Results of Operations
(Comparison of December 31, 2023 and 2022 results)
General
The Company reported diluted earnings per share of $0.66 in 2023, a decrease of 88.8% compared to diluted earnings per share of $5.89 in 2022. Net income for the year ended December 31, 2023, was $9.5 million, a decrease of 88.8% compared to $85.0 million in 2022. Significant contributors to the year-over-year decrease in net income included an after-tax loss of $52.9 million, or $3.69 loss per diluted share, related to the sale of $510.5 million of available-for-sale debt securities, increased funding costs and an increase in operating expenses. The sale of securities and subsequent reinvestment in the second and third quarters of 2023 favorably impacted securities revenue in the fourth quarter of 2023 as the securities sold had an average yield of 0.86%, while the proceeds of the sale were largely reinvested into securities with an estimated yield of approximately 5.09%. Average yields on securities for the fourth quarter of 2023 were 2.33%, compared to 1.59% for the third quarter of 2023, and 1.44% for the fourth quarter of 2022. Net interest income of $209.5 million for 2023, was down $20.8 million or 9.0% compared to 2022, the increase in interest rates paid on interest-bearing liabilities continues to outpace increases on interest earning asset yields.
Excluding the impact of the realized losses on the sales of investment securities, adjusted net income, a non-GAAP financial measure, was $62.4 million for the year ended December 31, 2023, down $23.1 million, or 27.1%, when compared to the prior year. Earnings per diluted share, adjusted to exclude the impact of realized losses on sales of investment securities (“adjusted diluted earnings per share”), a non-GAAP measure, of $4.36 for the year ended December 31, 2023, decreased $1.56 compared to the prior year period. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in the "Non-GAAP Disclosure" on page 54.
In addition to earnings per share, key performance measurements for the Company include return on average shareholders’ equity (ROE) and return on average assets (ROA). ROE was 1.50% in 2023, compared to 13.25% in 2022, while ROA was 0.12% in 2023 and 1.09% in 2022. Tompkins’ 2023 ROE and 2023 ROA did not compare favorably with peer ratios of 11.18% and 1.01%, respectively, due to the above mentioned securities sale. The peer group data is derived from the FRB's "Bank Holding Company Performance Report", which covers banks and bank holding companies with assets between $3.0 billion and $10.0 billion as of September 30, 2023 (the most recent report available). Although the peer group data is presented based upon financial information that is one fiscal quarter behind the financial information included in this report, the Company believes that it is relevant to include certain peer group information for comparison to current period numbers. ROA and ROE, adjusted
to exclude the impact of realized losses on sales of investment securities, ("adjusted ROA" and "adjusted ROE"), non-GAAP measures, were 0.82% and 9.83% for the year ended December 31, 2023. Reconciliations of GAAP amounts with corresponding non-GAAP amounts are presented in "Non-GAAP Disclosure" on page 54.
Segment Reporting
The Company operates in three business segments: banking, insurance and wealth management. Insurance is comprised of property and casualty insurance services and employee benefit consulting operated under the Tompkins Insurance, subsidiary. Wealth management activities include the results of the Company’s trust, financial planning, and wealth management services provided by Tompkins Financial Advisors, a division of Tompkins Community Bank. All other activities are considered banking. For additional financial information on the Company’s segments, refer to "Note 22 Segment and Related Information" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
Banking Segment
The banking segment reported net income of $74,000 for the year ended December 31, 2023, down $75.4 million or 99.9%, compared to 2022. The decrease in net income in 2023 compared to 2022 was largely driven by the sale of $510.5 million of available-for-sale debt securities, that resulted in an after-tax loss on the sale of securities of $52.9 million. Higher funding costs and increased operating expenses also contributed to the decrease. Net interest income was down $20.8 million or 9.0% in 2023 compared to 2022, primarily due to interest-bearing liabilities outpacing increases on interest earning assets yields due to the higher interest rate environment.
The provision for credit loss expense was a expense of $4.3 million in 2023, compared to provision credit of $2.8 million in the prior year. The increase in the provision for credit losses in 2023 over 2022 was mainly driven by loan growth, current economic forecasts and changes in asset quality. The allowance to total loan ratio at December 31, 2023 was 0.92%, up from 0.87% at December 31, 2022. For additional information, see the section titled "The Allowance for Credit Losses" below.
Noninterest income of $43.7 million in 2023 decreased $69.1 million or 272.0% compared to 2022. The decrease in noninterest income was largely due to the sale of available-for-sale debt securities in the second and third quarters of 2023, which resulted in the recognition of a pre-tax loss of $70.0 million. For the year ended December 31, 2023, card services income increased $464,000, or 4.2% over the same period in 2022, while service charges on deposit accounts decreased $452,000, or 6.1% for the same time period, mainly due to lower overdraft fees.
Noninterest expense of $162.3 million for the year ended December 31, 2023, increased $6.1 million or 3.9% from December 31, 2022. The increases were largely due to nonrecurring expenses which included $879,000 of expenses related to branch closures in 2023; New York State minimum tax expense of $830,000, as a result of the previously mentioned losses on sales of available-for-sale debt securities contributing to state taxes as equity rather than income; and approximately $640,000 in expenses related to staff restructuring charges. FDIC insurance expense in 2023 was up $1.5 million over 2022.
Insurance Segment
The insurance segment reported net income of $6.6 million for 2023, which is in line with 2022, as a $1.1 million or 3.1% increase in noninterest revenue was offset by an increase in noninterest expenses of $1.1 million or 3.9%. The increase in revenue was mainly in property and casualty commissions, which were up $1.8 million or 5.4% in 2023 over 2022. Contingency revenue was down $546,000 or 13.6% in 2023 compared to 2022. Revenue growth in 2023 benefited from business development efforts and generally higher policy premium levels. The increase in expenses was mainly in salaries and wages as a result of normal annual merit increases along with increases in health insurance costs, which were partially offset by a decrease in incentive related accruals.
Wealth Management Segment
The wealth management segment reported net income of $2.9 million for the year ended December 31, 2023, a decrease of $126,000 or 4.2% compared to 2022. Revenue of $18.3 million increased $133,000 or 0.7% compared to 2022. Noninterest expenses increased by $273,000 or 1.9% compared to 2022. The increase was mainly driven by professional fees related to recruiting and increases in expenses related to health insurance and the Company's retirement plans, partially offset by lower incentive related accruals. The fair value of assets under management or in custody at December 31, 2023 totaled $3.1 billion, representing an increase of $181.7 million or 6.2% compared to $2.9 billion at year-end 2022. The increase in assets under management from prior year was mainly a result of market performance seen throughout the year as well as new business.
Net Interest Income
Net interest income is the Company’s largest source of revenue, representing 95.3% of total revenues for the year ended December 31, 2023, and 74.7% of total revenues for the year ended December 31, 2022. The increase in the ratio of net interest income to revenues in 2023 was largely driven by the decrease in total revenues in 2023 compared to 2022 as a result of the pre-tax loss of $70.0 million on the sales of available-for-sale debt securities during 2023. Net interest income is dependent on the volume and composition of interest earning assets and interest-bearing liabilities and the level of market interest rates. Table 1 – Average Statements of Condition and Net Interest Analysis shows average interest-earning assets and interest-bearing liabilities, and the corresponding yield or cost associated with each.
Net interest income of $209.5 million for 2023 decreased by $20.8 million or 9.0% from 2022. The decrease was primarily due to higher funding costs and a decrease in average earning assets, partially offset by an increase in the average yield on interest-earning assets in 2023 compared to 2022. The average rates paid on interest-bearing liabilities for the year ended December 31, 2023, was up 136 basis points over the same period in 2022, while the average yield on interest-earning assets increased 71 basis points over the same period.
The net interest margin for 2023 was 2.84% compared to 3.05% for 2022. The decrease in net interest margin for the year ended December 31, 2023 compared to the year ended December 31, 2022 was due to increases in the average rates paid on interest-bearing liabilities outpacing increases on interest earning assets yields due to the higher interest rate environment, as well as increases in higher rate average other borrowings and average time deposits due to lower average interest checking, savings and money market deposit balances.
The quarterly net interest margin for the fourth quarter of 2023 of 2.82% increased from a net interest margin of 2.75% for the third quarter of 2023, and decreased from 3.02% for the fourth quarter of 2022. The increase in net interest margin compared to the third quarter of 2023 was primarily due to securities purchased in the second and third quarters of 2023 yielding higher interest rates compared to securities sold during the same periods. The increase in securities yields was partially offset by the reversal of $1.0 million of accrued interest during the fourth quarter of 2023 related to loans that moved to nonaccrual status during the quarter. The decrease in net interest margin compared to the fourth quarter of last year were primarily attributable to increased interest costs on interest-bearing liabilities outpacing increased interest income on interest earning assets due to the higher interest rate environment.
Interest income increased $46.0 million or 18.3% in 2023 from 2022, mainly driven by higher interest earning asset yields due to the higher interest rate environment, and partially offset by decreases in the volume of average interest-earning assets. For the year ended December 31, 2023, the average yield on interest-earning assets increased 71 basis points over the same period in 2022. Average interest-earning assets for the year ended December 31, 2023, decreased $198.7 million, or 2.6%, compared to the same period in 2022.
Interest income on loans for the year ended December 31, 2023, was up $42.8 million, or 19.7% compared to the same period in 2022, driven by higher average yields and higher average balances. The average yields on loans for the year ended December 31, 2023, of 4.87%, was up 62 basis points from the same period in 2022. The increase in loan yields was a result of market-related increases in interest rates on new loans, a significant increase in variable and adjustable rate loan yields driven by rising market interest rates, including the prime rate, and new loan originations. Average loans and leases increased $215.6 million or 4.2% in 2023 compared to 2022, and represented 72.3% of average earning assets in 2023 compared to 67.6% in 2022. The increase was largely driven by a growth in the commercial real estate portfolio. As a result of its participation in the SBA's Paycheck Protection Plan ("PPP"), the Company recorded net deferred loan fees of $9,390 in 2023 as compared to $3.0 million in 2022, which are included in interest income.
Interest income on securities, excluding dividends on FHLB stock, for the year ended December 31, 2023, was up $1.9 million or 5.7% as compared to the same period in 2022, as higher average yields more than offset lower average balances. The average yield on total securities for the year ended December 31, 2023, increased 34 basis points, while average balances for securities decreased $350.5 million, or 14.8%, from the same period in 2022. The increase in securities yields were driven by market interest rate increases and the sales and maturities of certain available-for-sale investment securities during 2023. During the second quarter of 2023, the Company sold $80.9 million of available-for-sale debt securities and used the proceeds mainly to pay down overnight borrowings with the FHLB. During the third quarter of 2023, the Company sold $429.6 million of available-for-sale debt securities with an average yield of 0.93% and reinvested $357.3 million of the proceeds into securities with an estimated yield of approximately 5.12%. The weighted average life of the securities purchased and sold was approximately 4.3 years.
Interest expense for 2023 increased $66.8 million or 317.5% compared to 2022, driven mainly by the increase in average rates paid on interest-bearing liabilities and funding mix, with an increase in average borrowings and average time deposits and a decrease in average interest-bearing checking, savings and money market deposits. The average cost of interest-bearing deposits was 1.58% in 2023, an increase of 123 basis points from 0.35% in 2022, while the average cost of interest bearing liabilities increased to 1.79% in 2023 from 0.43% in 2022. The rate paid on average interest-bearing deposits increased as interest rates on certain interest-bearing deposits were raised in response to market conditions. Average interest bearing deposits in 2023 decreased $149.2 million or 3.2% compared to 2022. Average noninterest bearing deposit balances in 2023 decreased $191.9 million or 8.8% versus 2022 and represented 30.8% of average total deposits in 2023 compared to 32.0% in 2022.
Average other borrowings increased by $168.4 million or 86.3% in 2023 from 2022. The average rate paid on other borrowings for the year ended December 31, 2023, was up 220 basis points over the same period in 2022. The increase in the cost of average borrowings was primarily the result of the greater utilization of comparatively higher rate overnight borrowings to fund loan growth as a result of lower average deposit balances.
Table 1 - Average Statements of Condition and Net Interest Analysis
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the year ended December 31, |
| 2023 | 2022 | 2021 |
(dollar amounts in thousands) | Average Balance (YTD) | Interest | Average Yield/Rate | Average Balance (YTD) | Interest | Average Yield/Rate | Average Balance (YTD) | Interest | Average Yield/Rate |
ASSETS | | | | | | | | | |
Interest-earning assets | | | | | | | | | |
Interest-bearing balances due from banks | $ | 13,064 | | $ | 674 | | 5.16 | % | $ | 85,788 | | $ | 371 | | 0.43 | % | $ | 307,253 | | $ | 343 | | 0.11 | % |
Securities1 | | | | | | | | | |
U.S. Government securities | 1,920,678 | | 32,433 | | 1.69 | % | 2,265,226 | | 30,587 | | 1.35 | % | 2,003,450 | | 23,145 | | 1.16 | % |
Trading securities | 0 | | 0 | | 0.00 | % | 0 | | 0 | | 0.00 | % | 0 | | 0 | | 0.00 | % |
State and municipal2 | 91,407 | | 2,338 | | 2.56 | % | 97,283 | | 2,490 | | 2.56 | % | 112,391 | | 2,871 | | 2.55 | % |
Other securities2 | 3,272 | | 229 | | 6.99 | % | 3,329 | | 135 | | 4.06 | % | 3,417 | | 92 | | 2.68 | % |
Total securities | 2,015,357 | | 35,000 | | 1.74 | % | 2,365,838 | | 33,212 | | 1.40 | % | 2,119,258 | | 26,108 | | 1.23 | % |
FHLBNY and FRB stock | 22,284 | | 1,697 | | 7.63 | % | 13,354 | | 646 | | 4.84 | % | 14,830 | | 776 | | 5.24 | % |
Total loans and leases, net of unearned income2,3 | 5,357,699 | | 261,144 | | 4.87 | % | 5,142,098 | | 218,494 | | 4.25 | % | 5,184,491 | | 215,709 | | 4.16 | % |
Total interest-earning assets | 7,408,404 | | 298,515 | | 4.03 | % | 7,607,078 | | 252,723 | | 3.32 | % | 7,625,832 | | 242,936 | | 3.19 | % |
Other assets | 233,268 | | | | 221,442 | | | | 343,119 | | | |
Total assets | $ | 7,641,672 | | | | $ | 7,828,520 | | | | $ | 7,968,951 | | | |
LIABILITIES & EQUITY | | | | | | | | | |
Deposits | | | | | | | | | |
Interest-bearing deposits | | | | | | | | | |
Interest bearing checking, savings, & money market | $ | 3,697,780 | | $ | 46,820 | | 1.27 | % | $ | 4,029,008 | | $ | 10,389 | | 0.26 | % | $ | 4,034,969 | | $ | 3,736 | | 0.09 | % |
Time deposits | 793,709 | | 23,988 | | 3.02 | % | 611,708 | | 5,779 | | 0.94 | % | 711,381 | | 7,111 | | 1.00 | % |
Total interest-bearing deposits | 4,491,489 | | 70,808 | | 1.58 | % | 4,640,716 | | 16,168 | | 0.35 | % | 4,746,350 | | 10,847 | | 0.23 | % |
Federal funds purchased & securities sold under agreements to repurchase | 55,773 | | 58 | | 0.10 | % | 57,126 | | 60 | | 0.10 | % | 58,627 | | 64 | | 0.11 | % |
Other borrowings | 363,530 | | 16,978 | | 4.67 | % | 195,110 | | 4,815 | | 2.47 | % | 217,799 | | 4,382 | | 2.01 | % |
Trust preferred debentures | 0 | | 0 | | 0.00 | % | 0 | | 0 | | 0.00 | % | 7,367 | | 2,233 | | 30.32 | % |
Total interest-bearing liabilities | 4,910,792 | | 87,844 | | 1.79 | % | 4,892,952 | | 21,043 | | 0.43 | % | 5,030,143 | | 17,526 | | 0.35 | % |
Noninterest bearing deposits | 1,994,861 | | | | 2,186,720 | | | | 2,096,542 | | | |
Accrued expenses and other liabilities | 101,287 | | | | 107,122 | | | | 117,790 | | | |
Total liabilities | 7,006,940 | | | | 7,186,795 | | | | 7,244,475 | | | |
Tompkins Financial Corporation Shareholders’ equity | 633,267 | | | | 640,258 | | | | 723,009 | | | |
Noncontrolling interest | 1,465 | | | | 1,468 | | | | 1,467 | | | |
Total equity | 634,732 | | | | 641,725 | | | | 724,476 | | | |
Total liabilities and equity | $ | 7,641,672 | | | | $ | 7,828,520 | | | | $ | 7,968,951 | | | |
Interest rate spread | | | 2.24 | % | | | 2.89 | % | | | 2.84 | % |
Net interest income/margin on earning assets | | 210,671 | | 2.84 | % | | 231,680 | | 3.05 | % | | 225,410 | | 2.96 | % |
Tax Equivalent Adjustment | | (1,157) | | | | (1,399) | | | | (1,618) | | |
Net interest income per consolidated financial statements | | $ | 209,514 | | | | $ | 230,281 | | | | $ | 223,792 | | |
1 Average balances and yields on available-for-sale debt securities are based on historical amortized cost.
2 Interest income includes the tax effects of tax-equivalent adjustments using the Federal income tax rate of 21.0% in 2023, 2022, and 2021 to increase tax exempt interest income to tax-equivalent basis.
3 Nonaccrual loans are included in the average asset totals presented above. Payments received on nonaccrual loans have been recognized as disclosed in Note 1 of the Company’s consolidated financial statements included in Part 1 of this Report on Form 10-K.
Table 2 - Analysis of Changes in Net Interest Income
| | | | | | | | | | | | | | | | | | | | |
| 2023 vs. 2022 | 2022 vs. 2021 |
| Increase (Decrease) Due to Change in Average | Increase (Decrease) Due to Change in Average |
(In thousands)(taxable equivalent) | Volume | Yield/Rate | Total | Volume | Yield/Rate | Total |
INTEREST INCOME: | | | | | | |
Interest-bearing balances due from bank | $ | (563) | | $ | 866 | | $ | 303 | | $ | (389) | | $ | 417 | | $ | 28 | |
Investments1 | | | | | | |
Taxable | (5,095) | | 7,035 | | 1,940 | | 3,245 | | 4,240 | | 7,485 | |
Tax-exempt | (150) | | (2) | | (152) | | (386) | | 5 | | (381) | |
FHLB and FRB stock | 565 | | 486 | | 1,051 | | (73) | | (57) | | (130) | |
Loans, net1 | 9,754 | | 32,896 | | 42,650 | | (3,949) | | 6,734 | | 2,785 | |
Total interest income | $ | 4,511 | | $ | 41,281 | | $ | 45,792 | | $ | (1,552) | | $ | 11,339 | | $ | 9,787 | |
INTEREST EXPENSE: | | | | | | |
Interest-bearing deposits: | | | | | | |
Interest checking, savings and money market | $ | (923) | | $ | 37,354 | | $ | 36,431 | | $ | (6) | | $ | 6,659 | | $ | 6,653 | |
Time | 3,200 | | 15,009 | | 18,209 | | (1,063) | | (269) | | (1,332) | |
Federal funds purchased and securities sold under agreements to repurchase | (2) | | 0 | | (2) | | (2) | | (2) | | (4) | |
Other borrowings | 5,980 | | 6,183 | | 12,163 | | (1,607) | | (193) | | (1,800) | |
Total interest expense | $ | 8,255 | | $ | 58,546 | | $ | 66,801 | | $ | (2,678) | | $ | 6,195 | | $ | 3,517 | |
Net interest income | $ | (3,744) | | $ | (17,265) | | $ | (21,009) | | $ | 1,126 | | $ | 5,144 | | $ | 6,270 | |
1 Interest income includes the tax effects of tax-equivalent adjustments using the Federal income tax rate of 21.0% in 2023, 2022 and 2021 to increase tax exempt interest income to tax-equivalent basis.
Changes in net interest income occur from a combination of changes in the volume of interest-earning assets and interest-bearing liabilities, and in the rate of interest earned or paid on them. The above table illustrates changes in interest income and interest expense attributable to changes in volume (change in average balance multiplied by prior year rate), changes in rate (change in rate multiplied by prior year volume), and the net change in net interest income. The net change attributable to the combined impact of volume and rate has been allocated to each in proportion to the absolute dollar amounts of the change. In 2023, net interest income decreased by $21.0 million, resulting from a $66.8 million increase in interest expense, partially offset from a $45.8 million increase in interest income. The increase in interest expense reflects higher rates paid on interest bearing liabilities, both deposits and other borrowings, and increases in average other borrowings and average time deposit.
Provision for Credit Loss Expense
The provision for credit loss expense represents management’s estimate of the expense necessary to maintain the allowance for credit losses at an appropriate level. The ratio of total allowance to total loans and leases increased to 0.92% at December 31, 2023 from 0.87% at December 31, 2022. The increase in the ACL from year-end December 31, 2023 was driven by loan growth, economic forecasts, and changes in asset quality. The provision for credit loss expense was $4.3 million in 2023, compared to provision expense of $2.8 million in 2022. The provision for credit losses for 2023 included a provision credit of $526,000 related to off-balance sheet credit exposures compared to a provision expense of $290,000 for 2022. 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
| | | | | | | | | | | |
| Year ended December 31, |
(In thousands) | 2023 | 2022 | 2021 |
Insurance commissions and fees | $ | 37,351 | | $ | 36,201 | | $ | 34,836 | |
Wealth management fees | 17,951 | | 18,091 | | 19,388 | |
Service charges on deposit accounts | 6,913 | | 7,365 | | 6,347 | |
Card services income | 11,488 | | 11,024 | | 10,826 | |
| | | |
Other income | 6,511 | | 5,925 | | 7,203 | |
Net (loss) gain on securities transactions | (69,973) | | (634) | | 249 | |
Total | $ | 10,241 | | $ | 77,972 | | $ | 78,849 | |
Noninterest income of $10.2 million for the year-ended December 31, 2023 decreased $67.7 million or 86.9% from 2022. Noninterest income represented 4.7% of total revenues in 2023, down from 25.3% in 2022. The decrease in noninterest income was largely due to the previously noted sales of available-for-sale debt securities, mainly in the third quarter of 2023, which resulted in the recognition of a pre-tax loss of $70.0 million for the year ended December 31, 2023. Fee-based revenues, including insurance commissions and fees, wealth management fees, service charges on deposit accounts and card services income, for the year ended December 31, 2023, collectively, increased $1.0 million, or 1.4%, over the same period in 2022.
Insurance commissions and fees of $37.4 million increased $1.2 million or 3.2% in 2023 compared to $36.2 million for 2022. The increase in revenue was mainly in property and casualty commissions, which were up $1.8 million or 5.4% in 2023 over 2022. Contingency revenue was down $546,000 or 13.6% in 2023 compared to 2022. Revenue growth in 2023 benefited from business development efforts and generally higher policy premium levels as a result of general market conditions.
Wealth management fees of $18.0 million in 2023 decreased $140,000 or 0.8% compared to 2022. Wealth management fees includes trust services, financial planning, wealth management services, and brokerage related services. The fair value of assets managed by, or in custody of, Tompkins was $3.1 billion at December 31, 2023, an increase from $2.9 billion at December 31, 2022. The increase in assets under management was mainly attributable to improved market performance in 2023, in comparison to 2022, with major equity market indices up in 2023 over 2022.
Service charges on deposit accounts of $6.9 million decreased $452,000 or 6.1% in 2023 compared to 2022. The decrease was driven by lower net overdraft fees in 2023 compared to 2022.
Card services income increased $464,000 or 4.2% in 2023 over 2022. The primary components of card services income are fees related to interchange income and transactions fees for debit card transactions, credit card transactions and ATM usage. The increase over prior year reflects an increase in the number and dollar volume of transactions.
Other income of $6.5 million increased $586,000 or 9.9% compared to 2022. The increase was largely due to higher earnings on bank owned life insurance ("BOLI"). Earnings on BOLI totaled $1.7 million in 2023, up from $1.2 million in 2022, reflecting the net impact of gain on death benefits of $962,000, partially offset by write-downs on separate account BOLI policies surrendered in the fourth quarter of 2023. Derivative fee income increased to $485,000 in 2023 from $57,000 in 2022, driven mainly by income on an interest rate swap.
Noninterest Expense
| | | | | | | | | | | |
| Year ended December 31, |
(In thousands) | 2023 | 2022 | 2021 |
Salaries and wages | $ | 97,370 | | $ | 98,261 | | $ | 96,038 | |
Other employee benefits | 27,333 | | 24,969 | | 24,172 | |
Net occupancy expense of premises | 13,278 | | 13,093 | | 13,179 | |
Furniture and fixture expense | 8,663 | | 8,058 | | 8,328 | |
FDIC insurance | 4,298 | | 2,798 | | 2,758 | |
Amortization of intangible assets | 334 | | 873 | | 1,317 | |
Other operating expense | 52,016 | | 47,699 | | 44,495 | |
Total | $ | 203,292 | | $ | 195,751 | | $ | 190,287 | |
Noninterest expense as a percentage of total revenue was 92.5% in 2023, compared to 63.5% in 2022. Noninterest expense for the year ended 2023 of $203.3 million, increased $7.5 million, or 3.9% compared to the same period in 2022. The increase in noninterest expense in 2023 over the same period in 2022 was mainly driven by other operating expenses, which increased $4.3 million; FDIC insurance, which increased $1.4 million; and higher personnel-related expenses, which increased $1.5 million.
Expenses associated with salaries and wages and employee benefits are the largest component of total noninterest expense. In 2023, these expenses increased $1.5 million or 1.2% compared to 2022. Salaries and wages decreased $891,000 or 0.9% in 2023 over the prior year, as increases driven mainly by annual merit pay increases were more than offset by lower incentive related accruals. Salaries and wages in 2023 included $638,000 of personnel-related charges. The number of employees as measured by average full time equivalents (FTEs) for 2023 were 1,014, compared to 1,020 for 2022. Other employee benefits increased $2.4 million or 9.5% over 2022, mainly in health insurance, which was up $1.8 million or 18.3% in 2023 over 2022.
The increase in net occupancy expense of premises and furniture and fixture expense in 2023 over 2022, included $879,000 related to the closure of three branch locations in the latter half of 2023.
Other operating expenses of $52.0 million increased by $4.3 million or 9.1% compared to 2022. The primary components of other operating expenses in 2023 were technology ($15.9 million), professional fees ($7.5 million), marketing ($5.3 million), and cardholder expense ($4.2 million). Contributing to the growth in other operating expenses for the year ended December 31, 2023, compared to the same period in 2022 were the following: expenses related to the Company’s retirement plans, up $1.7 million, or 441.3%, professional fees, up $604,000, or 8.7%; and accrual for New York State minimum tax, up $830,000, mainly as a result of the losses on the sales of available-for-sale debt securities. Marketing expenses in 2023 were down $444,000, or 7.8% when compared to 2022 which was driven by one time expenses related to rebranding of $156,000 in 2022 along with a reduction in media buys of $464,000; offset by donation expense being up $317,000 or 29.9%.
Noncontrolling Interests
Net income attributable to noncontrolling interests represents the portion of net income in consolidated majority-owned subsidiaries that is attributable to the minority owners of a subsidiary. The Company had net income attributable to noncontrolling interests of $124,000 in 2023, in line with 2022. The noncontrolling interests relate to three real estate investment trusts, which are substantially owned by the Company.
Income Tax Expense
The provision for income taxes provides for Federal, New York State, Pennsylvania and other miscellaneous state income taxes. The 2023 provision was $2.5 million, which decreased $22.1 million or 89.8% compared to the 2022 provision. The decrease in income tax expense between comparable periods reflects the decrease in pre-tax income, due primarily to the realized losses on the sale of certain available-for-sale debt securities. The effective tax rate for the Company was 20.8% in 2023, down from 22.4% in 2022. The effective rates for 2023 and 2022 differed from the U.S. statutory rate of 21.0% during those periods due to the effect of tax-exempt income from loans, securities, and life insurance assets, investments in tax credits, and excess tax benefits of stock based compensation. The fourth quarter 2023 included the impact of surrendering certain separate account BOLI policies, which added $1.8 million to tax expense for the quarter.
The Company's banking subsidiary has an investment in a real estate investment trust that provides certain benefits on its New York State tax return for qualifying entities. A condition to claim the benefit is that the consolidated company has average assets of no more than $8.0 billion for the taxable year. As of December 31, 2023, the Company's consolidated average assets, as defined by New York tax law, were under the $8.0 billion threshold. The Company will continue to monitor the consolidated average assets during 2024 to determine future eligibility.
Financial Condition
Total assets were $7.8 billion at December 31, 2023, up by 1.9% or $149.1 million from the previous year end. Total securities decreased $178.3 million or 9.3% from December 31, 2022, while total loans increased $337.0 million or 6.4%. Total deposits at year-end 2023 decreased $202.4 million or 3.1% from year-end 2022, while total borrowings increased $310.8 million or 106.7%.
Loans and leases were 71.7% of total assets at December 31, 2023, compared to 68.7% of total assets at December 31, 2022. Total loan balances were $5.6 billion at December 31, 2023, an increase of $337.0 million or 6.4% compared to the $5.3 billion reported at year-end 2022. The increase was mainly in commercial real estate loans. A more detailed discussion of the loan portfolio is provided below in this section under the caption "Loans and Leases".
As of December 31, 2023, total securities comprised 22.1% of total assets, compared to 24.9% of total assets at year-end 2022. Securities decreased $178.3 million or 9.3% at December 31, 2023, compared to December 31, 2022. Contributing to the decrease in securities from year-end 2022 was the the sale of available-for-sale debt securities, payments, maturities and calls. These were partially offset by securities purchases in 2023. A detailed discussion of the securities portfolio is provided below in this section under the caption "Securities".
Total deposits at year-end 2023 decreased by $202.4 million or 3.1% compared to December 31, 2022. At December 31, 2023 noninterest bearing deposits decreased by $233.2 million or 10.8%, time deposit balances increased $366.6 million or 58.1% and checking, savings and money market accounts decreased $335.9 million or 8.8% when compared to December 31, 2022. Other borrowings, consisting mainly of short term advances with the FHLB, increased $310.8 million or 106.7% from December 31, 2022. A more detailed discussion of deposits and borrowings is provided below in this section under the caption "Deposits and Other Liabilities".
Shareholders’ Equity
The Consolidated Statements of Changes in Shareholders’ Equity included in the Consolidated Financial Statements of the Company contained in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, detail changes in equity capital over prior year end. Total shareholders’ equity increased $52.5 million or 8.5% to $669.9 million at December 31, 2023, from $617.4 million at December 31, 2022. The increase was primarily the result of a decrease in unrealized losses on the available-for-sale portfolio mainly due to the recognition of the $70.0 million pre-tax loss on sales of available-for-sale investment securities, including the $62.9 million pre-tax loss recognized in the third quarter of 2023 related to balance sheet repositioning, as well as market interest rates.
Additional paid-in capital decreased by $5.6 million, from $302.8 million at December 31, 2022, to $297.2 million at December 31, 2023. The $5.6 million decrease included the following: a $8.7 million aggregate purchase price related to the Company's repurchase and retirement of 150,000 shares of its common stock in the first six months of 2023 pursuant to its publicly announced stock repurchase plan; and $1.3 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.1 million attributed to stock based compensation expense, and $331,000 related to shares issued for the Company's director deferred compensation plan.
Retained earnings decreased by $25.2 million, reflecting net income of $9.5 million, less dividends paid of $34.7 million for the year-ended December 31, 2023.
Accumulated other comprehensive loss decreased from $208.7 million at December 31, 2022 to $125.0 million at December 31, 2023, reflecting a $79.3 million decrease in unrealized losses on available-for-sale debt securities due to market interest rates and the aforementioned $70.0 million pre-tax loss on available-for-sale debt securities sales, and $4.4 million related to employee post-retirement benefit plans. Under regulatory requirements, amounts reported as accumulated other comprehensive income/loss related to net unrealized gain or loss on available-for-sale debt securities and the funded status of the Company’s defined benefit post-retirement benefit plans do not increase or reduce regulatory capital and are not included in the calculation of risk-based capital and leverage capital ratios.
Total shareholders’ equity decreased $111.6 million or 15.3% to $617.4 million at December 31, 2022, from $728.9 million at December 31, 2021. Additional paid-in capital decreased by $9.8 million, from $312.5 million at December 31, 2021, to $302.8 million at December 31, 2022. The $9.8 million decrease included the following: a $15.4 million aggregate purchase price related to the Company's repurchase and retirement of 197,979 shares of its common stock in connection with Board-approved repurchase plans, and $2.3 million related to the exercise of stock options and restricted stock activity. These were partially offset by $4.3 million attributed to stock based compensation expense, $2.9 million related to shares issued for Company's employee stock ownership plan, and $488,000 related to shares issued for the Company's director deferred compensation plan. Retained earnings increased by $51.5 million, reflecting net income of $85.0 million, less dividends paid of $33.6 million for the year ended December 31, 2022.
Accumulated other comprehensive loss increased from $56.0 million at December 31, 2021 to $208.7 million at December 31, 2022; reflecting a $164.2 million increase in unrealized losses on available-for-sale debt securities due to market interest rates; partially offset by a $11.5 million related to employee post-retirement benefit plans.
The Company increased cash dividends per share by 3.9% in 2023 over 2022, which followed an increase of 5.5% in 2022 over 2021. Dividends per share were $2.40 in 2023, compared to $2.31 in 2022, and $2.19 in 2021. Cash dividends paid represented 364.6%, 39.5%, and 36.3% of after-tax net income in 2023, 2022, and 2021, respectively. The increase in the ratio of cash dividends to after-tax net income in 2023 reflects the year-over-year decrease in net income, which was largely due to the previously noted recognition of an after-tax loss of $52.9 million for the year-ended December 31, 2023, on the sales of available-for-sale debt securities, mainly in the third quarter of 2023. Cash dividends paid in 2023 represents 55.6% of adjusted net income, a non-GAAP financial measure, which excludes the impact of the after-tax loss of $52.9 million on the sales of available-for-sale debt securities.
On October 22, 2021, the Company’s Board of Directors authorized a share repurchase plan (the "2021 Repurchase Plan") for the repurchase of up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the 2021 Repurchase Plan. Under the 2021 Repurchase Plan, the Company had repurchased 380,182 shares as of July 20, 2023, at an average cost of $70.14. No further shares will be repurchased under the 2021 Repurchase Plan.
On July 20, 2023, the Company’s Board of Directors authorized a replacement share repurchase plan (the “2023 Repurchase Plan”) under which it may repurchase up to 400,000 shares of the Company’s common stock over the 24 months following adoption of the plan. Shares may be repurchased from time to time under the 2023 Repurchase Plan in open market transactions at prevailing market prices, in privately negotiated transactions, or by other means in accordance with federal securities laws, and the repurchase program may be suspended, modified or terminated by the Board of Directors at any time for any reason. As of December 31, 2023, there have been no shares repurchased under the 2023 Repurchase Plan.
The Company and its subsidiary bank are subject to various regulatory capital requirements administered by federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary bank are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios of common equity Tier 1 capital, Total capital and Tier 1 capital to risk-weighted assets, and of Tier 1 capital to average assets. Management believes that the Company and its subsidiary bank meet all capital adequacy requirements to which they are subject.
In addition to setting higher minimum capital ratios, the Basel III Capital Rules introduced a capital conservation buffer, which must be added to each of the minimum capital ratios and is designed to absorb losses during periods of economic stress. The capital conservation buffer was phased-in over a three year period that began on January 1, 2016, and was fully phased-in on January 1, 2019 at 2.5%.
As of December 31, 2023, the capital ratios for the Company’s subsidiary bank exceeded the minimum levels required to be considered well capitalized. Additional information on the Company’s capital ratios and regulatory requirements is provided in "Note 20 - Regulations and Supervision" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
Securities
The Company maintains a portfolio of securities such as U.S. Treasuries, U.S. government sponsored entities securities, U.S. government agencies, non-U.S. Government agencies or sponsored entities mortgage-backed securities, obligations of states and political subdivisions thereof and equity securities. Management typically invests in securities with short to intermediate average lives in order to better match the interest rate sensitivities of its assets and liabilities. Investment decisions are made within policy guidelines established by the Company’s Board of Directors. The investment policy established by the Company’s Board of Directors is based on the asset/liability management goals of the Company, and is monitored by the Company’s Asset/Liability Management Committee and Investment Committee. The intent of the policy is to establish a portfolio of high quality diversified securities, which optimizes net interest income within safety and liquidity limits deemed acceptable by the Asset/Liability Management Committee.
The Company classifies its securities at date of purchase as available-for-sale, held-to-maturity or trading. Securities are generally classified as available-for-sale. Securities available-for-sale may be used to enhance total return, provide additional liquidity, or reduce interest rate risk. Securities in the held-to-maturity portfolio would consist of obligations of the U.S. Government, U.S. Government sponsored entities and obligations of state and political subdivisions. Securities in the trading portfolio would reflect those securities that the Company elects to account for at fair value, with the adoption of ASC Topic 825, Financial Instruments.
The Company’s total securities portfolio at December 31, 2023 was $1.7 billion compared to $1.9 billion at December 31, 2022. The table below shows the composition of the available-for-sale and held-to-maturity debt securities portfolios as of year-end 2023, 2022 and 2021. The decrease in securities from year-end 2022 was largely driven by $510.5 million of sales of available-for-sale debt securities and $161.8 million of payments, maturities and calls, partially offset by $391.5 million of securities purchases. Unrealized losses on the available-for-sale debt securities portfolio were $131.8 million at year-end 2023, down from $236.8 million at year-end 2022. The sale of securities and market conditions contributed to the decrease in unrealized losses at year-end 2023 from prior year end.
Additional information on the securities portfolio is available in "Note 2 Securities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K, which details the types of securities held, the carrying and fair values, and the contractual maturities as of December 31, 2023 and 2022.
| | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
Available-for-Sale Debt Securities | 2023 | 2022 | 2021 |
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
U.S. Treasuries | $ | 114,418 | | $ | 109,904 | | $ | 190,170 | | $ | 167,251 | | $ | 160,291 | | $ | 157,834 | |
Obligations of U.S. Government sponsored entities | 472,286 | | 456,458 | | 681,192 | | 601,167 | | 843,218 | | 832,373 | |
Obligations of U.S. states and political subdivisions | 89,999 | | 81,924 | | 93,599 | | 85,281 | | 102,177 | | 104,169 | |
Mortgage-backed securities-residential, issued by | | | | | | |
U.S. Government agencies | 49,976 | | 45,240 | | 58,727 | | 52,668 | | 76,502 | | 77,157 | |
U.S. Government sponsored entities | 819,303 | | 720,830 | | 805,603 | | 686,222 | | 879,102 | | 870,556 | |
| | | | | | |
U.S. corporate debt securities | 2,500 | | 2,294 | | 2,500 | | 2,378 | | 2,500 | | 2,424 | |
Total available-for-sale debt securities | $ | 1,548,482 | | $ | 1,416,650 | | $ | 1,831,791 | | $ | 1,594,967 | | $ | 2,063,790 | | $ | 2,044,513 | |
| | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
Held-to-Maturity Debt Securities | 2023 | 2022 | 2021 |
(In thousands) | Amortized Cost | Fair Value | Amortized Cost | Fair Value | Amortized Cost | Fair Value |
U. S. Treasuries | $ | 86,266 | | $ | 75,215 | | $ | 86,478 | | $ | 73,541 | | $ | 86,689 | | $ | 86,368 | |
Obligations of U.S. Government sponsored entities | 226,135 | | 192,240 | | 225,866 | | 188,151 | | 197,320 | | 195,920 | |
Total held-to-maturity debt securities | $ | 312,401 | | $ | 267,455 | | $ | 312,344 | | $ | 261,692 | | $ | 284,009 | | $ | 282,288 | |
The Company evaluates available-for-sale debt securities for expected credit losses ("ECL") in unrealized loss positions at each
measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.
Factors that may be indicative of ECL include, but are not limited to, the following:
•Extent to which the fair value is less than the amortized cost basis.
•Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice).
•Payment structure of the debt security with respect to underlying issuer or obligor.
•Failure of the issuer to make scheduled payment of principal and/or interest.
•Changes to the rating of a security or issuer by a NRSRO.
•Changes in tax or regulatory guidelines that impact a security or underlying issuer.
For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income, net of applicable taxes. Credit-related impairment is recognized as an allowance for credit losses ("ACL") on the Statement of Condition, limited to the amount by which the amortized cost basis exceeds the fair value, with a corresponding adjustment to earnings. Both the ACL and the adjustment to net income may be reversed if conditions change.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of December 31, 2023, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including Federal National Mortgage Agency, Federal Home Loan Bank, and Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of December 31, 2023.
The gross unrealized losses reported for residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, Federal Home Loan Mortgage Corporation ("FHLMC"), and U.S. government agencies such as Government National Mortgage Association. The total gross unrealized losses, shown in the tables above, were primarily attributable to changes in interest rates and levels of market liquidity, relative to when the investment securities were purchased, and not due to the credit-related quality of the investment securities. The Company does not have the intent to sell these securities and does not believe it is more likely than not that the Company will be required to sell these securities before a recovery of amortized cost.
The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY") stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and ACBB stock totaled $33.6 million and $95,000 at December 31, 2023, respectively. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase stock. As such, the Company has
not recognized any impairment on its holdings of FHLBNY. At December 31, 2022, the Company’s holdings of FHLBNY stock and ACBB stock totaled $17.6 million and $95,000, respectively.
Management’s policy is to purchase investment grade securities that, on average, have relatively short expected durations. This policy helps mitigate interest rate risk and provides sources of liquidity without significant risk to capital. The contractual maturity distribution of debt securities and mortgage-backed securities as of December 31, 2023, along with the weighted average yield of each category, is presented in Table 3-Maturity Distribution below. Balances are shown at amortized cost and weighted average yields are calculated on a fully tax-equivalent basis. Expected maturities will differ from contractual maturities presented in Table 3-Maturity Distribution below, because issuers may have the right to call or prepay obligations with or without penalty and mortgage-backed securities will pay throughout the periods prior to contractual maturity.
Table 3 - Maturity Distribution
| | | | | | | | | | | | | | |
| As of December 31, 2023 |
| Securities Available-for-Sale1 | Securities Held-to-Maturity |
(dollar amounts in thousands) | Amount | Yield2 | Amount | Yield2 |
U.S. Treasury | | | | |
Within 1 year | $ | 19,836 | | 2.07 | % | $ | 0 | | 0.00 | % |
Over 1 to 5 years | 84,636 | | 2.71 | % | 0 | | 0.00 | % |
Over 5 to 10 years | 9,946 | | 1.54 | % | 86,266 | | 1.37 | % |
| | | | |
| $ | 114,418 | | 2.50 | % | $ | 86,266 | | 1.37 | % |
| | | | |
Obligations of U.S. Government sponsored entities | | | | |
Within 1 year | $ | 75,032 | | 4.14 | % | $ | 0 | | 0.00 | % |
Over 1 to 5 years | 196,596 | | 2.83 | % | 0 | | 0.00 | % |
Over 5 to 10 years | 180,658 | | 3.68 | % | 226,135 | | 1.64 | % |
Over 10 years | 20,000 | | 2.23 | % | $ | 0 | | 0.00 | % |
| $ | 472,286 | | 3.34 | % | $ | 226,135 | | 1.64 | % |
| | | | |
Obligations of U.S. state and political subdivisions | | | | |
Within 1 year | $ | 4,374 | | 3.10 | % | $ | 0 | | 0.00 | % |
Over 1 to 5 years | 25,861 | | 3.04 | % | 0 | | 0.00 | % |
Over 5 to 10 years | 52,513 | | 2.60 | % | 0 | | 0.00 | % |
Over 10 years | 7,251 | | 2.59 | % | 0 | | 0.00 | % |
| $ | 89,999 | | 2.75 | % | $ | 0 | | 0.00 | % |
| | | | |
Mortgage-backed securities - residential | | | | |
Within 1 year | $ | 0 | | 0.00 | % | $ | 0 | | 0.00 | % |
Over 1 to 5 years | 23,486 | | 2.48 | % | 0 | | 0.00 | % |
Over 5 to 10 years | 281,076 | | 1.69 | % | 0 | | 0.00 | % |
Over 10 years | 564,717 | | 2.22 | % | 0 | | 0.00 | % |
| $ | 869,279 | | 2.06 | % | $ | 0 | | 0.00 | % |
| | | | |
Other securities | | | | |
Over 5 to 10 years | $ | 2,500 | | 8.36 | % | $ | 0 | | 0.00 | % |
| $ | 2,500 | | 8.36 | % | $ | 0 | | 0.00 | % |
| | | | |
Total securities | | | | |
Within 1 year | $ | 99,243 | | 3.68 | % | $ | 0 | | 0.00 | % |
Over 1 to 5 years | 330,579 | | 2.79 | % | 0 | | 0.00 | % |
Over 5 to 10 years | 526,692 | | 2.49 | % | 312,401 | | 1.56 | % |
Over 10 years | 591,968 | | 2.22 | % | 0 | | 0.00 | % |
| | | | |
| $ | 1,548,482 | | 2.53 | % | $ | 312,401 | | 1.56 | % |
1 Balances of available-for-sale debt securities are shown at amortized cost.
2 Interest income includes the tax effects of tax-equivalent adjustments using a combined New York State and Federal effective income tax rate of 24.5% to increase tax exempt interest income to tax-equivalent basis.
The average tax-equivalent yield on the securities portfolio was 1.74% in 2023, 1.40% in 2022 and 1.23% in 2021.
At December 31, 2023, there were no holdings of any one issuer, other than the U.S. Government sponsored entities, in an amount greater than 10% of the Company’s shareholders’ equity.
Loans and Leases
Table 4 - Composition of Loan and Lease Portfolio
| | | | | | | | | | | | | | | | | |
Loans and Leases | As of December 31, |
(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 |
Commercial and industrial | | | | | |
Agriculture | $ | 101,211 | | $ | 85,073 | | $ | 99,172 | | $ | 94,489 | | $ | 105,786 | |
Commercial and industrial other | 721,890 | | 705,700 | | 699,121 | | 792,987 | | 902,275 | |
PPP loans | 404 | | 756 | | 71,260 | | 291,252 | | 0 | |
Subtotal commercial and industrial | 823,505 | | 791,529 | | 869,553 | | 1,178,728 | | 1,008,061 | |
Commercial real estate | | | | | |
Construction | 303,406 | | 201,116 | | 178,582 | | 163,016 | | 213,637 | |
Agriculture | 221,670 | | 214,963 | | 195,973 | | 201,866 | | 184,898 | |
Commercial real estate other | 2,587,591 | | 2,437,339 | | 2,278,599 | | 2,204,310 | | 2,045,030 | |
Subtotal commercial real estate | 3,112,667 | | 2,853,418 | | 2,653,154 | | 2,569,192 | | 2,443,565 | |
Residential real estate | | | | | |
Home equity | 188,316 | | 188,623 | | 182,671 | | 200,827 | | 219,245 | |
Mortgages | 1,373,275 | | 1,346,318 | | 1,290,911 | | 1,235,160 | | 1,158,592 | |
Subtotal residential real estate | 1,561,591 | | 1,534,941 | | 1,473,582 | | 1,435,987 | | 1,377,837 | |
Consumer and other | | | | | |
Indirect | 841 | | 2,224 | | 4,655 | | 8,401 | | 12,964 | |
Consumer and other | 96,942 | | 75,412 | | 67,396 | | 61,399 | | 61,446 | |
Subtotal consumer and other | 97,783 | | 77,636 | | 72,051 | | 69,800 | | 74,410 | |
Leases | 15,383 | | 16,134 | | 13,948 | | 14,203 | | 17,322 | |
Total loans and leases | $ | 5,610,929 | | $ | 5,273,658 | | $ | 5,082,288 | | $ | 5,267,910 | | $ | 4,921,195 | |
Less: unearned income and deferred costs and fees | (4,994) | | (4,747) | | (6,821) | | (7,583) | | (3,645) | |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 5,605,935 | | $ | 5,268,911 | | $ | 5,075,467 | | $ | 5,260,327 | | $ | 4,917,550 | |
The below table shows a more detailed break-out of commercial real estate ("CRE") loans as of December 31, 2023 and December 31, 2022:
| | | | | | | | | | | | | | |
| As of December 31, |
CRE Concentrations | 2023 | 2022 |
(dollar amounts in thousands) | Balance | % CRE | Balance | % CRE |
Construction | $ | 303,406 | | 9.75 | % | $ | 201,031 | | 7.05 | % |
Multi-family/Single family real estate | 603,118 | | 19.38 | % | 587,467 | | 20.59 | % |
Agriculture | 221,670 | | 7.12 | % | 214,963 | | 7.53 | % |
Retail1 | 425,871 | | 13.68 | % | 434,998 | | 15.25 | % |
Hotels/motels | 167,408 | | 5.38 | % | 144,710 | | 5.07 | % |
Office space2 | 236,721 | | 7.61 | % | 236,281 | | 8.28 | % |
Industrial3 | 215,459 | | 6.92 | % | 179,772 | | 6.30 | % |
Mixed Use | 349,985 | | 11.24 | % | 322,537 | | 11.30 | % |
Medical4 | 138,057 | | 4.44 | % | 135,024 | | 4.73 | % |
Other | 450,972 | | 14.49 | % | 396,549 | | 13.90 | % |
Total CRE | $ | 3,112,667 | | 100.00 | % | $ | 2,853,332 | | 100.00 | % |
1Retail includes 2.9% and 3.2% of owner occupied real estate at December 31, 2023 and December 31, 2022. |
2Office space includes 1.4% and 1.5% of owner occupied real estate at December 31, 2023 and December 31, 2022. |
3Industrial includes 2.16% and 2.08% of owner occupied real estate at December 31, 2023 and December 31, 2022. |
4Medical includes 2.69% and 3.01% of owner occupied real estate at December 31, 2023 and December 31, 2022. |
Total loans and leases of $5.6 billion at December 31, 2023 increased $337.0 million or 6.4% from December 31, 2022. The increase was mainly in commercial real estate loans, but all loan portfolios grew in 2023. At December 31, 2023, total loans and leases represented 71.7% of total assets compared to 68.7% of total assets at December 31, 2022.
Residential real estate loans, including home equity loans, were $1.6 billion at December 31, 2023, an increase of $26.7 million or 1.7% compared to $1.5 billion at year-end 2022. Residential real estate loans comprised 27.9% of total loans and leases at December 31, 2023 compared to 29.1% at December 31, 2022. Growth in residential loan balances is impacted by the Company’s decision to retain these loans or sell them in the secondary market due to interest rate considerations. The Company’s Asset/Liability Committee meets regularly and establishes standards for selling and retaining residential real estate mortgage originations.
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to FHLMC or State of New York Mortgage Agency ("SONYMA") without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loans also are subject to customary representations and warranties made by the Company, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these representations and warranties.
During 2023, 2022, and 2021, the Company sold residential mortgage loans totaling $4.5 million, $8.9 million, and $31.5 million, respectively, and realized net gains on these sales of $96,000, $155,000, and $943,000, respectively. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2023, 2022, and 2021, the Company recorded mortgage-servicing assets of $34,000, $66,000, and $236,000, respectively.
The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/6 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts semi-annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate loans. Adjustment rate loans have increased in popularity due to the rising interest rate environment. Adjustable rate residential real estate loans are underwritten based upon the initial rate when the fixed rate period is 5 years or longer. For loans with an initial fixed rate of less than 5 years, the fully indexed rate is utilized for ability to repay qualifying and underwriting. This underwriting practice matches secondary market guidelines.
Commercial real estate loans totaled $3.1 billion at December 31, 2023, an increase of $259.2 million or 9.1% compared to December 31, 2022, and represented 55.5% of total loans and leases at December 31, 2023, compared to 54.2% at December 31, 2022.
Commercial and industrial loans totaled $823.5 million at December 31, 2023, which was an increase of $32.0 million or 4.0% from December 31, 2022. Commercial and industrial loans represented 14.7% of total loans at December 31, 2023 compared to 15.0% at December 31, 2022.
As of December 31, 2023, agriculturally-related loans totaled $322.9 million or 5.8% of total loans and leases compared to $300.0 million or 5.7% of total loans and leases at December 31, 2022. Agriculturally-related loans include loans to dairy farms and cash and vegetable crop farms. Agriculturally related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment or commodities/crops.
The consumer loan portfolio includes personal installment loans, indirect automobile financing, and overdraft lines of credit. Consumer and other loans were $97.8 million at December 31, 2023, compared to $77.6 million at December 31, 2022.
The lease portfolio decreased by 4.7% to $15.4 million at December 31, 2023 from $16.1 million at December 31, 2022. As of December 31, 2023, commercial leases and municipal leases represented 100.0% of total leases.
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing policies, underwriting standards and loan review during 2023. The Company’s Board of Directors approves the lending policies at least annually. The Company recognizes that exceptions to policy guidelines may occasionally occur and has established procedures for approving exceptions to these policy guidelines. Management has also implemented reporting systems to monitor loan originations, loan quality, concentrations of credit, loan delinquencies and nonperforming loans and potential problem loans.
The Company’s loan and lease customers are located primarily in the New York and Pennsylvania communities served by its subsidiary bank. Although operating in numerous communities in New York State and Pennsylvania, the Company is still dependent on the general economic conditions of these states. As a result, the economic consequences of the pandemic on our market area generally and on the Company in particular continue to be difficult to quantify. Other than geographic and general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.
Analysis of Past Due and Nonperforming Loans
| | | | | | | | | | | | | | | | | |
| As of December 31, |
(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 |
Loans 90 days past due and accruing1 | | | | | |
Commercial and industrial | $ | 0 | | $ | 25 | | $ | 0 | | $ | 0 | | $ | 0 | |
| | | | | |
| | | | | |
Consumer and other | 101 | | 0 | | 0 | | 0 | | 0 | |
Total loans 90 days past due and accruing | $ | 101 | | $ | 25 | | $ | 0 | | $ | 0 | | $ | 0 | |
Nonaccrual loans | | | | | |
Commercial and industrial | $ | 2,273 | | $ | 618 | | $ | 533 | | $ | 1,775 | | $ | 2,335 | |
Commercial real estate | 44,450 | | 13,858 | | 13,893 | | 23,627 | | 10,789 | |
Residential real estate | 15,172 | | 13,544 | | 11,178 | | 13,145 | | 10,882 | |
Consumer and other | 270 | | 269 | | 429 | | 429 | | 275 | |
| | | | | |
Total nonaccrual loans and leases | $ | 62,165 | | $ | 28,289 | | $ | 26,033 | | $ | 38,976 | | $ | 24,281 | |
Troubled debt restructurings not included above | 0 | | 4,530 | | 5,124 | | 6,803 | | 7,154 | |
Total nonperforming loans and leases | $ | 62,266 | | $ | 32,844 | | $ | 31,157 | | $ | 45,779 | | $ | 31,435 | |
Other real estate owned | 131 | | 152 | | 135 | | 88 | | 428 | |
Total nonperforming assets | $ | 62,397 | | $ | 32,996 | | $ | 31,292 | | $ | 45,867 | | $ | 31,863 | |
Total nonperforming loans and leases as a percentage of total loans and leases | 1.11 | % | 0.62 | % | 0.61 | % | 0.87 | % | 0.64 | % |
Total nonperforming assets as a percentage of total assets | 0.80 | % | 0.43 | % | 0.40 | % | 0.60 | % | 0.47 | % |
Allowance as a percentage of nonperforming loans and leases | 82.84 | % | 139.86 | % | 137.51 | % | 112.87 | % | 126.90 | % |
1 The 2020 and 2019 columns in the above table exclude $794,000 and $1.3 million, respectively, of acquired loans that were 90 days past due and accruing interest. These loans were originally recorded at fair value on the acquisition date of August 1, 2012. These loans are considered to be accruing as the Company can reasonably estimate future cash flows on these acquired loans and the Company expects to fully collect the carrying value of these loans. Therefore, the Company is accreting the difference between the carrying value of these loans and their expected cash flows into interest income.
The level of nonperforming assets as of the past five year-ends is illustrated in the table above. The Company’s total nonperforming assets as a percentage of total assets was 0.80% at December 31, 2023, compared to 0.43% at December 31, 2022, and compared to its peer group's most recent ratio of 0.34% at September 30, 2023. The peer data is from the Federal Reserve Board and represents banks or bank holding companies with assets between $3.0 billion and $10.0 billion.
Nonperforming loans and leases totaled $62.3 million at December 31, 2023 and increased 89.6% from December 31, 2022. Nonperforming loans and leases represented 1.11% of total loans at December 31, 2023, compared to 0.62% of total loans at December 31, 2022, and 0.61% of total loans at December 31, 2021. Nonperforming loans and leases in the commercial real estate portfolio at year-end 2023 increased by $30.6 million compared to year-end 2022. The increase in nonperforming loans at year-end 2023, was mainly due to the addition of one relationship with three commercial real estate loans on two properties, including a technology and healthcare business park and a student housing property totaling approximately $33.8 million. The Company believes that the existing collateral securing the loans is sufficient to cover the exposure as of December 31, 2023, and as such there is no allowance for credit losses designated for these loans.
The Company adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous troubled debt restructuring ("TDR") accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral. Prior year 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".
In general, the Company places a loan on nonaccrual status if principal or interest payments become 90 days or more past due and/or management deems the collectability of the principal and/or interest to be in question, as well as when called for by regulatory requirements. Although in nonaccrual status, the Company may continue to receive payments on these loans. These payments are generally recorded as a reduction to principal and interest income is recorded only after principal recovery is reasonably assured. For additional financial information on the difference between the interest income that would have been recorded if these loans and leases had been paid in accordance with their original terms and the interest income that was recorded, refer to "Note 3 – Loans and Leases" in the Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
The Company’s recorded investment in loans and leases that are individually evaluated totaled $44.4 million at December 31, 2023, and $20.8 million at December 31, 2022. The increase in nonperforming loans at December 31, 2023, was mainly due to the addition of the above mentioned relationship totaling approximately $33.8 million. A loan is individually evaluated when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. Individually evaluated loans consist of our non-homogenous nonaccrual loans and loans that are 90 days or more past due. Specific reserves on individually evaluated loans that are not collateral dependent are measured based on the present value of expected future cash flows discounted at the original effective interest rate of each loan. For loans that are collateral dependent, impairment is measured based on the fair value of the collateral less estimated selling costs, and such impaired amounts are generally charged off.
At December 31, 2023, there were specific reserves of $1.1 million, related to one commercial real estate relationship totaling $7.4 million compared to $3,000 of specific reserves on residential real estate loans at December 31, 2022. The majority of the individually evaluated loans are collateral dependent loans that have limited exposure or require limited specific reserves because of the amount of collateral support with respect to these loans or the loans have been written down to fair value. Interest payments on individually evaluated loans are typically applied to principal unless collectability of the principal amount is reasonably assured. In these cases, interest is recognized on a cash basis. There was no interest income recognized on individually evaluated loans and leases for 2023, 2022 and 2021.
The ratio of the allowance to nonperforming loans (loans past due 90 days and accruing, nonaccrual loans and restructured troubled debt) was 82.84% at December 31, 2023, compared to 139.86% at December 31, 2022. The decrease in the ratio from year-end 2022 to year-end 2023 was mainly due to the increase in nonperforming loans discussed in more detail above. The Company’s nonperforming loans are mostly made up of collateral dependent loans requiring little to no specific allowance due to the level of collateral available with respect to these loans and/or previous charge-offs.
Management reviews the loan portfolio for evidence of potential problem loans and leases. Potential problem loans and leases are loans and leases that are currently performing in accordance with contractual terms, but where known information about possible credit problems of the related borrowers causes management to have doubt as to the ability of such borrowers to comply with the present loan payment terms and may result in such loans and leases becoming nonperforming at some time in the future. Management considers loans and leases classified as Substandard, which continue to accrue interest, to be potential problem loans and leases. The Company, through its credit administration function, identified 17 commercial relationships totaling $26.0 million at December 31, 2023 that were potential problem loans. At December 31, 2022, there were 17 commercial relationships totaling $33.3 million in the loan portfolio that were considered potential problem loans. Of the 17 commercial relationships from the portfolio that were classified as potential problem loans at December 31, 2023, there were 4 relationships that equaled or exceeded $1.0 million, which in aggregate totaled $22.9 million. The potential problem loans remain in a performing status due to a variety of factors, including payment history, the value of collateral supporting the credits, and personal or government guarantees. These factors, when considered in the aggregate, give management reason to believe that the current risk exposure on these loans does not warrant accounting for these loans as nonperforming. However, these loans do exhibit certain risk factors, which have the potential to cause them to become nonperforming. Accordingly, management’s attention is focused on these credits, which are reviewed on at least a quarterly basis.
The Allowance for Credit Losses
Management reviews the appropriateness of the ACL on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.
The Company uses a discounted cash flow ("DCF") method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speeds, curtailments, recovery lag, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes and forecasts national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics.
Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.
The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.
The Company adopted Accounting Standard Update ("ASU") 2016-13 on January 1, 2020, using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. The remaining discount on the PCD assets will be accreted into interest income on a level-yield method over the life of the loans.
Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of December 31, 2023 considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit exposures included in other noninterest expense in the Company's consolidated statements of income. As of December 31, 2023, the Company's reserve for off-balance sheet credit exposures was $2.3 million, compared to $2.8 million at December 31, 2022.
As of December 31, 2023, the total allowance for credit losses was $51.6 million, an increase of $5.7 million or 12.3% from year-end 2022. The increase reflects net loan recoveries of $721,000 and provision for credit loss expense of $4.9 million. The ratio of the allowance for credit losses as a percentage of total loans was 0.92% at year-end 2023 compared to 0.87% at year-end 2022. The allowance coverage to nonperforming loans and leases was 82.84% at December 31, 2023 compared to 139.86% at December 31, 2022.
The increase in the ACL from year-end 2022 reflects loan growth, mainly in the real estate portfolios, and changes in asset quality; partially offset by improvements in economic forecasts for unemployment and gross domestic product ("GDP"). Forecasts related to unemployment continue to improve and GDP forecasts show more growth compared to prior forecasts. Qualitative reserves were added to the commercial real estate portfolio at year-end 2023 driven by the uncertain impact of economic conditions, as well as increases in non-performing loans during the fourth quarter of 2023, primarily driven by one large commercial relationship, consisting of loans on two commercial properties.
Total loans were $5.6 billion at December 31, 2023, an increase of $337.0 million or 6.4% from December 31, 2022. The increase from year-end 2022 was mainly due to loan growth in the commercial real estate portfolio. Credit quality metrics at December 31, 2023, were mixed when compared to year-end 2022. Nonperforming assets represented 0.80% of total assets at December 31, 2023, compared to 0.43% at December 31, 2022. Nonperforming loans and leases increased $29.4 million or 89.6% from year end 2022 and represented 1.11% of total loans at December 31, 2023 compared to 0.62% at December 31, 2022. Loans internally-classified Special Mention or Substandard increased $24.8 million or 25.2% compared to December 31, 2022. The increase was mainly due to one relationship with three commercial real estate loans totaling $33.8 million being downgraded during 2023. Net loan recoveries totaled $721,000 in 2023, compared to net recoveries of $592,000 in 2022.
The allocation of the Company’s allowance as of December 31, 2023, and each of the previous four years is illustrated in Table 5- Allocation of the Allowance for Credit Losses, below. The table represents the allowance for credit losses calculated under the new accounting guidance as of December 31, 2020, and the prior periods show amounts calculated under the incurred loss methodology calculation used prior to adoption. The table provides an allocation of the allowance for credit losses for inherent loan losses by type. The allocation is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of future loss trends. The allocation of the allowance for credit losses to each category does not restrict the use of the allowance to absorb losses in any category.
Table 5 - Allocation of the Allowance for Credit Losses
| | | | | | | | | | | | | | | | | | | | | |
| As of December 31, |
(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | | | | |
Total loans outstanding at end of year | $ | 5,605,935 | | $ | 5,268,911 | | $ | 5,075,467 | | $ | 5,260,327 | | $ | 4,917,550 | | | | | |
| | | | | | | | | |
Allocation of the ACL by loan type: |
Commercial and industrial | $ | 6,667 | | $ | 6,039 | | $ | 6,335 | | $ | 9,239 | | $ | 10,541 | | | | | |
Commercial real estate | 31,581 | | 27,287 | | 24,813 | | 30,546 | | 21,608 | | | | | |
Residential real estate | 11,700 | | 11,154 | | 10,139 | | 10,257 | | 6,381 | | | | | |
Consumer and other | 1,557 | | 1,358 | | 1,492 | | 1,562 | | 1,362 | | | | | |
Leases | 79 | | 96 | | 64 | | 65 | | 0 | | | | | |
Total | $ | 51,584 | | $ | 45,934 | | $ | 42,843 | | $ | 51,669 | | $ | 39,892 | | | | | |
| | | | | | | | | |
Allocation of the ACL as a percentage of total allowance: |
Commercial and industrial | 13 | % | 13 | % | 15 | % | 18 | % | 26 | % | | | | |
Commercial real estate | 61 | % | 60 | % | 58 | % | 59 | % | 54 | % | | | | |
Residential real estate | 23 | % | 24 | % | 24 | % | 20 | % | 16 | % | | | | |
Consumer and other | 3 | % | 3 | % | 3 | % | 3 | % | 3 | % | | | | |
Leases | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | | | | |
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | | | | |
Loan and lease types as a percentage of total loans and leases: |
Commercial and industrial | 15 | % | 16 | % | 18 | % | 23 | % | 21 | % | | | | |
Commercial real estate | 55 | % | 54 | % | 52 | % | 49 | % | 50 | % | | | | |
Residential real estate | 28 | % | 29 | % | 29 | % | 27 | % | 28 | % | | | | |
Consumer and other | 2 | % | 1 | % | 1 | % | 1 | % | 1 | % | | | | |
Leases | 0 | % | 0 | % | 0 | % | 0 | % | 0 | % | | | | |
Total | 100 | % | 100 | % | 100 | % | 100 | % | 100 | % | | | | |
The above table shows a fairly consistent allocation of the loan portfolio and allowance over the period with commercial real estate and residential real estate representing the largest proportion of total loans and the allowance. The increase in commercial and industrial loans at year-end 2020, was mainly due to PPP loans, which decreased at year end 2021 and 2022 as these loans were forgiven by the SBA. Given the SBA guaranty of the PPP loans, there were no reserves allocated to PPP loans.
Table 6 - Analysis of the Allowance for Credit Losses shows the activity in the allowance for credit losses over the past five years. The allowance at December 31, 2023 was $51.6 million, an increase of $5.7 million from year-end 2022, reflecting a provision expense of $4.9 million and net recoveries of $721,000 for the year-ended December 31, 2023. Net charge-offs of $6.0 million in 2021, were mainly due to one commercial real estate relationship that included two loans and was charged off in the fourth quarter of 2022. The $16.2 million provision expense in 2020 was driven by changes in economic conditions and forecasts related to the impact of COVID-19, including forecasts of significantly slower economic growth and higher unemployment. The majority of the increase in the allowance and provision expense in 2020 was in the first quarter of 2020. Provision expense decreased in 2021, as businesses opened and economic conditions continued to improve, resulting in the ability to reverse some of the provision expense booked in the first quarter of 2020 related to the COVID-19 pandemic.
Table 6 - Analysis of the Allowance for Credit Losses
| | | | | | | | | | | | | | | | | |
| As of December 31, |
(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 |
Average loans outstanding during year | $ | 5,357,699 | | $ | 5,142,099 | | $ | 5,184,492 | | $ | 5,228,135 | | $ | 4,830,089 | |
Balance of allowance at beginning of year | 45,934 | | 42,843 | | 51,669 | | 39,892 | | 43,410 | |
Impact of adopting ASU 2022-02 | 64 | | 0 | | 0 | | 0 | | 0 | |
Impact of adopting ASU 2016-13 | 0 | | 0 | | 0 | | (2,534) | | 0 | |
| | | | | |
Loans charged-off: | | | | | |
Commercial and industrial | $ | 34 | | $ | 559 | | $ | 274 | | $ | 2 | | $ | 696 | |
Commercial real estate | 0 | | 50 | | 6,957 | | 1,903 | | 4,015 | |
Residential real estate | 20 | | 53 | | 77 | | 84 | | 256 | |
Consumer and other | 1,045 | | 544 | | 438 | | 482 | | 823 | |
Leases | 0 | | 0 | | 0 | | 0 | | 0 | |
Total loans charged-off | $ | 1,099 | | $ | 1,206 | | $ | 7,746 | | $ | 2,471 | | $ | 5,790 | |
| | | | | |
Recoveries of loans previously charged-off: |
Commercial and industrial | $ | 87 | | $ | 195 | | $ | 118 | | $ | 131 | | $ | 103 | |
Commercial real estate | 1,292 | | 951 | | 1,175 | | 58 | | 174 | |
Residential real estate | 186 | | 346 | | 236 | | 194 | | 334 | |
Consumer and other | 255 | | 306 | | 196 | | 248 | | 295 | |
Total loan recoveries | $ | 1,820 | | $ | 1,798 | | $ | 1,725 | | $ | 631 | | $ | 906 | |
Net loan (recoveries) charged-off | (721) | | (592) | | 6,021 | | 1,840 | | 4,884 | |
Additions/(Reductions) to allowance charged to operations | 4,865 | | 2,499 | | (2,805) | | 16,151 | | 1,366 | |
Balance of allowance at end of year | $ | 51,584 | | $ | 45,934 | | $ | 42,843 | | $ | 51,669 | | $ | 39,892 | |
Allowance as a percentage of total loans and leases outstanding | 0.92 | % | 0.87 | % | 0.84 | % | 0.98 | % | 0.81 | % |
Net (recoveries) charge-offs as a percentage of average loans and leases outstanding during the year | (0.01) | % | (0.01) | % | 0.12 | % | 0.04 | % | 0.10 | % |
As a result of the adoption of ASU 2016-13, the Company recorded a net cumulative-effect adjustment reducing the allowance for credit losses by $2.5 million from $39.9 million at December 31, 2019 to $37.4 million at January 1, 2020.
Management believes that, based upon its evaluation as of December 31, 2023, the allowance is appropriate.
Deposits and Other Liabilities
Total deposits were $6.4 billion at December 31, 2023, a decrease of $202.4 million or 3.1% compared to year-end 2022. The decrease from year-end 2022 consisted of savings and money market balances, and noninterest bearing deposits, which were down $335.9 million, and $233.2 million, respectively. This was partially offset by an increase in time deposit balances, which increased $366.6 million. The decrease in deposits was largely driven by inflation and persistent rate competition for deposits due to the current interest rate environment and tightening monetary policy.
The most significant source of funding for the Company is core deposits. The Company defines core deposits as total deposits less time deposits of $250,000 or more, brokered deposits, municipal money market deposits and reciprocal deposit relationships with municipalities. Core deposits decreased by $390.4 million or 7.0% to $5.2 billion at year-end 2023 from $5.6 billion at year-end 2022. Core deposits represented 81.1% of total deposits at December 31, 2023, compared to 84.5% of total deposits at December 31, 2022.
Municipal money market accounts and reciprocal deposit relationships with municipalities totaled $542.1 million at year-end 2023, which decreased 25.3% from year-end 2022. In general, there is a seasonal pattern to municipal deposits starting with a low point during July and August. Account balances tend to increase throughout the fall and into the winter months from tax deposits and receive an additional inflow at the end of March from the electronic deposit of state funds.
The Company uses both retail and wholesale repurchase agreements. Retail repurchase agreements are arrangements with local customers of the Company, in which the Company agrees to sell securities to the customer with an agreement to repurchase those securities at a specified later date. Retail repurchase agreements totaled $51.0 million at December 31, 2023, and $56.3 million at December 31, 2022. Management generally views local repurchase agreements as an alternative to large time deposits. Refer to "Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s repurchase agreements.
The Company’s other borrowings totaled $602.1 million at year-end 2023, which were up $310.8 million over prior year end. Loan growth and lower deposit balances compared to year-end 2022 contributed to the increase in borrowings year-over-year. The $602.1 million in borrowings at December 31, 2023, represented $477.1 million in overnight advances from the FHLB and $125.0 million in term advances from the FHLB. Borrowings of $291.3 million at year-end 2022 represented $241.3 million in overnight borrowings and $50.0 million in FHLB term advances. Of the $125.0 million in FHLB term advances at year-end 2023, $85.0 million are due in over one year. Refer to "Note 9 - Other Borrowings" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K for further details on the Company’s term borrowings with the FHLB.
Liquidity Management
The objective of liquidity management is to ensure the availability of adequate funding sources to satisfy the demand for credit, deposit withdrawals, operating expenses, and business investment opportunities. The Company’s large, stable core deposit base and strong capital position are the foundation for the Company’s liquidity position. The Company uses a variety of resources to meet its liquidity needs, which include deposits, cash and cash equivalents, short-term investments, cash flow from lending and investing activities, repurchase agreements, and borrowings. The Company may also use borrowings as part of a growth strategy. Asset and liability positions are monitored primarily through the Asset/Liability Management Committee of the Company’s subsidiary bank. This Committee reviews periodic reports on the liquidity and interest rate sensitivity positions. Comparisons with industry and peer groups are also monitored. The Company’s strong reputation in the communities it serves, along with its strong financial condition, provides access to numerous sources of liquidity as described below. Management believes these diverse liquidity sources provide sufficient means to meet all demands on the Company’s liquidity that are reasonably likely to occur. Management measures liquidity, including the level of cash, unencumbered securities, and the availability of dependable borrowing sources. The board has set a policy limit stating that reliable sources of liquidity should remain in excess of 6% of total assets. The ratio was 18.3% of assets at December 31, 2023.
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, municipal money market deposits, brokered 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 $1.9 billion at December 31, 2023 increased $493.5 million, or 36.0% as compared to December 31, 2022.
Non-core funding sources, as a percentage of total liabilities, were 26.1% at December 31, 2023, compared to 19.4% at December 31, 2022.
Non-core funding sources may require securities to be pledged against the underlying liability. Securities carried at $1.0 billion at December 31, 2023 were either pledged or sold under agreements to repurchase, compared to $1.8 billion at December 31, 2022. Pledged securities or securities sold under agreements to repurchase represented 54.8% of total securities at December 31, 2023, compared to 82.4% of total securities at December 31, 2022.
Cash and cash equivalents totaled $79.5 million as of December 31, 2023 which increased from $77.8 million at December 31, 2022. Short-term investments, consisting of securities due in one year or less, increased from $50.3 million at December 31, 2022, to $98.7 million on December 31, 2023.
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 $766.1 million at December 31, 2023 compared with $738.9 million at December 31, 2022. Outstanding principal balances of residential mortgage loans, consumer loans, and leases totaled approximately $1.7 billion at December 31, 2023, up $46.0 million, or 2.8% compared with December 31, 2022. Aggregate amortization from monthly payments on these assets provides significant additional cash flow to the Company.
Liquidity is enhanced by ready access to national and regional wholesale funding sources including Federal funds purchased, repurchase agreements, brokered certificates of deposit, and FHLB advances. Through its subsidiary bank, the Company has borrowing relationships with the FHLB and correspondent banks, which provide secured and unsecured borrowing capacity. As members of the FHLB, the Company’s subsidiary banks can use certain unencumbered mortgage-related assets and securities to secure additional borrowings from the FHLB. At December 31, 2023, the established borrowing capacity with the FHLB was $1.6 billion, or 20.0% of total assets, with available unencumbered mortgage-related assets of $642.2 million. Additional assets may also qualify as collateral for FHLB advances upon approval of the FHLB. Through various programs at the Federal Reserve Bank, the Company has the ability to use certain unencumbered mortgage-related assets and securities to secure borrowings from the Federal Reserve Bank's Discount Window. At December 31, 2023 the available borrowing capacity with the Federal Reserve Bank was $92.6 million, secured by investment securities. In addition to the available borrowing lines at the FHLB and Federal Reserve Bank, the Company maintains $687.0 million of unencumbered securities which could be pledged to further enhance secured borrowing capacity.
The Company has not identified any trends or circumstances that are reasonably likely to result in material increases or decreases in liquidity in the near term.
Table 7 - Loan Maturity
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Remaining maturity of loans | December 31, 2023 | |
(In thousands) | Total | Less than 1 year | After 1 year to 5 years | After 5 years to 15 years | After 15 years |
Commercial and industrial | $ | 823,505 | | $ | 207,962 | | $ | 258,878 | | $ | 217,810 | | $ | 138,855 | |
Commercial real estate | 3,112,667 | | 132,461 | | 558,340 | | 1,422,233 | | 999,633 | |
Residential real estate | 1,561,591 | | 757 | | 25,538 | | 292,831 | | 1,242,465 | |
Total | $ | 5,497,763 | | $ | 341,180 | | $ | 842,756 | | $ | 1,932,874 | | $ | 2,380,953 | |
Of the loan amounts shown above in Table 7 - Loan Maturity, maturing over 1 year, $2.3 billion have fixed rates and $2.8 billion have adjustable rates.
Off-Balance Sheet Arrangements
In the normal course of business, the Company is party to certain financial instruments, which in accordance with accounting principles generally accepted in the United States, are not included in its Consolidated Statements of Condition. These transactions include commitments under standby letters of credit, unused portions of lines of credit, and commitments to fund new loans and are undertaken to accommodate the financing needs of the Company’s customers. Loan commitments are agreements by the Company to lend monies at a future date. These loan and letter of credit commitments are subject to the same credit policies and reviews as the Company’s loans. Because most of these loan commitments expire within one year from the
date of issue, the total amount of these loan commitments as of December 31, 2023, are not necessarily indicative of future cash requirements. Further information on these commitments and contingent liabilities is provided in "Note 17 Commitments and Contingent Liabilities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
Contractual Obligations
The Company leases land, buildings, and equipment under operating lease arrangements extending to the year 2090. Most leases include options to renew for periods ranging from 5 to 20 years. In addition, the Company has a software contract for its core banking application through June 30, 2024 along with contracts for more specialized software programs through 2026. Further information on the Company’s lease arrangements is provided in "Note 6 Premises and Equipment" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K. The Company’s contractual obligations as of December 31, 2023, are shown in Table 8-Contractual Obligations and Commitments below.
Table 8 - Contractual Obligations and Commitments
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Contractual cash obligations | At December 31, 2023 Payments due within |
(In thousands) | Total | 1 year | 1-3 years | 3-5 years | After 5 years |
Long-term debt | $ | 133,602 | | $ | 43,849 | | $ | 63,738 | | $ | 26,015 | | $ | 0 | |
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Operating leases 1 | 35,868 | | 3,824 | | 7,011 | | 6,103 | | 18,930 | |
Software contracts | 3,500 | | 2,856 | | 644 | | 0 | | 0 | |
Total contractual cash obligations | $ | 172,970 | | $ | 50,529 | | $ | 71,393 | | $ | 32,118 | | $ | 18,930 | |
1 Operating leases include renewals the Company considers reasonably certain to exercise.
Non-GAAP Disclosure
The following table summarizes the Company’s results of operations on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. The non-GAAP financial measures adjust GAAP measures to exclude the effects of non-operating items, such as the effects of the sales of available-for-sale debt securities, and significant nonrecurring income or expense on earnings, equity, and capital. The Company believes the non-GAAP measures provide meaningful comparisons of our underlying operational performance and facilitate management's and investors' assessments of business and performance trends in comparison to others in the financial services industry. These non-GAAP financial measures should not be considered in isolation or as a measure of the Company's profitability or liquidity; they are in addition to, and are not a substitute for, financial measures under GAAP. The non-GAAP financial measures presented herein may be different from non-GAAP financial measures used by other companies, and may not be comparable to similarly titled measures reported by other companies. In the future, the Company may utilize other measures to illustrate performance. Non-GAAP financial measures have limitations since they do not reflect all of the amounts associated with the Company's results of operations as determined in accordance with GAAP.
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Reconciliation of Net Income Available to Common Shareholders/Diluted Earnings Per Share (GAAP) to Net Operating Income Available to Common Shareholders/Adjusted Diluted Earnings Per Share (Non-GAAP); Return on Average Assets and Return on Average Equity to Adjusted Return on Average Assets and Adjusted Return on Average Equity; and Adjusted Operating Return on Average Tangible Common Equity (Non-GAAP) |
| For the year ended December 31, |
(In thousands, except per share data) | 2023 | 2022 | 2021 | 2020 | 2019 |
Net income available to common shareholders | $ | 9,505 | | $ | 85,030 | | $ | 89,264 | | $ | 77,588 | | $ | 81,718 | |
Less: income attributable to unvested stock-based compensations awards | (42) | | (250) | | (615) | | (857) | | (1,306) | |
Net earnings allocated to common shareholders (GAAP) | 9,463 | | 84,780 | | 88,649 | | 76,731 | | 80,412 | |
Diluted earnings per share (GAAP) | 0.66 | | 5.89 | | 6.05 | | 5.20 | | 5.37 | |
Adjustments for non-operating income and expense: | | | | | |
Loss (gain) on sale of investment securities | 70,019 | | 634 | | (249) | | (443) | | (645) | |
Purchase accounting related to redemption of trust preferred securities | 0 | | 0 | | 1,849 | | 0 | | 0 | |
Penalties on prepayment of FHLB borrowings | 0 | | 0 | | 2,929 | | 0 | | 0 | |
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Write-down of real estate pending sale | 0 | | 0 | | 0 | | 673 | | 0 | |
Total adjustments | 70,019 | | 634 | | 4,529 | | 230 | | (645) | |
Tax expense | 17,155 | | 155 | | 1,110 | | 56 | | (158) | |
Total adjustments, net of tax | 52,864 | | 479 | | 3,419 | | 174 | | (487) | |
Adjusted net income (Non-GAAP) | 62,369 | | 85,509 | | 92,683 | | 77,762 | | 81,231 | |
Net earnings allocated to common shareholders (Non-GAAP) | 62,327 | | 85,259 | | 92,068 | | 76,905 | | 79,925 | |
Weighted average shares outstanding (basic) | 14,254,661 | | 14,328,280 | | 14,568,763 | | 14,703,390 | | 14,907,057 | |
Weighted average shares outstanding (diluted) | 14,301,221 | | 14,404,294 | | 14,648,167 | | 14,751,303 | | 14,973,951 | |
Adjusted basic earnings per share (Non-GAAP) | 4.37 | | 5.95 | | 6.32 | | 5.23 | | 5.36 | |
Adjusted diluted earnings per share (Non-GAAP) | 4.36 | | 5.92 | | 6.29 | | 5.21 | | 5.34 | |
Net income available to common shareholders | 9,505 | | 85,030 | | 89,264 | | 77,588 | | 81,718 | |
Adjusted net income (Non-GAAP) | 62,369 | | 85,509 | | 92,683 | | 77,762 | | 81,231 | |
Average total assets | 7,641,672 | | 7,828,520 | | 7,968,951 | | 7,358,478 | | 6,679,578 | |
Return on average assets | 0.12 | % | 1.09 | % | 1.12 | % | 1.05 | % | 1.22 | % |
Adjusted return on average assets (Non-GAAP) | 0.82 | % | 1.09 | % | 1.16 | % | 1.06 | % | 1.22 | % |
Net income available to common shareholders | 9,505 | | 85,030 | | 89,264 | | 77,588 | | 81,718 | |
Adjusted net income (Non-GAAP) | 62,369 | | 85,509 | | 92,683 | | 77,762 | | 81,231 | |
Average total equity | 634,732 | | 641,725 | | 724,477 | | 699,554 | | 651,341 | |
Return on average equity | 1.50 | % | 13.25 | % | 12.32 | % | 11.09 | % | 12.55 | % |
Adjusted return on average equity (Non-GAAP) | 9.83 | % | 13.32 | % | 12.79 | % | 11.12 | % | 12.47 | % |
Net earnings allocated to common shareholders (Non-GAAP) | 62,327 | | 85,259 | | 92,068 | | 76,905 | | 79,925 | |
Average Tompkins Financial Corporation shareholders' equity (GAAP) | 633,267 | | 640,258 | | 723,009 | | 698,088 | | 649,871 | |
Amortization of intangibles | 334 | | 873 | | 1,317 | | 1,484 | | 1,673 | |
Tax expense | 82 | | 214 | | 323 | | 364 | | 410 | |
Amortization of intangibles, net of tax | 252 | | 659 | | 994 | | 1,120 | | 1,263 | |
Adjusted net operating income available to common shareholders' (Non-GAAP) | 62,579 | | 85,918 | | 93,062 | | 78,025 | | 81,188 | |
Average Tompkins Financial Corporation shareholders' equity | 633,267 | | 640,258 | | 723,009 | | 698,088 | | 649,871 | |
Average goodwill and intangibles | 94,169 | | 94,677 | | 95,719 | | 97,134 | | 98,104 | |
Average Tompkins Financial Corporation shareholders' tangible common equity (Non-GAAP) | $ | 539,098 | | $ | 545,581 | | $ | 627,290 | | $ | 600,954 | | $ | 551,767 | |
Adjusted operating return on average shareholders' tangible common equity (Non-GAAP) | 11.61 | % | 15.75 | % | 14.84 | % | 12.98 | % | 14.71 | % |
Newly Adopted Accounting Standards
ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting." The amendments in this update provide optional guidance for a limited period of time to ease the potential burden in accounting for (or recognizing the effects of) reference rate reform on financial reporting. It provides optional expedients and exceptions for applying U.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 March 12, 2020 through December 31, 2022. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
ASU 2022-01, "Derivatives and Hedging (Topic 815)" ("ASU 2022-01"): provides the disclosure requirements for derivatives and hedging activities with the intent to provide users of financial statements with an enhanced understanding of: (a) how and why an entity uses derivative instruments, (b) how the entity accounts for derivative instruments and related hedged items, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. Further, qualitative disclosures are required that explain the Company’s objectives and strategies for using derivatives, as well as quantitative disclosures about the fair value of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative instruments.
As required by ASU 2022-01, the Company records all derivatives on the balance sheet at fair value. The accounting for changes in the fair value of derivatives depends on the intended use of the derivative, whether the Company has elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Derivatives may also be designated as hedges of the foreign currency exposure of a net investment in a foreign operation. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge. The Company may enter into derivative contracts that are intended to economically hedge certain of its risk, even though hedge accounting does not apply or the Company elects not to apply hedge accounting.
In accordance with the FASB’s fair value measurement guidance in ASU 2011-04, the Company made an accounting policy election to measure the credit risk of its derivative financial instruments that are subject to master netting agreements on a net basis by counterparty portfolio.
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 became effective for the Company on January 1, 2023. The Company elected to apply the ASU on a modified retrospective basis to recognize any change in the allowance for credit losses that had been recognized for receivables previously modified (or reasonably expected to be modified) in a TDR. This election resulted in cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amount of the adjustment to retained earnings was a decrease of $64,000. See Note 5 to the Consolidated Financial Statements for changes in disclosures related to this adoption. The adoption of this standard did not have a material impact on our Consolidated Financial Statements.
ASU No. 2022-03, "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 2022-03 became effective for the Company on January 1, 2023. As there are no equity securities subject to contract sales during the current or prior year, the adoption of ASU 2022-03 had no effect on the financial statements for the current fiscal year, and the Company will apply the guidance prospectively to future acquisitions.
Accounting Standards Pending Adoption
ASU No. 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method." This update will allow reporting entities to consistently account for equity investments made primarily for the purpose of receiving income tax credits or other income tax benefits. This update applies this to all reporting entities that hold (1) tax equity investments that meet the conditions for and elect to account for them using the proportional amortization method or (2) an investment in a LIHTC structure through a limited liability entity that is not accounted for using the proportional amortization method and to which certain LIHTC specific guidance removed from Subtopic 323-740 has been applied. Additionally, the disclosure requirements apply to investments that generate income tax credits and other income tax benefits from a tax credit program for which the entity has elected to apply the proportional amortization method (including investments within that elected program that do not meet the conditions to apply the proportional amortization method). The amendments in this Update permit reporting entities to elect to account for their tax equity investments, regardless of the tax credit program from which the income tax credits are received, using the proportional amortization method if certain conditions are met. ASU 2023-02 is effective for fiscal years beginning after December 15, 2023 and interim periods in those years. The adoption of ASU 2023-02 is not expected to have a significant effect on the Company's financial statements.
ASU No. 2023-07, "Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures." The amendments in this Update improve financial reporting by requiring disclosure of incremental segment information on an annual and interim basis. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods in those years, and its adoption is not expected to have a significant effect on our financial statements.
ASU No. 2023-09, "Income Taxes (Topic 740) - Improvements to Income Tax Disclosures." The amendments in this Update related to the rate reconciliation and income taxes paid disclosures improve the transparency of income tax disclosures by requiring (1) consistent categories and greater disaggregation of information in the rate reconciliation and (2) income taxes paid disaggregated by jurisdiction. ASU 2023-09 is effective for fiscal years beginning after December 15, 2024 and interim periods in those years. Tompkins is currently evaluating the potential impact of ASU 2023-09 on our consolidated financial statements.
The Company reviewed new accounting standards as issued. Management has not identified any other new standards that it believes will have a significant impact on the Company’s financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Market Risk
Interest rate risk is the primary market risk category associated with the Company’s operations. Interest rate risk refers to the volatility of earnings caused by changes in interest rates. The Company manages interest rate risk using income simulation to measure interest rate risk inherent in its on-balance sheet and off-balance sheet financial instruments at a given point in time. The simulation models are used to estimate the potential effect of interest rate shifts on net interest income for future periods. Each quarter the Company’s Asset/Liability Management Committee reviews the simulation results to determine whether the exposure of net interest income to changes in interest rates remains within Board-approved levels. The Committee also considers strategies to manage this exposure and incorporates these strategies into the investment and funding decisions of the Company. The Company uses derivatives to manage various risks and to accommodate the business requirements of its customers. Additional information on derivatives is available in "Note 23 Derivatives and Hedging Activities" in Notes to Consolidated Financial Statements in Part II, "Item 8. Financial Statements and Supplementary Data" of this Report on Form 10-K.
The Company’s Board of Directors has set a policy that interest rate risk exposure will remain within a range whereby net interest income will not decline by more than 10% in one year as a result of a 100 basis point parallel change in rates. Based upon the most recent simulation analysis performed as of November 30, 2023, a 200 basis point parallel upward change in interest rates over a one-year time frame would result in a one-year decrease in net interest income from the base case of approximately 5.3%, while a 200 basis point parallel decline in interest rates over a one-year period would result in a one year increase in net interest income of 4.6% from the base case. This simulation assumes no balance sheet growth, no changes in balance sheet mix, deposit rates move in a manner that reflects the historical relationship between deposit rate movement and changes in Federal funds rate, and no management action to address balance sheet mismatches.
The decrease in net interest income in the rising rate scenario is a result of the balance sheet showing a more liability sensitive position over a one year time horizon. As such, in the short-term net interest income is expected to trend slightly below the base
assumption, as upward adjustments to rate sensitive deposits and short-term funding outpace increases to asset yields which are concentrated in intermediate to longer-term products. As intermediate and longer-term assets continue to reprice/adjust into higher rate environment and funding costs stabilize, the simulation shows net interest income is expected to trend upwards.
The down 200 basis point scenario increases net income slightly in the first year as a result of the Company's assets repricing downward to a lesser degree than the rates on the Company's interest-bearing liabilities, mainly deposits and overnight borrowings. The model assumes that prepayments accelerate in the down interest rate environment resulting in additional pressure on asset yields as proceeds are reinvested at lower rates.
The most recent simulation of a base case scenario, which in addition to the above assumptions, also assumes interest rates remain unchanged from the date of the simulation, reflects a net interest margin that is increasing slightly over the next 12 to 18 months.
Although the simulation model is useful in identifying potential exposure to interest rate movements, actual results may differ from those modeled as the repricing, maturity, balance sheet mix, and prepayment characteristics of financial instruments may change to a different degree than modeled. In addition, the model does not reflect actions that management may employ to manage its interest rate risk exposure. The Company’s current liquidity profile, capital position, and growth prospects, offer a level of flexibility for management to take actions that could offset some of the negative effects of unfavorable movements in interest rates. Management believes the current exposure to changes in interest rates is not significant in relation to the earnings and capital strength of the Company.
In addition to the simulation analysis, management uses an interest rate gap measure. Table 9-Interest Rate Risk Analysis below is a Condensed Static Gap Report, which illustrates the anticipated repricing intervals of assets and liabilities as of December 31, 2023. The Company’s one-year interest rate gap was a negative $836.6 million or 10.70% of total assets at December 31, 2023, compared with a negative $656.5 million or 8.56% of total assets at December 31, 2022. The change from year-end 2022 to year-end 2023 is mainly due to the increase in borrowings with the FHLB, which were used to support loan growth given the decrease in deposit balances year-over-year. A negative gap position exists when the amount of interest-bearing liabilities maturing or repricing exceeds the amount of interest-earning assets maturing or repricing within a particular time period. This analysis suggests that the Company’s net interest income is moderately at risk in an increasing rate environment over the next 12 months. An interest rate gap measure could be significantly affected by external factors such as a rise or decline in interest rates, loan or securities prepayments, and deposit withdrawals.
Table 9 - Interest Rate Risk Analysis
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Condensed Static Gap - December 31, 2023 | |
(In thousands) | Total | 0-3 months | 3-6 months | 6-12 months | 12 months |
Interest-earning assets1 | $ | 7,513,654 | | $ | 1,089,463 | | $ | 332,291 | | $ | 702,192 | | $ | 2,123,946 | |
Interest-bearing liabilities | 5,135,988 | | 2,436,139 | | 304,305 | | 220,067 | | 2,960,511 | |
Net gap position | | (1,346,676) | | 27,986 | | 482,125 | | (836,565) | |
Net gap position as a percentage of total assets | | (17.22) | % | 0.36 | % | 6.17 | % | (10.70) | % |
1Balances of available-for-sale debt securities are shown at amortized cost.
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Item 8. Financial Statements and Supplementary Data
Financial Statements and Supplementary Data consist of the consolidated financial statements and the unaudited quarterly financial data as indexed and presented below.
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Management’s Statement of Responsibility
Management is responsible for the preparation of the consolidated financial statements and related financial information contained in all sections of this annual report, including the determination of amounts that must necessarily be based on judgments and estimates. It is the belief of management that the consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.
Management establishes and monitors the Company’s system of internal accounting controls to meet its responsibility for reliable financial statements. The system is designed to provide reasonable assurance that assets are safeguarded, and that transactions are executed in accordance with management’s authorization and are properly recorded.
The Audit & Examining Committee of the board of directors, composed solely of outside directors, meets periodically and privately with management, internal auditors, and the independent registered public accounting firm, KPMG LLP, to review matters relating to the quality of financial reporting, internal accounting control, and the nature, extent, and results of audit efforts. The independent registered public accounting firm and internal auditors have unlimited access to the Audit/Examining Committee to discuss all such matters. The consolidated financial statements have been audited by KPMG LLP for the purpose of expressing an opinion on the consolidated financial statements. In addition, KPMG LLP has audited the Company's internal control over financial reporting, as of December 31, 2023.
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/s/ Stephen S. Romaine | | /s/ Matthew D. Tomazin | | Date: | February 29, 2024 |
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Stephen S. Romaine | | Matthew D. Tomazin | | | |
Chief Executive Officer | | Chief Financial Officer | | | |
| | Treasurer | | | |
Note 1 Summary of Significant Accounting Policies
Basis Of Presentation
Tompkins Financial Corporation ("Tompkins" or "the Company") is a registered Financial Holding Company with the Federal Reserve Board pursuant to the Bank Holding Company Act of 1956, as amended, organized under the laws of New York State. Effective January 1, 2022, the Company combined its four wholly-owned banking subsidiaries into one bank, with the Bank of Castile, Mahopac Bank, and VIST Bank merging with and into Tompkins Trust Company (the "Trust Company") with the Trust Company as the surviving institution. Immediately following the merger, the Trust Company changed its name to Tompkins Community Bank. Tompkins is the parent company of Tompkins Community Bank, and Tompkins Insurance Agencies, Inc. ("Tompkins Insurance"). Tompkins Community Bank provides a full array of trust and investment services under the Tompkins Financial Advisors brand. Unless the context otherwise requires, the term "Company" refers to Tompkins Financial Corporation and its subsidiaries.
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity (including comprehensive income or loss) of the Company and all entities in which the Company has a controlling financial interest. All significant intercompany balances and transactions are eliminated in consolidation.
The Company determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity under GAAP. Voting interest entities are entities in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make decisions about the entity’s activities. The Company consolidates voting interest entities in which it has all, or at least a majority of, the voting interest. As defined in applicable accounting standards, variable interest entities (VIEs) are entities that lack one or more of the characteristics of a voting interest entity. A controlling financial interest in a VIE is present when the Company has both the power and ability to direct the activities of the VIE that most significantly impact the VIE’s economic performance and an obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE.
The consolidated financial statements have been prepared in accordance with GAAP. In preparing the financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclose contingent assets and liabilities, at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the allowance for credit losses, valuation of goodwill and intangible assets, deferred income tax assets, and obligations related to employee benefits.
The consolidated financial information included herein combines the results of operations, the assets, liabilities, and shareholders’ equity of the Company and its subsidiaries. Amounts in the prior periods’ consolidated financial statements are reclassified when necessary to conform to the current periods’ presentation.
The Company has evaluated subsequent events for potential recognition and/or disclosure and determined that no further disclosures were required.
Cash and Cash Equivalents
Cash and cash equivalents in the Consolidated Statements of Cash Flows include cash and noninterest bearing balances due from banks, interest-bearing balances due from banks, Federal funds sold, and money market funds. Management regularly evaluates the credit risk associated with the counterparties to these transactions and believes that the Company is not exposed to any significant credit risk on cash and cash equivalents. Historically, banks have been required to maintain reserve balances by the Federal Reserve Bank. However, due to the COVID-19 pandemic, the Federal Reserve Board reduced reserve requirement ratios to zero percent effective March 26, 2020. The Federal Reserve Board has stated that it has no plans to re-impose reserve requirements, but that it may adjust reserve requirements ratios in the future if conditions warrant. At both December 31, 2023 and December 31, 2022, there were no reserve requirements for the Company's banking subsidiary.
Securities
Management determines the appropriate classification of debt securities at the time of purchase. Securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity debt securities are stated at amortized cost. Debt securities not classified as held-to-maturity debt securities are classified as either available-for-sale or trading. Available-for-sale debt securities are stated at fair value with the unrealized gains and losses, net of tax, excluded from earnings and reported as a separate component of accumulated comprehensive income or loss, in
shareholders’ equity. Trading securities are stated at fair value, with unrealized gains or losses included in earnings. Equity securities with a readily determinable fair value are reported at fair value with net unrealized gains and losses recognized in the consolidated statements of income. Certain equity securities that do not have a readily determinable fair value are stated at cost. Shares of stock of the Federal Home Loan Bank of New York, are also carried at cost.
Premiums and discounts are amortized or accreted over the expected life or call date of the related security as an adjustment to yield using the interest method. Dividend and interest income are recognized when earned. Realized gains and losses on the sale of securities are included in net gain (loss) on securities transactions. The cost of securities sold is based on the specific identification method.
Beginning January 1, 2020, for available-for-sale debt securities in an unrealized loss position, at least quarterly, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors. Any impairment that is not credit-related is recognized in other comprehensive income (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. However, if the Company intends to sell an impaired available-for-sale debt security or more likely than not will be required to sell such a security before recovering its amortized cost basis, the entire impairment amount must be recognized in earnings with a corresponding adjustment to the security’s amortized cost basis. Because the security’s amortized cost basis is adjusted to fair value, there is no ACL in this situation. Changes in the allowance for credit losses are recorded as provision (credit) for credit loss expense. Losses are charged against the ACL when management believes the uncollectability of an available-for-sale debt security is confirmed or when either of the criteria regarding intent or requirement to sell is met.
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.
Accrued interest receivable on securities is excluded from the estimate of credit losses.
Loans and Leases
Loans are reported at their principal outstanding balance, net of deferred loan origination fees and costs, and unearned income. The Company has the ability and intent to hold its loans for the foreseeable future, except for certain residential real estate loans held-for-sale. The Company provides motor vehicle and equipment financing to its customers through direct financing leases. These leases are carried at the aggregate of lease payments receivable, plus estimated residual values, less unearned income. Unearned income on direct financing leases is amortized over the lease terms, resulting in a level rate of return.
Residential real estate loans originated and intended for sale in the secondary market are carried at the lower of aggregate cost or estimated fair value. Fair value is determined on the basis of the rates quoted in the secondary market. Net unrealized losses attributable to changes in market interest rates are recognized through a valuation allowance by charges to income. Loans are generally sold on a non-recourse basis with servicing retained. Any gain or loss on the sale of loans is recognized at the time of sale as the difference between the recorded basis in the loan and the net proceeds from the sale. The Company may use commitments at the time loans are originated or identified for sale to mitigate interest rate risk. The commitments to sell loans and the commitments to originate loans held-for-sale at a set interest rate, if originated, are considered derivatives under Accounting Standard Codification ("ASC") Topic 815 Derivatives and Hedging. The impact of the estimated fair value adjustment was not significant to the consolidated financial statements.
Interest income on loans is accrued and credited to income based upon the principal amount outstanding. Loan origination fees and costs are deferred and recognized over the life of the loan as an adjustment to yield. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans and leases, including individually evaluated loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well secured and in the process of collection. Loans that are past due less than 90 days may also be classified as nonaccrual if repayment in full of principal or interest is in doubt.
Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable time period, and there is a sustained period (generally six consecutive months) of repayment performance by the borrower in accordance with the contractual terms of the loan agreement. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan.
In general, the principal balance of a loan is charged off in full or in part when management concludes, based on the available facts and circumstances, that collection of principal in full is not probable. For commercial and commercial real estate loans, this conclusion is generally based upon a review of the borrower’s financial condition and cash flow, payment history, economic conditions, and the conditions in the various markets in which the collateral, if any, may be liquidated. In general, consumer loans are charged-off in accordance with regulatory guidelines which provides that such loans be charged-off when the Company becomes aware of the loss, such as from a triggering event that may include new information about a borrower’s intent/ability to repay the loan, bankruptcy, fraud or death, among other things, but in no case will the charge-off exceed specified delinquency timeframes. Such delinquency timeframes state that closed-end retail loans (loans with pre-defined maturity dates, such as real estate mortgages, home equity loans and consumer installment loans) that become past due 120 cumulative days and open-end retail loans (loans that roll-over at the end of each term, such as home equity lines of credit) that become past due 180 cumulative days should be classified as a loss and charged-off. For residential real estate loans, charge-off decisions are based upon past due status, current assessment of collateral value, and general market conditions in the areas where the properties are located.
Acquired Loans
Acquired loans are recorded at fair value at the date of acquisition based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. Certain larger purchased loans are individually evaluated while other purchased loans are grouped together according to similar risk characteristics and are treated in the aggregate when applying various valuation techniques. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change.
Prior to January 1, 2020, loans acquired in a business combination that had evidence of deterioration of credit quality since origination and for which it was probable, at acquisition, that the Company would be unable to collect all contractually required payments receivable were considered purchased credit impaired ("PCI") loans. PCI loans were individually evaluated and recorded at fair value at the date of acquisition with no initial valuation allowance based on a discounted cash flow methodology that considered various factors including the type of loan and related collateral, classification status, fixed or variable interest rate, term of loan and whether or not the loan was amortizing, and a discount rate reflecting the Company’s assessment of risk inherent in the cash flow estimates. The difference between the undiscounted cash flows expected at acquisition and the investment in the loan, or the "accretable yield," was recognized as interest income on a level-yield method over the life of the loan. Contractually required payments for interest and principal that exceeded the undiscounted cash flows expected at acquisition, or the "non-accretable difference," were not recognized on the Statement of Condition and did not result in any yield adjustments, loss accruals or valuation allowances. Increases in expected cash flows, including prepayments, subsequent to the initial investment were recognized prospectively through adjustment of the yield on the loan over its remaining life. Decreases in expected cash flows were recognized as impairment. Valuation allowances on PCI loans reflected only losses incurred after the acquisition (meaning the present value of all cash flows expected at acquisition that ultimately were not to be received).
Commencing January 1, 2020, in connection with the Company's adoption of ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and its related amendments, loans acquired in a business combination that have experienced more-than-insignificant deterioration in credit quality since origination are considered purchased credit deteriorated ("PCD") loans. At the acquisition date, an estimate of expected credit losses is made for groups of PCD loans with similar risk characteristics and individual PCD loans without similar risk characteristics. This initial allowance for credit losses is allocated to individual PCD loans and added to the purchase price or acquisition date fair values to establish the initial amortized cost basis of the PCD loans. As the initial allowance for credit losses is added to the purchase price, there is no credit loss expense recognized upon acquisition of a PCD loan. Any difference between the unpaid principal balance of PCD loans and the amortized cost basis is considered to relate to noncredit factors and results in a discount or premium. Discounts and premiums are recognized through interest income on a level-yield method over the life of the loans. All loans considered to be PCI prior to January 1, 2020 were converted to PCD on that date.
The subsequent measurement of expected credit losses for all acquired loans is the same as the subsequent measurement of expected credit losses for originated loans.
Allowance for Credit Losses – Loans
The Company adopted ASU 2016-13 on January 1, 2020 using the modified retrospective approach. The Company recorded a net increase to retained earnings of $1.7 million, upon adoption. The transition adjustment includes a decrease in the allowance
for credit losses on loans of $2.5 million, and an increase in the allowance for credit losses on off-balance sheet credit exposures of $400,000, net of the corresponding decrease in deferred tax assets of $400,000. The following policies noted are under the current expected credit losses methodology. Under the current expected credit loss model, the ACL on loans is a valuation allowance estimated at the balance sheet date in accordance with GAAP that is deducted from the loans’ amortized cost basis to present the net amount expected to be collected on the loans.
The Company estimates the ACL on loans based on the underlying assets’ amortized cost basis, which is the amount at which the financing receivable is originated or acquired, adjusted for applicable accretion or amortization of premium, discount, collection of cash, and charge-offs. In the event that collection of principal becomes uncertain, the Company has policies in place to reverse accrued interest in a timely manner. Therefore, the Company has made a policy election to exclude accrued interest from the amortized cost basis.
Expected credit losses are reflected in the ACL through a charge to the provision for credit loss expense. When the Company deems all or a portion of a financial asset to be uncollectible, the appropriate amount is written off and the ACL is reduced by the same amount. In general, the principal balance of a loan is charged off in full or in part when management concludes, based on the available facts and circumstances, that collection of principal in full is not probable. In addition, the Company has reserves for expected recoveries where the Company reviews the prior four quarter charge offs and applies a recovery rate based on the Company’s historical experience. Subsequent recoveries, if any, are credited to the ACL when received.
The Company measures expected credit losses of financial assets at the loan level by segment, by pooling loans when the financial assets share similar risk characteristics. Depending on the nature of the pool of financial assets with similar risk characteristics, the Company uses a discounted cash flow ("DCF") method to estimate the expected credit losses. Allowance on loans that do not share risk characteristics are evaluated on an individual basis. The Company assigns a credit risk rating to all commercial and commercial real estate loans. The Company reviews commercial and commercial real estate loans rated Substandard or worse, on nonaccrual, and greater than $250,000 for loss potential and when deemed appropriate, assigns an allowance based on an individual evaluation.
The Company’s methodologies for estimating the ACL consider available relevant information about the collectability of cash flows, including information about past events, current conditions, and reasonable and supportable forecasts. The methodologies apply historical loss information, adjusted for asset-specific characteristics, economic conditions at the measurement date, and forecasts about future economic conditions expected to exist through the contractual lives of the financial assets that are reasonable and supportable, to the identified pools of financial assets with similar risk characteristics for which the historical loss experience was observed. The Company’s methodologies revert back to average historical loss information on a straight line basis over eight quarters when it can no longer develop reasonable and supportable forecasts.
The Company has identified the following pools of financial assets with similar risk characteristics for measuring expected credit losses: commercial, commercial real estate, residential, home equity, consumer and leases. This segmentation was selected based on the differences in the risk profile of each of these categories and aligns well with regulatory reporting categories. This segmentation separates borrower type, collateral type and the nature of the loan. The differences in risk profiles of these segments enable the ACL to be more precise in its allocation due to the inherent risk in these specific portfolios.
Discounted Cash Flow Method
The Company uses the DCF method to estimate expected credit losses for the commercial, commercial real estate, residential, home equity, and consumer loan pools. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for exposure at default using estimated prepayment speeds, time to recovery, probability of default, and loss given default. The modeling of expected prepayment speeds, and time to recovery are based on historical internal data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loan pools utilizing the DCF method, management utilizes and forecasts national unemployment and a one year percentage change in national gross domestic product as loss drivers in the model.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from an independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the
forecast metrics. The model considers a base case forecast and two alternative forecasts and assigns weightings to these three scenarios based on current conditions and expectations for future conditions.
The combination of adjustments for credit expectations (default and loss) and timing expectations (prepayment, curtailment, and time to recovery) produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce an instrument-level net present value of expected cash flows ("NPV"). An ACL is established for the difference between the instrument’s NPV and amortized cost basis.
The model also considers the need to qualitatively adjust expected loss estimates for information not already captured in the loss estimation process. These qualitative factors include, but are not limited to, those suggested by the Interagency Policy Statement on Allowances for Credit Losses. These qualitative factor adjustments may increase or decrease the Company's estimate of expected credit losses.
Due to the size and characteristics of the leasing portfolio, the remaining life method, using the historical loss rate of the commercial and industrial segment, is used to determine the allowance for credit losses.
Individually Evaluated Financial Assets
Loans that do not share common risk characteristics are evaluated on an individual basis. For collateral dependent financial assets where the Company has determined that foreclosure of the collateral is probable, or where the borrower is experiencing financial difficulty and the Company expects repayment of the financial asset to be provided substantially through the operation or sale of the collateral, the ACL is measured based on the difference between the fair value of the collateral less cost to sell, and the amortized cost basis of the asset as of the measurement date. The ACL may be zero if the fair value of the collateral at the measurement date exceeds the amortized cost basis of the financial asset.
The Company’s estimate of the ACL reflects losses expected over the remaining contractual life of the assets. The contractual term does not consider extensions, renewals or modifications unless the Company has identified an expected troubled debt restructuring.
For acquired credit impaired loans accounted for under FASB ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, ("ASC Topic 310-30"), the Company’s allowance for loan and lease losses was estimated based upon our expected cash flows for these loans. To the extent that we experienced a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.
For acquired non-credit impaired loans accounted for under FASB ASC Topic 310-20, Nonrefundable Fees and Other Costs, ("ASC Topic 310-20"), the Company’s allowance for loan and lease losses was maintained through provisions for loan losses based upon an evaluation process that was similar to our evaluation process used for originated loans. This evaluation, which included a review of loans on which full collectability may not be reasonably assured, it considered, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which included the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.
Loan Modifications
The Company adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous troubled debt restructuring ("TDR") accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, unused lines of credit and commercial letters of credit, issued to meet customer financing needs. The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.
The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to the provision for credit loss expense for off-balance sheet credit
exposures included in other noninterest expense in the Company’s Consolidated Statements of Income. The ACL on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using similar methodologies as portfolio loans, taking into consideration the likelihood that funding will occur, and is included in other liabilities on the Company’s Statements of Condition.
Premises and Equipment
Land is carried at cost. Premises and equipment are stated at cost, less allowances for depreciation. The provision for depreciation for financial reporting purposes is computed generally by the straight-line method at rates sufficient to write-off the cost of such assets over their estimated useful lives. Buildings are amortized over a period of 10-39 years, and furniture, fixtures, and equipment are amortized over a period of 2-20 years. Leasehold improvements are generally depreciated over the lesser of the lease term or the estimated lives of the improvements. Maintenance and repairs are charged to expense as incurred. Gains or losses on disposition are reflected in earnings.
Leases
The Company leases certain office facilities and office equipment under operating leases. The Company also own certain office facilities which it leases to outside parties under operating lessor leases; however, such leases are not significant. For operating leases other than those considered to be short-term, defined as leases of 12 months or less, the Company recognizes operating lease right-of-use ("ROU") assets and related lease liabilities at the time of lease commencement. ROU assets represent the Company's right to use the underlying asset for the lease term and the lease liabilities represent the Company's obligation to make lease payments under the leases. ROU assets and operating lease liabilities are reported as components of accrued interest and other assets and other liabilities, respectively, on our accompanying consolidated balance sheets. Leases with terms of 12 months or less are recognized in the income statement over the lease term.
In recognizing ROU assets and related lease liabilities, the Company accounts for lease and non-lease components (such as taxes,insurance, and common area maintenance costs) separately as such amounts are generally readily determinable under our lease contracts. To estimate the present value of lease payments over the expected lease term, the Company uses interest rates on advances from the FHLB at the time of commencement. The Company's lease term may include options to extend or terminate the leases when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term and is included net occupancy expense of premises in the Company consolidated statements of income.
Bank Owned Life Insurance
The Company owns life insurance policies on certain current and former employees and directors where the Bank is the beneficiary. Bank owned life insurance ("BOLI") is recorded at the amount that can be realized under the insurance contract at the balance sheet date, which is the cash surrender value (“CSV”) adjusted for other charges or other amounts due that are probable at settlement. Increases in the CSV of the policies, as well as the death benefits received, net of any CSV, are recorded in noninterest income, and are not subject to income taxes.
Other Real Estate Owned
Other real estate owned consists of properties formerly pledged as collateral to loans, which have been acquired by the Company through foreclosure proceedings or acceptance of a deed in lieu of foreclosure. Upon transfer of a loan to foreclosure status, an appraisal is generally obtained and any excess of the loan balance over the fair value, less estimated costs to sell, is charged against the allowance for credit losses. Expenses and subsequent adjustments to the fair value are treated as other operating expense.
Goodwill
Goodwill represents the excess of purchase price over the fair value of assets acquired in a transaction using purchase accounting. Goodwill has an indefinite useful life and is not amortized, but is tested for impairment. Goodwill impairment tests are performed on an annual basis or when events or circumstances dictate. On January 1, 2020, the Company adopted ASU 2017-04, "Intangibles - Goodwill and Other (Topic 350) - Simplifying the Test for Goodwill Impairment", which eliminates the entities requirement to compute the implied fair value. The Company tests goodwill annually as of December 31st. The Company has the option to perform a qualitative assessment of goodwill, which considers company-specific and economic characteristics that might impact its carrying value. If based on this qualitative assessment, it is more likely than not that the fair value of the reporting unit is less than its carrying amount, then a quantitative test (Step 1) is performed, which compares the fair value of the reporting unit to the carrying amount of the reporting unit in order to identify potential impairment. If the estimated fair value of a reporting unit exceeds its carrying amount, the goodwill of the reporting unit is not considered impaired. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business
combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting units.
Other Intangible Assets
Other intangible assets include core deposit intangibles, customer related intangibles, covenants not to compete, and mortgage servicing rights. Core deposit intangibles represent a premium paid to acquire a base of stable, low cost deposits in the acquisition of a bank, or a bank branch, using purchase accounting. The amortization period for core deposit intangible ranges from 5 to 10 years, using an accelerated method. The covenants not to compete are amortized on a straight-line basis over 3 to 6 years, while customer related intangibles are amortized on an accelerated basis over a range of 6 to 15 years. The amortization period is monitored to determine if circumstances require such periods to be revised. The Company periodically reviews its intangible assets for changes in circumstances that may indicate the carrying amount of the asset is impaired. The Company tests its intangible assets for impairment on an annual basis or more frequently if conditions indicate that an impairment loss has more likely than not been incurred.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred taxes are reviewed quarterly and reduced by a valuation allowance if, based upon the information available, it is more likely than not that some or all of the deferred tax assets will not be realized. Realization of deferred tax assets is dependent upon the generation of a sufficient level of future taxable income and recoverable taxes paid in prior years. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized. The Company’s policy is to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income.
Tax Credit Investments
The Company accounts for its investments in qualified affordable housing projects using the proportional amortization method. Under that method, the Company amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense. As of December 31, 2023 and 2022, the Company's remaining investment in qualified affordable housing projects, net of amortization totaled $2.3 million and $2.5 million, respectively.
Securities Sold Under Agreements to Repurchase
Securities sold under agreements to repurchase (repurchase agreements) are agreements in which the Company transfers the underlying securities to a third-party custodian’s account that explicitly recognizes the Company’s interest in the securities. The agreements are accounted for as secured financing transactions provided the Company maintains effective control over the transferred securities and meets other criteria as specified in FASB ASC Topic 860, Transfers and Servicing ("ASC Topic 860"). The Company’s agreements are accounted for as secured financings; accordingly, the transaction proceeds are reflected as liabilities and the securities underlying the agreements continue to be carried in the Company’s securities portfolio.
Treasury Stock
The cost of treasury stock is shown on the Consolidated Statements of Condition as a separate component of shareholders’ equity, and is a reduction to total shareholders’ equity. Shares are released from treasury at fair value, identified on an average cost basis.
Trust and Investment Services
Assets held in fiduciary or agency capacities for customers are not included in the accompanying Consolidated Statements of Condition, since such items are not assets of the Company. Fees associated with providing trust and investment services are included in noninterest income. Additional information on trust and investment fees is presented in Note 14 - "Revenue Recognition."
Earnings Per Share
Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year, exclusive of shares represented by the unvested portion of restricted stock and restricted stock units. Diluted earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of shares outstanding during the year plus the dilutive effect of the unvested portion of restricted stock and restricted stock units and stock issuable upon conversion of common stock equivalents (primarily stock options) or
certain other contingencies. The Company uses authoritative accounting guidance under ASC Topic 260, Earnings Per Share, which provides that unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities and shall be included in the computation of earnings per share pursuant to the two-class method. The Company has issued stock-based compensation awards that included restricted stock awards that contain such rights and are thus considered participating securities. The Company has also issued restricted stock awards that do not contain non-forfeitable rights to dividends or dividend equivalents.
Segment Reporting
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC Topic 280, "Segment Reporting". The three segments are: (i) banking ("Banking"), (ii) insurance ("Tompkins Insurance Agencies, Inc.") and (iii) wealth management ("Tompkins Financial Advisors"). The Company’s insurance services and wealth management services are managed separately from the Bank. Additional information on the segments is presented in Note 22- "Segment and Related Information."
Comprehensive Income (Loss)
For the Company, comprehensive income (loss) represents net income plus the net change in unrealized gains or losses on available-for-sale debt securities for the period (net of taxes), and the actuarial gain or loss and amortization of unrealized amounts in the Company’s defined-benefit retirement and pension plan, supplemental employee retirement plan, and post-retirement life and healthcare benefit plan (net of taxes), and is presented in the Consolidated Statements of Comprehensive Income (Loss) and Consolidated Statements of Changes in Shareholders’ Equity. Accumulated other comprehensive income (loss) represents the net unrealized gains or losses on available-for-sale debt securities (net of tax) and unrecognized net actuarial gain or loss, unrecognized prior service costs, and unrecognized net initial obligation (net of tax) in the Company’s defined-benefit retirement and pension plan, supplemental employee retirement plan, and post-retirement life and healthcare benefit plan.
Pension and Other Employee Benefits
The Company maintains noncontributory defined-benefit and defined contribution plans, which cover substantially all employees of the Company. In addition, the Company also maintains supplemental employee retirement plans for certain executives and a post-retirement life and healthcare plan. These plans are discussed in detail in Note 11 "Employee Benefit Plans". The Company incurs certain employment-related expenses associated with these plans. In order to measure the expense associated with these plans, various assumptions are made including the discount rate used to value certain liabilities, expected return on plan assets, anticipated mortality rates, and expected future healthcare costs. The assumptions are based on historical experience as well as current facts and circumstances. A third-party actuarial firm is used to assist management in measuring the expense and liability associated with the plans. The Company uses a December 31 measurement date for its plans. As of the measurement date, plan assets are determined based on fair value, generally representing observable market prices. The projected benefit obligation is primarily determined based on the present value of projected benefit distributions at an assumed discount rate.
The expenses associated with these plans are charged to current operating expenses. The Company recognizes an asset for a plan’s overfunded status or a liability for a plan’s underfunded status in the Company’s consolidated statements of condition, and recognizes changes in the funded status of these plans in comprehensive income, net of applicable taxes, in the year in which the change occurred.
Fair Value Measurements
The Company accounts for the provisions of FASB ASC Topic 820, Fair Value Measurements and Disclosures ("ASC Topic 820"), for financial assets and financial liabilities. ASC Topic 820 defines fair value, establishes a framework for measuring fair value in accordance with GAAP, and expands disclosures about fair value measurements. See Note 19 "Fair Value Measurements".
In general, fair values of financial instruments are based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among others.
Revenue Recognition
In general, for revenue not associated with financial instruments, guarantees and lease contracts, the Company applies the following steps when recognizing revenue from contracts with customers: (i) identify the contract, (ii) identify the performance obligations, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations and (v)
recognize revenue when a performance obligation is satisfied. Our contracts with customers are generally short term in nature, typically due within one year or less or cancellable by us or our customer upon a short notice period. Performance obligations for our customer contracts are generally satisfied at a single point in time, typically when the transaction is complete, or over time. For performance obligations satisfied over time, The Company primarily uses the output method, directly measuring the value of the products/services transferred to the customer, to determine when performance obligations have been satisfied. The Company typically receive payment from customers and recognize revenue concurrent with the satisfaction of our performance obligations. In most cases, this occurs within a single financial reporting period. For payments received in advance of the satisfaction of performance obligations, revenue recognition is deferred until such time as the performance obligations have been satisfied. In cases where we have not received payment despite satisfaction of our performance obligations, we accrue an estimate of the amount due in the period our performance obligations have been satisfied. For contracts with variable components, only amounts for which collection is probable are accrued. The Company generally act in a principal capacity, on our own behalf, in most of our contracts with customers. In such transactions, The Company recognizes revenue and the related costs to provide our services on a gross basis in our financial statements. In some cases, The Company acts in an agent capacity, deriving revenue through assisting other entities in transactions with our customers. In such transactions, The Company recognizes revenue and the related costs to provide our services on a net basis in our financial statements. These transactions recognized on a net basis primarily relate to insurance and brokerage commissions and fees derived from our customers' use of various interchange and ATM/debit card networks. Refer to Note 14 "Revenue Recognition" for additional disclosures.
Note 2 Securities
Available-for-Sale Debt Securities
The following tables summarize available-for-sale debt securities held by the Company at December 31, 2023 and 2022:
| | | | | | | | | | | | | | |
December 31, 2023 | Available-for-Sale Debt Securities |
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
U.S. Treasuries | $ | 114,418 | | $ | 495 | | $ | 5,009 | | $ | 109,904 | |
Obligations of U.S. Government sponsored entities | 472,286 | | 6,449 | | 22,277 | | 456,458 | |
Obligations of U.S. states and political subdivisions | 89,999 | | 2 | | 8,077 | | 81,924 | |
Mortgage-backed securities – residential, issued by | | | | |
U.S. Government agencies | 49,976 | | 8 | | 4,744 | | 45,240 | |
U.S. Government sponsored entities | 819,303 | | 2,422 | | 100,895 | | 720,830 | |
| | | | |
U.S. corporate debt securities | 2,500 | | 0 | | 206 | | 2,294 | |
Total available-for-sale debt securities | $ | 1,548,482 | | $ | 9,376 | | $ | 141,208 | | $ | 1,416,650 | |
| | | | | | | | | | | | | | |
December 31, 2022 | Available-for-Sale Debt Securities |
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
U.S. Treasuries | $ | 190,170 | | $ | 0 | | $ | 22,919 | | $ | 167,251 | |
Obligations of U.S. Government sponsored entities | 681,192 | | 0 | | 80,025 | | 601,167 | |
Obligations of U.S. states and political subdivisions | 93,599 | | 8 | | 8,326 | | 85,281 | |
Mortgage-backed securities – residential, issued by | | | | |
U.S. Government agencies | 58,727 | | 12 | | 6,071 | | 52,668 | |
U.S. Government sponsored entities | 805,603 | | 0 | | 119,381 | | 686,222 | |
| | | | |
U.S. corporate debt securities | 2,500 | | 0 | | 122 | | 2,378 | |
Total available-for-sale debt securities | $ | 1,831,791 | | $ | 20 | | $ | 236,844 | | $ | 1,594,967 | |
Held-to-Maturity Debt Securities
The following tables summarize held-to-maturity debt securities held by the Company at December 31, 2023 and 2022:
| | | | | | | | | | | | | | |
December 31, 2023 | Held-to-Maturity Debt Securities |
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
U.S. Treasuries | $ | 86,266 | | $ | 0 | | $ | 11,051 | | $ | 75,215 | |
Obligations of U.S. Government sponsored entities | 226,135 | | $ | 0 | | 33,895 | | 192,240 | |
Total held-to-maturity debt securities | $ | 312,401 | | $ | 0 | | $ | 44,946 | | $ | 267,455 | |
| | | | | | | | | | | | | | |
December 31, 2022 | Held-to-Maturity Debt Securities |
(In thousands) | Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value |
U.S. Treasuries | $ | 86,478 | | $ | 0 | | $ | 12,937 | | $ | 73,541 | |
Obligations of U.S. Government sponsored entities | 225,866 | | 0 | | 37,715 | | 188,151 | |
Total held-to-maturity debt securities | $ | 312,344 | | $ | 0 | | $ | 50,652 | | $ | 261,692 | |
The following table sets forth information with regard to sales transactions of available-for-sale debt securities:
| | | | | | | | | | | |
| Year ended December 31, |
(In thousands) | 2023 | 2022 | 2021 |
Proceeds from sales | $ | 440,488 | | $ | 160,638 | | $ | 142,679 | |
Gross realized gains | 0 | | 0 | | 1,126 | |
Gross realized losses | (69,983) | | (11,916) | | (851) | |
Net (loss) gain on sales of available-for-sale debt securities | $ | (69,983) | | $ | (11,916) | | $ | 275 | |
The Company's available-for-sale and held-to-maturity debt securities portfolios includes callable securities that may be called prior to maturity. The Company recognized $0 gains on called securities for the years ending December 31, 2023, 2022 and 2021. The Company also recognized net gains of $10,000 and net losses of $125,000 and $26,000 on equity securities for the years ended December 31, 2023, December 31, 2022 and December 31, 2021, respectively, reflecting the change in fair value.
In the fourth quarter of 2022, the Company sold its VISA Class B common shares for $11.4 million. The shares had no carrying value on the Company's consolidated statement of condition, and the Company had no historical cost basis in the shares, thus the $11.4 million was realized as a pre-tax gain. The Company received the shares as part of its membership interest in VISA in March 2008.
The following table summarizes available-for-sale debt securities that had unrealized losses at December 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2023 | Available-for-Sale Debt Securities |
| Less than 12 Months | 12 Months or Longer | Total |
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
U.S. Treasuries | $ | 0 | | $ | 0 | | $ | 65,663 | | $ | 5,009 | | $ | 65,663 | | $ | 5,009 | |
Obligations of U.S. Government sponsored entities | 14,453 | | 110 | | 220,913 | | 22,167 | | 235,366 | | 22,277 | |
Obligations of U.S. states and political subdivisions | 10,572 | | 106 | | 69,601 | | 7,971 | | 80,173 | | 8,077 | |
Mortgage-backed securities – residential, issued by | | | | | | |
U.S. Government agencies | 1,145 | | 4 | | 43,764 | | 4,740 | | 44,909 | | 4,744 | |
U.S. Government sponsored entities | 5,659 | | 66 | | 609,456 | | 100,829 | | 615,115 | | 100,895 | |
U.S. corporate debt securities | 0 | | 0 | | 2,294 | | 206 | | 2,294 | | 206 | |
Total available-for-sale debt securities | $ | 31,829 | | $ | 286 | | $ | 1,011,691 | | $ | 140,922 | | $ | 1,043,520 | | $ | 141,208 | |
The following table summarizes held-to-maturity debt securities that had unrealized losses at December 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2023 | Held-to-Maturity Debt Securities |
| Less than 12 Months | 12 Months or Longer | Total |
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
U.S. Treasuries | $ | 0 | | $ | 0 | | $ | 75,215 | | $ | 11,051 | | $ | 75,215 | | $ | 11,051 | |
Obligations of U.S. Government sponsored entities | 0 | | 0 | | 192,240 | | 33,895 | | 192,240 | | 33,895 | |
Total held-to-maturity debt securities | $ | 0 | | $ | 0 | | $ | 267,455 | | $ | 44,946 | | $ | 267,455 | | $ | 44,946 | |
Within the available-for-sale and held-to-maturity portfolios, the total number of securities in an unrealized loss position were 572 and 635 at December 31, 2023 and 2022, respectively.
The following table summarizes available-for-sale debt securities that had unrealized losses at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | Available-for-Sale Debt Securities |
| Less than 12 Months | 12 Months or Longer | Total |
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
U.S. Treasuries | $ | 28,602 | | $ | 2,132 | | $ | 138,649 | | $ | 20,787 | | $ | 167,251 | | $ | 22,919 | |
Obligations of U.S. Government sponsored entities | 143,794 | | 7,508 | | 457,373 | | 72,517 | | 601,167 | | 80,025 | |
Obligations of U.S. states and political subdivisions | 46,638 | | 2,385 | | 33,435 | | 5,941 | | 80,073 | | 8,326 | |
Mortgage-backed securities – residential, issued by | | | | | | |
U.S. Government agencies | 22,945 | | 1,258 | | 29,356 | | 4,813 | | 52,301 | | 6,071 | |
U.S. Government sponsored entities | 186,690 | | 16,869 | | 499,532 | | 102,512 | | 686,222 | | 119,381 | |
U.S. corporate debt securities | 0 | | 0 | | 2,378 | | 122 | | 2,378 | | 122 | |
Total available-for-sale debt securities | $ | 428,669 | | $ | 30,152 | | $ | 1,160,723 | | $ | 206,692 | | $ | 1,589,392 | | $ | 236,844 | |
The following table summarizes held-to-maturity debt securities that had unrealized losses at December 31, 2022:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | Held-to-Maturity Debt Securities |
| Less than 12 Months | 12 Months or Longer | Total |
(In thousands) | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses | Fair Value | Unrealized Losses |
U.S. Treasuries | $ | 0 | | $ | 0 | | $ | 73,542 | | $ | 12,937 | | $ | 73,542 | | $ | 12,937 | |
Obligations of U.S. Government sponsored entities | 24,543 | | 3,903 | | 163,607 | | 33,812 | | 188,150 | | 37,715 | |
Total held-to-maturity debt securities | $ | 24,543 | | $ | 3,903 | | $ | 237,149 | | $ | 46,749 | | $ | 261,692 | | $ | 50,652 | |
The Company evaluates available-for-sale debt securities for expected credit losses ("ECL") in unrealized loss positions at each measurement date to determine whether the decline in the fair value below the amortized cost basis (impairment) is due to credit-related factors or noncredit-related factors.
Factors that may be indicative of ECL include, but are not limited to, the following:
•Extent to which the fair value is less than the amortized cost basis.
•Adverse conditions specifically related to the security, an industry, or geographic area (changes in technology, business practice).
•Payment structure of the debt security with respect to underlying issuer or obligor.
•Failure of the issuer to make scheduled payment of principal and/or interest.
•Changes to the rating of a security or issuer by a nationally recognized statistical rating organization.
•Changes in tax or regulatory guidelines that impact a security or underlying issuer.
For available-for-sale debt securities in an unrealized loss position, the Company evaluates the securities to determine whether the decline in the fair value below the amortized cost basis (technical impairment) is the result of changes in interest rates or reflects a fundamental change in the credit worthiness of the underlying issuer. Any impairment that is not credit related is recognized in other comprehensive income (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.
Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type with each type sharing similar risk characteristics and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Management has made the accounting policy election to exclude accrued interest receivable on held-to-maturity debt securities from the estimate of credit losses. As of December 31, 2023, the held-to- maturity portfolio consisted of U.S. Treasury securities and securities issued by U.S. government-sponsored enterprises, including The Federal National Mortgage Agency and the Federal Farm Credit Banks Funding Corporation. U.S. Treasury securities are backed by the full faith and credit of and/or guaranteed by the U.S. government, and it is expected that the securities will not be settled at prices less than the amortized cost bases of the securities. Securities issued by U.S. government agencies or U.S. government-sponsored enterprises carry the explicit and/or implicit guarantee of the U.S. government, are widely recognized as "risk-free," and have a long history of zero credit loss. As such, the Company did not record an allowance for credit losses for these securities as of December 31, 2023.
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. The gross unrealized losses reported for available-for-sale residential mortgage-backed securities relate to investment securities issued by U.S. government sponsored entities such as Federal National Mortgage Association, FHLMC and U.S. government agencies such as Government National Mortgage Association. The gross unrealized losses for held-to-maturity debt securities are on US Treasuries and securities issued by U.S. government-sponsored enterprises, including The Federal National Mortgage Agency and the Federal Farm Credit Banks Funding Corporation.
The Company did not recognize any net credit impairment charge to earnings on investment securities in 2023, 2022, or 2021.
The amortized cost and estimated fair value of debt securities by contractual maturity are shown in the following table. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities are shown separately since they are not due at a single maturity date.
| | | | | | | | |
December 31, 2023 | | |
(In thousands) | Amortized Cost | Fair Value |
Available-for-sale debt securities: | | |
Due in one year or less | $ | 99,242 | | $ | 98,650 | |
Due after one year through five years | 307,093 | | 296,279 | |
Due after five years through ten years | 245,617 | | 233,569 | |
Due after ten years | 27,251 | | 22,082 | |
Total | 679,203 | | 650,580 | |
Mortgage-backed securities | 869,279 | | 766,070 | |
Total available-for-sale debt securities | $ | 1,548,482 | | $ | 1,416,650 | |
| | | | | | | | |
December 31, 2022 | | |
(In thousands) | Amortized Cost | Fair Value |
Available-for-sale debt securities: | | |
Due in one year or less | $ | 50,922 | | $ | 50,269 | |
Due after one year through five years | 508,880 | | 459,721 | |
Due after five years through ten years | 367,743 | | 314,408 | |
Due after ten years | 39,916 | | 31,679 | |
Total | 967,461 | | 856,077 | |
Mortgage-backed securities | 864,330 | | 738,890 | |
Total available-for-sale debt securities | $ | 1,831,791 | | $ | 1,594,967 | |
| | | | | | | | |
December 31, 2023 | | |
(In thousands) | Amortized Cost | Fair Value |
Held-to-maturity debt securities: | | |
| | |
| | |
Due after five years through ten years | $ | 312,401 | | $ | 267,455 | |
| | |
Total held-to-maturity debt securities | $ | 312,401 | | $ | 267,455 | |
| | | | | | | | |
December 31, 2022 | | |
(In thousands) | Amortized Cost | Fair Value |
Held-to-maturity debt securities: | | |
| | |
| | |
Due after five years through ten years | $ | 312,344 | | $ | 261,692 | |
| | |
Total held-to-maturity debt securities | $ | 312,344 | | $ | 261,692 | |
Trading Securities
The Company had no securities designated as trading during 2023 or 2022.
Pledged Securities
The Company pledges securities as collateral for public deposits and other borrowings, and sells securities under agreements to repurchase. See "Note 8 - Federal Funds Purchased and Securities Sold Under Agreements to Repurchase" for further
discussion. Securities carried of $1.0 billion and $1.8 billion, at December 31, 2023 and 2022, respectively, were either pledged or sold under agreements to repurchase.
Concentrations of Securities
Except for U.S. government securities, there were no holdings, when taken in the aggregate, of any single issuer that exceeded 10% of shareholders’ equity at December 31, 2023.
Equity Securities
The Company invests in one CRA qualified equity fund. This security is carried at fair value.
Investment in Small Business Investment Companies
The Company has equity investments in small business investment companies ("SBIC") established for the purpose of providing financing to small businesses in market areas served by the Company. These investments totaled $0.5 million and $1.5 million at December 31, 2023 and 2022, respectfully, and were included in other assets on the Company’s Consolidated Statements of Condition. These investments are accounted for either under the cost method or the equity method of accounting. As of December 31, 2023, the Company reviewed these investments and determined that there was no impairment.
Federal Home Loan Bank Stock
The Company also holds non-marketable Federal Home Loan Bank New York ("FHLBNY") stock and non-marketable Atlantic Community Bankers Bank ("ACBB") stock, all of which are required to be held for regulatory purposes and for borrowing availability. The required investment in FHLB stock is tied to the Company’s borrowing levels with the FHLB. Holdings of FHLBNY stock and ACBB stock totaled $33.6 million, and $95,000 at December 31, 2023, respectively. These securities are carried at par, which is also cost. The FHLBNY continues to pay dividends and repurchase stock. As such, the Company has not recognized any impairment on its holdings of FHLBNY.
Note 3 Loans and Leases
Loans and Leases at December 31, 2023 and December 31, 2022 were as follows:
| | | | | | | | |
| Year ended December 31, |
(In thousands) | 2023 | 2022 |
Commercial and industrial | | |
Agriculture | $ | 101,211 | | $ | 85,073 | |
Commercial and industrial other | 721,890 | | 705,700 | |
PPP loans | 404 | | 756 | |
Subtotal commercial and industrial | 823,505 | | 791,529 | |
Commercial real estate | | |
Construction | 303,406 | | 201,116 | |
Agriculture | 221,670 | | 214,963 | |
Commercial real estate other | 2,587,591 | | 2,437,339 | |
Subtotal commercial real estate | 3,112,667 | | 2,853,418 | |
Residential real estate | | |
Home equity | 188,316 | | 188,623 | |
Mortgages | 1,373,275 | | 1,346,318 | |
Subtotal residential real estate | 1,561,591 | | 1,534,941 | |
Consumer and other | | |
Indirect | 841 | | 2,224 | |
Consumer and other | 96,942 | | 75,412 | |
Subtotal consumer and other | 97,783 | | 77,636 | |
Leases | 15,383 | | 16,134 | |
Total loans and leases | $ | 5,610,929 | | $ | 5,273,658 | |
Less: unearned income and deferred costs and fees | (4,994) | | (4,747) | |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 5,605,935 | | $ | 5,268,911 | |
The Company has adopted comprehensive lending policies, underwriting standards and loan review procedures. There were no significant changes to the Company’s existing lending policies, underwriting standards or loan review procedures during 2023. 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.
Residential real estate loans
The Company’s policy is to underwrite residential real estate loans in accordance with secondary market guidelines in effect at the time of origination, including loan-to-value ("LTV") and documentation requirements. LTVs exceeding 80% for fixed rate loans and 80% for adjustable rate loans require private mortgage insurance to reduce the exposure. The Company verifies applicants’ income, obtains credit reports and independent real estate appraisals in the underwriting process to ensure adequate collateral coverage and that loans are extended to individuals with good credit and income sufficient to repay the loan. In limited circumstances, the Company will make exceptions to secondary market underwriting standards to support community reinvestment activities.
The Company originates fixed rate and adjustable rate residential mortgage loans, including loans that have characteristics of both, such as a 7/6 adjustable rate mortgage, which has a fixed rate for the first seven years and then adjusts semi-annually thereafter. The majority of residential mortgage loans originated over the last several years have been fixed rate loans. Adjustment rate loans have increased in popularity due to the rising interest rate environment. Adjustable rate residential real estate loans are underwritten based upon the initial rate when the fixed rate period is 5 years or longer. For loans with an initial fixed rate of less than 5 years, the fully indexed rate is utilized for the ability to repay qualifying and underwriting. This underwriting practice matches secondary market guidelines.
The Company may sell residential real estate loans in the secondary market based on interest rate considerations. These residential real estate loans are generally sold to FHLMC or SONYMA without recourse in accordance with standard secondary market loan sale agreements. These residential real estate loan sales are subject to customary representations and warranties, including representations and warranties related to gross incompetence and fraud. The Company has not had to repurchase any loans as a result of these general representations and warranties.
During 2023, 2022, and 2021, the Company sold residential mortgage loans totaling $4.5 million, $8.9 million, and $31.5 million, respectively, and realized net gains on these sales of $96,000, $155,000, and $943,000, respectively. These residential real estate loans are generally sold without recourse in accordance with standard secondary market loan sale agreements. When residential mortgage loans are sold to FHLMC or SONYMA, the Company typically retains all servicing rights, which provides the Company with a source of fee income. In connection with the sales in 2023, 2022, and 2021, the Company recorded mortgage-servicing assets of $34,000, $66,000, and $236,000, respectively. The loans sold to FHLMC and SONYMA were originated with the intent to sell.
Amortization of mortgage servicing assets amounted to $81,000 in 2023, $128,000 in 2022, and $182,000 in 2021. At December 31, 2023 and 2022, the Company serviced residential mortgage loans aggregating $130.4 million and $137.5 million, including loans securitized and held as available-for-sale debt securities. Mortgage servicing rights, at an amortized cost basis, totaled $927,000 at December 31, 2023 and $1.0 million at December 31, 2022. These mortgage servicing rights were evaluated for impairment at year-end 2023 and 2022 and no impairment was recognized. Loans held for sale, which are included in residential real estate, totaled $602,000 and $0 at December 31, 2023 and 2022, respectively.
As members of the FHLB, the Company’s subsidiary bank may use unencumbered mortgage related assets to secure borrowings from the FHLB. At December 31, 2023 and 2022, the Company had $125.0 million and $50.0 million, respectively, of term advances from the FHLB that were secured by residential mortgage loans.
Commercial and industrial loans
The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial and industrial loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral and personal or government guarantees. The Company’s policy establishes debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial and industrial loans are generally secured by the assets being financed or other business assets such as accounts receivable or inventory. Many of the loans in the commercial portfolio have variable interest rates tied to Prime Rate, FHLBNY borrowing rates, SOFR, or U.S. Treasury indices.
Commercial real estate
The Company’s Commercial Loan Policy sets forth guidelines for debt service coverage ratios, LTV’s and documentation standards. Commercial real estate loans are primarily made based on identified cash flows of the borrower with consideration given to underlying real estate collateral and personal or government guarantees. The Company’s policy establishes a maximum LTV based on the type of property and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt. Commercial real estate loans may be fixed or variable rate loans with interest rates tied to Prime Rate, FHLBNY borrowing rates, SOFR, or U.S. Treasury indices.
Agriculture loans
Agriculturally-related loans include loans to dairy farms, cash and vegetable crop farms and a variety of other livestock and crop producers. Agriculturally-related loans are primarily made based on identified cash flows of the borrower with consideration given to underlying collateral, personal guarantees, and government related guarantees. Agriculturally-related loans are generally secured by the assets or property being financed or other business assets such as accounts receivable, livestock, equipment, or commodities/crops. The Company’s policy establishes a maximum LTV based on the type of property and debt service coverage ratio limits that require a borrower’s cash flow to be sufficient to cover principal and interest payments on all new and existing debt, with limited adjustments to consider commodity market cycles. The policy also establishes maximum LTV ratios for non-real estate collateral, such as livestock, commodities/crops, equipment and accounts receivable. Agriculturally-related loans may be fixed or variable rate with interest tied to Prime Rate, FHLBNY borrowing rates, SOFR, or U.S. Treasury indices.
Consumer and other loans
The consumer loan portfolio includes indirect and direct loans relating to personal installment loans, automobile financing, and overdraft lines of credit. The majority of the consumer portfolio consists of indirect and direct automobile loans. Consumer loans are generally short-term and have fixed rates of interest that are set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets. The Company's Consumer Loan Underwriting Guidelines Policy establishes maximum debt to income ratios and includes guidelines for verification of applicants’ income and receipt of credit reports.
Leases
Leases are primarily made to commercial customers and the origination criteria typically includes the value of the underlying assets being financed, the useful life of the assets being financed, and identified cash flows of the borrower. Most leases carry a fixed rate of interest that is set giving consideration to current market interest rates, the financial strength of the borrower, and internal profitability targets.
Loan and Lease Customers
The Company’s loan and lease customers are located primarily in the upstate New York and Pennsylvania communities served by Tompkins Community Bank. The Bank operates twelve banking offices in the counties of Tompkins, Cayuga, Cortland, Onondaga and Schuyler, New York; fifteen banking offices in the counties of Wyoming, Livingston, Genesee, Orleans and Monroe, New York; thirteen banking offices in the counties of Putnam County, Dutchess County and Westchester, New York; and sixteen offices in the counties of Berks, Montgomery, Philadelphia, Delaware and Schuylkill, Pennsylvania. Other than general economic risks, management is not aware of any material concentrations of credit risk to any industry or individual borrower.
Loans to Related Parties
Directors and officers of the Company and its affiliated companies were customers of, and had other transactions with, the Company's banking subsidiaries in the ordinary course of business. Such loans and commitments were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons not related to the Company, and did not involve more than normal risk of collectability or present other unfavorable features.
Nonaccrual Loans and Leases
Loans are considered past due if the required principal and interest payments have not been received as of the date such payments are due. Loans are placed on nonaccrual status either due to the delinquency status of principal and/or interest (generally when past due 90 or more days) or a judgment by management that the full repayment of principal and interest is unlikely. When interest accrual is discontinued, all unpaid accrued interest is reversed. Payments received on loans on nonaccrual are generally applied to reduce the principal balance of the loan. Loans are generally returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. When management determines that the collection of principal in full is improbable, management will charge-off a partial amount or full amount of the loan balance. Management considers specific facts and circumstances relative to each individual credit in
making such a determination. For residential and consumer loans, management uses specific regulatory guidance and thresholds for determining charge-offs.
The below table is an aging analysis of past due loans, segregated by class of loans as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2023 | | | | | | |
(In thousands) | 30-59 Days | 60-89 Days | 90 Days or More | Total Past Due | Current Loans | Total Loans |
Loans and Leases | | | | | | |
Commercial and industrial | | | | | | |
Agriculture | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 101,211 | | $ | 101,211 | |
Commercial and industrial other | 389 | | 887 | 2,124 | | 3,400 | | 718,490 | | 721,890 | |
PPP loans | 0 | | 0 | 0 | | 0 | | 404 | | 404 | |
Subtotal commercial and industrial | 389 | 887 | 2,124 | 3,400 | 820,105 | 823,505 |
Commercial real estate | | | | | | |
Construction | 0 | | 0 | 0 | | 0 | | 303,406 | | 303,406 | |
Agriculture | 61 | | 0 | 0 | | 61 | | 221,609 | | 221,670 | |
Commercial real estate other | 290 | | 0 | 25,056 | | 25,346 | | 2,562,245 | | 2,587,591 | |
Subtotal commercial real estate | 351 | 0 | 25,056 | 25,407 | 3,087,260 | 3,112,667 |
Residential real estate | | | | | | |
Home equity | 466 | | 211 | 1,968 | | 2,645 | | 185,671 | | 188,316 | |
Mortgages | 1,353 | | 111 | 6,916 | | 8,380 | | 1,364,895 | | 1,373,275 | |
Subtotal residential real estate | 1,819 | 322 | 8,884 | 11,025 | 1,550,566 | 1,561,591 |
Consumer and other | | | | | | |
Indirect | 7 | | 11 | 11 | | 29 | | 812 | | 841 | |
Consumer and other | 302 | | 122 | 270 | | 694 | | 96,248 | | 96,942 | |
Subtotal consumer and other | 309 | | 133 | 281 | | 723 | | 97,060 | | 97,783 | |
Leases | 0 | | 0 | 0 | | 0 | | 15,383 | | 15,383 | |
Total loans and leases | $ | 2,868 | | $ | 1,342 | | $ | 36,345 | | $ | 40,555 | | $ | 5,570,374 | | $ | 5,610,929 | |
Less: unearned income and deferred costs and fees | 0 | | 0 | 0 | | 0 | | (4,994) | | (4,994) | |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 2,868 | | $ | 1,342 | | $ | 36,345 | | $ | 40,555 | | $ | 5,565,380 | | $ | 5,605,935 | |
| | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | |
(In thousands) | 30-59 Days | 60-89 Days | 90 Days or More | Total Past Due | Current Loans | Total Loans |
Loans and Leases | | | | | | |
Commercial and industrial | | | | | | |
Agriculture | $ | 58 | | $ | 0 | | $ | 0 | | $ | 58 | | $ | 85,015 | | $ | 85,073 | |
Commercial and industrial other | 50 | | 381 | | 82 | | 513 | | 705,187 | | 705,700 | |
PPP loans | 0 | | 0 | | 0 | | 0 | | 756 | | 756 | |
Subtotal commercial and industrial | 108 | | 381 | | 82 | | 571 | | 790,958 | | 791,529 | |
Commercial real estate | | | | | | |
Construction | 0 | | 0 | | 0 | | 0 | | 201,116 | | 201,116 | |
Agriculture | 128 | | 0 | | 0 | | 128 | | 214,835 | | 214,963 | |
Commercial real estate other | 0 | | 0 | | 11,449 | | 11,449 | | 2,425,890 | | 2,437,339 | |
Subtotal commercial real estate | 128 | | 0 | | 11,449 | | 11,577 | | 2,841,841 | | 2,853,418 | |
Residential real estate | | | | | | |
Home equity | 435 | | 204 | | 1,628 | | 2,267 | | 186,356 | | 188,623 | |
Mortgages | 1,748 | | 0 | | 6,802 | | 8,550 | | 1,337,768 | | 1,346,318 | |
Subtotal residential real estate | 2,183 | | 204 | | 8,430 | | 10,817 | | 1,524,124 | | 1,534,941 | |
Consumer and other | | | | | | |
Indirect | 66 | | 31 | | 53 | | 150 | | 2,074 | | 2,224 | |
Consumer and other | 52 | | 19 | | 112 | | 183 | | 75,229 | | 75,412 | |
Subtotal consumer and other | 118 | | 50 | | 165 | | 333 | | 77,303 | | 77,636 | |
Leases | 0 | | 0 | | 0 | | 0 | | 16,134 | | 16,134 | |
Total loans and leases | $ | 2,537 | | $ | 635 | | $ | 20,126 | | $ | 23,298 | | $ | 5,250,360 | | $ | 5,273,658 | |
Less: unearned income and deferred costs and fees | 0 | | 0 | | 0 | | 0 | | (4,747) | | (4,747) | |
Total loans and leases, net of unearned income and deferred costs and fees | $ | 2,537 | | $ | 635 | | $ | 20,126 | | $ | 23,298 | | $ | 5,245,613 | | $ | 5,268,911 | |
The following table presents the amortized cost basis of loans on nonaccrual status and the amortized cost basis of loans on nonaccrual status for which there was no related allowance for credit losses:
| | | | | | | | | | | |
December 31, 2023 | | | |
(In thousands) | Nonaccrual Loans and Leases with no ACL | Nonaccrual Loans and Leases | Loans and Leases Past Due Over 89 Days and Accruing |
Loans and Leases | | | |
Commercial and industrial | | | |
Agriculture | $ | 0 | | $ | 20 | | $ | 0 | |
Commercial and industrial other | 0 | | 2,253 | | 0 | |
| | | |
Subtotal commercial and industrial | 0 | | 2,273 | | 0 | |
Commercial real estate | | | |
| | | |
Agriculture | 0 | | 170 | | 0 | |
Commercial real estate other | 42,038 | | 44,280 | | 0 | |
Subtotal commercial real estate | 42,038 | | 44,450 | | 0 | |
Residential real estate | | | |
Home equity | 0 | | 3,230 | | 0 | |
Mortgages | 0 | | 11,942 | | 0 | |
Subtotal residential real estate | 0 | | 15,172 | | 0 | |
Consumer and other | | | |
Indirect | 0 | | 40 | | 0 | |
Consumer and other | 0 | | 230 | | 101 | |
Subtotal consumer and other | 0 | | 270 | | 101 | |
| | | |
Total loans and leases | $ | 42,038 | | $ | 62,165 | | $ | 101 | |
| | | | | | | | | | | |
December 31, 2022 | | | |
(In thousands) | Nonaccrual Loans and Leases with no ACL | Nonaccrual Loans and Leases | Loans and Leases Past Due Over 89 Days and Accruing |
Loans and Leases | | | |
Commercial and industrial | | | |
| | | |
Commercial and industrial other | $ | 411 | | $ | 618 | | $ | 25 | |
| | | |
Subtotal commercial and industrial | 411 | | 618 | | 25 | |
Commercial real estate | | | |
| | | |
Agriculture | 186 | | 186 | | 0 | |
Commercial real estate other | 13,101 | | 13,672 | | 0 | |
Subtotal commercial real estate | 13,287 | | 13,858 | | 0 | |
Residential real estate | | | |
Home equity | 318 | | 2,391 | | 0 | |
Mortgages | 1,177 | | 11,153 | | 0 | |
Subtotal residential real estate | 1,495 | | 13,544 | | 0 | |
Consumer and other | | | |
Indirect | 0 | | 94 | | 0 | |
Consumer and other | 0 | | 175 | | 0 | |
Subtotal consumer and other | 0 | | 269 | | 0 | |
| | | |
Total loans and leases | $ | 15,193 | | $ | 28,289 | | $ | 25 | |
The difference between the interest income that would have been recorded if nonaccrual loans and leases had paid in accordance with their original terms and the interest income that was recorded, was $2.2 million for the year ended December 31, 2023, $1.4 million for year ended December 31, 2022, and $1.5 million for year ended December 31, 2021. The Company had no material commitments to make additional advances to borrowers with nonperforming loans.
Note 4 Allowance for Credit Losses
Management reviews the appropriateness of the ACL on a regular basis. Management considers the accounting policy relating to the allowance to be a critical accounting policy, given the inherent uncertainty in evaluating the levels of the allowance required to cover credit losses in the portfolio and the material effect that assumptions could have on the Company’s results of operations. The Company has developed a methodology to measure the amount of estimated credit loss exposure inherent in the loan portfolio to assure that an appropriate allowance is maintained. The Company’s methodology is based upon guidance provided in SEC Staff Accounting Bulletin No. 119, Measurement of Credit Losses on Financial Instruments ("CECL"), and Financial Instruments - Credit Losses and ASC Topic 326, Financial Instruments - Credit Losses.
The Company uses a DCF method to estimate expected credit losses for all loan segments excluding the leasing segment. For each of these loan segments, the Company generates cash flow projections at the instrument level wherein payment expectations are adjusted for estimated prepayment speed, curtailments, recovery lag, probability of default, and loss given default. The modeling of expected prepayment speeds, curtailment rates, and time to recovery are based on internal historical data.
The Company uses regression analysis of historical internal and peer data to determine suitable loss drivers to utilize when modeling lifetime probability of default and loss given default. This analysis also determines how expected probability of default and loss given default will react to forecasted levels of the loss drivers. For all loans utilizing the DCF method, management utilizes forecasts of national unemployment rates and a one year percentage change in national gross domestic product as loss drivers in the model.
For all DCF models, management has determined that four quarters represents a reasonable and supportable forecast period and reverts back to a historical loss rate over eight quarters on a straight-line basis. Management leverages economic projections from a reputable and independent third party to inform its loss driver forecasts over the four-quarter forecast period. Other internal and external indicators of economic forecasts, and scenario weightings, are also considered by management when developing the forecast metrics.
Due to the size and characteristics of the leasing portfolio, the Company uses the remaining life method, using the historical loss rate of the commercial and industrial segment, to determine the allowance for credit losses.
The combination of adjustments for credit expectations and timing expectations produces an expected cash flow stream at the instrument level. Instrument effective yield is calculated, net of the impacts of prepayment assumptions, and the instrument expected cash flows are then discounted at that effective yield to produce a net present value of expected cash flows ("NPV"). An ACL is established for the difference between the NPV and amortized cost basis.
The Company adopted ASU 2016-13 as of January 1, 2020 using the prospective transition approach for financial assets purchased with credit deterioration ("PCD") that were previously classified as purchased credit impaired ("PCI") and accounted for under ASC 310-30. In accordance with the standard, the Company did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption.
Since the methodology is based upon historical experience and trends, current conditions, and reasonable and supportable forecasts, as well as management’s judgment, factors may arise that result in different estimates. While management’s evaluation of the allowance as of December 31, 2023 considers the allowance to be appropriate, under adversely different conditions or assumptions, the Company would need to increase or decrease the allowance. In addition, various federal and State regulatory agencies, as part of their examination process, review the Company's allowance and may require the Company to recognize additions to the allowance based on their judgements and information available to them at the time of their examinations.
Loan Commitments and Allowance for Credit Losses on Off-Balance Sheet Credit Exposures
Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, and commercial letters of credit. The Company's exposure to credit loss in the event of nonperformance by the other party to the financial instrument
for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded. The Company records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancellable, through a charge to credit loss expense for off-balance sheet credit exposures included in provision expense in the Company's consolidated statements of income.
Changes in the allowance for credit losses for the years ended December 31, 2023, 2022 and 2021 are summarized as follows:
Allowance for Credit Losses - Loans and Leases
| | | | | | | | | | | |
(In thousands) | 2023 | 2022 | 2021 |
Total allowance at beginning of year | $ | 45,934 | | $ | 42,843 | | $ | 51,669 | |
Impact of adopting ASU 2022-02 | 64 | | 0 | | 0 | |
Provision (credit) for credit loss expense | 4,865 | | 2,499 | | (2,805) | |
Recoveries on loans and leases | 1,820 | | 1,798 | | 1,725 | |
Charge-offs on loans and leases | (1,099) | | (1,206) | | (7,746) | |
Total allowance at end of year | $ | 51,584 | | $ | 45,934 | | $ | 42,843 | |
Allowance for Credit Losses - Off-Balance Sheet Credit Exposures
| | | | | | | | | | | |
(In thousands) | 2023 | 2022 | 2021 |
Liabilities for off-balance sheet credit exposures at beginning of period | $ | 2,796 | | $ | 2,506 | | $ | 1,920 | |
| | | |
(Credit) provision for credit loss expense related to off-balance sheet credit exposures | (526) | | 290 | | 586 | |
Liabilities for off-balance sheet credit exposures at end of period | $ | 2,270 | | $ | 2,796 | | $ | 2,506 | |
The following tables detail activity in the allowance for credit losses for loans for the years ended December 31, 2023 and 2022. The allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.
| | | | | | | | | | | | | | | | | | | | |
December 31, 2023 | | | | | | |
(In thousands) | Commercial & Industrial | Commercial Real Estate | Residential Real Estate | Consumer and Other | Finance Leases | Total |
Allowance for credit losses: | | | | |
Beginning balance | $ | 6,039 | | $ | 27,287 | | $ | 11,154 | | $ | 1,358 | | $ | 96 | | $ | 45,934 | |
Impact of adopting ASU 2016-13 | 2 | | 16 | | 46 | | 0 | | 0 | | 64 | |
Charge-offs | (34) | | 0 | | (20) | | (1,045) | | 0 | | (1,099) | |
Recoveries | 87 | | 1,292 | | 186 | | 255 | | 0 | | 1,820 | |
Provision (credit) for credit loss expense | 573 | | 2,986 | | 334 | | 989 | | (17) | | 4,865 | |
Ending Balance | $ | 6,667 | | $ | 31,581 | | $ | 11,700 | | $ | 1,557 | | $ | 79 | | $ | 51,584 | |
| | | | | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | | |
(In thousands) | Commercial & Industrial | Commercial Real Estate | Residential Real Estate | Consumer and Other | Finance Leases | Total |
Allowance for credit losses: | | | | |
Beginning balance | $ | 6,335 | | $ | 24,813 | | $ | 10,139 | | $ | 1,492 | | $ | 64 | | $ | 42,843 | |
Charge-offs | (559) | | (50) | | (53) | | (544) | | 0 | | (1,206) | |
Recoveries | 195 | | 951 | | 346 | | 306 | | 0 | | 1,798 | |
Provision for credit loss expense | 68 | | 1,573 | | 722 | | 104 | | 32 | | 2,499 | |
Ending Balance | $ | 6,039 | | $ | 27,287 | | $ | 11,154 | | $ | 1,358 | | $ | 96 | | $ | 45,934 | |
The following tables presents the amortized cost basis of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses allocated to these loans as of December 31, 2023 and 2022:
| | | | | | | | | | | | | | | | | |
December 31, 2023 | | | | | |
(In thousands) | Real Estate | Business Assets | Other | Total | ACL Allocation |
Commercial and Industrial | $ | 2,035 | | $ | 0 | | $ | 0 | | $ | 2,035 | | $ | 0 | |
Commercial Real Estate | 42,333 | | 0 | | 0 | | 42,333 | | 1,082 | |
| | | | | |
Total Loans and Leases | $ | 44,368 | | $ | 0 | | $ | 0 | | $ | 44,368 | | $ | 1,082 | |
| | | | | | | | | | | | | | | | | |
December 31, 2022 | | | | | |
(In thousands) | Real Estate | Business Assets | Other | Total | ACL Allocation |
Commercial and Industrial | $ | 642 | | $ | 28 | | $ | 0 | | $ | 670 | | $ | 0 | |
Commercial Real Estate | 13,209 | | 0 | | 78 | | 13,287 | | 0 | |
Commercial Real Estate - Agriculture | 1,515 | | 0 | | 0 | | 1,515 | | 0 | |
Residential Real Estate | 188 | | 0 | | 0 | | 188 | | 3 | |
Total Loans and Leases | $ | 15,554 | | $ | 28 | | $ | 78 | | $ | 15,660 | | $ | 3 | |
Loan Modifications to Borrowers Experiencing Financial Difficulty
The Company adopted ASU 2022-02 effective January 1, 2023. This standard eliminated the previous trouble debt restructuring accounting model and replaced it with guidance and disclosure requirements for identifying modifications to loans to borrowers experiencing financial difficulty. Modifications to borrowers experiencing financial difficulty may include interest rate reductions, principal or interest forgiveness, forbearances, term extensions, and other actions intended to minimize economic loss and to avoid foreclosure or repossession of collateral.
The following table shows the amortized cost basis at the year ended December 31, 2023 of the loans modified to borrowers experiencing financial difficulty, disaggregated by class of financing receivable and type of concession granted:
| | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | Term Extension | Interest Rate Reduction | Payment Delay and Term Extension | Term Extension and Interest Rate Reduction | Payment Delay | Total | % of Total Class of Loans and Leases |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Commercial Real Estate | | | | | | | |
| | | | | | | |
| | | | | | | |
Commercial Real Estate Other | $ | 0 | | $ | 3,114 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 3,114 | | 0.12 | % |
Total Commercial Real Estate | 0 | | 3,114 | | 0 | | 0 | | 0 | | 3,114 | | 0.10 | % |
Residential | | | | | | | |
| | | | | | | |
Mortgages | 0 | | 0 | | 0 | | 0 | | 402 | | 402 | | 0.03 | % |
Total Residential | 0 | | 0 | | 0 | | 0 | | 402 | | 402 | | 0.03 | % |
Consumer | | | | | | | |
| | | | | | | |
Consumer and Other | 21 | | 0 | | 0 | | 0 | | 0 | | 21 | | 0.02 | % |
Total Consumer | 21 | | 0 | | 0 | | 0 | | 0 | | 21 | | 0.02 | % |
Total Loans and Leases | $ | 21 | | $ | 3,114 | | $ | 0 | | $ | 0 | | $ | 402 | | $ | 3,537 | | 0.06 | % |
There were no loan modifications made to borrowers experiencing financial difficulty that defaulted during the year ended December 31, 2023.
The following table shows the aging analysis of loan modifications made to borrowers experiencing financial difficulty as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | |
December 31, 2023 | Payment Status (Amorized Cost Basis) |
(In thousands) | Current | 30-59 Days Past Due | 60-89 Days Past Due | 90+ Days Past Due | Non-Accrual | Total |
| | | | | | |
| | | | | | |
| | | | | | |
| | | | | | |
Commercial Real Estate | | | | | | |
| | | | | | |
| | | | | | |
Commercial real estate other | $ | 3,114 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 3,114 | |
Total Commercial Real Estate | 3,114 | | 0 | | 0 | | 0 | | 0 | | 3,114 | |
Residential Real Estate | | | | | | |
| | | | | | |
Mortgages | 158 | | 0 | | 0 | | 0 | | 244 | | 402 | |
Total Residential Real Estate | 158 | | 0 | | 0 | | 0 | | 244 | | 402 | |
Consumer and Other | | | | | | |
| | | | | | |
Consumer and other | 0 | | 0 | | 0 | | 0 | | 21 | | 21 | |
Total Consumer and Other | 0 | | 0 | | 0 | | 0 | | 21 | | 21 | |
Total | $ | 3,272 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 265 | | $ | 3,537 | |
The following tables present loans by class modified in 2022 as troubled debt restructurings. Post-modification balances reflect paydowns and charge-offs at time of modification.
| | | | | | | | | | | | | | | | | |
December 31, 2022 | Year Ended |
| | | | Defaulted TDRs2 |
(In thousands) | Number of Loans | Pre- Modification Outstanding Recorded Investment | Post-Modification Outstanding Recorded Investment | Number of Loans | Post- Modification Outstanding Recorded Investment |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
Residential real estate | | | | | |
Mortgages1 | 7 | | $ | 714 | | $ | 714 | | 1 | | $ | 87 | |
| | | | | |
| | | | | |
| | | | | |
Total | 7 | | $ | 714 | | $ | 714 | | 1 | | $ | 87 | |
1Represents the following concessions: extension of term and reduction of rate.
2TDRs that defaulted during the 12 months ended December 31, 2022, that had been restructured in the prior twelve months.
The following table presents credit quality indicators by total loans on an amortized cost basis by origination year, and current year gross writeoffs as of December 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2023 | | | | | | | | |
(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
Commercial and Industrial - Other: | | | | | | |
Internal risk grade: | | | | | | | | | |
Pass | $ | 130,993 | | $ | 92,335 | | $ | 68,030 | | $ | 28,237 | | $ | 33,618 | | $ | 141,758 | | $ | 212,349 | | $ | 5,063 | | $ | 712,383 | |
Special Mention | 915 | | 196 | | 222 | | 242 | | 79 | | 1,287 | | 682 | | 0 | | 3,623 | |
Substandard | 0 | | 46 | | 78 | | 329 | | 18 | | 2,833 | | 2,580 | | 0 | | 5,884 | |
Total Commercial and Industrial - Other | $ | 131,908 | | $ | 92,577 | | $ | 68,330 | | $ | 28,808 | | $ | 33,715 | | $ | 145,878 | | $ | 215,611 | | $ | 5,063 | | $ | 721,890 | |
Current-period gross writeoffs | $ | 6 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 29 | | $ | 0 | | $ | 0 | | $ | 35 | |
Commercial and Industrial - PPP: | | | | | | |
Pass | $ | 0 | | $ | 0 | | $ | 264 | | $ | 140 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 404 | |
Special Mention | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Substandard | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Total Commercial and Industrial - PPP | $ | 0 | | $ | 0 | | $ | 264 | | $ | 140 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 404 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Commercial and Industrial - Agriculture: | | | | | | |
Pass | $ | 24,924 | | $ | 11,935 | | $ | 3,341 | | $ | 3,114 | | $ | 3,268 | | $ | 16,759 | | $ | 36,728 | | $ | 1,030 | | $ | 101,099 | |
Special Mention | 0 | | 0 | | 47 | | 0 | | 0 | | 0 | | 0 | | 0 | | 47 | |
Substandard | 0 | | 0 | | 0 | | 56 | | 0 | | 8 | | 1 | | 0 | | 65 | |
Total Commercial and Industrial - Agriculture | $ | 24,924 | | $ | 11,935 | | $ | 3,388 | | $ | 3,170 | | $ | 3,268 | | $ | 16,767 | | $ | 36,729 | | $ | 1,030 | | $ | 101,211 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Commercial Real Estate | | | | | | |
Pass | $ | 246,016 | | $ | 317,583 | | $ | 365,975 | | $ | 292,960 | | $ | 272,722 | | $ | 921,201 | | $ | 34,346 | | $ | 24,949 | | $ | 2,475,752 | |
Special Mention | 0 | | 632 | | 0 | | 17,133 | | 11,422 | | 16,100 | | 0 | | 0 | | 45,287 | |
Substandard | 0 | | 15,300 | | 2,128 | | 0 | | 2,059 | | 45,709 | | 1,356 | | 0 | | 66,552 | |
Total Commercial Real Estate | $ | 246,016 | | $ | 333,515 | | $ | 368,103 | | 310,093 | | 286,203 | | 983,010 | | $ | 35,702 | | $ | 24,949 | | $ | 2,587,591 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Commercial Real Estate - Agriculture: | | | | | | |
Pass | $ | 14,668 | | $ | 37,256 | | $ | 22,813 | | $ | 21,001 | | $ | 23,794 | | $ | 93,890 | | $ | 257 | | $ | 6,364 | | $ | 220,043 | |
Special Mention | 0 | | 0 | | 0 | | 0 | | 378 | | 1,033 | | 0 | | 0 | | 1,411 | |
Substandard | 0 | | 0 | | 0 | | 0 | | 170 | | 46 | | 0 | | 0 | | 216 | |
Total Commercial Real Estate - Agriculture | $ | 14,668 | | $ | 37,256 | | $ | 22,813 | | $ | 21,001 | | $ | 24,342 | | $ | 94,969 | | $ | 257 | | $ | 6,364 | | $ | 221,670 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2023 | 2022 | 2021 | 2020 | 2019 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
| | | | | | | | | |
Commercial Real Estate - Construction | | | | | | |
Pass | $ | 9,265 | | $ | 2,793 | | $ | 8,068 | | $ | 2,501 | | $ | 357 | | $ | 596 | | $ | 274,224 | | $ | 5,602 | | $ | 303,406 | |
Special Mention | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Substandard | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Total Commercial Real Estate - Construction | $ | 9,265 | | $ | 2,793 | | $ | 8,068 | | $ | 2,501 | | $ | 357 | | $ | 596 | | $ | 274,224 | | $ | 5,602 | | $ | 303,406 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Residential - Home Equity | | | | | | | |
Performing | $ | 2,378 | | $ | 2,237 | | $ | 890 | | $ | 529 | | $ | 832 | | $ | 8,178 | | $ | 164,205 | | $ | 5,837 | | $ | 185,086 | |
Nonperforming | 0 | | 0 | | 0 | | 0 | | 0 | | 337 | | 2,893 | | 0 | | 3,230 | |
Total Residential - Home Equity | $ | 2,378 | | $ | 2,237 | | $ | 890 | | $ | 529 | | $ | 832 | | $ | 8,515 | | $ | 167,098 | | $ | 5,837 | | $ | 188,316 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 20 | | $ | 0 | | $ | 0 | | $ | 20 | |
Residential - Mortgages | | | | | | | |
Performing | $ | 131,004 | | $ | 186,401 | | $ | 256,127 | | $ | 221,945 | | $ | 109,594 | | $ | 456,167 | | $ | 0 | | $ | 0 | | $ | 1,361,238 | |
Nonperforming | 0 | | 393 | | 329 | | 986 | | 883 | | 9,446 | | 0 | | 0 | | 12,037 | |
Total Residential - Mortgages | $ | 131,004 | | $ | 186,794 | | $ | 256,456 | | $ | 222,931 | | $ | 110,477 | | $ | 465,613 | | $ | 0 | | $ | 0 | | $ | 1,373,275 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Consumer - Direct | | | | | | | |
Performing | $ | 50,295 | | $ | 13,327 | | $ | 11,316 | | $ | 5,157 | | $ | 4,037 | | $ | 9,857 | | $ | 2,723 | | $ | 0 | | $ | 96,712 | |
Nonperforming | 2 | | 0 | | 0 | | 0 | | 70 | | 157 | | 1 | | 0 | | 230 | |
Total Consumer - Direct | $ | 50,297 | | $ | 13,327 | | $ | 11,316 | | $ | 5,157 | | $ | 4,107 | | $ | 10,014 | | $ | 2,724 | | $ | 0 | | $ | 96,942 | |
Current-period gross writeoffs | $ | 801 | | $ | 29 | | $ | 16 | | $ | 21 | | $ | 83 | | $ | 28 | | $ | 0 | | $ | 0 | | $ | 978 | |
Consumer - Indirect | | | | | | | |
Performing | $ | 0 | | $ | 0 | | $ | 97 | | $ | 68 | | $ | 402 | | $ | 234 | | $ | 0 | | $ | 0 | | $ | 801 | |
Nonperforming | 0 | | 0 | | 0 | | 0 | | 30 | | 10 | | 0 | | 0 | | 40 | |
Total Consumer - Indirect | $ | 0 | | $ | 0 | | $ | 97 | | $ | 68 | | $ | 432 | | $ | 244 | | $ | 0 | | $ | 0 | | $ | 841 | |
Current-period gross writeoffs | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 53 | | $ | 14 | | $ | 0 | | $ | 0 | | $ | 67 | |
The following tables present credit quality indicators (internal risk grade) by class of commercial and industrial loans and commercial real estate loans as of December 31, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
Commercial and Industrial - Other: | | | | | | | |
Pass | $ | 124,190 | | $ | 79,861 | | $ | 38,158 | | $ | 41,391 | | $ | 33,238 | | $ | 156,038 | | $ | 215,890 | | $ | 6,466 | | $ | 695,232 | |
Special Mention | 0 | | 127 | | 421 | | 285 | | 271 | | 1,380 | | 501 | | 0 | | 2,985 | |
Substandard | 0 | | 111 | | 442 | | 35 | | 733 | | 503 | | 5,659 | | 0 | | 7,483 | |
Total Commercial and Industrial - Other | $ | 124,190 | | $ | 80,099 | | $ | 39,021 | | $ | 41,711 | | $ | 34,242 | | $ | 157,921 | | $ | 222,050 | | $ | 6,466 | | $ | 705,700 | |
Commercial and Industrial - Agriculture: | | | | | | | |
Pass | $ | 16,694 | | $ | 4,120 | | $ | 4,944 | | $ | 4,186 | | $ | 7,734 | | $ | 4,883 | | $ | 42,097 | | $ | 215 | | $ | 84,873 | |
Special Mention | 0 | | 58 | | 0 | | 0 | | 0 | | 0 | | 50 | | 0 | | 108 | |
Substandard | 0 | | 0 | | 71 | | 0 | | 0 | | 16 | | 5 | | 0 | | 92 | |
Total Commercial and Industrial - Agriculture | $ | 16,694 | | $ | 4,178 | | $ | 5,015 | | $ | 4,186 | | $ | 7,734 | | $ | 4,899 | | $ | 42,152 | | $ | 215 | | $ | 85,073 | |
Commercial and Industrial - PPP: | | | | | | |
Pass | $ | 0 | | $ | 416 | | $ | 340 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 756 | |
Special Mention | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Substandard | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Total Commercial and Industrial - PPP | $ | 0 | | $ | 416 | | $ | 340 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 756 | |
Commercial Real Estate | | | | | | | |
Pass | $ | 342,311 | | $ | 367,104 | | $ | 311,607 | | $ | 279,587 | | $ | 203,016 | | $ | 812,563 | | $ | 10,906 | | $ | 24,503 | | $ | 2,351,597 | |
Special Mention | 643 | | 3,406 | | 1,688 | | 11,462 | | 2,555 | | 25,361 | | 0 | | 0 | 45,115 | |
Substandard | 78 | | 110 | | 0 | | 3,394 | | 1,692 | | 35,221 | | 132 | | 0 | | 40,627 | |
Total Commercial Real Estate | $ | 343,032 | | $ | 370,620 | | $ | 313,295 | | $ | 294,443 | | $ | 207,263 | | $ | 873,145 | | $ | 11,038 | | $ | 24,503 | | $ | 2,437,339 | |
Commercial Real Estate - Agriculture: | | | | | | | |
Pass | $ | 33,241 | | $ | 24,125 | | $ | 22,831 | | $ | 25,576 | | $ | 37,835 | | $ | 65,112 | | $ | 3,131 | | $ | 1,235 | | $ | 213,086 | |
Special Mention | 0 | | 0 | | 0 | | 401 | | 0 | | 1,142 | | 0 | | 0 | | 1,543 | |
Substandard | 0 | | 0 | | 0 | | 186 | | 38 | | 110 | | 0 | | 0 | | 334 | |
Total Commercial Real Estate - Agriculture | $ | 33,241 | | $ | 24,125 | | $ | 22,831 | | $ | 26,163 | | $ | 37,873 | | $ | 66,364 | | $ | 3,131 | | $ | 1,235 | | $ | 214,963 | |
Commercial Real Estate - Construction | | | | | | | |
Pass | $ | 23,105 | | $ | 75,245 | | $ | 27,584 | | $ | 14,842 | | $ | 9,083 | | $ | 7,268 | | $ | 42,701 | | $ | 1,288 | | $ | 201,116 | |
Special Mention | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Substandard | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Total Commercial Real Estate - Construction | $ | 23,105 | | $ | 75,245 | | $ | 27,584 | | $ | 14,842 | | $ | 9,083 | | $ | 7,268 | | $ | 42,701 | | $ | 1,288 | | $ | 201,116 | |
The following table presents credit quality indicators by total loans on an amortized cost basis by origination year as of December 31, 2022, continued:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | 2022 | 2021 | 2020 | 2019 | 2018 | Prior | Revolving Loans Amortized Cost Basis | Revolving Loans Converted to Term | Total Loans |
Residential - Home Equity | | | | | | | | |
Performing | $ | 3,030 | | $ | 1,062 | | $ | 637 | | $ | 992 | | $ | 792 | | $ | 3,183 | | $ | 175,451 | | $ | 1,085 | | $ | 186,232 | |
Nonperforming | 0 | | 0 | | 0 | | 14 | | 0 | | 25 | | 2,352 | | 0 | | 2,391 | |
Total Residential - Home Equity | $ | 3,030 | | $ | 1,062 | | $ | 637 | | $ | 1,006 | | $ | 792 | | $ | 3,208 | | $ | 177,803 | | $ | 1,085 | | $ | 188,623 | |
Residential - Mortgages | | | | | | | | |
Performing | $ | 187,129 | | $ | 272,235 | | $ | 239,584 | | $ | 117,391 | | $ | 66,605 | | $ | 452,221 | | $ | 0 | | $ | 0 | | $ | 1,335,165 | |
Nonperforming | 218 | | 335 | | 628 | | 682 | | 1,552 | | 7,738 | | 0 | | 0 | | 11,153 | |
Total Residential - Mortgages | $ | 187,347 | | $ | 272,570 | | $ | 240,212 | | $ | 118,073 | | $ | 68,157 | | $ | 459,959 | | $ | 0 | | $ | 0 | | $ | 1,346,318 | |
Consumer - Direct | | | | | | | | |
Performing | $ | 31,243 | | $ | 13,999 | | $ | 7,372 | | $ | 6,138 | | $ | 4,386 | | $ | 8,029 | | $ | 4,070 | | $ | 0 | | $ | 75,237 | |
Nonperforming | 0 | | 0 | | 3 | | 93 | | 76 | | 0 | | 3 | | $ | 0 | | 175 | |
Total Consumer - Direct | $ | 31,243 | | $ | 13,999 | | $ | 7,375 | | $ | 6,231 | | $ | 4,462 | | $ | 8,029 | | $ | 4,073 | | $ | 0 | | $ | 75,412 | |
Consumer - Indirect | | | | | | | | |
Performing | $ | 0 | | $ | 156 | | $ | 146 | | $ | 1,092 | | $ | 635 | | $ | 101 | | $ | 0 | | $ | 0 | | $ | 2,130 | |
Nonperforming | 0 | | 0 | | 0 | | 76 | | 10 | | 8 | | 0 | | 0 | | 94 | |
Total Consumer - Indirect | $ | 0 | | $ | 156 | | $ | 146 | | $ | 1,168 | | $ | 645 | | $ | 109 | | $ | 0 | | $ | 0 | | $ | 2,224 | |
Note 5 Goodwill and Other Intangible Assets
| | | | | | | | | | | | | | |
(In thousands) | Banking | Insurance | Wealth Management | Total |
Balance at January 1, 2022 | $ | 64,369 | | $ | 19,867 | | $ | 8,211 | | $ | 92,447 | |
| | | | |
Adjustment to goodwill | 155 | | 0 | | 0 | | 155 | |
| | | | |
Balance at December 31, 2022 | 64,524 | | 19,867 | | 8,211 | | 92,602 | |
| | | | |
Adjustment to goodwill | 0 | | 0 | | 0 | | 0 | |
Balance at December 31, 2023 | $ | 64,524 | | $ | 19,867 | | $ | 8,211 | | $ | 92,602 | |
Goodwill is assigned to reporting units. The Company reviews its goodwill and intangible assets annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value. Based on the Company’s review as of December 31, 2023, there was no impairment of its goodwill or intangible assets.
Other Intangible Assets
The following table provides information regarding the Company's amortizing intangible assets:
| | | | | | | | | | | |
December 31, 2023 | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
(In thousands) |
Amortized intangible assets: | | | |
Core deposit intangible | $ | 18,774 | | $ | 18,774 | | $ | 0 | |
Customer relationships | 9,048 | | 7,948 | | 1,100 | |
Other intangibles | 6,921 | | 5,694 | | 1,227 | |
Total intangible assets | $ | 34,743 | | $ | 32,416 | | $ | 2,327 | |
| | | | | | | | | | | |
December 31, 2022 | Gross Carrying Amount | Accumulated Amortization | Net Carrying Amount |
(In thousands) |
Amortized intangible assets: | | | |
Core deposit intangible | $ | 18,774 | | $ | 18,774 | | $ | 0 | |
Customer relationships | 9,048 | | 7,632 | | 1,416 | |
Other intangibles | 6,887 | | 5,595 | | 1,292 | |
Total intangible assets | $ | 34,709 | | $ | 32,001 | | $ | 2,708 | |
Amortization expense related to intangible assets totaled $334,000 in 2023, $873,000 in 2022 and $1.3 million in 2021. The estimated aggregate future amortization expense for intangible assets remaining as of December 31, 2023 is as follows:
| | | | | |
Estimated amortization expense:1 | |
(In thousands) | |
For the year ended December 31, 2024 | $ | 294 | |
For the year ended December 31, 2025 | 264 | |
For the year ended December 31, 2026 | 225 | |
For the year ended December 31, 2027 | 196 | |
For the year ended December 31, 2028 | 41 | |
1Excludes the amortization of mortgage servicing rights. Amortization of mortgage servicing rights was $81,000 in 2023, $128,000 in 2022 and $182,000 in 2021.
Note 6 Premises and Equipment
Premises and equipment at December 31 were as follows:
| | | | | | | | |
(In thousands) | 2023 | 2022 |
Land | $ | 8,063 | | $ | 8,063 | |
Premises and equipment | 104,366 | | 106,297 | |
Furniture, fixtures, and equipment | 90,168 | | 87,619 | |
Accumulated depreciation and amortization | (122,910) | | (119,839) | |
Total | $ | 79,687 | | $ | 82,140 | |
Depreciation and amortization expenses in 2023, 2022, and 2021 are included in operating expenses as follows:
| | | | | | | | | | | |
(In thousands) | 2023 | 2022 | 2021 |
Premises | $ | 2,844 | | $ | 2,500 | | $ | 2,599 | |
Furniture, fixtures, and equipment | 5,246 | | 5,138 | | 5,367 | |
Total | $ | 8,090 | | $ | 7,638 | | $ | 7,966 | |
The Company leases land, buildings and equipment under operating lease arrangements. Total gross rental expense amounted to $4.7 million in 2023, $4.6 million in 2022, and $4.9 million in 2021. Most leases include options to renew for periods ranging from 5 to 20 years.
Lease components
Right-of-use lease assets totaled $27.7 million and $33.1 million at December 31, 2023 and 2022, respectively and are reported in accrued interest and other assets in the accompanying consolidated statements of condition. The related lease liabilities totaled $29.1 million and $34.5 million at December 31, 2023 and 2022, respectively, and are reported as a component of other liabilities in the accompanying consolidated statements of condition. Lease payments under operating leases that were applied to our operating lease liability totaled $3.8 million during 2023 and $3.4 million during 2022. Included in the 2023 lease payment figures above were 2 lease termination payments totaling $579,000 and were applied to the lease liability.
The components of operating lease expense, primarily included in “Net occupancy expense of premises,” in 2023, 2022, and 2021 were as follows:
| | | | | | | | | | | |
(In thousands) | 2023 | 2022 | 2021 |
Operating lease cost | $ | 4,741 | | $ | 4,654 | | $ | 4,939 | |
Variable lease cost | 681 | | 695 | | 668 | |
Short-term lease cost | 2 | | 2 | | 2 | |
Sublease income | 0 | | (11) | | (25) | |
Total lease cost | $ | 5,424 | | $ | 5,340 | | $ | 5,584 | |
At December 31, 2023, we did not have any material finance lease assets or liabilities.
Other information related to operating leases for 2023 and 2022 was as follows:
| | | | | | | | |
(In thousands) | 2023 | 2022 |
Cash paid for amounts included in the measurement of lease liabilities: | | |
Operating cash flows from operating leases | $ | 4,688 | | $ | 4,389 | |
Weighted-average remaining lease term on operating leases | 11.64 | 13.45 |
Weighted-average discount rates on operating leases | 3.47 | % | 3.47 | % |
Right-of-use assets obtained in exchange for lease liabilities | 1,655 | | 2,498 | |
The following table reconciles future undiscounted lease payments due under non-cancelable operating leases (those amounts subject to recognition) to the aggregate operating lessee lease liability as of December 31, 2023:
| | | | | |
(In thousands) | |
2024 | $ | 3,824 | |
2025 | 3,531 | |
2026 | 3,480 | |
2027 | 3,161 | |
2028 | 2,942 | |
2029 and subsequent years | 18,930 | |
Total lease payments | 35,868 | |
Less: Interest | 6,793 | |
Present value of lease liabilities | $ | 29,075 | |
Note 7 Deposits
Aggregate time deposits of $250,000 or more were $389.8 million at December 31, 2023, and $192.7 million at December 31, 2022. Scheduled maturities of time deposits at December 31, 2023, were as follows:
| | | | | | | | | | | |
(In thousands) | Less than $250,000 | $250,000 and over | Total |
Maturity | | | |
Three months or less | $ | 224,408 | | $ | 168,658 | | $ | 393,066 | |
Over three through six months | 171,824 | | 136,949 | | 308,773 | |
Over six through twelve months | 121,372 | | 68,505 | | 189,877 | |
Total due in 2024 | $ | 517,604 | | $ | 374,112 | | $ | 891,716 | |
2025 | 75,677 | | 14,283 | | 89,960 | |
2026 | 8,451 | | 1,384 | | 9,835 | |
2027 | 4,302 | | 0 | | 4,302 | |
2028 | 2,034 | | 0 | | 2,034 | |
Thereafter | 166 | | 0 | | 166 | |
Total | $ | 608,234 | | $ | 389,779 | | $ | 998,013 | |
Note 8 Federal Funds Purchased and Securities Sold Under Agreements to Repurchase
Information regarding securities sold under agreements to repurchase and Federal funds purchased is detailed in the following tables for the years ended December 31:
| | | | | | | | | | | |
Securities Sold Under Agreements to Repurchase | | | |
(In thousands) | 2023 | 2022 | 2021 |
Total outstanding at December 31 | $ | 50,996 | | $ | 56,278 | | $ | 66,787 | |
| | | |
Maximum month-end balance | 71,031 | | 67,810 | | 78,420 | |
Average balance during the year | 55,773 | | 57,126 | | 58,627 | |
Weighted average rate at December 31 | 0.11 | % | 0.10 | % | 0.10 | % |
Average interest rate paid during the year | 0.10 | % | 0.10 | % | 0.11 | % |
Federal Funds Purchased | | | |
Average balance during the year | $ | 0 | | $ | 0 | | $ | 0 | |
Weighted average rate at December 31 | N/A | N/A | N/A |
Average interest rate paid during the year | 0.00 | % | 0.00 | % | 0.00 | % |
Securities sold under agreements to repurchase ("repurchase agreements") are secured borrowings that typically mature within thirty to ninety days, although the Company has, at times, entered into repurchase agreements with the Federal Home Loan Bank ("FHLB") with longer maturities. 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 $51.0 million at December 31, 2023. The Company had no outstanding wholesale repurchase agreements at December 31, 2023.
Securities sold under agreements to repurchase are stated at the amount of cash received in connection with the transaction. The Company may be required to provide additional collateral based on the fair value of the underlying securities.
Federal funds purchased are short-term borrowings that typically mature within one to ninety days.
Note 9 Other Borrowings
The following table summarized the Company’s borrowings as of December 31:
| | | | | | | | |
(In thousands) | 2023 | 2022 |
Overnight FHLB advances | $ | 477,100 | | $ | 241,300 | |
Term FHLB advances | 125,000 | | 50,000 | |
| | |
Total other borrowings | $ | 602,100 | | $ | 291,300 | |
The Company, through its subsidiary bank had available line-of-credit agreements with correspondent banks permitting borrowings to a maximum of approximately $99.0 million at both December 31, 2023 and December 31, 2022. There were no outstanding advances against those lines at December 31, 2023 and December 31, 2022.
Through its subsidiary bank, the Company has a borrowing relationship with the FHLB, which provides secured borrowing capacity, subject to available collateral. As a member of the FHLB, the Company can use certain unencumbered mortgage-related assets and securities to secure borrowings from the FHLB. Established borrowing capacity with the FHLB was $1.6 billion and $1.6 billion at December 31, 2023 and December 31, 2022, respectively. The unused borrowing capacity on established lines with the FHLB was $0.6 billion and $1.3 billion at December 31, 2023 and December 31, 2022, respectively.
At December 31, 2023, there were $477.1 million in overnight advances and $125.0 million in term advances with the FHLB, with a weighted average rate of 5.15%, compared to $241.3 million in overnight advances and $50.0 million in term advances with a weighted average rate of 4.12%, at December 31, 2022. At December 31, 2023, the term advances with the FHLB includes $40.0 million which matures within one year and $85.0 million which matures in over one year. Maturities of advances due in over one year include $40.0 million in 2025.
The Company had no callable FHLB borrowings at December 31, 2023.
The Company has a $25.0 million line of credit with a bank. As of December 31, 2023 and December 31, 2022, there was no outstanding balance on the line. The line matures in June 2025.
Note 10 Trust Preferred Debentures
During the second quarter of 2021, the Company exercised its right to redeem all of the trust preferred of Madison Statutory Trust I, with a par amount of $5.0 million. The redemption price was equal to 100% of the principal amount plus accrued and unpaid interest up to June 26, 2021. During the third quarter of 2021, the Company exercised its right to redeem all of the trust preferred of Leesport Capital Trust II, with a par amount of $10.0 million. The redemption price was equal to 100% of the principal amount plus accrued and unpaid interest up to August 7, 2021. The Company recognized accelerated non-cash purchase accounting discounts of $1.9 million in interest expense related to the redemptions. As of December 31, 2023 and 2022, the Company had no trust preferred debentures.
Note 11 Employee Benefit Plans
The Company maintains a noncontributory defined-benefit plan (the "DB Pension Plan") and a 401(k) plan (the "Retirement Savings Plan"), within which the Company makes both matching contributions and discretionary contributions which cover substantially all employees of the Company.
The DB Pension Plan was closed to new employees at year-end 2009 and was frozen on July 31, 2015. The benefits under the DB Pension Plan are based on years of service, age and percentages of the employees' average final compensation. Assets of the Company's DB Pension Plan are invested in common and preferred stock, mutual funds and cash equivalents.
The Retirement Savings Plan covers substantially all employees of the Company who have reached the age of 21. For participants in these plans, the Company makes matching contributions to an account set up in the participant's name. Under the Retirement Savings Plan, employees may contribute a percentage of their eligible compensation with a Company match of such contributions up to a maximum match of 4%. The Company’s expense associated with these matching provisions was $3.2 million in 2023, $3.1 million in 2022, and $3.0 million in 2021. In addition, discretionary contributions are made once per year and equals a percentage of pay and varies based on the participant's age, service, and tenure with the Company. The Retirement Savings Plan offers the participant a wide range of investment alternatives from which to choose. Expenses related to the discretionary contributions totaled $4.2 million in 2023, $4.1 million in 2022, and $4.4 million in 2021.
The Company has an Employee Stock Ownership Plan ("ESOP") covering substantially all employees of the Company that have a least one year of service. The ESOP allows for Company contributions in the form of common stock of the Company. Annually, the Tompkins Board of Directors determines a profit-sharing payout to its employees in accordance with a performance-based formula. A percentage of the approved amount is paid in Company common stock into the ESOP. Contributions are limited to a maximum amount as stipulated in the ESOP. The remaining percentage is either paid out in cash, contributed to a health savings account, or deferred into the Retirement Savings Plan at the direction of the employee. Compensation expense related to the profit-sharing totaled $1.4 million in 2023, $5.3 million in 2022, and $5.4 million in 2021.
The Company maintains supplemental employee retirement plans ("SERPs") for certain executives. In 2016, certain SERPs were amended and restated to reflect changes resulting from the freezing of the DB Pension Plan and the Company entered into additional SERP agreements with certain executives. In 2019, the SERP for the Company's CEO was amended to expand the definition of "Earnings" under the SERP to better align the scope of compensation included in our CEO's retirement benefits with chief executive compensation in a manner that is more consistent with market practice. All benefits provided under the SERPs are unfunded and the Company makes payments to plan participants.
The Company also maintains a post-retirement life and healthcare benefit plan (the "Life and Healthcare Plan"), which was amended in 2005. For employees commencing employment after January 1, 2005, the Company does not contribute towards post-retirement healthcare benefits. Retirees and employees who were eligible to retire when the Life and Healthcare Plan was amended were unaffected. Generally, all other employees were eligible for Health Reimbursement Accounts ("HRA") with an initial balance equal to the amount of the Company’s estimated then current liability. Contributions to the plan are limited to an annual contribution of 4% of the total HRA balance. Employees, upon retirement, will be able to utilize their HRA for qualified health costs and deductibles. In 2019, the Retiree Life Benefit program was closed to new entrants, and only employees who attained age 50 as of February 1, 2020 will be eligible to earn this benefit.
The Company engages independent, external actuaries to compute the amounts of liabilities and expenses relating to these plans, subject to the assumptions that the Company selects. The benefit obligation for these plans represents the liability of the Company for current and former employees, and is affected primarily by the following: service cost (benefits attributed to employee service during the period); interest cost (interest on the liability due to the passage of time); actuarial gains/losses (experience during the year different from that assumed and changes in plan assumptions); and benefits paid to participants.
GAAP requires an employer to recognize in its Statement of Condition as an asset or liability the overfunded or underfunded status of a defined benefit postretirement plan, measured as the difference between the fair value of plan assets and the benefit obligation. For a pension plan, the benefit obligation is the projected benefit obligation; for any other postretirement benefit plan, such as a retiree health care plan, the benefit obligation is the accumulated postretirement benefit obligation. The following table sets forth the changes in the projected benefit obligation for the DB Pension Plan and SERPs and the accumulated post-retirement benefit obligation for the Life and Healthcare Plan; and the respective plan assets, and the plans’ funded status and amounts recognized in the Company’s Consolidated Statements of Condition at December 31, 2023 and 2022 (the measurement dates of the plans).
| | | | | | | | | | | | | | | | | | | | |
| DB Pension Plan | Life and Healthcare Plan | SERP Plan |
(In thousands) | 2023 | 2022 | 2023 | 2022 | 2023 | 2022 |
Change in benefit obligation: | | | | | | |
Benefit obligation at beginning of year | $ | 70,521 | | $ | 93,009 | | $ | 7,603 | | $ | 10,055 | | $ | 24,991 | | $ | 34,033 | |
Service cost | 0 | | 0 | | 33 | | 174 | | 43 | | 78 | |
Interest cost | 3,275 | | 1,985 | | 354 | | 223 | | 1,148 | | 814 | |
Plan participants’ contributions | 0 | | 0 | | 92 | | 100 | | 0 | | 0 | |
| | | | | | |
| | | | | | |
Actuarial loss (gain) | 1,242 | | (20,729) | | (153) | | (2,598) | | (315) | | (9,083) | |
Benefits paid | (4,320) | | (3,744) | | (326) | | (351) | | (906) | | (851) | |
Benefit obligation at end of year | $ | 70,718 | | $ | 70,521 | | $ | 7,603 | | $ | 7,603 | | $ | 24,961 | | $ | 24,991 | |
Change in plan assets: | | | | | | |
Fair value of plan assets at beginning of year | $ | 78,885 | | $ | 96,393 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Actual return on plan assets | 10,079 | | (13,764) | | 0 | | 0 | | 0 | | 0 | |
Plan participants’ contributions | 0 | | 0 | | 92 | | 100 | | 0 | | 0 | |
Employer contributions | 0 | | 0 | | 234 | | 251 | | 906 | | 850 | |
Benefits paid | (4,320) | | (3,744) | | (326) | | (351) | | (906) | | (850) | |
Fair value of plan assets at end of year | $ | 84,644 | | $ | 78,885 | | $ | 0 | | $ | 0 | | $ | 0 | | $ | 0 | |
Funded (unfunded) status | $ | 13,926 | | $ | 8,364 | | $ | (7,603) | | $ | (7,603) | | $ | (24,961) | | $ | (24,991) | |
The benefit obligation for the DB Pension Plan at December 31, 2023 and 2022, was $70.7 million and $70.5 million, respectively. The accumulated benefit obligation for the Life and Healthcare Plan at both year end 2023 and 2022 was $7.6 million. The accumulated benefit obligation for the SERPs at both December 31, 2023 and 2022 was $25.0 million. The funded status of the DB Pension Plan was recognized in other assets and the unfunded status of the Life and Healthcare Plan, and SERPs was recognized in other liabilities in the Consolidated Statement of Condition at December 31, 2023 in the amounts of $13.9 million, $(7.6) million, and $(25.0) million, respectively. The funded status of the DB Pension Plan was recognized in other assets and the unfunded status of the Life and Healthcare Plan, and SERPs in the amount of $8.4 million, $(7.6) million, and $(25.0) million, respectively, was recognized in other liabilities in the Consolidated Statement of Condition at December 31, 2022.
The actuarial (gains) losses shown above totaling $(774,000) in 2023 and $32.4 million in 2022 were mainly the result of changes in the discount rates used to measure the benefit obligation of all plans at year end compared to those used at the prior year-end. The specific discount rates for each plan at December 31, 2023 and December 31, 2022 are provided below.
Net periodic benefit cost and other comprehensive income (loss) includes the following components:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
Components of net periodic benefit cost | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 |
Service cost | $ | 0 | | $ | 0 | | $ | 0 | | $ | 33 | | $ | 174 | | $ | 186 | | $ | 43 | | $ | 78 | | $ | 231 | |
Interest cost | 3,275 | | 1,985 | | 1,628 | | 354 | | 223 | | 180 | | 1,148 | | 814 | | 692 | |
Expected return on plan assets | (4,789) | | (5,885) | | (5,652) | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Amortization of prior service (credit) cost | 0 | | 0 | | 1 | | (61) | | (61) | | (61) | | 278 | | 277 | | 282 | |
Recognized net actuarial loss | 1,156 | | 1,217 | | 1,559 | | (40) | | 196 | | 312 | | 0 | | 847 | | 1,080 | |
| | | | | | | | | |
| | | | | | | | | |
Net periodic benefit (credit) cost | $ | (358) | | $ | (2,683) | | $ | (2,464) | | $ | 286 | | $ | 532 | | $ | 617 | | $ | 1,469 | | $ | 2,016 | | $ | 2,285 | |
Service cost is included in salaries and wages in the Consolidated Statements of Income. The other components of net periodic benefit costs are included in other operating expense in the Consolidated Statements of Income.
Other changes in plan assets and benefit obligations recognized in other comprehensive income (loss):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 |
Net actuarial gain | $ | (4,048) | | $ | (1,080) | | $ | (8,209) | | $ | (153) | | $ | (2,598) | | $ | (574) | | $ | (315) | | $ | (9,083) | | $ | (3,002) | |
Recognized actuarial (loss) gain | (1,156) | | (1,217) | | (1,559) | | 40 | | (196) | | (312) | | 0 | | (847) | | (1,080) | |
Prior service credit | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | | 0 | |
Recognized prior service cost (credit) | 0 | | 0 | | (1) | | 61 | | 61 | | 61 | | (278) | | (277) | | (282) | |
| | | | | | | | | |
| | | | | | | | | |
Recognized in other comprehensive income (loss) | $ | (5,204) | | $ | (2,297) | | $ | (9,769) | | $ | (52) | | $ | (2,733) | | $ | (825) | | $ | (593) | | $ | (10,207) | | $ | (4,364) | |
Total recognized in net periodic benefit cost and other comprehensive income (loss) | $ | (5,562) | | $ | (4,980) | | $ | (12,233) | | $ | 234 | | $ | (2,201) | | $ | (208) | | $ | 876 | | $ | (8,191) | | $ | (2,079) | |
Pre-tax amounts recognized as a component of accumulated other comprehensive income (loss) as of year-end that have not been recognized as a component of the Company’s combined net periodic benefit cost of the Company’s DB Pension Plan, Life and Healthcare Plan and SERPs are presented in the following table:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 |
Net actuarial loss (gain) | $ | 33,265 | | $ | 38,468 | | $ | 40,765 | | $ | (1,022) | | $ | (909) | | $ | 1,886 | | $ | 287 | | $ | 603 | | $ | 10,532 | |
Prior service cost (credit) | 0 | | 0 | | 0 | | (104) | | (165) | | (226) | | 1,311 | | 1,588 | | 1,866 | |
Total | $ | 33,265 | | $ | 38,468 | | $ | 40,765 | | $ | (1,126) | | $ | (1,074) | | $ | 1,660 | | $ | 1,598 | | $ | 2,191 | | $ | 12,398 | |
Weighted-average assumptions used in accounting for the plans were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
| 2023 | 2022 | 2021 | 2023 | 2022 | 2021 | 2023 | 2022 | 2021 |
Discount Rates | | | | | | | | | |
Benefit Cost for Plan Year | 4.95 | % | 2.63 | % | 2.24 | % | 4.98 | % | 2.69 | % | 2.33 | % | 4.98 | % | 2.71 | % | 2.37 | % |
Benefit Obligation at End of Plan Year | 4.75 | % | 4.95 | % | 2.63 | % | 4.79 | % | 4.98 | % | 2.69 | % | 4.78 | % | 4.98 | % | 2.71 | % |
Expected long-term return on plan assets | 6.25 | % | 6.25 | % | 6.50 | % | N/A | N/A | N/A | N/A | N/A | N/A |
Rate of compensation increase | | | | | | | | | |
Benefit Cost for Plan Year | N/A | N/A | N/A | 4.00 | % | 4.00 % | 4.00 % | 5.00 | % | 5.00 % | 5.00 % |
Benefit Obligation at End of Plan Year | N/A | N/A | N/A | 4.00 % | 4.00 % | 4.00 % | 5.00 | % | 5.00 % | 5.00 % |
To develop the expected long-term rate of return on assets assumption for the DB Pension Plan, the Company considered the historical returns and the future expectations for returns for each asset class, as well as target asset allocations of the pension portfolio. Based on this analysis, the Company selected 6.25% as the long-term rate of return on assets assumption.
The discount rates used to determine the Company’s DB Pension Plan and other post-retirement benefit obligations as of December 31, 2023, and December 31, 2022, were determined by matching estimated benefit cash flows to a yield curve derived from Citigroup’s regular bond yield at December 31, 2023 and December 31, 2022.
Based on the Company’s anticipation of future experience under the DB Pension Plan, the mortality tables used to determine future benefit obligations under the plan were updated as of December 31, 2021 to the PRI-2012 Mortality Tables with Mortality Improvement Scale MP 2021. The Company updated this assumption based on the newest improvement table released by The Society of Actuaries as of December 31, 2023. The appropriateness of the assumptions is reviewed annually.
Cash Flows
Plan assets are amounts that have been segregated and restricted to provide benefits, and include amounts contributed by the Company and amounts earned from investing contributions, less benefits paid. The Company funds the cost of the SERPs and the Life and Healthcare Plan benefits on a pay-as-you-go basis.
The benefits as of December 31, 2023, expected to be paid in each of the next five fiscal years, and in the aggregate for the five fiscal years thereafter were as follows:
| | | | | | | | | | | |
(In thousands) | DB Pension Plan | Life and Healthcare Plan | SERP Plan |
2024 | $ | 4,433 | | $ | 516 | | $ | 953 | |
2025 | 4,575 | | 490 | | 950 | |
2026 | 4,717 | | 492 | | 940 | |
2027 | 4,855 | | 495 | | 917 | |
2028 | 4,844 | | 477 | | 893 | |
2029-2033 | 24,596 | | 2,292 | | 8,938 | |
Total | $ | 48,020 | | $ | 4,762 | | $ | 13,591 | |
Plan Assets
The Company’s DB Pension Plan’s weighted-average asset allocations at December 31, 2023 and 2022, respectively, by asset category are as follows:
| | | | | | | | |
| 2023 | 2022 |
Equity securities | 61 | % | 58 | % |
Debt securities | 38 | % | 38 | % |
Other | 1 | % | 4 | % |
Total Allocation | 100 | % | 100 | % |
It is the policy of the Trustees of the Plan to invest the Pension Trust Fund (the "Fund") for total return. The Trustees seek the maximum return consistent with the interests of the participants and beneficiaries and prudent investment management. The management of the Fund’s assets is in compliance with the guidelines established in the Company’s Pension Plan and Trust Investment Policy, which is reviewed and approved annually by the Tompkins Board of Directors, and the Pension Investment Review Committee.
The intention is for the Fund to be prudently diversified. The Fund’s investments will be invested among the fixed income, equity and cash equivalent sectors. The Pension Investment Committee will designate minimum and maximum positions in any of the sectors. In no case shall more than 10% of the Fund assets consist of qualified securities or real estate of the Company. Unless otherwise approved by the Trustees of the Plan, the following investments are prohibited:
•Restricted stock, private placements, short positions, calls, puts, or margin transactions;
•Commodities, oil and gas properties, real estate properties, or
•Any investment that would constitute a prohibited transaction as described in the Employee Retirement Income Security Act of 1974 ("ERISA"), section 407, 29 U.S.C. 1106.
In general, the investment in debt securities is limited to readily marketable debt securities having a Standard & Poor’s rating of "A" or Moody’s rating of "A", securities of, or guaranteed by the United States Government or its agencies, or obligations of banks or their holding companies that are rated in the three highest ratings assigned by Fitch Investor Service, Inc. In addition, investments in equity securities must be listed on the NYSE or traded on the national Over The Counter market or listed on the NASDAQ. Cash equivalents generally may be United States Treasury obligations, commercial paper having a Standard & Poor’s rating of "A-1" or Moody’s National Credit Officer rating of "P-1"or higher.
The major categories of assets in the Company’s DB Pension Plan as of year-end are presented in the following table. Assets are segregated by the level of valuation inputs within the fair value hierarchy established by ASC Topic 820 utilized to measure fair value (see Note 19-Fair Value Measurements).
| | | | | | | | | | | | | | |
Fair Value Measurements | | | | |
December 31, 2023 | | | | |
(In thousands) | Fair Value 2023 | (Level 1) | (Level 2) | (Level 3) |
Cash and cash equivalents | $ | 1,023 | | $ | 1,023 | | $ | 0 | | $ | 0 | |
| | | | |
| | | | |
| | | | |
Common stocks | 25,975 | | 25,975 | | 0 | | 0 | |
Mutual funds | 57,646 | | 57,646 | | 0 | | 0 | |
| | | | |
Total Fair Value of Plan Assets | $ | 84,644 | | $ | 84,644 | | $ | 0 | | $ | 0 | |
| | | | | | | | | | | | | | |
Fair Value Measurements | | | | |
December 31, 2022 | | | | |
(In thousands) | Fair Value 2022 | (Level 1) | (Level 2) | (Level 3) |
Cash and cash equivalents | $ | 3,322 | | $ | 3,322 | | $ | 0 | | $ | 0 | |
| | | | |
| | | | |
| | | | |
Common stocks | 22,386 | | 22,386 | | 0 | | 0 | |
Mutual funds | 53,177 | | 53,177 | | 0 | | 0 | |
| | | | |
Total Fair Value of Plan Assets | $ | 78,885 | | $ | 78,885 | | $ | 0 | | $ | 0 | |
The Company determines the fair value for its pension plan assets using an independent pricing service. The pricing service uses a variety of techniques to determine fair value, including market maker bids, quotes and pricing models. Inputs to the model include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. Based on the inputs used by our independent pricing services, the Company identifies the appropriate level within the fair value hierarchy to report these fair values. U.S. Treasury securities, common stocks and mutual funds are considered Level 1 based on quoted prices in active markets.
Life insurance benefits are provided to certain officers of the Company. In connection with these policies, the Company reflects life insurance assets on its Consolidated Statements of Condition of $67.9 million at December 31, 2023, and $85.6 million at December 31, 2022. The insurance is carried at its cash surrender value on the Consolidated Statements of Condition. In the fourth quarter of 2023, the Company surrendered certain separate account BOLI policies, which accounts for the decrease in the cash surrender value between December 31, 2023 and December 31, 2022. Increases in the cash surrender value of the insurance are reflected as noninterest income, net of any related mortality expense.
The Company provides split dollar life insurance benefits to certain employees. The plan is unfunded and the estimated liability of the plan is recorded in other liabilities in the Consolidated Statement of Condition at $1.5 million as of both December 31, 2023 and 2022. Compensation expense related to the split dollar life insurance was approximately $3,000 in 2023 and $7,000 in 2022.
Note 12 Stock Plans and Stock Based Compensation
In 2019, the 2009 Tompkins Financial Corporation Equity Plan ("2009 Equity Plan") expired and was replaced by the new Tompkins Financial Corporation 2019 Equity Plan ("2019 Equity Plan"). Under the 2019 Equity Plan, the Company may grant stock appreciation rights ("SARs"), shares of restricted stock and restricted units and performance share awards covering up to 2,275,000 shares of the Company's common stock to certain officers and employees. Additionally, restricted stock awards and restricted units and performance share awards will reduce the shares available for grant under the 2019 Equity Plan by 4.25 shares for each share subject to an award, resulting in a total number of full-value share awards that may be issued under the 2019 Equity Plan to 535,294. Stock options and SARs are granted at an exercise price equal to the stock’s fair value at the date of grant, may not have a term in excess of ten years, and have vesting periods that range between five and seven years from the grant date. Options and SARs with an expiration date in 2026 have a five-year vesting schedule with zero percent vesting in year one and 25% vesting in years two through five. All other Options and SARs have a seven-year vesting schedule with zero percent vesting in year one, 17% vesting in years two through six and 15% vesting in year seven. Restricted stock awards and restricted stock units that were granted in the periods covering 2018 through 2023 have a five-year vesting schedule with zero percent vesting in year one and 25% vesting in years two through five. For Performance Awards, there is a 3-year performance period in the fiscal years immediately following the grant date, at which time the performance goal is measured. If the goal is achieved, the value of the award vests is either immediately payable, or is subject to additional time-based vesting, depending on the terms of the particular executive’s award agreement.
The Company granted 120,116 equity awards to its employees in 2023, consisting of 79,140 shares of restricted stock, 0 performance share awards, 28,346 performance stock units and 12,630 restricted stock units. The Company granted 77,269 equity awards to its employees in 2022, consisting of 50,155 shares of restricted stock, 2,615 performance share awards, 16,284 performance share units and 8,215 restricted stock units. The Company granted 67,846 equity awards to its employees in 2021, consisting of 54,151 shares of restricted stock, 5,340 performance share awards and 8,355 restricted stock units.
The following table presents the activity related to stock options and SARs under all plans for the year ended December 31, 2023: | | | | | | | | | | | | | | |
| Number of Shares/Rights | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value |
Outstanding at January 1, 2023 | 59,853 | | $ | 57.12 | | | |
Granted | 0 | | 0.00 | | | |
Exercised | (10,196) | | 45.97 | | | |
Forfeited | (775) | | 76.90 | | | |
Outstanding at December 31, 2023 | 48,882 | | $ | 59.13 | | 1.54 | $ | 276,810 | |
Exercisable at December 31, 2023 | 48,882 | | $ | 59.13 | | 1.54 | $ | 276,810 | |
Total stock-based compensation expense for stock options and SARs was $0 in 2023, $33,000 in 2022, and $151,000 in 2021. As of December 31, 2023, unrecognized compensation cost related to unvested stock options and SARs totaled $0. Net cash proceeds, tax benefits and intrinsic value related to total stock options, SARs, and restricted stock exercised is as follows:
| | | | | | | | | | | |
(In thousands) | 2023 | 2022 | 2021 |
Proceeds from stock option exercises | $ | (124) | | $ | (538) | | $ | (803) | |
Tax benefits related to stock option exercises | (229) | | 196 | | 355 | |
Intrinsic value of stock option exercises | 270 | | 1,075 | | 1,900 | |
The Company uses the Black-Scholes option-valuation model to determine the fair value of incentive stock options and SARs at the date of grant. The valuation model estimates fair value based on the assumptions for the risk-free rate, expected dividend yield, volatility and expected life. The risk-free rate is the interest rate available on zero-coupon U.S. Treasury instruments with a remaining term equal to the expected term of the share option at the time of grant. The expected dividend yield is based on the dividend trends and the market price of the Company’s stock price at grant. Volatility is largely based on historical volatility of the Company’s stock price. The expected term is based upon historical experience of employee exercises and terminations as the vesting term of the grants. The fair values of the grants are expensed over the vesting periods. There were no incentive stock options or SARs granted in 2023, 2022 and 2021.
| | | | | | | | | | | | | | | | | |
December 31, 2023 | | | |
Options and SARs Outstanding | Options and SARs Exercisable |
Range of Exercise Prices | Number Outstanding | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price |
| | | | | |
| | | | | |
$41.01-50.00 | 19,294 | | 0.82 | $ | 49.22 | | 19,294 | | $ | 49.22 | |
$50.01-76.90 | 29,366 | | 2.01 | $ | 65.43 | | 29,366 | | $ | 65.43 | |
$76.91-86.18 | 222 | | 2.89 | $ | 86.18 | | 222 | | $ | 86.18 | |
| 48,882 | | 1.54 | $ | 59.13 | | 48,882 | | $ | 59.13 | |
The following table presents activity related to restricted stock awards and restricted stock units for the year ended December 31, 2023:
| | | | | | | | |
| Number of Shares | Weighted Average Grant Date Fair Value |
Unvested at January 1, 2023 | 237,356 | | $ | 73.07 | |
Granted | 120,116 | | 51.02 | |
Vested | (61,065) | | 71.81 | |
Forfeited | (26,495) | | 78.37 | |
Unvested at December 31, 2023 | 269,912 | | $ | 63.22 | |
The Company granted 79,140 restricted stock awards, 12,630 restricted stock units, 28,346 performance units and 0 performance share awards in 2023, each at an average grant date fair value of $51.02. The Company granted 50,155 restricted stock awards, 8,215 restricted stock units, 16,284 performance units and 2,615 performance share awards in 2022, each at an average grant date fair value of $81.48. The Company granted 54,151 restricted stock awards, 8,355 restricted stock units and 5,340 performance share awards in 2021 at an average grant date fair value of $83.97. The grant date fair values were the closing prices of the Company’s common stock on the grant dates. The Company recognized stock-based compensation related to restricted stock awards, restricted stock units, and performance share awards of $4.4 million in 2023, $4.8 million in 2022, and $5.4 million in 2021. Unrecognized compensation costs related to restricted stock and performance awards totaled $8.1 million, and restricted stock units totaled $1.3 million at December 31, 2023 and will be recognized over 3.2 years and 4.1 years, respectively on a weighted average basis.
Note 13 Other Noninterest Income and Expense
Other income and operating expense totals are presented in the table below. Components of these totals exceeding 1%, and other significant items, of the aggregate of total other noninterest income and total other noninterest expenses for any of the years presented below are stated separately.
| | | | | | | | | | | |
| Year ended December 31, |
(In thousands) | 2023 | 2022 | 2021 |
NONINTEREST INCOME | | | |
Other service charges | $ | 2,625 | | $ | 2,703 | | $ | 2,826 | |
Increase in cash surrender value of corporate owned life insurance | 1,727 | | 1,162 | | 1,879 | |
Net gain on sale of loans | 96 | | 155 | | 943 | |
| | | |
Other miscellaneous income | 2,063 | | 1,905 | | 1,555 | |
Total other noninterest income | $ | 6,511 | | $ | 5,925 | | $ | 7,203 | |
NONINTEREST EXPENSES | | | |
Marketing expense | $ | 5,264 | | $ | 5,708 | | $ | 4,319 | |
Professional fees | 7,535 | | 6,931 | | 6,909 | |
Technology expense | 15,939 | | 15,167 | | 11,747 | |
Cardholder expense | 4,238 | | 4,560 | | 3,532 | |
FDIC insurance | 4,298 | | 2,798 | | 2,758 | |
Legal expense | 1,709 | | 1,414 | | 1,190 | |
Penalties on prepayment of FHLB borrowings | 0 | | 0 | | 2,929 | |
Other miscellaneous expenses | 17,331 | | 13,919 | | 13,869 | |
Total other noninterest expenses | $ | 56,314 | | $ | 50,497 | | $ | 47,253 | |
Note 14 Revenue Recognition
The Company recognizes revenue in accordance with ASU No. 2014-09 Revenue from Contracts with Customers (ASC 606) and all subsequent ASUs that modified ASC 606. ASC 606 is applicable to the Company’s noninterest revenue streams including its deposit related fees, card services income, trust and management, and insurance commissions and fees. Noninterest revenue streams in-scope of Topic 606 are discussed below.
Insurance Commissions and Fees
Insurance commissions and fees from insurance product sales are typically earned upon the effective date of bound coverage, as no significant performance obligation remains after coverage is bound. Commission revenue on policies billed in installments is accrued based upon the completion of the performance obligation creating a current asset for the unbilled revenue until such time as an invoice is generated, typically not to exceed twelve months. Contingent commissions are estimated based upon management's expectations for the user with an appropriate constraint applied and accrued relative to the recognition of the corresponding core commissions.
Trust & Asset Management
Trust and asset management income is primarily comprised of fees earned from the management and administration of trusts and other customer assets. The Company’s performance obligation is generally satisfied over time and the resulting fees are
recognized monthly, based upon the month-end fair value of the assets under management and the applicable fee rate. Payment is generally received a few days after month end through a direct charge to customers’ accounts. The Company does not earn performance-based incentives. Optional services such as real estate sales and tax return preparation services are also available to existing trust and asset management customers. The Company’s performance obligation for these transactional-based services is generally satisfied, and related revenue recognized, at a point in time (i.e., as incurred). Payment is received shortly after services are rendered.
Mutual Fund & Investment Income
Mutual fund and investment income consists of other recurring revenue streams such as commissions from sales of mutual funds and other investments, investment advisory fees from the Company’s Strategic Asset Management Services wealth management product. Commissions from the sale of mutual funds and other investments are recognized on trade date, which is when the Company has satisfied its performance obligation. The Company also receives periodic service fees (i.e., trailers) from mutual fund companies typically based on a percentage of net asset value, recorded over time, usually monthly or quarterly, as net asset value is determined. Investment advisor fees from the wealth management product is earned over time and based on an annual percentage rate of the net asset value. The investment advisor fees are charged to the customer’s account in advance on the first month of the quarter, and the revenue is recognized over the following three-month period. The Company does engage a third party, LPL Financial, LLC (LPL), to satisfy part of this performance obligation, and therefore this income is reported net of any corresponding expenses paid to LPL.
Service Charges on Deposit Accounts
Service charges on deposit accounts consist of account analysis fees (i.e., net fees earned on analyzed business and public checking accounts), monthly service fees, check orders, and other deposit account related fees. The Company’s performance obligation for account analysis fees and monthly service fees is generally satisfied, and the related revenue recognized, over the period in which the service is provided. Check orders and other deposit account related fees are largely transactional based, and therefore, the Company’s performance obligation is satisfied and related revenue recognized, at a point in time. Payment for service charges on deposit accounts is primarily received immediately or in the following month through a direct charge to customers’ accounts.
Card Services Income
Fees, exchange, and other service charges are primarily comprised of debit and credit card income, ATM fees, merchant services income, and other service charges. Debit and credit card income is primarily comprised of interchange fees earned whenever the Company’s debit and credit cards are processed through card payment networks such as MasterCard. ATM fees are primarily generated when a Company cardholder uses a non-Company ATM or a non-Company cardholder uses a Company ATM. Merchant services income mainly represents fees charged to merchants to process their debit and credit card transactions, in addition to account management fees. The Company’s performance obligation for fees and exchange are largely satisfied, and related revenue recognized, when the services are rendered or upon completion. Payment is typically received immediately or in the following month.
Other
Other service charges include revenue from processing wire and ACH transfers, lock box service and safe deposit box rental. Payment on these revenue streams is received primarily through a direct charge to the customer’s account, immediately or in the following month, and therefore, the Company’s performance obligation is satisfied, and related revenue recognized, at a point in time.
The following presents noninterest income, segregated by revenue streams in-scope and out-of-scope of ASC 606, for the years ended December 31, 2023, 2022, and 2021:
| | | | | | | | | | | |
| Year ended December 31, |
(In thousands) | 2023 | 2022 | 2021 |
Noninterest Income | | | |
In-scope of Topic 606: | | | |
Insurance Revenues | $ | 37,351 | | $ | 36,201 | | $ | 34,836 | |
Investment Service Income | 17,951 | | 18,091 | | 19,388 | |
Service Charges on Deposit Accounts | 6,913 | | 7,365 | | 6,347 | |
Card Services Income | 11,488 | | 11,024 | | 10,826 | |
Other | 1,324 | | 1,291 | | 1,204 | |
Noninterest Income (in-scope of ASC 606) | 75,027 | | 73,972 | | 72,601 | |
Noninterest Income (out-of-scope of ASC 606) | (64,786) | | 4,000 | | 6,248 | |
Total Noninterest Income | $ | 10,241 | | $ | 77,972 | | $ | 78,849 | |
Contract Balances
A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration or before payment is due, which would result in contract receivables or assets, respectively. A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment or for which payment is due from the customer. The Company’s noninterest revenue streams, excluding some insurance commissions and fees, are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Receivables primarily consist of amounts due for insurance and wealth management services performed for which the Company's performance obligations have been fully satisfied. Receivables amounted to $5.7 million and $3.0 million at December 31, 2023, compared to $6.1 million and $2.5 million at December 31, 2022. Additionally, the Company had contract assets related to contingent income of $2.8 million, and $2.9 million, respectively, related to period end 2023, and 2022, and contract liabilities of $1.9 million for year end 2023 and $1.6 million for year end 2022.
Contract Acquisition Costs
In connection with the adoption of ASC 606, an entity is required to capitalize, and subsequently amortize into expense, certain incremental costs of obtaining a contract with a customer if these costs are expected to be recovered. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it would not have incurred if the contract had not been obtained (for example, sales commission). The Company utilizes the practical expedient which allows entities to immediately expense contract acquisition costs when the asset that would have resulted from capitalizing these costs would have been amortized in one year or less. Upon adoption of ASC 606, the Company did not capitalize any contract acquisition costs.
Note 15 Income Taxes
The income tax expense (benefit) attributable to income from operations is summarized as follows:
| | | | | | | | | | | |
(In thousands) | Current | Deferred | Total |
2023 | | | |
Federal | $ | 2,583 | | $ | 381 | | $ | 2,964 | |
State | 346 | | (815) | | (469) | |
Total | $ | 2,929 | | $ | (434) | | $ | 2,495 | |
2022 | | | |
Federal | $ | 19,238 | | $ | 994 | | $ | 20,232 | |
State | 4,409 | | (84) | | 4,325 | |
Total | $ | 23,647 | | $ | 910 | | $ | 24,557 | |
2021 | | | |
Federal | $ | 19,345 | | $ | 1,485 | | $ | 20,830 | |
State | 4,039 | | 313 | | 4,352 | |
Total | $ | 23,384 | | $ | 1,798 | | $ | 25,182 | |
The primary reasons for the differences between income tax expense and the amount computed by applying the statutory federal income tax rate to earnings are as follows:
| | | | | | | | | | | |
| 2023 | 2022 | 2021 |
Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % |
State income taxes, net of federal benefit | (3.1) | | 3.1 | | 3.0 | |
Tax exempt income | (9.4) | | (1.1) | | (1.2) | |
Excess benefits from equity-based compensation | 1.1 | | (0.3) | | (0.5) | |
Bank-owned life insurance income | (3.0) | | (0.2) | | (0.4) | |
Surrender of Bank-owned life insurance | 13.6 | | 0.0 | | 0.0 | |
Federal tax credit | (0.8) | | 0.0 | | 0.0 | |
Non-Deductible Meals & Entertainment | 1.3 | | 0.0 | | 0.0 | |
Section 162(m) Limitation | 1.1 | | 0.2 | | 0.2 | |
Deductible ESOP Dividends under 404(k) | (2.5) | | (0.3) | | (0.2) | |
| | | |
All other | 1.5 | | 0.0 | | 0.1 | |
Total | 20.8 | % | 22.4 | % | 22.0 | % |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities as of December 31 were as follows:
| | | | | | | | | | |
(In thousands) | 2023 | 2022 | | |
Deferred tax assets: | | | | |
Allowance for credit losses | $ | 13,731 | | $ | 12,387 | | | |
Lease liability | 7,267 | | 8,535 | | |
Interest income on nonperforming loans | 992 | | 503 | | | |
Compensation and benefits | 12,414 | | 12,316 | | | |
Purchase accounting adjustments | 424 | | 517 | | | |
| | | | |
Liabilities held at fair value | 54 | | 56 | | | |
Deferred loan fees and costs | 1,111 | | 1,053 | | | |
Net operating loss carryforwards | 491 | | 4 | | | |
Other | 744 | | 589 | | | |
Total | $ | 37,228 | | $ | 35,960 | | | |
Deferred tax liabilities: | | | | |
Prepaid pension | 11,813 | | 11,528 | | | |
Right of use asset | 6,955 | | 8,222 | | |
Depreciation | 3,505 | | 3,767 | | | |
Intangibles | 1,600 | | 1,489 | | | |
| | | | |
Leases | 2,688 | | 2,617 | | | |
Taxable bank-owned life insurance policies | 1,834 | | 0 | | | |
Contingent Commissions | 778 | | 797 | | | |
Other | 855 | | 774 | | | |
Total deferred tax liabilities | $ | 30,028 | | $ | 29,194 | | | |
Net deferred tax asset at year-end | 7,200 | | 6,766 | | | |
Net deferred tax asset at beginning of year | 6,766 | | 7,676 | | | |
Decrease (increase) in net deferred tax asset | 434 | | (910) | | | |
| | | | |
| | | | |
Deferred tax (benefit) expense | $ | (434) | | $ | 910 | | | |
Net operating loss carryforwards for New York and New York City purposes of $8.6 million and $0.4 million were generated in 2023. These net operating losses do not begin to expire until 2043.
The above analysis does not include recorded deferred tax assets (liabilities) of $32.7 million and $58.6 million as of December 31, 2023 and 2022, respectively, related to net unrealized holdings losses/(gains) in the available-for-sale debt securities portfolio. In addition, the analysis excludes recorded deferred tax assets of $8.4 million and $9.8 million, as of December 31, 2023 and 2022, respectively, related to employee benefit plans.
Realization of deferred tax assets is dependent upon the generation of future taxable income or the existence of sufficient taxable income. A valuation allowance is provided when it is more likely than not that some portion of the deferred tax assets will not be realized. In assessing the need for a valuation allowance, management considers the scheduled reversal of the deferred tax liabilities, the level of historical taxable income, and the projected future taxable income over the periods in which the temporary differences comprising the deferred tax assets will be deductible. Based on its assessment, management determined that no valuation allowance was necessary at December 31, 2023 and 2022.
At December 31, 2023, December 31, 2022 and December 31, 2021, the Company had an insignificant amount of ASC 740-10 unrecognized tax benefits. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company recognizes interest and penalties on unrecognized tax benefits in income tax expense in its Consolidated Statements of Income.
The Company is subject to U.S. federal income tax and income tax in New York and various state jurisdictions. All tax years ending after December 31, 2019 are open to examination by the taxing authorities.
Note 16 Other Comprehensive Income (Loss)
The tax effect allocated to each component of other comprehensive income (loss) were as follows:
| | | | | | | | | | | |
December 31, 2023 | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax |
(In thousands) | | | |
Available-for-sale debt securities: | | | |
Change in net unrealized gain (loss) during the period | $ | 35,008 | | $ | (8,578) | | $ | 26,430 | |
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income | 69,984 | | (17,146) | | 52,838 | |
Net unrealized gains (losses) | 104,992 | | (25,724) | | 79,268 | |
| | | |
Employee benefit plans: | | | |
Net retirement plan gain (losses) | 4,516 | | (1,106) | | 3,410 | |
| | | |
| | | |
Amortization of net retirement plan actuarial loss | 1,116 | | (273) | | 843 | |
Amortization of net retirement plan prior service cost | 217 | | (54) | | 163 | |
Employee benefit plans | 5,849 | | (1,433) | | 4,416 | |
Other comprehensive income (loss) | $ | 110,841 | | $ | (27,157) | | $ | 83,684 | |
| | | | | | | | | | | |
December 31, 2022 | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax |
(In thousands) | | | |
Available-for-sale debt securities: | | | |
Change in net unrealized (loss) gain during the period | $ | (229,463) | | $ | 56,223 | | $ | (173,240) | |
Reclassification adjustment for net realized loss on sale of available-for-sale debt securities included in net income | 11,916 | | (2,919) | | 8,997 | |
Net unrealized losses | (217,547) | | 53,304 | | (164,243) | |
| | | |
Employee benefit plans: | | | |
Net retirement plan gain (loss) | 12,761 | | (3,127) | | 9,634 | |
| | | |
| | | |
Amortization of net retirement plan actuarial loss | 2,260 | | (554) | | 1,706 | |
Amortization of net retirement plan prior service cost | 216 | | (52) | | 164 | |
Employee benefit plans | 15,237 | | (3,733) | | 11,504 | |
Other comprehensive (loss) income | $ | (202,310) | | $ | 49,571 | | $ | (152,739) | |
| | | | | | | | | | | |
December 31, 2021 | Before-Tax Amount | Tax (Expense) Benefit | Net of Tax |
(In thousands) | | | |
Available-for-sale debt securities: | | | |
Change in net unrealized (loss) gain during the period | $ | (46,301) | | $ | 11,340 | | $ | (34,961) | |
Reclassification adjustment for net realized gain on sale of available-for-sale debt securities included in net income | (275) | | 67 | | (208) | |
Net unrealized losses | (46,576) | | 11,407 | | (35,169) | |
| | | |
Employee benefit plans: | | | |
Net retirement plan gain (loss) | 11,785 | | (2,887) | | 8,898 | |
| | | |
| | | |
Amortization of net retirement plan actuarial gain | 2,951 | | (723) | | 2,228 | |
Amortization of net retirement plan prior service (cost) credit | 221 | | (54) | | 167 | |
Employee benefit plans | 14,957 | | (3,664) | | $ | 11,293 | |
Other comprehensive (loss) income | $ | (31,619) | | $ | 7,743 | | $ | (23,876) | |
The following table presents the activity in our accumulated other comprehensive loss for the periods indicated:
| | | | | | | | | | | |
(In thousands) | Available-for- Sale Debt Securities | Employee Benefit Plans | Accumulated Other Comprehensive (Loss) Income |
Balance at January 1, 2021 | $ | 20,609 | | $ | (52,683) | | $ | (32,074) | |
Other comprehensive (loss) income | (35,169) | | 11,293 | | (23,876) | |
Balance at December 31, 2021 | $ | (14,560) | | $ | (41,390) | | $ | (55,950) | |
| | | |
Balance at January 1, 2022 | (14,560) | | (41,390) | | (55,950) | |
Other comprehensive (loss) income | (164,243) | | 11,504 | | (152,739) | |
| | | |
Balance at December 31, 2022 | $ | (178,803) | | $ | (29,886) | | $ | (208,689) | |
| | | |
Balance at January 1, 2023 | (178,803) | | (29,886) | | (208,689) | |
Other comprehensive income (loss) | 79,268 | | 4,416 | | 83,684 | |
Balance at December 31, 2023 | $ | (99,535) | | $ | (25,470) | | $ | (125,005) | |
| | | | | | | | |
December 31, 2023 | | |
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands) | Amount Reclassified from Accumulated Other Comprehensive (Loss)1 | Affected Line Item in the Statement Where Net Income is Presented |
Available-for-sale debt securities: | | |
Unrealized gains and losses on available-for-sale debt securities | $ | (69,984) | | Net (loss) gain on securities transactions |
| 17,146 | | Tax expense |
| (52,838) | | Net of tax |
Employee benefit plans: | | |
Amortization of the following2 | | |
Net retirement plan actuarial loss | (1,116) | | Other operating expense |
Net retirement plan prior service cost | (217) | | Other operating expense |
| (1,333) | | Total before tax |
| 327 | | Tax benefit |
| $ | (1,006) | | Net of tax |
| | | | | | | | |
December 31, 2022 | | |
Details about Accumulated other Comprehensive Income (Loss) Components (In thousands) | Amount Reclassified from Accumulated Other Comprehensive (Loss)1 | Affected Line Item in the Statement Where Net Income is Presented |
Available-for-sale debt securities: | | |
Unrealized gains and losses on available-for-sale debt securities | $ | (11,916) | | Net (loss) gain on securities transactions |
| 2,919 | | Tax expense |
| (8,997) | | Net of tax |
Employee benefit plans: | | |
Amortization of the following2 | | |
Net retirement plan actuarial loss | (2,260) | | Other operating expense |
Net retirement plan prior service cost | (216) | | Other operating expense |
| (2,476) | | Total before tax |
| 606 | | Tax benefit |
| $ | (1,870) | | Net of tax |
1 Amounts in parentheses indicate debits in income statement.
2 The accumulated other comprehensive income (loss) components are included in the computation of net periodic benefit cost (See Note 11 - "Employee Benefit Plans").
Note 17 Commitments and Contingent Liabilities
The Company, in the normal course of business, is a party to financial instruments with off-balance-sheet risk to meet the financial needs of its customers. These financial instruments include loan commitments, standby letters of credit, and unused portions of lines of credit. The contract, or notional amount, of these instruments represents the Company’s involvement in particular classes of financial instruments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized on the Consolidated Statements of Condition.
The Company’s maximum potential obligations to extend credit for loan commitments (unfunded loans, unused lines of credit, and standby letters of credit) outstanding on December 31 were as follows:
| | | | | | | | |
(In thousands) | 2023 | 2022 |
Loan commitments | $ | 109,342 | | $ | 160,647 | |
Standby letters of credit | 39,089 | | 35,759 | |
Undisbursed portion of lines of credit | 1,020,558 | | 978,484 | |
Total | $ | 1,168,989 | | $ | 1,174,890 | |
Commitments to extend credit (including lines of credit) are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Standby letters of credit are conditional commitments to guarantee the performance of a customer to a third party. The Company extends standby letters of credit to its customers in the normal course of business. The standby letters of credit are generally short-term. As of December 31, 2023, the Company’s maximum potential obligation under standby letters of credit was $39.1 million. Management uses the same credit policies in making commitments to extend credit and standby letters of credit as are used for on-balance-sheet lending decisions. Based upon management’s evaluation of the counterparty, the Company may require collateral to support commitments to extend credit and standby letters of credit. The credit risk amounts are equal to the contractual amounts, assuming the amounts are fully advanced and collateral or other security is of no value. The Company does not anticipate losses as a result of these transactions. These commitments also have off-balance-sheet interest-rate risk, in that the interest rate at which these commitments were made may not be at market rates on the date the commitments are fulfilled. Since some commitments and standby letters of credit are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements.
The Company may also have rate lock agreements associated with mortgage loans to be sold in the secondary market (certain of which relate to loan applications for which no formal commitment has been made). The amount of rate lock agreements at December 31, 2023 were immaterial. In order to limit the interest rate risk associated with rate lock agreements, as well as the interest rate risk associated with mortgages held for sale, if any, the Company enters into agreements to sell loans in the secondary market to unrelated investors on a loan-by-loan basis. At December 31, 2023, the Company had approximately $214,000 of commitments to sell mortgages to unrelated investors on a loan-by-loan basis.
In the normal course of business, the Company is involved in various legal proceedings, investigations, and administrative proceedings. Civil litigation may range from individual actions involving a single plaintiff to putative class action lawsuits with potentially thousands of class members. Investigations may involve both formal and informal proceedings, by both government agencies and self-regulatory bodies. Based on information presently known to us, we do not believe there is any matter to which we are a party, or involving any of our properties, that individually or in the aggregate, would reasonably be expected to have a material adverse effect on our financial statements.
Note 18 Earnings Per Share
Calculation of basic earnings per share (Basic EPS) and diluted earnings per share (Diluted EPS) is shown below.
| | | | | | | | | | | |
| Year ended December 31, |
(In thousands, except share and per share data) | 2023 | 2022 | 2021 |
Basic | | | |
Net income available to common shareholders | $ | 9,505 | | $ | 85,030 | | $ | 89,264 | |
Less: income attributable to unvested stock-based compensation awards | (42) | | (250) | | (615) | |
Net earnings allocated to common shareholders | 9,463 | | 84,780 | | 88,649 | |
Weighted average shares outstanding, including unvested stock-based compensation awards | 14,442,077 | | 14,532,448 | | 14,798,447 | |
Less: unvested stock-based compensation awards | (187,416) | | (204,168) | | (229,684) | |
Weighted average shares outstanding - Basic | 14,254,661 | | 14,328,280 | | 14,568,763 | |
| | | |
Diluted | | | |
Net earnings allocated to common shareholders | $ | 9,463 | | $ | 84,780 | | $ | 88,649 | |
Weighted average shares outstanding - Basic | 14,254,661 | | 14,328,280 | | 14,568,763 | |
Plus: incremental shares from assumed conversion of stock-based compensation awards | 46,560 | | 76,014 | | 79,404 | |
Weighted average shares outstanding - Diluted | 14,301,221 | | 14,404,294 | | 14,648,167 | |
| | | |
Basic EPS | $ | 0.66 | | $ | 5.92 | | $ | 6.08 | |
Diluted EPS | $ | 0.66 | | $ | 5.89 | | $ | 6.05 | |
Stock-based compensation awards representing 39,266, 1,554, and 4,984 common shares for 2023, 2022, and 2021, respectively, were not included in the computations of diluted earnings per common share because the effect on those periods would have been antidilutive.
Note 19 Fair Value Measurements
FASB ASC Topic 820, Fair Value Measurements and Disclosures, defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurements. FASB ASC Topic 820 also establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements).
The three levels of the fair value hierarchy are:
Level 1 – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
Level 2 – Quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability;
Level 3 – Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
The following table summarizes financial assets and financial liabilities measured at fair value on a recurring basis as of December 31, 2023 and 2022 segregated by the level of valuation inputs within the fair value hierarchy used to measure fair value:
Recurring Fair Value Measurements
December 31, 2023
| | | | | | | | | | | | | | |
(In thousands) | | (Level 1) | (Level 2) | (Level 3) |
Assets | | | | |
Available-for-sale debt securities | | | | |
U.S. Treasuries | $ | 109,904 | | $ | 0 | | $ | 109,904 | | $ | 0 | |
Obligations of U.S. Government sponsored entities | 456,458 | | 0 | | 456,458 | | 0 | |
Obligations of U.S. states and political subdivisions | 81,924 | | 0 | | 81,924 | | 0 | |
Mortgage-backed securities – residential, issued by: | | | | |
U.S. Government agencies | 45,240 | | 0 | | 45,240 | | 0 | |
U.S. Government sponsored entities | 720,830 | | 0 | | 720,830 | | 0 | |
| | | | |
U.S. corporate debt securities | 2,294 | | 0 | | 2,294 | | 0 | |
Total Available-for-sale debt securities | $ | 1,416,650 | | $ | 0 | | $ | 1,416,650 | | $ | 0 | |
Equity securities, at fair value | 787 | | 0 | | 0 | | 787 | |
Derivatives designated as hedging instruments | 1,503 | | 0 | | 1,503 | | 0 | |
Derivatives not designated as hedging instruments | 1,610 | | 0 | | 1,610 | | 0 | |
Liabilities | | | | |
Derivatives not designated as hedging instruments | $ | 1,826 | | $ | 0 | | $ | 1,826 | | $ | 0 | |
The change in the fair value of the $787,000 of equity securities valued using significant unobservable inputs (level 3), between January 1, 2023 and December 31, 2023 was immaterial.
Recurring Fair Value Measurements
December 31, 2022
| | | | | | | | | | | | | | |
(In thousands) | | (Level 1) | (Level 2) | (Level 3) |
Assets | | | | |
Available-for-sale debt securities | | | | |
U.S. Treasuries | $ | 167,251 | | $ | 0 | | $ | 167,251 | | $ | 0 | |
Obligations of U.S. Government sponsored entities | 601,167 | | 0 | | 601,167 | | 0 | |
Obligations of U.S. states and political subdivisions | 85,281 | | 0 | | 85,281 | | 0 | |
Mortgage-backed securities – residential, issued by: | | | 0 | | |
U.S. Government agencies | 52,668 | | 0 | | 52,668 | | 0 | |
U.S. Government sponsored entities | 686,222 | | 0 | | 686,222 | | 0 | |
| | | | |
U.S. corporate debt securities | 2,378 | | 0 | | 2,378 | | 0 | |
Total Available-for-sale debt securities | $ | 1,594,967 | | $ | 0 | | $ | 1,594,967 | | $ | 0 | |
Equity securities, at fair value | 777 | | 0 | | 0 | | 777 | |
Derivatives designated as hedging instruments | 0 | | 0 | | 0 | | 0 | |
Derivatives not designated as hedging instruments | 0 | | 0 | | 0 | | 0 | |
Liabilities | | | | |
Derivatives not designated as hedging instruments | $ | 21 | | $ | 0 | | $ | 21 | | $ | 0 | |
Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, mortgage-backed securities-residential, obligations of U.S. states and political subdivisions, and U.S. corporate debt securities are based on quoted market prices, where available, as provided by third party pricing vendors. If
quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.
The Company determines fair value for its available-for-sale debt securities using an independent bond pricing service for identical assets or very similar securities. The pricing service uses a variety of techniques to determine fair value, including market maker bids, quotes and pricing models. Inputs to the model include recent trades, benchmark interest rates, spreads, and actual and projected cash flows. The Company reviews the prices supplied by the independent pricing service, as well as their underlying pricing methodologies, for reasonableness and to ensure such prices are aligned with traditional pricing matrices. In general, the Company’s investment portfolio consists of traditional investments, nearly all of which are U.S. Treasury obligations, federal agency bullet or mortgage pass-through securities, or general obligation municipal bonds. Pricing for such instruments is fairly generic and is easily obtained. Quarterly, the Company will validate prices supplied by the independent pricing service by comparing to prices obtained from a second third-party source. Based on the inputs used by our independent pricing services, the Company identifies the appropriate level within the fair value hierarchy to report these fair values.
Certain assets are measured at fair value on a nonrecurring basis, that is, they are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances. For the Company, these include loans held for sale, collateral dependent individually evaluated loans, other real estate owned, goodwill and other intangible assets. During 2023, certain collateral dependent individually evaluated loans and other real estate owned at December 31, 2023, were adjusted down to fair value. Collateral values are estimated using Level 3 inputs based upon observable market data. Real estate values are generally valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally available in the market.
| | | | | | | | | | | | | | | | | |
(In thousands) | | Fair value measurements at reporting date using: | Gain (losses) from fair value changes |
| As of | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | Year ended |
Assets: | 12/31/2023 | (Level 1) | (Level 2) | (Level 3) | 12/31/2023 |
Individually evaluated loans | $ | 40,681 | | $ | 0 | | $ | 0 | | $ | 40,681 | | $ | 826 | |
Other real estate owned | 131 | | 0 | | 0 | | 131 | | 23 | |
| | | | | | | | | | | | | | | | | |
(In thousands) | | Fair value measurements at reporting date using: | Gain (losses) from fair value changes |
| As of | Quoted prices in active markets for identical assets | Significant other observable inputs | Significant unobservable inputs | Year ended |
Assets: | 12/31/2022 | (Level 1) | (Level 2) | (Level 3) | 12/31/2022 |
Individually evaluated loans | $ | 9,460 | | $ | 0 | | $ | 0 | | $ | 9,460 | | $ | 59 | |
Other real estate owned | 152 | | 0 | | | 152 | | 15 | |
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments at December 31, 2023 and 2022. The carrying amounts shown in the table are included in the Consolidated Statements of Condition under the indicated captions. The fair value estimates, methods and assumptions set forth below for the Company’s financial instruments, including those financial instruments carried at cost, are made solely to comply with disclosures required by GAAP and does not always incorporate the exit-price concept of fair value prescribed by ASC Topic 820-10 and should be read in conjunction with the financial statements and notes included in this Report.
| | | | | | | | | | | | | | | | | |
Estimated Fair Value of Financial Instruments | | | | |
December 31, 2023 | | | | | |
(In thousands) | Carrying Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) |
Financial Assets: | | | | | |
Cash and cash equivalents | $ | 79,542 | | $ | 79,542 | | $ | 79,542 | | $ | 0 | | $ | 0 | |
Securities - held-to-maturity | 312,401 | | 267,455 | | 0 | | 267,455 | | 0 | |
FHLB stock and other stock | 33,719 | | 33,719 | | 0 | | 33,719 | | 0 | |
Accrued interest receivable | 26,107 | | 26,107 | | 0 | | 26,107 | | 0 | |
Loans/leases, net1 | 5,554,351 | | 5,126,679 | | 0 | | 0 | | 5,126,679 | |
| | | | | |
Financial Liabilities: | | | | | |
Time deposits | $ | 998,013 | | $ | 990,933 | | $ | 0 | | $ | 990,933 | | $ | 0 | |
Other deposits | 5,401,834 | | 5,401,834 | | 0 | | 5,401,834 | | 0 | |
Fed funds purchased and securities sold | | | | | |
under agreements to repurchase | 50,996 | | 50,996 | | 0 | | 50,996 | | 0 | |
Other borrowings | 602,100 | | 600,814 | | 0 | | 600,814 | | 0 | |
Trust preferred debentures | 0 | | 0 | | 0 | | 0 | | 0 | |
Accrued interest payable | 3,474 | | 3,474 | | 0 | | 3,474 | | 0 | |
1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
| | | | | | | | | | | | | | | | | |
Estimated Fair Value of Financial Instruments | | | | |
December 31, 2022 | | | | | |
(In thousands) | Carrying Amount | Fair Value | (Level 1) | (Level 2) | (Level 3) |
Financial Assets: | | | | | |
Cash and cash equivalents | $ | 77,837 | | $ | 77,837 | | $ | 77,837 | | $ | 0 | | $ | 0 | |
Securities - held to maturity | 312,344 | | 261,692 | | 0 | | 261,692 | | 0 | |
FHLB stock and other stock | 17,720 | | 17,720 | | 0 | | 17,720 | | 0 | |
Accrued interest receivable | 24,865 | | 24,865 | | 0 | | 24,865 | | 0 | |
Loans/leases, net1 | 5,222,977 | | 4,939,246 | | 0 | | 0 | | 4,939,246 | |
| | | | | |
Financial Liabilities: | | | | | |
Time deposits | $ | 631,411 | | $ | 616,488 | | $ | 0 | | $ | 616,488 | | $ | 0 | |
Other deposits | 5,970,884 | | 5,970,884 | | 0 | | 5,970,884 | | 0 | |
Fed funds purchased and securities sold | | | | | |
under agreements to repurchase | 56,278 | | 56,278 | | 0 | | 56,278 | | 0 | |
Other borrowings | 291,300 | | 289,234 | | 0 | | 289,234 | | 0 | |
| | | | | |
Accrued interest payable | 1,420 | | 1,420 | | 0 | | 1,420 | | 0 | |
1 Lease receivables, although excluded from the scope of ASC Topic 825, are included in the estimated fair value amounts at their carrying value.
The following methods and assumptions were used in estimating fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amounts reported in the Consolidated Statements of Condition for cash, noninterest-bearing deposits, money market funds, and Federal funds sold approximate the fair value of those assets.
Securities - Held-to-Maturity: Fair values for U.S. Treasury securities are based on quoted market prices. Fair values for obligations of U.S. government sponsored entities, and mortgage-backed securities-residential are based on quoted market prices, where available, as provided by third party pricing vendors. If quoted market prices were not available, fair values are based on quoted market prices of comparable instruments in active markets and/or based upon a matrix pricing methodology, which uses comprehensive interest rate tables to determine market price, movement and yield relationships. These securities are reviewed periodically to determine if there are any events or changes in circumstances that would adversely affect their value.
FHLB Stock and Other Stock: The carrying amount of FHLB stock approximates fair value. If the stock is redeemed, the Company will receive an amount equal to the par value of the stock. For miscellaneous equity securities, carrying value is cost.
Loans and Leases: Fair value for loans are calculated using an exit price notion. The Company's valuation methodology takes into account factors such as estimated cash flows, including contractual cash flow and assumptions for prepayments; liquidity risk; and credit risk. The fair values of residential loans were estimated using discounted cash flow analyses, based upon available market benchmarks for rates and prepayment assumptions. The fair values of commercial and consumer loans were estimated using discounted cash flow analyses, based upon interest rates currently offered for loans and leases with similar terms and credit quality. The fair values of loans held for sale were determined based upon contractual prices for loans with similar characteristics.
Accrued Interest Receivable and Accrued Interest Payable: The carrying amount of these short term instruments approximate fair value.
Deposits: The fair values disclosed for noninterest bearing accounts and accounts with no stated maturities are equal to the amount payable on demand at the reporting date. The fair value of time deposits is based upon discounted cash flow analyses using rates offered for FHLB advances, which is the Company’s primary alternative source of funds.
Fed Funds Purchased and Securities Sold Under Agreements to Repurchase: The carrying amount of these instruments approximate fair value because the instruments have short-term maturities.
Other borrowings: The fair value of other borrowings is based upon discounted cash flow analyses using current rates offered for FHLB advances, with similar terms.
Note 20 Regulations and Supervision
Capital Requirements:
The Company and its subsidiary bank are subject to various regulatory capital requirements administered by federal bank regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material adverse effect on the Company’s business, results of operation and financial condition. Under capital adequacy guidelines and the regulatory framework for prompt corrective action (PCA), banks must meet specific guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classifications of the Company and its subsidiary bank are also subject to qualitative judgments by regulators concerning components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the maintenance of minimum amounts and ratios (set forth in the table below) of common equity Tier I capital, total capital and Tier 1 capital to risk-weighted assets (as defined in the regulation), and of Tier 1 capital to average assets (as defined in the regulation). Management believes that the Company and its subsidiary bank meet all capital adequacy requirements to which they are subject.
As of December 31, 2023, the most recent notifications from Federal bank regulatory agencies categorized the Company's subsidiary bank as "well capitalized" under the regulatory framework for PCA. To be categorized as well capitalized, the Company and its subsidiary bank must maintain total risk-based, Tier 1 risk-based, common equity Tier 1 capital and Tier 1 leverage ratios as set forth in the table below. There are no conditions or events since that notification that management believes have changed the capital category of the Company or its subsidiary bank.
In the first quarter of 2020, U.S. Federal regulatory authorities issued an interim final rule that provided 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 elected to utilize the five-year CECL transition.
The following table presents actual and required capital ratios as of December 31, 2023 and December 31, 2022 for Tompkins and its banking subsidiary. The minimum capital amounts required under Basel III includes the capital conservation buffer of 2.5%, which must be added to each of the minimum required risk-based capital ratios (Total capital to risk-weighted assets, Common equity Tier 1 capital to risk weighted assets and Tier 1 capital to risk weighted assets). Capital levels required to be considered well capitalized are based upon prompt corrective action regulations, as amended to reflect the changes under the Basel III Capital Rules.
Actual capital amounts and ratios of the Company and its subsidiary bank are as follows:
| | | | | | | | | | | |
| Actual | Minimum Capital Required- Basel III Fully-Phased-In | Required to be Considered Well Capitalized |
(dollar amounts in thousands) | Amount/Ratio | Amount/Ratio | Amount/Ratio |
December 31, 2023 | | | |
Total Capital (to risk-weighted assets) | | | |
The Company (consolidated) | $754,792 /13.4% | $593,213/>10.5% | $564,965/>10.0% |
Tompkins Community Bank | $721,297/12.8% | $591,445/>10.5% | $563,281/>10.0% |
| | | |
Common Equity Tier 1 Capital (to risk-weighted assets) | |
The Company (consolidated) | $699,525/12.4% | $395,476/>7.0% | $367,227/>6.5% |
Tompkins Community Bank | $666,030/11.8% | $394,297/>7.0% | $366,133/>6.5% |
| | | |
Tier 1 Capital (to risk-weighted assets) | | | |
The Company (consolidated) | $699,525/12.4% | $480,220/>8.5% | $451,972/>8.0% |
Tompkins Community Bank | $666,030/11.8% | $478,789/>8.5% | $450,625/>8.0% |
| | | |
Tier 1 Capital (to average assets) | | | |
The Company (consolidated) | $699,525/9.1% | $308,269/>4.0% | $385,337/>5.0% |
Tompkins Community Bank | $666,030/8.7% | $307,956/>4.0% | $384,945/>5.0% |
| | | |
| | | |
December 31, 2022 | | | |
Total Capital (to risk-weighted assets) | | | |
The Company (consolidated) | $780,472 /14.4% | $568,431/>10.5% | $541,363/>10.0% |
Tompkins Community Bank | $736,099/13.6% | $567,793/>10.5% | $540,755/>10.0% |
| | | |
Common Equity Tier 1 Capital (to risk-weighted assets) |
The Company (consolidated) | $730,330/13.5% | $378,954/>7.0% | $351,886/>6.5% |
Tompkins Community Bank | $685,956/12.7% | $378,529/>7.0% | $351,491/>6.5% |
| | | |
Tier 1 Capital (to risk-weighted assets) | | | |
The Company (consolidated) | $730,330/13.5% | $460,159/>8.5% | $433,091/>8.0% |
Tompkins Community Bank | $685,956/12.7% | $459,642/>8.5% | $432,604/>8.0% |
| | | |
Tier 1 Capital (to average assets) | | | |
The Company (consolidated) | $730,330/9.3% | $312,695/>4.0% | $390,868/>5.0% |
Tompkins Community Bank | $685,956/8.8% | $312,057/>4.0% | $390,071/>5.0% |
| | | |
Note 21 Condensed Parent Company Only Financial Statements
Condensed financial statements for Tompkins (the Parent Company) are presented below.
| | | | | | | | |
Condensed Statements of Condition | As of | As of |
(In thousands) | 12/31/2023 | 12/31/2022 |
Assets | | |
Cash | $ | 10,710 | | $ | 28,543 | |
| | |
Investment in subsidiaries | 650,595 | | 587,032 | |
Other | 8,455 | | 1,344 | |
Total Assets | $ | 669,760 | | $ | 616,920 | |
Liabilities and Shareholders’ Equity | | |
| | |
| | |
Other liabilities | 1,238 | | 942 | |
Tompkins Financial Corporation Shareholders’ Equity | 668,522 | | 615,978 | |
Total Liabilities and Shareholders’ Equity | $ | 669,760 | | $ | 616,920 | |
| | | | | | | | | | | |
Condensed Statements of Income | Year ended December 31, |
(In thousands) | 2023 | 2022 | 2021 |
| | | |
Dividends received from subsidiaries | $ | 42,634 | | $ | 62,559 | | $ | 81,408 | |
Other income | 297 | | 147 | | 279 | |
Total Operating Income | $ | 42,931 | | $ | 62,706 | | $ | 81,687 | |
Interest expense | 0 | | 0 | | 2,232 | |
Other expenses | 13,117 | | 11,295 | | 9,039 | |
Total Operating Expenses | $ | 13,117 | | $ | 11,295 | | $ | 11,271 | |
Income Before Taxes and Equity in Undistributed | | | |
Earnings of Subsidiaries | 29,814 | | 51,411 | | 70,416 | |
Income tax benefit | 3,223 | | 2,841 | | 2,068 | |
Equity in undistributed earnings of subsidiaries | (23,532) | | 30,778 | | 16,780 | |
Net Income | $ | 9,505 | | $ | 85,030 | | $ | 89,264 | |
| | | | | | | | | | | |
Condensed Statements of Cash Flows | Year ended December 31, |
(In thousands) | 2023 | 2022 | 2021 |
Operating activities | | | |
Net income | $ | 9,505 | $ | 85,030 | $ | 89,264 |
Adjustments to reconcile net income to net cash provided by operating activities |
Equity in undistributed earnings of subsidiaries | 23,532 | | (30,778) | | (16,780) | |
Other, net | (7,350) | | 3,561 | | 4,126 | |
Net Cash Provided by Operating Activities | 25,687 | | 57,813 | | 76,610 | |
Investing activities | | | |
Repayment of investments in and advances to subsidiaries | 0 | 350 | 0 |
Other, net | 1,015 | | 29 | | (76) | |
Net Cash Provided by (Used in) Investing Activities | 1,015 | | 379 | | (76) | |
Financing activities | | | |
Borrowings, net | 0 | | 0 | | 0 | |
Cash dividends | (34,512) | | (33,565) | | (32,415) | |
Repurchase of common shares | (8,726) | | (15,430) | | (23,773) | |
Redemption of trust preferred debentures | 0 | | 0 | | (15,150) | |
Net proceeds from restricted stock awards | (1,173) | | (1,758) | | (2,292) | |
Shares issued for dividend reinvestment plan | 0 | | 0 | | 2 | |
| | | |
Shares issued for employee stock ownership plan | 0 | | 2,951 | | 0 | |
Net proceeds from exercise of stock options | (124) | | (538) | | (803) | |
| | | |
| | | |
Net Cash Used in Financing Activities | (44,535) | | (48,340) | | (74,431) | |
Net (decrease) increase in cash | (17,833) | | 9,852 | | 2,103 | |
Cash at beginning of year | 28,543 | | 18,691 | | 16,588 | |
Cash at End of Year | $ | 10,710 | | $ | 28,543 | | $ | 18,691 | |
A Statement of Changes in Shareholders’ Equity has not been presented since it is the same as the Consolidated Statement of Changes in Shareholders’ Equity previously presented for the consolidated Company.
Note 22 Segment and Related Information
The Company manages its operations through three reportable business segments in accordance with the standards set forth in FASB ASC 280, "Segment Reporting": (i) banking and financial services ("Banking"), (ii) insurance services ("Tompkins Insurance") and (iii) wealth management ("Tompkins Financial Advisors"). The Company’s insurance services and wealth management services are managed separately from the Banking segment.
Banking
Tompkins Community Bank has twelve banking offices located in Ithaca, NY and surrounding communities; fifteen banking offices located in the Genesee Valley region of New York State as well as Monroe County; thirteen full-service banking offices located in the counties north of New York City; and sixteen banking offices headquartered and operating in the areas surrounding southeastern Pennsylvania
Banking services consist primarily of attracting deposits from the areas served by the Company’s banking subsidiary and using those deposits to originate a variety of commercial loans, agricultural loans, consumer loans, real estate loans and leases in those same areas. The Company’s subsidiary bank provides a variety of retail banking services including checking accounts, savings accounts, time deposits, IRA products, residential mortgage loans, personal loans, home equity loans, credit cards, debit cards and safe deposit services delivered through its branch facilities, ATMs, voice response, mobile banking, Internet banking and remote deposit services. The Company’s subsidiary bank also provides a variety of commercial banking services such as lending activities for a variety of business purposes, including real estate financing, construction, equipment financing, accounts receivable financing and commercial leasing. Other commercial services include deposit and cash management services, letters of credit, sweep accounts, credit cards, Internet-based account services, mobile banking and remote deposit services. The banking subsidiary does not engage in sub-prime lending.
Insurance
The Company provides property and casualty insurance services and employee benefits consulting through Tompkins Insurance Agencies, Inc., a 100% wholly-owned subsidiary of the Company, headquartered in Batavia, New York. Tompkins Insurance is an independent insurance agency, representing many major insurance carriers and provides employee benefit consulting to employers in Western and Central New York and Southeastern Pennsylvania, assisting them with their medical, group life insurance and group disability insurance. Tompkins Insurance has four stand-alone offices in Western New York.
Wealth Management
The wealth management segment is generally organized under the Tompkins Financial Advisors brand. Tompkins Financial Advisors offers a comprehensive suite of financial services to customers, including trust and estate services, investment management and financial and insurance planning for individuals, corporate executives, small business owners and high net worth individuals. Tompkins Financial Advisors has offices in each of the Company’s regional markets.
Summarized financial information concerning the Company’s reportable segments and the reconciliation to the Company’s consolidated results is shown in the following table. Investment in subsidiaries is netted out of the presentations below. The "Intercompany" column identifies the intercompany activities of revenues, expenses and other assets between the banking and financial services segments. The Company accounts for intercompany fees and services at an estimated fair value according to regulatory requirements for the services provided. Intercompany items relate primarily to the use of human resources, information systems, accounting and marketing services provided by any of the banks and the holding company. All other accounting policies are the same as those described in Note 1 "Summary of Significant Accounting Policies" in this Report.
| | | | | | | | | | | | | | | | | |
As of and for the year ended December 31, 2023 |
(In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated |
Interest income | $ | 297,358 | | $ | 5 | | $ | 0 | | $ | (5) | | $ | 297,358 | |
Interest expense | 87,849 | | 0 | | 0 | | (5) | | 87,844 | |
Net interest income | 209,509 | | 5 | | 0 | | 0 | | 209,514 | |
Provision for credit loss expense | 4,339 | | 0 | | 0 | | 0 | | 4,339 | |
Noninterest income | (43,667) | | 37,868 | | 18,262 | | (2,222) | | 10,241 | |
Noninterest expense | 162,312 | | 28,770 | | 14,432 | | (2,222) | | 203,292 | |
(Loss) Income before income tax expense | (809) | | 9,103 | | 3,830 | | 0 | | 12,124 | |
Income tax (benefit) expense | (1,007) | | 2,548 | | 954 | | 0 | | 2,495 | |
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 198 | | 6,555 | | 2,876 | | 0 | | 9,629 | |
Less: Net income attributable to noncontrolling interests | 124 | | 0 | | 0 | | 0 | | 124 | |
Net Income attributable to Tompkins Financial Corporation | $ | 74 | | $ | 6,555 | | $ | 2,876 | | $ | 0 | | $ | 9,505 | |
| | | | | |
Depreciation and amortization | $ | 11,047 | | $ | 176 | | $ | 176 | | $ | 0 | | $ | 11,399 | |
Assets | 7,760,160 | | 44,143 | | 29,089 | | (13,643) | | 7,819,749 | |
Goodwill | 64,524 | | 19,867 | | 8,211 | | 0 | | 92,602 | |
Other intangibles, net | 956 | | 1,336 | | 35 | | 0 | | 2,327 | |
Net loans and leases | 5,554,351 | | 0 | | 0 | | 0 | | 5,554,351 | |
Deposits | 6,419,872 | | 0 | | 0 | | (20,025) | | 6,399,847 | |
Total equity | 601,598 | | 36,176 | | 32,160 | | 0 | | 669,934 | |
| | | | | | | | | | | | | | | | | |
As of and for the year ended December 31, 2022 |
(In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated |
Interest income | $ | 251,324 | | $ | 5 | | $ | 0 | | $ | (5) | | $ | 251,324 | |
Interest expense | 21,048 | | 0 | | 0 | | (5) | | 21,043 | |
Net interest income | 230,276 | | 5 | | 0 | | 0 | | 230,281 | |
Provision for credit loss expense | 2,789 | | 0 | | 0 | | 0 | | 2,789 | |
Noninterest income | 25,394 | | 36,721 | | 18,129 | | (2,272) | | 77,972 | |
Noninterest expense | 156,186 | | 27,678 | | 14,159 | | (2,272) | | 195,751 | |
Income before income tax expense | 96,695 | | 9,048 | | 3,970 | | 0 | | 109,713 | |
Income tax expense | 21,085 | | 2,504 | | 968 | | 0 | | 24,557 | |
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 75,610 | | 6,544 | | 3,002 | | 0 | | 85,156 | |
Less: Net income attributable to noncontrolling interests | 126 | | 0 | | 0 | | 0 | | 126 | |
Net Income attributable to Tompkins Financial Corporation | $ | 75,484 | | $ | 6,544 | | $ | 3,002 | | $ | 0 | | $ | 85,030 | |
| | | | | |
Depreciation and amortization | $ | 10,366 | | $ | 175 | | $ | 143 | | $ | 0 | | $ | 10,684 | |
Assets | 7,610,701 | | 45,090 | | 28,977 | | (14,082) | | 7,670,686 | |
Goodwill | 64,524 | | 19,867 | | 8,211 | | 0 | | 92,602 | |
Other intangibles, net | 1,004 | | 1,655 | | 49 | | 0 | | 2,708 | |
Net loans and leases | 5,222,977 | | 0 | | 0 | | 0 | | 5,222,977 | |
Deposits | 6,614,659 | | 0 | | 1,079 | | (13,443) | | 6,602,295 | |
Total equity | 559,123 | | 35,155 | | 23,112 | | 0 | | 617,390 | |
| | | | | | | | | | | | | | | | | |
As of and for the year ended December 31, 2021 |
(In thousands) | Banking | Insurance | Wealth Management | Intercompany | Consolidated |
Interest income | $ | 241,322 | | $ | 11 | | $ | 0 | | $ | (15) | | $ | 241,318 | |
Interest expense | 17,541 | | 0 | | 0 | | (15) | | 17,526 | |
Net interest income | 223,781 | | 11 | | 0 | | 0 | | 223,792 | |
Credit for credit loss expense | (2,219) | | 0 | | 0 | | 0 | | (2,219) | |
Noninterest income | 25,944 | | 35,430 | | 19,727 | | (2,252) | | 78,849 | |
Noninterest expense | 152,624 | | 26,857 | | 13,058 | | (2,252) | | 190,287 | |
Income before income tax expense | 99,320 | | 8,584 | | 6,669 | | 0 | | 114,573 | |
Income tax expense | 21,257 | | 2,326 | | 1,599 | | 0 | | 25,182 | |
Net Income attributable to noncontrolling interests and Tompkins Financial Corporation | 78,063 | | 6,258 | | 5,070 | | 0 | | 89,391 | |
Less: Net income attributable to noncontrolling interests | 127 | | 0 | | 0 | | 0 | | 127 | |
Net Income attributable to Tompkins Financial Corporation | $ | 77,936 | | $ | 6,258 | | $ | 5,070 | | $ | 0 | | $ | 89,264 | |
| | | | | |
Depreciation and amortization | $ | 9,987 | | $ | 208 | | $ | 55 | | $ | 0 | | $ | 10,250 | |
Assets | 7,794,561 | | 42,879 | | 33,735 | | (51,193) | | 7,819,982 | |
Goodwill | 64,370 | | 19,866 | | 8,211 | | 0 | | 92,447 | |
Other intangibles, net | 1,571 | | 2,004 | | 68 | | 0 | | 3,643 | |
Net loans and leases | 5,032,624 | | 0 | | 0 | | 0 | | 5,032,624 | |
Deposits | 6,802,852 | | 0 | | 0 | | (11,417) | | 6,791,435 | |
Total equity | 664,800 | 33,171 | 30,970 | 0 | 728,941 |
Note 23 Derivatives and Hedging Activities
Risk Management Objective of Using Derivatives
The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s existing credit derivatives result from participations of loan participation arrangements, therefore, are not used to manage interest rate risk in the Company’s assets or liabilities.
Fair Value Hedges of Interest Rate Risk
The Company is exposed to changes in the fair value of certain of its fixed-rate assets due to changes in benchmark interest rates. The Company uses interest rate swaps to manage its exposure to changes in fair value on these instruments attributable to changes in the designated benchmark interest rate. Interest rate swaps designated as fair value hedges involve the payment of fixed-rate amounts to a counterparty in exchange for the Company receiving variable-rate payments over the life of the agreements without the exchange of the underlying notional amount.
For derivatives designated and that qualify as fair value hedges, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in interest income.
As of December 31, 2023, the following amounts were recorded on the Consolidated Statement of Condition related to cumulative basis adjustment for fair value hedges. As of December 31, 2022, there no balances for Fixed Rate Loans.
| | | | | | | | |
Line Item in the Statement of Financial Position in Which the Hedged Item is Included | Carrying Amount of the Hedged Assets/(Liabilities) | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Assets/(Liabilities) |
| December 31, 2023 | December 31, 2023 |
Fixed Rate Loans1 | $148,633 | $(1,367) |
Total | $148,633 | $(1,367) |
1 These amounts include the amortized cost basis of closed portfolios of fixed rate loans used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolio anticipated to be outstanding for the designated hedged period. At December 31, 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $763.4 million; the cumulative basis adjustments associated with these hedging relationships was $1.4 million; and the amounts of the designated hedged items were $150.0 million. |
Non-designated Hedges
The Company’s existing credit derivatives result from participations in interest rate swaps provided by external lenders as part of loan participation arrangements, and therefore, are not used to manage interest rate risk in the Company’s assets or liabilities. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain lenders which participate in loans.
Tabular Disclosure of Fair Values of Derivative Instruments on the Consolidated Statements of Condition
The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the consolidated statements of condition as of December 31, 2023 and December 31, 2022. The Company began entering into derivative transactions in the second quarter of 2022. Amounts below are presented on a net basis in accordance with applicable accounting guidance.
| | | | | | | | | | | |
Derivative Assets | | | |
| December 31, 2023 |
(In thousands) | Notional Amount | Balance Sheet Location | Fair Value* |
Derivatives designated as hedging instruments | | | |
Interest Rate Products | $ | 150,000 | | Other Assets | $ | 1,503 | |
| | | |
Total derivatives designated as hedging instruments | | | $ | 1,503 | |
| | | |
Derivatives not designated as hedging instruments | | | |
Interest Rate Products | $ | 34,930 | | Other Assets | $ | 1,610 | |
Risk Participation Agreement | 0 | | Other Assets | 0 | |
Total derivatives not designated as hedging instruments | | | $ | 1,610 | |
| | | | | | | | | | | |
Derivative Assets | | | |
| December 31, 2022 |
(In thousands) | Notional Amount | Balance Sheet Location | Fair Value |
Derivatives designated as hedging instruments | | | |
Interest Rate Products | $ | 0 | | Other Assets | $ | 0 | |
| | | |
Total derivatives designated as hedging instruments | | | $ | 0 | |
| | | |
Derivatives not designated as hedging instruments | | | |
Interest Rate Products | $ | 0 | | Other Assets | $ | 0 | |
Risk Participation Agreement | 0 | | Other Assets | 0 | |
Total derivatives not designated as hedging instruments | | | $ | 0 | |
| | | | | | | | | | | |
Derivative Liabilities | |
| December 31, 2023 |
(In thousands) | Notional Amount | Balance Sheet Location | Fair Value* |
Derivatives not designated as hedging instruments |
Interest Rate Products | $ | 34,930 | | Other Liabilities | $ | 1,778 | |
Risk Participation Agreement | 7,542 | | Other Liabilities | 48 | |
Total derivatives not designated as hedging instruments | $ | 1,826 | |
| | | | | | | | | | | |
Derivative Liabilities | | | |
| December 31, 2022 |
(In thousands) | Notional Amount | Balance Sheet Location | Fair Value |
Derivatives not designated as hedging instruments |
| | | |
Risk Participation Agreement | $ | 7,499 | | Other Liabilities | $ | 21 | |
Total derivatives not designated as hedging instruments | | $ | 21 | |
Tabular Disclosure of the Effect of Fair Value and Cash Flow Hedge Accounting on the Consolidated Statements of Income
The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of income for the years ended December 31, 2023 and 2022:
| | | | | | | | |
The Effect of Fair Value and Cash Flow Hedge Accounting on the Statement of Financial Performance |
| Location of Gain or (Loss) Recognized in Income on Derivative |
| Year Ended December 31, 2023 | Year Ended December 31, 2022 |
(In thousands) | Interest Income |
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded | $ | 1,650 | | $ | 0 | |
The effects of fair value and cash flow hedging: | | |
Gain or (loss) on fair value hedging relationships in Subtopic 815-20 | | |
Interest contracts | | |
Hedged items | (1,367) | | 0 | |
Derivatives designated as hedging instruments | 3,017 | | 0 | |
Tabular Disclosure of the Effect of Derivatives Not Designated as Hedging Instruments on the Income Statement
The table below presents the effect of the Company’s derivative financial instruments that are not designated as hedging instruments on the consolidated statements of income for the years ended December 31, 2023 and 2022:
| | | | | | | | | | | |
Effect of Derivatives Not Designated as Hedging Instruments on the Statement of Financial Performance |
Derivatives Not Designated as Hedging Instruments under Subtopic 815-20 | Location of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative | Amount of Gain or (Loss) Recognized in Income on Derivative |
| | Year Ended |
(In thousands) | | December 31, 2023 | December 31, 2022 |
| | | |
Interest Rate Products | Other income / (expense) | $ | (168) | | $ | 0 | |
Risk Participation Agreement | Other income / (expense) | 114 | | 57 | |
Total | | $ | (54) | | $ | 57 | |
Fee Income | Other income / (expense) | $ | 539 | | $ | 0 | |
Credit-risk-related Contingent Features
Applicable for OTC derivatives with dealers
The Company has agreements with each of its derivative counterparties that contain a provision where if the Company defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the company could also be declared in default on its derivative obligations.
As of December 31, 2023, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $1.8 million. As of December 31, 2023, the Company has posted $1.5 million in collateral related to these agreements. The interest rate hedge counterparty has posted $1.5 million of collateral in proportion to potential losses in the derivative position.
Unaudited Quarterly Financial Data
The Company has adopted certain provisions within the amendments to Regulation S-K that eliminate tabular presentation of unaudited quarterly financial information. There have been no material retrospective changes to financial statements for any of the quarters within the fiscal years ended December 31, 2023 and December 31, 2022.