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TOMPKINS FINANCIAL CORP – 10-Q – Management's Discussion and Analysis of Financial Condition and Results of Operations
BUSINESS
Corporate Overview and Strategic InitiativesTompkins 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. EffectiveJanuary 1, 2022 , the Company's four wholly-owned banking subsidiaries were combined into one bank, with the Bank of ofCastile ,Mahopac Bank , andVIST Bank merging with and intoTompkins Trust Company (the "Trust Company ") with theTrust Company as the surviving institution. Immediately following the merger, theTrust Company changed its name toTompkins Community Bank . AtSeptember 30, 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 "). 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 ,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." TheTompkins strategy centers around our core values and a commitment to delivering long-term value to our clients, communities, and shareholders. A key strategic initiative for the Company is a focus on responsible and sustainable growth, including initiatives to grow organically through our current businesses, as well as through possible acquisitions of financial institutions, branches, and financial services businesses. As such, the Company has acquired, and from time to time considers acquiring, banks, thrift institutions, branch offices of banks or thrift institutions, or other businesses that would complement the Company's business or its geographic reach. The Company generally targets merger or acquisition partners that are culturally similar and have experienced management and possess either significant market presence or have potential for improved profitability through financial management, economies of scale and expanded services. Business Segments Banking services consist primarily of attracting deposits from the areas served by the Company's one banking subsidiary's 62 banking offices (43 offices inNew York and 19 offices inPennsylvania ) and using those deposits to originate a variety of commercial loans, consumer loans, real estate loans (including commercial loans collateralized by real estate), 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 byTompkins Community Bank under the trade nameTompkins Financial Advisors .Tompkins Financial Advisors offers services to customers ofTompkins Community Bank and shares offices in each of the banking markets. Insurance services include property and casualty insurance, employee benefit consulting, and life, long-term care and disability insurance.Tompkins Insurance is headquartered inBatavia, New York . Over the years,Tompkins Insurance has acquired smaller insurance agencies in the market areas serviced by the Company's banking subsidiaries and successfully consolidated them intoTompkins Insurance .Tompkins Insurance offers services to customers ofTompkins Community Bank and shares offices in each of the banking markets. In addition to these shared offices,Tompkins Insurance has five stand-alone offices inWestern New York , and one stand-alone office inTompkins 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.
46 --------------------------------------------------------------------------------
Competition
Competition for commercial banking and other financial services is strong in the Company's market areas. In one or more aspects of its business, the Company's subsidiaries compete with other commercial banks, savings and loan associations, credit unions, finance companies, Internet-based financial services companies, mutual funds, insurance companies, brokerage and investment banking companies, and other financial intermediaries. Some of these competitors have substantially greater resources and lending capabilities and may offer services that the Company does not currently provide. In addition, many of the Company's non-bank competitors are not subject to the same extensive Federal regulations that govern financial holding companies and Federally-insured banks. Competition among financial institutions is based upon interest rates offered on deposit accounts, interest rates charged on loans and other credit and service charges, the quality and scope of the services rendered, the convenience of facilities and services, and, in the case of loans to commercial borrowers, relative lending limits. Management believes that a community-based financial organization is better positioned to establish personalized financial relationships with both commercial customers and individual households. The Company's community commitment and involvement in its primary market areas, as well as its commitment to quality and personalized financial services, are factors that contribute to the Company's competitiveness. Management believes that each of the Company's subsidiary banks can compete successfully in its primary market areas by making prudent lending decisions quickly and more efficiently than its competitors, without compromising asset quality or profitability. In addition, the Company focuses on providing unparalleled customer service, which includes offering a strong suite of products and services, including products that are accessible to our customers through digital means. Although management feels that this business model has caused the Company to grow its customer base in recent years and allows it to compete effectively in the markets it serves, we cannot assure you that such factors will result in future success.
Regulation
Banking, insurance services and wealth management are highly regulated. As a financial holding company including a community bank, a registered investment adviser, and an insurance agency subsidiary, the Company and its subsidiaries are subject to examination and regulation by theFederal Reserve Board ("FRB"),Securities and Exchange Commission ("SEC"), theFederal Deposit Insurance Corporation ("FDIC"), theNew York State Department of Financial Services ,Pennsylvania Department of Banking and Securities , theFinancial Industry Regulatory Authority , and thePennsylvania Insurance Department .
OTHER IMPORTANT INFORMATION
The following discussion is intended to provide an understanding of the consolidated financial condition and results of operations of the Company for the three and nine months endedSeptember 30, 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 endedDecember 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 164 domestic bank holding companies with$3 billion to$10 billion in total assets as defined in theFederal Reserve's "Bank Holding Company Performance Report" forJune 30, 2022 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current 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 endedDecember 31, 2021 , are among those that could cause actual results to differ 47 -------------------------------------------------------------------------------- materially from the forward-looking statements: changes in general economic, market and regulatory conditions; GDP growth and inflation trends; the impact of the interest rate and inflationary environment on the Company' business, financial condition and results of operations; other income or cash flow anticipated from the Company's operations, investment and/or lending activities; changes in laws and regulations affecting banks, bank holding companies and/or financial holding companies, such as the Dodd-Frank Act and Basel III and the Economic Growth, Regulatory Relief, and Consumer Protection Act; the impact of any change in theFDIC insurance assessment rate or the rules and regulations related to the calculation of theFDIC insurance assessment amount; technological developments and changes; the ability to continue to introduce competitive new products and services on a timely, cost-effective basis; governmental and public policy changes, including environmental regulation; reliance on large customers; uncertainties arising from national and global events, including the war inUkraine , as well as the potential impact of widespread protests, civil unrest, political uncertainty on the economy and the financial services industry, and pandemics or other public health crises, including the COVID-19 pandemic; and financial resources in the amounts, at the times and on the terms required to support the Company's future businesses. Critical Accounting Policies The accounting and reporting policies followed by the Company conform, in all material respects, toU.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 endedDecember 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 withU.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: 48 -------------------------------------------------------------------------------- •Accounting for credit losses - The Company accounts for the allowance for credit losses using the current expected credit loss model. Under this accounting guidance, the allowance for credit losses represents a valuation account that is deducted from the amortized cost basis of certain financial assets, including loans and leases, to present the net amount expected to be collected at the balance sheet date. A provision for credit losses is recorded to adjust the level of the allowance as deemed necessary by management. In estimating expected losses in the loan and lease portfolio, borrower-specific financial data and macro-economic assumptions are utilized to project losses over a reasonable and supportable forecast period. For certain loan pools that share similar risk characteristics, the Company utilizes statistically developed models to estimate amounts and timing of expected future cash flows, collateral values and other factors used to determine the borrowers' abilities to repay obligations. Such models consider historical correlations of credit losses with various macroeconomic assumptions including unemployment and gross domestic product. These forecasts may be adjusted for inherent limitations or biases of the models. Subsequent to the forecast period, the Company utilizes longer-term historical loss experience to estimate losses over the remaining contractual life of the loans. Changes in the circumstances considered when determining management's estimates and assumptions could result in changes in those estimates and assumptions, which could result in adjustment of the allowance for credit losses in future periods. A discussion of facts and circumstances considered by management in determining the allowance for credit losses is included herein in Note 4 of Notes to Financial Statements.
COVID-19 Pandemic and Recent Events
The COVID-19 global pandemic continued to present health and economic challenges
in the third quarter of 2022, but conditions were generally improved from 2021.
In accordance with the Coronavirus Aid, Relief and Economic Security Act (the
"CARES Act") and the interagency guidance, the Company elected to adopt the
provisions to not report qualified loan modifications as troubled debt
restructurings ("TDRs"). The relief related to TDRs under the CARES Act was
extended by the Consolidated Appropriations Act, 2021. Under the Consolidated
Appropriations Act, relief under the CARES Act was extended until the earlier of
(i) 60 days after the date the COVID-19 national emergency comes to an end or
(ii) January 1, 2022 . Management continues to monitor credit conditions
carefully at the individual borrower level, as well as by industry segment, in
order to be responsive to changing credit conditions.
The Company funded a total of 5,140 applications for Paycheck Protection Plan
("PPP") loans totaling $694.1 million in 2020 and 2021. Out of the $694.1
million of PPP loans that the Company funded, approximately $693.2 million have
been forgiven by the Small Business Administration ("SBA") under the terms of
the program as of September 30, 2022 , or paid back by the borrower. As of
September 30, 2022 , there were fourteen outstanding PPP loans totaling
approximately $875,000 . Total net deferred fees on the remaining balance of PPP
loans amounted to $19,000 at September 30, 2022 .
RESULTS OF OPERATION
Performance Summary Net income for the third quarter of 2022 was$21.3 million or$1.48 diluted earnings per share, compared to$21.3 million or$1.45 diluted earnings per share for the same period in 2021. Net income for the first nine months of 2022 was$65.5 million or$4.53 diluted earnings per share compared to$69.8 million or$4.72 diluted earnings per share for the first nine months of 2021. Net income for the third quarter of 2022 was in line with the same quarter in 2021. For the year-to-date period endedSeptember 30, 2022 , net income decreased by$4.3 million or 6.2%. The decrease in net income for the nine month period in 2022 compared to the same period in 2021 was mainly a result of the provision for credit losses, which was an expense of$1.4 million in 2022, versus a credit of$6.1 million in 2021, a pre-tax variance of$7.5 million . Return on average assets ("ROA") for the quarter endedSeptember 30, 2022 was 1.08%, compared to 1.05% for the quarter endedSeptember 30, 2021 . Return on average shareholders' equity ("ROE") for the third quarter of 2022 was 13.33%, compared to 11.55% for the same period in 2021. For the year-to-date period endedSeptember 30, 2022 , ROA and ROE totaled 1.11% and 13.22%, respectively, compared to 1.17% and 12.87%, for the same period in 2021. 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 theTompkins 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. 49 -------------------------------------------------------------------------------- Banking Segment The banking segment reported net income of$18.0 million for the third quarter of 2022, an increase of$252,000 or 1.4% from net income of$17.8 million for the same period in 2021. For the nine months endedSeptember 30, 2022 , the banking segment reported net income of$57.0 million , a decrease of$3.8 million or 6.2% from the same period in 2021. The year-to-date decrease in net income was mainly due to a$7.5 million increase in provision expense over prior year, partially offset by increased net interest income. Net interest income of$58.1 million for the third quarter of 2022 was up$2.0 million or 3.6% from the same period in 2021. For the nine months endedSeptember 30, 2022 , net interest income of$173.0 million was up$7.0 million or 4.2% compared to the first nine months of 2021, the improvement is mainly due to higher yields on interest earning assets as well as lower interest expense on other borrowings due to lower balances in the first nine months of 2022 compared to the same period in 2021. Net interest income for the three and nine months endedSeptember 30, 2022 included net deferred loan fees associated with PPP loans of$88,000 and$3.0 million , respectively, compared to net deferred loan fees of$3.3 million and$8.0 million for the three and nine months endedSeptember 30, 2021 , respectively. The provision for credit losses was an expense of$1.1 million for the three months endedSeptember 30, 2022 , compared to a credit of$1.2 million for the same period in 2021. For the nine month period endedSeptember 30, 2022 , the provision for credit losses was an expense of$1.4 million compared to a credit of$6.1 million for the same period in 2021. The increase in provision for credit losses for both the three and nine month periods is mainly driven by current economic forecasts coupled with loan growth. For additional information, see the section titled "The Allowance for Credit Losses" below. Noninterest income of$6.0 million for the three months endedSeptember 30, 2022 was down$443,000 or 6.9% compared to the same period in 2021. For the nine months endedSeptember 30, 2022 , noninterest income of$18.5 million was down$680,000 or 3.6% compared to the nine months endedSeptember 30, 2021 . The decrease was mainly driven by reduced income on bank owned life insurance and lower gains on sales of residential loans, which were down$604,000 and$213,000 , respectively, in the third quarter of 2022 compared to the same quarter in 2021, and down$1.2 million and$738,000 , respectively, for the year-to-date period endedSeptember 30, 2022 compared to the same period in 2021. Service charges on deposit accounts were up$279,000 or 17.0% in the third quarter of 2022 over the third quarter of 2021 and up$873,000 or 19.1% for the nine months endedSeptember 30, 2022 over the same period in 2021. Noninterest expense of$39.4 million and$116.0 million for the three and nine months endedSeptember 30, 2022 , respectively, was down$1.1 million or 2.8% and$2.2 million or 2.0%, respectively, over the same periods in 2021. The main driver for the decrease in noninterest expenses was mainly due to penalties of$2.9 million related to the prepayment of$135.0 million in FHLB fixed rate advances paid in the third quarter of 2021. Included in the quarter and year-to-date periods of 2022 were nonrecurring expenses of$196,000 and$1.2 million , respectively, related to the consolidation of the Company's four banking charters, including the related conversion of the core banking system and rebranding. Insurance Segment The insurance segment reported net income of$2.7 million for the three months endedSeptember 30, 2022 , which was up$467,000 or 20.7% compared to the third quarter of 2021. Total noninterest revenue was up$1.0 million or 10.1% for the third quarter of 2022 compared to the same quarter in the prior year, primarily due to growth in both commercial and personal lines, and property and casualty commissions. The growth in property and casualty commission revenue is attributed to new business, growth within the existing client base, and premium increases related to change in general market conditions. For the nine months endedSeptember 30, 2022 , net income was up$670,000 or 12.3% compared to the same period in the prior year. Total revenue for the year-to-date period endedSeptember 30, 2022 , was up$1.4 million or 5.2% compared to the same period inSeptember 30, 2021 . The increase in revenues and net income for the nine months endedSeptember 30, 2022 compared to the prior year is mainly due to growth in overall commission revenue of$1.5 million or 6.4%, primarily in commercial and personal lines, which were up 10.8% and 5.1% respectively. Noninterest expenses for the three months endedSeptember 30, 2022 were up$332,000 or 4.9% compared to the three months endedSeptember 30, 2021 . Year-to-date noninterest expenses were up$448,000 or 2.2% compared to the nine months endedSeptember 30, 2021 . The increases in noninterest expenses for the three and nine months endedSeptember 30, 2022 were mainly the result of increases in wages and new business commissions along with related tax and benefit expenses tied to the increase in commission revenue. 50 -------------------------------------------------------------------------------- Wealth Management Segment The wealth management segment reported net income of$596,000 for the three months endedSeptember 30, 2022 , which was down$721,000 or 54.8% compared to the third quarter of 2021. Revenue for the third quarter of 2022 was down$705,000 or 14.0% compared to the third quarter of 2021. The decrease for the three months endedSeptember 30, 2022 was mainly in advisory revenues related to a decrease in assets under management, largely a result of unfavorable market conditions. Total expense for the third quarter of 2022 was up$246,000 or 7.4% compared to the third quarter of 2021. The increase in expense was primarily due to technology costs, mainly related to the implementation of a new core platform. For the nine months endedSeptember 30, 2022 , net income of$2.4 million was down$1.2 million or 33.8% compared to the prior year, mainly due to the items outlined above. 51 -------------------------------------------------------------------------------- Net Interest Income The following tables show average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each for the three and nine month periods endedSeptember 30, 2022 and 2021: Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited) Quarter Ended Quarter Ended September 30, 2022 September 30, 2021 Average Average Balance Average Balance Average (Dollar amounts in thousands) (QTD) Interest Yield/Rate (QTD) Interest Yield/Rate ASSETS Interest-earning assets Interest-bearing balances due from banks$ 63,516 $ 85 0.53 %$ 376,341 $ 136 0.14 % Securities (1) U.S. Government securities 2,276,380 7,853 1.37 % 2,133,984 6,467 1.20 % State and municipal (2) 95,627 614 2.55 % 109,375 697 2.53 % Other securities (2) 3,323 37 4.44 % 3,417 23 2.64 % Total securities 2,375,330 8,504 1.42 % 2,246,776 7,187 1.27 % FHLBNY and FRB stock 15,058 166 4.38 % 15,330 196 5.07 % Total loans and leases, net of unearned income (2)(3) 5,185,219 55,265 4.23 % 5,115,253 53,989 4.19 % Total interest-earning assets 7,639,123 64,020 3.32 % 7,753,700 61,508 3.15 % Other assets 214,724 348,370 Total assets$ 7,853,847 $ 8,102,070 LIABILITIES & EQUITY Deposits Interest-bearing deposits Interest bearing checking, savings, & money market 3,979,590 2,863 0.29 % 4,090,840 906 0.09 % Time deposits 596,299 1,331 0.89 % 707,212 1,700 0.95 % Total interest-bearing deposits 4,575,889 4,194 0.36 % 4,798,052 2,606 0.22 % Federal funds purchased & securities sold under agreements to repurchase 53,810 14 0.10 % 60,798 17 0.11 % Other borrowings 232,158 1,351 2.31 % 224,459 1,156 2.04 % Trust preferred debentures 0 0 0.00 % 3,444 1,237 142.50 % Total interest-bearing liabilities 4,861,857 5,559 0.45 % 5,086,753 5,016 0.39 % Noninterest bearing deposits 2,250,263 2,165,537 Accrued expenses and other liabilities 106,403 116,663 Total liabilities 7,218,523 7,368,953 Tompkins Financial Corporation Shareholders' equity 633,837 731,629 Noncontrolling interest 1,487 1,488 Total equity 635,324 733,117 Total liabilities and equity$ 7,853,847 $ 8,102,070 Interest rate spread 2.87 % 2.76 % Net interest income/margin on earning assets 58,461 3.04 % 56,492 2.89 % Tax Equivalent Adjustment (350) (394) Net interest income per consolidated financial statements$ 58,111 $ 56,098 52
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Average Consolidated Statements of Condition and Net Interest Analysis (Unaudited)
Year to Date Period Ended Year to Date Period Ended
September 30, 2022 September 30, 2021
Average Average
Balance Average Balance Average
(Dollar amounts in thousands) (YTD) Interest Yield/Rate (YTD) Interest
Yield/Rate
ASSETS
Interest-earning assets
Interest-bearing balances due from banks
0.27 %$ 333,769 $ 266 0.11
%
Securities (1) U.S. Government securities 2,291,636 22,960 1.34 % 1,920,717 16,417
1.14 %
State and municipal (2) 98,262 1,882 2.56 % 114,809 2,200 2.56 % Other securities (2) 3,349 88 3.52 % 3,420 69 2.70 % Total securities 2,393,247 24,930 1.39 % 2,038,946 18,685 1.23 % FHLBNY and FRB stock 12,481 391 4.19 % 16,328 608 4.98
%
Total loans and leases, net of unearned income (2)(3) 5,119,309 159,353 4.16 % 5,225,087 162,355 4.15 % Total interest-earning assets 7,620,025 184,864 3.24 % 7,614,130 181,915 3.19 % Other assets 244,615 346,441 Total assets$ 7,864,640 $ 7,960,571 LIABILITIES & EQUITY Deposits Interest-bearing deposits Interest bearing checking, savings, & money market 4,070,607 4,502 0.15 % 4,002,724 2,943 0.10 % Time deposits 610,432 3,785 0.83 % 727,445 5,616 1.03 % Total interest-bearing deposits 4,681,039 8,287 0.24 % 4,730,169 8,559 0.24 % Federal funds purchased & securities sold under agreements to repurchase 57,606 45 0.10 % 57,498 48 0.11 % Other borrowings 176,007 2,480 1.88 % 254,002 3,883 2.04 % Trust preferred debentures 0 0 0.00 % 9,849 2,233 30.32 % Total interest-bearing liabilities 4,914,652 10,812 0.29 % 5,051,518 14,723 0.39 % Noninterest bearing deposits 2,183,258 2,066,567 Accrued expenses and other liabilities 104,446 117,383 Total liabilities 7,202,356 7,235,468 Tompkins Financial Corporation Shareholders' equity 660,826 723,645 Noncontrolling interest 1,458 1,458 Total equity 662,284 725,103 Total liabilities and equity$ 7,864,640 $ 7,960,571 Interest rate spread 2.95 % 2.80 % Net interest income/margin on earning assets 174,052 3.05 % 167,192
2.94 %
Tax Equivalent Adjustment (1,065) (1,211) Net interest income per consolidated financial statements$ 172,987 $ 165,981 1 Average balances and yields on available-for-sale debt securities are based on historical amortized cost. 2 Interest income includes the tax effects of taxable-equivalent adjustments using an effective income tax rate of 21% in 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 endedDecember 31, 2021 . Net Interest Income Net interest income is the Company's largest source of revenue, representing 73.7% and 74.4%, respectively, of total revenues for the three and nine months endedSeptember 30, 2022 , compared to 72.9% and 73.6% for the same periods 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. 53 -------------------------------------------------------------------------------- Taxable-equivalent net interest income for the three months endedSeptember 30, 2022 increased$2.0 million or 3.5% from the same period in the prior year. The increase in net interest income for the three months endedSeptember 30, 2022 , was mainly a result of the 17 basis point increase in rates paid on interest earning assets, and was partially offset by a 6 basis point increase on rates paid on interest earning liabilities. Taxable-equivalent net interest income for the nine month period endedSeptember 30, 2022 increased$6.9 million or 4.1% from the nine month period endedSeptember 30, 2021 . Net interest income in the first nine months of 2022 benefited from the growth in average securities balances and average yields on securities, which were up 17.4% and 16 basis points over the same nine month period in 2021, and a 10 basis point decrease in the average rate paid on interest bearing liabilities. Net interest margin for the three months endedSeptember 30, 2022 was 3.04% compared to 2.89% for the same period in 2021. Net interest margin for the nine months endedSeptember 30, 2022 was 3.05% compared to 2.94% for the same period in 2021. The increase in net interest margin for the three and nine months endedSeptember 30, 2022 compared to the same periods in 2021 was mainly due to an increase in higher yielding securities, reflecting the investment of excess liquidity in securities. Taxable-equivalent interest income for the three and nine months endedSeptember 30, 2022 , was$64.0 million and$184.9 million , up 4.1% and 1.6%, respectively, compared to the same periods in 2021. The growth in the three month period reflects higher average asset yields and growth in total securities, while the year-to-date reflects growth in average earning assets. Average asset yields for the three months endedSeptember 30, 2022 were up 17 basis points compared to the same period in 2021 driven by growth in higher yielding securities as excess liquidity was invested in securities and loans. For the three months endedSeptember 30, 2022 , the average yield on securities and loans were up 15 and 4 basis points, respectively, over the same period in 2021 Average asset yields for the nine months endedSeptember 30, 2022 were up 5 basis points compared to the same period in 2021. As a result of its participation in the SBA's PPP, the Company recorded net deferred loan fees of$88,000 and$3.0 million , respectively, in the three and nine months endedSeptember 30, 2022 , compared to$3.3 million and$8.0 million , respectively, for the three and nine months endedSeptember 30, 2021 . These net deferred loan fees are included in interest income. For the three months endedSeptember 30, 2022 , average earning assets were down$114.6 million or 1.5% over the same period in 2021 with the majority of the decrease in average interest-bearing balances due from banks and partially off-set by increases in average securities and loan balances. Average earning assets for the nine months endedSeptember 30, 2022 were in line with same period in 2021. Average loan balances for the three months endedSeptember 30, 2022 , were up$70.0 million or 1.4% from the three months endedSeptember 30, 2021 . Average loan balances for the nine months endedSeptember 30, 2022 were down$105.8 million or 2.0% from the nine months endedSeptember 30, 2021 . The decrease in average loans was primarily due to a decline in average PPP loans. Average securities balances for the three and nine months endedSeptember 30, 2022 , were up$128.6 million or 5.7%, and$354.3 million or 17.4%, respectively. Average interest-bearing balances due from banks were down$312.8 million or 83.1%, and$238.8 million or 71.5%, respectively, compared to the same periods in 2021. Interest expense for the three months endedSeptember 30, 2022 , increased$543,000 or 10.8%, and for the nine month period endedSeptember 30, 2022 decreased by$3.9 million or 26.6% compared to the same periods in 2021. The average cost of interest-bearing deposits during the three and nine months endedSeptember 30, 2022 was 0.45% and 0.29%, respectively, up 6 basis points for the three month period and down 10 basis points for the nine months period end, compared to the same periods in 2021. Average interest-bearing deposits were down$222.2 million or 4.6% and$49.1 million or 1.0%, respectively, for the same three and nine months ended 2021. Average noninterest bearing deposits were up$84.7 million or 3.9% for the three months endedSeptember 30, 2022 when compared to the third quarter of 2021, and for the nine months endedSeptember 30, 2022 were up$116.7 million or 5.7% compared to the same period in 2021. Average other borrowings for the three and nine months endedSeptember 30, 2022 were up$7.7 million or 3.4%, and down$78.0 million or 30.7%, respectively, compared to the same periods in 2021. Net interest margin for the third quarter of 2022 of 3.04% was down from a net interest margin of 3.09% for the second quarter of 2022. Taxable-equivalent interest income was up$2.5 million or 4.1%, as yields on average earning assets were up 9 basis points over the second quarter of 2022 to 3.32%, while average earning assets were flat compared to the second quarter of 2022. Interest expense was up$2.9 million or 106.6%, as the average cost of interest bearing liabilities increased 23 basis points over the second quarter of 2022 to 0.45%; reflecting a 18 basis point increase in the average cost of interest bearing deposits and a 182 basis point increase in the average cost of borrowings with the FHLB. 54 -------------------------------------------------------------------------------- Provision for Credit Losses The provision for credit losses represents management's estimate of the amount necessary to maintain the allowance for credit losses ("ACL") at an appropriate level. Provision for credit losses in the third quarter of 2022 was$1.1 million compared to a credit of$1.2 million for the third quarter of 2021. Provision for credit losses for the nine months endedSeptember 30, 2022 was an expense of$1.4 million compared to a provision credit of$6.1 million for the same period in 2021. The provision for credit losses for the three and nine months endedSeptember 30, 2022 included a provision credit of$45,000 and expense of$245,000 , respectively, related to off-balance sheet credit exposures compared to a provision credit of$55,000 and a provision expense of$272,000 , respectively, for the same periods in 2021. The increase in provision for credit losses for both the three and nine month periods is mainly driven by current economic forecasts coupled with loan growth. 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$20.7 million and$59.6 million for the three and nine months endedSeptember 30, 2022 , which were both in line with the same periods in 2021. Noninterest income represented 26.3% of total revenue for the third quarter of 2022 and 25.6% for the nine months endedSeptember 30, 2022 , compared to 27.1% and 26.5%, respectively, for the same periods in 2021. Insurance commissions and fees, the largest component of noninterest income, were$10.8 million for the third quarter of 2022, an increase of 10.1% from the same period prior year. The increase in insurance commissions and fees in the third quarter of 2022 over the same period in 2021 was mainly commercial and personal lines property and casualty commissions which grew by 17.6% and 4.9%, respectively. For the first nine months of 2022, insurance commissions and fees were up$1.5 million or 5.6% compared to the same period in 2021. The increase in revenues for the nine months endedSeptember 30, 2022 , compared to the prior year was primarily due to growth in commercial lines and personal lines revenue, which were up 10.8% and 5.1%, respectively, and attributable to increased new business, growth within the existing client base, and premium increases related to changes in general market conditions and exposures for certain business sectors. Wealth management fees of$4.3 million in the third quarter of 2022 were down$620,000 or 12.5% compared to the third quarter of 2021. For the first nine months of 2022, wealth management fees were down$497,000 or 3.5% compared to the same period in 2021. Wealth management fees include trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of,Tompkins was$2.8 billion atSeptember 30, 2022 . The fair value of assets managed by, or in custody of,Tompkins was$5.3 billion atSeptember 30, 2021 , which included$1.7 billion of Company-owned securities whereTompkins is custodian. The decline in assets from prior year resulted in part from the outsourcing of the management of the Tompkins Retirement Account ($94.0 million ) and custody of Company-owned securities whereTompkins was custodian ($1.7 billion ); however, as these were inter-company related items, they did not have a meaningful impact on total income. The remaining decline in assets is related to negative market performance seen throughout the year. Service fees were up and included service charges on deposit accounts of$1.9 million and$5.5 million for the three and nine months endedSeptember 30, 2022 , up$279,000 or 17.0% and$873,000 or 19.1%, respectively, over the same periods in 2021. Card services income in the third quarter of 2022 was in line with the same three month period end in 2021, while the nine months endedSeptember 30, 2022 , was up$182,000 or 2.3% compared to the same period in 2021. Debit card income, the largest component of card services income, was in line with both the three and nine month period endedSeptember 30, 2022 . Interchange income related to credit card services was up$37,000 and$167,000 , respectively, compared to the same three and nine month periods in 2021. Other income of$1.0 million in the third quarter of 2022 was down$792,000 or 44.8% compared to the same period in 2021. For the first nine months of 2022, other income of$3.7 million was down$1.7 million or 31.7% compared to the same period in 2021. The decrease for the three and nine months endedSeptember 30, 2022 compared to the same periods in 2021, was mainly due to lower earnings on bank owned life insurance and lower gains on sales of residential loans. Earnings on bank owned life insurance were down$603,000 and$1.2 million , respectively, as certain separate account policies were unfavorably impacted by decreases in the market value of the underlying assets. Gains on sales of loans were down$213,000 and$738,000 , respectively, for the three and nine months endedSeptember 30, 2022 , compared to the same periods in the prior year. Noninterest Expense Noninterest expense of$49.6 million for the third quarter of 2022 and$145.6 million for the first nine months of 2022, was down 1.2% for the third quarter of 2022, and up 2.4% for the first nine months of 2022, compared to the same periods in 2021. 55 -------------------------------------------------------------------------------- Expenses associated with compensation and benefits comprise the largest component of noninterest expense, representing 64.2% and 63.0% of total noninterest expense for the three and nine months endedSeptember 30, 2022 . Salaries and wages expense for the three and nine months endedSeptember 30, 2022 increased by$519,000 or 2.1%, and$1.5 million or 2.1%, respectively, compared to the same periods in 2021. The increases were mainly due to normal merit adjustments. Employee benefits for the three and nine months endedSeptember 30, 2022 increased by$712,000 or 12.3% and$740,000 or 4.1%, respectively. The increase is mainly as a result of higher health care expense. Other expense categories, not related to compensation and benefits, for the three and nine months endedSeptember 30, 2022 were down$1.8 million or 9.2%, and up$1.2 million or 2.2%, respectively. The main driver for the three month period end decline in balance was due to penalties of$2.9 million related to the prepayment of$135.0 million in FHLB fix rate advances paid in the third quarter of 2021. For the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021, marketing expenses were up$35,000 or 3.0% and$921,000 or 32.9%, respectively, cardholder expense was up$302,000 or 36.6% and$1.1 million or 42.7%, respectively, and technology expense was up$967,000 or 33.2% and$2.4 million or 27.6%, respectively. Contributing to the growth in these expenses for the year-to-date period endedSeptember 30, 2022 , were nonrecurring expenses of$1.2 million , related to the consolidation of the Company's four banking charters, including the related conversion of the core banking system and rebranding. Business travel and related expenses were up$222,000 or 106.2% and$520,000 or 130.3%, respectively, for the three and nine months endedSeptember 30, 2022 , over the same periods in 2021. Also included in other expense was a one-time lease expense of$452,000 , which was related to one lease that included seven branches inPennsylvania region. Income Tax Expense The provision for income taxes was$6.8 million for an effective rate of 24.1% for the third quarter of 2022, compared to tax expense of$6.6 million and an effective rate of 23.7% for the same quarter in 2021. For the first nine months of 2022, the provision for income taxes was$20.1 million for an effective rate of 23.4% compared to tax expense of$19.8 million and an effective rate of 22.1% for the same period in 2021. The effective rates differ from theU.S. and state statutory rates primarily due to the effect of tax-exempt income from loans, securities and life insurance assets, and the income tax effects associated with stock based compensation. The increase in the effective tax rate for the three and nine months endedSeptember 30, 2022 , over the same period in 2021, is largely due to the anticipated loss of certainNew York State tax benefits due to the expectation that average assets will exceed$8.0 billion for the 2022 tax year. The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on itsNew York State tax return for qualifying entities. A condition to claim the benefit is that the consolidated company has average assets of no more than$8.0 billion for the taxable year. The Company expects average assets to exceed the$8.0 billion threshold for the 2022 tax year. As ofSeptember 30, 2022 , the Company's consolidated average assets, as defined byNew York tax law, were slightly over the$8.0 billion threshold. The Company will continue to monitor the consolidated average assets during 2022 to determine future eligibility.
FINANCIAL CONDITION
Total assets were$7.8 billion atSeptember 30, 2022 , down$40.0 million or 0.5% fromDecember 31, 2021 . The decrease in total assets from year-end 2021 was mainly due to decreased security balances partially offset by an increase in the loan portfolio, compared toDecember 31, 2021 . Total securities were$2.1 billion atSeptember 30, 2022 , down$275.4 million or 11.8% compared to the$2.3 billion reported at year-end 2021. The decrease was the result of an increase in unrealized losses on the available-for-sale portfolio from$19.3 million at year-end 2021 to$269.2 million atSeptember 30, 2022 , as a result of the increase in market interest rates in 2022. Total cash and cash equivalents were up$40.5 million or 64.2% compared toDecember 31, 2021 . Total deposits atSeptember 30, 2022 were up$145.3 million or 2.1% fromDecember 31, 2021 . Other borrowings atSeptember 30, 2022 decreased$23.0 million or 18.6% fromDecember 31, 2021 , as loan growth outpaced deposit growth. 56 --------------------------------------------------------------------------------
Securities
As ofSeptember 30, 2022 , the Company's securities portfolio was$2.1 billion or 26.4% of total assets, compared to$2.3 billion or 29.8% of total assets at year end 2021. The following table details the composition of the securities portfolio:
September 30, 2022 December 31, 2021
(In thousands) Amortized Cost Fair Value Amortized Cost Fair Value
U.S. Treasuries $ 191,108 $ 166,604 $ 160,291 $ 157,834
Obligations of U.S. Government sponsored entities 828,313 730,028 843,218 832,373
Obligations of U.S. states and political subdivisions 95,162 83,061 102,177 104,169
Mortgage-backed securities - residential, issued by
61,553 55,059 76,502 77,157 U.S. Government sponsored entities 831,465 703,814 879,102 870,556 U.S. corporate debt securities 2,500 2,370 2,500 2,424 Total available-for-sale debt securities$ 2,010,101 $
1,740,936
September 30, 2022 December 31, 2021
(In thousands) Amortized Cost Fair Value Amortized Cost Fair Value
U.S. Treasuries $ 86,530 $ 73,036 $ 86,689 $ 86,368
Obligations of U.S. Government sponsored entities 225,799 185,719 197,320 195,920
Total held-to-maturity debt securities $ 312,329 $
258,755
As ofSeptember 30, 2022 , the available-for-sale debt securities portfolio had net unrealized losses of$269.2 million compared to net unrealized losses of$19.3 million atDecember 31, 2021 . The increase in unrealized losses related to the available-for-sale debt securities portfolio, which reflects the amount that the amortized cost exceeds fair value, was due to increases in market interest rates during the first nine 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. The Company evaluates available-for-sale and held-to-maturity debt securities in an unrealized loss position to determine whether the decline in the fair value below the amortized cost basis (impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income (loss), net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change. The Company determined that atSeptember 30, 2022 , all impaired available-for-sale and held-to-maturity debt securities were because of changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit worthiness of the underlying issuers. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost. Therefore, the Company carried no ACL atSeptember 30, 2022 and there was no credit loss expense recognized by the Company with respect to the securities portfolio during the three and nine months endedSeptember 30, 2022 . 57 -------------------------------------------------------------------------------- Loans and Leases Loans and leases as of the end of the third quarter and prior year-end period were as follows: (In thousands) 9/30/2022 12/31/2021 Commercial and industrial Agriculture$ 66,576 $ 99,172 Commercial and industrial other 718,726 699,121 PPP loans 875 71,260 Subtotal commercial and industrial 786,177 869,553 Commercial real estate Construction 199,144 178,582 Agriculture 210,140 195,973 Commercial real estate other 2,399,951 2,278,599 Subtotal commercial real estate 2,809,235 2,653,154 Residential real estate Home equity 188,002 182,671 Mortgages 1,344,741 1,290,911 Subtotal residential real estate 1,532,743 1,473,582 Consumer and other Indirect 2,712 4,655 Consumer and other 66,262 67,396 Subtotal consumer and other 68,974 72,051 Leases 15,749 13,948 Total loans and leases 5,212,878 5,082,288 Less: unearned income and deferred costs and fees (4,442) (6,821) Total loans and leases, net of unearned income and deferred costs and fees$ 5,208,436 $ 5,075,467 Total loans and leases of$5.2 billion atSeptember 30, 2022 were up$133.0 million or 2.6% fromDecember 31, 2021 , mainly in the commercial real estate and residential real estate portfolios, and partially offset by the decline in PPP loan balances. PPP loans decreased$70.4 million from$71.3 million at year-end 2021, to$875,000 atSeptember 30, 2022 . Excluding PPP loans, total loans atSeptember 30, 2022 were up$203.4 million or 4.1% fromDecember 31, 2021 . As ofSeptember 30, 2022 , total loans and leases represented 66.9% of total assets compared to 64.9% of total assets atDecember 31, 2021 . Residential real estate loans, including home equity loans, were$1.5 billion atSeptember 30, 2022 , up$59.2 million or 4.0% compared toDecember 31, 2021 , and comprised 29.4% of total loans and leases atSeptember 30, 2022 . Changes in residential loan balances reflect 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") orState 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 nine months of 2022 and 2021, the Company sold residential loans totaling$7.3 million and$27.7 million , respectively, recognizing gains of$140,000 and$878,000 , 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 million at bothSeptember 30, 2022 andDecember 31, 2021 . 58 -------------------------------------------------------------------------------- Commercial real estate loans and commercial and industrial loans totaled$2.8 billion and$786.2 million , respectively, and represented 53.9% and 15.1%, respectively, of total loans and leases as ofSeptember 30, 2022 . The commercial real estate portfolio was up$156.1 million or 5.9% over year-end 2021, while commercial and industrial loans were down$83.4 million or 9.6%. The decrease in commercial and industrial loans over year-end 2021 was mainly in PPP loans, which were down$70.4 million or 98.8% to$875,000 atSeptember 30, 2022 . As ofSeptember 30, 2022 , agriculturally-related loans totaled$276.7 million or 5.3% of total loans and leases, compared to$295.1 million or 5.8% of total loans and leases atDecember 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 endedDecember 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 theNew York andPennsylvania communities served by its subsidiary bank. Although operating in numerous communities inNew York State andPennsylvania , the Company is still dependent on the general economic conditions of these states and the local economic conditions of the communities within those states in which the Company does business. The Allowance for Credit Losses The below table represents the allowance for credit losses as ofSeptember 30, 2022 andDecember 31, 2021 . The table provides, as of the dates indicated, an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category. (In thousands) 9/30/2022 12/31/2021 Allowance for credit losses Commercial and industrial$ 6,524 $ 6,335 Commercial real estate 26,539 24,813 Residential real estate 10,443 10,139 Consumer and other 1,180 1,492 Finance leases 86 64 Total$ 44,772 $ 42,843
As of
million
percentage of total loans measured 0.86% at
0.84% at
The increase in the ACL from year-end 2021 reflects updated economic forecasts
for unemployment and gross domestic product ("GDP") coupled with loan growth,
mainly in the real estate portfolios. Forecasts related to unemployment are
beginning to deteriorate and GDP forecasts continue to weaken showing less
growth compared to prior forecasts. Qualitative reserves established as a result
of the COVID-19 pandemic to address specific portfolios with increased risk
characteristics, including loans in our hotel portfolio, have been removed as of
September 30, 2022 , due to improved metrics that have stabilized and are in line
with pre-pandemic trends.
59
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Asset quality measures at September 30, 2022 were generally favorable compared
with December 31, 2021 . Loans internally-classified Special Mention or
Substandard were down $30.8 million or 22.4% compared to December 31, 2021 .
Nonperforming loans and leases were up $3.7 million or 12.0% from year end 2021
and represented 0.67% of total loans at September 30, 2022 compared to 0.61% at
December 31, 2021 . The allowance for credit losses covered 128.27% of
nonperforming loans and leases at September 30, 2022 , compared to 137.51% at
December 31, 2021 . The increase in nonperforming loans and leases is mainly due
to one commercial real estate relationship, made up of two loans, totaling
approximately $7.4 million that moved into nonaccrual during the third quarter
of 2022, this loan has previously been reported as substandard.
Activity in the Company's allowance for credit losses during the nine months of
2022 and 2021 is illustrated in the table below:
Analysis of the Allowance for Credit Losses (In thousands) 9/30/2022 9/30/2021 Average loans outstanding during period$ 5,119,309 $ 5,225,087 Allowance at beginning of year, prior to adoption of ASU 2016-13 42,843 51,669 LOANS CHARGED-OFF: Commercial and industrial 366 274 Commercial real estate 50 0 Residential real estate 0 51 Consumer and other 410 218 Finance leases 0 0 Total loans charged-off$ 826 $ 543 RECOVERIES OF LOANS PREVIOUSLY CHARGED-OFF: Commercial and industrial 132 116 Commercial real estate 910 1,040 Residential real estate 315 229 Consumer and other 251 153 Finance Leases 0 0 Total loans recovered$ 1,608 $ 1,538 Net loans recovered (782) (995) Provision (credit) for credit losses related to loans 1,147 (6,405) Balance of allowance at end of period $
44,772
Allowance for credit losses as a percentage of total loans and
leases
0.86 % 0.91 %
Annualized net (recoveries) charge-offs on loans to average total
loans and leases during the period
(0.02) % (0.01) %
The provision for credit losses for loans was an expense of$1.1 million for the three months endedSeptember 30, 2022 , compared to a credit of$1.2 million for the same period in 2021. For the nine month period endedSeptember 30, 2022 , the provision for credit losses for loans was an expense of$1.1 million compared to credit of$6.4 million for the same period in 2021. The provision expense for credit losses for loans is based upon the Company's quarterly evaluation of the appropriateness of the allowance for credit losses. As discussed above, the ACL model estimated higher reserves atSeptember 30, 2022 due to lower GDP and unemployment forecasts coupled with loan growth. Net loan and lease recoveries for the nine months endedSeptember 30, 2022 were$782,000 compared to net recoveries of$995,000 for the same period in 2021.
Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as
commitments to make loans, and commercial letters of credit. The Company's
exposure to credit loss in the event of nonperformance by the other party to the
financial instrument for off-balance sheet loan commitments is represented by
the contractual amount of those instruments. Such financial instruments are
recorded when they are funded. The Company records an allowance for credit
losses on off-balance sheet credit exposures, unless the commitments to extend
credit are unconditionally cancellable, through a charge to credit loss expense
for off-balance sheet credit exposures included in provision for credit loss
expense in the Company's consolidated statements of income.
60
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For the three months ended September 30, 2022 , the provision for credit losses
for off-balance sheet credit exposures was a credit of $45,000 compared to a
credit of $55,000 for the same period in 2021. For the nine month period ended
September 30, 2022 , the provision for credit losses for off-balance sheet credit
exposures was $245,000 compared to $272,000 for the same nine month period in
2021. The provision in 2022 was driven by an increase in off-balance sheet
exposures, specifically commercial real estate loan commitments.
Analysis of Past Due and Nonperforming Loans
(In thousands) 9/30/2022 12/31/2021 9/30/2021
Loans 90 days past due and accruing
Commercial real estate $ 161 $ 0 $ 7,463
Total loans 90 days past due and accruing $ 161 $ 0 $ 7,463
Nonaccrual loans
Commercial and industrial $ 803 $ 533 $ 543
Commercial real estate 15,901 13,893 35,022
Residential real estate 13,041 11,178 11,965
Consumer and other 268 429 411
Total nonaccrual loans $ 30,013 $ 26,033 $ 47,941
Troubled debt restructurings not included above 4,730 5,124 5,343
Total nonperforming loans and leases $ 34,904 $ 31,157 $ 60,747
Other real estate owned 335 135 135
Total nonperforming assets $ 35,239 $ 31,292 $ 60,882
Allowance as a percentage of nonperforming loans and leases 128.27 %
137.51 % 76.15 %
Total nonperforming loans and leases as percentage of total
loans and leases
0.67 % 0.61 % 1.19 % Total nonperforming assets as percentage of total assets 0.45 %
0.40 % 0.75 %
Nonperforming assets include loans past due 90 days and accruing, nonaccrual loans, TDRs, and foreclosed real estate/other real estate owned. Total nonperforming assets of$35.2 million atSeptember 30, 2022 were up$3.9 million or 12.6% compared toDecember 31, 2021 , and down$25.6 million or 42.1% compared toSeptember 30, 2021 . The decrease in nonperforming assets fromSeptember 30, 2021 , was mainly in the commercial real estate portfolio and included the payoff of one relationship totaling$11.8 million in the hospitality industry and a$7.0 million charge-off of another relationship that included two loans in the hospitality industry during the fourth quarter of 2021. During the third quarter of 2022 there was one commercial real estate relationship totaling approximately$7.4 million that was moved into nonaccrual, this relationship was previously, and currently, included in Substandard loans. Nonperforming assets represented 0.45% of total assets atSeptember 30, 2022 , up from 0.40% atDecember 31, 2021 , and down from the 0.75% reported forSeptember 30, 2021 . The Company's ratio of nonperforming assets to total assets compares to our peer groups's most recent ratio of 0.38% atJune 30, 2022 . 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 therefore classified as accruing loans. AtSeptember 30, 2022 , the Company had$6.6 million in TDRs, and of that total$1.9 million was reported as nonaccrual and$4.7 million was 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. 61 -------------------------------------------------------------------------------- The ratio of the allowance to nonperforming loans and leases (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 128.27% atSeptember 30, 2022 , compared to 137.51% atDecember 31, 2021 , and 76.15% atSeptember 30, 2021 . The Company's nonperforming loans and leases are mostly made up of individually evaluated loans with limited exposure or loans that require limited specific reserves due to the level of collateral available with respect to these loans and/or previous charge-offs. The Company, through its internal loan review function, identified 17 commercial relationships from the loan portfolio totaling$22.9 million atSeptember 30, 2022 , that were potential problem loans. AtDecember 31, 2021 , the Company had identified 25 relationships totaling$36.5 million that were potential problem loans. Of the 17 relationships atSeptember 30, 2022 , that were Substandard, there were 6 relationships that equaled or exceeded$1.0 million , which in aggregate totaled$19.1 million , the largest of which was$4.0 million . The Company continues to monitor these potential problem relationships; however, management cannot predict the extent to which continued weak economic conditions or other factors may further impact borrowers. These loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management's attention is focused on these credits, which are reviewed on at least a quarterly basis.
Capital
Total equity was$573.0 million atSeptember 30, 2022 , a decrease of$156.0 million or 21.4% fromDecember 31, 2021 . The decrease was the result of an increase in unrealized losses on the available-for-sale portfolio from$14.6 million at year-end 2021 to$203.2 million atSeptember 30, 2022 , as a result of the increase in market interest rates in 2022. The decrease was partially offset by an increase in retained earnings. Additional paid-in capital decreased by$9.1 million , from$312.5 million atDecember 31, 2021 , to$303.4 million atSeptember 30, 2022 . The decrease was primarily attributable to a$15.4 million aggregate purchase price related to the Company's repurchase and retirement of 197,979 shares of its common stock during the first nine months of 2022 pursuant to its publicly announced stock repurchase plan; partially offset by$2.9 million related shares issued for the employee stock ownership program and$3.1 million attributed to stock-based compensation. Retained earnings increased by$40.6 million or 8.5% from$475.3 million atDecember 31, 2021 , to$515.9 million atSeptember 30, 2022 , mainly reflecting net income of$65.5 million for the year-to-date period, less dividends of$24.9 million . Accumulated other comprehensive loss increased from a net loss of$56.0 million atDecember 31, 2021 , to a net loss of$243.2 million atSeptember 30, 2022 , reflecting a$188.7 million increase in unrealized losses on available-for-sale debt securities mainly due to changes in market rates, partially offset by a$1.4 million decrease related to post-retirement benefit plan losses. Cash dividends paid in the first nine months of 2022 totaled approximately$24.9 million or$1.71 per common share, representing 38.0% of year to date 2022 earnings throughSeptember 30, 2022 , compared to cash dividends of$24.1 million or$1.62 per common share paid in the first nine months of 2021. Cash dividends per share during the first nine months of 2022 were up 5.6% over the same period in 2021. The Company and its subsidiary bank are subject to various regulatory capital requirements administered by Federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company's business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary banks are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank meets all capital adequacy requirements to which they are subject. 62 --------------------------------------------------------------------------------
The following table provides a summary of the Company's capital ratios as of
Regulatory Capital Analysis
Minimum Capital Required - Basel
September 30, 2022 Actual
III Fully Phased-In Well Capitalized Requirement
(dollar amounts in thousands)
Amount Ratio Amount Ratio Amount Ratio Total Capital (to risk weighted assets)$ 769,165 14.26 %$ 566,543 10.50 %$ 539,564 10.00 % Tier 1 Capital (to risk weighted assets)$ 720,136 13.35 %$ 458,630 8.50 %$ 431,652 8.00 % Tier 1 Common Equity (to risk weighted assets)$ 720,136 13.35 %$ 377,695 7.00 %$ 350,717 6.50 % Tier 1 Capital (to average assets)$ 720,136 9.14 %$ 315,268 4.00 %$ 394,085 5.00 % As ofSeptember 30, 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 14.3% atSeptember 30, 2022 , compared with 14.2% as ofDecember 31, 2021 . Tier 1 capital as a percent of risk weighted assets increased from 13.3% at the end of 2021 to 13.4% as ofSeptember 30, 2022 . Tier 1 capital as a percent of average assets was 9.1% atSeptember 30, 2022 , up from 8.7% as ofDecember 31, 2021 . Common equity Tier 1 capital was 13.4% at the end of the third quarter of 2022, up from 13.3% at the end of 2021.
As of
also exceeded the minimum required capital ratios for well capitalized
institutions, plus the fully phased-in capital conservation buffer.
In the first quarter of 2020,U.S. Federal regulatory authorities issued an interim final rule that provides banking organizations that adopt CECL during the 2020 calendar year with the option to delay for two years the estimated impact of CECL on regulatory capital relative to regulatory capital determined under the prior incurred loss methodology, followed by a three-year transition period to phase out the aggregate amount of the capital benefit provided during the initial two-year delay (i.e., a five-year transition in total). In connection with our adoption of CECL onJanuary 1, 2020 , we elected to utilize the five-year CECL transition. Deposits and Other Liabilities Total deposits of$6.9 billion atSeptember 30, 2022 were up$145.3 million or 2.1% fromDecember 31, 2021 . The increase from year-end 2021 was primarily in noninterest bearing deposits up$124.6 million or 5.8% and in checking, money market and savings balances, which collectively were up$60.7 million or 1.5%. These were slightly offset by decreases in time deposits, which were down$40.1 million or 6.3% compared toDecember 31, 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 grew by$191.0 million or 3.3% from year-end 2021, to$6.0 billion atSeptember 30, 2022 . Core deposits represented 86.1% of total deposits atSeptember 30, 2022 , compared to 85.1% of total deposits atDecember 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$55.3 million atSeptember 30, 2022 , and$66.8 million atDecember 31, 2021 . Management generally views retail repurchase agreements as an alternative to large time deposits. The Company's other borrowings totaled$101.0 million atSeptember 30, 2022 , down$23.0 million or 18.6% from$124.0 million atDecember 31, 2021 . Borrowings atSeptember 30, 2022 consisted of$41.0 million in overnight FHLB advances and$60.0 million of FHLB term advances, compared to$14.0 million in FHLB overnight advances and$110.0 million of FHLB term advances at year end 2021. Of the$60.0 million in FHLB term advances atSeptember 30, 2022 ,$20.0 million is due to mature in less than one year and$40.0 million is due to mature in over one year. 63 --------------------------------------------------------------------------------
Liquidity
The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, and business investment opportunities. The Company's large, stable core deposit base and strong capital position are the foundation for the Company's liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company's Asset/Liability Management Committee monitors asset and liability positions of the Company's subsidiary banks individually and on a combined basis. The Committee reviews periodic reports on liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company's strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company's liquidity that are reasonably likely to occur. 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 and overnight and term advances from the FHLB. Rates and terms are the primary determinants of the mix of these funding sources. Non-core funding sources of$1.1 billion atSeptember 30, 2022 decreased$80.1 million or 6.7% as compared to year-end 2021. Non-core funding sources, as a percentage of total liabilities, were 15.6% atSeptember 30, 2022 , compared to 17.0% atDecember 31, 2021 .
Non-core funding sources may require securities to be pledged against the
underlying liability. Securities held at fair value were
pledged or sold under agreements to repurchase. Pledged securities represented
71.5% of total securities at
securities at
Cash and cash equivalents totaled$103.6 million as ofSeptember 30, 2022 which increased from$63.1 million atDecember 31, 2021 . Short-term investments, consisting of securities due in one year or less, decreased from$77.9 million atDecember 31, 2021 , to$31.9 million onSeptember 30, 2022 . 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$758.9 million atSeptember 30, 2022 compared with$947.7 million atDecember 31, 2021 . Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately$1.6 billion atSeptember 30, 2022 , up$57.9 million or 3.7% 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. AtSeptember 30, 2022 , the established borrowing capacity with the FHLB was$1.6 billion , with available unencumbered mortgage-related assets of$1.5 billion . Additional assets may also qualify as collateral for FHLB advances, upon approval of the FHLB.
Accounting Standards Pending Adoption
ASU No. 2020-06, "Fair Value Measurements (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions." The amendments in this update provides clarification on guidance in Topic 820, Fair Value Measurement, when measuring the fair value of an equity security subject to contractual restrictions that prohibit the sale of an equity security and provides new disclosure requirements for equity securities subject to contractual sale restrictions, that are measured at fair value. ASU 2022-06 is effectiveDecember 15, 2023 and is not expected to have a significant impact on our consolidated financial statements. 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 applyingU.S. generally accepted accounting principles to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update are effective for all entities as of 64 --------------------------------------------------------------------------------
adoption of this standard to have a material impact on our consolidated
financial statements.
ASU 2022-01, "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, 2023 and 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.
While the guidance will result in expanded disclosures, the Company does not
expect the adoption of this standard to have a material impact on our
consolidated financial statements.
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