Item 1A. Risk Factors
The Company's success depends on management's ability to identify and manage the risks inherent in its financial services business. These risks include credit risk, market risk, liquidity risk, operational risk, model risk, compliance and legal risk, and strategic and reputation risk. We list below the material risks we face. Any of these risks could result in a material adverse impact on the Company's business, operating results, financial condition, liquidity, and cash flow, or may cause the Company's results to vary materially from recent results, or from the results implied by any forward-looking statements made by the Company.
Risks Related to the Company’s Business
The Company is subject to increased business risk because the Company has a significant concentration of commercial real estate and commercial business loans, repayment of which is often dependent on the cash flows of the borrower.
The Company offers different types of commercial loans to a variety of businesses, and we believe commercial loans will continue to comprise a significant concentration of our loan portfolio in 2023 and beyond. Real estate lending is generally considered to be collateral-based lending with loan amounts based on predetermined loan-to-collateral values. As such, declines in real estate valuations in the Company’s market area would lower the value of the collateral securing these loans. Additionally, the Company has experienced, and expects to continue experiencing, increased competition in commercial real estate lending. This increased competition may inhibit the Company's ability to generate additional commercial real estate loans or maintain its current inventory of commercial real estate loans. The Company’s commercial business loans are made based primarily on the cash flow and creditworthiness of the borrower and secondarily on the underlying collateral provided by the borrower, with liquidation of the underlying real estate collateral being viewed as the primary source of repayment in the event of borrower default. The borrowers’ cash flow may be difficult to predict, and collateral securing these loans may fluctuate in value. Although commercial business loans are often collateralized by equipment, inventory, accounts receivable, or other business assets, the liquidation of collateral in the event of default is often an insufficient source of repayment. As of December 31, 2022, commercial and commercial real estate loans totaled $3.6 billion or 69.2% of total loans.
The Company’s agricultural loans are often dependent upon the health of the agricultural industry in the location of the borrower, and the ability of the borrower to repay may be affected by many factors outside of the borrower’s control.
As part of the Company’s commercial business lending activities, the Company originates agricultural loans, consisting of agricultural real estate loans and agricultural operating loans. As of December 31, 2022, $300.0 million or 5.7% of the Company’s total loan portfolio consisted of agriculturally-related loans, including $215.0 million in agricultural real estate loans and $85.1 million in agricultural operating loans. Payments on agricultural loans are dependent on the profitable operation or management of the related farm property. The success of the farm may be affected by many factors outside the control of the borrower, including adverse weather conditions that prevent the planting of a crop or limit crop yields (such as hail, drought and floods), loss of livestock due to disease or other factors, declines in market prices for agricultural products and the impact of governmental regulations and subsidies (including changes in price supports and environmental regulations). Many farms are dependent upon a limited number of key individuals whose injury or death may significantly affect the successful operation of
13
Table of Contents
the farm. If the cash flow from a farming operation is diminished, the borrower’s ability to repay the loan may be impaired. While agricultural operating loans are generally secured by a blanket lien on the farm’s operating assets, any repossessed collateral in respect of a defaulted loan may not provide an adequate source of repayment of the outstanding balance.
Additionally, the profitable operation or management of the related farm properties, and the value thereof, is impacted by changes in U.S. government trade policies. In 2020, 2021, and 2022, the U.S. government implemented tariffs on certain products, and certain countries or entities, such as Mexico, Canada, China and the European Union, have issued or continue to threaten retaliatory tariffs against products from the United States, including agricultural products. Tariffs, retaliatory tariffs or other trade restrictions on products and materials that farm properties related to our agriculturally-related loans import or export could cause the costs of such farm operations and management to increase, the price of products from such farm operations to increase, demand for such products to decrease and the margins on such products to decrease. Such potential adverse effects on related farm property operations and management could reduce the related farm properties’ revenues, financial results and ability to service debt, which, in turn, could adversely affect our financial condition and results of operations. In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate, our business, results of operations and financial condition could be materially and adversely impacted in the future.
Declines in asset values may result in impairment charges and may adversely affect the value of the Company’s results of operations, financial condition and cash flows.
A majority of the Company’s investment portfolio is comprised of securities which are collateralized by residential mortgages. These residential mortgage-backed securities include securities of U.S. government agencies, U.S. government-sponsored entities, and private-label collateralized mortgage obligations. The Company’s securities portfolio also includes obligations of U.S. government-sponsored entities, obligations of states and political subdivisions thereof, U.S. corporate debt securities and equity securities. A more detailed discussion of the investment portfolio, including types of securities held, the carrying and fair values, and contractual maturities, is provided in the Notes to Consolidated Financial Statements in Part II, Item 8 of this Report. Gains or losses on these instruments may have a direct impact on the results of operations, including higher or lower income and earnings, unless we adequately hedge our positions. The fair value of investments may be affected by factors other than the underlying performance of the issuer or composition of the obligations themselves, such as rating downgrades, adverse changes in the business climate, a lack of liquidity for resale of certain investment securities and changes in interest rates. For example, decreases in interest rates and increases in mortgage prepayment speeds, which are influenced by interest rates and other factors, could adversely impact the value of our securities collateralized by residential mortgages, causing a significant acceleration of purchase premium amortization on our mortgage portfolio because a decline in long-term interest rates shortens the expected lives of the securities. Conversely, increases in interest rates may result in a decrease in residential mortgage loan originations and mortgage prepayment speeds, directly impacting the value of these securities collateralized by residential mortgages. Management evaluates investment securities for expected credit losses impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings.
A decline in the value of our goodwill and other intangible assets could adversely affect our financial condition and results of operations.
As of December 31, 2022, the Company had $95.3 million of goodwill and other intangible assets. The Company is required to test its goodwill and intangible assets for impairment on a periodic basis. A significant decline in the Company’s expected future cash flows, a significant adverse change in business climate, slower growth rates or a significant and sustained decline in the price of the Company’s common stock, may necessitate our taking charges in the future related to the impairment of the Company’s goodwill and intangible assets. If we make an impairment determination in a future reporting period, the Company’s earnings and the book value of these intangible assets would be reduced by the amount of the impairment. Further, a goodwill impairment charge could significantly restrict the ability of our banking subsidiary to make dividend payments to us without prior regulatory approval, which could have a material adverse effect on our financial condition and results of operations.
The Company may be adversely affected by the soundness of other financial institutions.
Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. The Company has exposure to many different industries and counterparties, and routinely executes transactions with counterparties in the financial services industry. The most important counterparty for the Company, in terms of liquidity, is the Federal Home Loan Bank of New York ("FHLBNY"). The Company uses FHLBNY as its primary source of overnight funds and also has long-term
14
Table of Contents
advances and repurchase agreements with FHLBNY. The Company has placed sufficient collateral in the form of commercial and residential real estate loans at FHLBNY. In addition, the Company is required to hold stock in FHLBNY. The amount of borrowed funds and repurchase agreements with the FHLBNY, and the amount of FHLBNY stock held by the Company, at its most recent fiscal year-end are discussed in Part II, Item 8 of this Report on Form 10-K.
There are 11 branches of the FHLB, including New York. The FHLBNY severally liable along with the other FHLBs for the consolidated obligations issued on behalf of the FHLBs through the Office of Finance. Dividends on, redemption of, or repurchase of shares of the FHLBNY’s capital stock cannot occur unless the principal and interest due on all consolidated obligations have been paid in full. If another FHLB were to default on its obligation to pay principal or interest on any consolidated obligations, the Federal Home Loan Finance Agency (the "Finance Agency") may allocate the outstanding liability among one or more of the remaining Federal Home Loan Banks on a pro rata basis or on any other basis the Finance Agency may determine. As a result, the FHLBNY’s ability to pay dividends on, to redeem, or to repurchase shares of capital stock could be affected by the financial condition of one or more of the other Federal Home Loan Banks. Any such adverse effects on the FHLBNY could adversely affect our liquidity, the value of our investment in FHLBNY common stock, and could negatively impact our results of operations.
Systemic weakness in the FHLB could result in higher costs of FHLB borrowings, reduced value of FHLB stock, and increased demand for alternative sources of liquidity that are more expensive, such as brokered time deposits, the discount window at the Federal Reserve, or lines of credit with correspondent banks. Any of these scenarios could adversely affect our liquidity, the value of our investment in FHLB common stock and our financial condition.
The Company relies on cash dividends from its subsidiaries to fund its operations, and payment of those dividends could be discontinued at any time.
The Company is a financial holding company whose principal assets and sources of income are its wholly-owned subsidiaries. The Company is a separate and distinct legal entity from its subsidiaries, and therefore the Company relies primarily on dividends from its banking and other subsidiaries to meet its obligations and to provide funds for the payment of dividends to the Company’s shareholders, to the extent declared by the Company’s board of directors. Various federal and state laws and regulations limit the amount of dividends that a bank may pay to its parent company and impose regulatory capital and liquidity requirements on the Company and its banking subsidiary. Further, as a holding company, the Company’s right to participate in a distribution of assets upon the liquidation or reorganization of a subsidiary is subject to the prior claims of the subsidiary’s creditors (including, in the case of the Company’s banking subsidiary, the bank's depositors). If the Company were unable to receive dividends from its subsidiaries it would materially and adversely affect the Company’s liquidity and its ability to service its debt, pay its other obligations, or pay cash dividends on its common stock.
The Company’s business may be adversely affected by general economic conditions in local and national markets, the possibility of the economy’s return to recessionary conditions and the possibility of further turmoil or volatility in the financial markets.
General economic conditions impact the banking and financial services industry. The U.S. and global economies have experienced volatility in recent years and may continue to do so for the foreseeable future. There can be no assurance that economic conditions will not deteriorate. Unfavorable or uncertain economic conditions can be caused by many macro and micro factors, including declines in economic growth, business activity or investor or business confidence, limitations on the availability or increases in the cost of credit and capital, increases in inflation or interest rates, the timing and impact of changing governmental policies and other factors. The Company is particularly affected by U.S. domestic economic conditions, including U.S. interest rates, the unemployment rate, housing prices, the level of consumer confidence, changes in consumer spending, the number of personal bankruptcies and other factors. A decline in U.S. domestic business and economic conditions, without rapid recovery, could have adverse effects on our business, including the following:
•consumer and business confidence levels could be lowered and cause declines in credit usage, adverse changes in payment patterns, decreases in demand for loans or other financial products and services and decreases in deposits or investments in accounts with Company;
•the Company’s ability to assess the creditworthiness of its customers may be impaired if the models and approaches the Company uses to select, manage and underwrite its customers become less predictive of future behaviors;
•demand for and income received from the Company's fee-based services, including investment services and insurance commissions and fees, could decline, the cost to the Company to provide any or all products and services could increase, and the levels of assets under management could materially impact revenues from our trust and wealth management businesses; and
15
Table of Contents
•the credit quality or value of loans and other assets or collateral securing loans may decrease.
The Company's business is concentrated in and largely dependent upon the continued growth and welfare of the general geographic markets in which we operate.
The Company's operations are heavily concentrated in the New York State and, to a lesser extent, Pennsylvania and, as a result, the Company's financial condition, results of operations and cash flows are significantly impacted by changes in the economic conditions in those areas. Therefore, the Company’s financial performance generally, and in particular, the ability of borrowers to pay interest on and repay the principal of outstanding loans and the value of collateral securing these loans, is highly dependent upon the business environment in the markets where the Company operates, particularly New York State and Pennsylvania. The Company's success depends to a significant extent upon the business activity, population, income levels, deposits and real estate activity in these markets. Although the Company's clients’ business and financial interests may extend well beyond these markets, adverse economic conditions that affect these markets could disproportionately reduce the Company's growth rate, affect the ability of the Company's clients to repay their loans to the Company, affect the value of collateral underlying loans and generally affect the Company's financial condition and results of operations. Because of the Company's geographic concentration, we are less able than other regional or national financial institutions to diversify our credit risks across multiple markets. For additional information on the Company's market area, see Part I, Item 1, "Business" of this Report on Form 10-K.
The Company's insurance agency subsidiary’s commission revenues are based on premiums set by insurers and any decreases in these premium rates could adversely affect its operations and revenues.
The Company's insurance agency subsidiary, Tompkins Insurance, derives the bulk of its revenue from commissions paid by insurance underwriters on the sale of insurance products to clients. Tompkins Insurance does not determine the insurance premiums on which its commissions are based. Insurance premiums are cyclical in nature and may vary widely based on market conditions. As a result, insurance brokerage revenues and profitability can be volatile. Revenue from insurance commissions and fees could be negatively affected by fluctuations in insurance premiums and other factors beyond the Company’s control, including changes in laws and regulations impacting the healthcare and insurance markets. In addition, there have been and may continue to be various trends in the insurance industry toward alternative insurance markets including, among other things, increased use of self-insurance, captives, and risk retention groups. Even if Tompkins Insurance is able to participate in these activities, it is unlikely to realize revenues and profitability as favorable as those realized from our traditional brokerage activities. The Company cannot predict the timing or extent of future changes in premiums and thus commissions. As a result, the Company cannot predict the effect that future premium rates will have on its operations. Decreases in premium rates could adversely affect its operations and revenues.
The Company’s business and financial performance are impacted significantly by market interest rates and movements in those rates. The monetary, tax and other policies of governmental agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance over which the Company has no control and which the Company may not be able to anticipate adequately.
As a result of the high percentage of the Company’s assets and liabilities that are in the form of interest-bearing or interest-related instruments, changes in interest rates, in the shape of the yield curve or in spreads between different market interest rates, can have a material effect on the Company’s business and profitability and the value of the Company’s assets and liabilities. For example, changes in interest rates or interest rate spreads may:
•affect the difference between the interest that the Company earns on assets and the interest that the Company pays on liabilities, which impacts the Company's overall net interest income and profitability.
•adversely affect the ability of borrowers to meet obligations under variable or adjustable rate loans and other debt instruments, which in turn, affects the Company's loss rates on those assets.
•decrease the demand for interest rate-based products and services, including loans and deposits.
•affect prepayment rates on the Company's loans and securities, which could adversely affect the Company's earnings, financial condition and cash flow.
The monetary, tax and other policies of the Federal government and its agencies, including the Federal Reserve, have a significant impact on interest rates and overall financial market performance. These governmental policies can thus affect the activities and results of operations of banking organizations such as the Company. An important function of the Federal Reserve is to regulate the national supply of bank credit and certain interest rates. The actions of the Federal Reserve influence the rates of interest that the Company charges on loans and that the Company pays on borrowings and interest-bearing deposits
16
Table of Contents
and can also affect the value of the Company’s on-balance sheet and off-balance sheet financial instruments. Also, due to the impact on rates for short-term funding, the Federal Reserve’s policies influence, to a significant extent, the Company’s cost of such funding. The Company cannot predict the nature or timing of future changes in monetary, tax and other policies or the effect that they may have on the Company’s business activities, financial condition and results of operations.
For information about how the Company manages its interest rate risk, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" of this Report.
The Company's funding sources may prove insufficient to replace deposits and support future growth.
The Company must maintain sufficient cash flow and liquid assets to satisfy current and future financial obligations, including demand for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. As a part of our liquidity management, we use a number of funding sources in addition to core deposit growth and repayments and maturities of loans and investments. As we continue to grow, we are likely to become more dependent on these sources, which may include various short-term and long-term wholesale borrowings, including Federal funds purchased and securities sold under agreements to repurchase, brokered certificates of deposit, proceeds from the sale of loans, and borrowings from the FHLBNY and others. We also maintain available lines of credit with the FHLBNY that are secured by loans. Adverse operating results or changes in industry conditions could make it difficult or impossible for us to access these additional funding sources and could make our existing funds more volatile. Our financial flexibility could be materially constrained if we are unable to maintain access to funding or if adequate financing is not available to accommodate future growth at acceptable interest rates. If we are required to rely more heavily on more expensive funding sources to support future growth, our revenues may not increase proportionately to cover our costs. In that case, our operating margins and profitability would be adversely affected. Further, the volatility inherent in some of these funding sources, particularly including brokered deposits, may increase our exposure to liquidity risk. Any interruption in these sources of liquidity when needed could adversely affect our results of operations, financial condition, cash flow or regulatory capital levels. In addition, reduced liquidity could result from circumstances beyond our control, such as general market disruptions or operational problems that affect us or third parties. Management’s efforts to closely monitor our liquidity position for compliance with internal policies may not be successful or sufficient to deal with dramatic or unanticipated reductions in liquidity.
The Company is or may become involved in lawsuits, legal proceedings, information-gathering requests, and investigations by governmental agencies or other parties that may lead to adverse consequences.
The Company’s primary business of financial services involves substantial risk of legal liability. The Company and its subsidiaries are, from time to time, named or threatened to be named as defendants in various lawsuits arising from their respective business activities, including activities of companies they have acquired. In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by bank regulatory agencies, the SEC and law enforcement authorities. The results of such proceedings could lead to delays in or prohibition to acquire other companies, significant penalties, including monetary penalties, damages, adverse judgments, settlements, fines, injunctions, restrictions on the way in which the Company conducts its business, or reputational harm.
Although the Company establishes accruals for legal proceedings when information related to the loss contingencies represented by those matters indicates both that a loss is probable and that the amount of loss can be reasonably estimated, the Company does not have accruals for all legal proceedings where it faces a risk of loss. In addition, due to the inherent subjectivity of the assessments and unpredictability of the outcome of legal proceedings, amounts accrued may not represent the ultimate loss to the Company from the legal proceedings in question. Thus, the Company’s ultimate losses may be higher than the amounts accrued for legal loss contingencies, which could adversely affect the Company’s financial condition and results of operations.
Climate change could have a material negative impact on the Company and clients.
The Company’s business, as well as the operations and activities of our clients, could be negatively impacted by climate change. Climate change presents both immediate and long-term risks to the Company and its clients, and these risks are expected to increase over time. Climate change presents multi-faceted risks, including: operational risk from the physical effects of climate events on the Company and its clients’ facilities and other assets; credit risk from borrowers with significant exposure to climate risk; transition risks associated with the transition to a less carbon- dependent economy; and reputational risk from stakeholder concerns about our practices related to climate change, the Company’s carbon footprint, and the Company’s business relationships with clients who operate in carbon-intensive industries.
17
Table of Contents
Federal and state banking regulators and supervisory authorities, investors, and other stakeholders have increasingly viewed financial institutions as important in helping to address the risks related to climate change both directly and with respect to their clients, which may result in financial institutions coming under increased pressure regarding the disclosure and management of their climate risks and related lending and investment activities. Given that climate change could impose systemic risks upon the financial sector, either via disruptions in economic activity resulting from the physical impacts of climate change or changes in policies as the economy transitions to a less carbon-intensive environment, the Company may face regulatory risk of increasing focus on the Company’s resilience to climate-related risks, including in the context of stress testing for various climate stress scenarios. Ongoing legislative or regulatory uncertainties and changes regarding climate risk management and practices may result in higher regulatory, compliance, credit, and reputational risks and costs.
With the increased importance and focus on climate change, we are making efforts to enhance our governance of climate change-related risks and integrate climate considerations into our risk governance framework. Nonetheless, the risks associated with climate change are rapidly changing and evolving in an escalating fashion, making them difficult to assess due to limited data and other uncertainties. We could experience increased expenses resulting from strategic planning, litigation, and technology and market changes, and reputational harm as a result of negative public sentiment, regulatory scrutiny, and reduced investor and stakeholder confidence due to our response to climate change and our climate change strategy, which, in turn, could have a material negative impact on our business, results of operations, and financial condition.
The Company operates in a highly regulated environment and may be adversely impacted by current or future laws and regulations due to increased compliance costs, potential fines for noncompliance, and restrictions on our ability to offer products or buy or sell businesses.
The Company is subject to extensive state and federal laws and regulations, supervision and legislation that affect how it conducts its business. The majority of these laws and regulations are for the protection of consumers, depositors and the deposit insurance funds. The regulations influence such things as the Company’s lending practices, capital structure, investment practices, and dividend policy. The Dodd-Frank Act, which established the CFPB, and enacted other reforms, has had, and will continue to have, a significant effect on the entire financial services industry. Compliance with these regulations and other initiatives negatively impacts revenue and increases the cost of doing business on an ongoing basis. New regulatory requirements or changes to existing requirements could necessitate changes to the Company’s businesses, result in increased compliance costs and affect the profitability of such businesses. Refer to "Supervision and Regulation" in Part I, Item 1 - "Business" of this Report on Form 10‐K for additional information on material laws and regulations impacting the Company’s business.
Additionally, banking regulators are authorized to take supervisory actions that may restrict or limit a financial institution's activities. Regulatory restrictions on our activities could adversely affect our costs and revenues, and may impair our ability to execute our strategic plans. In addition, if our regulators identify a compliance failure, we may be assessed a fine, prohibited from completing a strategic acquisition or divestiture, or subject to other actions imposed by the regulatory authorities. The recent regulatory activity and increased scrutiny have resulted, and may continue to result, in increases in our costs of doing business, and could result in decreased revenues and net income, reduce our ability to effectively compete to attract and retain customers, or make it less attractive for us to continue providing certain products and services. Any future changes in federal or state law and regulations, as well as the interpretations and implementations, or modifications or repeals, of such laws and regulations, could have a material adverse effect on our business, financial condition or results of operations.
The Company could be subject to environmental risks and associated costs on real estate properties owned by the Company, real estate properties that collateralize the Company’s loans or real estate properties that the Company obtains title to.
The Company owns various properties used in the operation of its business. In addition, from time to time, the Company forecloses on properties or may be deemed to become involved in the management of its borrowers’ properties. The Company could be subject to environmental liabilities imposed by applicable federal and state laws with respect to any of these properties. For example, we may be held liable to a government entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to clean up hazardous or toxic substances, or chemical releases, at a property, or may be subject to common law claims by third parties for damages and costs resulting from environmental contamination emanating from the property. Additionally, a significant portion of our loan portfolio at December 31, 2022 was secured by real estate and, if the real estate securing our assets is subject to environmental liability, our collateral position may be substantially weakened. Any such environmental
18
Table of Contents
liabilities imposed on the Company could have a material adverse impact on the Company's financial condition or results of operations.
The Company may be exposed to regulatory sanctions or liability if we do not timely detect and report money laundering or other illegal activities.
We are required to comply with anti-money laundering and anti-terrorism laws. These laws and regulations require us, among things, to enact policies and procedures to confirm the identity of our customers, and to report suspicious transactions to regulatory agencies. These laws and regulations are complex and require costly, sophisticated monitoring systems and qualified personnel. The policies and procedures that we have adopted in order to detect and prevent such illegal transactions may not be successful in eliminating all instances of such transactions. To the extent we fail to fully comply with applicable laws and regulations, we face the possibility of fines or other penalties, such as restrictions on our business activities, and we may also suffer reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition. Refer to "Supervision and Regulation" in Part I, Item 1 - "Business" of this Report on Form 10‐K for additional information on anti-money laundering and anti-terrorism laws impacting the Company’s business.
We will be subject to heightened regulatory requirements if we exceed $10 billion in total consolidated assets.
Based on our historical growth rates and current size, it is possible that our total assets could exceed $10 billion dollars in the future. Our total consolidated assets on December 31, 2022 were $7.7 billion. The Dodd-Frank Act and its implementing regulations impose enhanced supervisory requirements on bank holding companies with more than $10 billion in total consolidated assets.
In addition to the additional regulatory requirements that we will become subject to upon crossing this asset threshold, federal financial regulators may require the Company to, or the Company may proactively, take actions to prepare for compliance with such increased regulations before we exceed $10 billion in total consolidated assets. We may, therefore, incur significant compliance costs in an effort to ensure compliance before we reach $10 billion in total consolidated assets. These additional compliance costs, if they occur, may adversely affect our business, results of operations and financial condition.
The Company may be adversely affected by fraud.
As a financial institution, the Company is inherently exposed to operational risk in the form of theft and other fraudulent activity by employees, customers and other third parties targeting the Company and/or the Company’s customers or data. Such activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Although the Company devotes substantial resources to maintaining effective policies and internal controls to identify and prevent such incidents, given the increasing sophistication of possible perpetrators, the Company may experience financial losses or reputational harm as a result of fraud. Fraudulent activity could have a material adverse effect on the Company’s business, financial condition and results of operations.
The Company's business requires the collection and retention of large volumes of sensitive data, which is subject to extensive regulation and oversight and exposes our business to additional risks.
In the Company's ordinary course of business, it collects and retains large volumes of customer data, including personally identifiable information in various information systems that we maintain and maintained by third parties with whom we contract to provide data services. The Company also maintains important internal Company data such as personally identifiable information about its employees and information relating to operations. Customers and employees have been, and will continue to be, targeted by cybersecurity threats attempting to misappropriate passwords, bank account information or other personal information. The Company's attempts to mitigate these threats may not be successful as cybercrimes are complex and continue to evolve. Publicized information concerning security and cyber-related problems could cause us to incur reputational harm and discourage customers from using our electronic or web-based applications or solutions, which could harm their utility as a means of conducting commercial transactions.
Even the most well protected information, networks, systems and facilities remain potentially vulnerable because the techniques used in breach attempts or other disruptions are constantly evolving and generally are not recognized until launched against a target, and in some cases are designed not to be detected and, in fact, may not be detected. Accordingly, we may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures. A security breach or other significant disruption of our information systems or those related to our customers, merchants and our third party vendors, including as a result of cyber-attacks, could (i) disrupt the proper functioning of our internal, or our third-party vendors’,
19
Table of Contents
networks and systems and therefore our operations and/or those of certain of our customers; (ii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of confidential, sensitive or otherwise valuable information of ours or our customers; (iii) result in a violation of applicable privacy, data breach and other laws, subjecting us to additional regulatory scrutiny and expose the us to civil litigation, governmental fines and possible financial liability; (iv) require significant management attention and resources to remedy the damages that result; or (v) harm our reputation or cause a decrease in the number of customers that choose to do business with us. The occurrence of any of the foregoing could have a material adverse effect on our business, financial condition and results of operations.
A breach of information or other technological security, including as a result of cyber-attacks, could have a material adverse effect on our business, financial condition and results of operations.
In the ordinary course of business we rely on electronic communications and information systems, both internal and provided by external third parties, to conduct our operations and to store, process, and/or transmit sensitive data on a variety of computing platforms and networks and over the Internet. We cannot be certain that all of our systems, or third-party systems upon which we rely, are free from vulnerability to attack or other technological difficulties or failures. Information security breaches and cybersecurity-related incidents may include attempts to access information, including customer and company information, malicious code, computer viruses, phishing, denial of service attacks and other means of intrusion that could result in unauthorized access, misuse, loss or destruction of data (including confidential customer or employee information), account takeovers, unavailability of service or other events. These types of threats may derive from human error, fraud or malice on the part of external or internal parties, or may result from accidental technological failure. Further, to access our products and services our customers may use computers and mobile devices that are beyond our security control systems. If information security is breached or difficulties or failures occur, despite the controls we and our third party vendors have instituted, information may be lost or misappropriated, resulting in financial loss or costs, reputational harm or damages and litigation, regulatory investigation costs or remediation costs to us or others. While we maintain specific "cyber" insurance coverage, which would apply in the event of many breach scenarios, the amount of coverage may not be adequate in any particular case. Furthermore, because cyber threat scenarios are inherently difficult to predict and can take many forms, some breaches may not be covered under our cyber insurance coverage. Any of these consequences could have a material adverse effect on our financial condition and results of operations.
The risk of a security breach or disruption, particularly through cyber-attack or cyber intrusion, has significantly increased, in part due to the expansion of new technologies, the increased use of the Internet and mobile services and the increased intensity and sophistication of attempted attacks and intrusions from around the world. The threat from cyber-attacks is severe, attacks are sophisticated and increasing in volume, and attackers respond rapidly to changes in defensive measures. Our systems and those of our customers and third-party service providers are under constant threat and it is possible that we could experience a significant event in the future. Our technologies, systems, networks and software, and those of other financial institutions have been, and are likely to continue to be, the target of cybersecurity threats and attacks, which may range from uncoordinated individual attempts to sophisticated and targeted measures directed at us. Risks and exposures related to cybersecurity attacks are expected to remain high for the foreseeable future due to the rapidly evolving nature and sophistication of these threats as well as the expanding use of Internet banking, mobile banking and other technology-based products and services by us and our customers. As cyber threats continue to evolve, we may be required to expend significant additional resources to modify our protective measures or to investigate and remediate any information security vulnerabilities.
The Company is subject to risks presented by acquisitions, which, if realized, could negatively affect our results of operations and financial condition.
The Company’s strategic initiatives include diversification within its markets, growth of its fee-based businesses, and growth internally and through acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses within markets currently served by the Company or in other locations that would complement the Company’s business or its geographic reach. Any future acquisitions will be accompanied by the risks commonly encountered in acquisitions. These risks include: the difficulty of integrating operations and personnel, the potential disruption of our ongoing business, the inability of management to realize or maximize anticipated financial and strategic positions, increased operating costs, the inability to maintain uniform standards, controls, procedures and policies, the difficulty and cost of obtaining adequate financing, the potential for litigation risk, the potential loss of members of a key executive management group, the potential reputational damage and the impairment of relationships with employees and customers as a result of changes in ownership and management. Further, the asset quality or other financial characteristics of an acquired company may deteriorate after the acquisition agreement is signed or after the acquisition closes. We cannot provide any assurance that we
20
Table of Contents
will be successful in overcoming these risks or any other problems encountered in connection with acquisitions and any of these risks, if realized, could have an adverse effect on our results of operations and financial condition.
The Company's operations may be adversely affected if its external vendors do not perform as expected or if its access to third-party services is interrupted.
The Company relies on certain external vendors to provide products and services necessary to maintain the day-to-day operations of the Company. Some of the products and services provided by vendors include key components of our business infrastructure including data processing and storage and internet connections and network access, among other products and services. Accordingly, the Company’s operations are exposed to the risk that these vendors will not perform in accordance with the contracted arrangements or under service level agreements. The failure of an external vendor to perform in accordance with the contracted arrangements or under service level agreements, because of changes in the vendor’s organizational structure, financial condition, support for existing products and services or strategic focus or for any other reason, could disrupt the Company’s operations. If we are unable to find alternative sources for our vendors’ services and products quickly and cost-effectively, the failures of our vendors could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.
Additionally, our information technology and telecommunications systems interface with and depend on third-party systems, and we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If sustained or repeated, a system failure or service denial could result in a deterioration of our ability to process new and renewal loans, gather deposits and provide customer service, compromise our ability to operate effectively, damage our reputation, result in a loss of customer business and subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.
General Risks
Our success depends on our ability to offer our customers an evolving suite of products and services, and we may not be able to effectively manage the risks inherent in the development of financial products and services.
We continually monitor our suite of products and services, and prioritize new offerings based on our determination of customer demand, within regulatory parameters for financial products. We may invest significant time and resources in new products which become obsolete, or do not generate the revenues we had anticipated, or which are ultimately deemed unacceptable by regulatory authorities. As we expand the range and complexity of our products and services, we are exposed to increasingly complex risks, including potential fraud, and our employees and risk management systems may not be adequate to mitigate such risks effectively. Our failure to effectively identify and manage these risks and uncertainties could have a material adverse effect on our business.
COVID-19 Pandemic and Recent Events
The COVID-19 global pandemic continued to present health and economic challenges in the fourth quarter of 2022, but conditions were generally improved from 2021. In accordance with the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as troubled debt restructurings ("TDRs"). The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021. Under the Consolidated Appropriations Act, relief under the CARES Act was extended until the earlier of (i) 60 days after the date the COVID-19 national emergency comes to an end or (ii) January 1, 2022. Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions.
Item 1B. Unresolved Staff Comments
None.
21
Table of Contents
Item 2. Properties
The Company’s executive offices are located at 118 East Seneca Street in Ithaca, New York. Tompkins Community Bank has 60 branch offices, of which 29 are owned and 31 are leased at market rents. The Company’s insurance subsidiary has 6 stand-alone offices, of which 3 are owned by the Company and 3 are leased at market rents. The Company’s wealth management and financial planning division has 2 offices which are leased at a market rent, and shares other locations within branches of Tompkins Community Bank. Management believes the current facilities are suitable for their present and intended purposes. For additional information about the Company’s facilities, including rental expenses, see "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
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, 2022, management, after consultation with legal counsel, does not anticipate that the aggregate ultimate liability arising out of litigation pending or threatened against the Company or its subsidiaries will be material to the Company’s consolidated financial position. On at least a quarterly basis, the Company assesses its liabilities and contingencies in connection with such legal proceedings. Although the Company does not believe that the outcome of pending litigation will be material to the Company’s consolidated financial position, it cannot rule out the possibility that such outcomes will be material to the consolidated results of operations for a particular reporting period in the future.
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, 2023.
Name Age Title Year Joined Company
Stephen S. Romaine 58 President and CEO January 2000
David S. Boyce 56 Executive Vice President January 2001
David M. DeMilia 47 Executive Vice President April 2008
Francis M. Fetsko 58 Executive Vice President, COO, and CFO October 1996
Gregory J. Hartz 62 Executive Vice President August 2002
Brian A. Howard 58 Executive Vice President July 2016
Ginger G. Kunkel 52 Executive Vice President December 2021
John M. McKenna 56 Executive Vice President April 2009
Susan M. Valenti 68 Executive Vice President of Corporate Marketing March 2012
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 in 2002. He has been employed by Tompkins Insurance and a predecessor company to Tompkins Insurance for 34 years.
David M. DeMilia joined Tompkins Mahopac Bank in April 2008 as a regional vice president, providing commercial banking services in Westchester County. In 2014, he was promoted to senior vice president before becoming Tompkins Mahopac
22
Table of Contents
Bank’s senior commercial loan officer in October 2018. In June 2021, he was appointed president and CEO of Tompkins Mahopac Bank, overseeing Tompkins’ activities in the Hudson Valley region.
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 Tompkins Community Bank. In July 2003, he was promoted to Executive Vice President and he assumed the additional role of Chief Operating Officer in April 2012.
Alyssa H. Fontaine joined the Company in January 2016 as Executive Vice President and General Counsel. She took on the additional responsibility of Chief Risk Officer in the first quarter of 2022. 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.
Gregory J. Hartz has been employed by the Company since 2002 and was appointed President and Chief Executive Officer of Tompkins Community Bank CNY 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.Mr. Hartz has announced his retirement from the Company, and will be retiring during the second quarter of 2023.
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.
Ginger G. Kunkel has been employed by the Company since December 2021 as Chief Operating Officer of VIST Bank and Executive Vice President of the Company.In May 18, 2022, Ms. Kunkel was appointed president of Tompkins Community Bank PA, overseeing Tompkins’ activities in the Pennsylvania market. Prior to joining Tompkins Community Bank Ms. Kunkel spent 7 years at Riverview Financial Corporation, most recently as Chief Operating Officer of the Bank and Corporation where she led the Commercial, Retail, Operations/IT, Trust and Wealth Management teams.
John M. McKenna has been employed by the Company since April 2009. He was appointed President and CEO of Tompkins Community Bank WNY effective January 1, 2015 and President of Tompkins Community Bank effective January 1, 2022.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.
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 Vice President of Human Resources and Director of Organizational Development at Albany International Corporation.
23
Table of Contents
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. As of February 27, 2023, there are approximately 2,753 holders of shares of our common stock.
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.
Issuer Purchases of Equity Securities
The following table reflects all Company repurchases, including those made pursuant to publicly announced plans or programs, during the quarter ended December 31, 2022.
Period (a) (b) (c) (d)
Included above are 2,148 shares purchased in October 2022, at an average cost of $75.20, and 657 shares purchased in November 2022, at an average cost of $84.22, 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 20,564 shares delivered to the Company in November 2022 at an average cost of $81.63 to satisfy mandatory tax withholding requirements upon vesting of restricted stock under the Company's 2009 and 2019 Equity Plans.
On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the "2021 Repurchase Plan") for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Shares may be repurchased from time to time under the 2021 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2021 Repurchase Plan, the Company had repurchased 230,182 shares through December 31, 2022, at an average cost of $78.31.
Recent Sales of Unregistered Securities
None.
24
Table of Contents
Performance Graph
The following graph compares the Company’s cumulative total stockholder return over the five-year period from December 31, 2017 through December 31, 2022, with (1) the total return for the NASDAQ Composite and (2) the total return for S&P U.S. BMI Banks index. The graph assumes $100.00 was invested on December 31, 2017, 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 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.
Period Ending
Item 6. Reserved
25
Table of Contents
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," and Part II, "Item 8. Financial Statements and Supplementary Data."
Overview
The Company is headquartered in Ithaca, New York and is registered as a Financial Holding Company with the Federal Reserve Board under the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services.Effective January 1, 2022, the Company's four wholly-owned banking subsidiaries were combined into one bank, with the Bank of of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company (the "Trust Company") with the Trust Company as the surviving institution. Immediately following the merger, the Trust Company changed its name to Tompkins Community Bank. At December 31, 2022, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance. Tompkins Financial Advisors, a division of Tompkins Community Bank provides a full array of investment services, including investment management, trust and estate, financial and tax planning services. The Company’s principal offices are located at 118 E. Seneca Street, Ithaca, NY, 14850, and its telephone number is (888) 503-5753. The Company’s common stock is traded on the NYSE American under the Symbol "TMP."
Forward-Looking Statements
This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", the negative and other variations of these terms and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the impact of changes in accounting standards; and trends, plans, prospects, growth and strategies. Forward-looking statements are made based on management’s expectations and beliefs concerning future events impacting the Company and are subject to certain uncertainties and factors relating to the Company’s operations and economic environment, all of which are difficult to predict and many of which are beyond the control of the Company, that could cause actual results of the Company to differ materially from those expressed and/or implied by forward-looking statements and historical performance. The following factors, in addition to those listed as Risk Factors in Item 1A are among those that could cause actual results to differ materially from the forward-looking statements: changes in general economic, market and regulatory conditions; GDP growth and inflation trends; the impact of the interest rate and inflationary environment on the Company' business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; the impact of any change in the FDIC insurance assessment rate or the rules and regulations related to the calculation of the FDIC insurance assessment amount; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; uncertainties arising from national and global events, including the war in Ukraine, as well as the potential impact of widespread protests, civil unrest, political uncertainty on the economy and the financial services industry, and pandemics or other public health crises, including the COVID-19 pandemic; and financial resources in the amounts, at the times and on the terms required to support the Company’s future businesses.
26
Table of Contents
Critical Accounting Policies
The accounting and reporting policies followed by the Company conform, in all material respects, to U.S. generally accepted accounting principles ("GAAP") and to general practices within the financial services industry. In the course of normal business activity, management must select and apply many accounting policies and methodologies and make estimates and assumptions that lead to the financial results presented in the Company’s consolidated financial statements and accompanying notes. There are uncertainties inherent in making these estimates and assumptions, which could materially affect the Company’s results of operations and financial position.
Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimates require management to make assumptions about matters that are highly uncertain, and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements. Management considers the accounting policies relating to the allowance for credit losses ("allowance", or "ACL"), and the review of the securities portfolio for other-than-temporary impairment to be critical accounting policies because of the uncertainty and subjectivity involved in these policies and the material effect that estimates related to these areas can have on the Company’s results of operations.
The Company’s methodology for estimating the allowance considers available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. Refer to "Allowance for Credit Losses" below, "Note 4 - Allowance for Credit Losses", and "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for the year ended December 31, 2022.
For information on the Company's significant accounting policies and to gain a greater understanding of how the Company’s financial performance is reported, refer to "Note 1 – Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for the year ended December 31, 2022.
Critical Accounting Estimates
The Company's significant accounting policies conform with GAAP and are described in Note 1 of the Notes to Consolidated Financial Statements. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. The more significant area in which management of the Company applies critical assumptions and estimates include the following:
•Accounting for credit losses - The Company accounts for the allowance for credit losses using the current expected credit loss model. Under this accounting guidance, the allowance for credit losses represents a valuation account that is deducted from the amortized cost basis of certain financial assets, including loans and leases, to present the net amount expected to be collected at the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 4 of Notes to Financial Statements.
27
Table of Contents
COVID-19 Pandemic and Recent Events
The COVID-19 global pandemic continued to present health and economic challenges in the fourth quarter of 2022, but conditions were generally improved from 2021. In accordance with the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as troubled debt restructurings ("TDRs"). The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021, but expired on January 1, 2022. Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions.
The Company funded a total of 5,140 applications for Paycheck Protection Plan ("PPP") loans totaling $694.1 million in 2020 and 2021. Out of the $694.1 million of PPP loans that the Company funded, approximately $693.3 million have been forgiven by the Small Business Administration ("SBA") under the terms of the program as of December 31, 2022, or paid back by the borrower. As of December 31, 2022, there were thirteen outstanding PPP loans totaling approximately $756,000. Total net deferred fees on the remaining balance of PPP loans amounted to $19,000 at December 31, 2022.
Results of Operations
(Comparison of December 31, 2022 and 2021 results)
General
The Company reported diluted earnings per share of $5.89 in 2022, a decrease of 2.6% compared to diluted earnings per share of $6.05 in 2021. Net income for the year ended December 31, 2022, was $85.0 million, a decrease of 4.7% compared to $89.3 million in 2021. Significant contributors to the negative variance in annual net income included a reduction in net deferred loan fees associated with PPP loans from $11.2 million in 2021 to $3.0 million in 2022, as well as an increase in provision for credit loss expense, which was a credit of $2.2 million in 2021 versus an expense of $2.8 million in 2022. Earnings performance in 2022 compared to 2021 benefited from growth in interest income sources, including loan and securities interest income. During the fourth quarter of 2022, the Company sold its VISA Class B common shares, recognizing a pre-tax gain of $11.4 million. Also in the fourth quarter of 2022, the Company sold $147.9 million of available-for-sale securities, recognizing a pre-tax loss on the sale of $11.9 million. The available-for-sale securities sold during the quarter had an average yield of 0.41% and remaining life of 2.1 years. Proceeds from the sale of the VISA Class B shares and the available-for-sale securities were used to pay down overnight borrowings with the FHLB. Earnings in 2021 included a $1.9 million purchase accounting charge related to the redemption of $15.2 million in trust preferred securities and $2.9 million in penalties related to the prepayment of $135.0 million in FHLB fixed rate advances.
In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 13.25% in 2022, compared to 12.32% in 2021, while ROA was 1.09% in 2022 and 1.12% in 2021. Tompkins’ 2022 ROE compared favorably with peer ratios of 12.17% for ROE, while ROA trailed by 7 basis points when compared to peer ROA of 1.16%. The peer group data is derived from the FRB's "Bank Holding Company Performance Report", which covers banks and bank holding companies with assets between $3.0 billion and $10.0 billion as of September 30, 2022 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current period numbers.
Segment Reporting
The Company operates in three business segments: banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance, subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services provided by Tompkins Financial Advisors, a division of Tompkins Community Bank. All other activities are considered banking. For additional financial information on the Company’s segments, refer to "Note 22 Segment and Related Information" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
28
Table of Contents
Banking Segment
The banking segment reported net income of $75.5 million for the year ended December 31, 2022, representing a $2.5 million or 3.1%, decrease compared to 2021. The decrease in net income in 2022 compared to 2021 was largely driven by an increase in the provision for credit losses, realized losses on the sale of available-for-sale securities in 2022, and an increase in noninterest expense. Net interest income increased $6.5 million or 2.9% in 2022 compared to 2021, as the increase in average asset yields offset the increase in the average cost of funds. Net deferred loan fees associated with PPP loans, included in net interest income, decreased from $11.2 million in 2021 to $3.0 million in 2022. Net interest income in 2021 included a $1.9 million purchase accounting charge related to the redemption of $15.2 million in trust preferred securities.
The provision for credit loss expense was a expense of $2.8 million in 2022, compared to provision credit of $2.2 million in the prior year. The increase in the provision for credit losses in 2022 over 2021 is mainly driven by current economic forecasts coupled with loan growth. The allowance to total loan ratio at December 31, 2022 was 0.87%, up from 0.84% at December 31, 2021. For additional information, see the section titled "The Allowance for Credit Losses" below.
Noninterest income of $25.4 million in 2022 decreased $550,000 or 2.1% compared to 2021. Noninterest expense of $156.2 million for the year ended December 31, 2022, increased $3.6 million or 2.3% from 2021. The decrease in noninterest income was mainly driven by pre-tax losses of $634,000 on the sales of available-for-sale securities in 2022 compared to pre-tax gains of $249,000 in 2021. During the fourth quarter of 2022, the Company sold its VISA Class B common shares, recognizing a pre-tax gain of $11.4 million. Also in the fourth quarter of 2022, the Company sold $147.9 million of available-for-sale securities, recognizing a pre-tax loss on the sale of $11.9 million. The available-for-sale securities sold during the quarter had an average yield of 0.41% and remaining life of 2.1 years. Proceeds from the sale of the VISA Class B shares and the available-for-sale securities were used to pay down overnight borrowings with the FHLB. The year-to-date increase in noninterest expense was mainly attributed to salary and wages and employee benefits reflecting normal annual merit adjustments and to nonrecurring expenses of $1.2 million, related to the consolidation of the Company's four banking charters into one charter, including the related conversion of the core banking system, which was completed in May of 2022.
Insurance Segment
The insurance segment reported net income of $6.5 million, an increase of $286,000 or 4.6% when compared to 2021, as a $1.3 million or 3.6% increase in noninterest revenue was only partially offset by an increase in expenses of $821,000 or 3.1%. The increase in revenue was mainly in property and casualty commissions, which were up $1.8 million or 7.7% in 2022 over 2021. Contingency revenue was down $300,000 or 6.8% in 2022 compared to 2021. Revenue growth in 2022 benefited from business development efforts and generally higher policy premium levels.
The increase in expenses was mainly in salaries and wages and a result of normal annual merit increases and increases in health insurance costs. Certain expenses such as auto, travel, entertainment and marketing, which have been affected by the COVID-19 pandemic in prior years, increased for the year ended December 31, 2022.
Wealth Management Segment
The wealth management segment reported net income of $3.0 million for the year ended December 31, 2022, a decrease of $2.1 million or 40.8% compared to 2021. Revenue of $18.1 million decreased $1.6 million or 8.1% compared to 2021, mainly a result of decreased assets under management and advisory revenue, primarily as a result of market conditions. Noninterest expenses increased by $1.1 million or 8.4% compared to 2021. The increase was mainly driven by technology costs, attributable to a new core platform which was implemented at the beginning of 2022. The fair value of assets under management or in custody at December 31, 2022 totaled $2.9 billion, representing a decrease of $2.1 billion or 41.7% compared to $5.1 billion at year-end 2021. The balance at year-end 2021 included $1.7 billion of Company-owned securities where Tompkins was custodian. The decline in assets from prior year resulted in part from the outsourcing of the custody of Company-owned securities where Tompkins was custodian. Since these were inter-company related items, they did not have a meaningful impact on total income. The remaining decline in assets is related to negative market performance seen throughout the year.
Net Interest Income
Net interest income is the Company’s largest source of revenue, representing 74.7% of total revenues for the year ended December 31, 2022, and 74.0% of total revenues for the year ended December 31, 2021. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Table 1 – Average Statements of Condition and Net Interest Analysis shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.
29
Table of Contents
Tax-equivalent net interest income of $231.7 million for 2022 increased by $6.3 million or 2.8% from 2021. The increase resulted mainly from a 13 basis point increase in the average yield on interest-earning assets exceeding an 8 basis point increase in the average rate paid on interest-bearing liabilities, the investment of excess liquidity in securities and loans, and growth in average noninterest bearing deposits, which supported the decrease in average interest-bearing liabilities. The net interest margin for 2022 was 3.05% compared to 2.96% for 2021.
The quarterly net interest margin for the fourth quarter of 2022 of 3.02% was down from a net interest margin of 3.04% for the third quarter of 2022. The decrease in net interest margin was driven mainly by higher funding costs during the fourth quarter as a result of higher average rates paid on interest-bearing deposits and borrowings exceeding the growth in average asset yields. The average cost of interest-bearing liabilities for the fourth quarter of 2022 was 0.84% compared to 0.45% for the third quarter of 2022, while the average yield on interest earning assets was 3.56% and 3.32% for the same two periods. Average interest-bearing deposit balances for the fourth quarter of 2022 were down $54.8 million or 1.2%, while other borrowings were up $19.6 million or 8.5%. The decrease in deposit balances was largely due to seasonal outflows of municipal deposits
Tax-equivalent interest income increased $9.8 million or 4.0% in 2022 from 2021, driven mainly by an increase in the average yield on interest-earning assets reflecting higher market interest rate and growth in higher yielding securities as excess liquidity was invested in securities. For the year, average interest-earning assets were flat compared to 2021. Average loans and leases decreased $42.4 million or 0.8% in 2022 compared to 2021, and represented 67.6% of average earning assets in 2022 compared to 68.0% in 2021. The decrease was largely driven by a decrease in PPP loans. As a result of its participation in the SBA's PPP, the Company recorded net deferred loan fees of $3.0 million in 2022 and $11.2 million in 2021, which are included in interest income. The average yield on loans was 4.25% in 2022, an increase of 9 basis points compared to 4.16% in 2021. Average balances on securities increased $246.6 million or 11.6% in 2022 compared to 2021, while the average yield on the securities portfolio increased 17 basis points or 13.8% compared to 2021, reflecting the investment of excess liquidity in securities. Average interest-bearing balances due from banks in 2022 were down $221.5 million or 72.1% from 2021.
Interest expense for 2022 increased $3.5 million or 20.1% compared to 2021, driven mainly by higher funding costs as average interest-bearing liabilities in 2022 were down $137.2 million or 2.7% compared to 2021. The average cost of interest-bearing deposits was 0.35% in 2022, an increase of 12 basis points from 0.23% in 2021, while the average cost of interest bearing liabilities increased to 0.43% in 2022 from 0.35% in 2021. Average interest bearing deposits in 2022 decreased $105.6 million or 2.2% compared to 2021. Average noninterest bearing deposit balances in 2022 increased $90.2 million or 4.3% over 2021 and represented 32.0% of average total deposits in 2022 compared to 30.6% in 2021. Average other borrowings decreased by $22.7 million or 10.4% in 2022 from 2021.
30
Table of Contents
Table 1 - Average Statements of Condition and Net Interest Analysis
For the year ended December 31,
ASSETS
Interest-earning assets
Securities1
LIABILITIES & EQUITY
Deposits
Interest-bearing deposits
1 Average balances and yields on available-for-sale debt securities are based on historical amortized cost.
2 Interest income includes the tax effects of tax-equivalent adjustments using the Federal income tax rate of 21.0% in 2022, 2021, and 2020 to increase tax exempt interest income to tax-equivalent basis.
3 Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of this annual report on Form 10-K.
31
Table of Contents
Table 2 - Analysis of Changes in Net Interest Income
INTEREST INCOME:
Investments1
INTEREST EXPENSE:
Interest-bearing deposits:
1 Interest income includes the tax effects of tax-equivalent adjustments using the Federal income tax rate of 21.0% in 2022, 2021 and 2020 to increase tax exempt interest income to tax-equivalent basis.
Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. In 2022, net interest income increased by $6.3 million, resulting from a $9.8 million increase in interest income, partially offset by a $3.5 million increase in interest expense. Higher yields on average interest-earning assets drove interest income up by $11.3 million, while the decrease in average balances on interest-earning assets decreased interest income by $1.6 million. The increase in interest expense reflects higher rates paid on interest bearing liabilities, both deposits and other borrowings and a decrease in average interest-bearing deposits and borrowings.
Provision for Credit Loss Expense
The provision for credit loss expense represents management’s estimate of the expense necessary to maintain the allowance for credit losses at an appropriate level. The ratio of total allowance to total loans and leases increased to 0.87% at December 31, 2022 from 0.84% at December 31, 2021. The increase in the ACL from year-end 2021 reflects updated economic forecasts for unemployment and gross domestic product ("GDP") coupled with loan growth, mainly in the real estate portfolios. Forecasts related to unemployment are beginning to deteriorate and GDP forecasts continue to weaken showing less growth compared to prior forecasts. The provision for credit loss expense was $2.8 million in 2022, compared to provision credit of $2.2 million in 2021. The provision for credit losses for 2022 included a provision of $290,000 related to off-balance sheet credit exposures compared to a provision of $586,000, respectively, for 2021. The fourth quarter of 2021 included a $7.0 million charge-off of a commercial real estate relationship consisting of two loans that were previously reported as nonperforming loans. The section captioned "Financial Condition – The Allowance for Credit Losses" below has further details on the allowance for credit losses and asset quality metrics.
32
Table of Contents
Noninterest Income
Year ended December 31,
Net gain on securities transactions (634) 249 443
Noninterest income of $78.0 million for the year-ended December 31, 2022 decreased $877,000 or 1.1% from 2021. Noninterest income represented 25.3% of total revenues in 2022, down from 26.1% in 2021.
Insurance commissions and fees of $36.2 million increased $1.4 million or 3.9% in 2022 compared to $34.8 million for 2021. The increase in revenue included $1.8 million or 7.7% growth in property and casualty commissions, partially offset by a $300,000 or 6.8% decrease in contingency revenue over 2021
Investment services income of $18.1 million in 2022 decreased $1.3 million or 6.7% compared to 2021, primarily a result of unfavorable market conditions. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $2.9 billion at December 31, 2022, a decrease from $5.1 billion at December 31, 2021. The fair value of assets in custody at December 31, 2021 included $1.7 billion of Company-owned securities where Tompkins is custodian. In the first quarter of 2022, the Company moved custody of Company-owned securities to a third party. Unfavorable market conditions also contributed to the decrease in the fair value of assets under management.
Service charges on deposit accounts of $7.4 million increased $1.0 million of 16.0% in 2022 compared to 2021. The increase was in net overdraft fees and service fees on personal and business accounts, reflective of increased transaction activity.
Card services income increased $198,000 or 1.8% in 2022 over 2021. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. The increase in card services income in 2022, when compared to 2021, was mainly driven by interchange income related to credit cards.
Other income of $5.9 million decreased $1.3 million or 17.7% compared to 2021. The decrease was largely due to lower earnings on bank owned life insurance and lower gains on the sale of residential loans. Earnings on bank owned life insurance totaled $1.2 million in 2022, down from $1.9 million in 2021, as certain separate account policies were unfavorably impacted by decreases in the fair value of the underlying assets. Gains on the sale of residential loans were down $788,000 or 83.6% in 2022 when compared to 2021.
During the fourth quarter of 2022, the Company sold its VISA Class B common shares, recognizing a pre-tax gain of $11.4 million. Also in the fourth quarter of 2022, the Company sold $147.9 million of available-for-sale securities, recognizing a pre-tax loss on the sale of $11.9 million. The available-for-sale securities sold during the quarter had an average yield of 0.41% and remaining life of 2.1 years. Proceeds from the sale of the VISA Class B shares and the available-for-sale securities were used to pay down overnight borrowings from the FHLB.
33
Table of Contents
Noninterest Expense
Year ended December 31,
Noninterest expense as a percentage of total revenue was 63.5% in 2022, compared to 62.9% in 2021.
Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2022, these expenses increased $3.0 million or 2.5% compared to 2021. Salaries and wages increased $2.2 million or 2.3% in 2022 over the prior year, mainly as a result of annual merit pay increases. Other employee benefits increased $797,000 or 3.3% over 2021, mainly in health insurance, which was up $754,000 or 8.5% in 2022 over 2021. The number of employees as measured by average full time equivalents (FTEs) for 2022 were 1,020, compared to 1,032 for 2021.
Other operating expenses of $47.7 million increased by $3.2 million or 7.2% compared to 2021. The primary components of other operating expenses in 2022 were technology ($15.2 million), professional fees ($6.9 million), marketing ($5.7 million), and cardholder expense ($4.6 million). The increase in other operating expenses in 2022 compared to 2021 included increases in technology (up $3.4 million or 29.1%), marketing (up $1.4 million or 32.2%), and cardholder expense (up $1.0 million or 29.1%). Contributing to the growth in these expenses in 2022 were nonrecurring expenses of $1.2 million, related to the consolidation and rebranding of the Company's four banking charters, including the related conversion of the core banking system. Other expenses in 2021 included $2.9 million in penalties related to the prepayment of $135.0 million in FHLB fixed rate advances.
Noncontrolling Interests
Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $126,000 in 2022, in line with 2021. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company.
Income Tax Expense
The provision for income taxes provides for Federal, New York State, Pennsylvania and other miscellaneous state income taxes. The 2022 provision was $24.6 million, which decreased $625,000 or 2.5% compared to the 2021 provision. The effective tax rate for the Company was 22.4% in 2022, up from 22.0% in 2021. The effective rates for 2022 and 2021 differed from the U.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. The increase in the effective tax rate for 2022 over 2021 was due to lower excess tax benefits of stock based compensation and life insurance income.
The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on its New York State tax return for qualifying entities. A condition to claim the benefit is that the consolidated company has average assets of no more than $8.0 billion for the taxable year. As of December 31, 2022, the Company's consolidated average assets, as defined by New York tax law, were under the $8.0 billion threshold. The Company will continue to monitor the consolidated average assets during 2023 to determine future eligibility.
34
Table of Contents
Financial Condition
Total assets were $7.7 billion at December 31, 2022, down by 1.9% or $149.3 million from the previous year end. Total securities decreased $421.3 million or 18.1% over December 31, 2021, while total loans were up $193.4 million or 3.8%. Total deposits at year-end 2022 decreased $189.1 million or 2.8% over year-end 2021, while total borrowings were up $167.3 million or 134.9%.
Loans and leases were 68.7% of total assets at December 31, 2022, compared to 64.9% of total assets at December 31, 2021. Total loan balances were $5.3 billion at December 31, 2022, an increase of $193.4 million or 3.8% compared to the $5.1 billion reported at year-end 2021. The increase was mainly in commercial real estate loans and residential real estate loans. A more detailed discussion of the loan portfolio is provided below in this section under the caption "Loans and Leases".
As of December 31, 2022, total securities comprised 24.9% of total assets, compared to 29.8% of total assets at year-end 2021. Securities decreased $421.3 million or 18.1% at December 31, 2022, compared to December 31, 2021. Contributing to the decrease in securities from year-end 2021 were an increase in unrealized losses on the available-for-sale portfolio from $19.3 million at year-end 2021 to $236.8 million at December 31, 2022, as a result of the increase in market interest rates in 2022, and
the use of proceeds from investment sales and principal maturities to fund loan growth and pay down borrowings. A detailed discussion of the securities portfolio is provided below in this section under the caption "Securities".
Total deposits at year-end 2022 decreased by $189.1 million or 2.8% compared to December 31, 2021. At December 31, 2022 noninterest bearing deposits increased by $14.4 million or 0.7%, time deposit balances decreased $8.3 million or 1.3% and checking, savings and money market accounts decreased $195.3 million or 4.9% when compared to December 31, 2021. Other borrowings, consisting mainly of short term advances with the FHLB, increased $167.3 million or 53.2% from December 31, 2021. A more detailed discussion of deposits and borrowings is provided below in this section under the caption "Deposits and Other Liabilities".
Shareholders’ Equity
The Consolidated Statements of Changes in Shareholders’ Equity included in the Consolidated Financial Statements of the Company contained in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, detail changes in equity capital over prior year end. Total shareholders’ equity decreased $111.6 million or 15.3% to $617.4 million at December 31, 2022, from $728.9 million at December 31, 2021. The decrease was primarily the result of an increase in unrealized losses on the available-for-sale portfolio driven by the increase in market interest rates in 2022.
Additional paid-in capital decreased by $9.8 million, from $312.5 million at December 31, 2021, to $302.8 million at December 31, 2022. The $9.8 million decrease included the following: a $15.4 million aggregate purchase price related to the Company's repurchase and retirement of 197,979 shares of its common stock in connection with Board-approved repurchase plans, and $2.3 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.3 million attributed to stock based compensation expense, and $488,000 related to shares issued for the Company's director deferred compensation plan.
Retained earnings increased by $51.5 million, reflecting net income of $85.0 million, less dividends paid of $33.6 million for the year-ended December 31, 2022.
Accumulated other comprehensive loss increased from $56.0 million at December 31, 2021 to $208.7 million at December 31, 2022, reflecting a $164.2 million increase in unrealized losses on available-for-sale debt securities due to market interest rates, partially offset by a $11.5 million actuarial gain associated with employee benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale debt securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage capital ratios.
35
Table of Contents
Total shareholders’ equity increased $11.3 million or 1.6% to $728.9 million at December 31, 2021, from $717.7 million at December 31, 2020. Additional paid-in capital decreased by $21.4 million, from $334.0 million at December 31, 2020, to $312.5 million at December 31, 2021. The $21.4 million decrease included the following: $23.8 million aggregate purchase price related to the Company's repurchase and retirement of 304,513 shares of its common stock in connection with the Board-approved repurchase plans, and $3.1 million related to the exercise of stock options and restricted stock activity. These were partially offset by $5.1 million attributed to stock based compensation expense, $257,000 related to shares issued in connection with the Company's dividend reinvestment program, and $255,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $56.8 million, reflecting net income of $89.3 million, less dividends paid of $32.4 million for the year ended December 31, 2021.
Accumulated other comprehensive loss increased from $32.1 million at December 31, 2020 to $56.0 million at December 31, 2021; reflecting a $35.2 million increase in unrealized losses on available-for-sale debt securities due to market interest rates; partially offset by a $11.3 million increase in actuarial gain associated with employee benefit plans.
The Company continued its long history of increasing cash dividends with a per share increase of 5.5% in 2022, which followed an increase of 4.3% in 2021. Dividends per share were $2.31 in 2022, compared to $2.19 in 2021, and $2.10 in 2020. Cash dividends paid represented 39.5%, 36.3%, and 40.4% of after-tax net income in 2022, 2021, and 2020, respectively.
On January 30, 2020, the Company’s Board of Directors authorized a stock repurchase plan (the "2020 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. In the third quarter of 2021, the Company reached the 400,000 share limit under the 2020 Repurchase Plan; the 400,000 shares were purchased at an average price of $75.99.
On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the "2021 Repurchase Plan") for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Shares may be repurchased from time to time under the 2021 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. Under the 2021 Repurchase Plan, the Company repurchased 230,182 shares through December 31, 2022, at an average cost of $78.31.
The Company and its subsidiary bank are subject to various regulatory capital requirements administered by federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary bank are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank meet all capital adequacy requirements to which they are subject.
In addition to setting higher minimum capital ratios, the Basel III Capital Rules introduced a capital conservation buffer, which must be added to each of the minimum capital ratios and is designed to absorb losses during periods of economic stress. The capital conservation buffer was phased-in over a three year period that began on January 1, 2016, and was fully phased-in on January 1, 2019 at 2.5%.
As of December 31, 2022, the capital ratios for the Company’s subsidiary bank exceeded the minimum levels required to be considered well capitalized. Effective January 1, 2022, the Company's four wholly-owned banking subsidiaries were combined into one bank, with the Bank of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company. Immediately following the merger, Tompkins Trust Company changed its name to Tompkins Community Bank. Additional information on the Company’s capital ratios and regulatory requirements is provided in "Note 20 - Regulations and Supervision" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
36
Table of Contents
Securities
The Company maintains a portfolio of securities such as U.S. Treasuries, U.S. government sponsored entities securities, U.S. government agencies, non-U.S. Government agencies or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy established by the Company’s Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee and Investment Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee.
The Company classifies its securities at date of purchase as available-for-sale, held-to-maturity or trading. Securities, other than certain obligations of states and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. Securities in the held-to-maturity portfolio would consists of obligations of the U.S. Government, U.S. Government sponsored entities and obligations of state and political subdivisions. Securities in the trading portfolio would reflect those securities that the Company elects to account for at fair value, with the adoption of ASC Topic 825, Financial Instruments.
The Company’s total securities portfolio at December 31, 2022 was $1.9 billion compared to $2.3 billion at December 31, 2021. The table below shows the composition of the available-for-sale and held-to-maturity securities portfolios as of year-end 2022, 2021 and 2020. Contributing to the decrease in securities from year-end 2021 were an increase in unrealized losses on the available-for-sale portfolio from $19.3 million at year-end 2021 to $236.8 million at December 31, 2022, as a result of the increase in market interest rates in 2022, and the use of proceeds from investment sales and principal maturities to fund loan growth and pay down borrowings. The Company purchased approximately $183.1 million of securities in 2022, which were offset by $208.7 million of payments, maturities and calls and $172.6 million of sales of available-for-sale securities.
Additional information on the securities portfolio is available in "Note 2 Securities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, which details the types of securities held, the carrying and fair values, and the contractual maturities as of December 31, 2022 and 2021.
As of December 31,
Mortgage-backed securities-residential, issued by
37
Table of Contents
As of December 31,
The Company evaluates available-for-sale debt securities for expected credit losses ("ECL") in unrealized loss positions at each
measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.
Factors that may be indicative of ECL include, but are not limited to, the following:
•Extent to which the fair value is less than the amortized cost basis.
•Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice).
•Payment structure of the debt security with respect to underlying issuer or obligor.
•Failure of the issuer to make scheduled payment of principal and/or interest.
•Changes to the rating of a security or issuer by a NRSRO.
•Changes in tax or regulatory guidelines that impact a security or underlying issuer.
For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of December 31, 2022, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including Federal National Mortgage Agency, Federal Home Loan Bank, and Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of December 31, 2022.
The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation ("FHLMC"), and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.
38
Table of Contents
The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY") stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and ACBB stock totaled $17.6 million and $95,000 at December 31, 2022, respectively. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY. At December 31, 2021, the Company’s holdings of FHLBNY stock and ACBB stock totaled $9.9 million and $95,000, respectively.
Management’s policy is to purchase investment grade securities that, on average, have relatively short expected durations. This policy helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The contractual maturity distribution of debt securities and mortgage-backed securities as of December 31, 2022, along with the weighted average yield of each category, is presented in Table 3-Maturity Distribution below. Balances are shown at amortized cost and weighted average yields are calculated on a fully tax-equivalent basis. Expected maturities will differ from contractual maturities presented in Table 3-Maturity Distribution below, because issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout the periods prior to contractual maturity.
39
Table of Contents
Table 3 - Maturity Distribution
Securities Available-for-Sale1 SecuritiesHeld-to-Maturity
(dollar amounts in thousands) Amount Yield2 Amount Yield2
U.S. Treasury
Obligations of U.S. Government sponsored entities
Obligations of U.S. state and political subdivisions
Mortgage-backed securities - residential
Other securities
Total securities
1 Balances of available-for-sale debt securities are shown at amortized cost.
2 Interest income includes the tax effects of tax-equivalent adjustments using a combined New York State and Federal effective income tax rate of 24.5% to increase tax exempt interest income to tax-equivalent basis.
The average tax-equivalent yield on the securities portfolio was 1.40% in 2022, 1.23% in 2021 and 1.83% in 2020.
At December 31, 2022, there were no holdings of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of the Company’s shareholders’ equity.
40
Table of Contents
Loans and Leases
Table 4 - Composition of Loan and Lease Portfolio
Loans and Leases As of December 31,
Commercial and industrial
Commercial real estate
Residential real estate
Consumer and other
Total loans and leases of $5.3 billion at December 31, 2022 increased $193.4 million or 3.8% from December 31, 2021. The increase was mainly in commercial real estate loans; all loan portfolios grew other than commercial and industrial, which decreased mainly in PPP loans as a result of the PPP forgiveness program. At December 31, 2022, total loans and leases represented 68.7% of total assets compared to 64.9% of total assets at December 31, 2021.
Residential real estate loans, including home equity loans, were $1.5 billion at December 31, 2022, an increase of $61.4 million or 4.2% compared to $1.5 billion at year-end 2021. Residential real estate loans comprised 29.1% of total loans and leases at December 31, 2022 compared to 29.0% at December 31, 2021. Growth in residential loan balances is impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to FHLMC or State of New York Mortgage Agency ("SONYMA") without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties.
During 2022, 2021, and 2020, the Company sold residential mortgage loans totaling $8.9 million, $31.5 million, and $51.7 million, respectively, and realized net gains on these sales of $155,000, $943,000, and $2.1 million, respectively. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2022, 2021, and 2020, the Company recorded mortgage-servicing assets of $66,000, $236,000, and $388,000, respectively.
41
Table of Contents
The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/1 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate given the low interest rate environment. Adjustable rate residential real estate loans may be underwritten based upon an initial rate which is below the fully indexed rate; however, the initial rate is generally less than 100 basis points below the fully indexed rate. As such, the Company does not believe that this practice creates any significant credit risk.
Commercial real estate loans totaled $2.9 billion at December 31, 2022, an increase of $200.3 million or 7.5% compared to December 31, 2021, and represented 54.2% of total loans and leases at December 31, 2022, compared to 52.3% at December 31, 2021.
Commercial and industrial loans totaled $791.5 million at December 31, 2022, which is a decrease of $78.0 million or 9.0% from December 31, 2021. Commercial and industrial loans represented 15.0% of total loans at December 31, 2022 compared to 17.1% at December 31, 2021. The decrease was mainly in PPP loans, which totaled $756,000 at year end 2022, and $71.3 million at year-end 2021. The decrease in PPP loans is due to the PPP loan forgiveness program and pay downs made in 2022.
As of December 31, 2022, agriculturally-related loans totaled $300.0 million or 5.7% of total loans and leases compared to $295.1 million or 5.8% of total loans and leases at December 31, 2021. Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.
The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $77.6 million at December 31, 2022, compared to $72.1 million at December 31, 2021.
The lease portfolio increased by 15.7% to $16.1 million at December 31, 2022 from $13.9 million at December 31, 2021. As of December 31, 2022, commercial leases and municipal leases represented 100.0% of total leases.
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing policies, underwriting standards and loan review during 2022. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
The Company’s loan and lease customers are located primarily in the New York and Pennsylvania communities served by its subsidiary bank. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states. As a result, the economic consequences of the pandemic on our market area generally and on the Company in particular continue to be difficult to quantify. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.
42
Table of Contents
Analysis of Past Due and Nonperforming Loans
As of December 31,
Loans 90 days past due and accruing1
Commercial and industrial $ 25 $ 0 $ 0 $ 0 $ 0
Total loans 90 days past due and accruing $ 25 $ 0 $ 0 $ 0 $ 0
Nonaccrual loans
1 The 2020, 2019 and 2018 columns in the above table exclude $794,000, $1.3 million, and $1.1 million, respectively, of acquired loans that were 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date of August 1, 2012. These loans are considered to be accruing as the Company can reasonably estimate future cash flows on these acquired loans and the Company expects to fully collect the carrying value of these loans. Therefore, the Company is accreting the difference between the carrying value of these loans and their expected cash flows into interest income.
The level of nonperforming assets as of the past five year-ends is illustrated in the table above. The Company’s total nonperforming assets as a percentage of total assets was 0.43% at December 31, 2022, compared to 0.40% at December 31, 2021, and compares to its peer group's most recent ratio of 0.37% at September 30, 2022. The peer data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion.
Nonperforming loans and leases totaled $32.8 million at December 31, 2022 and increased 5.4% from December 31, 2021. Nonperforming loans and leases represented 0.62% of total loans at December 31, 2022, compared to 0.61% of total loans at December 31, 2021, and 0.87% of total loans at December 31, 2020. Nonperforming loans and leases in the residential real estate portfolio at year-end 2022 increased by $2.4 million compared to 2021.
Loans are considered modified in a troubled debt restructuring ("TDR") when, due to a borrower’s financial difficulties, the Company makes a concession(s) to the borrower that the Company would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDRs or impaired. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: "loans 90 days past due and accruing", "nonaccrual loans", or "troubled debt restructurings not included above". Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all amounts due are reasonably assured. At December 31, 2022, the Company had $6.4 million in TDR balances, which are included in the above table, of which $4.5 million are included in the line captioned "Troubled debt restructurings not included above" and the remainder are included within nonaccrual loans.
43
Table of Contents
In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when called for by regulatory requirements. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal and interest income is recorded only after principal recovery is reasonably assured. For additional financial information on the difference between the interest income that would have been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was recorded, refer to "Note 3 – Loans and Leases" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
The Company’s recorded investment in loans and leases that are individually evaluated totaled $20.8 million at December 31, 2022, and $20.5 million at December 31, 2021. A loan is individually evaluated when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Individually evaluated loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due. Specific reserves on individually evaluated loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off.
At December 31, 2022, there were specific reserves of $3,000, mainly related to residential real estate loans compared to $67,000 of specific reserves mainly related to one commercial real estate loan and one commercial loan at December 31, 2021. The majority of the individually evaluated loans are collateral dependent loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans or the loans have been written down to fair value. Interest payments on individually evaluated loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. There was no interest income recognized on individually evaluated loans and leases for 2022, 2021 and 2020.
The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 139.9% at December 31, 2022, compared to 137.5% at December 31, 2021. The Company’s nonperforming loans are mostly made up of collateral dependent loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs.
Management reviews the loan portfolio for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its credit administration function, identified 17 commercial relationships totaling $33.3 million at December 31, 2022 that were potential problem loans. At December 31, 2021, there were 25 commercial relationships totaling $36.5 million in the loan portfolio that were considered potential problem loans. Of the 17 commercial relationships from the portfolio that were classified as potential problem loans at December 31, 2022, there were 5 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $29.7 million. The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis.
The Allowance for Credit Losses
Management reviews the appropriateness of the ACL on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.
44
Table of Contents
The Company uses a discounted cash flow ("DCF") method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, recovery lag, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes and forecasts national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics.
Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.
The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.
The Company adopted Accounting Standard Update ("ASU") 2016-13 on January 1, 2020, using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets will be accreted into interest income on a level-yield method over the life of the loans.
Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of December 31, 2022, considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company's consolidated statements of income. As of December 31, 2022, the Company's reserve for off-balance sheet credit exposures was $2.8 million, compared to $2.5 million at December 31, 2021. As a result of the adoption of ASC 326, the Company recorded a net cumulative-effect adjustment increasing the allowance for credit losses on off-balance sheet credit exposures by $381,000 from $477,000 at December 31, 2019, to $858,000 at January 1, 2020.
As of December 31, 2022, the total allowance for credit losses was $45.9 million, a increase of $3.1 million or 7.2% from year-end 2021. The increase reflects net loan recoveries of $592,000 and provision for credit loss expense of $2.5 million. The ratio of the allowance for credit losses as a percentage of total loans was 0.87% at year-end 2022 compared to 0.84% at year-end 2021. The allowance coverage to nonperforming loans and leases was 139.86% at December 31, 2022 compared to 137.50% at December 31, 2021.
45
Table of Contents
The increase in the ACL from year-end 2021 reflects updated economic forecasts for unemployment and gross domestic product ("GDP") coupled with loan growth, mainly in the real estate portfolios. Forecasts related to unemployment are beginning to deteriorate and GDP forecasts continue to weaken showing less growth compared to prior forecasts. Qualitative reserves established as a result of the COVID-19 pandemic to address specific portfolios with increased risk characteristics, including loans in our hotel portfolio, were reduced over 2022, and mainly removed from the allowance as of September 30, 2022, due to improved metrics that have stabilized and are in line with pre-pandemic trends. Qualitative reserves were added to the residential portfolio at year-end 2022 driven by uncertain impact of economic conditions, including rising interest rates, higher inflation, possible recession and rising consumer debt.
Total loans were $5.3 billion at December 31, 2022, an increase of $193.4 million or 3.8% from December 31, 2021. The increase from year-end 2021 was mainly due to loan growth in the commercial real estate portfolio. Credit quality metrics at December 31, 2022, were mixed when compared to year-end 2021. Nonperforming assets represented 0.43% of total assets at December 31, 2022, compared to 0.40% at December 31, 2021. Nonperforming loans and leases increased $1.7 million or 5.4% from year end 2021 and represented 0.62% of total loans at December 31, 2022 compared to 0.61% at December 31, 2021. Loans internally-classified Special Mention or Substandard decreased $39.6 million or 28.8% compared to December 31, 2021. The improvement over December 31, 2021, were mainly due to improved economic conditions as pandemic-related restrictions are being lifted and businesses are reopening. Net loan recoveries totaled $592,000 in 2022, compared to net charge-offs of $6.0 million in 2021.
The allocation of the Company’s allowance as of December 31, 2022, and each of the previous four years is illustrated in Table 5- Allocation of the Allowance for Credit Losses, below. The table represents the allowance for credit losses calculated under the new accounting guidance as of December 31, 2020, and the prior periods show amounts calculated under the incurred loss methodology calculation used prior to adoption. The table provides an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.
46
Table of Contents
Table 5 - Allocation of the Allowance for Credit Losses
As of December 31,
Allocation of the ACL by loan type:
Allocation of the ACL as a percentage of total allowance:
Consumer and other 3 % 3 % 3 % 3 % 3 %
Leases 0 % 0 % 0 % 0 % 0 %
Loan and lease types as a percentage of total loans and leases:
Consumer and other 1 % 1 % 1 % 1 % 1 %
Leases 0 % 0 % 0 % 0 % 0 %
The above table shows a fairly consistent allocation of the loan portfolio and allowance over the period with commercial real estate and residential real estate representing the largest proportion of total loans and the allowance. The increase in commercial and industrial loans at year-end 2020, was mainly due to PPP loans, which decreased at year end 2021 and 2022 as these loans were forgiven by the SBA. Given the SBA guaranty of the PPP loans, there were no reserves allocated to PPP loans.
Table 6 - Analysis of the Allowance for Credit Losses shows the activity in the allowance for credit losses over the past five years. The allowance at December 31, 2022 was $45.9 million, an increase of $3.1 million from year-end 2021, reflecting a provision expense of $2.5 million and net recoveries of $592,000 for the year-ended December 31, 2022. Net charge-offs of $6.0 million in 2021, were mainly due to one commercial real estate relationship that included two loans and was charged off in the fourth quarter of 2021. The $16.2 million provision expense in 2020 was driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. Provision expense decreased in 2021, as businesses opened and economic conditions continued to improve, resulting in the ability to reverse some of the provision expense booked in the first quarter of 2020 related to the COVID-19 pandemic.
47
Table of Contents
Table 6 - Analysis of the Allowance for Credit Losses
December 31,
Loans charged-off:
Recoveries of loans previously charged-off:
As a result of the adoption of ASU 2016-13, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by $2.5 million from $39.9 million at December 31, 2019 to $37.4 million at January 1, 2020.
Management believes that, based upon its evaluation as of December 31, 2022, the allowance is appropriate.
Deposits and Other Liabilities
Total deposits were $6.6 billion at December 31, 2022, a decrease of $189.1 million or 2.8% compared to year-end 2021. The decrease from year-end 2021 consisted of savings and money market balances, and time deposit balances, which were down $195.3 million, and $8.3 million, respectively. This was partially offset by an increase in noninterest bearing deposits, which increased $14.4 million. The decrease in deposits was largely driven by inflation and higher rate alternatives due to the current interest rate environment and tighter monetary policy. The Company had significant deposit growth in 2021 and 2020 as deposit balances benefited from PPP loan originations and from government stimulus programs issued in response to the COVID-19 pandemic. Deposit balances were up $353.7 million or 5.5% at year end 2021 compared to year end 2020 and up $1.2 billion or 23.5% at year-end 2020 compared to year-end 2019.
The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits, municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits decreased by $200.3 million or 3.5% to $5.6 billion at year-end 2022 from $5.8 billion at year-end 2021. Core deposits represented 84.5% of total deposits at December 31, 2022, compared to 85.1% of total deposits at December 31, 2021.
48
Table of Contents
Municipal money market accounts and reciprocal deposit relationships with municipalities totaled $679.0 million at year-end 2022, which decreased 18.12% from year-end 2021. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds.
The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $56.3 million at December 31, 2022, and $66.8 million at December 31, 2021. Management generally views local repurchase agreements as an alternative to large time deposits. Refer to "Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s repurchase agreements.
The Company’s other borrowings totaled $291.3 million at year-end 2022, which were up $167.3 million over prior year end. Loan growth and lower deposit balances compared to year-end 2021 contributed to the increase in borrowings year-over-year. The $291.3 million in borrowings at December 31, 2022, represented $241.3 million in overnight advances from the FHLB and $50.0 million in term advances from the FHLB. Borrowings of $124.0 million at year-end 2021 represented $14.0 million in overnight borrowings and $110.0 million in FHLB term advances. Of the $50.0 million in FHLB term advances at year-end 2022, $40.0 million are due in over one year. Refer to "Note 9 - Other Borrowings" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s term borrowings with the FHLB.
Liquidity Management
The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company may also use borrowings as part of a growth strategy. Asset and liability positions are monitored primarily through the Asset/Liability Management Committee of the Company’s subsidiary bank. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur. Management measures liquidity, including the level of cash, unencumbered securities, and the availability of of dependable borrowing sources. The board has set a policy limit stating that reliable sources of liquidity should remain in excess of 6% of total assets. The ratio was 21.6% of assets at December 31, 2022.
Core deposits, discussed above under "Deposits and Other Liabilities", are a primary and low cost funding source obtained primarily through the Company’s branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of $250,000 or more, brokered time deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight borrowings and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources.
Non-core funding sources totaled $1.4 billion at December 31, 2022, an increase of $168.1 million or 14.0% from $1.2 billion at December 31, 2021. The increase is due to lower deposit balances that were replaced by FHLB borrowings. Non-core funding sources as a percentage of total liabilities increased from 17.0% at year-end 2021 to 19.4% at year-end 2022.
Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.8 billion at December 31, 2022 were either pledged or sold under agreements to repurchase, compared to $1.4 billion at December 31, 2021. Pledged securities or securities sold under agreements to repurchase represented 82.4% of total securities at December 31, 2022, compared to 59.4% of total securities at December 31, 2021.
Cash and cash equivalents totaled $77.8 million at December 31, 2022, a decrease from $63.1 million at December 31, 2021. Short-term investments, consisting of securities due in one year or less, decreased from $77.9 million at December 31, 2021, to $50.3 million at December 31, 2022.
49
Table of Contents
Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but they have monthly principal reductions. Total mortgage-backed securities, at fair value, were $738.9 million at December 31, 2022 compared with $947.7 million at December 31, 2021. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.6 billion at both December 31, 2022 and 2021. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.
Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary bank, the Company has borrowing relationship with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. At December 31, 2022, the unused borrowing capacity on established lines with the FHLB was $1.3 billion.
As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At December 31, 2022, total unencumbered mortgage loans and securities of the Company were $1.3 billion. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB.
The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.
Table 7 - Loan Maturity
Remaining maturity of loans December 31, 2022
Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1 year, $2.2 billion have fixed rates and $2.6 billion have adjustable rates.
Off-Balance Sheet Arrangements
In the normal course of business, the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States, are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan commitments expire within one year from the date of issue, the total amount of these loan commitments as of December 31, 2022, are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in "Note 17 Commitments and Contingent Liabilities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
Contractual Obligations
The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application through June 30, 2024 along with contracts for more specialized software programs through 2026. Further information on the Company’s lease arrangements is provided in "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. The Company’s contractual obligations as of December 31, 2022, are shown in Table 8-Contractual Obligations and Commitments below.
50
Table of Contents
Table 8 - Contractual Obligations and Commitments
Contractual cash obligations At December 31, 2022Payments due within
(In thousands) Total 1 year 1-3 years 3-5 years After 5 years
1 Operating leases include renewals the Company considers reasonably certain to exercise.
Non-GAAP Disclosure