Tompkins Financial Corporation("Tompkins" or the "Company") is headquartered in Ithaca, New Yorkand is registered as a Financial Holding Companywith the Federal Reserve Boardunder the Bank Holding Company Act of 1956, as amended. The Company is a locally oriented, community-based financial services organization that offers a full array of products and services, including commercial and consumer banking, leasing, trust and investment management, financial planning and wealth management, and insurance services. At March 31, 2022, the Company had one wholly-owned banking subsidiary, Tompkins Community Bank. The Company also has a wholly-owned insurance agency subsidiary, Tompkins Insurance Agencies, Inc.(" Tompkins Insurance"). Tompkins Community Bankprovides a full array of investment services, including investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. The Company's principal offices are located at 118 E. Seneca Street, P.O. Box 460, Ithaca, NY, 14850, and its telephone number is (888) 503-5753. The Company's common stock is traded on the NYSE American under the Symbol "TMP." The Tompkinsstrategy centers around our core values and a commitment to delivering long-term value to our clients, communities, and shareholders. A key strategic initiative for the Company is a focus on responsible and sustainable growth, including initiatives to grow organically through our current businesses, as well as through possible acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses that would complement the Company's business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. Business Segments Banking services consist primarily of attracting deposits from the areas served by Tompkins Community Bank, which has 63 banking offices (43 offices in New Yorkand 20 offices in Pennsylvania) and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans, and leases. The Company's lending function is managed within the guidelines of a comprehensive Board-approved lending policy. Reporting systems are in place to provide management with ongoing information related to loan production, loan quality, concentrations of credit, loan delinquencies, and nonperforming and potential problem loans. Banking services also include a full suite of products such as debit cards, credit cards, remote deposit, electronic banking, mobile banking, cash management, and safe deposit services. Wealth management services consist of investment management, trust and estate, financial and tax planning as well as life, disability and long-term care insurance services. Wealth management services are provided under the trade name Tompkins Financial Advisors. Tompkins Financial Advisorsoffers services to customers of Tompkins Community Bankand shares offices in each of the banking markets. Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance. Tompkins Insuranceis headquartered in Batavia, New York. Over the years, Tompkins Insurancehas acquired smaller insurance agencies in the market areas serviced by the Company's banking subsidiaries and successfully consolidated them into Tompkins Insurance. Tompkins Insuranceoffers services to customers of Tompkins Community Bankand shares offices in each of the banking markets. In addition to these shared offices, Tompkins Insurancehas five stand-alone offices in Western New York, and one stand-alone office in Tompkins County, New York.
The Company’s principal expenses are interest on deposits, interest on
borrowings, and operating and general administrative expenses, as well as
provisions for credit losses. Funding sources, other than deposits, include
borrowings, securities sold under agreements to repurchase, and cash flow from
lending and investing activities.
Competition for commercial banking and other financial services is strong in the Company's market areas. In one or more aspects of its business, the Company's subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company's non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks. 37 -------------------------------------------------------------------------------- Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of facilities and services, and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community-based financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company's community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company's competitiveness. Management believes that the Company's subsidiary bank can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services, including products that are accessible to our customers through digital means. Although management feels that this business model has caused the Company to grow its customer base in recent years and allows it to compete effectively in the markets it serves, we cannot assure you that such factors will result in future success.
Banking, insurance services and wealth management are highly regulated. As a financial holding company including a community bank, a registered investment adviser, and an insurance agency subsidiary, the Company and its subsidiaries are subject to examination and regulation by the
Federal Reserve Board("FRB"), Securities and Exchange Commission("SEC"), the Federal Deposit Insurance Corporation("FDIC"), the New York State Department of Financial Services, the Financial Industry Regulatory Authority, and the Pennsylvania Insurance Department.
OTHER IMPORTANT INFORMATION
The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three months ended
March 31, 2022. It should be read in conjunction with the Company's Audited Consolidated Financial Statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2021, and the Unaudited Consolidated Financial Statements and notes thereto included in Part I of this Quarterly Report on Form 10-Q. In this Report, there are comparisons of the Company's performance to that of a peer group, which is comprised of the group of 152 domestic bank holding companies with $3 billionto $10 billionin total assets as defined in the Federal Reserve's"Bank Holding Company Performance Report" for December 31, 2021(the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current quarter numbers. Forward-Looking Statements This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The statements contained in this Report that are not statements of historical fact may include forward-looking statements that involve a number of risks and uncertainties. Forward-looking statements may be identified by use of such words as "may", "will", "estimate", "intend", "continue", "believe", "expect", "plan", or "anticipate", and other similar words. Examples of forward-looking statements may include statements regarding the asset quality of the Company's loan portfolios; the level of the Company's allowance for credit losses; whether, when and how borrowers will repay deferred amounts and resume scheduled payments; the sufficiency of liquidity sources; the Company's exposure to changes in interest rates, and to new, changed, or extended government/regulatory expectations; the 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 of our Annual Report on Form 10-K for the year ended December 31, 2021, 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 38 -------------------------------------------------------------------------------- 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 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 war in Ukraine, as well as 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. 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. For information on the Company's significant accounting policies and to gain a greater understanding of how the Company's financial performance is reported, refer to Note 1 - "Summary of Significant Accounting Policies" in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. Refer to "Recently Issued Accounting Standards" in Management's Discussion and Analysis in this Quarterly Report on Form 10-Q for a discussion of recent accounting updates.
Critical Accounting Estimates
The Company's significant accounting policies conform with
U.S.generally accepted accounting principles ("GAAP") and are described in Note 1 of Notes to Financial Statements. In applying those accounting policies, management of the Company is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. Certain critical accounting estimates are more dependent on such judgment and in some cases may contribute to volatility in the Company's reported financial performance should the assumptions and estimates used change over time due to changes in circumstances. The more significant area in which management of the Company applies critical assumptions and estimates includes the following: 39 -------------------------------------------------------------------------------- •Accounting for credit losses - Effective January 1, 2020the Company adopted amended accounting guidance that impacts how the allowance for credit losses is determined. Under this accounting guidance, the allowance for credit losses represents a valuation account that is deducted from the amortized cost basis of certain financial assets, including loans and leases, to present the net amount expected to be collected at the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 4 of Notes to Financial Statements.
COVID-19 Pandemic and Recent Events
The COVID-19 global pandemic continued to present health and economic challenges in the first quarter of 2022, but conditions were generally improved from 2021. The Company's hybrid work environment for most noncustomer facing employees is in place and travel restrictions eliminated. On
March 17, 2022, the NY State Department of Laborannounced that the department ended the designation of COVID-19 as an airborne infectious disease that presents a serious risk of harm to public health under the HERO Act and our protocols have been updated accordingly. The Company's payment deferral program that was implemented in 2020 to provide assistance to its customers that were experiencing financial hardship due to the COVID-19 pandemic has been reduced as customers return to repayment status. As of March 31, 2022, total loans that continued in a deferral status amounted to approximately $2.6 million, representing 0.05% of total loans, and of those loans approximately 0.47% were past due. In accordance with the Coronavirus Aid, Relief and Economic Security Act (the "CARES Act") and the interagency guidance, the Company elected to adopt the provisions to not report qualified loan modifications as troubled debt restructurings ("TDRs"). The relief related to TDRs under the CARES Act was extended by the Consolidated Appropriations Act, 2021. Under the Consolidated Appropriations Act, relief under the CARES Act was extended until the earlier of (i) 60 days after the date the COVID-19 national emergency comes to an end or (ii) January 1, 2022. Management continues to monitor credit conditions carefully at the individual borrower level, as well as by industry segment, in order to be responsive to changing credit conditions. In 2020 and 2021, the Company also participated in the U.S. Small Business Administration("SBA") Paycheck Protection Program ("PPP"). The Company began accepting applications for PPP loans on April 3, 2020, and continued through the program end date in 2020. On January 19, 2021, the Company began accepting both first draw and second draw applications for the reopening of the PPP program. The 2021 PPP program funding closed on May 12, 2021. The Company funded over 5,100 applications totaling about $694.0 millionin 2020 and 2021. Of the $694.0 millionof PPP loans that the Company funded, approximately $664.0 millionhave been forgiven by the SBA under the terms of the program. Total net deferred fees on the remaining balance of PPP loans amounted to $1.0 millionat March 31, 2022. RESULTS OF OPERATION Performance Summary Net income for the first quarter of 2022 was $23.3 millionor $1.60diluted earnings per share, compared to $25.6 millionor $1.72diluted earnings per share for the same period in 2021. The decrease in net income for the first quarter of 2022 compared to the first quarter of 2021 was mainly a result of a decrease in the credit to the provision for credit loss expense, a decrease in PPP fees and an increase in noninterest expenses. Return on average assets ("ROA") for the quarter ended March 31, 2022was 1.19%, compared to 1.33% for the quarter ended March 31, 2021. Return on average shareholders' equity ("ROE") for the first quarter of 2022 was 13.24%, compared to 14.42% for the same period in 2021. 40 -------------------------------------------------------------------------------- Segment Reporting The Company operates in the following three business segments, banking, insurance, and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance Agencies, Inc.subsidiary. Wealth management activities include the results of the Company's trust, financial planning, and wealth management services, organized under the Tompkins Financial Advisors brand. All other activities are considered banking. Banking Segment The banking segment reported net income of $20.3 millionfor the first quarter of 2022, down $2.0 millionor 8.9% from net income of $22.3 millionfor the same period in 2021. Net interest income of $56.6 millionfor the first quarter of 2022 was up $1.6 millionor 2.9% from the same period in 2021. The increase in net interest income was mainly a result of a decrease in interest expense. Interest expense benefited from growth in average deposit balances and a decrease in average borrowings. Interest income was down in the first quarter of 2022 compared to the first quarter of 2021 as lower yields offset growth in average earning assets. The first quarter of 2022 included $2.0 millionof net deferred loan fees associated with PPP loans, compared to net deferred loan fees of $2.8 millionin the first quarter of 2021. The provision for credit losses was a credit of $520,000for the three months ended March 31, 2022, compared to a credit of $1.8 millionfor the same period in 2021. For additional information, see the section titled "The Allowance for Credit Losses" below. Noninterest income of $6.2 millionfor the three months ended March 31, 2022was down $125,000or 2.0% compared to the same period in 2021. The decrease in the three months ended March 31, 2022from the same period in 2021 was mainly in lower gains on security transactions and lower gains on sales of residential loans in the first quarter of 2022. These decreases were slightly offset by service charges on deposit accounts and card services income both being higher than the first quarter 2021. Noninterest expense of $37.2 millionfor the first quarter of 2022 was up $1.9 millionor 5.3% from the same period in 2021. Salaries and employee benefits were up compared to the same period in 2021 mainly due to yearly merit increases and higher healthcare expense. Also contributing to increases in noninterest expense were higher marketing and technology expenses in the first quarter of 2022 compared to same period in 2021. Insurance Segment The insurance segment reported net income of $2.1 millionfor the three months ended March 31, 2022, which was down $58,000or 2.7% compared to the first quarter of 2021. Noninterest income in the first quarter of 2022 was flat compared to the same period in 2021. Insurance commissions were up $271,000or 3.5% while contingency revenue was $130,000less than the first quarter of 2021. Noninterest income for the first quarter of 2021 also included gains on life insurance proceeds of $140,000.
Noninterest expenses were up
2021. The increase was mainly in salaries and healthcare expenses partially
offset by decreases in other employee benefits.
Wealth Management Segment The wealth management segment reported net income of
$840,000for the three months ended March 31, 2022, which was down $301,000or 26.4% compared to the first quarter of 2021. The decrease in net income for the three month period ended March 31, 2022, was mainly attributable to an increase in expenses. Noninterest expense for the first quarter of 2022 was up $447,000or 13.6% compared to the same period in 2021. The increase was mainly attributable to an increase in salaries and employee benefits, mainly incentives and healthcare, and an increase in technology expenses associated with system upgrades. 41 -------------------------------------------------------------------------------- Net Interest Income The following table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each for the three month periods ended March 31, 2022and 2021: Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited) Quarter Ended Quarter Ended March 31, 2022 March 31, 2021 Average Average Balance Average Balance Average (Dollar amounts in thousands) (QTD) Interest Yield/Rate (QTD) Interest Yield/Rate ASSETS Interest-earning assets Interest-bearing balances due from banks $ 134,129 $ 410.12 % $ 408,642 $ 850.08 % Securities (1) U.S. Government securities 2,293,611 7,362 1.30 % 1,635,143 4,612 1.14 % State and municipal (2) 101,746 649 2.59 % 120,959 775 2.60 % Other securities (2) 3,390 23 2.73 % 3,425 23 2.75 % Total securities 2,398,747 8,034 1.36 % 1,759,527 5,410 1.25 % FHLBNY and FRB stock 10,098 105 4.23 % 16,382 213 5.27 % Total loans and leases, net of unearned income (2)(3) 5,055,948 51,355 4.12 % 5,291,295 54,454 4.17 % Total interest-earning assets 7,598,922 59,535 3.18 % 7,475,846 60,162 3.26 % Other assets 311,125 350,826 Total assets $ 7,910,047 $ 7,826,672LIABILITIES & EQUITY Deposits Interest-bearing deposits Interest bearing checking, savings, & money market 4,160,946 750 0.07 % 3,949,304 1,093 0.11 % Time deposits 631,594 1,296 0.83 % 749,328 2,057 1.11 % Total interest-bearing deposits 4,792,540 2,046 0.17 % 4,698,632 3,150 0.27 % Federal funds purchased & securities sold under agreements to repurchase 64,237 16 0.10 % 59,584 16 0.11 % Other borrowings 125,298 500 1.62 % 265,001 1,376 2.11 % Trust preferred debentures 0 0 0.00 % 13,234 175 5.35 % Total interest-bearing liabilities 4,982,075 2,562 0.21 % 5,036,451 4,717 0.38 % Noninterest bearing deposits 2,108,825 1,949,643 Accrued expenses and other liabilities 106,120 119,860 Total liabilities 7,197,020 7,105,954 Tompkins Financial Corporation Shareholders' equity 711,601 719,290 Noncontrolling interest 1,426 1,428 Total equity 713,027 720,718 Total liabilities and equity $ 7,910,047 $ 7,826,672Interest rate spread 2.97 % 2.88 % Net interest income/margin on earning assets 56,973 3.04 % 55,445 3.01 % Tax Equivalent Adjustment (359) (408) Net interest income per consolidated financial statements $ 56,614 $ 55,0371 Average balances and yields on available-for-sale debt securities are based on historical amortized cost 2 Interest income includes the tax effects of taxable-equivalent adjustments using an effective income tax rate of 21% in 2022 and 2021 to increase tax exempt interest income to taxable-equivalent basis. 3 Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company's consolidated financial statements included in Part 1 of the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2021. 42 -------------------------------------------------------------------------------- Net Interest Income Net interest income is the Company's largest source of revenue, representing 73.9% of total revenues for the three months ended March 31, 2022, compared to 73.4% for the same period in 2021. Net interest income is dependent on the volume and composition of interest-earning assets and interest-bearing liabilities and the level of market interest rates. The above table shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each. Taxable-equivalent net interest income for the three months ended March 31, 2022, was up $1.5 millionor 2.8% over the same period in 2021. The increase was due to lower interest expense in the first quarter of March 31, 2022compared to the same period in 2021, driven by deposit growth, including average noninterest bearing deposits and lower average borrowings. For the three months ended March 31, 2022, average total deposits represented 95.9% of average total liabilities compared to 93.6% for the same period in 2021, while total average borrowings represented 1.7% of average total liabilities in 2022 compared to 3.7% in 2021. Average earnings assets for the three months ended March 31, 2022were up $123.1 millionor 1.7% over the same period in 2021, while average asset yields for the first quarter of 2022 were down 8 basis points from the first quarter of 2021. Net interest margin for the three months ended March 31, 2022was 3.04% compared to 3.01% for the same period in 2021. The increase in net interest margin for 2022 compared to 2021 was mainly a result of a decrease in funding costs, mainly due to the mix of funding sources, and higher yields and balances of securities for the first quarter of 2022 compared to the first quarter of 2021. Taxable-equivalent interest income for the three months ended March 31, 2022, was $59.5 million, down 1.0% compared to the same period in 2021, as the yield on average interest-earning assets decreased 8 basis points, while average interest earning assets increased $123.1 millionor 1.7%, primarily in the investment portfolio as excess liquidity was invested in securities and loans. The decrease in taxable-equivalent interest income was in interest and fees on loans, driven by lower yields and lower average balances for the three months ended March 31, 2022, compared to the same period in 2021. Average loan balances for the first quarter of 2022 were down $235.3 millionor 4.5% from the first quarter of 2021, while the average yield on loans of 4.12% for the first quarter of 2022 was down 5 basis points from the average loan yield in the first quarter of 2021. The decrease in average loan balances was mainly in PPP loans. Interest income in the first quarter of 2022 included $2.0 millionof net deferred loan fees related to PPP loans compared to net deferred loan fees of $2.8 millionin the first quarter of 2021. For the three months ended March 31, 2022, average balances for securities were up $639.2 millionor 36.3% over the first quarter of 2021, while the average yield on securities of 1.36% for the first quarter of 2022 was up 11 basis points. Average interest bearing balances for the three months ended March 31, 2022were down $274.5 millionor 67.2% from the same period in 2021. Interest expense for the three months ended March 31, 2022decreased by $2.2 millionor 45.7% compared to the same period in 2021, as the cost of interest bearing liabilities for the first quarter of 2022 decreased 17 basis points from the first quarter of 2021. Funding costs benefited from a decrease in average other borrowings, which were down as a result of the increase in average deposit balances. Average interest bearing deposits for the first quarter of 2022 were up $93.9 millionor 2.0% compared to the same period in 2021. Average other borrowings for the three months ended March 31, 2022were down $139.7 millionor 52.7% compared to the same period in 2021. The average cost of interest bearing deposits was 0.17% for the first quarter of 2022, compared to 0.27% for the first quarter of 2021. Provision for Credit Losses The provision for credit losses represents management's estimate of the amount necessary to maintain the allowance for credit losses at an appropriate level. The provision for credit losses for the three months ended March 31, 2022was a credit of $520,000compared to a credit of $2.5 millionfor the same period in 2021. Included in the provision credits for the first quarter of 2022 and 2021 were provision expenses of $214,000and $680,000, respectively, related to off-balance sheet credit exposures. The provision credit in the first quarter of 2022 was mainly driven by improvement in the macroeconomic factor assumptions utilized in the calculation as well as was improved credit quality. The section captioned "Financial Condition - The Allowance for Credit Losses" below has further details on the allowance for credit losses and asset quality metrics. Noninterest Income Noninterest income was $20.0 millionfor the first quarter of 2022, which was in line with the same period prior year. Noninterest income represented 26.1% of total revenue for the three months ended March 31, 2022, compared to 26.6% for the same period in 2021. Insurance commissions and fees of $9.3 millionin the first quarter of 2022 was up $151,000or 1.7% compared to the same period prior year. Insurance commissions were up $271,000or 3.5% while contingency revenue was down $130,000compared to the first quarter of 2021. 43 -------------------------------------------------------------------------------- Investment services income of $4.9 millionin the first quarter of 2022 was up $244,000or 5.2% compared to the first quarter of 2021, mainly due to an increase in investment management services. Investment services income includes investment management, trust and estate, financial and tax planning, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkinswas $4.4 billionat March 31, 2022, compared to $4.8 billionat March 31, 2021. The fair value of assets in custody at March 31, 2022includes $1.3 billionof Company-owned securities where Tompkins Trust Companyis custodian. Card services income of $2.5 millionin the first quarter of 2022 was up $160,000or 6.7% compared to the same period in 2021. Debit card income was up $70,000or 4.0% in the first quarter of 2022 compared to the same period in 2021, driven by higher transaction volume in 2022 compared to the same period in 2021. Other income of $1.5 millionin the first quarter of 2022 was down $498,000or 25.2% compared to the same period in 2021. The decrease in the first quarter of 2022 was mainly attributable to a decrease in gains on sales of residential loans of $425,000, compared to the first quarter of 2021. Noninterest Expense Noninterest expense was $46.8 millionfor the first quarter of 2022, up 5.2% compared to the same period in 2021. Noninterest expense as a percentage of total revenue for the first quarter of 2022 was 61.2% compared to 60.2% for the same period in 2021. Expenses associated with salaries and wages and employee benefits are the largest component of noninterest expense, representing 62.1% of total noninterest expense for the three months ended March 31, 2022and 62.3% for the three months ended March 31, 2021. Salaries and wages and employee benefit expense for the three months ended March 31, 2022were up $925,000or 3.3% for same period in 2021 resulting from normal merit adjustments and an increase in healthcare expense in the first quarter of 2022 over the same period prior year. Other expense categories not related to compensation and benefits, such as marketing, technology, and professional fee expenses, for the three months ended March 31, 2022, were up $1.4 millionor 13.1% compared to the same period in 2021. Marketing expenses for the three months ended March 31, 2022were up $562,000or 113.7% from the same period in 2021, partly due to the consolidation of the Company's four banking subsidiaries. Technology expenses for the first quarter of 2022 were up $756,000or 25.8% over the same period in 2021, driven largely by software related conversion expenses. Business related travel and entertainment expenses for the first quarter of 2022 were up $102,000or 147.4% from the same period in 2021 due to increased travel and entertainment activities as compared to the prior period as the economy continued to open following the most recent peak of the pandemic. Income Tax Expense The provision for income taxes was $7.0 millionfor an effective rate of 23.0% for the first quarter of 2022, compared to tax expense of $6.7 millionand an effective rate of 20.7% for the same quarter in 2021. The effective rates differ from the U.S.statutory rate primarily due to the effect of tax-exempt income from loans, securities and life insurance assets, and the income tax effects associated with stock based compensation. The increase in the effective tax rate for the three months ended March 31, 2022, over the same period in 2021, is largely due to the anticipated loss of certain New York Statetax benefits due to the expectation that average assets will exceed $8.0 billionfor the 2022 tax year. The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on its New York Statetax return for qualifying entities. A condition to claim the benefit is that the consolidated company has average assets of no more than $8 billionfor the taxable year. The Company expects average assets to exceed the $8.0 billionthreshold for the 2022 tax year. As of March 31, 2022, the Company's consolidated average assets, as defined by New Yorktax law, were slightly under the $8.0 billionthreshold. The Company will continue to monitor the consolidated average assets during 2022 to determine future eligibility.
Total assets were
$7.9 billionat March 31, 2022, up $71.1 millionor 0.9% from December 31, 2021. The increase in total assets was mainly in cash and cash equivalents balances, which were up $112.0 millionor 177.4%. Total securities were down $43.9 millionor 1.9% compared to December 31, 2021. The decrease was the result of an increase in unrealized losses on the available-for-sale portfolio from $19.3 millionat year-end 2021 to $125.8 millionat March 31, 2022, as a result of the increase in market interest rates in the first quarter of 2022. Total loan balances of $5.1 billionat March 31, 2022were in line with year-end 2021. Total deposits were up $225.3 millionor 3.3% from December 31, 2021. The increase in deposits at March 31, 2022was mainly in checking, savings and money market accounts. 44 --------------------------------------------------------------------------------
March 31, 2022, the Company's securities portfolio was $2.3 billionor 29.0% of total assets, compared to $2.3 billionor 29.8% of total assets at year-end 2021. The following table details the composition of the securities portfolio:
March 31, 2022 December 31, 2021(In thousands) Amortized Cost
Fair Value Amortized Cost Fair Value
$ 190,997 $ 178,903 $160,291 $157,834Obligations of U.S. Government sponsored entities 852,733 802,107 843,218 832,373
95,661 102,177 104,169
Mortgage-backed securities – residential, issued by
68,435 66,277 76,502 77,157 U.S. Government sponsored entities 891,954 835,773 879,102 870,556 U.S. corporate debt securities 2,500 2,427 2,500 2,424 Total available-for-sale debt securities
March 31, 2022 December 31, 2021 (In thousands) Amortized Cost Fair Value Amortized Cost Fair Value U.S. Treasuries
$86,635 $80,633 $86,689 $86,368Obligations of U.S. Government sponsored entities 216,889 200,284 197,320 195,920 Total held-to-maturity debt securities $ 303,524
The increase in unrealized losses, which reflects the amount that amortized cost exceeds fair value, related to the available-for-sale debt portfolio was due primarily to changes in market interest rates during the first three months of 2022. Management's policy is to purchase investment grade securities that on average have relatively short duration, which helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. 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 (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the Statements of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by
U.S.government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation, and U.S.government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of March 31, 2022, the held-to- 45 -------------------------------------------------------------------------------- maturity portfolio consisted of U.S. Treasurysecurities and securities issued by U.S.government-sponsored enterprises, including The Federal National Mortgage Agencyand the Federal Farm Credit Banks Funding Corporation. U.S. Treasurysecurities are backed by the full faith and credit of and/or guaranteed by the U.S.government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S.government agencies or U.S.government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S.government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of March 31, 2022.
The Company did not recognize any net credit impairment charge to earnings on
investment securities in the first quarter of 2022.
Loans and Leases Loans and leases as of the end of the first quarter and prior year-end periods were as follows: (In thousands) 03/31/2022 12/31/2021 Commercial and industrial Agriculture
$ 81,269 $ 99,172Commercial and industrial other 708,626 699,121 PPP loans 24,095 71,260 Subtotal commercial and industrial 813,990 869,553 Commercial real estate Construction 185,503 178,582 Agriculture 199,652 195,973 Commercial real estate other 2,292,099 2,278,599 Subtotal commercial real estate 2,677,254 2,653,154 Residential real estate Home equity 179,798 182,671 Mortgages 1,312,913 1,290,911 Subtotal residential real estate 1,492,711 1,473,582 Consumer and other Indirect 3,857 4,655 Consumer and other 66,601 67,396 Subtotal consumer and other 70,458 72,051 Leases 13,881 13,948 Total loans and leases 5,068,294 5,082,288 Less: unearned income and deferred costs and fees (4,843) (6,821) Total loans and leases, net of unearned income and deferred costs and fees $ 5,063,451 $ 5,075,467Total loans and leases of $5.1 billionat March 31, 2022were down $12.0 millionor 0.2% from December 31, 2021. The decrease was mainly in PPP loans, which were down $47.2 millionto $24.1 millionat March 31, 2022, from $71.3 millionat December 31, 2021. Excluding PPP loans, total loans at March 31, 2022were up $35.1 millionor 0.7% from December 31, 2021. As of March 31, 2022, total loans and leases represented 64.2% of total assets compared to 64.9% of total assets at December 31, 2021. Residential real estate loans, including home equity loans were $1.5 billionat March 31, 2022, up $19.1 millionor 1.3% compared to December 31, 2021, and comprised 29.5% of total loans and leases at March 31, 2022. Changes in residential loan balances are 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. 46 -------------------------------------------------------------------------------- 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 the first three months of 2022 and 2021, the Company sold residential loans totaling $135,000and $10.5 million, respectively, recognizing gains on these sales of $4,000and $429,000, respectively. These residential real estate loans were sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold, the Company typically retains all servicing rights, which provides the Company with a source of fee income. Mortgage servicing rights totaled $1.0 millionat both March 31, 2022and December 31, 2021. Commercial real estate loans and commercial and industrial loans totaled $2.7 billionand $814.0 million, respectively, and represented 52.9% and 16.1%, respectively of total loans as of March 31, 2022. The commercial real estate portfolio was up $24.1 millionor 0.9% over year-end 2021, while commercial and industrial loans were down $55.6 millionor 6.4% from year-end 2021. The decrease in commercial and industrial loans over year-end 2021 was mainly in PPP loans, which were down $47.2 millionor 66.2% to $24.1 millionat March 31, 2022. As of March 31, 2022, agriculturally-related loans totaled $280.9 millionor 5.5% of total loans and leases, compared to $295.1 millionor 5.8% of total loans and leases at December 31, 2021. Agriculturally-related loans include loans to dairy farms and crop farms. Agricultural-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops. The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. Management reviews these policies and procedures on a regular basis. The Company discussed its lending policies and underwriting guidelines for its various lending portfolios in Note 4 - "Loans and Leases" in the Notes to Consolidated Financial Statements contained in the Company's Annual Report on Form 10-K for the year ended December 31, 2021. There have been no significant changes in these policies and guidelines since the date of that report. The Company's Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans. The Company's loan and lease customers are located primarily in the New Yorkand Pennsylvaniacommunities served by its subsidiary bank. Although operating in numerous communities in New York Stateand Pennsylvania, the Company is still dependent on the general economic conditions of these states and the local economic conditions of the communities within those states in which the Company does business. Allowance for Credit Losses The below tables represents the allowance for credit losses as of March 31, 2022and December 31, 2021. The tables provide, as of the dates indicated, an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category. 47 --------------------------------------------------------------------------------
(In thousands) 3/31/2022 12/31/2021 Allowance for credit losses Commercial and industrial
$ 7,027 $ 6,335Commercial real estate 22,982 24,813 Residential real estate 10,447 10,139 Consumer and other 1,588 1,492 Finance leases 82 64 Total $ 42,126 $ 42,843As of March 31, 2022, the total allowance for credit losses for loans was $42.1 million, down $717,000or 1.7% compared to December 31, 2021. The ACL as a percentage of total loans measured 0.83% at March 31, 2022, compared to 0.84% at December 31, 2021. The decrease in the ACL from year-end 2021 was driven by continued improvements in unemployment forecasts and decreases in qualitative adjustments used in our model, offset by an increase due to lower forecasted GDP growth. Qualitative reserves established in 2020 and 2021 as a result of the COVID-19 pandemic to address specific portfolios with increased risk characteristics, including loans in our hotel portfolio, and loans in our deferral program, continue to move lower as a result of improved conditions in the hotel industry and payment performance of loans coming out of the deferral program. Although we have seen improved occupancy rates in the hospitality industry in recent months, resulting in a decrease of qualitative reserves, we continue to closely monitor this industry. Asset quality measures at March 31, 2022were generally favorable compared to December 31, 2021. Loans internally-classified Special Mention or Substandard were down $2.5 millionor 1.8% compared to December 31, 2021. Nonperforming loans and leases were down $893,000or 2.9% from year end 2021 and represented 0.60% of total loans at March 31, 2022compared to 0.61% at December 31, 2021. The allowance for credit losses covered 139.20% of nonperforming loans and leases as of March 31, 2022, compared to 137.51% at December 31, 2021. The Company had net recoveries of $17,000in the first quarter of 2022, compared to net recoveries of $180,000for the same period in 2021. 48 --------------------------------------------------------------------------------
Activity in the Company’s allowance for credit losses during the first three
months of 2022 and 2021 is illustrated in the table below:
Analysis of the Allowance for Credit Losses (In thousands)
Average loans outstanding during period
$ 5,055,948 $ 5,291,295Balance of allowance at beginning of year 42,843 51,669 LOANS CHARGED-OFF: Commercial and industrial 23 116 Commercial real estate 27 0 Consumer and other 196 91 Total loans charged-off $ 246 $ 207 RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF: Commercial and industrial 20 97 Commercial real estate 42 213 Residential real estate 109 34 Consumer and other 92 43 Total loans recovered $ 263 $ 387 Net loans recovered (17) (180) Credit for credit losses related to loans (734)
Balance of allowance at end of period
Allowance for credit losses as a percentage of total
loans and leases
0.83 % 0.93 %
Annualized net (recoveries) charge-offs on loans to
average total loans and leases during the period
The provision for credit losses for loans was a credit of
$734,000for the three months ended March 31, 2022, compared to a credit of $2.5 millionfor the same period in 2021. The provision expense for credit losses related to loans is based upon the Company's quarterly evaluation of the appropriateness of the allowance for credit losses. As discussed above, the ACL model estimated lower reserves at Q1 2022 compared to year-end 2021, mainly driven by improving macroeconomic conditions, the need for lower qualitative reserves related to risks related to COVID-19 and improving asset quality metrics. As such, the provision for credit losses for loans for the first three months of 2022 was a credit of $734,000.
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 provision for credit loss expense in the Company's consolidated statements of income. For the three months ended
March 31, 2022, the provision for credit losses for off-balance sheet credit exposures was $214,000compared to $680,000for the same period in 2021. The provision in 2022 was driven by an increase in off-balance sheet exposures, specifically commercial real estate loan commitments. 49 -------------------------------------------------------------------------------- Analysis of Past Due and Nonperforming Loans (In thousands) 3/31/2022 12/31/2021 3/31/2021 Loans 90 days past due and accruing Commercial real estate $ 0 $ 0 $ 0Consumer and other 0 0 0 Total loans 90 days past due and accruing $ 0 $ 0 $ 0Nonaccrual loans Commercial and industrial 806 533 768 Commercial real estate 13,623 13,893 27,847 Residential real estate 10,200 11,178 12,745 Consumer and other 571 429 296 Total nonaccrual loans $ 25,200 $ 26,033 $ 41,656Troubled debt restructurings not included above 5,064 5,124 6,069 Total nonperforming loans and leases $ 30,264 $ 31,157 $ 47,725Other real estate owned 88 135 88 Total nonperforming assets $ 30,352 $ 31,292 $ 47,813Allowance as a percentage of nonperforming loans and leases 139.20 %
137.51 % 103.38 %
Total nonperforming loans and leases as percentage of total
loans and leases
0.60 % 0.61 % 0.90 % Total nonperforming assets as percentage of total assets 0.38 %
0.40 % 0.59 %
Nonperforming assets include nonaccrual loans, TDR, and foreclosed real estate/other real estate owned. Total nonperforming assets of
$30.4 millionat March 31, 2022were down $940,000or 3.0% compared to December 31, 2021, and down $17.5 millionor 36.5% compared to March 31, 2021. The decrease in nonperforming assets from March 31, 2021, was mainly in the commercial real estate and residential real estate portfolios. The decrease in commercial real estate loans from March 31, 2021, was due to the payoff of one relationship totaling $11.8 millionin the hospitality industry and a $6.0 millioncharge-off of another relationship that included two loans in the hospitality industry during the fourth quarter of 2021. Nonperforming assets represented 0.38% of total assets at March 31, 2022, down from 0.40% at December 31, 2021, and from 0.59% at March 31, 2021. The Company's ratio of nonperforming assets to total assets is in line with our peer group's most recent ratio of 0.41% at December 31, 2021. Loans are considered modified in a TDR when, due to a borrower's financial difficulties, the Company makes a concession(s) to the borrower that it would not otherwise consider and the borrower could not obtain elsewhere. These modifications may include, among others, an extension of the term of the loan, and granting a period when interest-only payments can be made, with the principal payments made over the remaining term of the loan or at maturity. TDRs are included in the above table within the following categories: "loans 90 days past due and accruing", "nonaccrual loans", or "troubled debt restructurings not included above". Loans in the latter category include loans that meet the definition of a TDR but are performing in accordance with the modified terms and have shown a satisfactory period of repayment (generally six consecutive months) and where full collection of all is reasonably assured. At March 31, 2022, the Company had $6.3 millionin TDRs, and of that total $1.2 millionwere reported as nonaccrual and $5.1 millionwere considered performing and included in the table above. In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when required by applicable regulations. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal, and interest income is recorded only after principal recovery is reasonably assured. The ratio of the allowance to nonperforming loans and leases (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 139.20% at March 31, 2022, compared to 137.51% at December 31, 2021, and 103.38% at March 31, 2021. The Company's nonperforming loans and leases are mostly comprised of collateral dependent impaired loans with limited exposure or loans that require limited specific reserve due to the level of collateral available with respect to these loans and/or previous charge-offs. 50 -------------------------------------------------------------------------------- The Company, through its internal loan review function, identified 21 commercial relationships totaling $27.5 millionat March 31, 2022that were potential problem loans. At December 31, 2021, the Company had identified 25 relationships totaling $36.5 millionthat were potential problem loans. Of the 21 commercial relationships at March 31, 2022that were Substandard, there were 7 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $23.2 million, the largest of which was $7.4 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.
Total equity was
$657.5 millionat March 31, 2022, a decrease of $71.4 millionor 9.8% from December 31, 2021. The decrease was mainly a result of the increase in accumulated other comprehensive loss, reflecting the change in unrealized gains/loss on available-for-sale securities from an unrealized loss of $14.6 millionat December 31, 2021to an unrealized loss of $95.0 millionat March 31, 2022. The decrease was partially offset by an increase in retained earnings. Additional paid-in capital decreased from $312.5 millionat December 31, 2021, to $305.9 millionat March 31, 2022. The decrease was primarily attributable to a $10.4 millionaggregate purchase price related to the Company's repurchase and retirement of 130,168 shares of its common stock during the first quarter of 2022 pursuant to its publicly announced stock repurchase plan, partially offset by $2.9 millionrelated to shares issued for the employee stock ownership program and $945,000related to stock based compensation. Retained earnings increased by $14.9 millionfrom $475.3 millionat December 31, 2021, to $490.2 millionat March 31, 2022, reflecting net income of $23.3 millionless dividends of $8.3 million. Accumulated other comprehensive loss increased from a net loss of $56.0 millionat December 31, 2021, to a net loss of $135.8 millionat March 31, 2022, reflecting a $80.4 millionincrease in unrealized losses on available-for-sale debt securities due to changes in market rates coupled with a $506,000decrease related to post-retirement benefit plans. Cash dividends paid in the first three months of 2022 totaled approximately $8.3 millionor $0.57per common share, representing 35.8% of year to date 2022 earnings through March 31, 2022, and were up 5.6% over cash dividends of $8.0 millionor $0.54per common share paid in the first three months of 2021. The Company and its subsidiary bank are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank meet all capital adequacy requirements to which they are subject. In addition to setting higher minimum capital ratios, the Basel III CapitalRules introduced a 2.5% capital conservation buffer, which has been fully phased in and must be added to each of the minimum capital ratios and is designed to absorb losses during periods of economic stress. 51 --------------------------------------------------------------------------------
The following table provides a summary of the Company’s capital ratios as of
Regulatory Capital Analysis
Minimum Capital Required - Basel
March 31, 2022Actual
III Fully Phased-In Well Capitalized Requirement
(dollar amounts in thousands)
Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk weighted assets)
$ 743,35314.23 % $ 548,58810.50 % $ 522,46410.00 % Tier 1 Capital (to risk weighted assets) 697,063 13.34 % 444,095 8.50 % 417,971 8.00 % Tier 1 Common Equity (to risk weighted assets) 697,063 13.34 % 365,725 7.00 % 339,602 6.50 % Tier 1 Capital (to average assets) 697,063 8.89 % 313,543 4.00 % 391,928 5.00 % As of March 31, 2022, the Company's capital ratios exceeded the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions. The capital levels required to be considered well capitalized, presented in the above table, are based upon prompt corrective action regulations, as amended to reflect the changes under Basel III Capital Rules. Total capital as a percent of risk weighted assets increased to 14.2% at March 31, 2022, compared with 14.2% as of December 31, 2021. Tier 1 capital as a percent of risk weighted assets remained unchanged from 13.3% at the end of 2021 to 13.3% as of March 31, 2022. Tier 1 capital as a percent of average assets was 8.9% at March 31, 2022, which is up from 8.7% at December 31, 2021. Common equity Tier 1 capital was 13.3% at the end of the first quarter of 2022, unchanged from 13.3% at the end of 2021. As of March 31, 2022, the capital ratios for the Company's subsidiary banks also exceeded the minimum required capital ratios plus the fully phased-in capital conservation buffer, and the minimum required capital ratios for well capitalized institutions. In the first quarter of 2020, U.S.Federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL on January 1, 2020, we have elected to utilize the five-year CECL transition.
Deposits and Other Liabilities
Total deposits of
$7.0 billionat March 31, 2022were up $225.3 millionor 3.3% from December 31, 2021. The increase from year-end was primarily in checking, money market and savings balances, which collectively were up $247.4 millionor 6.2% from year end 2021. The majority of the increase was in money market deposit balances and reflects growth in municipal deposits. Noninterest bearing deposits were flat compared to year-end 2021 and time deposits were down $23.7 millionor 3.7%, respectively, from year-end 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 $250,000or more, brokered deposits and municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits were up by $110.6 millionor 1.9% from year-end 2021, to $5.9 billionat March 31, 2022. Core deposits represented 84.0% of total deposits at March 31, 2022, compared to 85.1% of total deposits at December 31, 2021. 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 $57.1 millionat March 31, 2022, and $66.8 millionat December 31, 2021. Management generally views local repurchase agreements as an alternative to large time deposits. The Company's other borrowings totaled $60.0 millionat March 31, 2022, compared to $124.0at December 31, 2021. The decrease in borrowings was primarily due to the prepayment of $50.0 millionof FHLB term advances, with no prepayment penalties. Borrowings at March 31, 2022represented $60.0 millionof FHLB term advances. The $124.0 millionin borrowings at December 31, 2021, represented $14.0 millionin overnight advances from the FHLB and $110.0 millionin term advances from the FHLB. Of the $60.0 millionin FHLB term advances at March 31, 2022, $50.0 millionwas due in over one year. 52 --------------------------------------------------------------------------------
March 31, 2022, the Company had not experienced any significant impact to our liquidity or funding capabilities as a result of the COVID-19 pandemic. The Company is participating in the PPP under the CARES Act and at March 31, 2022, PPP loans totaled $24.1 million. 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 confirmed availability of Federal Fundlines 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, 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 Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company's strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company's liquidity that are reasonably likely to occur. 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 $250,000or more, brokered deposits, municipal money market deposits, reciprocal deposits, bank borrowings, securities sold under agreements to repurchase, overnight 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 of $1.2 billionat March 31, 2022increased $41.1 millionor 3.4% as compared to year end 2021. Non-core funding sources, as a percentage of total liabilities, were 17.2% at March 31, 2022, compared to 17.0% at December 31, 2021. Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.6 billionat March 31, 2022and at $1.4 billionat December 31, 2021, were either pledged or sold under agreements to repurchase. Pledged securities represented 66.7% of total securities at March 31, 2022, compared to 59.4% of total securities at December 31, 2021.
Cash and cash equivalents totaled
consisting of securities due in one year or less, decreased from
Cash flow from the loan and investment portfolios provides a significant source of liquidity. These assets may have stated maturities in excess of one year, but have monthly principal reductions. Total mortgage-backed securities, at fair value, were
$902.1 millionat March 31, 2022compared with $947.7 millionat December 31, 2021. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.6 billionat March 31, 2022, up $17.5 millionor 1.1% compared with year end 2021. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company. The Company's liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered deposits, and FHLB advances. Through its subsidiary bank, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. As members of the FHLB, the Company can use certain unencumbered mortgage-related assets and securities to secure borrowings from the FHLB. At March 31, 2022, the established borrowing capacity with the FHLB was $1.47 billion, with available unencumbered mortgage-related assets of $1.41 billion. Additional assets may also qualify as collateral for FHLB advances, upon approval of the FHLB.
Accounting Standards Pending Adoption
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 53
exceptions for applying generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of
March 12, 2020through December 31, 2022. Tompkinsis currently evaluating the potential impact of ASU 2020-04 on our consolidated financial statements. Accounting Standard Update ("ASU") ASU2022-01, "Derivatives and Hedging (Topic 815)" ("ASU 2022-01") clarifies the guidance in ASC 815 on fair value hedge accounting of interest rate risk for portfolios and financial assets. Among other things, the amended guidance established the "last-of-layer" method for making the fair value hedge accounting for these portfolios more accessible and renamed that method the "portfolio layer" method. ASU 2022-01 is effective January 1, 2023and is not expected to have a significant impact on our consolidated financial statements. ASU 2022-02, "Financial Instruments - Credit Losses (Topic 326)" ("ASU 2022-02") eliminates the guidance on troubled debt restructurings and requires entities to evaluate all loan modifications to determine if they result in a new loan or a continuation of the existing loan. ASU 2022-02 also requires that entities disclose current-period gross charge-offs by year of origination for loans and leases. ASU 2022-02 is effective January 1, 2023, with early adoption permitted. Tompkinsis currently assessing the impact that ASU 2022-02 will have on our consolidated financial statements.