73

TOMPKINS FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
 
Supplemental Cash Flow Information
Year ended December 31,
(In thousands)202020192018
Cash paid during the year for - Interest$30,340 $51,545 $40,660 
Cash paid, net of refunds, during the year for - Income taxes22,893 16,727 16,949 
Non-cash investing and financing activities:
Transfer of loans to other real estate owned192 803 518 
Transfer of securities from held-to-maturity to available-for-sale0 138,206 
Initial recognition of operating lease right-of-use assets0 35,783 
Initial recognition of operating lease liabilities0 38,119 
Right-of-use assets obtained in exchange for new lease liabilities1,256 585 
 
See notes to consolidated financial statements.
 

74


 TOMPKINS FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands except share and per share data)
Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTreasury StockNon- controlling InterestsTotal
Balances at December 31, 2017$1,530 $364,031 $265,007 $(51,296)$(4,492)$1,422 $576,202 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation82,308 127 82,435 
Other comprehensive loss(11,934)(11,934)
Total Comprehensive Income70,501 
Cash dividends ($1.94 per share)(29,634)(29,634)
Net exercise of stock options (10,786 shares)(541)(540)
Common stock repurchased and returned to unissued status (32,483 shares)(3)(2,445)(2,448)
Stock-based compensation expense3,477 3,477 
Shares issued for employee stock ownership plan (38,883 shares)3,069 3,073 
Directors deferred compensation plan (1,422 shares)0410 (410)
Restricted stock activity (29,577 shares)(1,406)(1,403)
Adoption of Accounting Guidance ASU 2016-01(65)65 
Adoption of Accounting Guidance ASU 2014-091,780 1,780 
Partial repurchase of noncontrolling interest(10)(10)
Dividend to noncontrolling interests(127)(127)
Balances at December 31, 2018$1,535 $366,595 $319,396 $(63,165)$(4,902)$1,412 $620,871 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation81,718 127 81,845 
Other comprehensive income19,601 19,601 
Total Comprehensive Income101,446 
Cash dividends ($2.02 per share)(30,637)(30,637)
Net exercise of stock options (18,053 shares)(994)(992)
Common stock repurchased and returned to unissued status (376,021 shares)(38)(29,829)(29,867)
Stock-based compensation expense4,235 4,235 
Directors deferred compensation plan (1,729 shares)377 (377)
Restricted stock activity (24,180 shares)(1,877)(1,875)
Dividend to noncontrolling interests(127)(127)
Balances at December 31, 2019$1,501 $338,507 $370,477 $(43,564)$(5,279)$1,412 $663,054 





75

TOMPKINS FINANCIAL CORPORATION
 CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (continued)
(In thousands except share and per share data)Common StockAdditional Paid-in CapitalRetained EarningsAccumulated Other Comprehensive (Loss) IncomeTreasury StockNon- controlling InterestsTotal
Balances at December 31, 2019$1,501 $338,507 $370,477 $(43,564)$(5,279)$1,412 $663,054 
Impact of adoption of ASU 2016-131,707 1,707 
Net income attributable to noncontrolling interests and Tompkins Financial Corporation77,588 154 77,742 
Other comprehensive income11,490 11,490 
Total Comprehensive Income89,232 
Cash dividends ($2.10 per share)(31,359)(31,359)
Net exercise of stock options (3,775 shares)(254)(253)
Common stock repurchased and returned to unissued status (127,690 shares)(13)(9,401)(9,414)
Stock-based compensation expense4,733 4,733 
Shares issued for dividend reinvestment plan (29,842 shares)1,822 1,825 
Directors deferred compensation plan (893 shares)0255 (255)
Restricted stock activity (43,963 shares)(1,686)(1,682)
Partial repurchase of noncontrolling interest(6)(6)
Dividend to noncontrolling interests(148)(148)
Balances at December 31, 2020$1,496 $333,976 $418,413 $(32,074)$(5,534)$1,412 $717,689 

See notes to consolidated financial statements.
76


Note 1 Summary of Significant Accounting Policies
 
Basis Of Presentation
Tompkins Financial Corporation (“Tompkins” or “the Company”) is a registered Financial Holding Company with the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956, as amended, organized under the laws of New York State, and is the parent company of Tompkins Trust Company (the “Trust Company”), The Bank of Castile, Mahopac Bank, VIST Bank, and Tompkins Insurance Agencies, Inc. (“Tompkins Insurance”). The Trust Company provides a full array of trust and investment services under the Tompkins Financial Advisors brand. Unless the context otherwise requires, the term “Company” refers to Tompkins Financial Corporation and its subsidiaries.
 
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity (including comprehensive income or loss) of the Company and all entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions are eliminated in consolidation.
 
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under U.S. generally accepted accounting principles. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE. Two of the Company’s wholly owned subsidiaries, Leesport Capital Trust II and Madison Statutory Trust I, are VIE’s for which the Company is not the primary beneficiary. Accordingly, the accounts of these entities are not included in the Company’s consolidated financial statements.
 
The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclose contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the allowance for credit losses, valuation of goodwill and intangible assets, deferred income tax assets, and obligations related to employee benefits.
 
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ unaudited consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation.
 
The Company has evaluated subsequent events for potential recognition and/or disclosure and determined that no further disclosures were required.
 
Cash and Cash Equivalents
Cash and cash equivalents in the Consolidated Statements of Cash Flows include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, Federal funds sold, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents. Historically, each bank subsidiary is required to maintain reserve balances by the Federal Reserve Bank. However, due to the COVID-19 pandemic, the Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26, 2020. The Federal Reserve Board has stated that it has no plans to re-impose reserve requirements, but that it may adjust reserve requirements ratios in the future if conditions warrant. At December 31, 2020 and December 31, 2019, the reserve requirements for the Company’s banking subsidiaries totaled $0 and $9.5 million, respectively.

Securities
Management determines the appropriate classification of debt and equity securities at the time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity securities are classified as either available-for-sale or trading. Available-for-sale securities are stated at fair value with the unrealized gains and losses, net
77

of tax, excluded from earnings and reported as a separate component of accumulated comprehensive income or loss, in shareholders’ equity. Trading securities are stated at fair value, with unrealized gains or losses included in earnings.

Beginning January 1, 2018, upon adoption of ASU 2016-01, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in income. For periods prior to January 1, 2018, equity securities were classified as available-for-sale and stated at fair value with unrealized gains and losses reported as a separate component of accumulated other comprehensive income, net of tax. Securities with limited marketability or restricted equity securities, such as Federal Home Loan Bank stock and Federal Reserve Bank stock, are carried at cost, less any impairment, if any. At adoption of ASU 2016-01, the Company recognized a cumulative-effect adjustment of $65,000 for the after-tax impact of the unrealized loss on equity securities.

Premiums and discounts are amortized or accreted over the expected life or call date of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on the sale of securities are included in net gain (loss) on securities transactions. The cost of securities sold is based on the specific identification method.

Beginning January 1, 2020, for available-for-sale debt securities in an unrealized loss position, at least quarterly, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit-related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses (“ACL”) on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. However, if the Company intends to sell an impaired available- for-sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation. Changes in the allowance for credit losses are recorded as provision (credit) for credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.

Prior to January 1, 2020, we regularly evaluated our debt securities to determine whether there have been any events or economic circumstances indicating that a security with an unrealized loss has suffered other-than-temporary impairment. A debt security is considered impaired if the fair value is less than its amortized cost basis at the reporting date. If impaired, the Company then assesses whether the unrealized loss is other-than-temporary. An unrealized loss on a debt security is generally deemed to be other-than-temporary and a credit loss is deemed to exist if the present value, discounted at the security’s effective rate, of the expected future cash flows is less than the amortized cost basis of the debt security. As a result, the credit loss component of an other-than-temporary impairment write-down for debt securities is recorded in earnings while the remaining portion of the impairment loss is recognized, net of tax, in other comprehensive income provided that the Company does not intend to sell the underlying debt security and it is more-likely-than not that the Company would not have to sell the debt security prior to recovery of the unrealized loss, which may be to maturity. If the Company intended to sell any securities with an unrealized loss or it is more-likely-than not that the Company would be required to sell the investment securities, before recovery of their amortized cost basis, then the entire unrealized loss would be recorded in earnings.

Accrued interest receivable on securities is excluded from the estimate of credit losses.

Loans and Leases
Loans are reported at their principal outstanding balance, net of deferred loan origination fees and costs, and unearned income. The Company has the ability and intent to hold its loans for the foreseeable future, except for certain residential real estate loans held-for-sale. The Company provides motor vehicle and equipment financing to its customers through direct financing leases. These leases are carried at the aggregate of lease payments receivable, plus estimated residual values, less unearned income. Unearned income on direct financing leases is amortized over the lease terms, resulting in a level rate of return.
 
Residential real estate loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Fair value is determined on the basis of the rates quoted in the secondary market. Net unrealized losses attributable to changes in market interest rates are recognized through a valuation allowance by charges to income. Loans are generally sold on a non-recourse basis with servicing retained. Any gain or loss on the sale of loans is recognized at the time of sale as the difference between the recorded basis in the loan and the net proceeds from the sale. The Company may use commitments at the time loans are originated or identified for sale to mitigate interest rate risk. The commitments to sell loans and the commitments to originate loans held-for-sale at a set interest rate, if originated, are considered derivatives under ASC Topic 815. The impact of the estimated fair value adjustment was not significant to the consolidated financial statements.
78

 Interest income on loans is accrued and credited to income based upon the principal amount outstanding. Loan origination fees and costs are deferred and recognized over the life of the loan as an adjustment to yield. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans and leases, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. Loans that are past due less than 90 days may also be classified as nonaccrual if repayment in full of principal or interest is in doubt.
 
Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable time period, and there is a sustained period (generally six consecutive months) of repayment performance by the borrower in accordance with the contractual terms of the loan agreement. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan.
 
In general, the principal balance of a loan is charged off in full or in part when management concludes, based on the available facts and circumstances, that collection of principal in full is not probable. For commercial and commercial real estate loans, this conclusion is generally based upon a review of the borrower’s financial condition and cash flow, payment history, economic conditions, and the conditions in the various markets in which the collateral, if any, may be liquidated. In general, consumer loans are charged-off in accordance with regulatory guidelines which provide that such loans be charged-off when the Company becomes aware of the loss, such as from a triggering event that may include new information about a borrower’s intent/ability to repay the loan, bankruptcy, fraud or death, among other things, but in no case will the charge-off exceed specified delinquency timeframes. Such delinquency timeframes state that closed-end retail loans (loans with pre-defined maturity dates, such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (loans that roll-over at the end of each term, such as home equity lines of credit) that become past due 180 cumulative days should be classified as a loss and charged-off. For residential real estate loans, charge-off decisions are based upon past due status, current assessment of collateral value, and general market conditions in the areas where the properties are located.
 
Acquired Loans
Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while other purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.

Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired (“PCI”) loans. PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’ assessment of risk inherent in the cash flow estimates. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the “accretable yield,” was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceeded the undiscounted cash flows expected at acquisition, or the “non-accretable difference,” were not recognized on the Statement of Condition and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows were recognized as impairment. Valuation allowances on PCI loans reflected only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately were not to be received).

Commencing January 1, 2020, in connection with the Company's adoption of ASU 2016-13, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated (“PCD”) loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is
79

no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.

The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
 
Allowance for Credit Losses – Loans
The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The Company recorded a net increase to retained earnings of $1.7 million, upon adoption. The transition adjustment includes a decrease in the allowance for credit losses on loans of $2.5 million, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $0.4 million, net of the corresponding decrease in deferred tax assets of $0.4 million. Results for the periods beginning after January 1, 2020 are presented under Accounting Standards Codification (“ASC”) 326 and follows the current expected credit loss methodology. Prior periods continue to be reported in accordance with previously applicable U.S. GAAP, which followed the incurred credit losses methodology. The following policies noted are under the current expected credit losses methodology. A summary of the Company's previous policies under the incurred credit losses methodology follows at the end of this section. Under the current expected credit loss model, the ACL on loans is a valuation allowance estimated at the balance sheet date in accordance with U.S. GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.

The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis.

Expected credit losses are reflected in the ACL through a charge to the provision for credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. In general, the principal balance of a loan is charged off in full or in part when management concludes, based on the available facts and circumstances, that collection of principal in full is not probable. In addition, the Company has reserves for expected recoveries where the Company reviews the prior four quarter charge offs and applies a recovery rate based on the Company’s historical experience. Subsequent recoveries, if any, are credited to the ACL when received.

The Company measures expected credit losses of financial assets at the loan level by segment, by pooling loans when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow (“DCF”) method to estimate the expected credit losses. Allowance on loans that do not share risk characteristics are evaluated on an individual basis. The Company assigns a credit risk rating to all commercial and commercial real estate loans. The Company reviews commercial and commercial real estate loans rated Substandard or worse, on nonaccrual, and greater than $250,000 for loss potential and when deemed appropriate, and assigns an allowance based on an individual evaluation.

The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to average historical loss information on a straight line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.

The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses: commercial, commercial real estate, residential, home equity, consumer and leases. This segmentation was selected based on the differences in the risk profile of each of these categories and aligns well with regulatory reporting categories. This segmentation separates borrower type, collateral type and the nature of the loan. The differences in risk profiles of these segments enable the ACL to be more precise in its allocation due to the inherent risk in these specific portfolios.

Discounted Cash Flow Method
The Company uses the DCF method to estimate expected credit losses for the commercial, commercial real estate, residential, home equity, and consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for exposure at default using estimated prepayment speeds, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, and time to recovery are based on historical internal data.
80

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

For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from an independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics. The model considers a base case forecast and two alternative forecasts and assigns weightings to these three scenarios based on current conditions and expectations for future conditions.

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

The model also considers the need to qualitatively adjust expected loss estimates for information not already captured in the loss estimation process. These qualitative factors include, but are not limited to, those suggested by the Interagency Policy Statement on Allowances for Credit Losses. These qualitative factor adjustments may increase or decrease the Company's estimate of expected credit losses. At December 31, 2020, the ACL model included increases in qualitative reserves for loans within the hospitality and other certain industries that may have an elevated level of risk due to the adverse economic impact of the COVID-19 pandemic, as well as loans that remain in the Company's payment deferral program implemented in response to the COVID-19 pandemic. The qualitative reserves were added to all portfolio segments with the majority in commercial real estate and then residential real estate.

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

Individually Evaluated Financial Assets
Loans that do not share common risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.

The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.

Under the incurred credit losses methodology utilized in the prior periods, the allowance for loans and leases was maintained at an amount to assure that an appropriate allowance was maintained. The methodology was comprised of four major components that management had deemed appropriate in evaluating the appropriateness of the allowance for loan and lease losses. The components included: impaired loans; criticized and classified credits; historical loss experience; and qualitative or subjective analysis. For impaired loans, an allowance was recognized if the fair value of the loan was less than the recorded investment in the loan (recorded investment in the loan is the principal balance plus any accrued interest, net of deferred loan fees or costs and unamortized premium or discount). For loans that were not impaired or reviewed individually, management assigned a reserve based upon historical loss experience over a designated look-back period. Management had evaluated a variety of look-back periods and had determined that an eight year look back period was appropriate to capture a full range of economic cycles. Management had also evaluated a variety of statistical methods in analyzing loss history, including averages, weighted averages and loss emergence periods and had determined that by applying a loss emergence period analysis to historical losses over a full economic cycle had resulted in a reasonable estimate of losses inherent in the loan portfolio. The model also included an analysis of a variety of subjective factors to support the reserve estimate. These subjective factors included allowance allocations for risks that may not otherwise be fully recognized in other components of the model. Among the subjective factors that were routinely considered as part of this analysis were: growth trends in the portfolio, changes in management and/or polices related to lending activities, trends in classified or nonaccrual loans, concentrations of credit, local and national economic trends, and industry trends.

For acquired credit impaired loans accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, (“ASC Topic 310-30”), the Company’s allowance for loan and lease losses was estimated based upon our expected cash flows for these loans. To the extent that we experienced a deterioration in borrower credit quality
81

resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

For acquired non-credit impaired loans accounted for under FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, (“ASC Topic 310-20”), the Company’s allowance for loan and lease losses was maintained through provisions for loan losses based upon an evaluation process that was similar to our evaluation process used for originated loans. This evaluation, which included a review of loans on which full collectability may not be reasonably assured, it considered, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which included the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

Troubled Debt Restructuring
A loan that has been modified or renewed is considered a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulty and 2) concessions are made for the borrower's benefit that would not otherwise be considered for a borrower or transaction with similar credit risk characteristics. The Company’s ACL reflects all effects of a TDR when an individual asset is specifically identified as a reasonably expected TDR. The Company has determined that a TDR is reasonably expected no later than the point when the lender concludes that modification is the best course of action and it is at least reasonably possible that the troubled borrower will accept some form of concession from the lender to avoid a default. Reasonably expected TDRs and executed non-performing TDRs are evaluated individually to determine the required ACL. TDRs performing in accordance with their modified contractual terms for a reasonable period of time may be included in the Company’s existing pools based on the underlying risk characteristics of the loan to measure the ACL. The provisions of the CARES Act and interagency guidance issued by Federal banking regulators provided guidance and clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. Under the CARES Act, a modification deemed to be COVID-19-related is not considered to be a TDR if the loan was not more than 30 days past due as of December 31, 2019 and the deferral was executed between March 1, 2020 and the earlier of 60 days after the date of termination of the COVID-19 national emergency or December 31, 2020. The Consolidated Appropriations Act, 2021 extended the termination of these provisions to the earlier of 60 days after the COVID-19 national emergency date or January 1, 2022. The banking regulators issued similar guidance, which clarified that a COVID-19-related modification should not be considered a TDR if the borrower was current on payments at the time the underlying loan modification program was implemented and if the modification was considered to be short-term. In accordance with the CARES Act and the interagency guidance, the Company does not designate eligible loan modifications and deferrals resulting from the impacts of COVID-19 as TDRs. The Company evaluates modifications for eligibility under the CARES Act, then the interagency guidance if they do not qualify for the CARES Act relief. Modifications that are not eligible for either program continue to follow the Corporation’s established TDR policy. Additionally, loans with deferrals granted due to COVID-19 are not generally reported as past due or nonaccrual.

Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, unused lines of credit and commercial letters of credit, issued to meet customer financing needs. 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 the provision for credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company’s Consolidated Statements of Income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using similar methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s Statements of Condition.

Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less allowances for depreciation. The provision for depreciation for financial reporting purposes is computed generally by the straight-line method at rates sufficient to write-off the cost of such assets over their estimated useful lives. Buildings are amortized over a period of 10-39 years, and furniture, fixtures, and equipment are amortized over a period of 2-20 years. Leasehold improvements are generally depreciated over the lesser of the lease term or the estimated lives of the improvements. Maintenance and repairs are charged to expense as incurred. Gains or losses on disposition are reflected in earnings.
 
82

Other Real Estate Owned
Other real estate owned consists of properties formerly pledged as collateral to loans, which have been acquired by the Company through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Upon transfer of a loan to foreclosure status, an appraisal is generally obtained and any excess of the loan balance over the fair value, less estimated costs to sell, is charged against the allowance for credit losses. Expenses and subsequent adjustments to the fair value are treated as other operating expense.
 
Goodwill
Goodwill represents the excess of purchase price over the fair value of assets acquired in a transaction using purchase accounting. Goodwill has an indefinite useful life and is not amortized, but is tested for impairment. Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. On January 1, 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment", which eliminates the entities requirement to compute the implied fair value. The Company tests goodwill annually as of December 31st. The Company has the option to perform a qualitative assessment of goodwill, which considers company-specific and economic characteristics that might impact its carrying value. If based on this qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then a quantitative test (Step 1) is performed, which compares the fair value of the reporting unit to the carrying amount of the reporting unit in order to identify potential impairment. If the estimated fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting units.
 
Other Intangible Assets
Other intangible assets include core deposit intangibles, customer related intangibles, covenants not to compete, and mortgage servicing rights. Core deposit intangibles represent a premium paid to acquire a base of stable, low cost deposits in the acquisition of a bank, or a bank branch, using purchase accounting. The amortization period for core deposit intangible ranges from 5 to 10 years, using an accelerated method. The covenants not to compete are amortized on a straight-line basis over 3 to 6 years, while customer related intangibles are amortized on an accelerated basis over a range of 6 to 15 years. The amortization period is monitored to determine if circumstances require such periods to be revised. The Company periodically reviews its intangible assets for changes in circumstances that may indicate the carrying amount of the asset is impaired. The Company tests its intangible assets for impairment on an annual basis or more frequently if conditions indicate that an impairment loss has more likely than not been incurred.
 
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes are reviewed quarterly and reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.

Tax Credit Investments
The Company accounts for its investments in qualified affordable housing projects using the proportional amortization method. Under that method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. As of December 31, 2020 and 2019, the Company's remaining investment in qualified affordable housing projects, net of amortization totaled $180,000 and $485,000, respectively.
 
83

Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase (repurchase agreements) are agreements in which the Company transfers the underlying securities to a third-party custodian’s account that explicitly recognizes the Company’s interest in the securities. The agreements are accounted for as secured financing transactions provided the Company maintains effective control over the transferred securities and meets other criteria as specified in FASB ASC Topic 860, Transfers and Servicing (“ASC Topic 860”). The Company’s agreements are accounted for as secured financings; accordingly, the transaction proceeds are reflected as liabilities and the securities underlying the agreements continue to be carried in the Company’s securities portfolio.

Treasury Stock
The cost of treasury stock is shown on the Consolidated Statements of Condition as a separate component of shareholders’ equity, and is a reduction to total shareholders’ equity. Shares are released from treasury at fair value, identified on an average cost basis.
 
Trust and Investment Services
Assets held in fiduciary or agency capacities for customers are not included in the accompanying Consolidated Statements of Condition, since such items are not assets of the Company. Fees associated with providing trust and investment services are included in noninterest income. Additional information on trust and investment fees is presented in Note 14 - "Revenue Recognition."
 
Earnings Per Share
Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year, exclusive of shares represented by the unvested portion of restricted stock and restricted stock units. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year plus the dilutive effect of the unvested portion of restricted stock and restricted stock units and stock issuable upon conversion of common stock equivalents (primarily stock options) or certain other contingencies. The Company uses authoritative accounting guidance under ASC Topic 260, Earnings Per Share, which provides that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company issues stock-based compensation awards that included restricted stock awards that contain such rights.
 
Segment Reporting
The Company manages its operations through 3 reportable business segments in accordance with the standards set forth in FASB ASC Topic 280, “Segment Reporting”. The 3 segments are: (i) banking (“Banking”), (ii) insurance (“Tompkins Insurance Agencies, Inc.”) and (iii) wealth management (“Tompkins Financial Advisors”). The Company’s insurance services and wealth management services are managed separately from the Bank. Additional information on the segments is presented in Note 22- “Segment and Related Information.”
 
Comprehensive Income (Loss)
For the Company, comprehensive income (loss) represents net income plus the net change in unrealized gains or losses on available-for-sale debt securities for the period (net of taxes), and the actuarial gain or loss and amortization of unrealized amounts in the Company’s defined-benefit retirement and pension plan, supplemental employee retirement plan, and post-retirement life and healthcare benefit plan (net of taxes), and is presented in the Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Changes in Shareholders’ Equity. Accumulated other comprehensive income (loss) represents the net unrealized gains or losses on available-for-sale debt securities (net of tax) and unrecognized net actuarial gain or loss, unrecognized prior service costs, and unrecognized net initial obligation (net of tax) in the Company’s defined-benefit retirement and pension plan, supplemental employee retirement plan, and post-retirement life and healthcare benefit plan.
 
Pension and Other Employee Benefits
The Company maintains noncontributory defined-benefit and defined contribution plans, which cover substantially all employees of the Company. In addition, the Company also maintains supplemental employee retirement plans for certain executives and a post-retirement life and healthcare plan. These plans are discussed in detail in Note 11 “Employee Benefit Plans”. The Company incurs certain employment-related expenses associated with these plans. In order to measure the expense associated with these plans, various assumptions are made including the discount rate used to value certain liabilities, expected return on plan assets, anticipated mortality rates, and expected future healthcare costs. The assumptions are based on historical experience as well as current facts and circumstances. A third-party actuarial firm is used to assist management in measuring the expense and liability associated with the plans. The Company uses a December 31 measurement date for its plans. As of the
84

measurement date, plan assets are determined based on fair value, generally representing observable market prices. The projected benefit obligation is primarily determined based on the present value of projected benefit distributions at an assumed discount rate.
 
The expenses associated with these plans are charged to current operating expenses. The Company recognizes an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the Company’s consolidated statements of condition, and recognizes changes in the funded status of these plans in comprehensive income, net of applicable taxes, in the year in which the change occurred.

Fair Value Measurements
The Company accounts for the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures (“ASC Topic 820”), for financial assets and financial liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with U.S. GAAP, and expands disclosures about fair value measurements. See Note 19 “Fair Value Measurements”.
  
In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among others.

Revenue Recognition
Tompkins adopted Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606) as of January 1, 2018 using the modified retrospective method for all contracts. Results for reporting periods beginning January 1, 2018 are presented under ASC 606, while prior period amounts were not adjusted and continue to be reported in accordance with the Company’s historic accounting under Topic 605, Revenue Recognition. The Company recorded a net increase to beginning retained earnings of $1.8 million as of January 1, 2018 due to the cumulative impact of adopting ASC 606. The impact on beginning retained earnings was primarily driven by the recognition of $1.8 million of contingency income related to our insurance business segment. Under ASU 2014-09, effective January 1, 2018, the Company adopted new policies related to revenue recognition. In general, for revenue not associated with financial instruments, guarantees and lease contracts, the Company applies the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v) recognize revenue when a performance obligation is satisfied. Tompkins' contracts with customers are generally short term in nature, typically due within one year or less or cancellable by the Company or the Company's customer upon a short notice period. Performance obligations for the Company's customer contracts are generally satisfied at a single point in time, typically when the transaction is complete, or over time. For performance obligations satisfied over time, Tompkins primarily uses the output method, directly measuring the value of the products/services transferred to the customer, to determine when performance obligations have been satisfied. The Company typically receives payment from customers and recognizes revenue concurrent with the satisfaction of the Company's performance obligations. In most cases, this occurs within a single financial reporting period. For payments received in advance of the satisfaction of performance obligations, revenue recognition is deferred until such time as the performance obligations have been satisfied. In cases where the Company has not received payment despite satisfaction of the Company's performance obligations, the Company accrues an estimate of the amount due in the period the Company's performance obligations have been satisfied. For contracts with variable components, only amounts for which collection is probable are accrued. The Company generally acts in a principal capacity, on the Company's own behalf, in most of the Company's contracts with customers. In such transactions, Tompkins recognizes revenue and the related costs to provide the services on a gross basis in the Company's financial statements. In some cases, Tompkins acts in an agent capacity, deriving revenue through assisting other entities in transactions with the Company's customers. In such transactions, Tompkins recognizes revenue and the related costs to provide the services on a net basis in the Company's financial statements. These transactions recognized on a net basis primarily relate to insurance and brokerage commissions and fees derived from the Company's customers' use of various interchange and ATM/debit card networks. Refer to Note 14 "Revenue Recognition" for additional disclosures required by ASC 606.

85

Note 2 Securities 
 
Available-for-Sale Securities
The following tables summarize available-for-sale securities held by the Company at December 31, 2020 and 2019:
Available-for-Sale Securities
December 31, 2020Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
(In thousands)
Obligations of U.S. Government sponsored entities$599,652 $9,820 $1,992 $607,480 
Obligations of U.S. states and political subdivisions126,642 3,144 40 129,746 
Mortgage-backed securities – residential, issued by
U.S. Government agencies179,538 3,216 646 182,108 
U.S. Government sponsored entities691,562 14,593 675 705,480 
U.S. corporate debt securities2,500 121 2,379 
Total available-for-sale securities$1,599,894 $30,773 $3,474 $1,627,193 
  
Available-for-Sale Securities
December 31, 2019Amortized CostGross Unrealized GainsGross Unrealized LossesFair Value
(In thousands)
U.S. Treasuries$1,840 $$$1,840 
Obligations of U.S. Government sponsored entities367,551 5,021 84 372,488 
Obligations of U.S. states and political subdivisions96,668 1,178 61 97,785 
Mortgage-backed securities – residential, issued by
U.S. Government agencies164,643 1,327 1,519 164,451 
U.S. Government sponsored entities660,037 2,940 3,387 659,590 
U.S. corporate debt securities2,500 67 2,433 
Total available-for-sale securities$1,293,239 $10,466 $5,118 $1,298,587 
  
Held-to-Maturity Securities 

The Company early adopted ASU 2019-04 on November 30, 2019. Since the Company had already adopted ASUs 2016-01 and 2017-12, the related amendments were effective as of November 30, 2019. As part of the adoption, the Company reclassified $138.2 million aggregate amortized cost basis of debt securities held-to-maturity to debt securities available-for-sale.
The Company had 0 held-to-maturity securities at December 31, 2020.
 
The following table sets forth information with regard to sales transactions of securities available-for-sale:
Year ended December 31,
(In thousands)202020192018
Proceeds from sales$42,333 $232,598 $70,652 
Gross realized gains179 1,123 327 
Gross realized losses0 (595)(767)
Net gains (losses) on sales of available-for-sale securities$179 $528 $(440)
86

The Company's available-for-sale securities portfolio includes callable securities that may be called prior to maturity. In 2020, 2019, and 2018, the Company recognized gains of $251,000, $88,000 and $0 on securities that were called. The Company also recognized gains of $13,000 and $29,000 on equity securities for the years ended December 31, 2020 and 2019, respectively, reflecting the change in fair value. For the year ended December 31, 2018, the Company recognized losses of $26,000 on equity securities, reflecting the change in fair value.

The following table summarizes available-for-sale securities that had unrealized losses at December 31, 2020:
December 31, 2020
Available-for-Sale SecuritiesLess than 12 Months12 Months or LongerTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Obligations of U.S. Government sponsored entities$310,711 $1,992 $$$310,711 $1,992 
Obligations of U.S. states and political subdivisions8,868 40 8,868 40 
Mortgage-backed securities – residential, issued by
U.S. Government agencies10,560 396 1,819 250 12,379 646 
U.S. Government sponsored entities87,643 586 5,068 89 92,711 675 
U.S. corporate debt securities2,379 121 2,379 121 
Total available-for-sale securities$417,782 $3,014 $9,266 $460 $427,048 $3,474 
 
The following table summarizes available-for-sale securities that had unrealized losses at December 31, 2019: 
December 31, 2019
Available-for-Sale SecuritiesLess than 12 Months12 Months or LongerTotal
(In thousands)Fair ValueUnrealized LossesFair ValueUnrealized LossesFair ValueUnrealized Losses
Obligations of U.S. Government sponsored entities$18,654 $76 $3,479 $$22,133 $84 
Obligations of U.S. states and political subdivisions10,456 54 2,300 12,756 61 
Mortgage-backed securities – residential, issued by
U.S. Government agencies54,846 489 45,999 1,030 100,845 1,519 
U.S. Government sponsored entities157,801 752 233,999 2,635 391,800 3,387 
U.S. corporate debt securities2,433 67 2,433 67 
Total available-for-sale securities$241,757 $1,371 $288,210 $3,747 $529,967 $5,118 
 
The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association and Federal Home Loan Mortgage Corporation, and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit quality of the investment securities.
 
For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an ACL on the Statements 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.
 
However, if the Company intends to sell an impaired available for sale debt security, or more likely than not be required to sell the debt security before the recovery of the amortized cost basis, the entire impairment amount, including any previously
87

recognized ACL, must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL.

The Company did not recognize any net credit impairment charge to earnings on investment securities in 2020, 2019, or 2018.
 
The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date. 
December 31, 2020
(In thousands)Amortized CostFair Value
Available-for-sale securities:
Due in one year or less$54,484 $55,008 
Due after one year through five years379,044 388,132 
Due after five years through ten years228,572 229,107 
Due after ten years66,694 67,358 
Total728,794 739,605 
Mortgage-backed securities871,100 887,588 
Total available-for-sale debt securities$1,599,894 $1,627,193 
December 31, 2019
(In thousands)Amortized CostFair Value
Available-for-sale securities:
Due in one year or less$107,975 $108,089 
Due after one year through five years270,477 274,798 
Due after five years through ten years77,710 79,165 
Due after ten years12,397 12,494 
Total468,559 474,546 
Mortgage-backed securities824,680 824,041 
Total available-for-sale debt securities$1,293,239 $1,298,587 
 
Trading Securities 
The Company had no securities designated as trading during 2020 or 2019.

Pledged Securities 
The Company pledges securities as collateral for public deposits and other borrowings, and sells securities under agreements to repurchase. See “Note 8 - Securities Sold Under Agreements to Repurchase and Federal Funds Purchased” for further discussion. Securities carried of $1.2 billion and $1.0 billion, at December 31, 2020 and 2019, respectively, were either pledged or sold under agreements to repurchase.
 
Concentrations of Securities 
Except for U.S. government securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of shareholders’ equity at December 31, 2020.

Investment in Small Business Investment Companies 
The Company has equity investments in small business investment companies (“SBIC”) established for the purpose of providing financing to small businesses in market areas served by the Company. These investments totaled $1.5 million at both December 31, 2020 and 2019, and were included in other assets on the Company’s Consolidated Statements of Condition. These investments are accounted for either under the cost method or the equity method of accounting. As of December 31, 2020, the Company reviewed these investments and determined that there was 0 impairment.
 
88

Federal Home Loan Bank Stock 
The Company also holds non-marketable Federal Home Loan Bank New York (“FHLBNY”) stock, non-marketable Federal Home Loan Bank Pittsburgh (“FHLBPITT”) stock and non-marketable Atlantic Community Bankers Bank (“ACBB”) stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock, FHLBPITT stock and ACBB stock totaled $11.0 million, $5.2 million and $95,000 at December 31, 2020, respectively. These securities are carried at par, which is also cost. The FHLBNY and FHLBPITT continue to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY and FHLBPITT stock.
 
Note 3 Loans and Leases
 
Loans and Leases at December 31, 2020 and December 31, 2019 were as follows:
(In thousands)12/31/202012/31/2019
Commercial and industrial
Agriculture$94,489 $105,786 
Commercial and industrial other792,987 902,275 
PPP loans*291,252 
Subtotal commercial and industrial1,178,728 1,008,061 
Commercial real estate
Construction163,016 213,637 
Agriculture201,866 184,898 
Commercial real estate other2,204,310 2,045,030 
Subtotal commercial real estate2,569,192 2,443,565 
Residential real estate
Home equity200,827 219,245 
Mortgages1,235,160 1,158,592 
Subtotal residential real estate1,435,987 1,377,837 
Consumer and other
Indirect8,401 12,964 
Consumer and other61,399 61,446 
Subtotal consumer and other69,800 74,410 
Leases14,203 17,322 
Total loans and leases5,267,910 4,921,195 
Less: unearned income and deferred costs and fees(7,583)(3,645)
Total loans and leases, net of unearned income and deferred costs and fees$5,260,327 $4,917,550 
*Paycheck Protection Program ("PPP")
 
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing lending policies, underwriting standards or loan review procedures during 2020. 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. 
 
89

Residential real estate loans 
The Company’s policy is to underwrite residential real estate loans in accordance with secondary market guidelines in effect at the time of origination, including loan-to-value (“LTV”) and documentation requirements. LTVs exceeding 80% for fixed rate loans and 85% for adjustable rate loans require private mortgage insurance to reduce the exposure. The Company verifies applicants’ income, obtains credit reports and independent real estate appraisals in the underwriting process to ensure adequate collateral coverage and that loans are extended to individuals with good credit and income sufficient to repay the loan. In limited circumstances, the Company will make exceptions to secondary market underwriting standards to support community reinvestment activities.

The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate loans due to the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk. 

The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to Federal Home Loan Mortgage Corporation (“FHLMC”) or State of New York Mortgage Agency (“SONYMA”) without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales are subject to customary representations and warranties, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and warranties.
 
During 2020, 2019, and 2018, the Company sold residential mortgage loans totaling $51.7 million, $16.9 million, and $27.7 million, respectively, and realized net gains on these sales of $2,054,000, $227,000, and $458,000, respectively. These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2020, 2019, and 2018, the Company recorded mortgage-servicing assets of $388,000, $127,000, and $207,000, respectively.
 
Amortization of mortgage servicing assets amounted to $221,000 in 2020, $117,000 in 2019, and $69,000 in 2018. At December 31, 2020 and 2019, the Company serviced residential mortgage loans aggregating $140.9 million and $120.3 million, including loans securitized and held as available-for-sale securities. Mortgage servicing rights, at an amortized cost basis, totaled $981,000 at December 31, 2020 and $815,000 at December 31, 2019. These mortgage servicing rights were evaluated for impairment at year-end 2020 and 2019 and 0 impairment was recognized. Loans held for sale, which are included in residential real estate, totaled $4,367,000 and $807,000 at December 31, 2020 and 2019, respectively.
 
As members of the FHLB, the Company’s subsidiary banks may use unencumbered mortgage related assets to secure borrowings from the FHLB. At December 31, 2020 and 2019, the Company had $265.0 million and $415.0 million, respectively, of term advances from the FHLB that were secured by residential mortgage loans.
 
Commercial and industrial loans 
The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial and industrial loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or government guarantees. The Company’s policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial and industrial loans are generally secured by the assets being financed or other business assets such as accounts receivable or inventory. Many of the loans in the commercial portfolio have variable interest rates tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.
 
Commercial real estate 
The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial real estate loans are primarily made based on identified cash flows of the borrower with consideration given to underlying real estate collateral and personal or government guarantees. The Company’s policy establishes a maximum LTV based on the type of property and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial real estate loans may be fixed or variable rate loans with interest rates tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.
 
90

Agriculture loans
Agriculturally-related loans include loans to dairy farms, cash and vegetable crop farms and a variety of other livestock and crop producers. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment, or commodities/crops. The Company’s Commercial Loan Policy establishes a maximum LTV of 75% for real estate secured loans and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt, with limited adjustments to consider commodity market cycles. The policy also establishes maximum LTV ratios for non-real estate collateral, such as livestock, commodities/crops, equipment and accounts receivable. Agriculturally-related loans may be fixed or variable rate with interest tied to Prime Rate, FHLBNY borrowing rates, or U.S. Treasury indices.
 
Consumer and other loans
The consumer loan portfolio includes personal installment loans, direct and indirect automobile financing, and overdraft lines of credit. The majority of the consumer portfolio consists of indirect and direct automobile loans. Consumer loans are generally short-term and have fixed rates of interest that are set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets. The Company's Consumer Loan Underwriting Guidelines Policy establishes maximum debt to income ratios and includes guidelines for verification of applicants’ income and receipt of credit reports.
 
Leases 
Leases are primarily made to commercial customers and the origination criteria typically includes the value of the underlying assets being financed, the useful life of the assets being financed, and identified cash flows of the borrower. Most leases carry a fixed rate of interest that is set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets. 

Loan and Lease Customers 
The Company’s loan and lease customers are located primarily in the upstate New York communities served by its 3 subsidiary banks and in the Pennsylvania communities served by VIST Bank. The Trust Company operates 14 banking offices in the counties of Tompkins, Cayuga, Cortland, Onondaga and Schuyler, New York. The Bank of Castile operates 16 banking offices in the counties of Wyoming, Livingston, Genesee, Orleans and Monroe, New York. Mahopac Bank operates 14 banking offices in the counties of Putnam County, Dutchess County and Westchester, New York. VIST Bank operates 20 offices in the counties of Berks, Montgomery, Philadelphia, Delaware and Schuylkill, Pennsylvania. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. 

Loans to Related Parties
Directors and officers of the Company and its affiliated companies were customers of, and had other transactions with, the Company's banking subsidiaries in the ordinary course of business. Such loans and commitments were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company, and did not involve more than normal risk of collectability or present other unfavorable features.

Loan transactions with related parties are summarized as follows:
(In thousands)December 31, 2020December 31, 2019
Balance at beginning of year$48,389 $39,595 
Loans to new directors/executive officers5,886 
New loans and advancements3,022 19,393 
Loan payments(8,217)(10,599)
Balance at end of year$49,080 $48,389 

91

Nonaccrual Loans and Leases 
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest (generally when past due 90 or more days) or a judgment by management that the full repayment of principal and interest is unlikely. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When management determines that the collection of principal in full is improbable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs. 

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.  

The below table is an aging analysis of past due loans, segregated by class of loans as of December 31, 2020 and 2019.
12/31/2020
(In thousands)30-59 Days60-89 Days90 Days or MoreTotal Past DueCurrent LoansTotal Loans
Loans and Leases
Commercial and industrial
Agriculture$$18 $$18 $94,471 $94,489 
Commercial and industrial other44 71,516 1,567 791,420 792,987 
PPP loans*0291,252 291,252 
Subtotal commercial and industrial44251,5161,5851,177,1431,178,728
Commercial real estate
Construction0163,016 163,016 
Agriculture263 0263 201,603 201,866 
Commercial real estate other07,125 7,125 2,197,185 2,204,310 
Subtotal commercial real estate26307,1257,3882,561,8042,569,192
Residential real estate
Home equity713 2241,126 2,063 198,764 200,827 
Mortgages521 8794,210 5,610 1,229,550 1,235,160 
Subtotal residential real estate1,2341,1035,3367,6731,428,3141,435,987
Consumer and other
Indirect175 3591 301 8,100 8,401 
Consumer and other115 18232 365 61,034 61,399 
Subtotal consumer and other290 53323 666 69,134 69,800 
Leases014,203 14,203 
Total loans and leases1,831 1,18114,300 17,312 5,250,598 5,267,910 
Less: unearned income and deferred costs and fees0(7,583)(7,583)
Total loans and leases, net of unearned income and deferred costs and fees$1,831$1,181$14,300$17,312$5,243,015$5,260,327
 *Paycheck Protection Program ("PPP")
92

December 31, 2019
(In thousands)30-89 Days90 Days or MoreCurrent LoansTotal Loans90 days and accruingNonaccrual
Loans and Leases
Commercial and industrial
Agriculture$$65 $105,721 $105,786 $$
Commercial and industrial other413 2,081 899,781 902,275 2,335 
Subtotal commercial and industrial413 2,146 1,005,502 1,008,061 2,335 
Commercial real estate
Construction213,637 213,637 
Agriculture184,898 184,898 
Commercial real estate other1,140 10,780 2,033,110 2,045,030 542 10,789 
Subtotal commercial real estate1,140 10,780 2,431,645 2,443,565 542 10,789 
Residential real estate
Home equity348 727 218,170 219,245 55 2,796 
Mortgages1,344 3,985 1,153,263 1,158,592 195 8,086 
Subtotal residential real estate1,692 4,712 1,371,433 1,377,837 250 10,882 
Consumer and other
Indirect312 60 12,592 12,964 117 
Consumer and other167 66 61,213 61,446 158 
Subtotal consumer and other479 126 73,805 74,410 275 
Leases17,322 17,322 
Total loans and leases3,724 17,764 4,899,707 4,921,195 794 24,281 
Less: unearned income and deferred costs and fees(3,645)(3,645)
Total loans and leases, net of unearned income and deferred costs and fees$3,724 $17,764 $4,896,062 $4,917,550 $794 $24,281 
 
 
93

The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses. The below table presents nonaccrual loans and leases, segregated by class of loans, as of December 31, 2020.

(In thousands)Nonaccrual Loans and Leases with no Allowance for Credit LossesNonaccrual Loans and LeasesLoans and Leases Past Due Over 89 Days and Accruing
Loans and Leases
Commercial and industrial
Commercial and industrial other$803 $1,775 $
Subtotal commercial and industrial803 1,775 
Commercial real estate
Agriculture118 
Commercial real estate other23,080 23,509 
Subtotal commercial real estate23,080 23,627 
Residential real estate
Home equity767 2,965 
Mortgages1,365 10,180 
Subtotal residential real estate2,132 13,145 
Consumer and other
Indirect169 
Consumer and other260 
Subtotal consumer and other429 
Total loans and leases$26,018 $38,976 $0 

The difference between the interest income that would have been recorded if nonaccrual loans and leases had paid in accordance with their original terms and the interest income that was recorded, was $1.7 million for the year ended December 31, 2020, $1.2 million for year ended December 31, 2019, and $1.0 million for year ended December 31, 2018. The Company had 0 material commitments to make additional advances to borrowers with nonperforming loans.

Note 4 Allowance for Credit Losses
 
Management reviews the appropriateness of the ACL on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.

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

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

94

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

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

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

The Company adopted ASU 2016-13 as of January 1, 2020 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets will be accreted into interest income on a level-yield method over the life of the loans.

Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of December 31, 2020, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.

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

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

Changes in the allowance for credit losses for the years ended December 31, 2020, 2019 and 2018 are summarized as follows:
(In thousands)202020192018
Total allowance at beginning of year$39,892 $43,410 $39,771 
Impact of adopting ASU 2016-13(2,534)
Provisions for credit loss expense16,151 1,366 3,942 
Recoveries on loans and leases631 906 2,137 
Charge-offs on loans and leases(2,471)(5,790)(2,440)
Total allowance at end of year$51,669 $39,892 $43,410 
 
95

The following table details activity in the allowance for credit losses on loans for the years ended December 31, 2020 and 2019. As previously discussed, the Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. Results for the periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable U.S. GAAP. As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by $2.5 million. The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
 
December 31, 2020
(In thousands)Commercial
& Industrial
Commercial
Real Estate
Residential
Real Estate
Consumer
and Other
Finance
Leases
Total
Allowance for credit losses:
Beginning balance, prior to adoption of ASU 2016-13$10,541 $21,608 $6,381 $1,362 $$39,892 
Impact of adopting ASU 2016-13(2,008)(5,917)4,459 850 82 (2,534)
Charge-offs(2)(1,903)(84)(482)(2,471)
Recoveries131 58 194 248 631 
Provision (credit) for credit loss expense577 16,700 (693)(416)(17)16,151 
Ending Balance$9,239 $30,546 $10,257 $1,562 $65 $51,669 
 
December 31, 2019
(In thousands)Commercial
& Industrial
Commercial
Real Estate
Residential
Real Estate
Consumer
and Other
Finance
Leases
Total
Allowance for credit losses:
Beginning balance$11,272 $23,483 $7,345 $1,310 $$43,410 
Charge-offs(696)(4,015)(256)(823)(5,790)
Recoveries103 174 334 295 906 
Provision (credit) for credit loss expense(138)1,966 (1,042)580 1,366 
Ending Balance$10,541 $21,608 $6,381 $1,362 $0 $39,892 

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

(In thousands)Real EstateBusiness AssetsOtherTotalACL Allocation
December 31, 2020
Commercial and Industrial$103 $582 $110 $795 $122 
Commercial Real Estate24,277 1,418 25,695 186 
Residential Real Estate
Total$24,380 $2,000 $110 $26,490 $308 
  
96

At December 31, 2019, the allocation of the allowance for loan and lease losses summarized on the basis of the Company’s impairment methodology was as follows:
December 31, 2019
(In thousands)Commercial
& Industrial
Commercial
Real Estate
Residential
Real Estate
Consumer
and Other
Finance LeasesTotal
Allowance for originated loans and leases
Individually evaluated for impairment$245 $662 $$$$907 
Collectively evaluated for impairment10,296 20,895 6,360 1,356 38,907 
Ending balance$10,541 $21,557 $6,360 $1,356 $0 $39,814 
Allowance for acquired loans
Individually evaluated for impairment$$$$$$
Collectively evaluated for impairment51 21 78 
Ending balance$0 $51 $21 $6 $0 $78 
  
The recorded investment in loans and leases summarized on the basis of the Company’s impairment methodology as of December 31, 2019 was as follows:
December 31, 2019
(In thousands)Commercial
& Industrial
Commercial
Real Estate
Residential
Real Estate
Consumer 
and Other
Finance LeasesTotal
Originated loans and leases
Individually evaluated for impairment$2,110 $13,496 $3,779 $$$19,385 
Collectively evaluated for impairment966,875 2,283,152 1,340,687 73,625 17,322 4,681,661 
Total$968,985 $2,296,648 $1,344,466 $73,625 $17,322 $4,701,046 

December 31, 2019
(In thousands)Commercial
& Industrial
Commercial
Real Estate
Residential
Real Estate
Consumer 
and Other
Finance
Leases
Total
Acquired loans
Individually evaluated for impairment$$714 $2,114 $$$2,830 
Loans acquired with deteriorated credit quality173 5,674 3,302 9,149 
Collectively evaluated for impairment38,901 140,529 27,955 785 208,170 
Total$39,076 $146,917 $33,371 $785 $0 $220,149 
 
Prior to the adoption of ASC 326, a loan was considered impaired when, based on current information and events, it was probable that we would be unable to collect all amounts due according to the contractual terms of the loan agreement. Impaired loans consisted of non-homogenous nonaccrual loans, and all loans restructured in a troubled debt restructuring (TDR). Specific reserves on individually identified impaired loans that were not collateral dependent were measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that were collateral dependent, impairment was measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts were generally charged off. The majority of impaired loans were collateral dependent impaired loans that had limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans, and
97

previous charge-offs. Interest payments on impaired loans were typically applied to principal unless collectability of the principal amount was reasonably assured. In these cases, interest was recognized on a cash basis. There was 0 interest income recognized on impaired loans and leases for 2019 and 2018. 

Impaired loans at December 31, 2019 were as follows: 
December 31, 2019
(In thousands)Recorded InvestmentUnpaid Principal BalanceRelated Allowance
Originated loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other$1,865 $1,965 $
Commercial real estate
Commercial real estate other10,205 11,017 
Residential real estate
Home equity3,779 3,992 
Subtotal$15,849 $16,974 $
Originated loans and leases with related allowance
Commercial & industrial
Commercial and industrial other245 245 245 
Commercial real estate
Commercial real estate other3,291 3,291 662 
Subtotal$3,536 $3,536 $907 
Total$19,385 $20,510 $907 
 
December 31, 2019
(In thousands)Recorded InvestmentUnpaid Principal BalanceRelated Allowance
Acquired loans with no related allowance
Commercial & industrial
Commercial and industrial other$$$
Commercial real estate
Commercial real estate other714 714 
Residential real estate
Home equity2,114 2,217 
Total$2,830 $2,933 $0 
98

The average recorded investment and interest income recognized on impaired originated loans for the years ended December 31, 2019 and 2018 was as follows:
Year Ended December 31,
20192018
(In thousands)Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Originated loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other$1,830 $0 $1,979 $
Commercial real estate
Commercial real estate other7,552 0 5,165 
Residential real estate
Home equity3,943 0 3,983 
Subtotal$13,325 $0 $11,127 $
Originated loans and leases with related allowance
Commercial & industrial
Commercial and industrial other$132 $0 $1,374 $
Commercial real estate
Commercial real estate other1,391 0 1,357 
Subtotal$1,523 $0 $2,731 $
Total$14,848 $0 $13,858 $
 
The average recorded investment and interest income recognized on impaired acquired loans for the years ended December 31, 2019 and 2018 was as follows:
Year Ended December 31, 
20192018
(In thousands)Average Recorded InvestmentInterest Income RecognizedAverage Recorded InvestmentInterest Income Recognized
Acquired loans and leases with no related allowance
Commercial & industrial
Commercial and industrial other$21 $$50 $
Commercial real estate
Commercial real estate other822 999 
Residential real estate
Home equity2,503 2,945 
Subtotal$3,346 $$3,994 $
Acquired loans and leases with related allowance
Subtotal$$$$
Total$3,346 $$3,994 $
 
The average recorded investment in impaired loans was $18.2 million at December 31, 2019, and $17.9 million at December 31, 2018.
 
99

Loans are considered modified in a TDR when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDRs or impaired. These modifications primarily 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 and interest caught up over the remaining term of the loan or at maturity, among others.
 
The following tables present loans by class modified in 2020 and 2019 as troubled debt restructurings. Post-modification balances reflect paydowns and charge-offs at time of modification.
 
Troubled Debt Restructuring
December 31, 2020Year Ended
Defaulted TDRs2
(In thousands)Number of
Loans
Pre-
Modification
Outstanding
Recorded
Investment
Post-Modification Outstanding Recorded InvestmentNumber of
Loans
Post-
Modification
Outstanding
Recorded
Investment
Commer