TOMPKINS FINANCIAL CORPORATION The following analysis is intended to provide the reader with a further understanding of the consolidated financial condition and results of operations of the Company and its operating subsidiaries for the periods shown. This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with other sections of this Report on Form 10-K, including Part I, "Item 1. Business," Part II, "Item 6. Selected Financial Data," and Part II, "Item 8. Financial Statements and Supplementary Data." OverviewTompkins Financial Corporation ("Tompkins" or the "Company") is headquartered inIthaca, New York and is registered as aFinancial Holding Company with theFederal 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. AtDecember 31, 2020 , the Company's subsidiaries included: four wholly-owned banking subsidiaries,Tompkins Trust Company (the "Trust Company "), TheBank of Castile (DBA Tompkins Bank of Castile ),Mahopac Bank (DBA Tompkins Mahopac Bank ),VIST Bank (DBA Tompkins VIST Bank ); and a wholly-owned insurance agency subsidiary,Tompkins Insurance Agencies, Inc. ("Tompkins Insurance "). The trust division of theTrust Company provides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company's principal offices are located at118 E. Seneca Street , P.O. Box 460,Ithaca, NY , 14850, and its telephone number is (888) 503-5753. The Company's common stock is traded on the NYSE American under the Symbol "TMP."
Forward-Looking Statements
This Annual Report on Form 10-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. The statements
contained in this Report that are not statements of historical fact may include
forward-looking statements that involve a number of risks and uncertainties.
Forward-looking statements may be identified by use of such words as "may",
"will", "estimate", "intend", "continue", "believe", "expect", "plan", or
"anticipate", and other similar words. Examples of forward-looking statements
may include statements regarding the asset quality of the Company's loan
portfolios; the level of the Company's allowance for credit losses; whether,
when and how borrowers will repay deferred amounts and resume scheduled
payments; the sufficiency of liquidity sources; the Company's exposure to
changes in interest rates, and to new, changed, or extended
government/regulatory expectations; the impact of changes in accounting
standards; and trends, plans, prospects, growth and strategies. Forward-looking
statements are made based on management's expectations and beliefs concerning
future events impacting the Company and are subject to certain uncertainties and
factors relating to the Company's operations and economic environment, all of
which are difficult to predict and many of which are beyond the control of the
Company, that could cause actual results of the Company to differ materially
from those expressed and/or implied by forward-looking statements. The following
factors, in addition to those listed as Risk Factors in Item 1A are among those
that could cause actual results to differ materially from the forward-looking
statements: changes in general economic, market and regulatory conditions; the
severity and duration of the COVID-19 outbreak and the impact of the outbreak
(including the government's response to the outbreak) on economic and financial
markets, potential regulatory actions, and modifications to our operations,
products, and services relating thereto; disruptions in our and our customers'
operations and loss of revenue due to pandemics, epidemics, widespread health
emergencies, government-imposed travel/business restrictions, or outbreaks of
infectious diseases such as the COVID-19, and the associated adverse impact on
our financial position, liquidity, and our customers' abilities or willingness
to repay their obligations to us or willingness to obtain financial services
products from the Company; a decision to amend or modify the terms under which
our customers are obligated to repay amounts owed to us; the development of an
interest rate environment that may adversely affect the Company's interest rate
spread, other income or cash flow anticipated from the Company's operations,
investment and/or lending activities; changes in laws and regulations affecting
banks, bank holding companies and/or financial holding companies, such as the
Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and
Consumer Protection Act; legislative and regulatory changes in response to
COVID-19 with which we and our subsidiaries must comply, including the
Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the
Consolidated Appropriations Act, 2021 and the rules and regulations promulgated
thereunder, and federal, state and local government mandates; technological
developments and changes; the ability to continue to introduce competitive new
products and services on a timely, cost-effective basis; governmental and public
policy changes, including environmental regulation; reliance on large customers;
uncertainties arising from national and global events, including the potential
impact of widespread protests, civil unrest, and political uncertainty on the
economy and the financial services industry; and financial resources in the
amounts, at the times and on the terms required to support the Company's future
businesses.
31
--------------------------------------------------------------------------------
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. On January 1, 2020 , the Company
adopted ASU 2016-13, "Financial Instruments - Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments," which resulted in
changes to the Company's existing critical accounting policy that existed at
December 31, 2019 .
The Company's methodology for estimating the allowance considers available
relevant information about the collectability of cash flows, including
information about past events, current conditions, and reasonable and
supportable forecasts. Refer to "Allowance for Credit Losses" below, "Note 4 -
Allowance for Credit Losses", and "Note 1 - Summary of Significant Accounting
Policies" in the Notes to Consolidated Financial Statements in Part II, Item 8.
of this Form 10-K for the year ended December 31, 2020 .
For information on the Company's significant accounting policies and to gain a
greater understanding of how the Company's financial performance is reported,
refer to "Note 1 - Summary of Significant Accounting Policies" in the Notes to
Consolidated Financial Statements in Part II, Item 8. of this Form 10-K for the
year ended December 31, 2020 .
COVID-19 Pandemic and Recent Events
The COVID-19 global pandemic presented health and economic challenges on an unprecedented scale in 2020. During the year, the Company focused on the health and well-being of its workforce, meeting its clients' needs, and supporting its communities. The Company has designated a Pandemic Planning Committee, which includes key individuals across the Company as well as members of Senior Management, to oversee the Company's response to COVID-19, and has implemented a number of risk mitigation measures designed to protect our employees and customers while maintaining services for our customers and community. These measures included restrictions on business travel, establishment of a remote work environment for most non-customer facing employees, and social distancing restrictions for those employees working at our offices and branch locations. InJuly 2020 , we began initiating the reopening of our offices and reinstatement of branch services, and the return of our workforce, but as ofDecember 31, 2020 , approximately 85% of our noncustomer facing employees continued to work remotely. To promote the health and well-being of the Company's workforce, customers, and visitors as we reopen, we implemented several new social distancing protocols and other protective measures, such as temperature screenings, distribution of personal protective equipment, and workforce self-certifications. Tompkins continues to offer assistance to its customers affected by the COVID-19 pandemic by implementing a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Our standard program allows for the deferral of loan payments for up to 90 days. In certain cases, and where required by applicable law or regulations, we extend additional deferrals or other accommodations. Weekly deferral requests for the month ofDecember 2020 were down 98.5% from peak levels the Company experienced in lateMarch 2020 . As ofDecember 31, 2020 , total loans impacted by COVID-19 that continued in a deferral status amounted to approximately$212.2 million , representing 4.0% of total loans. Loans to finance hotels and motels comprise approximately 53.0% of total loans that continue in deferral status. Of the loans that had come out of the deferral program as ofDecember 31, 2020 , about 94.4% had made at least one payment and 0.13% were more than 30 days delinquent. We expect that loans that are currently in deferral will continue to accrue interest during the deferral period unless otherwise classified as nonperforming. The provisions of the CARES Act and interagency guidance issued by Federal banking regulators provided clarification related to modifications and deferral programs to assist borrowers who are negatively impacted by the COVID-19 national emergency. Under the CARES Act, a modification deemed to be COVID-19 related is not considered to be a troubled debt restructuring ("TDR") if the loan was not more than 30 days past due as ofDecember 31, 2019 and the deferral was executed betweenMarch 1, 2020 and the 32 -------------------------------------------------------------------------------- Table of Contents earlier of 60 days after the date of termination of the COVID-19 national emergency orDecember 31, 2020 . The Consolidated Appropriations Act, 2021 extended the termination of these provisions to the earlier of 60 days after the COVID-19 national emergency date orJanuary 1, 2022 . The Federal banking regulators issued similar guidance. In accordance with the CARES Act, the Consolidated Appropriations Act, 2021, and the interagency guidance, the Company is not designating eligible loan modifications and deferrals resulting from the impacts of COVID-19 as TDRs. Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions. The table below lists certain larger industry concentrations within our loan portfolio and the percentage of each segment that are currently in a deferral status. Deferral Credit Concentrations (In thousands) As of December 31, 2020 Percent of Loans Portfolio Balance Deferral Balance Currently in Deferral Description ($) Concentration* ($) Status Lessors of Residential Buildings and Dwellings$ 520,793 16.1 % $ 490 0.1 % Hotels and Motels 191,690 5.9 % 101,496 52.9 % Dairy Cattle and Milk Production 194,050 6.0 % 0 0 Health Care and Social Assistance 156,693 4.8 % 0 0 Lessors of Other Real Estate Property 123,835 3.8 % 8,678 7.0 %$ 2,176,729
The Company is also participating in theU.S. Small Business Administration ("SBA") Paycheck Protection Program ("PPP"). Borrowers with loan balances which are not forgiven are obligated to repay such balances over a 2-year term at a rate of 1% interest, with principal and interest payments deferred for the first six months. The SBA has announced that, under limited circumstances described in the current SBA guidance, fees will not be paid, even if the participating lender has approved and processed the PPP loan. The Company began accepting applications for PPP loans onApril 3, 2020 , and approved and funded 2,998 loans totaling approximately$465.6 million during the second quarter of 2020. The Company received approximately$14.5 million of fees related to the PPP loans funded. The fees are amortized as interest income over the life of the loan and recognized net of origination costs. The Company recognized net loan fees of$9.2 million in 2020 related to the PPP loans. This program provides borrower guarantees for lenders, and envisions a certain amount of loan forgiveness for loan recipients who properly utilize funds, all in accordance with the rules and regulations established by the SBA for the PPP. AtDecember 31, 2020 , the Company had submitted 1,484 loans totaling$244.0 million to the SBA for forgiveness under the terms of the PPP program. Approximately 1,212 of those loans, totaling$171.1 million , had been forgiven by the SBA as ofDecember 31, 2020 . OnJanuary 11, 2021 , the SBA reactivated the PPP. The Company's banking subsidiaries have originated additional PPP loans through the PPP, which is currently scheduled to extend throughMarch 31, 2021 . As ofFebruary 21, 2021 the Company had submitted 1,341 PPP loan applications totaling$171.0 million under the 2021 PPP authorization. As ofDecember 31, 2020 , the Company's nonperforming assets represented 0.60% of total assets, up from 0.44% atSeptember 30, 2020 , and 0.47% atDecember 31, 2019 . Special Mention loans totaled$121.3 million at the end of the fourth quarter of 2020, in line with the quarter endedSeptember 30, 2020 , and up compared to the$29.8 million reported for the fourth quarter of 2019. Total Substandard loans increased during the quarter to$68.6 million atDecember 31, 2020 , compared to$45.4 million atSeptember 30, 2020 , and$60.5 million atDecember 31, 2019 . The increases in nonperforming loans and leases and Substandard loans were mainly related to the downgrades of credit in the loan portfolio related to the hospitality industry. Included in the nonperforming and Substandard loans and leases are 17 loans totaling$17.8 million , that are currently in deferral status. Results of Operations (Comparison ofDecember 31, 2020 and 2019 results)
General
The Company reported diluted earnings per share of
33
--------------------------------------------------------------------------------
Table of Contents
In addition to earnings per share, key performance measurements for the Company
include return on average shareholders' equity (ROE) and return on average
assets (ROA). ROE was 11.09% in 2020, compared to 12.55% in 2019, while ROA was
1.05% in 2020 and 1.22% in 2019. Tompkins' 2020 ROE and ROA compared favorably
with peer ratios of 8.40% for ROE and 0.88% for ROA, as of September 30, 2020 .
The peer group data is derived from the FRB's "Bank Holding Company Performance
Report", which covers banks and bank holding companies with assets between $3.0
billion and $10.0 billion as of September 30, 2020 (the most recent report
available). Although the peer group data is presented based upon financial
information that is one fiscal quarter behind the financial information included
in this report, the Company believes that it is relevant to include certain peer
group information for comparison to current period numbers.
Segment Reporting
The Company operates in three business segments: banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under theTompkins Insurance Agencies, Inc. subsidiary. Wealth management activities include the results of the Company's trust, financial planning, and wealth management services provided byTompkins Financial Advisors , a division of theTrust Company . All other activities are considered banking. For additional financial information on the Company's segments, refer to "Note 23 - Segment and Related Information" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. Banking Segment The banking segment reported net income of$69.3 million for the year endedDecember 31, 2020 , representing a$5.2 million or 7.0%, decrease compared to 2019. Net interest income increased$14.7 million or 7.0% in 2020 compared to 2019. Contributing to the increase from 2019 were lower funding costs and an increase in average earning assets, which were partially offset by lower asset yield. Interest income decreased$7.0 million or 2.7% compared to 2019, while interest expense decreased$21.8 million or 42.9%. The provision for credit loss expense was$16.2 million in 2020, compared to$1.4 million in the prior year. The first quarter of 2020 included provision expense of$16.3 million related to the impact of the economic conditions due to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, and reflects the calculation of the allowance for credit losses in accordance with ASU 2016-13. For additional information, see the section titled "The Allowance for Credit Losses" below. Noninterest income in the banking segment of$26.0 million in 2020 decreased by$3.0 million or 10.5% when compared to 2019. The negative variance compared to the prior year was mainly in fee based services and was largely a result of a decrease in transactions attributable to the economic impact of pandemic-related travel and business restrictions, which reduced card services and the related service charge income. Card services fees and deposit fees in 2020 were down 12.0% and 24.1%, respectively, from prior year. This decrease was partially offset by gains on sales of residential loans, which were up$1.8 million over 2019, and the increase was mainly due to a higher volume of loans sold and higher premiums paid on sold loans. Noninterest expense of$148.7 million for the year endedDecember 31, 2020 , was up$3.6 million or 2.5% from 2019. The increases were mainly attributed to increases in salary and wages and employee benefits reflecting normal annual merit increases, premium pay for employees required to be on-site during pandemic-related business restrictions, and higher health insurance expense over the comparable periods in the prior year. Noninterest expenses for the year endedDecember 31, 2020 , included$1.0 million in off-balance sheet exposures calculated due to changes in methodology in accordance with the adoption of ASU 2016-13. Insurance Segment The insurance segment reported net income of$4.4 million , up$198,000 or 4.7% when compared to 2019, as a$429,000 or 1.4% increase in noninterest revenue was only partially offset by a 0.1% increase in expenses. The increase in revenue included$384,000 or 1.9% of organic growth in property and casualty commissions and a$167,000 or 5.5% increase in contingency revenue over 2019. Health and voluntary benefits grew by$105,000 or 1.4%, while life, financial services and other revenue was$212,000 or 40.2% less than 2019; 2019 benefited from the new business of one large relationship in 2019. Increases in expenses, mainly attributed to salaries, wages and employee benefits reflecting normal annual merit and incentive adjustments along with higher health insurance costs, were mainly offset by reductions in items such as auto, travel, entertainment and marketing that were affected by COVID-19 pandemic. 34 -------------------------------------------------------------------------------- Table of Contents Wealth Management Segment The wealth management segment reported net income of$4.0 million for the year endedDecember 31, 2020 , an increase of$0.9 million or 29.0% compared to 2019. Noninterest income of$18.1 million increased$1.1 million or 6.6% compared to 2019, mainly a result of estate and terminating trust fees, which were up$569,000 or 176.4% in 2020 over 2019, as a result of the settlement of a large estate in 2020, and an increase in assets under management. Noninterest expenses remained flat year over year, as increases in technology expenses were offset by decreases in travel and meetings expenses as a result of the COVID-19 pandemic. The market value of assets under management or in custody atDecember 31, 2020 totaled$4.4 billion , an increase of 9.5% compared to year-end 2019. This figure included$1.2 billion at year-end 2020, of Company-owned securities from which no income was recognized as theTrust Company was serving as custodian.
Net Interest Income
Net interest income is the Company's largest source of revenue, representing 75.3% of total revenues for the year endedDecember 31, 2020 , and 73.6% of total revenues for the year endedDecember 31, 2019 . Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Table 1 - Average Statements of Condition and Net Interest Analysis shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. Tax-equivalent net interest income for 2020 increased by$15.2 million or 7.1% from 2019. The increase was mainly due to lower interest expense in 2020 compared to 2019, driven by lower market interest rates and by deposit growth, which contributed to a reduction in other borrowings. Average total deposits represented 91.7% of average total liabilities in 2020 compared to 84.4% in 2019, while total average borrowings represented 6.6% of average total liabilities in 2020 and 13.9% in 2019. Net interest income also benefited from the growth in average earning assets in 2020 over 2019; however, average asset yields for 2020 were down from 2019. The net interest margin for 2020 was 3.31% compared to 3.39% for 2019. The decline in net interest margin for 2020 when compared to 2019 was mainly due to a decrease in overall asset yields. The decrease in average asset yields was mainly due to lower securities yields and a slight shift in the composition of average earning assets, with a greater mix of lower yielding average interest bearing balances. Tax-equivalent interest income decreased$6.6 million or 2.5% in 2020 from 2019. The decrease in taxable-equivalent interest income was mainly due to lower asset yields, partially offset by an increase in the volume of average earning assets. Average asset yields for 2020 were down 47 basis points compared to 2019, which reflects the impact of reductions in market interest rates during 2020, and the addition of lower yielding PPP loans. Average loans and leases increased$398.0 million or 8.2% in 2020 compared to 2019, and represented 76.1% of average earning assets in 2020 compared to 77.1% in 2019. The increase in average loans includes$465.6 million in PPP loans originated in the second quarter of 2020. As a result of its participation in the SBA's PPP, the Company recorded net deferred loan fees of$9.2 million , which are included in interest income. The average yield on loans was 4.38% in 2020, a decrease of 34 basis points compared to 4.72% in 2019. Average balances on securities increased$27.4 million or 2.0% in 2020 compared to 2019, while the average yield on the securities portfolio decreased 47 basis points or 20.4% compared to 2019 due to lower market interest rates in 2020. Interest expense for 2020 decreased$21.8 million or 42.9% compared to 2019, driven mainly by decreases in rates paid on deposits and borrowings as a result of lower market interest rates. The average cost of interest bearing deposits was 0.46% in 2020, down 38 basis points from 0.84% in 2019, while the average cost of interest bearing liabilities decreased to 0.60% in 2020 from 1.12% in 2019. Average interest bearing deposits in 2020 increased$671.0 million or 18.2% compared to 2019. Average noninterest bearing deposit balances in 2020 increased$349.9 million or 24.9% over 2019 and represented 28.7% of average total deposits in 2020 compared to 27.6% in 2019. Average total deposits were up$1.0 billion or 20.1% in 2020 over 2019. Average deposit balances increased due to the$465.6 million of PPP loan originations during the second quarter of 2020, the majority of which were deposited into Tompkins checking accounts, as well as brokered funds obtained in the first half of 2020 to support PPP loans and overall liquidity during COVID-19. Average other borrowings decreased by$397.3 million or 52.1% in 2020 from 2019. The decrease in borrowings was due to the strong deposit growth during 2020. 35 -------------------------------------------------------------------------------- Table of Contents Table 1 - Average Statements of Condition and Net Interest Analysis For the year ended December 31, 2020 2019 2018 Average Average Average Balance Average Balance Average Balance Average (dollar amounts in thousands) (YTD) Interest
Yield/Rate (YTD) Interest Yield/Rate (YTD)
Interest Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks $ 194,211 $ 194 0.10 % $ 1,647 $ 41 2.49 % $ 2,139 $ 31 1.45 %
Securities1
U.S. Government securities 1,307,905 22,906 1.75 % 1,301,813 29,411 2.26 % 1,429,875 31,645 2.21 % State and municipal2 114,462 3,048 2.66 % 93,168 2,547 2.73 % 97,116 2,520 2.59 % Other securities2 3,430 117 3.40 % 3,417 158 4.62 % 3,491 153 4.38 % Total securities 1,425,797 26,071 1.83 % 1,398,398 32,116 2.30 % 1,530,482 34,318 2.24 % FHLBNY and FRB stock 20,815 1,373 6.60 % 38,308 3,003 7.84 % 51,815 3,377 6.52 % Total loans and leases, net of unearned income2,3 5,228,135 228,806 4.38 % 4,830,089 227,869 4.72 % 4,757,583 215,648 4.53 % Total interest-earning assets 6,868,958 256,444 3.73 % 6,268,442 263,029 4.20 % 6,342,019
253,374 4.00 % Other assets 489,520 411,136 350,659 Total assets$ 7,358,478 $ 6,679,578 $ 6,692,678 LIABILITIES & EQUITY Deposits Interest-bearing deposits Interest bearing checking, savings, & money market$ 3,650,358 $ 9,430 0.26 %$ 3,007,221 $ 20,099 0.67 %$ 2,822,747 $ 9,847 0.35 % Time deposits 703,999 10,534 1.50 % 676,106 10,805 1.60 % 664,788 6,748 1.02 % Total interest-bearing deposits 4,354,357 19,964 0.46 % 3,683,327 30,904 0.84 % 3,487,535 16,595 0.48 % Federal funds purchased & securities sold under agreements to repurchase 55,973 95 0.17 % 59,825 143 0.24 % 63,472 152 0.24 % Other borrowings 365,732 7,799 2.13 % 762,993 18,427 2.42 % 1,086,847 21,818 2.01 % Trust preferred debentures 17,092 1,133 6.63 % 16,943 1,276 7.53 % 16,771 1,227 7.32 %
Total interest-bearing liabilities 4,793,154 28,991
0.60 % 4,523,088 50,750 1.12 % 4,654,625 39,792 0.85 %
Noninterest bearing deposits 1,753,226 1,403,330 1,382,550
Accrued expenses and other liabilities 112,544 101,819 64,559
Total liabilities 6,658,924 6,028,237 6,101,734
Tompkins Financial Corporation
Shareholders' equity 698,088 649,871 589,475
Noncontrolling interest 1,466 1,470 1,469
Total equity 699,554 651,341 590,944
Total liabilities and equity $ 7,358,478 $ 6,679,578 $ 6,692,678
Interest rate spread 3.13 % 3.07 % 3.14 %
Net interest income /margin on earning
assets 227,453 3.31 % 212,279 3.39 % 213,582 3.37 %
Tax Equivalent Adjustment (2,114) (1,651) (1,782)
Net interest income per consolidated financial statements$ 225,339 $ 210,628 $ 211,800 1 Average balances and yields on available-for-sale securities are based on historical amortized cost. 2 Interest income includes the tax effects of taxable-equivalent adjustments using the Federal income tax rate of 21.0% in 2020, 2019 and 2018 to increase tax exempt interest income to taxable-equivalent basis. 3 Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company's consolidated financial statements included in Part 1 of this annual report on Form 10-K. 36 -------------------------------------------------------------------------------- Table of Contents Table 2 - Analysis of Changes in Net Interest Income 2020 vs. 2019 2019 vs. 2018 Increase (Decrease) Due to Change Increase (Decrease) Due to Change in Average in Average (In thousands)(taxable equivalent) Volume Yield/Rate Total Volume Yield/Rate Total INTEREST INCOME: Interest-bearing balances due from banks$ 229 $ (76) $ 153 $ (10) $ 20 $ 10 Investments1 Taxable 139 (6,685) (6,546) (2,896) 667 (2,229) Tax-exempt 566 (65) 501 (105) 132 27 FHLB and FRB stock (1,212) (418) (1,630) (970) 596 (374) Loans, net1 18,122 (17,185) 937 3,354 8,867 12,221 Total interest income$ 17,844 $ (24,429) $ (6,585) $ (627) $ 10,282 $ 9,655 INTEREST EXPENSE: Interest-bearing deposits: Interest checking, savings and money market 3,638 (14,307) (10,669) 938 9,314 10,252 Time 440 (711) (271) 148 3,909 4,057 Federal funds purchased and securities sold under agreements to repurchase (8) (40) (48) (9) 0 (9) Other borrowings (8,642) (2,129) (10,771) (7,148) 3,806 (3,342) Total interest expense (4,572) (17,187) (21,759) (6,071) 17,029 10,958 Net interest income$ 22,416 $ (7,242) $ 15,174 $ 5,444 $ (6,747) $ (1,303) 1 Interest income includes the tax effects of taxable-equivalent adjustments using the Federal income tax rate of 21.0% in 2020, 2019 and 2018 to increase tax exempt interest income to taxable-equivalent basis. Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. In 2020, net interest income increased by$15.2 million , resulting from a$21.8 million decrease in interest expense, partially offset by a$6.6 million decrease in interest income. Lower yields on average earning assets reduced interest income by$24.4 million , while the increase in average balances on interest-earning assets increased interest income by$17.8 million . The decrease in interest expense reflects lower rates paid on interest bearing liabilities, both deposits and other borrowings. Lower rates on deposits and borrowings reduced interest expense by$17.2 million , while lower average balances of interest bearing liabilities reduced interest expense by$4.6 million .
Provision for Credit Loss Expense
The provision for credit loss expense represents management's estimate of the expense necessary to maintain the allowance for credit losses at an appropriate level. The provision for credit loss expense was$16.2 million in 2020, compared to$1.4 million in 2019. The ratio of total allowance to total loans and leases increased to 0.98% atDecember 31, 2020 from 0.81% atDecember 31, 2019 . The first quarter of 2020 included a provision expense of$16.3 million driven by the impact of the economic restrictions/shutdowns related to COVID-19 on economic forecasts and other model assumptions relied upon by management in determining the allowance, as well as normal adjustments for loan growth and changing loan portfolio mix. See the section captioned "The Allowance for Credit Losses" included within "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition" of this Report for further analysis of the Company's allowance for credit losses. 37 --------------------------------------------------------------------------------
Table of Contents
Noninterest Income
Year ended December 31,
(In thousands) 2020 2019 2018
Insurance commissions and fees $ 31,505 $ 31,091 $ 29,369
Investment services 17,520 16,434
17,288
Service charges on deposit accounts 6,312 8,321 8,435 Card services 9,263 10,526 9,693 Other income 8,817 8,416 13,130 Net gain (loss) on securities transactions 443 645 (466) Total$ 73,860 $ 75,433 $ 77,449
Noninterest income represented 24.7% of total revenues in 2020, and 26.4% in 2019.
Insurance commissions and fees increased 1.3% to$31.5 million in 2020, compared to$31.1 million in 2019. The increase in insurance commissions and fees in 2020 over 2019, was mainly in property and casualty commissions, personal line commissions, and contingency income, partially offset by an increase in reserves for cancellations and policy changes as a result of economic uncertainties related to COVID-19. New business volumes were also negatively impacted by COVID-19. Investment services income of$17.5 million increased$1.1 million or 6.6% in 2020 compared to 2019, mainly due to an increase in advisory fee income resulting from the growth in assets under management, and higher estate and terminating trust fees earned in 2020. Investment services income includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was$4.4 billion atDecember 31, 2020 , up from$4.1 billion atDecember 31, 2019 . The fair value of assets in custody atDecember 31, 2020 and 2019 includes$1.2 billion , and$1.0 billion , respectively, of Company-owned securities whereTompkins Trust Company is custodian. Service charges on deposit accounts in 2020 were down$2.0 million or 24.1% compared to the prior year. Overdraft/insufficient funds charges, the largest component of service charges on deposit accounts, were down$1.7 million or 32.2% in 2020 compared to 2019. The decreases in overdraft/insufficient funds charges during 2020 were primarily related to a decrease in the volume of overdrafts relative to 2019. Card services income decreased$1.3 million or 12.0% over 2019. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. The reduction in card services income in 2020, when compared to 2019, is largely related to the pandemic-related travel and business restrictions, which resulted in lower transaction volume. Additionally, card services income for 2019 included a one-time incentive payment of$500,000 related to the Company's merchant card business. Other income of$8.8 million was up$401,000 or 4.8% compared to 2019. The increase was largely due to gains on sales of residential mortgage loans of$2.0 million in 2020, compared to gains of$227,000 in 2019, due to a higher volume of loans sold and higher premiums paid on loans sold in 2020. Noninterest Expense Year ended December 31, (In thousands) 2020 2019 2018 Salaries and wages$ 92,519 $ 89,399 $ 85,625 Other employee benefits 24,812 23,488 22,090
Net occupancy expense of premises 12,930 13,210 13,309 Furniture and fixture expense
7,846 7,815 7,351
FDIC insurance 2,398 773 2,618
Amortization of intangible assets 1,484 1,673 1,771
Other 43,393 45,476 48,303
Total $ 185,382 $ 181,834 $ 181,067
Noninterest expense as a percentage of total revenue was 62.0% in 2020, compared
to 63.6% in 2019. Expenses associated with salaries and wages and employee
benefits are the largest component of total noninterest expense. In 2020, these
expenses increased $4.4 million or 3.9% compared to 2019. Salaries and wages
increased $3.1 million or 3.5% in 2020 over the prior
38
--------------------------------------------------------------------------------
Table of Contents
year, mainly as a result of annual merit pay increases. Other employee benefits
increased $1.3 million or 5.6% over 2019, mainly in health insurance, which was
up $942,000 or 10.4% in 2020 over 2019. The $1.6 million increase in FDIC
expense in 2020 over 2019 is due to the benefit of the FDIC insurance assessment
small bank credits in 2019.
Other operating expenses of $43.4 million decreased by $2.1 million or 4.6%
compared to 2019. The primary components of other operating expenses in 2020
were technology expense ($11.8 million ), professional fees ($6.1 million ),
marketing expense ($4.8 million ), and cardholder expense ($3.3 million ) The
decrease in other operating expenses in 2020 compared to 2019 was mainly in
professional fees (down $2.9 million or 32.3%) and business related travel and
entertainment expense (down $1.3 million or 67.3%). These decreases were
partially offset by increases in technology related expenses in 2020 over 2019
(up $1.1 million or 10.5%), and expense related to our allowance for off-balance
sheet exposures (up $1.0 million ).
Noncontrolling Interests
Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of$154,000 in 2020, up$27,000 from 2019. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company'sNew York banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for Federal,New York State ,Pennsylvania and other miscellaneous state income taxes. The 2020 provision was$19.9 million , which decreased$1.1 million or 5.2% compared to the 2019 provision. The effective tax rate for the Company was 20.4% in 2020, down from 20.5% in 2019. The effective rates for 2020 and 2019 differed from theU.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. Results of Operations (Comparison ofDecember 31, 2019 and 2018 results)
General
The Company reported diluted earnings per share of
In addition to earnings per share, key performance measurements for the Company include return on average shareholders' equity (ROE) and return on average assets (ROA). ROE was 12.55% in 2019, compared to 13.93% in 2018, while ROA was 1.22% in 2019 and 1.23% in 2018.
Segment Reporting
Banking Segment The banking segment reported net income of$74.5 million for the year endedDecember 31, 2019 , representing a$424,000 or 0.6% decrease compared to 2018. Net interest income decreased$1.2 million or 0.6% in 2019 compared to 2018. Contributing to the decline from 2018, was a decline in average security balances, which was partially offset by an improved net interest margin in 2019. Interest income increased$9.8 million or 3.9% compared to 2018, while interest expense increased$11.0 million or 27.5%. The provision for loan and lease losses was$1.4 million in 2019, compared to$3.9 million in the prior year. The reduction in provision was primarily due to a$3.0 million specific reserve on one commercial real estate property atDecember 31, 2018 , which was subsequently charged off in the first quarter of 2019. The provision expense in 2019 also benefited from favorable trends in certain qualitative factors and lower average historical loan loss rates in all loan portfolios except commercial real estate at year-end 2019, compared to year-end 2018. Noninterest income in the banking segment of$29.1 million in 2019 decreased by$2.7 million or 8.5% when compared to 2018. The negative variance to prior year was mainly due to the$2.9 million gain on the sale of two properties in 2018 related to the completion and move to the Company's new headquarters building and the collection of fees and nonaccrual interest of$2.5 million in 2018 on a loan that was charged off in 2010. This was partially offset by the$500,000 one-time incentive payment received by the Company in the first quarter of 2019 related to the Company's merchant card business, and gains of 39
--------------------------------------------------------------------------------
Table of Contents
Noninterest expenses in 2019 were flat compared to 2018. Salary and wages and employee benefits were up in 2019 over 2018, mainly as a result of an increase in average FTEs, normal annual merit and incentive adjustments and higher health insurance costs. These increases were mainly offset by a decrease in other operating expenses.FDIC insurance expense was down in 2019 compared to 2018, mainly as a result of deposit insurance credits received from theFDIC , which included$1.5 million that were applied in 2019. 2018 operating expenses included write-downs of$2.3 million on leases on space vacated in 2018 following completion of the Company's new headquarters in 2018. Insurance Segment The insurance segment reported net income of$4.2 million , up$926,000 or 28.5% when compared to 2018, as a 5.9% increase in noninterest revenue was only partially offset by a 1.9% increase in expenses. This increase included$900,000 or 4.6% of organic growth in property and casualty commissions and a$738,000 or 32.0% increase in contingency revenue over 2018, while life, health and financial services commissions decreased slightly. OnMay 1, 2019 ,Tompkins Insurance purchased the assets ofCali Agency, Inc. inWarsaw, NY , adding an additional$112,000 in non-interest income for 2019. The increase in expenses was mainly attributed to an increase in salary and wages and employee benefits reflecting normal annual merit and incentive adjustments and higher health insurance costs, respectively, over the prior year. Wealth Management Segment The wealth management segment reported net income of$3.1 million for the year endedDecember 31, 2019 , a decrease of$1.1 million or 26.3% compared to 2018. Noninterest income of$17.0 million decreased$1.0 million or 5.5% compared to 2018, mainly a result of estate and terminating trust fees, which were down$1.0 million or 75.4% in 2019 over 2018, as a result of the settlement of a large estate in 2018. Noninterest expenses increased by$331,000 or 2.6% in 2019 compared to 2018, mainly due to changes in staffing and normal merit and incentive adjustments in 2019 compared to 2018. The market value of assets under management or in custody atDecember 31, 2019 totaled$4.1 billion , an increase of 6.7% compared to year-end 2018. This figure included$1.0 billion at year-end 2019 of Company-owned securities from which no income was recognized as theTrust Company was serving as custodian.
Net Interest Income
Net interest income is the Company's largest source of revenue, representing 73.6% of total revenues for the year endedDecember 31, 2019 , and 73.2% of total revenues for the year endedDecember 31, 2018 . Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Tax-equivalent net interest income for 2019 decreased by$1.3 million or 0.6% from 2018. The decrease was mainly due to the decline in average earning assets and higher funding costs in 2019 compared to 2018. Average total deposits represented 84.4% of average total liabilities in 2019 compared to 79.8% in 2018, while total average borrowings represented 13.9% of average total liabilities in 2019 and 19.1% in 2018. Tax-equivalent interest income increased$9.7 million or 3.8% in 2019 over 2018. The increase in taxable-equivalent interest income was mainly the result of improved asset yields and an increase in average loan balances. Average loans and leases increased$72.5 million or 1.5% in 2019 compared to 2018. Average loan balances represented 77.1% of average earning assets in 2019 compared to 75.0% in 2018. The average yield on interest earning assets for 2019 was 4.2%, which increased by 20 basis points from 2018. The average yield on loans was 4.72% in 2019, an increase of 19 basis points compared to 4.53% in 2018. Average balances on securities decreased$132.1 million or 8.6% compared to 2018, while the average yield on the securities portfolio increased 5 basis points or 2.2% compared to 2018. The decrease in average securities was mainly due to the sale of approximately$152.1 million of available-for-sale securities in the second quarter of 2019. The proceeds from the sale were mainly used to reduce borrowings. Interest expense for 2019 increased$11.0 million or 27.5% compared to 2018, reflecting higher rates as average interest bearing liabilities decreased$131.5 million or 2.8% from 2018. The increase in interest expense was the result of the increase in the average rates paid on deposits and interest bearing liabilities in 2019 compared to 2018. The average cost of interest bearing deposits was 0.84% in 2019, up 36 basis points from 0.48% in 2018, while the average costs of interest bearing liabilities increased to 1.12% in 2019 from 0.85% in 2018. Average total deposits were up$216.6 million or 4.4% in 2019 over 2018, with the majority of the growth in average interest bearing deposits. Average interest bearing deposits in 2019 increased$195.8 40 -------------------------------------------------------------------------------- Table of Contents million or 5.6% compared to 2018. Average noninterest bearing deposit balances in 2019 increased$20.8 million or 1.5% over 2018 and represented 27.6% of average total deposits in 2019 compared to 28.4% in 2018. Average other borrowings decreased by$323.9 million or 29.8% in 2019 from 2018. The decrease in borrowings was due to strong deposit growth during the third quarter of 2019 as well as pay downs resulting from proceeds from sales of$152.1 million of available-for-sale securities in the second quarter of 2019.
Provision for Loan and Lease Losses
The provision for loan and lease losses represents management's estimate of the expense necessary to maintain the allowance for loan and lease losses at an appropriate level. The provision for loan and lease losses was$1.4 million in 2019, compared to$3.9 million in 2018. The ratio of total allowance to total loans and leases decreased to 0.81% atDecember 31, 2019 from 0.90% atDecember 31, 2018 . Favorable trends in certain qualitative factors and lower average historical loan loss rates in all loan portfolios except commercial real estate at year-end 2019, compared to year-end 2018, and lower specific reserves for impaired loans, contributed to the lower allowance level atDecember 31, 2019 . The allowance atDecember 31, 2018 included a specific reserve of$3.0 million related to one commercial real estate credit that was subsequently charged off in the first quarter of 2019. See the section captioned "The Allowance for Loan and Lease Losses" included within "Management's Discussion and Analysis of Financial Condition and Results of Operations-Financial Condition" of this Report for further analysis of the Company's allowance for loan and lease losses. Noninterest Income Noninterest income represented 26.4% of total revenues in 2019, and 26.8% in 2018. Insurance commissions and fees increased 5.9% to$31.1 million in 2019, compared to$29.4 million in 2018. This increase included$900,000 or 4.6% of organic growth in property and casualty commissions and a$738,000 or 32.0% increase in contingency revenue over 2018, while life, health and financial services commissions decreased slightly. Investment services income of$16.4 million decreased$854,000 or 4.9% in 2019 compared to 2018. Investment services income includes trust services, financial planning, and wealth management services. The decrease in income was mainly a result of estate and terminating trust fees being down$1.0 million or 75.4% in 2019 over 2018, due to fees received in 2018 related to the settlement of a large estate. Fees are largely based on the market value and the mix of assets managed, and accordingly, the general direction of the stock market can have a considerable impact on fee income. The market value of assets managed by, or in custody of, theTrust Company was$4.1 billion atDecember 31, 2019 , and$3.8 billion atDecember 31, 2018 . These figures included$1.0 billion in 2019 and 2018 of Company-owned securities from which no income was recognized as theTrust Company was serving as custodian. Service charges on deposit accounts in 2019 were down$114,000 or 1.4% compared to prior year. Overdraft/insufficient funds charges, the largest component of service charges on deposit accounts, were down$180,000 or 3.2% in 2019 compared to 2018, while service fees on personal and business accounts were up by$36,000 or 1.4% in 2019 compared to 2018. Card services income increased$833,000 or 8.6% over 2018. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. Card services income for 2019 included a one-time incentive payment of$500,000 related to the Company's merchant card business. Increased revenue was also driven by increased transaction volume in both credit and debit cards. The Company recognized$645,000 of gains on sales/calls of available-for-sale securities in 2019, compared to$466,000 of losses in 2018. The gains are primarily related to the sales of available-for-sale securities, which are generally the result of general portfolio maintenance and interest rate risk management. Other income of$8.4 million was down$4.7 million or 35.9% compared to 2018. The primary contributors for the decrease in 2019 over 2018 were$2.9 million of gains on the sale of two properties we sold in 2018 upon completion of the Company's new headquarters building and$2.5 million related to the collection of fees and nonaccrual interest for a credit that was charged off in 2010. 41 -------------------------------------------------------------------------------- Table of Contents Noninterest Expense Noninterest expense as a percentage of total revenue was 63.6% in 2019, compared to 62.6% in 2018. Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2019, these expenses increased$5.2 million or 4.8% compared to 2018. Salaries and wages increased$3.8 million or 4.4% in 2019 over prior year, mainly as a result of annual merit pay increases. Other employee benefits increased$1.4 million or 6.3% over 2018, mainly in health insurance, which was up$736,000 or 8.9% in 2019 over 2018. Other operating expenses of$45.5 million decreased by$2.8 million or 5.9% compared to 2018. The primary components of other operating expenses in 2019 were technology expense ($10.7 million ), professional fees ($8.9 million ), marketing expense ($4.9 million ), cardholder expense ($3.2 million ) and other miscellaneous expense ($18.3 million ). Professional fees and technology related expenses in 2019 were up by$378,000 and$567,000 , respectively, over 2018, mainly as a result of investments in strengthening the Company's compliance and information security infrastructure. Other operating expense in 2018 included$2.5 million of write-downs related to two leases on space vacated in 2018.
Noncontrolling Interests
Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of$127,000 in 2019 and 2018. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company'sNew York banking subsidiaries.
Income Tax Expense
The provision for income taxes provides for Federal,New York State ,Pennsylvania and other miscellaneous state income taxes. The 2019 provision was$21.0 million , which decreased$789,000 or 3.6% compared to the 2018 provision. The effective tax rate for the Company was 20.5% in 2019, down from 20.9% in 2018. The effective rates for 2019 and 2018 differed from theU.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation.
Financial Condition
Total assets were$7.6 billion atDecember 31, 2020 , increasing by 13.3% or$896.5 million from the previous year end. The increase in total assets was mainly due to increases in loans, securities, and cash and cash equivalent balances. Total cash and cash equivalents were up$250.5 million or 181.5% overDecember 31, 2019 . The increase in cash and cash equivalents was mainly in balances held at theFederal Reserve and reflects the investment of excess liquidity in short term investments. Total deposits at year-end 2020 were up$1.2 billion or 23.5% over year-end 2019. Loans and leases were 69.0% of total assets atDecember 31, 2020 , compared to 73.1% of total assets atDecember 31, 2019 . Total loan balances were$5.2 billion atDecember 31, 2020 , up$342.8 million or 7.0% compared to the$4.9 billion reported at year-end 2019, mainly due to the addition of PPP loans originated and funded in the second quarter of 2020. PPP loan balances totaled$291.3 million at year-end 2020. A more detailed discussion of the loan portfolio is provided below in this section under the caption "Loans and Leases". As ofDecember 31, 2020 , total securities comprised 21.4% of total assets, compared to 19.3% of total assets at year-end 2019. Securities were up$328.6 million or 25.3% atDecember 31, 2020 , compared toDecember 31, 2019 . The increase in securities from year-end 2019 was largely due to the investment of excess liquidity into securities and interest bearing balances. The securities portfolio primarily contains mortgage-backed securities, obligations ofU.S. Government sponsored entities, and obligations of states and political subdivisions. A more detailed discussion of the securities portfolio is provided below in this section under the caption "Securities". Total deposits at year-end 2020 increased by$1.2 billion or 23.5% compared toDecember 31, 2019 . All deposit categories at year-end 2020 were up over year-end 2019, with noninterest bearing deposits up by$472.4 million or 32.4%, time deposit balances up by$71.2 million or 10.6% and checking, savings and money market accounts up by$681.2 million or 22.1% atDecember 31, 2020 compared toDecember 31, 2019 . Other borrowings, consisting mainly of short term advances with the FHLB, decreased$393.1 million fromDecember 31, 2019 , as deposit growth were used to reduce borrowings. A more detailed discussion of deposits and borrowings is provided below in this section under the caption "Deposits and Other Liabilities". 42 -------------------------------------------------------------------------------- Table of Contents Shareholders' Equity The Consolidated Statements of Changes in Shareholders' Equity included in the Consolidated Financial Statements of the Company contained in Part II, Item 8. of this Report, detail changes in equity capital over prior year end. Total shareholders' equity was up$54.6 million or 8.2% to$717.7 million atDecember 31, 2020 , from$663.1 million atDecember 31, 2019 . Additional paid-in capital decreased by$4.5 million , from$338.5 million atDecember 31, 2019 , to$334.0 million atDecember 31, 2020 . The$4.5 million decrease included the following: a$9.4 million aggregate purchase price related to the Company's repurchase and retirement of 127,690 shares of its common stock in connection with the 2020 Repurchase Plan and$1.9 million related to the exercise of stock options and restricted stock activity. These were partially offset by$4.7 million attributed to stock based compensation expense,$1.8 million related to shares issued in connection with the Company's dividend reinvestment program and$255,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by$47.9 million , reflecting net income of$77.6 million , less dividends paid of$31.4 million and the net cumulative effect adjustment related to the adoption of ASU 2016-13 of$1.7 million . Accumulated other comprehensive loss decreased from$43.6 million atDecember 31, 2019 to$32.1 million atDecember 31, 2020 , reflecting a$16.6 million increase in unrealized gains on available-for-sale securities due to market interest rates, and a$5.1 million increase in actuarial loss associated with employee benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale securities and the funded status of the Company's defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage capital ratios. Total shareholders' equity was up$42.2 million or 6.8% to$663.1 million atDecember 31, 2019 , from$620.9 million atDecember 31, 2018 . Additional paid-in capital decreased by$28.1 million , from$366.6 million atDecember 31, 2018 , to$338.5 million atDecember 31, 2019 . The$28.1 million decrease included the following:$29.9 million aggregate purchase price related to the Company's repurchase and retirement of 376,021 shares of its common stock in connection with its stock repurchase plan and$2.9 million related to the exercise of stock options and restricted stock activity. These were partially offset by$4.2 million attributed to stock based compensation expense and$377,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by$51.1 million , reflecting net income of$81.7 million , less dividends paid of$30.6 million . Accumulated other comprehensive loss decreased from$63.2 million atDecember 31, 2018 to$43.6 million atDecember 31, 2019 ; reflecting a$27.6 million increase in unrealized gains on available-for-sale securities due to market interest rates, and a$8.0 million decrease in actuarial loss associated with employee benefit plans. The Company continued its long history of increasing cash dividends with a per share increase of 4.0% in 2020, which followed an increase of 4.1% in 2019. Dividends per share amounted to$2.10 in 2020, compared to$2.02 in 2019, and$1.94 in 2018. Cash dividends paid represented 40.4%, 37.5%, and 36.0% of after-tax net income in 2020, 2019, and 2018, respectively. OnJuly 19, 2018 , the Company's Board of Directors authorized a stock repurchase plan (the "2018 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company's common stock over the 24 months following adoption of the plan. ThroughDecember 31, 2019 , the Company had repurchased 393,004 shares under the 2018 Repurchase Plan at an average price of$79.15 . OnJanuary 30, 2020 , the Company's Board of Directors authorized a stock repurchase plan (the "2020 Repurchase Plan") for the Company to repurchase up to 400,000 shares of the Company's common stock over the 24 months following adoption of the plan. As with the 2018 Repurchase Plan, shares may be repurchased from time to time under the 2020 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. ThroughDecember 31, 2020 , the Company had repurchased 127,690 shares under the 2020 Repurchase Plan at an average price of$73.72 . The Company and its subsidiary banks are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk 43 -------------------------------------------------------------------------------- Table of Contents weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary banks meet all capital adequacy requirements to which they are subject. In addition to setting higher minimum capital ratios, theBasel 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 onJanuary 1, 2016 , and was fully phased-in onJanuary 1, 2019 at 2.5%. As ofDecember 31, 2020 , the capital ratios for the Company's four subsidiary banks exceeded the minimum levels required to be considered well capitalized. Additional information on the Company's capital ratios and regulatory requirements is provided in "Note 20 - Regulations and Supervision" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report on Form 10-K. Securities The Company maintains a portfolio of securities such asU.S. Treasuries,U.S. government sponsored entities securities,U.S. government agencies, non-U.S. Government agencies or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company's Board of Directors. The investment policy established by the Company's Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company's Asset/Liability Management Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee. The Company classifies its securities at date of purchase as available-for-sale, held-to-maturity or trading. Securities, other than certain obligations of states and political subdivisions thereof, are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. Securities in the held-to-maturity portfolio would consists of obligations ofU.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 atDecember 31, 2020 totaled$1.63 billion compared to$1.30 billion atDecember 31, 2019 . The table below shows the composition of the available-for-sale and held-to-maturity securities portfolio as of year-end 2020, 2019 and 2018. The increase in the available-for-sale portfolio at year-end 2020 over year-end 2019 reflects the reinvestment of excess liquidity. The Company purchased about$904.9 million of securities in 2020, which were partially offset by$545.6 million of payments, maturities and calls. In 2020, fair values were favorably impacted by changes in market interest rates. For held-to-maturity securities, the Company early adopted ASU 2019-04 onNovember 30, 2019 . Since the Company had already adopted ASUs 2016-01 and 2017-12, the related amendments were effective as ofNovember 30, 2019 . As part of the adoption of ASU 2019-04, the Company reclassified$138.2 million in aggregate amortized cost basis of debt securities from held-to-maturity to available-for-sale. Included in other comprehensive income atDecember 31, 2019 is an unrealized gain of approximately$3.8 million related to the fair market value versus the cost basis of the portfolio at the time of the transfer. The Company had not reclassified debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12. Under ASU 2019-04, entities that did not reclassify debt securities from held-to-maturity to available-for-sale upon adoption of the amendments in ASU 2017-12 and elect to reclassify debt securities upon adoption of the amendments in ASU 2019-04 are required to reflect the reclassification as of the date of adoption of that Update. Additional information on the securities portfolio is available in "Note 2 Securities" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report, which details the types of securities held, the carrying and fair values, and the contractual maturities as ofDecember 31, 2020 and 2019. 44
--------------------------------------------------------------------------------
Table of Contents
As of December 31,
Available-for-Sale Securities 2020 2019 2018
Amortized Amortized Amortized
(In thousands) Cost Fair Value Cost Fair Value Cost Fair Value
U.S. Treasuries $ 0 $ 0 $ 1,840 $ 1,840 $ 289 $ 289
Obligations of U.S. Government sponsored
entities 599,652 607,480 367,551 372,488 493,371 485,898
Obligations ofU.S. states and political subdivisions 126,642 129,746 96,668 97,785 86,260
85,440
Mortgage-backed securities-residential, issued by U.S. Government agencies 179,538 182,108 164,643 164,451 131,831
128,267
U.S. Government sponsored entities 691,562 705,480 660,037 659,590 649,620
630,558
Non-U.S. Government agencies or sponsored entities 0 0 0 0 31
31
U.S. corporate debt securities 2,500 2,379 2,500 2,433 2,500
2,175
Total available-for-sale securities
$ 1,293,239 $ 1,298,587 $ 1,363,902 $ 1,332,658 Held-to-Maturity Securities 2020 2019 2018 Amortized Amortized Amortized (In thousands) Cost Fair Value Cost Fair Value Cost Fair Value Obligations ofU.S. Government sponsored entities$ 0 $ 0
0 0 0 0 9,273 9,269
Total held-to-maturity securities
EffectiveJanuary 1, 2020 , the Company adopted a new accounting standard (ASU 2016-13), "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments" which amends the accounting guidance on the impairment of financial instruments. Management evaluates investment securities for expected credit losses ("ECL") impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Factors that may be indicative of ECL include, but are not limited to, the following: •Extent to which the fair value is less than the amortized cost basis. •Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice). •Payment structure of the debt security with respect to underlying issuer or obligor. •Failure of the issuer to make scheduled payment of principal and/or interest. •Changes to the rating of a security or issuer by a NRSRO. •Changes in tax or regulatory guidelines that impact a security or underlying issuer. For available for sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the balance sheet, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.
However, if the Company intends to sell an impaired available for sale debt security, or more likely than not be required to sell the debt security before the recovery of the amortized cost basis, the entire impairment amount, including any previously
45
--------------------------------------------------------------------------------
Table of Contents
recognized ACL, must be recognized in earnings with a corresponding adjustment
to the security's amortized cost basis. Because the security's amortized cost
basis is adjusted to fair value, there is no ACL.
The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY")
stock, non-marketable Federal Home Loan Bank Pittsburgh ("FHLBPITT") stock and
non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are
required to be held for regulatory purposes and for borrowing availability. The
required investment in FHLB stock is tied to the Company's borrowing levels with
the FHLB. Holdings of FHLBNY stock, FHLBPITT stock and ACBB stock totaled $11.0
million , $5.2 million and $95,000 at December 31, 2020 , respectively. These
securities are carried at par, which is also cost. The FHLBNY and FHLBPITT
continue to pay dividends and repurchase stock. As such, the Company has not
recognized any impairment on its holdings of FHLBNY and FHLBPITT stock. At
December 31, 2019 , the Company's holdings of FHLBNY stock, FHLBPITT stock, and
ACBB stock totaled $24.3 million , $9.3 million , and $95,000 , respectively.
Management's policy is to purchase investment grade securities that, on average,
have relatively short expected durations. This policy helps mitigate interest
rate risk and provides sources of liquidity without significant risk to capital.
The contractual maturity distribution of debt securities and mortgage-backed
securities as of December 31, 2020 , along with the weighted average yield of
each category, is presented in Table 3-Maturity Distribution below. Balances are
shown at amortized cost and weighted average yields are calculated on a fully
taxable-equivalent basis. Expected maturities will differ from contractual
maturities presented in Table 3-Maturity Distribution below, because issuers may
have the right to call or prepay obligations with or without penalty and
mortgage-backed securities will pay throughout the periods prior to contractual
maturity.
46
--------------------------------------------------------------------------------
Table of Contents
Table 3 - Maturity Distribution
As of December 31, 2020
Securities Securities
Available-for-Sale1 Held-to-Maturity
(dollar amounts in thousands) Amount Yield2 Amount Yield2
Obligations of U.S. Government sponsored entities
Within 1 year $ 43,255 2.31 % $ 0 0.00 %
Over 1 to 5 years 358,032 1.35 % 0 0.00 %
Over 5 to 10 years 173,156 0.82 % 0 0.00 %
Over 10 years 25,209 1.87 % $ 0 0.00 %
$ 599,652 1.29 % $ 0 0.00 %
Obligations of U.S. state and political subdivisions
Within 1 year $ 11,229 2.75 % $ 0 0.00 %
Over 1 to 5 years 21,011 2.46 % 0 0.00 %
Over 5 to 10 years 52,917 2.92 % 0 0.00 %
Over 10 years 41,485 2.51 % 0 0.00 %
$ 126,642 2.69 % $ 0 0.00 %
Mortgage-backed securities - residential
Within 1 year $ 0 0.00 % $ 0 0.00 %
Over 1 to 5 years 7,914 3.22 % 0 0.00 %
Over 5 to 10 years 105,389 2.05 % 0 0.00 %
Over 10 years 757,797 1.10 % 0 0.00 %
$ 871,100 1.23 % $ 0 0.00 %
Other securities
Over 5 to 10 years $ 2,500 3.04 % $ 0 0.00 %
$ 2,500 3.04 % $ 0 0.00 %
Total securities
Within 1 year $ 54,484 2.40 % $ 0 0.00 %
Over 1 to 5 years 386,958 1.45 % 0 0.00 %
Over 5 to 10 years 333,961 1.56 % 0 0.00 %
Over 10 years 824,491 1.19 % 0 0.00 %
$ 1,599,894 1.37 % $ 0 0.00 %
1 Balances of available-for-sale securities are shown at amortized cost.
2 Interest income includes the tax effects of taxable-equivalent adjustments
using a combined New York State and Federal effective income tax rate of 24.5%
to increase tax exempt interest income to taxable-equivalent basis.
The average taxable-equivalent yield on the securities portfolio was 1.83% in 2020, 2.30% in 2019 and 2.24% in 2018.
At
47
--------------------------------------------------------------------------------
Table of Contents
Loans and Leases
Table 4 - Composition of Loan and Lease Portfolio
Loans and Leases As of December 31,
(In thousands) 2020 2019 2018 2017 2016
Commercial and industrial
Agriculture $ 94,489 $ 105,786 $ 107,494 $ 108,608 $ 118,247
Commercial and industrial other 792,987 902,275 970,141 983,043 926,372
PPP Loans 291,252 0 0 0 0
Subtotal commercial and industrial 1,178,728 1,008,061 1,077,635 1,091,651 1,044,619
Commercial real estate
Construction 163,016 213,637 165,669 203,966 144,770
Agriculture 201,866 184,898 170,229 129,959 102,776
Commercial real estate other 2,204,310 2,045,030 2,004,763 1,866,802 1,673,295
Subtotal commercial real estate 2,569,192 2,443,565 2,340,661 2,200,727 1,920,841
Residential real estate
Home equity 200,827 219,245 229,608 241,256 247,014
Mortgages 1,235,160 1,158,592 1,104,286 1,061,685 972,801
Subtotal residential real estate 1,435,987 1,377,837 1,333,894 1,302,941 1,219,815
Consumer and other
Indirect 8,401 12,964 12,663 12,144 14,835
Consumer and other 61,399 61,446 58,326 50,979 45,219
Subtotal consumer and other 69,800 74,410 70,989 63,123 60,054
Leases 14,203 17,322 14,556 14,467 16,650
Total loans and leases 5,267,910 4,921,195 4,837,735 4,672,909 4,261,979
Less: unearned income and deferred costs and
fees (7,583) (3,645) (3,796) (3,789) (3,946)
Total loans and leases, net of unearned income
and deferred costs and fees $ 5,260,327 $ 4,917,550 $ 4,833,939 $ 4,669,120 $ 4,258,033
Total loans and leases of $5.3 billion at December 31, 2020 were up $342.8
million or 7.0% from December 31, 2019 . The growth was mainly in PPP loans,
which totaled $291.3 million at year-end 2020. As of December 31, 2020 , total
loans and leases represented 69.0% of total assets compared to 73.1% of total
assets at December 31, 2019 .
Residential real estate loans, including home equity loans, of $1.4 billion at
December 31, 2020 , increased by $58.2 million or 4.2% from $1.4 billion at
year-end 2019, and comprised 27.3% of total loans and leases at December 31,
2020 . Growth in residential loan balances is impacted by the Company's decision
to retain these loans or sell them in the secondary market due to interest rate
considerations. The Company's Asset/Liability Committee meets regularly and
establishes standards for selling and retaining residential real estate mortgage
originations.
The Company may sell residential real estate loans in the secondary market based
on interest rate considerations. These residential real estate loans are
generally sold to Federal Home Loan Mortgage Corporation ("FHLMC") or State of
New York Mortgage Agency ("SONYMA") without recourse in accordance with standard
secondary market loan sale agreements. These residential real estate loans also
are subject to customary representations and warranties made by the Company,
including representations and warranties related to gross incompetence and
fraud. The Company has not had to repurchase any loans as a result of these
representations and warranties.
During 2020, 2019, and 2018, the Company sold residential mortgage loans
totaling $51.7 million , $16.9 million , and $27.7 million , respectively, and
realized net gains on these sales of $2.1 million , $227,000 , and $458,000 ,
respectively. The increase in sold residential mortgage loans was mainly due to
a higher volume of originated loans in 2020 compared to 2019. The higher volume
sold coupled with higher premiums paid on sold loans resulted in higher net
gains on the sales of residential mortgage loans. When residential mortgage
loans are sold to FHLMC or SONYMA, the Company typically retains all servicing
rights, which provides the Company with a source of fee income. In connection
with the sales in 2020, 2019, and 2018, the Company recorded mortgage-servicing
assets of $388,000 , $127,000 , and $207,000 , respectively.
48
--------------------------------------------------------------------------------
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
Commercial and industrial loans totaled$1.2 billion atDecember 31, 2020 , which is an increase of$170.7 million or 16.9% fromDecember 31, 2019 . Commercial and industrial loans represented 22.4% of total loans atDecember 31, 2020 compared to 20.5% atDecember 31, 2019 . The increase at year-end 2020 over year-end 2019 was mainly due to PPP loan originations. In the second quarter of 2020, the Company funded$465.6 million of PPP loans. AtDecember 31, 2020 , PPP loans totaled$291.3 million , with the decrease reflecting loans forgiven by the SBA. The PPP provides borrower guarantees for lenders, as well as loan forgiveness incentives for borrowers that utilize the loan proceeds to cover employee compensation-related expenses and certain other eligible business operating costs, all in accordance with the rules and regulations established by the SBA. OnJanuary 11, 2021 , the SBA reactivated the PPP. The Company's banking subsidiaries have originated additional PPP loans through the PPP, which is currently scheduled to extend throughMarch 31, 2021 . As ofFebruary 21, 2021 , the Company had submitted 1,341 PPP loan applications totaling$171.0 million under the 2021 PPP authorization. As ofDecember 31, 2020 , agriculturally-related loans totaled$296.4 million or 5.6% of total loans and leases compared to$290.7 million or 5.9% of total loans and leases atDecember 31, 2019 . Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops. The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were$69.8 million atDecember 31, 2020 , compared to$74.4 million atDecember 31, 2019 . The lease portfolio decreased by 18.0% to$14.2 million atDecember 31, 2020 from$17.3 million atDecember 31, 2019 . As ofDecember 31, 2020 , commercial leases and municipal leases represented 100.0% of total leases. The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company's existing policies, underwriting standards and loan review during 2020. The Company's Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. The Company's loan and lease customers are located primarily in theNew York andPennsylvania communities served by its four subsidiary banks. Although operating in numerous communities inNew York State andPennsylvania , the Company is still dependent on the general economic conditions of these states. The suspension of business activities in our market area has led to a significant increase in unemployment rates and has had a negative effect on our customers. There continues to be a great deal of uncertainty regarding how long those conditions will continue to exist. As a result, the economic consequences of the pandemic on our market area generally and on the Company in particular continue to be difficult to quantify. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower. 49 -------------------------------------------------------------------------------- Table of Contents Analysis of Past Due and Nonperforming Loans As of December 31, (In thousands) 2020 2019 2018 2017 2016 Loans 90 days past due and accruing1 Consumer and other$ 0 $ 0 $ 0 $ 44 $ 0 Total loans 90 days past due and accruing 0 0 0 44 0 Nonaccrual loans Commercial and industrial 1,775 2,335 1,883 2,852 738 Commercial real estate 23,627 10,789 8,007 5,948 9,076 Residential real estate 13,145 10,882 12,072 10,363 9,061 Consumer and other 429 275
234 354 166
Total nonaccrual loans and leases 38,976 24,281 22,196 19,517 19,041 Troubled debt restructurings not included above 6,803 7,154 4,395 3,449 2,631 Total nonperforming loans and leases 45,779 31,435 26,591 23,010 21,672 Other real estate owned 88 428 1,595 2,047 908 Total nonperforming assets$ 45,867 $ 31,863 $ 28,186 $ 25,057 $ 22,580 Total nonperforming loans and leases as a percentage of total loans and leases 0.87 % 0.64 % 0.55 % 0.49 % 0.51 % Total nonperforming assets as a percentage of total assets 0.60 % 0.47 % 0.42 % 0.38 % 0.36 % Allowance as a percentage of nonperforming loans and leases 112.87 % 126.90 %
163.25 % 172.84 % 164.98 %
1 The 2019, 2018, 2017 and 2016 columns in the above table exclude$794,000 ,$1.3 million ,$1.1 million , and$2.6 million , respectively, of acquired loans that are 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date ofAugust 1, 2012 . These loans are considered to be accruing as the Company can reasonably estimate future cash flows on these acquired loans and the Company expects to fully collect the carrying value of these loans. Therefore, the Company is accreting the difference between the carrying value of these loans and their expected cash flows into interest income. The level of nonperforming assets at the past five year-ends is illustrated in the table above. The Company's total nonperforming assets as a percentage of total assets was 0.60% atDecember 31, 2020 , up from 0.47% atDecember 31, 2019 , and compares to its peer group's most recent ratio of 0.51% atSeptember 30, 2020 . The peer data is from theFederal Reserve Board and represents banks or bank holding companies with assets between$3.0 billion and$10.0 billion . A breakdown of nonperforming loans by portfolio segment is shown above. Nonperforming loans totaled$45.8 million atDecember 31, 2020 and were up 45.6% fromDecember 31, 2019 . Nonperforming loans represented 0.87% of total loans atDecember 31, 2020 , compared to 0.64% of total loans atDecember 31, 2019 , and 0.55% of total loans atDecember 31, 2018 . The increase in nonperforming loans was mainly in the commercial real estate and residential real estate portfolios, and a result of unfavorable economic conditions related to the COVID-19 pandemic. Nonperforming loans in the commercial real estate portfolio at year-end 2020 increased by$12.8 million compared to 2019; the increase was mainly due to one credit totaling$11.8 million in the hospitality industry that was downgraded to Substandard and placed on nonaccrual status in the fourth quarter of 2020. The loan is also currently in the Company's deferral payment program. AtDecember 31, 2020 , other real estate owned was down$340,000 from prior year-end and represented 0.2% of total nonperforming assets, down from 1.3% atDecember 31, 2019 . The decrease in other real estate owned was mainly a result of sales during 2020. The Company implemented a payment deferral program to assist both consumer and business borrowers that may be experiencing financial hardship due to COVID-19. Weekly deferral requests for the month of December were down 98.5% from peak levels the Company experienced in late March. As ofDecember 31, 2020 , total loans, impacted by COVID-19 and that continued in a deferral status amounted to approximately$212.2 million , representing 4.0% of total loans. Loans to finance hotels and motels comprise approximately 53.0% of total loans that continue in deferral status. Of loans that had come out of the deferral program as ofDecember 31, 2020 , about 94.4% had made at least one payment and only 0.13% were more than 30 days delinquent. 50 -------------------------------------------------------------------------------- Table of Contents Loans are considered modified in a troubled debt restructuring ("TDR") when, due to a borrower's financial difficulties, the Company makes a concession(s) to the borrower that the Company would not otherwise consider. When modifications are provided for reasons other than as a result of the financial distress of the borrower, these loans are not classified as TDRs or impaired. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: "loans 90 days past due and accruing", "nonaccrual loans", or "troubled debt restructurings not included above". Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all is reasonably assured. AtDecember 31, 2020 , the Company had$8.5 million in TDR balances, which are included in the above table, of which$6.8 million are included in the line captioned "Troubled debt restructurings not included above" and the remainder are included within nonaccrual loans. In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when called for by regulatory requirements. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal and interest income is recorded only after principal recovery is reasonably assured. For additional financial information on the difference between the interest income that would have been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was recorded, refer to "Note 3 - Loans and Leases" in the Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company's recorded investment in loans and leases that are individually evaluated totaled$32.18 million atDecember 31, 2020 , and$19.4 million atDecember 31, 2019 . A loan is individually evaluated when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Individually evaluated loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due. Specific reserves on individually evaluated loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off. AtDecember 31, 2020 , there were specific reserves of$308,000 on four commercial real estate loans and five commercial loans, compared to$907,000 of specific reserves on seven commercial real estate loans atDecember 31, 2019 . The majority of the individually evaluated loans are collateral dependent loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans or the loans have been written down to fair value. Interest payments on individually evaluated loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. There was no interest income recognized on individually evaluated loans and leases for 2020, 2019 and 2018. The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 112.87% atDecember 31, 2020 , compared to 126.90% atDecember 31, 2019 . The Company's nonperforming loans are mostly made up of collateral dependent loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs. Management reviews the loan portfolio for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its credit administration function, identified 35 commercial relationships totaling$40.8 million atDecember 31, 2020 that were potential problem loans. AtDecember 31, 2019 , there were 41 relationships totaling$44.0 million in the loan portfolio that were considered potential problem loans. Of the 35 commercial relationships from the portfolio that were classified as potential problem loans atDecember 31, 2020 , there were 12 relationships that equaled or exceeded$1.0 million , which in aggregate totaled$36.1 million . The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis. 51
--------------------------------------------------------------------------------
Table of Contents
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 inSEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses. The Company uses a discounted cash flow ("DCF") method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, recovery lag probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data. The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes and forecasts national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model. For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics. Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses. The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis. The Company adopted ASU 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets will be accreted into interest income on a level-yield method over the life of the loans. Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management's judgment, factors may arise that result in different estimates. While management's evaluation of the allowance as ofDecember 31, 2020 , considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance bases on their judgements and information available to them at the time of their examinations.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans, and commercial letters of credit. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for off-balance sheet loan commitments is represented by
the contractual amount of those instruments. Such financial instruments are
recorded when they are funded. The Company records an allowance for credit
losses on off-balance sheet credit exposures, unless the commitments to extend
credit are unconditionally cancelable, through a charge to credit loss expense
for off-balance sheet credit exposures included in other noninterest expense in
the Company's consolidated statements of income.
52
--------------------------------------------------------------------------------
Table of Contents
As of December 31, 2020 , the Company's reserve for off-balance sheet credit
exposures was $1.9 million , compared to $477,000 at December 31, 2019 . As a
result of the adoption of ASC 326, the Company recorded a net cumulative-effect
adjustment increasing the allowance for credit losses on off-balance sheet
credit exposures by $381,000 from $477,000 at December 31, 2019 , to $858,000 at
January 1, 2020 .
The allocation of the Company's allowance as of December 31, 2020 , and each of
the previous four years is illustrated in Table 5- Allocation of the Allowance
for Credit Losses, below. The table represents the allowance for credit losses
calculated under the new accounting guidance as of December 31, 2020 , and the
prior period show amounts calculated under the incurred loss methodology
calculation used prior to adoption. The table provides an allocation of the
allowance for credit losses for inherent loan losses by type. The allocation is
neither indicative of the specific amounts or the loan categories in which
future charge-offs may occur, nor is it an indicator of future loss trends. The
allocation of the allowance for credit losses to each category does not restrict
the use of the allowance to absorb losses in any category.
Table 5 - Allocation of the Allowance for Credit Losses
As of December 31,
(In thousands) 2020 2019 2018 2017 2016
Total loans outstanding at end of year
Allocation of the ACL by loan type: Commercial and industrial$ 9,239 $ 10,541 $ 11,272 $ 11,837 $ 9,389 Commercial real estate 30,546 21,608 23,483 20,412 19,933 Residential real estate 10,257 6,381 7,345 6,215 5,203 Consumer and other 1,562 1,362 1,310 1,307 1,230 Leases 65 0 0 0 0 Total$ 51,669 $ 39,892 $ 43,410 $ 39,771 $ 35,755 Allocation of the ACL as a percentage of total allowance: Commercial and industrial 18 % 26 % 26 % 30 % 26 % Commercial real estate 59 % 54 % 54 % 51 % 56 % Residential real estate 20 % 16 % 17 % 16 % 15 % Consumer and other 3 % 3 % 3 % 3 % 3 % Leases 0 % 0 % 0 % 0 % 0 % Total 100 % 100 % 100 % 100 % 100 % Loan and lease types as a percentage of total loans and leases: Commercial and industrial 23 % 21 % 22 % 24 % 25 % Commercial real estate 49 % 50 % 49 % 47 % 45 % Residential real estate 27 % 28 % 28 % 28 % 29 % Consumer and other 1 % 1 % 1 % 1 % 1 % Leases 0 % 0 % 0 % 0 % 0 % Total 100 % 100 % 100 % 100 % 100 % The five year trend in the allowance is shown above. Over the three year period between 2016 through 2018, the allowance steadily increased driven in large part by growth in loans. The increase in 2018 was also a result of specific reserve allocations for one commercial real estate relationship. This credit was charged off during 2019, which contributed to the decrease in the allowance from year-end 2018 to year-end 2019. As a result of the adoption of ASU 2016-13, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by$2.5 million from$39.9 million atDecember 31, 2019 to$37.4 million atJanuary 1, 2020 . As ofDecember 31, 2020 , the total allowance for credit losses was$51.7 million , which was up$11.8 million or 29.5% from year-end 2019. The$14.3 million increase in the allowance atDecember 31, 2020 , compared toJanuary 1, 2020 was mainly due to a$14.9 million increase in the provision expense driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. The allowance was relatively flat 53 -------------------------------------------------------------------------------- Table of Contents betweenJune 30, 2020 andDecember 31, 2020 , as lower estimated reserves driven by improvements in forecasts for unemployment and the gross domestic product used in our model were offset by increases in qualitative reserves for loans within the hospitality and certain other industries that may have an elevated level of risk due to the adverse economic impact of the COVID-19 pandemic, as well as loans that remain in the Company's payment deferral program implemented in response to the COVID-19 pandemic. The qualitative reserves were added to all portfolio segments with the majority in commercial real estate and then residential real estate. Total loans were$5.3 billion atDecember 31, 2020 , up$342.8 million or 7.0% fromDecember 31, 2019 . The increase from year-end 2019 included$465.6 million of PPP loans originated in the second quarter of 2020. Since the PPP loans are guaranteed by the SBA, there are no reserves allocated to these loans. Credit quality metrics atDecember 31, 2020 , were mixed compared to year-end 2019. Nonperforming assets represented 0.60% of total assets atDecember 31, 2020 , compared to 0.47% atDecember 31, 2019 . Nonperforming loans and leases were up$14.3 million or 45.6% from year end 2019 and represented 0.87% of total loans atDecember 31, 2020 compared to 0.64% atDecember 31, 2019 . Loans internally-classified Special Mention or Substandard were up$99.6 million or 110.3% compared toDecember 31, 2019 . The increase overDecember 31, 2019 , was mainly a result of the downgrade of loans in the hospitality industry, reflecting cash flow stress related to the pandemic-related business and travel restrictions and social distancing guidelines. Many of these hospitality loans are in the Company's payment deferral program and are included in the estimate of qualitative reserves.
Table 6 - Analysis of the Allowance for Credit Losses
December 31,
(In thousands) 2020 2019 2018 2017 2016
Average loans outstanding during
year $ 5,228,135 $ 4,830,089
39,892 43,410 39,771 35,755 32,004
Impact of adopting ASU 2016-13 (2,534) 0 0 0 0
Loans charged-off:
Commercial and industrial $ 2 $ 696 $ 334 $ 365 $ 1,576
Commercial real estate 1,903 4,015 142 180 193
Residential real estate 84 256 614 1,067 298
Consumer and other 482 823 1,350 962 642
Leases 0 0 0 0 0
Total loans charged-off 2,471 5,790 2,440 2,574 2,709
Recoveries of loans previously charged-off:
Commercial and industrial 131 103 156 143 596
Commercial real estate 58 174 843 1,617 1,127
Residential real estate 194 334 459 256 63
Consumer and other 248 295 679 413 353
Total loan recoveries 631 906 2,137 2,429 2,139
Net loan charge-offs and
(recoveries) 1,840 4,884 303 145 570
Additions to allowance charged to
operations 16,151 1,366 3,942 4,161 4,321
Balance of allowance at end of year
0.98 % 0.81 % 0.90 % 0.85 % 0.84 %
Net charge-offs (recoveries) as a
percentage of average loans and
leases outstanding during the year 0.04 % 0.10 % 0.01 % 0.00 % 0.01 %
The above table shows a fairly stable level of gross loan charge-offs over the
period, with the increase in 2019 mainly related to a $3.3 million charge-off
related to one commercial real estate loan. The higher level of loan recoveries
in 2016 to 2018 was mainly a result of recoveries on two large
commercial/commercial real estate relationships that were charged off in 2011
and 2012. Provision expense was stable between 2016 and 2018. For 2019,
favorable trends in certain qualitative factors, lower
54
--------------------------------------------------------------------------------
Table of Contents
historical loss rates in all loan portfolios except for commercial real estate
at year-end 2019 compared to year-end 2018, and lower specific reserves for
impaired loans contributed to the lower allowance level at December 31, 2019
compared to December 31, 2018 and a decrease in provision expense in 2019
compared to 2018. As mentioned above, the $16.2 million provision expense in
2020 was driven by changes in economic conditions and forecasts related to the
impact of COVID-19, including forecasts of significantly slower economic growth
and higher unemployment. The majority of the increase in the allowance and
provision expense in 2020 was in the first quarter of 2020.
The ratio of the allowance for credit losses as a percentage of total loans was
0.98% at year-end 2020 compared to 0.81% at year-end 2019. The allowance
coverage to nonperforming loans and leases was 112.87% at December 31, 2020
compared to 126.90% at December 31, 2019 . Management believes that, based upon
its evaluation as of December 31, 2020 , the allowance is appropriate.
Deposits and Other Liabilities
Total deposits were$6.4 billion atDecember 31, 2020 , up$1.2 billion or 23.5% compared to year-end 2019. The increase from year-end 2019 consisted of savings and money market balances, noninterest bearing deposits, and time deposits up$681.2 million ,$472.4 million , and$71.2 million , respectively. Deposit balances during 2020 benefited from the$465.6 million of PPP loan originations during the second quarter of 2020, the majority of which were deposited in Tompkins checking accounts. The growth also included short-term brokered deposits. InApril 2020 , the Company obtained$295.0 million of short-term brokered deposits and actively increased liquid assets to further strengthen the Company's liquidity position in response to the economic uncertainty related to the COVID-19 pandemic. Of the$295.0 million of brokered deposits,$95.0 million matured and were paid in the fourth quarter of 2020; the remaining$200.0 million mature inApril 2021 . The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of$250,000 or more, brokered deposits, municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits increased by$863.8 million or 20.1% to$5.2 billion at year-end 2020 from$4.3 billion at year-end 2019. Core deposits represented 80.1% of total deposits atDecember 31, 2020 , compared to 82.3% of total deposits atDecember 31, 2019 . Municipal money market accounts and reciprocal deposit relationships with municipalities totaled$685.6 million at year-end 2020, which increased 11.3% over year-end 2019. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds. Table 1-Average Statements of Condition and Net Interest Analysis, shows the average balance and average rate paid on the Company's primary deposit categories for the years endedDecember 31, 2020 , 2019, and 2018. Average interest-bearing deposits in 2020 increased$671.0 million or 18.2% when compared to 2019. The average cost of interest-bearing deposits was 0.46% for 2020 and 0.84% for 2019. Average noninterest bearing deposits for 2020 were up$349.9 million or 24.9% over 2019. A maturity schedule of time deposits outstanding atDecember 31, 2020 is included in "Note 7 Deposits" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled$65.8 million atDecember 31, 2020 , and$60.3 million atDecember 31, 2019 . Management generally views local repurchase agreements as an alternative to large time deposits. Refer to "Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company's repurchase agreements. The Company's other borrowings totaled$265.0 million at year-end 2020, which was$393.1 million below prior year end. The decrease in borrowings was due to core deposit growth, municipal deposit growth, and an increase in brokered deposits from year-end 2019. The$265.0 million in borrowings atDecember 31, 2020 , represented term advances from the FHLB. Borrowings of$658.1 million at year-end 2019 included$239.1 million in overnight advances from the FHLB,$415.0 million of FHLB term advances, and a$4.0 million advance from a bank. Of the$265.0 million in FHLB term advances at year-end 2020,$235.0 million are due in over one year. Refer to "Note 9 - Other Borrowings" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report for further details on the Company's term borrowings with the FHLB. 55 -------------------------------------------------------------------------------- Table of Contents Liquidity Management As ofDecember 31, 2020 , the Company had not experienced any significant impact on our liquidity or funding capabilities as a result of the COVID-19 pandemic. As previously noted, the Company participated in the SBA's PPP. The Company began accepting applications for PPP loans onApril 3, 2020 , and funded 2,998 PPP loans during the second quarter of 2020. Outstanding PPP loans totaled$291.3 million as ofDecember 31, 2020 . The majority of the PPP loan proceeds were deposited into accounts at Tompkins, which contributed to the deposit growth in the second quarter of 2020. InApril 2020 , the Company obtained$295.0 million of short-term brokered deposits and actively increased liquid assets to further strengthen the Company's position with the goal of guarding against economic uncertainty related to the COVID-19 pandemic. The Company has a long-standing liquidity plan in place that is designed to ensure that appropriate liquidity resources are available to fund the balance sheet. Additionally, given the uncertainties related to the impact of the COVID-19 crisis on liquidity, the Company has confirmed the availability of funds at the FHLB of NY and FHLB of Pittsburgh, completed actions required to activate participation in the Federal Reserve Bank PPP lending facility, and confirmed availability ofFederal Fund lines with correspondent bank partners. The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, and business investment opportunities. The Company's large, stable core deposit base and strong capital position are the foundation for the Company's liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company may also use borrowings as part of a growth strategy. Asset and liability positions are monitored primarily through theAsset/Liability Management Committee of the Company's subsidiary banks. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company's strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company's liquidity that are reasonably likely to occur. Core deposits, discussed above under "Deposits and Other Liabilities", are a primary and low cost funding source obtained primarily through the Company's branch network. In addition to core deposits, the Company uses non-core funding sources to support asset growth. These non-core funding sources include time deposits of$250,000 or more, brokered time deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight borrowings and term advances from the FHLB and other funding sources. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources totaled$1.6 billion atDecember 31, 2020 , a decrease of$26.6 million or 1.6% from$1.6 billion atDecember 31, 2019 . The decrease reflects the pay down of FHLB borrowings, partially offset by the increase in brokered deposits mentioned above under "Deposits and Other Liabilities". Non-core funding sources decreased year-over-year as the Company experienced sufficient growth in core deposits to fund earning asset growth. Non-core funding sources as a percentage of total liabilities decreased from 27.1% at year-end 2019 to 23.4% at year-end 2020. Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at$1.2 billion atDecember 31, 2020 and 2019, were either pledged or sold under agreements to repurchase. Pledged securities or securities sold under agreements to repurchase represented 75.3% of total securities atDecember 31, 2020 , compared to 89.7% of total securities atDecember 31, 2019 . Cash and cash equivalents totaled$388.5 million as ofDecember 31, 2020 , up from$138.0 million atDecember 31, 2019 . Short-term investments, consisting of securities due in one year or less, decreased from$108.1 million atDecember 31, 2019 , to$55.0 million atDecember 31, 2020 . Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but they have monthly principal reductions. Total mortgage-backed securities, at fair value, were$887.6 million atDecember 31, 2020 compared with$824.0 million atDecember 31, 2019 . Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately$1.5 billion atDecember 31, 2020 compared to$1.5 billion atDecember 31, 2019 . Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company. Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary banks, the Company has 56 -------------------------------------------------------------------------------- Table of Contents borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. AtDecember 31, 2020 , the unused borrowing capacity on established lines with the FHLB was$2.1 billion .
As members of the FHLB, the Company's subsidiary banks can use certain
unencumbered mortgage-related assets and securities to secure additional
borrowings from the FHLB. At
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, 2020
Less than 1 After 1 year
(In thousands) Total year to 5 years After 5 years
Commercial and industrial $ 1,178,728 $
213,472
2,569,192 98,844 342,075 2,128,273
Residential real estate 1,435,987 855 20,897 1,414,235
Total $ 5,183,907 $ 313,171 $ 960,038 $ 3,910,698 Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1
year,
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 inthe 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 ofDecember 31, 2020 , are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in "Note 17 Commitments and Contingent Liabilities" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. Contractual Obligations The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application throughJune 30, 2024 along with contracts for more specialized software programs through 2021. Further information on the Company's lease arrangements is provided in "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, Item 8. of this Report. The Company's contractual obligations as ofDecember 31, 2020 , are shown in Table 8-Contractual Obligations and Commitments below. 57 -------------------------------------------------------------------------------- Table of Contents Table 8 - Contractual Obligations and Commitments At December 31, 2020 Contractual cash obligations Payments due within (In thousands) Total 1 year 1-3 years 3-5 years After 5 years Long-term debt$ 276,330 $ 35,175 $ 170,658 $ 70,497 $ 0 Trust Preferred Debentures1 21,662 540 1,079 1,079 18,964 Operating leases 2 43,446 4,528 8,196 7,120 23,602 Software contracts 5,420 1,764 2,835 821 0
Total contractual cash obligations
1 Dollar amounts include interest payments and contractual payments due until maturity without conversion to stock or early redemption for the remainder of the Company's Trust Preferred Debentures. 2 Operating leases include renewals the Company considers reasonably certain to exercise. Non-GAAP Disclosure The following table summarizes the Company's results of operations on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. The non-GAAP financial measures adjust GAAP measures to exclude the effects of non-operating items, such as acquisition related intangible amortization expense, and significant nonrecurring income or expense on earnings, equity, and capital. The Company believes the non-GAAP measures provide meaningful comparisons of our underlying operational performance and facilitate management's and investors' assessments of business and performance trends in comparison to others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a measure of the Company's profitability or liquidity; they are in addition to, and are not a substitute for, financial measures under GAAP. The non-GAAP financial measures presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies. In the future, the Company may utilize other measures to illustrate performance. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP. 58
--------------------------------------------------------------------------------
Table of Contents
Reconciliation of Net Income Available to Common Shareholders/Diluted Earnings Per Share (GAAP) to Net Operating Income
Available to Common Shareholders/Adjusted Diluted Earnings Per Share (Non-GAAP) and Adjusted Operating Return on Average
Tangible Common Equity (Non-GAAP)
For the year ended December 31,
(In thousands, except per share data) 2020 2019 2018 2017 2016
Net income available to common shareholders
$ 82,308 $ 52,494 $ 59,340 Less: income attributable to unvested stock-based compensations awards (857) (1,306) (1,315) (818) (912) Net earnings allocated to common shareholders (GAAP) 76,731 80,412 80,993 51,676 58,428 Diluted earnings per share (GAAP) 5.20 5.37 5.35 3.43 3.91 Adjustments for non-operating income and expense: Gain on sale of real estate 0 0 (2,950) 0 0 Write-down of impaired leases 0 0 2,536 0 0 Remeasurement of deferred taxes 0 0 0 14,944 0 Write-down of real estate pending sale 673 0 0 0 0 Total adjustments 673 0 (414) 14,944 0 Tax (benefit) expense (165) 0 102 0 0 Total adjustments, net of tax 508 0 (312) 14,944 0 Net operating income available to common shareholders (Non-GAAP) 77,239 80,412 80,681 66,620 58,428 Weighted average shares outstanding (diluted) 14,751,303 14,973,951 15,132,257 15,073,255 14,936,231 Adjusted diluted earnings per share (Non-GAAP) 5.24 5.37 5.33 4.42 3.91 Net earnings allocated to common shareholders (GAAP) 76,731 80,412 80,681 66,620 58,428Average Tompkins Financial Corporation shareholders' equity (GAAP) 699,554 649,871 589,475 575,958 545,545 Amortization of intangibles 1,484 1,673 1,771 1,932 2,090 Tax expense 364 410 434 773 836 Amortization of intangibles, net of tax 1,120 1,263 1,337 1,159 1,254 Adjusted net operating income available to common shareholders' (Non-GAAP) 77,851 81,675
82,018 67,779 59,682
AverageTompkins Financial Corporation shareholders' common equity 698,088 649,871 589,475 575,958 545,545 Average goodwill and intangibles 97,134 98,104 99,999 101,583 104,263Average Tompkins Financial Corporation shareholders' tangible common equity (Non-GAAP)$ 600,954 $ 551,767
Adjusted operating return on average shareholders' tangible common equity (Non-GAAP) 12.95 % 14.80 % 16.76 % 14.29 % 13.52 %
Newly Adopted Accounting Standards
ASU No. 2016-13, "Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments." ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts and requires enhanced disclosures related to the significant estimates and judgments used in estimating credit losses, as well as the credit quality and underwriting standards of an organization's portfolio. In addition, ASU 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU 2016-13 was effective for the Company onJanuary 1, 2020 . Upon adoption, a cumulative effect adjustment for the change in the allowance for credit losses was recognized in 59 -------------------------------------------------------------------------------- Table of Contents retained earnings. The cumulative-effect adjustment to retained earnings, net of taxes, is comprised of the impact on the allowance for credit losses on outstanding loans and leases and the impact on the liability for off-balance sheet commitments. The Company adopted ASU 2016-13 onJanuary 1, 2020 using the modified retrospective approach. Results for the periods beginning afterJanuary 1, 2020 are presented under Accounting Standards Codification ("ASC") 326, while prior period amounts continue to be reported in accordance with previously applicable US GAAP. The Company recorded a net increase to retained earnings of$1.7 million , upon adoption. The transition adjustment includes a decrease in the allowance for credit losses on loans of$2.5 million , and an increase in the allowance for credit losses on off-balance sheet credit exposures of$0.4 million , net of the corresponding decrease in deferred tax assets of$0.4 million . The Company adopted ASU 2016-13 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets was determined to be related to noncredit factors and will be accreted into interest income on a level-yield method over the life of the loans. ASU 2017-04, "Intangibles -Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment." ASU 2017-04 eliminates Step 2 from the goodwill impairment test which required entities to compute the implied fair value of goodwill. Under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. ASU 2017-04 was effective for the Company onJanuary 1, 2020 and did not have a material impact on our consolidated financial statements. ASU 2018-13, "Fair Value Measurement (Topic 820) - Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement." ASU 2018-13 modifies the disclosure requirements on fair value measurements in Topic 820. The amendments in this update remove disclosures that no longer are considered cost beneficial, modify/clarify the specific requirements of certain disclosures, and add disclosure requirements identified as relevant. ASU 2018-13 was effective for the Company onJanuary 1, 2020 , and did not have a significant impact on our consolidated financial statements. ASU 2018-14, "Compensation - Retirement Benefits-Defined Benefit Plans-General (Subtopic 715-20)." ASU 2018-14 amends and modifies the disclosure requirements for employers that sponsor defined benefit pension or other post-retirement plans. The amendments in this update remove disclosures that no longer are considered cost beneficial, clarify the specific requirements of disclosures, and add disclosure requirements identified as relevant. ASU 2018-14 became effective for us onDecember 31, 2020 , and did not have a significant impact on our consolidated financial statements. The Company updated its disclosures atDecember 31, 2020 , to comply with the amended guidance. ASU 2018-15, "Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40) - Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract." ASU 2018-15 clarifies certain aspects of ASU 2015-05, "Customer's Accounting for Fees Paid in a Cloud Computing Arrangement," which was issued inApril 2015 . Specifically, ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). ASU 2018-15 does not affect the accounting for the service element of a hosting arrangement that is a service contract. ASU 2018-15 was effective for the Company onJanuary 1, 2020 , and did not have a significant impact on our consolidated financial statements. ASU 2020-03 "Codification Improvements to Financial Instruments." ASU 2020-03 revised a wide variety of topics in the Codification with the intent to make the Codification easier to understand and apply by eliminating inconsistencies and providing clarifications. ASU 2020-03 was effective immediately upon its release inMarch 2020 and did not have a significant impact on our consolidated financial statements.
Accounting Standards Pending Adoption
ASU No 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." ASU 2019-12 removes certain exceptions to the general principles in Topic 740 in Generally Accepted Accounting Principles. ASU 2019-12 is effective for public entities for fiscal years beginning afterDecember 15, 2020 , with early adoption permitted. Tompkins is currently evaluating the potential impact of ASU 2019-12 on our consolidated financial statements. 60 -------------------------------------------------------------------------------- Table of Contents ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as ofMarch 12, 2020 throughDecember 31, 2022 . Tompkins is currently evaluating the potential impact of ASU 2020-04 on our consolidated financial statements. Fourth Quarter Summary
Net income was
Net interest income was$57.8 million for the fourth quarter of 2020, compared to$53.2 million reported for the same period in 2019. The net interest margin for the fourth quarter of 2020 was 3.12%, down from the 3.44% reported for the quarter endedDecember 31, 2019 , and 3.26% for the third quarter of 2020. Net interest income benefited from lower funding costs and growth in average earning assets and average deposits. The cost of interest bearing liabilities for the fourth quarter of 2020 was 0.45% compared to 1.03% for the fourth quarter of 2019. The decrease reflects lower market interest rates as well as an improved funding mix as a result of deposit growth and the pay down of borrowings. Average earnings assets for the fourth quarter of 2020 were up$1.2 billion , or 19.7% compared to the fourth quarter of 2019. Average loans, average securities, and average interest bearing balances due from banks for the fourth quarter of 2020 increased by$447.1 million or 9.2%,$344.5 million or 26.7%, and$437.0 million , respectively, over the same quarter in the prior year. The growth in average earning assets was offset by a decrease in the average yield on earning assets from 4.17% for the fourth quarter of 2019 to 3.43% for the fourth quarter of 2020. The decrease in the yield on average assets for the fourth quarter of 2020 compared to the fourth quarter of 2019 reflects lower market interest rates and an increase in the mix of lower yielding securities and cash balances as a percentage of average earning assets for 2020 compared to 2019. Average deposits for the fourth quarter of 2020 increased$1.3 billion , or 24.0% compared to the same period in 2019. Included in the growth of average deposits for the fourth quarter of 2020 was a$442.4 million or 30.1% increase in average noninterest bearing deposits over the fourth quarter of 2019. Provision for credit losses for the fourth quarter of 2020 was$6,000 compared to a negative$1.0 million for the same period in 2019. Net charge-offs for the fourth quarter of 2020 were$630,000 compared to net charge-offs of$479,000 reported in the fourth quarter of 2019. Noninterest income of$18.8 million for the fourth quarter of 2020 was up 4.8% compared to the same period in 2019. The increase was mainly in insurance commissions and fees, investment services income and gains on sales of residential real estate loans. Investment services income in the fourth quarter of 2020 benefited from fees related to the settlement of a large estate. These increases were partially offset by lower service charges on deposit accounts, mainly due to a decrease in overdraft fees, resulting from a decline in the volume of overdrafts related to the COVID-19 pandemic.
Noninterest expense was
Income tax expense for the fourth quarter of 2020 was$6.1 million compared to$5.2 million for the fourth quarter of 2019. The Company's effective tax rate was 20.4% for the fourth quarter of 2020, compared to 19.8% for the same period in 2019.
© Edgar Online, source
